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On 23 April 2021, the Ningbo Intermediate People’s Court handed down a judgment which found that Hitachi Metals Co. (“Hitachi”) violated China’s Anti-monopoly Law (AML) by refusing to license its patents related to the production of rare earth magnets. In doing so it applied the “essential facilities” doctrine.

Neodynmium-iron-boron (NdFeB) magnets are commonly used in high-tech industries and high-end consumer electronics, such as wind power generation, electric vehicles and mobile phones. China is the world’s top producer of rare earths and NdFeB magnets specifically. Japan-based Hitachi owns over 600 patents worldwide related to the production of sintered NdFeB magnets (i.e. magnets created through a powder metallurgical process, where no additional material is mixed with the NdFeB). The Court found that it had announced the licensing of its patents to more than ten companies worldwide, all before 2013. In 2014, Ningbo Ketian Magnet Co. (“Ketian”) formed an alliance with six other Chinese companies seeking a licence from Hitachi for its sintered NdFeB magnet patents. Hitachi entered into preliminary negotiations with the alliance, but following an initial meeting and further requests for information, negotiations broke down between the parties. A few months later, Ketian filed an application against Hitachi alleging that it had abused its dominant position by refusing to license its patents and by bundling its essential patents with non-essential patents. Following two hearings in 2015 and 2017 respectively and an exchange of evidence and expert reports, the Ningbo court delivered its long-awaited decision in favour of Ketian.

The court’s findings

The court held that Ketian did not have standing to sue Hitachi for bundling essential and non-essential patents. It considered the “refusal to deal” ground only.

The court held that Hitachi was dominant. It defined the relevant markets as a downstream product market of sintered NdFeB products and an upstream “technology market” of Hitachi’s Class I and Class II patents, which the Court considered to be difficult to bypass technically, although not formally standard-essential patents (SEPs). The court began its analysis by considering the downstream market affected by Hitachi’s conduct. Following a substitutability test, it concluded that there was limited demand and supply substitutability between categories of NdFeB magnets, so the downstream market was for sintered NdFeB magnet products. This conclusion was based in large part on the particular physical characteristics of those magnets. When considering the upstream market, the Court considered that some of Hitachi’s patents formed the relevant technology market on the basis that:

The court accepted expert testimony put forward by Ketian that identified two categories of patents as essential: Class I patents (those which could not be avoided without raising costs to such an extent that market exit was inevitable) and Class II patents (those which could not be avoided without significantly increasing costs, described as unavoidable patents). The Court held specifically that while these were not SEPs, since there was no relevant standard, they were nevertheless “essential patents” because they were difficult to bypass technically.

The geographic scope of both the upstream and downstream market was held to be worldwide. The Court also, somewhat unusually, considered the temporal scope of the market. It noted that Hitachi had previously licensed its patents, but found that it had not done so since 2013. The Court therefore defined the temporal market as covering the period from 2013 until the end of the first instance hearing.

As Hitachi was the only owner of the Class I and Class II patents identified by the experts and considering no other business operators had licensed patents for sintered NdFeB technology for many years, the Court held that the licensing market for sintered NdFeB technology was essentially controlled by Hitachi. The Court noted that ownership of IP rights does not necessarily give rise to dominance, but commented that the exercise of IP rights could demonstrate or give rise to dominance if the IP owner was able to control downstream pricing and eliminate or restrict competition. The court concluded that, on the facts, Hitachi could control prices, quantities, and other conditions in the relevant upstream market owing to its ownership of essential IP, as well as exerting a strong influence on the downstream market through its licensing agreements with manufacturers. On this basis, the court concluded that Hitachi held a dominant position.

The court relied on Article 17 of the AML, which prohibits “refusal to deal” by a firm with a dominant market position, especially where such refusal has the effect of eliminating or restricting competition. According to the judgment, this can include a refusal to license by an IP right holder. The court explained that in its view IP rights generally yield the most positive and efficient outcomes for production processes and consumer welfare when shared or traded collaboratively. The sentiment conveyed by the court is that cooperation is good for competition, and this appears to have provided a basis for its position that a refusal to license may be harmful for innovation, technological development and, in turn, the public interest. Against this context, the court relied on Article 7 of the amended Rules on Prohibition of IPR Abuse, which prohibits a refusal to license an IP right without a reasonable justification where that IP right constitutes an “essential facility”. The court set out the test for establishing an essential facility as follows:

Relying on the expert opinions referred to above and general market perception that Hitachi’s patents were commercially essential in order to manufacture NdFeB magnets, the court held that the patents constituted essential facilities. The court accepted that Hitachi’s patents were not SEPs, but found that they were technically very difficult to bypass. The court again acknowledged that IP rights, by their exclusive nature, may unavoidably give rise to a bottleneck effect in the market and noted that the essential facilities principle should therefore be applied carefully to IP licensing, given the importance of IP rights in incentivising innovation and improving public welfare. Nevertheless, the court found that Hitachi’s refusal to license its NdFeB patents was anti-competitive on the following bases:

The Ningbo court’s application of the essential facilities doctrine as an “analytical tool” in this case is interesting for a few reasons:

Given that the court’s decision has been appealed to the Supreme People’s Court, these points may yet find welcome clarification by China’s highest arbiter.

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