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Can a company refuse to deal with its competitors? On the specific question of patent licensing, the answer now generally accepted in the United States is yes: A patent holder may choose not to license its intellectual property to anyone, including a competitor, even if the intent is to disadvantage the competitor. But this legal rule only emerged after decades of battle between competing antitrust philosophies. And victory in U.S. courts will not necessarily translate into victory in other countries with different economic agendas. In particular, American business must get ready to fight the same battle all over again in China. Economic and political changes have set the stage for a major clash between antitrust and IP rights across the Pacific Ocean. In the midst of one of the greatest booms in history, China has built itself into the world’s fourth-largest economy. China recently surpassed the United States as the leading destination for foreign direct investment, and U.S. direct investment alone rose to $15.4 billion in 2004. Indeed, it is difficult to pick up a paper without reading about another U.S. company entering China. Legal observers have written a great deal on when and how China will recognize and enforce basic patent rights. There has been far less thinking about the precise limits of those rights — for instance, what happens when patent and antitrust laws collide? It is very possible that China will not adopt the same antitrust theories that prevail here. In fact, it is possible that China will adopt something very much like the antitrust views only recently vanquished in the United States. Unfortunately, not many American companies are preparing for this fight. THE ANTITRUST REVOLUTION U.S. competition law has made some significant course corrections in the past 20 years. It was not always so clear that antitrust law did not bar a patent holder from refusing to license to a competitor. But in the 1990s a number of federal courts confronted the issue of whether a manufacturer of a high-technology product could refuse to license its product parts and manuals. Many of these cases set brand-name manufacturers against so-called independent service organizations, small companies that repair and otherwise service the manufacturers’ products. The ISOs argued that a manufacturer’s refusal to license patented replacement parts unlawfully excluded them from the service market, which, they alleged, was separate and distinct from the market for the products themselves. The manufacturers contended that patent laws permit them to refuse to license their technology to anyone for the life of the patent. These disputes arose during a time of great change in antitrust law. Thirty years ago, U.S. regulatory authorities were openly hostile to some of the same IP rights now taken for granted. An assault on antitrust dogma was launched by the “Chicago School,” including one-time federal Judge Robert Bork. Bork argued that regulators and courts were focusing too much on protecting competitors from big business and not enough on protecting competition itself and enhancing consumer welfare. Though he appeared to be tilting at windmills for years, Bork was actually building the foundation of an antitrust revolution. When Ronald Reagan remade the Justice Department’s Antitrust Division and the Federal Trade Commission, the revolution was in high gear. It was complete when Presidents Reagan, George H.W. Bush, and Bill Clinton appointed federal judges much more friendly to business interests. This was the environment in which the ISOs marched into federal court. At first, the results were mixed. Most importantly, the ISOs prevailed in the U.S. District Court for the Northern District of California and in the U.S. Court of Appeals for the 9th Circuit. In Image Technical Services Inc. v. Eastman Kodak Co. (1996), the 9th Circuit famously held that a patent holder’s refusal to license its technology as “a purposeful means of monopolizing interstate commerce” could violate the antitrust law. The court acknowledged that patent law expressly permitted the patent holder to refuse to license its technology, and it characterized this right as providing “a presumptively valid business justification.” But the court held it to be a rebuttable presumption, which could be negated by a finding that the patent holder intended to harm competition.
