the u.s.-china business relationship – the most important issues: a complex balancing act live...

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Wilson Sonsini Goodrich & RosatiStuart M. ChemtobSenior Of Counsel

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Presented By:

September 09, 2014

1

Partner Firms:

Winston & Strawn LLPSteve Harris

Partner

Greenberg Traurig, LLPWeisun Rao, Ph.D.

Shareholder

Economists IncorporatedSu Sun

Vice President

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Partner Firms:

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Greenberg Traurig, LLP is an international, multi-practice law firm with approximately 1750 attorneys serving clients from 36 offices in the United States, Latin America, Europe, the Middle East and Asia. Greenberg Traurig is among the Top 10 law firms on The National Law Journal's 2013 NLJ 350, an annual ranking of the largest firms in the U.S. For additional information, please visit www.gtlaw.com.

Wilson Sonsini Goodrich & Rosati is the premier legal advisor to technology, life sciences, and other growth enterprises worldwide. Its services include antitrust counseling and litigation, corporate law and governance, public and private offerings of equity and debt securities, mergers and acquisitions, securities class action litigation, intellectual property litigation, joint ventures and strategic alliances, technology licensing and other intellectual property transactions, tax, and employee benefits and employment law. Its accomplished team of antitrust attorneys is uniquely positioned to assist clients on the most important bet-the-company matters, as well as with regular counseling and compliance matters, and represents enterprises in merger and anticompetitive conduct matters in the United States and before Asian and European competition authorities. WSGR’s accomplished team is consistently recognized among the leading antitrust practices in the United States.

http://theknowledgegroup.org/%22http:/www.gtlaw.com/%22




Partner Firms:

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Winston & Strawn LLP is an international law firm with more than 850 attorneys among 18 offices in Beijing, Brussels, Charlotte, Chicago, Geneva, Hong Kong, Houston, London, Los Angeles, Moscow, New York, Newark, Paris, San Francisco, Shanghai, Silicon Valley, Taipei, and Washington, D.C. The exceptional depth and geographic reach of our resources enable Winston & Strawn to manage virtually every type of business-related legal issue. We serve the needs of enterprises of all types and sizes, in both the private and the public sector. We understand that clients are looking for value beyond just legal expertise. With this in mind, we work hard to understand the level of involvement our clients want from us. We take time to learn about our clients’ organizations and their business objectives. And, we place significant emphasis on technology and teamwork in an effort to respond quickly and effectively to our clients’ needs. Visit winston.com if you would like more information about our legal services, our experience, or the industries we serve. Antitrust - Asia competition and regulatoryWinston & Strawn has extensive experience advising multinational companies in connection with merger reviews in numerous Asian jurisdictions, including China, Japan, Korea, and Taiwan, as well as in connection with government investigations and litigation. Through our offices in the Asia-Pacific region, as well as through our experienced practitioners based in the U.S., we are frequently involved in leading merger and cartel cases and investigations. While many of these cases run parallel to related proceedings in the United States, EU, and other jurisdictions we have mastered successful coordination to ensure an efficient and consistent worldwide approach with proven results

Economists Incorporated is a premier economic consulting firm in the fields of law and economics, public policy, and business strategy. Headquartered in Washington, D.C., EI offers expert consulting and testifying services in the context of litigation, arbitration, proposed mergers and acquisitions, regulatory hearings, and business planning. Its clients include legal counsel, businesses, trade associations, government agencies, and multilateral organizations. Since its founding in 1981, EI has participated in path breaking and high profile antitrust, commercial litigation, and regulatory matters. EI’s work has covered a large number of industries and multiple jurisdictions. EI’s Asia practice has focused primarily on work before antitrust enforcement agencies and courts in countries such as China and South Korea, and is led by highly experienced economists who speak the local language and understand the local market.

http://theknowledgegroup.org/%22http:/www.winston.com/%22

Brief Speaker Bios:

Stuart M. Chemtob

Stuart Chemtob is Senior Of Counsel in WSGR’s Washington, D.C. office, where his Asia-oriented practice focuses on representing companies and individuals in criminal and non-criminal antitrust investigations in the United States and providing global strategic antitrust counseling. He has appeared before China’s National Development and Reform Commission on behalf of American companies that have been the subject of investigation. He previously served as Special Counsel for International Trade in the Antitrust Division, where he advised on international enforcement, mutual legal assistance and extradition matters, and was the Antitrust Division’s liaison to the antitrust enforcement agencies in Asia. Stuart was the lead Department of Justice official on relations with China’s antimonopoly agencies (MOFCOM, NDRC, SAIC), spearheading negotiation of the U.S.–China MOU on Antitrust Cooperation and providing advice and training to the Chinese government on the drafting and implementation of the Antimonopoly Law.

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Weisun Rao, Ph.D.

Dr. Weisun Rao focuses his practice on intellectual property law and business law. He is experienced in developing IP strategies and building and managing IP portfolios for legal and business opportunities in the United States, China and elsewhere in the world. Additionally, Weisun also advises clients on monetizing and enforcing their IP rights throughout the world. He counsels clients on IP and business issues in the pharmaceutical, biotechnology, nutraceutical, medical device, advanced material and mechanical industries. Weisun is also experienced with due diligence and counter-diligence investigation, negotiating and drafting technology transfer agreements and licensing agreements, and providing patentability, validity, infringement, and freedom-to-operate opinions.

