China: Qualcomm investigation finally closed: some changes in business model in addition to an RMB 6.088 billion fine

Last Updated: 15 February 2015
Article by Susan Ning and Kate Peng

On 10 February 2015, the NDRC announced its decision in relation to the abuse of dominance investigation into Qualcomm. Following the announcement, the NDRC held a press conference and revealed more details about the case.

According to Mr. Xu Kunlin, the Director General of the Anti-monopoly Bureau of the NDRC, two US companies filed a complaint to the NDRC about Qualcomm's alleged abuse of dominance in 2009. In November 2013, the NDRC initiated an investigation into Qualcomm and conducted a dawn raid at Qualcomm's Beijing and Shanghai offices in the same month. It is reported that during the proceedings, Qualcomm delegates had made 28 visits to the NDRC. Mr. Xu personally attended 8 of those visits. Finally, yesterday the NDRC announced its decision, imposing a fine of RMB 6.088 billion (approximately USD 975 million). The fine is the largest in China's corporate history, outnumbering all fines imposed by the NDRC in 2014 (RMB 1.8 billion in total) by more than double. In addition to the fine, Qualcomm has made commitments to the NDRC to take several rectification measures.

According to press releases, Mr. Xu indicated that the full text of the decision will be published in the coming days.

  1. Abusive Conducts Concerned

According to the NDRC's announcement, the NDRC considers that Qualcomm has a dominant position in the license market of standard-essential patents (SEPs) for CDMA, WCDMA, LTE (i.e. 3G and 4G) wireless communication technology and the baseband chip market, and it abused that position by conducting three types of abusive behaviour.

First, Qualcomm imposed unfairly high patent license royalties, which is prohibited by Article 17(1) of the PRC Anti-Monopoly Law ("AML"). The NDRC came to this conclusion based on the following considerations: (i) Qualcomm refused to disclose its patent list and included expired patents in its patent portfolio licensed to Chinese licensees; (ii) Qualcomm requested that Chinese licensees grant back their patents free of charge, and refused to deduct the value of such patents from royalty fees or to pay for such patents in other ways; and (iii) Qualcomm charged relatively high royalty fees and unreasonably used the net sale price of the whole mobile phones which incorporated its technology as the base for its royalty fees.

Second, Qualcomm tied sales of SEPs with non-SEPs without justification, which is prohibited by Article 17(5) of the AML. Instead of licensing SEPs and non-SEPs separately, Qualcomm took advantage of its dominant position and forced Chinese licensees to purchase non-SEPs from it.

Third, Qualcomm imposed unreasonable conditions when dealing with Chinese enterprises, which is prohibited by Article 17(5) of the AML. In particular, Qualcomm threatened to refuse selling baseband chips to Chinese enterprises if they did not sign patent license agreements containing unreasonable terms, and it prohibited the licensees from challenging such license agreements.

These are essentially all the practices which Qualcomm was accused of carrying out when details of the investigation were disclosed in 2014.

  1. Qualcomm's Commitments

According to media reports, Qualcomm does not intend to challenge the decision. Instead, Qualcomm has committed to take rectification measures to address its abusive practices listed above. The measures include the following:

  1. It will charge royalty fees based on 65% of the net sale price of whole mobile phones, provided that the mobile phones are to be sold to Chinese consumers;
  2. It will disclose a list of its patents and will not charge for expired patents;
  3. It will not request Chinese licensees to provide grant-back of patents for free;
  4. It will not tie non-SEPs with SEPs;
  5. It will not request buyers of baseband chips to sign patent license agreements containing unreasonable terms, and will not prohibit them from challenging the license agreements.

Qualcomm believes that the above rectification measures will enable it to be well positioned to fully participate in China's rapidly accelerating adoption of Qualcomm's 3G/4G technology.