Don’t Sweat the Small Knockoffs
by Philippa MaisterComplaints about Chinese companies that produce illegal knockoffs of well-known global brands in cheerful disregard of international copyright and patent protections are common. But American corporations must accept some of the responsibility for protecting their products from infringement, according to Cecilia Lou, a partner in China’s largest law firm, King & Wood.“Foreign companies must have an intellectual property strategy for China,” said Lou, speaking in Atlanta last month.USE LOCAL PROTECTIONRelying on an English-language name trademarked in the United States or Europe won’t work, Lou said. Whether a company does business in China or not, it should register its products in China under Chinese names. “Otherwise, they can and will copy [the product],” Lou warned. She added that registration is easy and affordable.Japanese companies have taken note. “Japanese companies have more patents and more goods trademarked and make a lot of money in China,” she said.Trademarks registered by U.S. companies in China total only about 60 percent of the number owned by Japanese companies.Foreign companies also need to be aware of regional variations in the law. “They must know the differences between laws in Shanghai, Beijing, or Guangzhou, because the law can be different in each part of the country,” Lou said.Chinese companies share a growing interest in protecting patents for their own products. According to Lou, there are now more domestic patent applications in China than foreign ones.FOCUS ON NEW BUSINESSThough China is developing an extensive body of intellectual property laws, Lou acknowledged that there are still difficulties. Enforcement is a problem because of limited resources — although Lou said that situation is improving — and there are still few people with judicial expertise in intellectual property.Lou urged U.S. companies not to dwell too much on enforcement in minor cases. “I would advise against taking action on small infringements.” she said. “China has a large population and a huge market, and it may be better to be successful there than to stop all infringements. We have a saying in China, �If the water is too clean, there will be no fish.’ “It’s often more effective to send a warning letter to the manufacturer of the copied product, she said. “Sixty percent of companies will stop infringement if they receive a warning.” Lou noted that U.S. companies tend to sell their older products in China, making it more difficult to prevent infringements. “Do something to stop the infringement,” she suggested, “but also develop new products in China.” She advised foreign companies to select their Chinese partners very carefully. “They should also think about human resources — their employees may be a threat to keeping their technology secret,” Lou advised.The event at which Lou spoke was co-sponsored by Sutherland Asbill & Brennan and the Georgia China Alliance, which promotes Georgia-China trade. Philippa Maister is a staff reporter for the Daily Report, an ALM publication based in Atlanta where this article first ran in.

A RATIONAL CONCLUSION The 9th Circuit’s decision alarmed the business community, which feared that juries would start to second-guess the subjective intentions of corporations exercising their patent rights. Fortunately, it never came to that. What seemed to be the start of a disturbing trend was actually the last gasp of a legal regime. That the 9th Circuit was the final bastion of an increasingly discredited antitrust policy became obvious when the 4th, 5th, 7th, 11th, and Federal circuits all rejected the 9th Circuit’s view and held that a patent holder may unilaterally refuse to license its patents without incurring antitrust liability. Though the courts never stated it this way, the current rule can be understood as a simple aphorism: Doing what the patent law expressly permits cannot violate the antitrust law. This is the only way to validate two legal policies that may seem contradictory but are, in fact, complementary. Although the patent law grants exclusivity and the antitrust law abhors it, both work toward a thriving marketplace of ideas, goods, and services. Thus, by the turn of the 21st century in the United States, the patent and antitrust laws had been rationalized. In a 2005 speech, R. Hewitt Pate, then assistant attorney general for antitrust, said that with the exception of the 9th Circuit’s decision in Kodak, the ISOs’ argument “has never found support in any U.S. legal decision” and “[a]t this point in the development of U.S. law, it is safe to say that this argument is without merit.” Most U.S. patent holders are pleased by this development of antitrust law and believe they have won the war. But the fight is not ended, and a new front has been opened overseas. THE CHINA FRONT As U.S. companies expand their investment in China, the ability of China’s law to protect IP rights has been a major topic of discussion. U.S. general counsel and their advisers have focused a great deal on the question of whether China’s soon-to-be-enacted Anti-Monopoly Law will protect the IP rights of foreign companies at all. The Anti-Monopoly Law has been in the works for more than a decade. In June, the latest draft was approved by the State Council, the country’s chief administrative authority. Most observers expect the National People’s Congress to sign off on the legislation next year. Given China’s long history of not protecting (or even recognizing) IP rights, foreigners’ fears about this legislation are understandable. To this day vendors hawk obviously pirated DVDs of prominent American movies on the streets of Beijing, right under the noses of Chinese regulators. But China seems to be responding to foreign concerns: The latest draft of the Anti-Monopoly Law promises to protect IP rights. President Hu Jintao has said protection of IP rights is “essential” for China’s development, and he assured Western companies that China takes “very seriously” its “promises” to enforce its IP laws. U.S. businesses are hearing this message