As Asia’s appreciation for intellectual property rights grows, lawyers in the region note that competition law is increasingly finding its way into IP matters. In China, the issue of anticompetitive behaviour over IP rights is coming to the fore, evidenced by several recent high-profile investigations. Kanishk Verghese reports, with additional reporting by Michael Martina and Matthew Miller of Reuters

As Asia matures, a growing number of corporations and individuals in the region are realising the value of intellectual property rights. This has in turn helped spur spending on R&D to drive innovation. A World Intellectual Property Organization (WIPO) report published last November shows that global patent filings grew by 9.2 percent in 2012 – the fastest rate of growth in nearly two decades. Meanwhile, China’s State Intellectual Property Office (SIPO) saw a 24 percent growth in filings in 2012, the highest increase in filings among the top 20 IP offices.

WIPO’s findings underscore China’s developing appreciation for owning IP rights. “China is realising that patents are an innovation currency of sorts, and they can be used to trade, barter and accelerate the rate at which it grows its own value-added economy,” said Ross O’Brien, Chief Hong Kong Economist at The Economist Corporate Network, at Baker & McKenzie’s Asia-Pacific Transactional IP seminar, held on May 8. “Being able to license technology is a way to get innovations kick-started and completed a lot faster,” O’Brien said.

Clash or complement?

But the growth of technology licensing has given rise to numerous antitrust issues, which is garnering greater attention in China, competition lawyers in the region say. At first glance, the objectives of IP law and competition law seem to clash – IP owners are granted statutory rights to control access and prices of their rights, while competition law looks to curb the abuse of a dominant market position.

However, the prevailing view is that IP and competition laws complement one another, as both seek to boost consumer welfare and encourage innovation. According to the U.S. Department of Justice and the Federal Trade Commission: “Competition laws protect robust competition in the marketplace, while intellectual property laws protect the ability to earn a return on the investments necessary to innovate. Both spur competition among rivals to be the first to enter the marketplace with a desirable technology, product, or service.”

In China, the State Administration for Industry and Commerce (SAIC) is finalising rules for the enforcement of the Anti-Monopoly Law (AML) against the abuse of IP rights. Lawyers in the region have welcomed the rules, and believe that they will bring clarity to this increasingly contentious area, evidenced by recent high-profile investigations in China.

Qualcomm under the microscope

One such highly publicised case involves San Diego-headquartered Qualcomm Inc, the world’s biggest cellphone chip maker. In November last year, China’s National Development and Reform Commission (NDRC) launched an investigation to determine whether Qualcomm abused its dominant market position to charge discriminatory prices for patent licensing.

Under the AML, the NDRC can impose fines of between 1 and 10 percent of a company’s revenues for the previous year. According to Reuters, Qualcomm earned $12.3 billion in China for its fiscal year ended Sep. 29, or nearly half of its global sales. This means the NDRC could slap Qualcomm with a fine exceeding $1 billion, which would be the highest fine issued to date. “The NDRC keeps as much discretion for the decision maker as possible,” says Peter Wang, partner at Jones Day in Shanghai, and head of the firm’s China antitrust practice. “Technically, it would appear they can't go below 1 percent, though they have other ways to reduce the fines based on cooperation.”

Lawyers add that the fine is likely to be extremely high if Qualcomm fails to make concessions in its talks with the NDRC. “While the [fine] money may be very attractive to the NDRC, they would also be happy if Qualcomm were to make all sorts of commitments regarding its technology and the licensing of the technology,” Yee Wah Chin, a New York-based counsel at Ingram Yuzek Gainen Carroll and Bertolotti, told Reuters.

Some experts claim the NDRC’s scrutiny of IT providers stems from its desire to lower domestic costs as China rolls out its 4G mobile networks. While some of this might be valid, it is important to remember that the AML actually contains provisions to allow competition regulators to look at broader concerns, rather than just pure competition law concerns, said Eva Crook-Santner, a registered foreign lawyer at Baker & McKenzie in Hong Kong, at the IP seminar.

InterDigital v Huawei

In another notable case, last year the NDRC launched an investigation of InterDigital Inc, a U.S. patent licensing firm, to assess antitrust complaints by Huawei Technologies, a Chinese network equipment maker, related to technologies for wireless devices and networks. InterDigital has also been locked in a legal battle over patent royalty rates it has been seeking from Huawei. In February last year, the Shenzhen Intermediate People’s Court heard that InterDigital had abused its patent rights by charging Huawei a royalty rate far above what it obtained from the likes of Apple Inc and Samsung Electronics for essential patents for mobile telephone technology. The court found that the licence terms weren’t compliant with fair, reasonable and non-discriminatory (FRAND) terms, and ordered InterDigital to license the patents to Huawei at a royalty rate of 0.019 percent. “Interestingly, this is the first time we have seen a court determine a specific FRAND royalty rate in China,” says Crook-Santner.

