Are Intellectual Property Licensing Agreements Exempt from AML Scrutiny?

A common misconception among foreign companies entering the Chinese market is that intellectual property (IP) licensing agreements — because they involve lawful IP rights granted by patent, trademark, or copyright law — are automatically exempt from scrutiny under China’s Anti-Monopoly Law (AML). This question is of critical importance for technology companies, pharmaceutical firms, entertainment conglomerates, and any business that licenses IP into or within China. The short answer is that IP licensing agreements are not exempt from AML scrutiny. While the AML recognizes the pro-competitive benefits of IP licensing, it simultaneously subjects such agreements to competition law review where they restrict competition beyond the legitimate scope of the IP right.

Article 68 of the AML: The IP Provision

Article 68 of the AML states: “An undertaking’s exercise of intellectual property rights in accordance with laws and administrative regulations on intellectual property rights shall not be governed by this Law; however, an undertaking’s abuse of intellectual property rights to eliminate or restrict competition shall be governed by this Law.”

This provision establishes a dual framework. On one hand, the lawful exercise of IP rights — including the exclusive rights to make, use, sell, and license the protected subject matter — is not within the scope of the AML. On the other hand, when the exercise of IP rights goes beyond their legitimate scope and has the purpose or effect of eliminating or restricting competition, the AML applies fully.

The key question, therefore, is where the line is drawn between the “lawful exercise” of IP rights and the “abuse” of those rights for anti-competitive purposes. This line has been elaborated through guidelines, administrative decisions, and judicial interpretations since the AML came into effect.

SAMR’s Prohibited Conduct in IP Licensing

In 2015, the former SAIC (predecessor to SAMR) issued the Provisions on the Prohibition of Abuse of Intellectual Property Rights to Eliminate or Restrict Competition, which were updated and replaced by SAMR in 2020. These provisions identify several types of IP licensing clauses that may violate the AML:

• Tying arrangements: Requiring the licensee to accept unrelated IP licenses or products as a condition for licensing the desired IP. For example, a patent holder requiring a licensee to also take a trademark license for an unrelated product.
• Exclusive grant-back clauses: Requiring the licensee to assign or license back to the licensor any improvements the licensee develops, on an exclusive basis, thereby preventing the licensee from competing using its own innovations.
• Non-challenge clauses: Prohibiting the licensee from challenging the validity of the licensed IP right. Such clauses can stifle competition by maintaining weak or invalid IP rights in force.
• Territorial and field-of-use restrictions that extend beyond the legitimate scope of the IP right: While some territorial restrictions are inherent to IP rights (e.g., a patent only covers the jurisdiction where issued), restrictions that exceed the geographic, temporal, or subject-matter scope of the IP right may violate the AML.
• Price restrictions on products manufactured under the license: While not automatically unlawful, SAMR may scrutinize resale price maintenance provisions in IP licensing agreements under Article 14 of the AML.
• Refusal to license essential IP: Refusing to license IP that is essential for competing in a downstream market can constitute abuse of dominance if the licensor holds a dominant market position (Article 22 of the AML).

The 2023 Anti-Monopoly Guidelines on Intellectual Property

SAMR issued its comprehensive Anti-Monopoly Guidelines on the Field of Intellectual Property in 2023 (effective as of 2023), which replaced earlier draft guidelines and sector-specific rules. These guidelines represent the most authoritative and detailed articulation of how the AML applies to IP licensing agreements. Key features of the guidelines include:

1. Analytical framework: The guidelines adopt an effects-based analysis for IP licensing agreements, evaluating both pro-competitive and anti-competitive effects. They recognize that most IP licensing agreements promote competition by facilitating technology dissemination and enabling complementary innovation, and they caution against over-enforcement.
2. Safe harbor provisions: The guidelines establish a safe harbor for IP licensing agreements where the parties’ combined market share in the relevant technology market does not exceed 20 percent and there is no evidence of anti-competitive effects. In the innovation market, alternative safe harbor criteria apply, focusing on the number of available substitute R&D efforts.
3. Blacklisted restrictions: The guidelines list specific “hardcore” restrictions in IP licensing that are presumed to violate the AML, including minimum resale price maintenance on products produced under the license, certain exclusive grant-back clauses, and non-challenge clauses.
4. Standard-essential patents (SEPs): The guidelines devote significant attention to SEPs and the obligations of SEP holders, particularly the duty to license on Fair, Reasonable, and Non-Discriminatory (FRAND) terms. The guidelines clarify that seeking injunctive relief against a willing licensee, excessive royalty demands, and discriminatory licensing may constitute abuse of dominance.
5. Patent pools and cross-licensing: The guidelines recognize the pro-competitive efficiency of patent pools and cross-licensing arrangements but caution against arrangements that exclude alternative technologies, fix downstream product prices, or reduce incentives for independent R&D.
6. Technology standard setting: The guidelines address the competitive risks in standard-setting organizations (SSOs), including the potential for collusion, exclusionary conduct, and deceptive disclosures during the standard-setting process.

Application of the AML to Specific IP Licensing Scenarios

Patent Licensing Agreements

Patent licensing is the most common form of IP licensing subject to AML scrutiny. SAMR’s enforcement interest focuses on several areas. Territorial and field-of-use restrictions are generally permissible if they correspond to the scope of the patent claims and the licensed territory of the patent grant. However, restrictions that go beyond the patent’s scope — such as requiring a licensee to pay royalties beyond the patent term or to refrain from competing outside the licensed field — are likely to attract scrutiny.

