The office of the State Council’s Anti-Monopoly Commission issued the Anti-monopoly Guidelines on Abuse of Intellectual Property (Draft for Comment) on 23 March 2017. The draft document has a chapter dedicated to the concentration of undertakings involving intellectual property (IP), which embodies a law enforcement model of applying the general principles and analytical framework for anti-monopoly review of concentrations between undertakings and also takes into consideration the characteristics of IP where the concentrations under review involve IP.

The draft for comment was formulated after years of painstaking efforts by all three competition authorities in China. It is likely that the final version will retain the provisions on concentration of undertakings involving IP. The fourth chapter of the draft, which covers concentration of undertakings involving IP, will provide important guidance for commercial practices regarding corporate mergers and acquisitions (M&A). If a company’s proposed M&A involving IP satisfies the conditions for anti-monopoly notification in China, the company should take into account the possible impact of IP issues on the anti-monopoly review of the concentration.

First of all, the draft for comment clarifies that the structural change of IP must be regarded as a kind of concentration of undertakings and the standards for evaluation. Such structural changes include transfer and exclusive license of IP. It is noteworthy that, generally speaking, in case of exclusive license of IP, only when such exclusive license has the same effect as the transfer of IP for a certain period of time may it be regarded as a concentration of undertakings.

The exclusive license as stipulated in the Interpretation of Supreme People’s Court on Several Issues regarding the Application of Laws in Disputes over Technical Contracts may be considered as concentration of undertakings if it sustains for a certain period of time.

Second, according to the draft, “if an arrangement involving intellectual property constitutes a substantial part of a concentration transaction, and is significant to the purpose of the transaction”, the authority must consider the characteristics of IP in the substantive analysis on competitive effect during the anti-monopoly review of the transaction.

Technically, this means that at least the core of one part of the review will lie in a certain technology, or the IP covering such technology. For instance, the relevant market is defined based on a technology or the IP covering such technology, and such market may be the relevant market for the product produced using the technology or the relevant technology market.

Another example would be where the authority decides that the transaction under review has, or may have, the effect of excluding or restricting competition that should be prohibited under the Anti-Monopoly Law (AML), the remedy involving IP may constitute a part, or even the major part, of the restrictive conditions to be attached to the clearance decision. If IP is insignificant to a transaction, the authority will usually not particularly consider IP issues for the purpose of reviewing the transaction under the AML.

Third, according to the AML and the relevant regulations issued by the Ministry of Commerce, if the authority deems that a concentration of undertakings has, or may have, the effect of excluding or restricting competition, they should be authorized to clear the concentration with restrictive conditions. The draft for comment also sets respective provisions on structural and behavioural restrictive conditions involving IP.

The major form of divestiture of IP is transfer. Like the traditional divestiture of assets or businesses, structural remedy in the form of IP transfer should be effective, feasible and timely, so as to ensure that the transferee is willing and able to use the IP to compete effectively in the market.

In practice, the exclusive license of IP, if sustained for a certain period of time, can have the same effect as IP transfer within such period. Therefore, exclusive license can also be regarded as a form of structural remedy, which will play a role in law enforcement. It is noteworthy that if the exclusive license is attached with restrictions on the field and territory of use, it will usually fail to deliver an expected structural effect and can hardly be applied as a structural remedy in the anti-monopoly review of a concentration.

Most of the behavioural conditions involving IP listed in the draft for comment are summed up from the restrictive conditions applied in previous cases where the concentrations have been cleared with conditions. Behavioural conditions are subject to the influence of specific factors of individual cases – such as the specific circumstances of the concentration transaction, the industries involved, and the competitive conditions of the relevant markets – and can hardly be listed exhaustively. Therefore, the provisions on behavioural conditions are more of a guidance than an exhaustive list.

In other words, the behavioural conditions to be proposed by the notifying party will not necessarily be confined to those listed in the draft for comment. Under the specific circumstances of an individual case, if the notifying party deems that certain behavioural conditions will substantially resolve the competitive concern of the authority, such party should actively communicate and negotiate with the authority in this regard.

The chapter about concentration of undertakings involving IP in the draft for comment is clearly formulated and will be playing a guiding role in the long term. In the meantime, the relevant provisions are principled, and their application allows for flexibility, which is in line with the current stage, experience and requirements in terms of the enforcement of the AML in China. If a corporate M&A involving IP should be subject to anti-monopoly review, the law enforcement tendency and logic system embodied by the draft for comment should be an important factor to consider at the strategic level.

Liu Dongping is a partner at East & Concord Partners