Brief Speaker Bios:

September 09, 2014

9► For more information about the speakers, you can visit:

http://theknowledgegroup.org/event_name/the-u-s-china-business-relationship-the-most-important-issues-a-complex-balancing-act-live-webcast/

Steve Harris

Steve Harris is a partner in the firm’s Washington, D.C. and New York offices and concentrates his practice in antitrust/competition law, including litigation, cartel defense, merger control filings, and administrative proceedings before U.S. and international courts and agencies. He has particular experience working with clients in China, Korea, Japan, and Taiwan.

Su Sun

Dr. Su Sun is a Vice President at Economists Incorporated. He specializes in economic analysis in antitrust and regulatory matters. He has conducted economic analysis for antitrust review of mergers before the U.S. Department of Justice and Federal Trade Commission, Canadian Bureau of Competition, and China’s Ministry of Commerce. He has also worked on estimation of damages in a number of price fixing cases, and has provided analysis in some abuse of dominance cases, including those involving bundled discounts, exclusionary practices and the licensing of patents.




The relationship between the U.S. and China is the most important in the world. Whether the two nations can co-exist may be a significant political and economic challenge.Under President Xi Jinping, China’s policy is changing quickly, with greater consolidation of power and more strategic economic and market reforms. There is interest in taking some limited measures to control state enterprises, but not to reduce the power of the Communist party.

China faces formidable challenges from environmental degradation, internal dissent, and changing demography due to the ‘one-child per family’ policy. Tension between China and the U.S. increases regarding numerous issues such as the instability of North Korea, maritime security in the South China Sea, human rights, data and information theft, cyber-attacks, and trade disagreements.

Many specific, contentious issues exist. Among these, the Chinese government has invested in many Western firms, such as Dalian Wanda’s acquisition of AMC, and it is unclear whether the U.S. Committee on Foreign Investment might obfuscate further investment. The Chinese government has been trying to control corruption, and securities violations thereby affecting domestic and foreign companies. Antimonopoly review of transnational mergers by China’s Ministry of Commerce has become a significant consideration in global M&A transactions, and many foreign companies operating in China have faced antimonopoly investigations and private litigation over their pricing and licensing practices, raising concerns that the Antimonopoly Law is being used for industrial policy reasons, rather than to promote competitive markets in China. Although China has some intellectual property (IP) protection policies for foreign multi-nations, it has a long-standing reputation as a haven for violators of IP law and deep concerns remain as stated recently by the Assistant US Trade Representative for Intellectual Property and Innovation in a report on behalf of the US-China Business Council . Many Chinese students who studied in the United States now are senior government or business officials in China. US law previously did not affect China too substantially. However, many Chinese companies now are affected by far-reaching U.S. laws, regulations, investigations, or litigation. Perception of political and economic bias in the US review of mergers or in application of U.S. laws such as FCPA have resulted in reciprocal, retaliatory actions by China.

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Nevertheless, there is substantial co-operation and agreement on many issues between the two nations at all levels of society and across most industries. Recently, Chinese regulators have targeted professional bankers, accountants, and lawyers working on suspect initial public offerings. Issuance of new IPOs was suspended for a year. The Chinese government appears to be interested in adopting a modified U.S.-style [IP disclosure regime].Yet, it is not clear whether the substantially different approaches to the law and commerce in general will lead to a better and more common understanding between the U.S. and China or lead to greater mis-understanding and tensions. Nor is it clear how this critical relationship might change and affect the global economy.

In this webinar, a group of experts in their fields will discuss the pertinent issues of Chinese investment, trade, capital markets, and compliance and conflict with regulations, laws, and resulting litigation.

• Chinese Overseas Investment Outlook• Foreign Investment Trends• Capital Markets• Regulation, Compliance, and Transparency• Intellectual Property, Licensing, and Reform• Antimonopoly Law Enforcement and Private Litigation• US China WTO Agreement and US Anti-dumping Law

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Featured Speakers:

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Weisun Rao, Ph.D.ShareholderGreenberg Traurig, LLP

Segment 1:Stuart M. ChemtobSenior Of CounselWilson Sonsini Goodrich & Rosati

Segment 2:

Steve HarrisPartnerWinston & Strawn LLP

Segment 3:Su Sun Vice President Economists Incorporated

Segment 4:

Introduction

Dr. Weisun Rao focuses his practice on intellectual property law and business law. He is experienced in developing IP

strategies and building and managing IP portfolios for legal and business opportunities in the United States, China and

elsewhere in the world. Additionally, Weisun also advises clients on monetizing and enforcing their IP rights throughout the

world. He counsels clients on IP and business issues in the pharmaceutical, biotechnology, nutraceutical, medical device,

advanced material and mechanical industries. Weisun is also experienced with due diligence and counter-diligence

investigation, negotiating and drafting technology transfer agreements and licensing agreements, and providing

patentability, validity, infringement, and freedom-to-operate opinions.

Weisun is involved in such business transactions as cross-border mergers and acquisitions. He is particularly experienced

in advising non-Chinese clients on legal regulations and business practices in China and advising Chinese businesses

interested in entering or expanding in the U.S. market.

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Segment 1:

Recent Developments in China’sIP and Business Environment for MNCs

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Segment 1:

Recent Significant Developments in China’s Intellectual Property Legal Framework -- Trademark

> New trademark law took effect on May 1, 2014, brought China’s trademark law more consistent with those of other counties

> Amended trademark law regulations (detailed implementing rules) also went into effect on May 1, 2014.

