Introduction
Recently, the Supreme People’s Court of China (“the Supreme Court”) has rendered its second instance judgment on the first antitrust case in China’s rare earth industry. The ruling overturned the first instance judgement by having dismissed all claims made by the plaintiff. AnJie Broad team represented Hitachi Metals in both the first instance and appellate proceedings and dedicated a span of nearly ten years to bring this case to its final conclusion. Given that this case marked the first instance of a Chinese court having applied the essential facilities doctrine in an antitrust litigation, this case garnered widespread attention and commentary from both domestic and international industry stakeholders, academic circles, and legal practitioners, rendering it extremely high-profile.
The complex issues involved in this case, such as the approach of defining the relevant technology market, whether the owner of non-SEP might be deemed to have a dominant position simply based on the patent ownership, the conditions for application of essential facilities doctrine and the approach of competitive analysis when it comes to exercising intellectual property rights. This case does not only bear academic significance within the antitrust domain but also wield a guiding influence on economic and innovative activities within the industry.
In addition, it is noteworthy that the Supreme Court’s ultimate ruling in this case not only thoroughly embodies the judicial spirit that “antitrust law protects competition, not specific competitors,” establishing judicial practice on the value and objectives of anti-monopoly law, but also showcases its stringent approach and commitment to impartial justice, especially facing the dispute between the Chinese party and foreign party.
I. Case Overview
On December 11, 2014, four companies engaged in the production and sale of sintered neodymium-iron-boron (“NdFeB”) permanent magnet materials in Ningbo, China, namely Ningbo Ketian Magnet Co., Ltd., Ningbo Permanent Magnetic Industry Co., Ltd., Ningbo Tongchuang Strong Magnet Material Co., Ltd., and Ningbo Huahui Magnetic Industry Co., Ltd (“the four plaintiffs”), initiated civil antitrust lawsuits against Hitachi Metals, Ltd. (“Hitachi Metals”) with the Intermediate People’s Court of Ningbo, Zhejiang Province (“the Ningbo court”). The four plaintiffs contended that Hitachi Metals owned numerous essential patents related to sintered NdFeB. Hitachi Metals had a dominant position in the essential patent licensing market for sintered NdFeB. Hitachi Metals’ refusal to license without justifiable reasons was considered a “refusal to deal” under the framework of AML. Additionally, the bundling of essential and non-essential patents by Hitachi Metals constituted tie-in sales. Therefore, the four plaintiffs believed that these activities constituted abuse of market dominance and requested the court to order Hitachi Metals to cease infringement and compensate for their economic losses.
On April 23, 2021, the first instance judgment was rendered by the Ningbo court against Hitachi Metals. The Ningbo court defined two relevant markets in the dispute: one upstream market for licensing sintered NdFeB magnet patents held by Hitachi Metals, and one downstream market for producing sintered NdFeB magnets. The Ningbo court determined that Hitachi Metals held a dominant market position in the upstream market, thus its refusal to license was deemed an abuse of dominant market position, leading to the court ordering the cessation of infringement and compensation for economic losses.
Subsequently, Hitachi Metals appealed to the Supreme Court. Following a public trial, the Supreme Court handed down its second instance judgment on December 14, 2023, overturning the first instance ruling and dismissing all claims made by the four plaintiffs. That marked a complete reversal took place in the appeal procedure.
Indeed, a meticulous analysis is necessary to understand the substantial disparity between the judgments of the first instance and second instance courts. What accounts for the complete divergence in the opinions of the two courts on the pivotal issues?
II. Does Licensing of Sintered NdFeB Patents Owned by Hitachi Metals Constitute A Separate Relevant Market?
- The Court’s Ruling
The Ningbo Court, in the first instance, found that from the perspective of demand-side substitution, licensing for sintered NdFeB patents owned by Hitachi Metals is essential. The primary evidence that Ningbo Court relied on includes Hitachi Metals’ public statement, the opinions of technical expert witnesses engaged by the four plaintiffs, and relevant statements of third-party reports. The Ningbo Court further explicitly clarified that since Hitachi Metals’ sintered NdFeB patents were not part of standard-setting, it did not qualify as a standard essential patent (SEP). To avoid ambiguities, the patents discussed in the instant case are referred to as sintered NdFeB “essential patents”.
