In August 2019, Taiwan's IP Court rendered a first-instance judgment holding that a headlight design patented by Daimler AG (for the headlight applied to Mercedez-Benz E-Class (W212)) was infringed by one of Taiwan's most active auto lamp manufacturers. In addition to granting Daimler's permanent injunction claims, the decision awarded Daimler compensatory damages in the amount of NT$30 million. Daimler AG v. DEPO Auto Parts Ind. Co., Ltd., 106 Min Zhuan Su 34, Taiwan's IP Court (August 2019). If this decision, currently appealed to the second-instance level, is eventually upheld by the higher courts, Taiwan's robust auto parts and accessories industry might need to reshape their development strategies, because under this decision the automotive aftermarket in Taiwan is very unlikely to be considered as an independent market to earn broader protection by the Fair Trade Act.

Among the many issues discussed in the more than 100-page judgment, the most intensely debated one is whether Daimler violated Taiwan's anti-trust regulations (mainly stipulated in the Fair Trade Act) for denying the defendant's request for license of the disputed design patent. Specifically, the judgment addressed two questions. First, under what conditions can we deem a patentee's refusal to deal as an act that unlawfully constrains competition? Second, under what conditions can we deem an original car manufacturer as having the dominant power in the automotive aftermarket (also called secondary market), especially the aftermarket pertaining to manufacturing and retailing of auto parts?

The judgment's answer to the first question is as follows:

Turning down a license request is, as a matter of fact, a way of exercising patent right at the choice of the patentee. Whether a refusal to license constitutes abuse of a dominant position and risks restricting competition in the market shall not be determined on a lenient basis. Otherwise ... patentees will easily fall prey to accusation of dominant position abuse simply due to refusal to license, and their motivation to innovate will then be utterly doomed. Therefore, the product asserted to have been hampered by market position abuse through refusal to license shall at least possess a certain degree of creativity on par with the patent which the patentee refuses to license. In the present case, the disputed product is simply a result of exploitation of the disputed patent, without any further technical feature invested on par with the patent in terms of creativity. Therefore, the disputed product cannot be considered a new product.

Drawings of the plaintiff's design (a counterpart to German Design No. 40705293-0001.2) and photos of the defendant's product are provided in the IP Court decision, from which the writer excerpted as follows.

Perspective views of Daimler's design (Left) and the defendant's product (Right)

Regarding the outwardly resemblance of the two, the defendant's explanation was that was a necessary result of the nature of the aftermarket auto parts industry: namely, replacement parts are required to completely match the concerned car's external profile (as well as some functional requirements, asserted the defendant) to such an extent that buyers are actually "locked in" the aftermarket without substitute options. Based on this argument, the defendant further claimed that the aftermarket for the headlight in dispute is monopolized by Daimler.

Yet the judge (Judge Henry Tsai) does not find this argument persuasive, holding that:

The term "relevant market" should be defined by considering the existence and degree of substituteness, and this review should be conducted mainly from the perspective of the demand side (rather than the supplier side).... Even if the relevant consumers are locked in the aftermarket without substitute options, the primary market and the aftermarket should be deemed as one and the same if sufficient competition has occurred in the primary market to such an extent that the locked-in effect in the aftermarket has no real meaning in terms of competition. As the evidence in the docket shows, the plaintiff takes up only a 6-8% share of the entire primary automotive market .... which proves the competition in the primary market is so intense that the competitive constraint therefrom has been transferred to the aftermarket, hence the phenomenon of interlinking the primary and secondary markets.

If a buyer believes a replacement headlight (licensed by the plaintiff) for her car will be too costly, she may as well choose not to buy that type of car in the first place. Even if she has inadvertently purchased that type of car and become "locked-in," she can always remove that type from her next purchase list for consideration, suppose she does care about the maintenance costs generated by the headlight. That is, in such a system where the primary and secondary markets are interlinked, the demand side, in the face of price adjustment by the supplier, is not totally incapable or unlikely to switch to another supplier or a substitutive commodity, even though the switch and substitution processes are somewhat indirect.

The judge further discussed whether, as the defendant contented, the information cost and switching cost are so high that the competitive constraint from the primary market cannot be transferred to the aftermarket. This argument was obviously inspired by the 1992 US Supreme Court's decision on the Eastman Kodak case, Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S.451 (1992), whose reasoning was largely transposed by the defendant in the reported headlight case. The judge's answer is in the negative, favoring Daimler:

Buyers of the disputed type of car can be broadly divided into two groups: those who make the purchase with the full knowledge of the limited choices of replacement aftermarket headlights and their expectably high prices, and those who make the purchase without such knowledge. In respect of the former group, the issue of incomplete information and switching burden does not exist, since these buyers' purchases are made evidently due to client-brand identification (in an environment) with sufficient competition. As to the latter group, it can be further divided into two sub-groups: buyers who, after becoming aware of the limited choices of replacement aftermarket headlights and their high prices some time after purchasing the car, are willing to take these facts as reflecting the brand value; and buyers who, because of their concerns about the prices of replacement aftermarket headlights, feel that their interests have been prejudiced given the asserted insufficiency of competition in the aftermarket. The main purpose for identifying the aftermarket for replacement aftermarket headlights as an independent market is to protect the consumer interests of the last group of buyers. However, if these owners truly mind the aftermarket price for the replacement headlights, why didn't they carefully consider this factor when purchasing the car in the first place? ...

As far as the first two types of buyers who acknowledge the brand value are considered, if the replacement aftermarket is viewed as an independent market, it is bound to cause the plaintiff to increase the sale price of the disputed car in order to maintain the overall sales profit generated from the entire system composed of the primary and secondary markets. However, these buyers do not necessarily prefer this high-car-price and low-replacement-cost sales model, because, after all, the frequency of maintenance and even the maintenance needs vary from buyer to buyer....

In the end, how to adjust the proportions and weights designated to retail price and aftermarket price of a car (and its parts) is a question of finding the most efficient arrangement and that should be obtained through the operation of the unitary system composed of the primary and the secondary markets. Arbitrarily viewing the replacement aftermarket as an independent market will inevitably stifle the market operation of this unitary system.... Compared with the consumers (asserted to be) concerned about the aftermarket replacement price but careless in evaluating the aftermarket replacement cost, these consumers who appreciate the brand-value are, in my perspective, the more legitimate stakeholders and hence deserve priority protection.

Another point worth noting is that Daimler was accused of breaching a commitment it made in 2003. The defendant asserted that, during the course of public deliberation for a then proposed amendment to the Germany's Act on the Legal Protection of Designs, Daimler "promised not to apply the Act to compete for market share with independent factories and independent parts traders." The reported decision did not side with the defendant, and the judge's analyses are equally thought-provoking. However, as that issue is of little relevance to Taiwan's IP laws or antitrust law, we will not delve into the details here.

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