> Generally favorable to trademark owners or bona fide applicants

> Most eye-catching provision of the new trademark law is the 6-fold increase of statutory maximal damage amount to RMB 3M (about US$ 490,000), from the previous ceiling of RMB 500,000 (about US$82,000).

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Segment 1:

Other significant provisions in China’s New Law

> “Sounds” are now protectable as trademarks

> One application can include multiple classes for one mark (under the old law, one class in each application)

> Reintroduction of the practice of office action (Art. 29), under which the China Trademark Office (CTMO) will issue an examination opinion within the substantive examination procedure, to request/allow the applicant to provide explanation and amendments before approving or refusing the application.

> Examination of application must now follow a transparent and calculable examination schedule, providing more predictable time-line in the examination procedure to be followed by both the CTMO and applicants.

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Segment 1:

Other significant provisions in China’s New Trademark Law (Cont.)

> Trademark squatting and trademark hijacking are more difficult under the new law which requires “honesty and credibility” in trademark applications.

> Infringement scope broadened to cover those who file trademark applications without authorization of the mark owners, even entities who have a contractual relationship or have had business dealings with the mark owners (e.g., distributors)

> The only standard for a judge to determine whether a similar mark infringes on a registered trademark is “likelihood of confusion.”

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Segment 1:

Recent Significant Developments in China Patent Legal Framework

> Overall, the numbers of patent applications and enforcement actions have continued to increase at double digit percentages, month-to-month

> Licensing activities also continue to rise.

> Hot discussion of courts specifically for handling patents cases are lead to such courts in Beijing, Shanghai and Guangzhou. (Similar to the United States Appeal Court for the Federal Circuit.)

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Segment 1:

China Outbound Investment -- Trends

> In 2013, there were 220 disclosed deals worth US$68.9 billion, representing a 37% and 17% increase in volume and value, respectively, from 2012. (Source: Mergermarket)

> Hot sectors

– Energy/Resources

– Food

– Technology

– Real Estate

> As a target region, North America accounts for 21% of all deals in 2013

> Among individual countries, US deals dominate in volume and value

> Increased activities by private Chinese companies

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Segment 1:


> Higher damage amount for TM infringement

> Damage can be calculated on the basis of a trademark license – when it is difficult to determine the loss of the TM owner or profit earned by infringer. (Art. 63(1))

> When a TM owner has tried his best to obtain the evidence but the infringer does not cooperate, Court may determine the amount of damage by reference to the claim and evidence already provided by the TM owner.

> When difficult to determine loss suffered by the TM owner, profit earned by infringer or proper licensing fees, Court has the discretion to grant compensation up to RMB 3M.

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Segment 1:


> New TM law explicitly recognizes prior use of trademark, and enhances protection of unregistered trademarks.

> New opposition procedure:

– Only the owner of prior right or interested party may apply (not any third party)

– If opposition ruling not in opponent’s favor, it cannot be appealed by opponent.

– If opposition ruling not in applicant (opposed party)’s favor, it can be appealed for review.

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Segment 1:

> Approved by Chinese legislature on August 31

> Three courts: Beijing, Shanghai, and Guangzhou

> Subject jurisdiction: patents, new plants, circuit board designs, technical secrets

– And, copyright and trademark cases originating from the city where each of the IP courts is located

> District court level, to handle law suits of first instance and appeals of administrative decisions

– Only in Beijing, appeals of administrative decisions by the State Council

> Cross-province jurisdiction

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Segment 1:

Recently Approved Chinese IP Courts

China Outbound Investments – Regulatory Regime

> NDRC Approval

– Previous regulatory framework

Resource-related investments greater than US$300 million required NDRC approval

Investments in other sectors greater than US$100 required NDRC approval

Approval times may take over 1 year

Approval not guaranteed

– Now

Overseas investments less than $1 billion no longer require NDRC approval, but registration still required

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Segment 1:

China Outbound Investments – Regulatory Regime (Cont.)

> MOFCOM (new rules taking effect on Oct. 6, 2014)

– Approval required only in sensitive countries or regions (i.e., no diplomatic relationship or sanctioned), or in sensitive industry (i.e., subject to export control, or affecting the interest of more than one country)

– Otherwise, registration is required

certificate issued in 3 working days.


Segment 1:

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China Outbound Investments – Challenges in the US

> Legal Concerns

– CFIUS

– State vs. Federal Laws

– Labor laws

– Litigation

> Cultural and Management Differences

– Government relations

– Employee relations (Confucian notions of top-down hierarchy)

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Segment 1:

Recently introduced reform to China’s State-Owned Enterprises

> At the end of 2011, there were 144,700 SOEs with total assets of RMB 85.4 trillion, revenues of RMB 39.25 trillion, and profits of 2.6 trillion yuan (43% of China’s total industrial & business profit).

> Pilot program includes 6 companies, in banking, pharma, building materials, energy, and natural resources,

> Goals: to allow private investors and to improve management

– Current Problems

inefficient and drag on economic development

Created unlevel ground for competition

> Also, to reduce the disparity in compensations between employees and executives in these companies and other government employees.

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Segment 1:

Hot Topics on China Business Environment for MNCs

> Recent heavy handy investigations by Chinese government authorities for foreign businesses in certain sectors

– Anti-bribery case against British pharma giant GSK

– Land Rover, Audi, and Mercedes Benz have been recently investigated and fined by NDRC for their pricing practices.

– Japanese Auto-Parts Makers were fined $202 M by NDRC also for alleged price manipulation.

– Qualcomm is also being investigated for alleged monopoly practice and, according to media, the company is cooperating with the ongoing investigation.

