China recently circulated a draft regulation regarding the use of patents in Chinese national standards. The regulation demands that for patents to be eligible for incorporation in standards, they must be made irrevocably available royalty free or for a nominal fee. This will have dramatic consequences for foreign and domestic innovators.
China divides standards into four different categories; national, industry, local or enterprise. Monday, November 30, was the last day to submit comments on a draft regulation regarding the use of patents in standards.
The draft regulation includes several interesting proposals that are bound to have substantial consequences. The negative impact on innovators could be severe. This proposal fuels the conflicts of interests between China, on the one hand, and the European Union and the USA, on the other. This development is worrying and could easily spill-over to trade- and investment policy.
A Chinese Approach to Standardization
Notably, the draft stipulates that any relevant intellectual property involved in the process of Chinese national standardization should be disclosed by participants as well as non-participants to the standardization body in charge. Patents that are not disclosed in accordance with the requirements are considered license free. Moreover, patent holders may be held liable for concealing patent information, if this has a negative effect on the development or implementation of a national standard.
The draft explicitly states (NB! This is an unofficial translation to English):
Article 8: “That patentees and their affiliates participating in the drafting of the standards fail to disclose in accordance with the above requirements shall be regarded as licensing for free and where they conceal the patent information, which bring losses to the setting and implementation of the national standards, they shall bear corresponding legal liabilities.”
Article 9: “When the setting and revision of national standards involve patents, [Professional Standardization Technical Commission or Body in Charge] shall obtain promptly the irrevocable licensing statements in writing issued by the patentees on implementing the patents.”
Also, national standards can only incorporate proprietary IP which is made available at royalty fees that are considerably lower than (F)RAND. Standards that are found to contain patents without licensing statements are to be revised unless licensing statements are promptly obtained by the (Chinese) National Administrative Department of Standardization.
For mandatory national standards, the draft regulation proposes that no patents should be incorporated in principle. When it is absolutely necessary to involve patents, the IPR holder is to grant licensing for free or the standard should be revised.
Diminishing the Value of Intellectual Property
The draft regulation will effectively force IPR holders to accept licensing terms deemed fair by the National Administrative Department of Standardization. This may result in patentees receiving licensing fees significantly lower than market level (i.e. “nominal fees”).
Consequently this implies that the Chinese are attempting to reduce the rewards to foreign IPR holders. The draft Chinese regulation not only demands disclosure of patents but forces the owners to accept low royalty rates. This will have a negative impact on innovators in OECD countries as well as in China.
After the public consultation has now ended one can hope that the Chinese authorities revise the regulation to be more coherent with basic IPR principles in the rest of the world. This would not only benefit innovators but would also reduce the risk of international policy conflicts considerably.