The Supreme Court held in the second instance ruling that the evidence at hand is inadequate to establish the existence of an independent market for licensing of essential patents for sintered NdFeB, let alone the relevant market for licensing of essential patents for sintered NdFeB owned by Hitachi Metals. Specific reasons for this conclusion include:
Firstly, there are two inconsistent or contradictory claims in this case. On the one hand, the four plaintiffs argued that Hitachi Metals’ patents were essential or crucial technology for manufacturing sintered NdFeB. On the other hand, the four plaintiffs sought a patent exploitation license from Hitachi Metals while simultaneously asserting that their production of sintered NdFeB did not infringe Hitachi Metals’ patent.
Secondly, the fact regarding the development of sintered NdFeB’s production technology objectively demonstrated that the argument at the time of the allegation that “Hitachi Metals’ sintered NdFeB patents are essential patents” lacked evidence to support. The technologies of manufacturers included patents, technical secrets, and publicly known technologies. Meanwhile, in recent years, China has made rapid progress in patent applications, production, and exports of sintered NdFeB. Sintered NdFeB and its production technology are non-standardized products and non-standardized technologies, characterized by frequent updates and iterations of technology.
Thirdly, Hitachi Metals used to hold more than 600 patents of sintered NdFeB worldwide. In China, Hitachi Metals held 90 Chinese patents and granted licenses to eight Chinese companies, such as Zhong Ke San Huan, for implementation. Nevertheless, companies that did not obtain licenses from Hitachi Metals continued to manufacture and sell sintered NdFeB materials in China, exporting to Europe and other countries, except the United States and Japan.
Fourth, the four plaintiffs further contended that the essential nature of the patents concerned did not result from technology but rather stems from Hitachi Metals’ abusive tie-in sales, litigation threats, and exclusive arrangements. This further indicated that claims such as “Hitachi Metals’ patents concerned are essential patents that cannot be design around in the production of sintered NdFeB materials” and “Chinese rare earth permanent magnet companies without license from Hitachi Metals cannot export their products to designated countries such as the United States” lacked sufficient factual basis and were more likely a misjudgment or misconception about the facts.
Based on the afore-mentioned reasons and through comprehensive analysis, the Supreme Court held that the four plaintiffs’ claim – the sintered NdFeB patent of Hitachi Metals was irreplaceable and constituted an independent relevant market – was inconsistent with the reality. The four plaintiffs also failed to provide sufficient evidence to prove its claims, especially did not provide evidence to prove why and how Hitachi Metals’ sintered NdFeB patents were technically irreplaceable. In the Supreme Court’s view, the relevant product market in this case should be defined as the market for the production technology of sintered NdFeB materials, encompassing both patented technology and non-patented technology with close substitutability.
2. Comments: “Patent Licensing Market” Is Different From “Technology Market”
Guidelines of the Anti-Monopoly Commission under the State Council on the Definition of Relevant Market （“Guidelines on Relevant Market”）and Provisions on Prohibition of Abuse of Intellectual Property to Exclude or Restrict Competition （“Antitrust Provisions on Abuse of Intellectual Property”） respectively stipulate that “In the antitrust enforcement for technology trade, licensing agreement, etc. that involves intellectual property, it might be necessary to define the relevant technology market in consideration of such factors as intellectual property and innovation.” and “In the antitrust enforcement involving intellectual property licensing, the relevant commodity market may be a technology market or a product market containing specific intellectual property.” Antitrust Provisions on Abuse of Intellectual Property also provides that “The relevant technology market refers to the market formed by the competition between technologies involved in the exercise of intellectual property and the same type of technologies that are mutually substitutable.”
Based on the above rules, it can be inferred that, substitutable technologies of the same type are not limited to patents. In other words, non-patented technologies can also constitute substitutes to patented technologies and may belong to the same relevant technology market along with patented technologies. Therefore, when defining the relevant technology market, it is necessary to examine not only the existence of substitutable patented technologies, but also the existence of substitutable non-patented technologies to accurately define the scope of the relevant technology market under antitrust regime. We must avoid falling into the misconception that the “relevant technology market” is equivalent to the “patent licensing market”.
It should be recognized that the judicial pattern of the Supreme Court’s judgment in this case aligns with the legislative spirit of the Antitrust Provisions on Abuse of Intellectual Property.
III. The Application of Essential Facilities Doctrine in the Field of Intellectual Property should Be Strictly Limited
- The Court’s Ruling
The Ningbo Court held in the first instance that, Hitachi Metals’ concerned patents enjoys a strong market dominance due to their technological irreplaceability, which was then further strengthened by the solidification of market awareness. The Ningbo Court believed that the “essential facilities” doctrine could be applied as an analytical tool in this case and determined that Hitachi Metals’ patents concerned had already constituted essential facilities. The rationale behind this decision is as follows: such a “facility” was indispensable for sintered NdFeB enterprises to participate in competition; Hitachi Metals, as the intellectual property rights holder, monopolistically controlled the essential facility; competitors cannot duplicate the facility exerting reasonable efforts; Hitachi Metals denied the use of the facility by competitors when the four plaintiffs having explicitly made licensing requests and being willing to pay reasonable consideration; the refusal to license is not justified.