– Microsoft is investigated by AIC for antimonopoly issues.

> Not Related, but China inbound FDI fell to the lowest level in July.

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Segment 1:

Introduction

Stuart Chemtob is Senior Of Counsel in WSGR’s Washington, D.C. office, where his Asia-oriented practice focuses on

representing companies and individuals in criminal and non-criminal antitrust investigations in the United States and

providing global strategic antitrust counseling. He has appeared before China’s National Development and Reform

Commission on behalf of American companies that have been the subject of investigation. He previously served as Special

Counsel for International Trade in the Antitrust Division, where he advised on international enforcement, mutual legal

assistance and extradition matters, and was the Antitrust Division’s liaison to the antitrust enforcement agencies in Asia.

Stuart was the lead Department of Justice official on relations with China’s antimonopoly agencies (MOFCOM, NDRC,

SAIC), spearheading negotiation of the U.S.–China MOU on Antitrust Cooperation and providing advice and training to the

Chinese government on the drafting and implementation of the Antimonopoly Law.

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Stuart M. ChemtobSenior Of CounselWilson Sonsini Goodrich & Rosati

Segment 2:

Enforcement of China’s Antimonopoly Law Against Anticompetitive Conduct

Stuart M. ChemtobSenior Of Counsel

[email protected]

The U.S.-China Business RelationshipThe Most Important Issues: A Complex Balancing Act

Knowledge Group WebcastSept. 9, 2014

September 09, 2014

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Segment 2:


AML PROVISIONS ADDRESSING ANTICOMPETITIVE CONDUCT

• Article 13 – prohibits monopoly agreements among competitors (horizontal restraints).• Article 14 – prohibits monopoly agreements between firms and their trading partners (vertical

restraints).• Article 17 – prohibits abuse of a dominant market position.

– A dominant market position is rebuttably presumed to exist where:• One firm accounts for more than 50% of the relevant market• Two firms together account for 66.7% of the relevant market• Three firms together account for 75% of the relevant market.

– No presumption for firms with less than 10% market share.

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Segment 2:

AML ENFORCEMENT AGENCIES

• China has authorized three AML enforcement agencies

– Ministry of Commerce (MOFCOM) – mergers

– National Development and Reform Commission (NDRC) – price-related anticompetitive conduct

– State Administration for Industry and Commerce (SAIC) – non-price-related anticompetitive conduct.

• In addition, the AML provides for a private right of action in the courts.

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Segment 2:

ABUSE OF DOMINANCE

Article 17 sets out seven categories of abusive conduct:

1. Selling at unfairly high prices or buying at unfairly low prices

2. Selling below cost without valid justification

3. Refusing to deal without valid justification

4. Exclusive dealing requirements without valid justification

5. Tying or imposing other unreasonable trading conditions without valid justification

6. Providing discriminatory treatment in transaction conditions to equivalent trading partners

7. Other activities determined to be an abuse of dominant market position.

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Segment 2:

ABUSE OF INTELLECTUAL PROPERTY

• Article 55 provides an AML exemption for the exercise of IP rights in accordance with the IP laws and administrative regulations.

• However, the exemption is not applicable to the “abuse” of IPR to eliminate or restrict competition.– Leads to a circular analysis – exercise of IP is not exempt if it violates the AML!

• SAIC now drafting Rules on the Prohibition of Abuse of IPR.– Intended to provide some clarity in the IP/AML interface– But officially only applicable to SAIC investigations;.

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Segment 2:

HIGHLIGHTS OF SAIC DRAFT IP ABUSE RULES

• Good framework of analysis– IP not presumed to create a dominant market position.– Recognition that IP licensing is generally a vertical relationship.– Rule of reason analysis normally applies.– Safe harbors from monopoly agreement prohibitions where:

• Combined share of competing firms no higher than 20%• Neither party has more than 30% market share.

• Areas of concern– IP can be an “essential facility” – refusal to license can be abuse– Strict rules on holders of standard-essential patents – even for non-members of SSOs.– Many license provisions presumptively unlawful.– Patents pools strictly regulated.

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Segment 2:

PENALTIES AND REMEDIES FOR ABUSE OF DOMINANCE

• Fine of 1% - 10% of previous year’s turnover.– Normally based on turnover in China.– However, for some cases with global impact, such as IP-related cases, could be based on

global turnover.– NDRC working on fine guidelines.

• Cease and desist order– Scope of conduct could be broad – change of business model?– Price reductions– Monitoring

• Disgorgement of illegal gains– Could be larger than fine – no look-back limit.

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Segment 2:

NDRC AND SAIC FOCUSING ON IP ABUSE BY FOREIGN HI-TECH COMPANIES

• NDRC has actively investigated at least five foreign firms for IP licensing “abuses.”– Qualcomm– InterDigital– Dolby– HDMI – Technicolor (Thomson)

• SAIC recently conducted dawn raids of Microsoft.– SAIC reportedly attempted to access information on servers located outside of China

• Qualcomm is reportedly being investigated for up to nine different “abusive” practices!– Threatened fines of almost $5 billion.– May require change of Qualcomm’s basic business model.

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Segment 2:

HUAWEI v. INTERDIGITAL A CASE STUDY

• Huawei filed two private actions in Shenzhen:– Action seeking determination of a FRAND royalty rate for InterDigital’s (IDC’s) Chinese

standard-essential patents.– AML damages action based on InterDigital’s licensing offers.

• IDC had never asserted its patents against Huawei in China, although it had sought exclusion of Huawei’s infringing products in the U.S.

