Abstract:
This chapter explores China’s strategic use of competition law to reduce foreign patent royalties, aligning with its pursuit of technological independence. Chinese regulators leverage concepts like patent holdup and royalty stacking to justify lowering technology input prices. Courts and agencies employ tools such as anti-suit injunctions, global royalty orders, and FRAND rate determinations to favor domestic firms. Notable cases, like Huawei v. InterDigital and Qualcomm’s settlement, exemplify this approach, shifting wealth from foreign innovators to local manufacturers. Additionally, Chinese competition law serves mercantilist purposes, benefiting both domestic producers and foreign companies like Apple that manufacture in China. These legal maneuvers create a global ripple effect, influencing technology pricing and royalty negotiations. The author argues that weakening patent protections threatens long-term innovation incentives. In the end, China’s actions reflect a broader global shift where economic interests drive IP and competition policy. This evolving dynamic has significant implications for technological advancement and international trade.
Chapters in the Book:
- Part 3-Unmaking Patent Law
- Chapter 11-China and the Accidental Alliance (p.226-245)
Summary
11. China and the Accidental Alliance
Large device manufacturers have extensively lobbied to weaken patent enforcement. The business rationale was that weakening patents decreases the innovators’ bargaining leverage when negotiating with implementers. This same logic can account for policy actions taken by the People’s Republic of China. China has pursued reducing the reliance on foreign technology and minimizing royalty obligations in wireless markets. The country prioritizes technological independence and IP rights protection at the highest government levels, aligning with national innovation strategies. In 2016, China formed a cross-agency effort to guide cross-border IP licensing and transfer. In 2021, President Xi Jinping emphasized protecting IP to safeguard Chinese R&D in key technologies. The 14th Five-Year Plan from 2021 promotes a closed-loop innovation process, linking R&D, standard setting, and industrial application. In other words, Chinese regulators apply theories like patent holdup and royalty stacking to justify lowering technology input prices. The result is a global agreement on patent and competition policy in wireless communications markets among many scholars and advocacy groups.
11.1. Competition Law and the IP Balance of Trade
China, South Korea, and Taiwan each run IP payment deficits. That means they pay more in IP royalties than they receive, unlike the U.S., which have a large surplus. These tendencies in the IP balance of trade have largely been consistent during the two-decade period starting in 2020. However, the gap between the United States and China has expanded since the mid-2000s.
In general, governments with IP deficits may use patent and antitrust laws to weaken foreign IP owners’ enforcement and reduce royalty payments. Furthermore, jurisdictions without strong rule-of-law constraints can reduce royalties paid to foreign IP suppliers, improving their IP balance and gaining political support. Moreover, patent and competition laws can serve mercantilist purposes, benefiting local IP users at the expense of foreign IP suppliers.
For example, China, Korea, and Taiwan have taken regulatory actions against Qualcomm to limit its patent licensing practices and reduce royalty payments. In the smartphone market, local producers rely on foreign suppliers for key technologies, making such regulatory actions beneficial for domestic firms. Therefore, these actions transfer wealth from foreign technology providers to local producers and assemblers in downstream market segments. These actions also benefit foreign device makers that outsource production in these jurisdictions. Therefore, they may similarly favor legal changes that depress the royalty rates paid to IP suppliers.
11.2. Competition Law as a Geopolitical Instrument
It is widely observed that the Chinese government has sought to secure technological independence, equality, and leadership relative to the U.S. and other Western economies. As part of this goal, China has promoted indigenous technology standards in wireless communications, DVD players, networking, and cloud computing. However, most of these efforts have been unsuccessful, especially in wireless communications and networking markets. For instance, China’s TD-CDMA and WAPI standards failed to replace the globally dominant W-CDMA and WiFi standards. Local device makers and telecom carriers resisted because indigenous standards could not match the performance of global standards. Consequently, Chinese producers still rely heavily on foreign technology, incurring license fees to foreign patent owners. To reduce this financial burden, Chinese courts and regulators have used patent and competition laws to lower royalty rates owed by local manufacturers.
11.2.1. Regulatory Actions
In 2018, China consolidated its competition enforcement into a single agency, the State Administration of Market Regulation (SAMR). Several elements of Chinese competition law have enabled regulators to take actions to impact the royalty rates for patent-protected technologies in wireless markets. First, Chinese competition law provides regulators with authority to take legal action against a company for “excessive prices.” Furthermore, draft guidelines in 2012 and 2017 affirmed that IP rights are subject to anti-monopoly laws prohibiting “unfairly high” prices. Second, SAMR’s 2020 guidelines and 2022 IP abuse rules addressed IP licensing, emphasizing fairness in pricing for firms with dominant market positions. In addition, draft guidelines issued in 2012 also defined when a dominant IP holder must offer licenses to third parties on reasonable terms. Moreover, SAMR’s 2015 and 2020 guidelines imposed a duty to deal on standard essential patent (SEP) holders with dominant market positions, which goes beyond U.S. antitrust law. Third, the 2020 and 2022 IP abuse rules specify that SEP holders must adhere to the FRAND[1] principle and avoid practices like refusal to license, tying, or price discrimination. These rules create near-per se liability for SEP licensing practices. The reason for that is that Chinese courts and regulators generally view SEP owners as holding dominant market positions, and thus triggering these licensing limitations.
