Interim Report on Startup Businesses Practices by the Japan Fair Trade Commission (“JFTC”)

On June 30, 2020, the JFTC published an interim report about market research on startup business practices (the "Report").¹ The JFTC will continue its research and will issue a final report. This is part of the effort by the JFTC, the Ministry of Economy, Trade and Industry ("METI") and the Japan Patent Office ("JPO") to prepare relevant guidelines.

The JFTC recognizes that it is important to secure a competitive situation where startup businesses can compete fairly and freely. Startups have the potential to make particularly significant contributions to productivity growth and the development of Japan’s economy by driving innovation.

Previously, the JFTC conducted market research on "know-how" and intellectual property ("IP") that are subject to abuse of superior bargaining position ("ASBP") under the Anti-Monopoly Act, and issued a report in June 2019.² At the time, the JFTC focused its market research on manufacturer know-how and IP because it received multiple complaints from manufacturers who claimed that their know-how and IP were being exploited by parties in a superior bargaining position.

This time, the JFTC conducted market research on startup businesses. In recent years, open innovation, where large companies cooperate with startups to create new value, has become important. Ensuring an environment in which startups can compete fairly and freely helps promote value creation through collaboration between startups and large companies.

The Research includes a hearing survey and a questionnaire survey. In November 2019, the JFTC started the hearing survey. Based on the results of hearing survey, the JFTC selected 5,593 startup businesses for the questionnaire survey, which was conducted online from February 21 to March 19, and from April 13 to June 11, 2020. It was carried out by dividing the survey into two time periods to consider the effect of COVID-19. A total of 1,447 startups responded to the questionnaire survey.

According to the Report, approximately 75 percent of the startups said they have had experiences where they had no choice but to accept impermissible behavior from others, such as large companies. The Report identifies the impermissible behavior that startups experienced. For example, a business partner disclosed a startup’s important materials (such as algorithms) to third parties contrary to a non-disclosure agreement. The Startup conducted Proof of Concept ("PoC") for free because it was implicated by a business partner to enter into a contract after PoC, but it ended up never entering into a contract. The joint research and development agreement proposed by a large company gives rights to the large company, even when the invention is newly created, mainly by using the startup’s know-how. The Startup is on the verge of being asked to provide a license for free.

The JFTC continues to research and will issue a final report that will identify potential issues and summarize its evaluation under the Anti-Monopoly Act; for example, whether conduct would violate ASBP and/or Trading on Restrictive Terms. The Report indicates that the JFTC will continue cooperating with the METI and JPO in the effort to prepare guidelines with respect to promoting collaboration between large companies and startups for innovation.

_{1 The Report (17 pages long) is available in Japanese at https://www.jftc.go.jp/houdou/pressrelease/2020/jun/200630_2.pdf.
2 The Client Alert about this report is available at https://www.whitecase.com/publications/alert/jftc-market-research-know-how-and-ip-subject-abuse-superior-bargaining-position.}

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