Jurisdiction - Hong Kong
Reports and Analysis
Hong Kong – The Competition Ordinance And The Strategic Use Of IP Rights.

28 December, 2012

 

Legal News & Analysis – Asia Pacific – Hong Kong – Intellectual Property

 

After much discussion and debate, the Hong Kong Competition Ordinance was passed on 14 June 2012. The law introduces a cross-sector competition law regime in Hong Kong which bears similarities to systems currently in place overseas.

 

Key Features

 

The main features of the Ordinance are:

 

  • a prohibition on anti-competitive agreements, concerted practices and decisions (the First Conduct Rule)
  • a prohibition on the abuse of substantial market power (the Second Conduct Rule)
  • a prohibition on anti-competitive mergers in the telecommunications sector
  • a stricter enforcement regime for "serious anti-competitive conduct"
  • limited exemptions for small and medium-sized enterprises, a broad exclusion regime for most statutory bodies, exclusions for agreements which enhance economic efficiency and provision for granting a "safe harbour" for certain types of agreements under a "block exemption" regime.

 

Horizontal and Vertical Agreements

 

The Ordinance is expected to have a significant impact on Hong Kong's famous laissez-faire economy and may require fundamental changes to the way that some businesses are conducted. The impact on intellectual property agreements and practices is not yet clear. The First Conduct Rule, on the face of it, applies not only to arrangements between competitors (i.e. "horizontal agreements") but also to agreements between businesses at different levels of the supply chain (i.e. "vertical agreements").

 

"Horizontal agreements" may encompass joint venture R&D agreements, joint procurement agreements, commercialisation agreements, agreements for the joint setting of technical and design standards and information sharing agreements. "Vertical agreements" include licence and distribution agreements, exclusive dealing arrangements, bundling and tying agreements, purchasing agreements and franchise agreements.

 

During the legislative debate in Hong Kong, the Government indicated that most vertical agreements are likely to be exempted since they generally will not be expected to have an anti-competitive effect in Hong Kong. Accordingly, a block exemption for certain vertical agreements as well as a technology transfer block exemption which would cover certain IP licensing agreements (including patent, know-how and software copyright licence agreements), may eventually be introduced as under EU competition law. However, under the EU system, there are certain hardcore or black-listed restrictions which must not be included in the agreements, such as price-fixing. The inclusion of such a provision will result in an agreement falling outside the safe harbour. In addition, it is recognised that vertical agreements may have an anti-competitive effects where, for instance:

 

  • a supplier has a substantial degree of market power and uses vertical restrictions to exclude competitors; or
  • when a supply agreement is entered into among competitors. 

 

Until guidelines are issued, it should be assumed that both horizontal and vertical agreements are covered.

 

Strategic Use of Technology and Patents

 

The patent system plays an important role in encouraging innovation by rewarding inventors with a statutory monopoly over new technologies in exchange for disclosing the technologies to the benefit of society. However, where the control of patent rights becomes concentrated in a single business entity or a limited number of businesses entities, the potential for anti-competitive abuses of market power may arise. Accordingly, special challenges may be faced in certain circumstances in balancing the rights of patentees against the restrictions imposed under the Competition law.

 

The Hong Kong Patents Ordinance already contains certain provisions (in accordance with TRIPs and the Paris Convention) which are specifically intended to guard against certain anti-competitive abuses in the context of the patent system including:

 

  • the issuance of compulsory licences; 
  • restrictions against oppressive licensing terms (e.g. licensing terms which unduly tie-in the licensee to other things not directly relating to the patent rights); and 
  • provisions against unjustified threats which may constitute an abuse of market power.

 

However, the existing provisions only apply in a very limited range of circumstances and the Competition Ordinance is expected to provide more general safeguards against anti-competitive abuses of the patent system. Practices that may breach the law include:

 

  • Joint R&D agreements 
  • "Pay-for-delay" type agreements 
  • Vexatious enforcement of patent rights

 

The experience and approach of jurisdictions with more mature competition law regimes may provide useful guidance for Hong Kong.

 

Joint R&D Agreements

 

Businesses frequently co-operate in the sharing of their R&D efforts in order to minimise duplication and wastage of resources and to reduce the time and costs involved in delivering new technologies to market. Such collaboration may be limited to the pre-commercialisation, or "pure" R&D, stage or may extend to joint production and marketing of products or processes. Under the EU competition law, block exemptions conferring safe harbour for R&D agreements meeting certain criteria have been provided.

 

Whilst there are definite benefits in exempting R&D agreements from the scope of the Competition Law, in some cases R&D agreements may be considered anti-competitive where the terms of the agreements, in substance, have the intention or effect of restricting or distorting competition in Hong Kong. In particular, agreements containing terms imposing serious anti-competitive restraints upon the parties such as price-fixing terms or market-sharing terms, may ultimately result in the entire agreement being voided under the Competition Law if EU law is to be followed. Problems may also arise if the co-operation enables the parties to maintain, gain or increase market power.

 

Pay-for-delay

 

"Pay-for-delay" or "reverse payment" type agreements are types of settlement agreements used by patentees to artificially restrict competition in a given market by the patentee rewarding a generic competitor with some form of compensation, in exchange for the generic competitor agreeing to delay entry into the market, when the patentee's rights have already expired. Such agreements typically arise in the pharmaceutical field however, in principle, such agreements may be employed more broadly.

 

Compensation may typically include direct cash payments, side-deals unrelated to the patent in question (such as granting a licence to the generic competitor to sell other drugs), or an agreement by the originator to exit other drugs equivalent to drugs sold by the generic.

 

Agreements of this nature can have anti-competitive effects if there is a restriction on the generic's ability to compete and have attracted the particular attention of regulators in the US and EU. It remains to be seen to what extent the legality of pay-for-delay settlement agreements will be scrutinised under Hong Kong Competition Law. However, there is certainly potential for these types of commercial dealings to fall foul of both the First and Second Conduct Rules. In addition to sanctions under the Competition Law, a compulsory licence may also be available under the Patents Ordinance in such situations.

 

Vexatious enforcement of patent rights

 

Patent enforcement measures such as injunctions, customs seizures and litigation may not always be used for safeguarding the rights of the patent holder, but rather as a means of applying pressure on a competitor in order to gain market power. As such, it could breach the Second Conduct Rule if the patent owner has substantial market power. 

In Europe, it is recognised that patent holders have a fundamental right to enforce patent rights and a finding of anti-competitive behaviour by abuse of market position will only be found in "wholly exceptional circumstances" including where:

 

  • the litigation action is a sham and solely intended to harass the other party;
  • the action is conceived within a definite framework of a plan to eliminate competition; 
  • multinational litigation proceedings are conducted in parallel; 
  • there is wilful assertion of patent claims against a competitor based on an invalid or expired patent.

 

The Competition Law is likely to introduce an additional dimension to the resolution of patent rights disputes in Hong Kong. An alleged infringer may seek to counter an infringement action with an allegation of anti-competitive conduct as part of its defence strategy.

 

Timetable

There will be a transitional period before the law is fully implemented to allow for the establishment of the new Competition Commission and Competition Tribunal and the drafting of guidelines for implementing and enforcing the Ordinance in practice. The substantive provisions will not come into force after the guidelines have been finalised, probably sometime in late 2013 or in 2014. This allows some time for Hong Kong businesses to scrutinise their existing business agreements (such as licences, distribution and joint R&D agreements) and their business practices (including patent procurement, enforcement and commercialisation practices) to identify and alleviate potential competition law issues.

 

 
For further information, please contact:
 
Charmaine Koo, Partner, Deacons
charmaine.koo@deacons.com.hk
 
 
 

 

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