InterDigital appealed this ruling at the Guangdong High Court, which found on October 2013 that the royalty charged to Huawei was higher than those charged by InterDigital to other companies, and awarded the Chinese company 20 million yuan ($3.3 million) in damages. InterDigital now intends to appeal to China’s Supreme Court. “It will be interesting to see what the outcome of this case is, as it sets an interesting precedent for other similar cases going forward in China,” says Crook-Santner.

MOFCOM has its say

Besides investigations and court cases, some proposed M&A transactions too have raised IP-related antitrust concerns in China. Nokia, for instance, agreed to sell its flagship business to Microsoft last September in a 5.4 billion euro ($7.4 billion) deal. However, it kept its patent portfolio, viewed by analysts as a promising source of future growth. The Finnish company, which once dominated the global mobile phone business, holds a portfolio of about 30,000 technology patents – some essential for mobile communications – which analysts say could be worth between 3 billion and 10 billion euros.

Regulators in the U.S. and EU gave the green light for the acquisition to go ahead. Like its Western counterparts, China’s Ministry of Commerce (MOFCOM) approved the deal in April this year, finding that Nokia’s smartphone and Microsoft mobile operating system businesses would not give rise to competition concerns post acquisition. However, in one of the first cases ever in China, MOFCOM instead focused on the two companies’ existing technology assets and patent portfolios.

MOFCOM concluded that after the acquisition, Microsoft would have the ability and incentive to restrict competition in the patent licence market for several patents used in Android smartphones in China. MOFCOM also found that Nokia would have the capability and motivation to increase patent licensing royalty rates for its own smartphone-related patents. As a result, the Ministry required commitments from both Microsoft and Nokia to honour FRAND licensing principles and refrain from seeking injunctions or exclusion orders against local Chinese smartphone makers. “As we ... plan to continue to honour our FRAND undertakings in the future, we are prepared to voluntarily reaffirm Nokia’s continuing commitment to FRAND licensing principles,” Nokia said.

Microsoft also pledged not to change its patent licensing practices and current royalty rates for eight years. “It has never been our intent to change our practices after we acquire the Nokia business,” David Howard, Microsoft vice-president for litigation and antitrust, wrote on the company’s blog.

Beef up compliance

The aforementioned examples are but a few of a growing number of cases and investigations concerning the interplay between IP and competition law in China. And as SAIC finalises its draft AML enforcement guidelines against the abuse of IP rights, companies in the region would be wise to review their business practices to ensure compliance with China’s AML, as well as conduct thorough IP due diligence on their dealings, lawyers advise.

Furthermore, lawyers note an increase in cooperation between competition authorities in Asia, and advise companies to align their approach in China with their other operations in Asia in order to limit the risk of multiple antitrust investigations occurring simultaneously. “The importance of making sure that your personnel on the ground in China understand how to cooperate and respond to such investigations cannot be underestimated,” says Crook-Santner.

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Fighting fakes: Ahead of U.S. IPO, Alibaba takes a tougher line

By Paul Carsten and Deepa Seetharaman of Reuters

Alibaba is taking a tougher line against counterfeit items sold on its online marketplaces as the Chinese e-commerce giant heads towards a U.S. stock listing that could be the world's biggest technology company IPO.

Some security experts say the Chinese group's stricter standards on piracy and fake goods may even surpass those of Amazon.com Inc and eBay Inc.

In its IPO filing last month, Alibaba Group Holding said the perception that its sites are cluttered with counterfeit items could hurt its ability to win over customers, investors and U.S. retail partners. The group, founded by entrepreneur Jack Ma 15 years ago, has stepped up efforts to clean house over recent years.

For example, Eduardo De Arkos last summer stumbled across a supplier attempting to make a counterfeit version of a floating pool toy his company made. Two days after contacting Alibaba, the supplier of the counterfeit had been removed.

"They reached out to the supplier and told them they couldn't do that," says De Arkos, CEO of U.S. company Innovative Watersports that has sourced through Alibaba since 2012. "That's the peace of mind a lot of people need when manufacturing overseas."

Alibaba's forceful response is a far cry from a few years back when its businesses were listed on the U.S. Trade Representative's list of "notorious markets" for intellectual property (IP) infringement.

"This is a much more aggressive stance than I've seen taken by U.S. marketplaces, including eBay," says Richard Last, a professor of retail at the University of North Texas and a former J.C. Penney executive.