Consequently, Chinese regulators have made use of these tools to intervene in licensing agreements between technology suppliers (usually foreign firms) and device producers (usually domestic firms). For example, in 2015, Chinese regulators brought an abuse of dominance case against Qualcomm for charging “excessive” royalties and engaging in anticompetitive tying practices. Qualcomm settled the case by paying a $975 million fine and significantly reducing royalty fees for China-based 3G and 4G handset makers. This strategic use of competition law aims to lower input costs for local device producers relying on foreign technology. Given the size of the Chinese market, the Qualcomm settlement had global ramifications, potentially influencing future licensing negotiations and judicial determinations of royalty rates. Furthermore, the fines imposed on Qualcomm in 2016 and 2017 by Korean and Taiwanese competition authorities reflect the wider impact of China’s regulatory actions. The strategic use of competition law by net-IP users may transfer wealth from patent licensors to IP licensees and device producers. While these policies benefit local net-IP users and firms in China, they may undermine the global property-rights infrastructure essential for long-term innovation.
11.2.2. Judicial Actions
With some exceptions, Chinese courts have largely followed a weak-patent policy, influenced by competition regulators and global trends from the U.S. and the EU. For example, in Huawei v. InterDigital, Huawei filed a lawsuit in China against InterDigital (IDC), a U.S.-based patent licensing entity. After IDC sought an exclusion order in the U.S. Huawei argued that IDC violated Chinese competition law and sought a FRAND rate determination for IDC’s patents. IDC lost the case in both the lower and appellate courts, resulting in a $3 million fine for violating Chinese competition law. The court found that IDC engaged in excessive pricing, illegal tying of SEPs and non-SEPs, and attempted to enforce its patent rights through the U.S. courts and International Trade Commission. The appellate court set the FRAND royalty rate for IDC’s patents at significantly lower rates from other SEP holders. Ultimately, IDC’s attempt to enforce its SEP rights in China led to a reduction in its royalty rate and a fine for attempting enforcement.
11.2.2.1. Injunctive Relief
Various statements by Chinese courts provide further indications of the uniformity with which Chinese governmental entities have pursued weak patent policy concerning SEPs. In 2015, draft guidelines indicated that requesting injunctive relief could violate competition laws if used to extract “unfairly high” royalties or enforce unreasonable terms. In 2016, the Supreme People’s Court clarified that SEP owners cannot seek injunctions if they violate their FRAND commitment by offering non-FRAND-compliant rates. This approach likely discouraged SEP owners from seeking injunctions due to uncertainty over what courts would consider a FRAND-compliant rate. Furthermore, in 2017 and 2018, two High Courts issued guidelines establishing a presumption against injunctive relief, with exceptions for bad-faith negotiation or refusal to pay a “reasonable” royalty. These guidelines align with similar court decisions in the EU, UK, and U.S. However, China’s vague standards for “reasonable” royalty and “good faith” negotiations make outcomes unpredictable. Overall, SEP owners face a low likelihood of securing injunctions in China, and attempting to do so may expose them to counterclaims under competition law.
11.2.2.2. Reasonable Royalty Determinations
The use of competition law by Chinese institutions for mercantilist purposes is most clearly illustrated by statements that directly set royalty rates between SEP owners and local device manufacturers. In 2008, the Supreme People’s Court issued an advisory opinion stating that SEP owners must offer licenses at “significantly lower” royalty rates than rates charged for non-SEPs. Similarly, a 2009 draft guideline proposed that SEP owners must offer either zero royalties or a “significantly lower” rate. However, this was later revised. The 2014 version of this guideline no longer included the zero-royalty option and instead required licensing at a FRAND rate. In 2018, a Court suggested that reasonable royalty rates in SEP litigation should reflect the ex-ante value of the patent before standard inclusion. This approach risks depriving patent owners of value generated by the standardization process. It benefits producers and users who adopt the standard but do not contribute to its development. Chinese courts’ devaluation of SEPs through lower royalty rates has resulted in lower rates compared to those in the U.S. and Europe. This approach effectively reduces the value of SEPs in both litigation and licensing negotiations. Consequently, it secures short-term cost savings for local manufacturers at the expense of future technological development incentives. In short, China is using a political system unconstrained by rule-of-law and separation-of-powers principles. Its strategy mirrors similar wealth-shifting tactics used by device producers in lobbying, advocacy, and litigation in the U.S. and European jurisdictions.
