On October 19 2015 the Ministry of Commerce (MOFCOM) conditionally cleared Nokia Oyi's acquisition of Alcatel-Lucent with four behavioural remedies focusing on maintaining fair licensing of standard-essential patents.
On April 15 2015 Nokia signed a memorandum of understanding with Alcatel whereby it would acquire 100% of Alcatel's shares through a tender offer. Notification of this deal was filed on April 21 2015 and officially accepted by MOFCOM on June 15 2015. On July 14 2015 the notification entered the second phase for review. After MOFCOM expressed its concerns that the deal would have anti-competitive effects, Nokia proposed relevant remedies. MOFCOM held that these proposals alleviated its concerns and accordingly cleared the transaction with remedies.
In MOFCOM's view, the relevant product markets for the deal were:
- the radio access network market;
- the core network systems market;
- the network infrastructure service market; and
- the information and communication technology (ICT) standard-essential patent licensing market.
The relevant geographic market was China.
MOFCOM found that the deal would not trigger anti-competitive effects in the first three relevant product markets, although it could obstruct or limit competition in the ICT standard-essential patent licensing market.
MOFCOM noted that Nokia would increase its holdings in 2G, 3G and 4G standard-essential patents and strengthen its concentration in the ICT standard-essential patent licensing market following conclusion of the deal. Downstream competition would in turn be distorted – and consumers' interests would be threatened – if Nokia refused to license, charged overly high royalties or displayed any other anti-competitive behaviour.
MOFCOM accordingly imposed four behavioural remedies on Nokia with the aim of ensuring fair licensing of standard-essential patents:
- On a reciprocal basis, Nokia must commit not to use injunctions to prevent enforcements of fair, reasonable and non-discriminatory (FRAND) encumbered standard-essential patents, unless the potential licensees are unwilling to sign FRAND licensing agreements and follow the terms.
- If Nokia transfers its standard-essential patents to a third party, it must inform Chinese licensees, as well as Chinese companies that are actively engaged in licensing talks, of the transfer details.
- Nokia may transfer its standard-essential patents to a new owner only if the new owner accepts Nokia's existing FRAND commitments.
- MOFCOM has the right to monitor the implementation of Nokia's commitments. Nokia must report to MOFCOM on the implementation of the conditions within 45 days of the end of each calendar year. The reporting obligation will be observed for five years, until October 18 2020.
This case illustrates MOFCOM's new approach to evaluating the competitive effects of M&A deals involving the transfer of standard-essential patents.
MOFCOM defined the entire ICT standard-essential patent market as the relevant product market, rather than divide it into individual markets. As MOFCOM noted, even though this market can be divided into more specific markets based on a demand-side analysis, it would have made no difference to the competition analysis in this deal.
As the starting point and basis of competition analysis, definition of the relevant market has been particularly important in cases involving standard-essential patents. Following the judgment in Huawei v IDC, which held that each standard-essential patent constitutes an individual relevant product market, the issue of whether it is necessary to specify the standard-essential patent licensing market has come to the fore. MOFCOM's stance provides helpful guidance that the relevant market should be specified to the extent that it aids competition analysis.
In conducting a competition analysis, MOFCOM evaluates various factors, rather than merely comparing market share. This is consistent with the complexity and flexibility of the high-technology industry.
The following factors were considered in this case:
- whether any other undertaking could compete with the concentrating parties;
- whether manufacturers in downstream markets could counterbalance Nokia by cross-licensing;
- the concentrating parties' production and marketing strategies; and
- the characteristics of the relevant product markets.
Although Nokia would have a large market share in the first three relevant markets following completion of the deal, MOFCOM concluded that this would not trigger anti-competitive effects because serious rivals operated in these markets (eg, Huawei and Ericsson).
As per MOFCOM's statement, Nokia's share in the fourth market would increase significantly. Moreover, most wireless communication equipment manufacturers and handset makers – as the downstream market undertakings – would be unable to engage in cross-licensing with Nokia and thus lack sufficient countervailing power to counterbalance Nokia.
Based on this finding, MOFCOM concluded that any unreasonable changes made by Nokia to its standard-essential patent licensing strategies could affect the competition dynamic among the manufacturer markets. Therefore, MOFCOM held that the deal would likely have anti-competitive effects on the fourth relevant market. In particular, it found that any unreasonable changes made by Nokia could increase costs for downstream undertakings, which could in turn force them to exit the market or pass the increased burden on to customers.
In formulating remedies, MOFCOM was particularly mindful of the need to protect Chinese downstream companies and increase its own supervisory capacity, as evidenced by the second and fourth remedies imposed on Nokia.
The second remedy requires Nokia to inform Chinese licensees and potential licensees if it intends to transfer its patents to a third party. This would allow licensees and potential licensees to take advance steps to address the change.
MOFCOM also asked Nokia to report relevant information on any patents that it transfers to third parties, so that MOFCOM could accordingly increase its supervision of Nokia's compliance with the imposed remedies.
This decision helpfully demonstrates MOFCOM's approach towards cases involving standard-essential patents. In particular, the following points can be gleaned:
- The relevant product market should be specified to the extent that it aids competition analysis.
- Various factors – rather than mere market share – should be considered in the competition analysis, such as the countervailing power of competitors and downstream undertakings, and the production and marketing strategies of the concentrating undertakings.
- MOFCOM intends to increase its supervision of the implementation of remedies.
For further information on this topic please contact Hao Zhan or Ying Song at AnJie Law Firm by telephone (+86 10 8567 5988) or email (firstname.lastname@example.org or email@example.com). The AnJie Law Firm website can be accessed at www.anjielaw.com.?
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.