A long road

But given China's reputation for churning out fake goods, Alibaba still has much to do to convince the world it's not a hub for piracy and knock-offs.

China and Hong Kong accounted for 93 percent of the value of IP infringing products seized by U.S. Customs and Border Protection in the fiscal year 2013, according to a U.S. government report. The previous year, China accounted for 72 percent.

This has deterred some U.S. retailers from opening stores on Alibaba's Taobao and Tmall marketplaces, experts say. To go around that problem, Alibaba will launch a separate service with Amazon rival ShopRunner to sell items from more than 100 U.S. retailers to Chinese consumers.

In its IPO filing, Alibaba acknowledged it could be exposed to lawsuits. "Although we have adopted measures to verify the authenticity of products sold on our marketplaces and minimise potential infringement of third-party intellectual property rights ... these measures may not always be successful," it warns. "We may be subject to allegations and lawsuits claiming that items listed on our marketplaces are pirated, counterfeit or illegal."

Listing in the United States may expose Alibaba to the kind of lawsuits over selling counterfeit goods that eBay and Amazon have fought for years - a magnet for litigious companies that don't now have to fight Alibaba on Chinese turf.

"I'm sure people will have a go," says Chris Bailey, a China-based executive at IP law firm Rouse. "The value of suing someone in the U.S. if you win is greater than in China."

Merchant mischief

Making things tougher for Alibaba, whose websites shift more goods than eBay and Amazon combined, merchants touting their fake goods are both savvy and persistent. They also use social networks like microblogs and mobile messaging apps to speak to potential customers and arrange payment and delivery, making it harder for Alibaba to track them.

"My shop has Chanel, Dior, Gucci, it does all kinds of bags. We get Louis Vuitton purses for 200 yuan ($32) and I sell them for 300 yuan," says a Chinese merchant based in the southern city of Guangzhou, who uses Alibaba's Taobao marketplace website to sell fake luxury goods.

"Taobao gets stricter every year, and last year they became particularly serious. I heard it was because they'll IPO," says the merchant, who doesn't want to be named for fear of his business being damaged or legal repercussions.

He adds that if Alibaba shut down his online store, he'll simply open another using a friend or relative's details to register.

Alibaba declined to comment, citing the company's pre-IPO quiet period.

With Alibaba, "the process is a lot more involved," says Rick Watson, CEO of Merchantry.com, which builds online marketplace software for Amazon and other companies. "They ask a lot more questions. They ask for upfront money – a deposit. I'm not aware of the U.S. companies doing that."

Measuring up

Almost a quarter of Alibaba's 20,000-plus workforce, plus volunteers, form an IP protection team, and the company spends more than 100 million yuan ($16 million) a year fighting counterfeit goods. In the past year, it removed more than 100 million hyperlinks to products suspected of IP infringement, the company said in a February filing to the World Intellectual Property Organization (WIPO).

eBay spends as much as $20 million each year on "buyer protection programmes”, such as reimbursing buyers for fake goods they bought on eBay's market, according to a 2010 U.S. federal court filing after Tiffany & Co alleged that eBay did little to clear up counterfeit goods sold on its site.

The San Jose, California-based company also set up a "Trust and Safety" department with some 4,000 employees, including more than 200 who focus just on combating infringement, and 70 who work exclusively with law enforcement, the court filing noted. eBay has a total workforce of around 33,500.

"Nothing is more important than the trust of our customers, and eBay employs a range of anti-counterfeit and fraud measures,” a spokesman said in emailed comments to Reuters, adding that eBay has more than 40,000 rights owners signed up to its Verified Rights Owner Program.

According to its WIPO filing, Alibaba's Taobao had 36,000 registered rights holders by 2013.

Amazon too faces a growing problem of counterfeit items as it relies more on third-party sales to pay for its other growth initiatives. Third-party sales are a lucrative business, accounting for about 40 percent of Amazon's unit sales - and around a quarter of total revenue.

As of 2012, Amazon had more than 100 employees "in risk investigation, including counterfeit listings," according to a California court filing that year. The company estimated it blocks 5,900 sellers a year suspected of "infringing conduct,” and "cancelled 4 million seller listings" over the course of a year. Amazon declined to comment for this article.

For Alibaba, countering the counterfeiters should both reduce the risk of fending off lawsuits, and make it more attractive to overseas clients and investors.

"In this business, reputation is everything," says Kent Kedl, managing director of Greater China and North Asia for Control Risks, a risk consulting firm.

"Brand is something companies are trying very hard to build, and if their brand is associated with really good buyer access and protection of IP, it can serve only to increase brand value and the value of the company."