• The FRAND rate court used an inappropriate methodology based on IDC’s 2007 license with Apple to arrive at a de minimis royalty rate (0.019%).– IDC was precluded from introducing comparable PLAs, because there was no protective order

system in place.– The court refused to look at licensing practices by others in the industry, including Huawei’s own

practices.

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Segment 2:

HUAWEI v. INTERDIGITAL A CASE STUDY (2)

• The court in the AML damages action case, based on the FRAND royalty rate determination, found that IDC had abused its dominant position by:– Requesting an unduly high royalty rate– Bundling its standard-essential patents (SEPs) with its non-SEPs– Requesting a royalty-free cross license of Huawei’s SEPs– Filing a section 337 action at the US International Trade Commission seeking exclusion of

Huawei’s infringing products from the U.S.• The court awarded Huawei damages of $3.3 million based on Huawei’s attorney’s fees in defending

the USITC action.• The Guangdong High Court affirmed both decisions in their entirety.• IDC is appealing the FRAND rate decision to the Chinese Supreme Court.

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Segment 2:

INTERDIGITAL NDRC INVESTIGATION

• While Huawei litigation still pending, NDRC opened an investigation of IDC’s licensing practices.• In December 2013, Huawei and IDC settled their dispute by agreeing to resolve the terms of a

worldwide patent license of InterDigital’s SEPs through binding international arbitration.• In March 2014, IDC submitted an application to suspend NDRC’s investigation based on

commitments that it would:– offer the option of SEP-only licenses to Chinese OEMs– not require a royalty-free cross-license– not seek an exclusion order or injunctive relief against any Chinese OEM that accepts

InterDigital’s offer to resolve the terms of a worldwide license of IDC’s SEPs through binding arbitration.

• In May 2014, NDRC accepted IDC’s commitments and suspended its investigation without finding a violation or imposing fines.

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Segment 2:

NDRC ENFORCEMENT AGAINST RESALE PRICE MAINTENANCE

• NDRC extremely active against resale price maintenance (RPM) practices.– High profile cases against foreign infant milk formula producers, high-end optical manufacturers,

and foreign automobile makers.– Per se unlawful approach.

• Small market share no defense.– NDRC demanding large price reductions, while also imposing heavy fines.– Real concern seems to be international price discrimination – prices higher in China than in

other countries.

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Segment 2:

RPM IN THE COURTS: THE JOHNSON & JOHNSON CASE

• Johnson & Johnson sued by Rainbow, a terminated distributor of surgical staples and sutures to hospitals.– Rainbow claimed that termination was because of violation of RPM restrictions.

• Shanghai High Court ruled that RPM must be analyzed under the “rule of reason” – RPM is not per se unlawful.– The Court applied a rule of reason analysis before determining that J&J’s conduct violated the

AML.• Decision creates conflict between NDRC and the courts on application of AML to RPM activities.• Shanghai Court’s rule of reason approach should logically apply to other types of vertical restrictions.

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Segment 2:

NDRC ENFORCEMENT: OTHER VERTICAL PRACTICES

• Article 14(3) prohibits “other [vertical] monopoly agreements determined by the Antimonopoly Enforcement Authority.”– Open ended; no guidance– Allows for investigations and punishment without warning

• NDRC announced investigation of on-line hotel reservation companies for most-favored-nation (MFN) clauses.– Appear to be investigating companies even with small market shares, i.e. based on per se illegal

approach• Penalties are the same as for hard core cartels or abuse of dominance.

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Segment 2:

INVESTIGATIONS BY NDRC: “RESISTENCE IS FUTILE”

• NDRC has been very aggressive in its AML enforcement:– Last year, foreign companies warned that if try to defend themselves, or hire lawyers, will be

punished more harshly.– Tendency to take a black and white approach to conduct.– Presumption of guilt.– Dawn raids for abuse of dominance and RPM investigations.

September 09, 2014

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Segment 2:

SOME POSITIVE DEVELOPMENTS

• In July U.S.-China S&ED meeting, China agreed that AML enforcement agencies will inform investigated party of the conduct of competitive concern and provide an “effective opportunity” to present evidence in its defense.

• NDRC now saying that foreign companies under investigation may bring their foreign lawyers to meetings.

• Reports that after Sumitomo Electric submitted revised sales data in its defense in a cartel matter, NDRC reduced fine by 15%.

• Some foreign companies that cooperated quickly with NDRC received no fines, and investigation of InterDigital was suspended based on commitments offered to NDRC.

September 09, 2014

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Segment 2:

CONCLUSIONS

American firms operating in, or contemplating entering, the Chinese market should carefully evaluate their business practices and exposure under the AML.• Parameters of lawful vs. unlawful conduct are unclear.• NDRC inclined to take a per se unlawful approach to conduct it decides to investigate.• Opportunity for presenting an effective defense limited.• Remedies can be severe.• Risks of private AML litigation are high.

It is important to consult with U.S. antitrust counsel in this process.

