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Korea Fair Trade Commission’s Right Balance in Regulating SEPs and De facto SEPs

The Korean Monopoly Regulation and Fair Trade Act ("MRFTA") stipulates that the justifiable exercise of intellectual property rights ("IPRs") is exempt from the application of the MRFTA. In order to determine whether a conduct constitutes a justifiable exercise of IPRs, the Korea Fair Trade Commission ("KFTC") issued and applied specific guidelines called the "Review Guidelines on Unfair Exercise of Intellectual Property Rights" (the "IPR Guidelines"). The most recent amendment to the IPR Guidelines was the fifth amendment announced on March 23, 2016 (KFTC's established rules No. 247, amended on March 23, 2016; hereinafter, the "Current IPR Guidelines"). Among such amendments, the most significant amendment was the exclusion of the so-called "de facto standard" and "de facto standard essential patent" ("SEP")" from the definition of "standard technology" and "SEP" and the clarification that the examination criteria for abuse of de facto SEP would be applied the same way as the examination criteria from a competition law perspective for patents concerning general technical inventions or differentiating patents.

The IPR Guidelines prior to the current amendments (KFTC's established rules No. 205, amended on December 17, 2014; hereinafter, the "Prior IPR Guidelines") defined the concept of "standard technology"' as a technology designated by the government, standard setting organizations, enterprisers organizations, a group of enterprisers possessing technology of the same type, etc. as standard technology in specific technology fields, or technology actually used widely as the de facto standard in the relevant technology field (Prior IPR Guidelines, Section I. 3. A. (5)), and defined the concept of a "SEP" as a patent to implement a standard technology, a license of which must be obtained to produce goods or provide services that require a standard technology (Prior IPR Guidelines, Section I. 3. A. (6)).

As described above, in the definition of "standard technology," the Prior IPR Guidelines not only included de jure standards, which were selected based upon agreed procedures at a recognized standard setting organization ("SSO"), but also de facto standards, which obtained success and value in the market based upon competition with substitutable technologies. This resulted in including patents necessary to implement de facto standards in the definition of SEPs and showed that patents necessary to implement de jure standards and patents necessary to implement de facto standards were not distinguished so the same examination criteria would apply to both standards in regard to conducts such as, among others, unreasonable refusal to license, unreasonable discrimination of license conditions and imposition of unreasonable license royalties. However, from a competition law perspective, there are significant differences between de jure standards and de facto standards.

First, there is a significant difference between the source of how market power is obtained between de jure standards and de facto standards. In the case of a de jure standard, it is selected as a standard through an agreement in an SSO where key players in the relevant industry, including companies in a competitive relationship, participate. Accordingly, an artificially formed market power is created for those patents necessary to implement de jure standard. Also, for a de jure standard, since companies that participate in SSOs agree to voluntarily exclude other substitute technologies while including certain patented technologies, at a minimum, the market power of a SEP is continuous and stable because, until a new standard is selected to substitute the applicable standard, there are inducements to implement applicable SEPs for a long duration and not to develop substitute technologies. Conversely, since the market power of patents necessary to implement de facto standard can be substituted with other competing technologies through competition in the market, such market power is relatively temporary and unstable.

Second, there is a significant difference in competition law concerns regarding the exercise of patents necessary to implement de jure standards and de facto standards. In the case of de jure standards, the representative competition law concern in regard to SEPs is patent hold-up of licensees that are locked-in from licensing the applicable technology. The value of a SEP does not derive from such SEP's own economic value, but, rather, from it being included as a standard based on the cooperativeness of key players in the relevant industry. Since the decision by an SSO artificially changes the conditions of competition in the relevant market, thereby excluding substitute technologies which were not selected as a standard while licensees are locked-in to a certain technology that is selected as a standard, this raises significant concerns because a SEP holder's patent hold-up goes beyond the intrinsic value of the patented technologies and is an attempt to exercise market power that was artificially obtained. The grounds for regulating patent hold-up under competition law derive from such competition law concerns.

Conversely, in the case of patents necessary to implement de facto standards, unlike SEPs, market power of de facto SEPs is legitimately obtained through market competition. Therefore, not only are there no grounds for issues that may be problematic for a de jure standard such as violation of fair, reasonable and non-discriminatory ("FRAND") commitments to occur from the outset, there are also no grounds for anticompetitive characteristics of the standard selection process at an SSO to be problematic.

Third, from the perspective that enterprisers holding patents in regard to de jure standards and de facto standards have entirely different business strategies and business expectations, it is improper to treat the two standards the same way under competition law. In the case of de jure standards, since the SEP holder pledges to license its patents in accordance with FRAND commitments in the standard selection process, this may be viewed as expressly agreeing to permit willing licensees to utilize its patents. In this connection, if such SEP holder subsequently violates its FRAND commitments by refusing to grant licenses or setting unreasonable or discriminatory license royalties, the likelihood that a negative determination would be made under competition law would be high. Conversely, in the case of de facto standards, since, for example, the act of refusing to license the applicable de facto SEP is a legitimate business strategy sought by the patent holder, and this merely constitutes the exercise of exclusive power that such patent holder has under its patent rights, the act of refusing to license the applicable de facto SEP belonging to a de facto standard may only be determined to be a competition law violation in exceptional circumstances.

As examined above, the Prior IPR Guidelines included de facto SEP in the definition of standard technology and SEP and applied the same examination criteria for the exercise of de facto SEP as SEP, and legal commentators opined that this could serve as excessive restriction to the exercise of patent rights by holders of de facto SEPs. Subsequently, after the KFTC considered such critical opinions, it amended the Prior IPR Guidelines and revised the definition of standard technology and SEP as seen in the Current IPR Guidelines. In the Current IPR Guidelines, the definition of standard technology excludes the language "technology actually used widely as the de facto standard in the relevant technology field" (Current IPR Guidelines I.3.A. (5)). Also, the definition of SEP made clear that the above only applied in the case of patents that were requested to be voluntarily entered into FRAND commitments during the selection process of a de jure standard, and not in the case of de facto standard (Current IPR Guidelines I. 3.A. (6)).

In the KFTC Press Release of March 30, 2016, "Rationalization of Regulation of SEPs for Promotion of Technological Innovation", the KFTC noted that the reason why the concept of de facto standard and de facto SEP was deleted in the provisions regarding standard technology and SEP under the Current IPR Guidelines is to clarify the distinction between SEPs, adopted by SSOs, and de facto SEPs, which became the industry standard as a consequence of fierce competition in the relevant market, in order to encourage the justifiable exercise of IPRs.

As discussed above, the Current IPR Guidelines clearly recognize the difference between SEPs, a patent necessary for a de jure standard that was formed through an SSO, which is a type of cooperative procedure among key players in the relevant industry, and de facto SEPs, which strive to be selected by consumers through competition in the market. By revising the relevant provisions so that the correct examination criteria could properly apply to the respective characteristics of the patents, under the Current IPR Guidelines, the examination criteria for the exercise of IPRs has become more reasonable by providing more protection for the justifiable exercise of IPRs in order to promote technological innovation.