No Parking Zone: Chinese Antitrust Agencies Put the Boot on Foreign Patent Rights

Anyone who has tried to interpret the parking signs in New York likely has been left wondering whether one can, in fact, ever legally park in the Big Apple. Confusing signs have led even the most law-abiding citizen to get a parking ticket after deciding he or she had parked legally. Unfortunately, the same frustration is coming to patent holders that own technology that is attractive to Chinese companies, although the stakes are much higher than a $100 ticket.

Chinese antitrust regulators have embarked on an unprecedented and alarming series of investigations targeting foreign patent rights in recent years. In one, the National Development and Reform Commission ("NDRC") launched an investigation of Qualcomm after receiving complaints that Chinese companies didn't want to pay the prices the San Diego-based company charged for accessing its patented technology for cellular chipsets. In a similar case, the NDRC investigated claims that San Francisco-based Dolby Labs, which licenses audio technologies to manufacturers of consumer electronics products, was charging high prices in China. Dawn raids and onerous requests for information soon followed.

These cases condemn practices that, for many companies, are considered routine protection of valuable proprietary technology. Nonetheless, China has sounded the alarm that it is willing to re-write arms' length business transactions to benefit Chinese companies. In each case, the Chinese regulators issued thinly-reasoned decisions finding violations of China's Anti-Monopoly Law, slapping the patent holder with extraordinarily high fines ($975 million in the case of Qualcomm) or procuring commitments to license patents on terms favorable to Chinese manufacturers.

In an apparent attempt to deflect criticism of these thinly-reasoned enforcement actions, Chinese antitrust regulators have proposed giving themselves more tools to regulate the patent licensing practices of foreign companies. Over the past year, the NDRC and China's State Administration for Industry and Commerce ("SAIC"), another of China's antitrust enforcement agencies, issued draft rules that they will apply to the exercise of patents and other intellectual property rights. Those guidelines are so fraught with uncertainty that they should send shivers down the spine of any company owning patented technology that looks attractive to a Chinese-based company, regardless of where the patents are issued. At best, the draft guidelines provide some smidgen of badly-needed guidance in an area of regulatory uncertainty. At worst, they lend themselves to whatever interpretation the regulators see fit in the interest of giving Chinese companies a competitive advantage.

Both sets of guidelines suffer from a lack of detail. They also suffer from, ironically, meaningful guidance.

The SAIC guidelines are so general as to be meaningless. They are a collection of rules and a proclamation of what may or may not be anticompetitive with little to no explanation of the principles of interpretation. Nor, as is common in similar guidelines in other jurisdictions, do the SAIC guidelines provide specific examples of their application to common situations.

The lengthier NDRC guidelines, on the other hand, are a collection of numerous factors with no indication of how they are to be balanced or applied. As a result, they subject even the most routine patent licensing practices to condemnation should it benefit Chinese companies wanting access to those patents.

To pinpoint specific examples, one need look no further than a provision in the SAIC guidelines that prohibits patent holders from refusing, "without justification," to license their patents "on reasonable terms" for the purposes of excluding or restricting competition. The NDRC guidelines likewise categorize a refusal to license patents "without justifiable reasons" as potentially anticompetitive. Taken to their logical conclusion, these provisions could force patent holders to license their proprietary technology to competitors, regardless of whether a company has formally promised to do so.

But this turns the entire patent system on its head. In the United States and elsewhere, patents grant the right to exclude others, for a limited period of time, from practicing the covered technology. Such limited exclusionary rights provide companies the incentive to invest in expensive research and development. As a result, and in the absence of a voluntary promise to the contrary, patent holders are free to refuse to license their invention to others. By providing no rationale or specific examples of instances in which a refusal to license would be anticompetitive, U.S. companies with patented technology desired by Chinese companies may be left being forced by foreign regulators to give away their patent rights with little to no justification.

Similarly, a provision in the NDRC guidelines asserting that cross licenses are "likely to restrict or eliminate competition" is enough to make lawyers cringe. Cross licenses, in which two patent holders agree to license technology to each other, are almost always pro-competitive because they allow the parties to develop products without worrying about provoking a patent infringement lawsuit. The notion that a company would license its proprietary technology to a Chinese company, while leaving itself defenseless to a countersuit for infringing the Chinese company's patents, is divorced from reality.

David Letterman once said, "Traffic signals in New York are just rough guidelines." So, seemingly, are the guidelines of China's antitrust regulators. With continued targeting of foreign patents by antitrust enforcement agencies, U.S. companies with valuable patent portfolios should beware of being forced to obey traffic signals without knowing what they mean. Hopefully the next presidential administration will move this up on the agenda in U.S.-China trade talks. Because underestimating the value of technology assets is a sure way to put a boot on the wheels of the U.S. economy.