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Essential Facilities Doctrine and its Application in Intellectual Property Space Under China's Anti-Monopoly Law
George Mason Law Review Vol. 22, No. 5, 2015, p.1103-1126
Authors: Prof Yong HUANG (黄勇教授), Elizabeth Xiao-Ru Wang, Roger Zhang
Year published: 2015

"Intellectual property rights ('IPRs') are the cornerstone of the modern economy. Questions regarding the use of another’s IPRs have long been a part of antitrust and innovation policy in the United States, Europe, and at the World Trade Organization level. With a six-year-old Anti-Monopoly Law (antitrust law) ('AML'), China has been confronting these issues since the AML’s drafting stages. Because of the significant size of China’s economy, Chinese antitrust legal remedies related to IPRs will have global effects.

Recent drafts of the enforcement guidelines and rules for China’s AML with respect to IPRs contain provisions extending the essential facilities doctrine to IPRs. It is unclear, however, whether China’s antitrust community properly understands and applies Western antitrust/intellectual property concepts like the 'essential facilities doctrine'. Recently, FTC Commissioner Ohlhausen pointed out that some in China misunderstand the essential facilities doctrine in the United States and its use in a recent FTC decision, and, as a result, have suggested a wide application of compulsory licensing as an antitrust remedy. This Article argues that applying the essential facilities doctrine to IPRs in China would have a significant chilling impact on innovation and harm consumers in the long run.

The essential facilities doctrine has its roots in decisions issued by the U.S. Supreme Court more than one hundred years ago. Through extensive debate in case law and through the development of modern economic theories, U.S. legal and economic scholars have since largely rejected this doctrine. The current consensus maintains that the doctrine should be applied only rarely and with extreme care. Indeed, the leading antitrust treatise argues that “the ‘essential facility’ doctrine is both harmful and unnecessary and should be abandoned.”

Applying the essential facilities doctrine to IPRs is even more highly questioned. In the United States, it is generally accepted that applying essential facilities theories to IPRs would reduce incentives for innovation and cause more harm than benefit to consumers. Indeed, the doctrine has never been successfully applied to IPRs in the United States.

Views of the doctrine are somewhat more tolerant in the UK and the European Union, along with a handful of other countries. Even so, the successful application of the doctrine to IPRs has been scarce and narrowly applied in these countries. Yet within China, there seems to be greater acceptance of the essential facilities doctrine. Such acceptance is alarming in terms of law, economics, and policy. The fifth draft of the Anti-Monopoly Law Antitrust-IP Guidelines, issued by the State Administration for Industry and Commerce ('SAIC') in the fall of 2012, was the first draft to include an article that explicitly incorporated the doctrine. The article incorporating the essential facilities doctrine with respect to IPRs remains in the later drafts, including the eighth draft issued in the summer of 2014.

China now stands at a critical crossroads in its move from a planned economy to a market economy. One important component of this transition is in the development of its antitrust regime. In addition, the country is updating its economic structure, finding a sustainable pathway to economic growth. Innovation will be the key driver facilitating this transition. Over the past decade, Chinese individuals and corporations have greatly increased their creation and ownership of IPRs. But economic growth and innovation require a careful balance to flourish. In particular, it is important to balance IPR policy and competition policy, which are two elements of governmental oversight that seem, at least in the short term, contradictory. China can benefit from understanding the historical experiences from the West, saving itself from repeating the mistakes of these jurisdictions, and selecting a strategy that promotes innovation and benefits its consumers in the long term. Recognizing the tendency of over-interference rooted in the past experiences with the planned economy, this Article suggests that Chinese regulators should resist the temptation to interfere with market forces, such as in (sometimes messy) licensing negotiations among willing companies to help establish a healthy market mechanism. Together with the development of a robust market economy, policies assuring that domestic as well as foreign firms have adequate incentives to innovate will promote sustainable long-term economic growth and consumer welfare.

This Article explores the development of the essential facilities doctrine and its potential applicability to IPR matters. It begins by explaining the history of, and the economic principles underlying, the essential facilities doctrine, which has typically been applied—and, even then, only in extreme cases—in matters involving refusals to deal in traditional markets for goods and services, rather than in markets for intellectual property. This discussion highlights the impact of government policy on dynamic incentives to invest and innovate, which are the common thread between IPR policy and competition policy. This Article also summarizes the key court cases in the United States involving the essential facilities doctrine. After explaining the doctrine’s foundations, this Article turns to the doctrine’s application to IPRs, beginning with the relevant economic characteristics of IPRs that distinguish them from other goods or services normally traded in the marketplace. Finally, this Article closes its analysis with an evaluation of the unique challenges imposed by China’s economic transition onto the balance of its IPR policy and competition policy.

To present a clear argument, this Article focuses largely on the features and the potential effects of an alleged 'essential facility' on competition and incentives to invest and innovate, and assumes that a single firm controls this facility. Additional complexity and entirely different issues may arise if an essential facility is controlled by a group of competitors. For example, a group of firms controlling an essential facility might engage in conduct designed to eliminate competition among themselves. Those multi-firm scenarios, however, are beyond the scope of this Article."