  1. Dominant Position

The NDRC's announcement does not provide a clear explanation of how the NDRC established that Qualcomm has a dominant market position. For the SEP licensing market, it is likely that the NDRC followed the same or similar approach adopted in the Huawei vs. IDC case. For the baseband chip market, it is unclear how broadly the NDRC defined the market and how it evaluated the factors listed in Article 18 of the AML, such as market share, barriers to entering the market and other business operators' reliance on Qualcomm. This is the first real abuse of market dominance case handled by the NDRC. The analysis and reasoning in its decision will provide important guidance on its approach in handling ongoing and future cases. It is also important to understand how the NDRC's approach compares to that of the judicial organs. For example, in the recent Qihoo 360 vs. Tencent case, the Supreme People's Court held that Tencent did not have market dominance in the Chinese instant messaging market, even though its market share was as high as 80%, because of the dynamic nature of the market.

  1. Calculation of the Fine

According to the NDRC's announcement, the RMB 6.088 billion fine is equal to 8% of Qualcomm's revenue generated from the Chinese market in 2013. DG Xu commented that, because Qualcomm had been cooperative during the investigation, the NDRC had reduced the fine from 10% to 8% of its revenue. In June 2014, the NDRC issued Several Provisions on Regulating the Price-Related Administrative Penalty Power ("Provisions"), which is applicable to antitrust cases handled by the NDRC and its local counterparts. According to Articles 8 and 12 of the Provisions, if a price-related violation is serious or has a relatively large social impact, a fine of no less than 60% of the maximum amount will be imposed. In September 2014, following the publication of the Provisions, the NDRC determined that the fine in the auto parts case should be 10%, considering the seriousness of the violation, but it reduced the fines on the cartelists by between 20%-60% under the leniency program.

In addition, DG Xu compared the approach of other jurisdictions with that of the NDRC, stating that Chinese antitrust authorities will only base fines on the company's revenue generated within China, rather than globally, and only from the products affected by the relevant monopolistic conduct, rather than the full spectrum of the company's products. Although this has always been our understanding of the NDRC's practice, DG Xu's comments are still valuable in that they clearly confirm the NDRC's position in this regard.

  1. Rectification Measures

As other commentators have observed, the change to Qualcomm's business model is even more noteworthy than the hefty fine. In particular, Qualcomm has committed to base its royalties on 65% of the net sales price of the mobile devices which incorporate its technology, to untie its licenses of SEPs from non-SEPs and to lift the requirements of free patent grant-back.

Many SEP holders adopt a similar business model to that of Qualcomm. The fact that the NDRC has determined that the above practices are abusive may serve as a warning to other SEP holders engaging in similar practices. Furthermore, it is still unclear how the NDRC determined that the practices in question were abusive. For example, the grant-back request has been found to be in violation of the AML in the present case. However, in jurisdictions like the US, it is accepted that some grant-back clauses, especially nonexclusive ones, may have pro-competitive effects. It is important to understand the rational of the NDRC in evaluating whether a grant-back clause is in violation of the AML.

Notably, the NDRC did not set the royalty rate or base for determining the royalty. Instead, Qualcomm proactively made a commitment in respect of the calculation of its royalties, which was accepted by the NDRC. It is not clear what factors the NDRC took into consideration in accepting the proposal to base royalties on 65% of the net sales price of a mobile device incorporating Qualcomm's technology. In any event, the NDRC does not follow the "smallest saleable patent-practicing unit" principle, which is the position of some courts in the US, and this is a very important message to patent holders.

  1. Commitment vs. Suspension

In contrast to the IDC investigation, where the NDRC suspended the investigation pursuant to Article 45 of the AML, Qualcomm accepted the fine imposed by the NDRC and has committed to take rectification measures. This practice of settling a case is similar to what has been done in some other cases. For example, in the LCD case in 2013, the cartelists accepted the fine and promised to extend their warranty period from 18 months to 36 months. Another example is the infant formula case, where the manufacturers promised to lower their prices. Pursuant to the suspension program, the NDRC has the power to restart a case if the company under investigation fails to fulfil its commitments. Whereas in a case such as the Qualcomm case, which is closed rather than suspended, there is no mechanism to restart the investigation. However, as the NDRC made clear after the infant formula case, the NDRC will monitor the process to ensure that the relevant company fulfils its commitments.

In summary, the Qualcomm case is a milestone case in the NDRC's antitrust enforcement activities. We expect to learn more details from the NDRC's decision, which will be published in the coming days according to DG Xu. We believe that the reasoning and analysis therein will provide vital guidance to SEP holders and other business operators in China.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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