Although the Supreme Court did not explicitly evaluate the application of essential facilities doctrine in the second instance ruling, the decision to overturn the determination of Hitachi Metals’ market dominance in the relevant market essentially negated the first instance finding of essential facilities. In reality, Hitachi Metals owns some important patents in the relevant product market, and it does not mean that Hitachi Metals has a dominant position under the AML.
- Comments: the Application of Essential Facilities Doctrine shall be strictly restricted
Pursuant to Article 123 of the Civil Code, a civil person or entity enjoys an intellectual property right in accordance with the law. The intellectual property right is a “proprietary right” enjoyed by the right holder in respect of a specific object. Given that intellectual property rights belong to the category of private rights and its nature of civil rights, the application of essential facilities doctrine in the field of intellectual property requires especially careful precaution.
Noteworthy, the Antitrust Provisions on Abuse of Intellectual Property released in 2023, compared to its old version in 2015, deleted the provision on essential facilities doctrine. Such a subtle legislative change further evidences the cautious attitude toward application of essential facilities doctrine in the Intellectual Property.
As a matter of fact, the application of essential facilities doctrine is also rare and controversial in other jurisdictions, such as Europe and the United States.
The essential facilities doctrine was first introduced in the case United States. v Terminal Railroad Association of St. Louis (1912). However, the Supreme Court of the United States remained conservative on the application of this doctrine in cases involving intellectual property. It has noted that compulsory licensing is in conflict with the legislative purpose of antitrust laws, as it would weaken the innovation incentives of competitors. In the case Verizon Communications Inc. v. Law Offices of Curtis v Trinko, LLP (2004), the Supreme Court of the United States elaborated on the potential conflict between compulsory licensing of intellectual property and the legislative purpose of antitrust laws as follows:
Compelling firms to share the source of their advantage is in some tension with the underlying purpose of antitrust law, since it may lessen the incentive for the monopolist, the rival, or both to invest in those economically beneficial facilities. Enforced sharing also requires antitrust courts to act as central planners, identifying the proper price, quantity, and other terms of dealing-a role for which they are ill suited. Moreover, compelling negotiation between competitors may facilitate the supreme evil of antitrust: collusion.
Similarly, there have been very strict requirements for the application of essential facilities doctrine in Europe as well. Relevant EU rules explicitly stipulate the requirements for applying the essential facilities doctrine, including: first, the refusal of the relevant product or service is objectively essential for effective competition in the downstream market; second, the refusal is likely to eliminate effective competition in the downstream market; third, the refusal is likely to cause harms to consumers; fourth, licensing will not have a negative impact on the innovation.
It’s critical to highlight that the EU has introduced an additional criterion for applying the essential facilities doctrine to intellectual property in practice, known as the “new product” standard. This means that it must be demonstrated that, after compulsory licensing, the result will be the creation of a new product that meets consumers’ new demand. For instance, in the Magill v Radio Telefis Eireann case, the plaintiff Magill intended to introduce a new business involving a comprehensive “television program guide” that met consumer demand. Similarly, in the IMS Health GmbH & Co. OHG v NDC Health GmbH & Co. KG case, IMS provided innovative regional sales data for pharmaceutical products in Germany, addressing consumer demand.
The “new demand” standard of the EU is reasonably justified. This is because intellectual property essentially grants intellectual property holders the legitimate right to restrict competitors from producing, selling, and offering products identical to their own. If, after licensing, the result is merely that other licensees produce products identical to those of the intellectual property holder, it would have no effect in promoting innovation. On the contrary, it could significantly dampen the enthusiasm of operators to innovate.
The first instance judgment of this case marks the first-time application of essential facilities doctrine in China, representing a bold attempt. However, this attempt is evidently flawed. The Supreme Court’s second instance judgment provides insights into the future application approach of essential facilities doctrine in China.
IV. Is the Key to Conduct Competitive Analysis on the Upstream Technology Market or Downstream Product Market?
- The Court’s Ruling
In the first instance judgment, the Ningbo Court directly concluded that Hitachi Metals’ activities excluded and restricted competition. Nevertheless, the Ningbo Court did not examine the fundamental facts needed for the “competitive effects analysis” nor elaborated on the “competition analysis process”.