September 09, 2014

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Segment 2:

September 09, 2014

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September 09, 2014

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IntroductionSteve Harris is a partner in the firm’s Washington, D.C. and New York offices and concentrates his practice in antitrust/competition law, including litigation, cartel defense, merger control filings, and administrative proceedings before U.S. and international courts and agencies. He has particular experience working with clients in China, Korea, Japan, and Taiwan.Mr. Harris’ representative matters include:

• Represented a major U.S. consumer products company in antitrust cartel investigation and follow-on class action litigation.• Represented a European chemicals manufacturer in antitrust cartel investigation in the United States and EU, and in follow-on class action

litigation.• Represented a leading personal computer manufacturer in an antitrust and patent infringement action involving MPEG data compression

technology.• Represented a major international airline before antitrust and regulatory agencies in Asia and the United States in a successful global effort to

retain its multi-year joint business agreement with one of Asia Pacific’s leading airlines.• Represented a leading U.S. biotechnology company in worldwide antitrust and merger control issues related to USD500 million acquisition by

European multinational crop science company. This matter was granted early termination by the U.S. Department of Justice Antitrust Division.• Represented Prestige Brands Holdings Inc. in the worldwide antitrust and merger control issues related to its USD660 million acquisition of

the over-the-counter pharmaceutical brands business of GlaxoSmithKline, Prestige’s largest acquisition ever. The matter involved two transactions and interesting issues under the U.S. Federal Trade Commission’s aggregation rule; the FTC granted early termination.

• Represented a leading global information services company in worldwide antitrust and merger control proceedings; the merger presented several unusual competition law issues, including the application of the “media merger” rules in Germany and Austria.

• Represented a leading specialty minerals company based in France in the U.S. antitrust and merger control issues related to its USD665 million acquisition of a talc business.

• Represented a leading global medical technology company in the worldwide antitrust and merger control proceedings in its acquisition of a Swedish company involving issues related to complementary versus competitive products in several jurisdictions.

• Represented a leading multinational resources company in the review of a joint venture with another large resources company under the China Anti-Monopoly Law.

Mr. Harris received his A.B., magna cum laude, from Cornell University in 1977. He received his J.D. from Columbia Law School in 1982, where he was certified with honors by the Parker Program in Foreign and Comparative Law, and was a Harlan Fiske Stone Scholar.

September 09, 2014

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Segment 3:

Cartels• “Monopoly Agreements”

– Article 13: horizontal agreements include traditional cartels plus:• Restricting the purchase of new technology or new equipment, or restricting the

development of new technology or new products• Jointly boycotting• Other monopoly agreements as determined by the AMEA

September 09, 2014

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Segment 3:

Cartels• “Monopoly Agreements”

– Article 14: vertical agreements include • fixing, or restricting the minimum price, for resale to a third party• Other monopoly agreements as determined by the AMEA

September 09, 2014

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Segment 3:

Cartels• Horizontal and vertical treated similarly

– Subject to same penalties • Confiscation of illegal gains• Fines of between 1% and 10% of total turnover of entity in prior year

– Not “per se” unlawful – eligible for exemption if parties can prove agreement was for certain purposes, such as “protecting the legitimate interests in foreign trade or economic cooperation”

– Both eligible for leniency

September 09, 2014

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Segment 3:

Cartels• AMEAs Enforcing Anti-Monopoly Agreement chapter of AML:

– NDRC– SAIC

• Broad investigative and enforcement powers• Bandwidth extended by use of local agencies• Little chance of successful appeal of AMEA order

September 09, 2014

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Segment 3:

Cartels• Enforcement first focused on Chinese entities, and imposed modest penalties, most well under

USD 1 million, but increasing recently– Rice noodles (2010)– Concrete (2011)– Paper manufcturers (2011)– Sea sand mining (2012)– Used cars (2012)– Roof tile manufacturers and trade assoc. (2013)– Jewelers and trade assoc. (2013)– Tourist agencies, gift shops and trade assoc. (2013)– Liquor manufacturers (2013)

September 09, 2014

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Segment 3:

Cartels• Recent enforcement has focused much more on foreign firms, with larger and increasing fines

– LCD manufacturers (USD 57 million)(2012)– Infant milk formula manufacturers (USD 108 million)(2013)(RPM)– Auto parts makers (bearings and wire harnesses)

(2014)(USD 201 million)

September 09, 2014

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Segment 3:

Cartels• In some cases, in addition to fines and confiscation of illegal gains, AMEAs have imposed behavioral

remedies– E.g.: LCD manufacturers must “fairly supply” Chinese television manufacturers with new

technologies

September 09, 2014

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Segment 3:

Cartels• Reported ongoing cartel investigations

– Auto parts manufacturers (capacitors) (2014)– Auto manufacturers (RPM?) (2014)

September 09, 2014

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Segment 3:

Cartels• Leniency

– Reportedly granted to some companies in several cases, including:• Infant formula• Capacitors

– NDRC and SAIC rules differ: if important evidence and cooperation provided:• NDRC “may” grant• SAIC “must grant

September 09, 2014

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Segment 3:

Mergers• “Concentrations”

– Mergers– Acquisitions– Acquisition of control over other undertakings or the capacity to exercise decisive influence on

other undertakings by contract or other means• requirements contracts?• exclusive distributorship agreements?• which joint ventures?

September 09, 2014

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Segment 3:

Mergers• Mandatory merger review

– A concentration that meets either of the following thresholds:• (1) the total worldwide turnover of all parties exceeded 10 billion RMB (approx. USD 1.6

billion) and (2) the PRC turnover of each of at least 2 parties to the transaction in the previous fiscal year exceeded 400 million RMB (approx. USD 63 million)or

• (1) the combined PRC turnover of all parties exceeded 2 billion RMB (approx. USD 315 million); and (2) the PRC turnover of each of at least 2 parties exceeded 400 million RMB (approx. USD 63 million)

- All figures refer to previous fiscal year

September 09, 2014

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Segment 3:

Mergers• AMEA enforcing the merger provisions is MOFCOM • MOFCOM must either:

– Approve a deal outright– Approve a deal subject to restrictive conditions– Prohibit a deal

September 09, 2014

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Segment 3:

Mergers• To date, MOFCOM has:

– Approved over 775 transactions– Approved 22 with restrictive conditions– Prohibited 2

September 09, 2014

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Segment 3:

Mergers• Conditions imposed by most jurisdictions are usually “structural” – divestitures

– Sometimes there are related “behavioral” conditions, requiring that assets be held separate until they are divested, e.g.