Pooled licensing arrangements have received particular attention. In 2022, SAMR issued guidance on the licensing of patent pools in the telecommunications and video coding sectors, warning against pools that unnecessarily exclude alternative technologies or impose excessive aggregate royalty rates. Foreign companies participating in or considering patent pools should carefully assess whether the pool’s governance structure, membership terms, and licensing terms comply with the AML.

Know-How and Trade Secret Licensing

Licensing of unregistered IP, such as know-how and trade secrets, is also subject to AML scrutiny. The 2023 guidelines recognize that know-how licensing may require additional protections (such as confidentiality obligations and restrictions on use after termination) to prevent misappropriation. However, SAMR will scrutinize post-termination restrictions that extend beyond what is reasonably necessary to protect the licensed know-how, particularly if they prevent the licensee from competing in the market using independently developed technology.

Copyright and Software Licensing

Software licensing raises unique competition issues under the AML, particularly for enterprise software, operating systems, and digital platforms. SAMR has examined software licensing practices in several cases:

• Tying of software products: Requiring customers who wish to license one software product to also license additional products that could be obtained separately.
• Volume-based discounts and loyalty rebates: Aggressive discount structures that effectively foreclose competitors from the market may constitute abuse of dominance by a dominant software licensor.
• Proprietary format lock-in: Using proprietary file formats or APIs to make it costly for customers to switch to competing software, combined with refusals to license interoperability information to competitors.

Case Studies: IP Licensing Under AML Scrutiny

Several notable cases illustrate the application of the AML to IP licensing:

• Qualcomm (2015): NDRC fined Qualcomm RMB 9.75 billion (approximately USD 1.4 billion) for abusing its dominant position in the SEP licensing market for mobile baseband chips. The decision found that Qualcomm: (a) charged unfair high royalty rates for its SEP portfolio; (b) tied the license of non-SEP patents with SEP patents without justification; (c) required free grant-back of licensees’ patent improvements; and (d) bundled baseband chip sales with SEP licensing. This case established important precedents regarding FRAND commitments in China and remains one of the highest antitrust fines globally.
• IDC v. Huawei (2013): In a civil case before the Shenzhen Intermediate People’s Court, Huawei sought a FRAND determination against InterDigital Corporation (IDC). The court found that IDC’s royalty demands exceeded FRAND rates and ordered IDC to license its SEPs to Huawei on FRAND terms. The case established that Chinese courts can determine FRAND rates and that excessive pricing of SEPs may constitute abuse of dominance.
• Audio and video coding patent pool investigation (2022-2023): SAMR investigated whether the governance and licensing terms of multiple patent pools in the video coding sector created barriers to entry and excluded alternative technologies. While no formal penalties were imposed, the investigation resulted in voluntary adjustments to pool structure and licensing terms.
• Pharmaceutical patent settlement scrutiny (2024): SAMR has increasingly scrutinized “pay-for-delay” settlement agreements in pharmaceutical patent litigation, where a brand-name drug company pays a generic company to delay launching a generic version. These agreements are analyzed as horizontal monopoly agreements under Article 17, and SAMR has signaled that it will treat reverse-payment settlements with the same scrutiny as other forms of market allocation.

Practical Compliance Recommendations for Foreign IP Licensors

Given the complexity and evolving nature of the AML’s application to IP licensing, foreign companies should adopt the following compliance measures:

1. Conduct a competition law risk assessment for each IP licensing arrangement. The assessment should evaluate the licensor’s and licensee’s market shares in relevant technology, product, and innovation markets, the scope of the licensed IP, and the specific restrictions in the agreement. Agreements where the parties’ combined share exceeds 20 percent in the technology market warrant enhanced scrutiny.
2. Avoid hardcore restrictions. Do not include non-challenge clauses, exclusive grant-back clauses exceeding the licensee’s improvements, or minimum resale price maintenance on products produced under the license. Where such clauses are included for legitimate business reasons, document the justification thoroughly.
3. Ensure FRAND compliance for SEPs. If the company holds SEPs, develop and document a FRAND licensing program with transparent, non-discriminatory, and objectively justifiable royalty methodology. Maintain records of licensing negotiations to demonstrate willingness to license on FRAND terms.
4. Review patent pool participation. Before joining or forming a patent pool, assess whether the pool’s composition, governance, and licensing terms comply with the 2023 IP Guidelines, particularly regarding inclusiveness, independence of the patent evaluator, and FRAND commitments.
5. Monitor regulatory developments. SAMR continues to refine its approach to IP licensing. Companies should monitor new guidelines, administrative decisions, and court judgments that may affect their IP licensing practices in China.
6. Consider voluntary notification of borderline arrangements. Where an IP licensing arrangement involves novel or borderline competitive issues, companies may consider seeking informal guidance from SAMR through its business counseling service, which provides non-binding preliminary assessments without triggering a formal investigation.

Conclusion

Intellectual property licensing agreements are not exempt from China’s Anti-Monopoly Law. While the AML respects the lawful exercise of IP rights, it simultaneously prohibits the abuse of those rights to eliminate or restrict competition. The dividing line between lawful and abusive conduct depends on the specifics of each licensing arrangement, including the scope of the licensed IP, the parties’ market positions, and the nature of the restrictions imposed. Foreign companies licensing IP into China should not assume that their agreements are immune from competition law challenge. A proactive compliance approach, informed by SAMR’s 2023 IP Guidelines and the evolving enforcement landscape, is essential for maintaining the benefits of IP licensing while managing AML risk.