Through the Anti-Monopoly Lens: What Constitutes ‘Unfairly High Patent Pricing’ in China?

By Yuan Hao (Tsinghua University School of Law)

China is facing a pressing need to build its innovation-driven economy. With this backdrop, recent cases and controversies in judicial/administrative practice call our attention to the need of a more systematic understanding of the intersection between antitrust and IP. A critical thread in this intersection tapestry is the concept of “unfairly high patent pricing (专利高价)”. Different than its US counterpart, Chinese Anti-Monopoly Law pays substantial attention to a dominant market player’s unilateral “exploitative” conducts. Specifically, section 17(1) of the AML forbids a dominant undertaking from “abusing its market position” by selling at “unfairly high prices”. However, neither the Law nor later enacted Judicial Interpretation provides an administrable definition of what constitutes “unfairly high price” in an anti-monopoly sense. Correspondingly, courts and enforcement agencies have significant discretion in characterizing a patent pricing as “unfairly high”, thereby imposing penalty in practice. Despite a good intention, this ex post legal risk would seriously curtail business entities’ ex ante incentive to invest in innovation, which is often entailed with high risks. Lacking adequate legal and economic guidance, this discretion would also result in significant institutional positive error. Such error would be particularly severe in the context of patent-intensive industries. 

Section 55 of the AML provides an IP “safety harbor”, providing that a proper exercise of IPR shall be immune from the scrutiny by Anti-monopoly Law, while an abuse of IPR shall not. However, as recent cases/controversies indicated, this provision has been seldom followed by authorities in practice, probably due to the lack of an administrable test to differentiate “proper exercise” of IPRs from “abuse”.

This article tries to inform the anti-monopoly differentiation between “proper use” and “misuse” of patent, by probing into the very mechanism patent regime has been utilizing to promote innovation, which constitutes a mutual goal with Chinese Anti-monopoly Law. Economic insight into patent jurisprudence prevalent in various jurisdictions including China and the US revealed that the patent regime promotes innovation essentially through the instigation of dynamic competition. More specifically, it (i) directly bridges an innovator’s R&D to market demands by granting the innovator a property right to exclude imitating competitors, thus restricting the competition by imitation; (ii) By restricting the competition by imitation, patent regime achieves dual goals – it not only enables an incumbent patentee’s access to ex post supra-competitive profits as ex ante incentive to invest, but also induces scarce social resources into other innovators’ channels for “inventing around”, i.e. to provide better/cheaper non-infringing technologies. This “inventing around”, i.e. subsequent innovators’ competition by substitution, constitutes a critical link in the virtuous circle of dynamic competition; (iii) Feeling competition pressure by existing or potential peer innovators, the original innovator would be incentivized to further investing in her own competition by substitution, in order to stay a winner in the marketplace. In this way, a virtuous circle of dynamic competition would be instigated. As the conventional vehicle to protect a healthy market competition ecosystem, antitrust/anti-monopoly law should adopt a more dynamic perspective and respect the patent regime’s key mechanism in its own facilitation of innovation. Importantly, antitrust law should not lightly disturb a well-functioning circle of dynamic competition, simply because under its lens competition by imitation or static efficiency seems restricted and local optimum seems not achieved – as a result, a supra-competitive or even monopoly profit enjoyed by a patentee, should be presumed legal per se if static efficiency loss is the only harm. On the other hand, arguably in exceptional circumstances certain patent pricing may indeed be so excessively structured to amount to a constructive refusal to deal with follow-on innovators or at least serious “margin squeeze” for these innovators, and such refusal or squeeze in theory may lead to foreclosure of the competition by substitution itself, thus frustrating the circle of dynamic competition. As an illustration, the conventional hypothesis of patent “anti-commons” or over-broad patents’ suppressing effect on follow-on innovation can be well considered as embodiments of such theoretical worries of foreclosure on competition by substitution. Nevertheless, decades of empirical research in various industries have showed little success in proving this theoretical hypothesis in practice. There might be different explanations to this empirical failure. This article comments that perhaps because of the very patent mechanism of promoting innovation is to instigate competition by substitution through a restriction of competition by imitation, throughout the years our patent regime has developed a critical yet implicit awareness to safeguard competition by substitution from being foreclosed. This built-in awareness is reflected in a wide variety of rules and principles of patent jurisprudence prevalent in many jurisdictions, such as the eligibility, inventiveness/non-obviousness and disclosure/enablement requirements in the grant of patent right, all-element rule and reverse doctrine of equivalents in patent infringement findings, as well as more fundamental principles such as the proportionality principle identified by Merges in his Justifying IP. Surely these built-in mechanisms are not ironclad, but they may have worked in a more successful way than we gave faith to, and 
Based on this insight, this article proposes that a patentee’s pricing act of her patented technologies should be presumed legal per se under section 55 of the AML, unless an administrative agency or anti-monopoly plaintiff can prove with actual evidence that the pricing at issue constitutes an “abuse” of the patent(s), in that it would likely foreclose the very type of competition mechanism the patent regime aims to promote, i.e. competition by substitution. In addition to the economic insight, this proposal is also supported by the antitrust/competition law practices in sister jurisdictions, and the cost-error framework pioneered by antitrust scholars such as Judge Easterbrook. Despite the existence of different official empowerments, almost all economically developed jurisdictions have exercised a very cautious practical attitude in condemning a market price as “unfairly high”, particularly when it comes to patent-intensive industries. Our unfairly high pricing provision does not have a counterpart in traditional US antitrust jurisprudence, and despite the existence of a theoretical counterpart in EU, it has been rarely invoked in practice for good reasons. Based on the above discussions of the critical mechanisms of patent regime to promote dynamic competition, the empirical scarcity of real foreclosure of competition by substitution, as well as the cautious attitude in sister jurisdictions, the cost-error framework pioneered by Judge Easterbrook further teaches us that as our knowledge of dynamic efficiency is still insufficient and precision is very often unreachable, in choosing a good antimonopoly policy we should prefer the side with less error costs. This preference is particularly necessary in China when it is still experiencing a strenuous transition from planned economy to a full-fledged market economy today.

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