11.2.2.3. Extra-Territorial Jurisdiction
Recently, Chinese courts have sought to act as the exclusive global jurisdiction to adjudicate disputes between SEP owners and implementers in SEP infringement litigation. Chinese courts have pursued this objective through three tools: anti-suit injunctions, global royalty orders, and choice of law rulings. Given the enormous size of the Chinese market as a portion of the global wireless device market, this allows China to exert significant influence over global technology pricing. As mentioned, in 2014, a Chinese court ruled that IDC violated competition law by filing a lawsuit in the U.S. courts while negotiating with Huawei. The court also determined that IDC’s FRAND commitment would be interpreted under Chinese law, contrary to other jurisdictions that follow the law selected by the standard-setting organization. This effectively converted the parties’ litigation into a dispute to be resolved exclusively in Chinese courts and subject to Chinese law.
The Chinese court’s decision in the Huawei/IDC case implicitly signalled that parties risk competition law liability when they initiate concurrent infringement actions outside China. Furthermore, following this decision, an article was published advocating a mercantilist approach to the application of competition and patent law. In addition, the court suggested that Chinese companies should employ anti-monopoly lawsuits to dismantle technology barriers and secure space for development. In a 2020 speech, President Xi Jinping highlighted that intellectual property is crucial for international competitiveness and dispute resolution. Following policy signals from Chinese government leaders, Chinese courts issued several anti-suit injunctions in 2020 and 2021. This barred SEP owners from seeking relief in courts outside China.
11.2.2.4. Conversant/Huawei Litigation
In the Conversant/Huawei litigation, Huawei sought an anti-suit injunction in a Chinese court on the same day Conversant obtained a German injunction. The German court set a FRAND licensing rate 18.3 times higher than the Chinese court’s rate. Thus, the Chinese court’s intervention significantly reduced the royalty burden on a local device manufacturer.
In the IDC/Xiaomi litigation, Xiaomi sought an injunction preventing IDC from enforcing an Indian injunction. In response, the Chinese court barred IDC from seeking injunctive relief for a FRAND rate from any other court during the proceeding. The court explained that the decision aimed to safeguard China’s high-tech enterprises in transnational intellectual property competition. This is another case in which the judicial system has been deployed explicitly for purposes of international trade strategy.
11.2.2.5. Sharp/Oppo Litigation
The Sharp/Oppo litigation was initiated by Oppo, a China-based device producer, in response to a patent infringement suit filed in Germany by Sharp, a Japan-based SEP owner. The Chinese court issued an anti-suit injunction barring Sharp from continuing its German litigation. While the German court issued an injunction against Oppo with respect to the Chinese litigation, Sharp agreed to abide by the Chinese court’s ruling. In 2021, the Supreme People’s Court affirmed the right of Chinese courts to set global FRAND royalty rates. Thus, in 2022, the Supreme People’s Court recognized Huawei v. Conversant and Oppo v. Sharp as significant IP cases.
As described by Mark Cohen, the Supreme People’s Court has used its rulings to actively influence global SEP royalty rates and international market competition. The Court views cases like Oppo v. Sharp and Huawei v. Conversant as signs of its shift from following to leading in international IP rules.
Courts in the United States have also issued anti-suit injunctions in connection with determinations of a global FRAND royalty rates. However, contrary to the U.S., Chinese Civil Procedure Law does not require respect for foreign court decisions or international comity when issuing anti-suit injunctions. Chinese anti-suit injunctions differ from those in common-law jurisdictions, in so far as Chinese courts issue injunctions only in relation to foreign judicial proceedings. Therefore, Chinese anti-suit injunctions should be seen as a tool of the Chinese government rather than independent judicial actions.
There are indications that Chinese policymakers have effectively shifted the use of anti-suit injunctions from the judiciary to regulatory authorities. In January 2021, a Chinese court denied an anti-suit injunction in Lenovo’s case, while Chinese competition regulators later proposed rules targeting FRAND commitment violations. These new competition rules prohibit the use of relevant intellectual property rights to force the licensee into accepting unfairly high prices. Additionally, the rules contemplate that the regulator may seek the equivalent of an anti-suit injunction through administrative action. Ultimately, this empowers regulators to take actions against business practices that occur outside China but have anticompetitive effects on the domestic Chinese market.