loud and clear. A senior IBM executive recently said that China’s improved patent laws are paving the way for more U.S. patented product traffic to China, and that even companies with a short-term focus now agree with earlier optimists about the long-term viability of IP protection in China. There is reason for a very cautious optimism. But now the attention of the companies that helped persuade China to protect IP rights needs to refocus on what is becoming the salient question: What will the effective parameters of those rights be when they clash with other interests, such as competition? ABSOLUTELY ESSENTIAL It is not useful to secure rights that are insufficient to truly protect IP and cannot be enforced. Both of these issues are now front and center in China. Many U.S. companies were relieved when the latest Anti-Monopoly Law draft dropped a section that could have greatly restricted the rights of IP holders by adopting an “essential facilities” analysis. If this section were made law, a patent holder could be compelled to license his product to a competitor if a Chinese court determined that the patent covered an essential component. It is true that U.S. law recognizes an essential-facilities doctrine, imposing liability when a company that controls an essential facility that cannot reasonably be duplicated denies a competitor access to that facility. The doctrine has been applied on matters as diverse as telecommunications services and sports stadiums. But because it cuts against the basic principle of competitors competing, the doctrine is used very sparingly. The concern is that Chinese courts would not be as cautious in defining what is “essential,” especially if the competitor was a Chinese business seeking access to a foreign company’s IP. The revised Anti-Monopoly Law now states that the statute is applicable to conduct that eliminates or restricts competition by abusing the rights stipulated by the Intellectual Property Rights Law or other administrative regulations. Enforcement agencies are charged with drawing the line between legal exploitation of IP rights on the one hand and illegal abuses of a dominant market position on the other. In practice, does this now mean that China will permit patent holders to refuse to license their technology? Maybe not. Although China wants to build an innovation-based economy, an overwhelming number of its businesses are small, fledgling entities whose existence does not depend on protecting their own IP. In other words, most Chinese businesses are potential licensees, not licensors. The political pressure on China’s leaders and regulators to pursue a policy of compulsory licensing, formally or informally, will be enormous. PLAYING FAIR A compulsory-licensing policy would permit China both to say it protects IP and to give its indigenous businesses access to IP they can use to grow. This is not to say that such a policy would be a good idea. To the contrary, it would be inimical to China’s long-term interests: Strong economies need to innovate, and strong IP laws push innovation. What would be especially disappointing would be a requirement that patent holders license their technology on “fair” terms. In all likelihood, this would preclude patent holders from realizing a market return on their investments. Instead, it would permit Chinese regulators — or, worse, Chinese juries — to determine what constitutes a fair licensing fee. Another important question relates to China’s ability to enforce any licensing rule. There are two immediate problems. First, China’s court system has not reached the level of professionalism one expects of a major commercial power. Judges often are not sufficiently knowledgeable, lack adequate training, and are too closely linked to local interests. Second, China does not have the powerful and experienced executive agencies necessary to enforce these regulations. The current draft of the Anti-Monopoly Law would create an enforcement authority under the State Council. Supposedly, this agency would be more autonomous and less susceptible to political pressure than the current Ministry of Commerce. The draft also provides for an anti-monopoly committee under the State Council that would have supervisory and policy-making powers. But no one knows how these organizations would actually enforce the law and whether that enforcement authority would be respected within China. Leaders can promise that action will be taken, but ultimately what matters are the front-line decision makers. Some suspect that the new agencies would be weak for a while. WHAT NOW? Where does all this leave U.S. companies doing business in China? In the 9th Circuit, figuratively speaking. It is not outside the realm of possibility that American companies will find themselves operating in China under the same rules they would be operating under here if more federal courts had adopted the 9th Circuit’s decision. U.S. companies may be obligated to license their IP in China, potentially on “fair” terms. If so, these companies will have to decide whether to adopt the same compulsory-licensing policy for the rest of the world or try to take two approaches, one in China and one everywhere else. The first option seems unpalatable: Why should companies give up certain rights in the rest of the world merely because China does not respect them? And yet the second option is no more appealing: It would be difficult, if not impossible, to administer. To avoid this perverse situation, U.S. companies need to bring the same energy and determination to encourage sound IP policy in China that they brought to the earlier question of basic IP rights. The years-long effort to sell China on the benefits of the Western world’s IP system is not over.

Leiv H. Blad Jr. is managing partner of the D.C. office of Clifford Chance. He specializes in class actions and multiparty disputes, including matters of antitrust and IP law. Paul R. Frontczak is counsel in the D.C. office, where he focuses on antitrust counseling and litigation.

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