In the second instance judgment, the Supreme Court held that it was difficult to establish Hitachi Metals’ dominant market position, and consequently, the plaintiff’s claims of dominant market position and bearing civil liability were difficult to substantiate. As a result, the Supreme Court decided not to further examine the case. That said, it is noteworthy that when discussing whether Hitachi Metals had market dominance, the Supreme Court had, in fact, carried out examinations and analysis of the competition in the downstream product market. Specifically, the Supreme Court maintained that in a situation where multiple competitive technologies exist in the relevant technology market, the market share of downstream products implementing that technology could more accurately and conveniently reflect the conditions of the relevant technology market. It could also more accurately reflect the market position of the operator owning that technology. The combined market share of sintered NdFeB produced by Hitachi Metals and eight Chinese enterprises licensed under its patents did not exceed 20% of the Chinese sintered NdFeB product market. Furthermore, the market share of Hitachi Metals and the eight Chinese licensees, along with foreign licensees, in foreign markets was even lower. In addition, despite not licensing other Chinese enterprises after 2013, the production of NdFeB magnets in China had increased significantly since 2014. This further supported the finding that Hitachi Metals did not have a dominant market position, either in the upstream NdFeB technology market or the downstream materials market.
- Comments: The Key to Antitrust Evaluations of the Exercise of Intellectual Property is the Competitive Analysis of Downstream Product Market
Pursuant to Article 68 of the Anti-Monopoly Law (AML) 2022, the AML does not apply to the exercise of intellectual property rights by undertakings according to relevant laws and administrative regulations governing intellectual property rights; however, undertakings’ abuse of intellectual property rights to eliminate or restrict competition shall be governed by the AML. Consequently, justifiable exercise of a patent right is a legitimate and free activity of the party involved and does not constitute an abuse of intellectual property rights under the AML.
As mentioned above, the application of essential facilities doctrine to regulate refusal to license activities is uncommon in global judicial practices. As emphasized by the Supreme Court of the United States in the case United States v. Colgate, every operator should have the right to freely choose its trading partners, and antitrust laws do not prevent operators from exercising their inherent autonomy in business. Compulsory transactions contradict the fundamental legal principle of freedom of contract. Therefore, the prerequisite for compulsory transactions must be that the refusal to deal would have a serious anticompetitive impact on the relevant market.
Moreover, although the Antitrust Provisions on Abuse of Intellectual Property only mentions that “refusal to license the intellectual property will have adverse impact on the competition or innovation in the relevant market, thus harming the interests of consumers or the public” without specifying which market it is, according to the domestic and overseas judicial practices, the primary consideration for the impact on competition should be the downstream product market. For instance, section 3.2 of the U.S. Antitrust Guidelines for the Licensing of Intellectual Property explicitly states that if the patent licensing appears likely to have anticompetitive effects, the Agencies normally will identify one or more relevant market in which the effects are likely to occur. Usually, enforcement agencies evaluate the downstream product market, and in other circumstances, they may consider the impact on technology or research and development markets.
Hence, when evaluating conduct that seems to be the lawful exercise of intellectual property rights, the primary emphasis in antitrust law assessment should be on examining whether it exerts substantial exclusionary or anticompetitive effects on the downstream product market, rather than the upstream technology market. This is crucial because obtaining a patent license is specifically for the production and sale of downstream products. If the upstream technology lacks application value, scrutinizing the market position in the upstream market becomes meaningless.
Conclusion
The refusal to license a patent presents distinctive features compared to a typical refusal to deal. When regulating the refusal to license, considerations should extend not only to protecting the licensor’s contractual rights, it is also essential to take into account the incentives for innovation and the strike on the proprietary nature of patent rights. In the case of refusal to license non-SEP, antitrust law should use intervention more cautiously to avoid inappropriate interference. Forcing patent owners into licensing may impede innovation and diminish incentives in alternative technologies, ultimately harming technological innovation in the market as a whole. From a technical standpoint, defining the relevant technology market should consider both patented and non-patented technologies. The application of essential facilities doctrine, given its controversial nature, should be cautious in the realm of intellectual property. When assessing antitrust implications of the normal exercise of intellectual property rights, careful attention should be directed towards analyzing the competitive effects on downstream product markets.
The nearly-ten-year legal dispute in the Hitachi Metals case has ultimately come to an end. The judicial pattern of the Supreme People’s Court of China in the first antitrust litigation of rare earth sector deserves careful study.
