For instance, George Willingmyre, in relation to the original proposal by SAC, commentated:

“The SAC patent policy proposal is unbalanced against an intellectual property owner’s rights and will discourage participation from owners of intellectual property within and outside of China. Implementation of the SAC patent policy proposal as worded will place China in a position to have to accept and promote inferior technologies and/or more costly implementations for important standards”

The proposal has not been implemented.

However, in January this year, three months following the SAC proposal, the China National Institute of Standardization (CNIS) issued a draft set of “Disposal Rules for Inclusion of Patents in National Standards”.

The Disposal Rules are a key component of the SAC proposal, however they notably do not include the provision from Article 9 of the SAC proposal, requiring that for inclusion in a national standard:

“The patentee agrees to license, on a reasonable and non-discriminatory basis, any organization and person to implement the patent when implementing the national standard at a price significantly lower than the normal royalties.”

As with the proposed changes to the public procurement policy (discussed here), the response from commentators has been mixed in relation to these changes.

In official comments to the draft Disposal Rules, both the American National Standards Institute (ANSI) as well as the American Intellectual Property Law Association (AIPLA), similarly commended on the one hand, the positive step that the Draft Rules represent relative to the SAC proposal – such as the inclusion of a RAND licensing option – while on the other hand outlined a number of questions and concerns they had with the regulation.

“While acknowledging and applauding the progress made in bringing the CNIS Proposed Rules more in line with international norms, AIPLA notes that some provisions of the CNIS Proposed Rules should be clarified or improved further to bring them into such alignment.”

The major concerns seem to stem from an inherent vagueness within the draft, perhaps due in part to the backlash from the SAC proposal. For instance, Willingmyre highlighted several areas of the draft rules requiring “refinement” which can be found here.

To what degree CNIS will take on board and implement such feedback (due date for comments was March 1st) in unclear at this stage, and whether they can their work together with SAC to provide a harmonized direction for China’s national standards environment. Also to watch will be whether these changes signify continued progress for China, or are merely reactionary amendments seeking to placate western critics.

As part of the indigenous innovation policy, MOST issued a notice in November 2009 which established a catalogue of products from which public institutions are restricted to purchase within 6 key strategic sectors; namely computer and application devices, telecommunication products, offline appliances, software, alternative energy and equipments, and high-efficiency energy-saving products.

Many observers were alarmed by the introduction of a public accreditation system, and by the IPR requirement in particular. In an open letter, the BSA highlighted the following to be of immediate concern:

“The criteria for eligibility for the catalogue is that the products contain intellectual property that is developed and owned in China and that any associated trademarks are originally registered in China.“

The major changes between the Ministry’s November 2009 publication and the draft proposal are in three categories, as outlined by the US-China Business Council:

• Intellectual Property: The new version now allows accreditation for products based on foreign IP which is licensed in China; as opposed to products being based solely on IP developed and owned in China as before.
• Trademark Registration: The new policy no longer requires trademarks to have been first registered in China. Applicants must still have exclusive rights to the product’s trademark in China.
• Technology Requirements: Originally accreditation required the product to “possess highly advanced technology that reaches or surpasses international standards”. However the new policy is more lenient, instead focusing on energy efficient and environmentally friendly or alternatively technology of a significant improvement over existing technology.

The Chinese ministry insist that the motivation for these changes flows from a “need to draw in increased foreign investment in the high tech industry”, downplaying the role of International pressure in these changes. However while US trade officials have greeted the development cautiously, those in the EU met the April 10th announcement with considerably more optimism. A spokes person from the EU chamber of Commerce stating that:

“This is an important sign that policymakers in China recognise the role that fair competition plays in developing and enhancing China’s high-tech capabilities, and that foreign-invested companies can make a valuable contribution.”

In response to the draft policies, a number of commentators have questioned whether the changes are big enough. In an open letter addressed to MOST commenting on the changes (found here) the U.S. Information Technology Office (USITO) highlight a number of specific issues they have with the proposed changes, in addition to indigenous innovation generally. Broadly speaking, these specific issues relate to the following:

• The unclear link between the Catalogue and government procurement preferences,
• The presence of Intellectual property (IP) as criteria for indigenous innovation,
• Vague, unworkable and problematic nature of requirements, and
• That the public comment period ends on the same date the application period starts for the revised program, which greatly reduces the value of any such comment.