11.3. Antitrust Mercantilism
In the aggregate, the actions taken by Chinese courts have created an environment that benefits local device producers. These producers can use legal proceedings to reduce the royalty rates owed to foreign IP owners. Specifically, the Chinese legal environment is attractive to producers in two important respects. First, Chinese competition law allows “excessive pricing” in SEP licenses as a cause of action, which is not available in U.S. law or European courts. Second, Chinese courts are willing to set global SEP royalty rates based on connections to China, sometimes determined by the location of license negotiations. Furthermore, Chinese courts have tended to set lower SEP royalty rates compared to foreign courts, making China an attractive venue for SEP infringement litigation. For example, in Huawei v. IDC, a Chinese court set a royalty rate for Huawei’s devices much lower than the rates set in TCL v. Ericsson in the U.S.
As mentioned, Chinese courts use FRAND determination and competition law to reduce royalty rates owed by downstream producers to foreign SEP holders. This approach effectively shifts economic value from foreign IP holders to domestic producers through judicial processes, seen as a mercantilist mechanism. In February 2022, the European Union filed a complaint against China at the World Trade Organization. The complaint alleged violations of World Trade Organization rules through anti-suit injunctions against EU-based SEP owners. Specifically, a 2021 Chinese court decision in the Hitachi case illustrated the use of competition law to challenge dominant foreign patent holders. Hitachi, a Japanese firm with over 600 patents for magnets, had licensed its portfolio to over 10 companies, including eight Chinese firms. After failed negotiations, a member of a Chinese alliance sued Hitachi for “abuse of dominance,” claiming its refusal to license was anti-competitive. The Court deemed Hitachi’s patents essential to the market and concluded that its refusal to license constituted an abuse of its dominant position. The ruling’s application of the essential facility doctrine shows China’s tendency to use competition law to shift economic value in favor of domestic firms. This approach illustrates Chinese courts’ readiness to re-engineer the distribution of economic value between foreign innovators and domestic implementers.
11.4. Apple, Inc., and China, Inc.
Similarly, Chinese courts and regulators have created a legal framework around FRAND commitments that benefits local companies in the smartphone supply chain. This legal framework also provides a competitive advantage to firms operating in midstream and downstream segments of the China market. This means that some foreign firms benefit from China’s policy of reducing SEP royalty rates. Among these firms, Apple is the clearest beneficiary. There are two reasons. First, Apple is a net-IP user in the smartphone market. Second, Apple derives a significant portion of its sales in the China market. Consequently, Apple has a strong interest in weaker patent protections in China, where it also produces most of its devices.
For example, in January 2017, Apple launched a multi-front litigation campaign against Qualcomm, including antitrust suits in China and the U.S. over SEP licensing practices. Apple’s legal actions aimed to challenge Qualcomm’s royalty rates in both the U.S. and China, key markets for Qualcomm’s SEP royalties. Internal documents from 2019 revealed a strategy aimed at devaluing Qualcomm’s IP assets and reducing its royalty rate through litigation. In short, Apple, with the intention of reshaping FRAND to secure lower rates, sought to create favourable licensing records to argue that Qualcomm’s royalty rates were not FRAND. Despite acknowledging Qualcomm’s superior patent portfolio, Apple tried to use litigation to impose a legal ceiling on SEP royalties in the smartphone market.
Through U.S. and Chinese competition law, Apple sought to secure legal outcomes such that Qualcomm would be compelled to license direct competitors in the chip supply market (or significantly reduce royalty rates). Apple argued that patent holdup and royalty stacking justified its legal actions, claiming it was in the public interest to preserve competitive markets. If successful, Apple’s legal strategy would have commoditized the chip segment in the smartphone supply chain. The result would be a wealth transfer to device makers. In other words, this shift would have appropriated profits from chip-design specialists, harming innovation in the medium to long term, despite reducing Apple’s input costs.
From Apple’s perspective, Chinese competition law is a mechanism to reduce technology input costs, benefiting both Apple directly and its contract producers. The same rationale applies to other multinational technology firms with significant production and sales in China. In summary, the convergence of economic interests between downstream firms and the Chinese government’s goal to lower technology input costs has supported tools to reduce IP costs.
11.5. Closing Thoughts
Enforcement actions by competition regulators in China indicate a growing accidental alliance between ideologically motivated advocates for weak IP rights and profit-driven device producers. This alliance now includes regulators in regions that play key roles in global technology production and distribution. While large technology firms raise concerns about patent holdup and royalty stacking, competition regulators in these regions share similar concerns. Both groups argue that “unreasonable” rates or terms imposed by IP owners should be evaluated in the context of their economic interests. These interests primarily seek to minimize input costs in the wireless technology ecosystem. However, this focus conflicts with the broader need to sustain innovation. Protecting IP rights is essential for maintaining the incentive and funding structures that drive global technological advancements.
[1] FRAND refers to fair reasonable and non-discriminatory. It is a commitment given by SEP holders to license their inventions on fair reasonable and non-discriminatory terms.