• MOFCOM imposes structural conditions, but also imposes many stand-alone behavioral conditions

September 09, 2014

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Segment 3:

Mergers• Behavioral Conditions Imposed by MOFCOM:

– Prohibition on acquirer buying other Chinese companies (Inbev/AB– Prohibition of building new factories for 5 years (Mitsubishi/Lucite)– Requirement to continue to supply Chinese buyers on non-discriminatory basis (GM/Delphi)– Prohibition on acquirer from obtaining Chinese companies’ trade secrets from acquired party

(GM/Delphi)

September 09, 2014

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Segment 3:


– Requirement of acquirer to provide buyer of divested business with acquirer’s technology for 3 years

– Termination of distribution agreement (Novartis/Alcon)– Maintain price-setting mechanism (OAO Ukralkali/OAO Silvinit)– Prohibition of requiring customers to use Joint Venture’s technology (GE/Shenhua Joint

Venture)

September 09, 2014

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Segment 3:


– Hold-separate (without a divestiture)(Seagate/Samsung)(Marubeni/Gavilon)– Prohibition on collaboration between acquirer and acquiree without approval from MOFCOM

(MediaTek/MStar)– FRAND obligations for non-IP protected products (Henkel/Tiande Joint Venture)– Require free and open-source licensing (Google/Motorola)– Honor existing FRAND commitments on SEPs (Google/Motorola; Microsoft/Nokia)

September 09, 2014

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Segment 3:


– Prohibition expanding acquisition on online platform into general retail platform (Wal-Mart/Newheight)

– Prohibition of discrimination in provision of IP services (non-SEPs) or designing IP in a way to degrade performance of third party products (ARM/Giesecke Joint Venture)

– Guarantee volume of supply to Chinese buyers (Glencore/Xstrata)

September 09, 2014

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Segment 3:


– Prohibition of acquirer’s buying from acquiree except on arm’s-length basis (Marubeni/Gavilon)– Require termination of OEM production agreement with non-Chinese company for production of

products within China (Baxter/Gambro)– Required price reductions and required production licenses to third parties on a permanent

basis (ThermoFisher/Life Technologies)

September 09, 2014

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Segment 3:


– Requirement to license non-SEPs on current terms and not seek injunctive relief from infringement unless licensee acts in bad faith (Microsoft/Nokia)

– Prohibition on bundling or cross-subsidization between products (Merck/AZ Electronic)– Sale of products (not IP) on FRAND basis (Human Corun/Toyota Joint Venture)

September 09, 2014

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Segment 3:

Mergers• Other concerns

– Duration of review, including failure to “start the clock”• Problems with “Simple Case” Rules

– Use of supervising trustees for behavioral remedies

September 09, 2014

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Segment 3:

Introduction

Dr. Su Sun is a Vice President at Economists Incorporated. He specializes in economic analysis in antitrust and regulatory

matters. He has conducted economic analysis for antitrust review of mergers before the U.S. Department of Justice and

Federal Trade Commission, Canadian Bureau of Competition, and China’s Ministry of Commerce. He has also worked on

estimation of damages in a number of price fixing cases, and has provided analysis in some abuse of dominance cases,

including those involving bundled discounts, exclusionary practices and the licensing of patents.

Dr. Sun has written extensively on antitrust issues, particularly those pertaining to China, both in English and in Chinese.

He is a Senior Editor of the Antitrust Law Journal, a member of the American Economic Association, and a member of the

Chinese Economists Society. Dr. Sun earned his Ph.D. in economics from the University of Michigan and his B.A. from

Renmin University of China.

September 09, 2014

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Su Sun Vice President Economists Incorporated

Segment 4:

Business Strategies and Antitrust Implications in China

September 09, 2014

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Segment 4:

Business Strategies

• Product Distribution and Pricing• Merger, Acquisition & Joint Venture• Technology Transfer and IPR Licensing

September 09, 2014

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Segment 4:

Pricing: Bundled Discounts

• SAIC’s Investigation of Tetra Pak• Tetra Pak’s Statement

September 09, 2014

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Segment 4:

Bundled Discounts As Considered in Merger Review

• MOFCOM’s Recent Merger Decision in Merck KGaA/AZ Electronic Materials S.A.– Merck: high market share in liquid display crystals– AZ: high market share in photoresists– Remedy: No tying/bundled discounts/cross subsidy of any form between Merck’s and AZ’s

products

September 09, 2014

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Segment 4:

Bundled Discounts: U.S. and Chinese Laws

• U.S. Law– LePage’s (3rd Circuit, 2003): vague standard based on market power and exclusion of rivals– PeaceHealth (9th Circuit, 2007): after all discounts on the bundle are allocated to competitive

product, is price below incremental cost?• Chinese Law

– AML Article 17 prohibits: selling below cost; tying or other unreasonable conditions; price discrimination

• Both Require Showing of Market Power

September 09, 2014

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Segment 4:

Bundled Discounts: Price-Cost Test

• Example: Aggressive Discount Implies Pricing Below Cost

September 09, 2014

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Segment 4:

Company Pricing

Company Product Average Variable Cost Buy A or B Buy A and B Discount

1A $1.50 $3.00 $2.25 $0.75

B $2.50 $5.00 $3.00 $2.00

2 A $1.25 $1.25 N/A N/A

Consumer Choice

Choice Expense

Buy A and B from Company 1 $5.25

Buy A from Company 2 and B from Company 1 $6.25

What is company 1's true price of A after discount allocation?