This soon after the comment phase of the regulation which ended May 10th, it is unclear what the final form of the regulation will take or whether MOST will take on board any feedback such as by USITO above. Furthermore it is unclear whether or not these changes will foreshadow greater change within the indigenous innovation policy in general.

The event is aimed at addressing some of the hot topics in the ongoing standards debate. As the importance of standards to our society is continuously increasing and gaining in technological complexity, compatibility and quality are key for competing companies who are striving towards establishing a common ground. Thus, the debate regarding proprietary standards vs open source based on collaborative efforts is central in mapping the future developments of ICT standardization.

Key questions up for discussion at this June event include: Should standards be based on open-efforts or on proprietary models? Should countries in Europe opt for a more specific model of standardisation? How should we consider the relationship between patents and standards, and what are the implications of not allowing standards to be protected by IPRs? Is the dichotomy between open and proprietary standards at all justified, or are these types of standards in fact complimentary?

The list of speakers include several prominent experts, including the keynote speaker Malcolm Harbour (MEP), which surely will create a high quality discussion.

For more information on the event, visit the Stockholm Network event page.

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.

Traditional antitrust principles are capable of dealing with the “deception” line of patent holdup cases.  As the D.C. Circuit correctly observed in overturning the Commission’s finding of liability against Rambus in such a case, plaintiffs must bear the burden of establishing the traditional elements of a monopolization case: that the defendant had ex ante monopoly power, that its deceptive conduct was “exclusionary,” and that it caused the maintenance or acquisition of greater monopoly power resulting in consumer harm.  The “breach” line of patent holdup cases is more problematic, in large part because antitrust agencies and some commentators wish to deviate from traditional antitrust principles in order to reach conduct that they view as problematic.  Again, the problem with this view is that it ignores or minimizes the costs of expanding the scope of antitrust rules to the standard setting process in this way without considering how such a scheme may obstruct innovation an economic growth.

Consider the Federal Trade Commission’s (“FTC”) recent decision to prosecute patent holdup without finding actual deception is a particularly egregious example.  In N-Data, the IEEE, an SSO, adopted a patent owned by National as part of a standard in exchange for National’s agreement to a licensing fee of $1,000.  National later assigned its right to Vertical.  Vertical attempted to amend the $1,000 licensing term to permit fair, reasonable, and nondiscriminatory (“FRAND”) pricing.  The SSO approved the change and posted the new agreement, along with the original, for all users to view.  Vertical then assigned its rights to N-Data.  The FTC found that N-Data had engaged in “oppressive” and “coercive” actions that “harmed consumers” and “undermine competition.”   In doing so, the FTC paved the way for finding antitrust liability whenever a patent holder breaches any licensing commitment that has the effect of increasing royalties—even when done in good faith.

I’ve criticized this decision at greater length in articles (read here and here), but there are three primary problems with the N-Data approach which makes such a breach a sufficient condition for access to antitrust remedies.  The first is that the approach deviates from the conventional role of antitrust has a set of rules governing the competitive process rather than particular outcomes.  Here, antitrust liability attaches not because of any deceptive conduct by the firm, but because the antitrust agencies’ ex post evaluation of the terms renegotiated in good faith seven years after the original contract deems them “oppressive.”  This approach invites expansion of antitrust doctrine to mundane contract disputes and disagreement that have price effects but no impact on the competitive process.  The second problem is that the FTC’s willingness to employ Section 5 to this end indicates a desire to circumvent these traditional principles as expressed under conventional monopolization law, to avoid problems of proof and take advantage of a vague standard with less rigorous requirements in regard to demonstrating actual consumer harm.  The third is, as I’ve argued with Bruce Kobayashi (read article here), that existing contract and patent doctrine contain superior substantive provisions to deal with the patent holdup problem without imposing the heavy hammer of antitrust law which does not give the flexibility to distinguish between the paradigmatic hypothetical case of pure deception in the standard setting process with cases like N-Data which involve mundane contractual disputes and renegotiation.

The immediate effect of employing the antitrust laws to patent holdup problems that present as merely ex post contractual opportunism is that businesses will forgo procompetitive negotiations for free of antitrust enforcement that carries severe penalties.  A more reasonable solution would have been to allow the contracting parties to settle any dispute under an already existing alternative regulatory scheme, such as contract or patent law, with a comparative advantage in enforcement.  As the prevalence of intellectual property in standards grows, it is important to remember that SSOs are sophisticated organizations with a host of state and federal remedies at their disposal that do not involve the heavy hammer of antitrust law, which ultimately may deter procompetitive innovation.