Total Discount $2.75

Price of A after Discount $0.25

Mergers and Acquisitions: Strategic Intervention

• Not Uncommon in U.S., But Maybe More Effective in China– MOFCOM lacks experience and knowledge of industry

Stakeholders provide theory of harm and industry information– No extensive discovery

Stakeholders provide more data– MOFCOM needs help in evaluating remedies

Stakeholders may participate in this process– MOFCOM is under influence of industrial policy goal

Stakeholders make a pitch in the name of domestic industry development

September 09, 2014

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Segment 4:

Recent Cases

• Glencore/Xstrata– Price restrictions– Sale of Las Bambas copper mine in Peru

• Microsoft/Nokia– FRAND commitment to licensing of SEPs– Extension to non-SEPs

• Omnicom/Publicis– 14 out of 15 jurisdictions cleared the deal; not China– Lost major customers to competitors

September 09, 2014

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Segment 4:

Role of Economic Analysis

• MOFCOM Has Increasingly Relied on Economic Analysis– Willingness to hear economic theories based on harm to competitors or supply chain, not

necessarily to final consumers (e.g., vertical markets, adjacent markets)– Emphasis on data analysis (e.g., Thermo Fisher/Life)

• Merging Parties And Intervening Parties Engage Economists to Conduct Analysis And Provide Credibility

• Analysis Needs to Be Tailored to Address Specific Concerns with Chinese Characteristics

September 09, 2014

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Segment 4:

IPR Licensing: Determining FRAND Rates

• Georgia Pacific v. U.S. Plywood: 15 factors– Established royalty, comparable patents, terms and scope of the licensing agreements,

profitability of patented product, value of patent to product, etc.• Several Recent U.S. District Court Decisions Shed Light on F/RAND Rate Determination

– Microsoft v. Motorola – In Re Innovatio

• Hypothetical Bilateral Negotiation• Fact Intensive Investigation• Use of Technical And Economic Experts

September 09, 2014

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Segment 4:

Chinese Laws & Guidelines

• Patent Law (Article 48)– Monopoly conduct may lead to compulsory licensing

• Antimonopoly Law (Article 55)– Abuse of IP rights subject to AML

• Regulation on the Administration of National Standards Involving Patents• SAIC Draft Guidelines/Regulation

September 09, 2014

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Segment 4:

Economics

• General Principles– Exclude hold-up value– Avoid royalty stacking– Encourage investment incentives

• Methodology– Importance of patents to standard– Importance of patents to infringing products– Comparable license

September 09, 2014

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Segment 4:

Huawei v. InterDigital

• Forum Shopping: U.S. EU China• Shenzhen Intermediate Court’s Decision• Guangdong High Court’s Affirmation• FRAND Rate: ≤0.019% of End Product Price• How Would the FRAND Rate Be Different If Calculated Differently?

September 09, 2014

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Segment 4:

Guangdong High Court’s Considerations

• Hold-up– SSO’s IPR policy

• Royalty Stacking– IDC’s SEPs declared to ETSI: Global 2,372; China 185– Some of IDC’s SEPs are found invalid– Huawei’s profit margin is 4.8%– IDC asked for 2% royalty rate

• Investment Incentive– IDC needs to be rewarded for its R&D

September 09, 2014

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Segment 4:

Looking for Comparable Licenses

• Huawei’s Offer: 0.005%• IDC’s Demand: 2%• Apple: global sales is $300 billion (2007-2014) and IDC licensing fee is $56 million 0.0183%• Samsung: global sales is $210 billion (2007-2012) and IDC licensing fee is $400 million 0.19%• Court: Samsung license influenced by litigation; Apple license is more comparable: <=0.019%

September 09, 2014

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Segment 4:

Other Considerations

• IDC’s May 1, 2014 SEC Filing:– Lump sum payment versus per unit fee– Actual sales versus expected sales – Scope of product coverage– Other SEP holders’ licensing fee in wireless industry

• Huawei’s Profit Margin or Industry Profit Margin?• Coverage of Technology?

– Apple & Samsung: 2G & 3G– Huawei: 2G, 3G & 4G

• Total Number of SEPs in 2G, 3G & 4G to Perform Methods in Innovatio?

September 09, 2014

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Segment 4:

Conclusion

• Business Strategies Need to Take into Account AML Legal Risks• Economic Analysis Informs and Supplements Legal Analysis• International Antitrust Development Has Influence on China’s AML Enforcement• Antitrust Analysis Should Be Tailored to China’s Specific Context

September 09, 2014

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Segment 4:

► You may ask a question at anytime throughout the presentation today. Simply click on the question mark icon located on the floating tool bar on the bottom right side of your screen. Type your

question in the box that appears and click send.

► Questions will be answered in the order they are received.

Q&A:

September 09, 2014

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Segment 1:Stuart M. ChemtobSenior Of CounselWilson Sonsini Goodrich & Rosati

Segment 2:


Segment 3:Su Sun Vice President Economists Incorporated

Segment 4:

September 09, 2014

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