On 10 February 2015, China’s National Development and Reform Commission (NDRC) announced that it was imposing fines of RMB 6.088 billion  (approximately USD 975 million) on Qualcomm for abusing its dominant position in the CDMA, WCDMA  and LTE wireless communication standard essential patents (SEPs) licensing market and the baseband  chip market. The NDRC’s decision marked the conclusion of a 15-month investigation which commenced  in November 2013.

Given the significance of this record-breaking fine and decision, the NDRC posted a public  statement on its website and simultaneously held a press conference both of which provided some  preliminary details of its investigation and decision. The complete Administrative Sanctions  Decision will be published on a later date.

Background

The NDRC first received complaints and reports from two US companies with regards to Qualcomm’s  abusive behaviour as early as 2009. The NDRC did not at this point initiate investigations, most  likely due to the infancy of the Anti-Monopoly Law (AML) and its limited experience in dealing with  the complexity of the interaction between the AML and intellectual property law. However, with the substantive developments in 2012 and 2013, including Huawei/InterDigital and the drafting of  the first guidelines for anti-monopoly  enforcement in the intellectual property right (IPR) related area, the NDRC commenced  investigations against Qualcomm following complaints and reports from a number of Chinese and  foreign smart mobile device manufacturers in 2013.

Qualcomm’s abusive behaviour

According to the NDRC’s public statement, Qualcomm was found to have a dominant position in (1) the markets for the licensing of CDMA, WCDMA and LTE wireless communication SEPs and (2) the  market for the supply of baseband chips. The public statement does not provide details on how the  relevant markets were defined nor market shares held by Qualcomm or how the NDRC established  dominance. However, it is understood from a televised interview with an NDRC official that in the SEPs licensing market, Qualcomm was found to have 100 percent market share for each individual SEP,  and over 50 percent market share for the supply of baseband chips.1

The NDRC concluded that Qualcomm abused its dominance in the two relevant markets as follows:

Click here to view the table.

Qualcomm was therefore found to have abused its power by engaging in excessive pricing, imposing unfair terms and bundling. The NDRC in its public  statement concluded that Qualcomm’s abusive behaviour eliminated and restricted market competition,  impeded and stifled technology innovation and development, and harmed consumer interests. When  released, the complete Administrative Sanctions Decision should provide valuable insights on the  NDRC’s interpretation of these provisions and procedural issues.

Fines and rectification plan

Pursuant to section 47 of the AML, a company who abuses its dominance can be subject to a fine of  between 1 percent to 10 percent of its annual revenue. According to the NDRC’s public statement,  Qualcomm’s fine was 8 percent of its revenue in China in 2013 and was determined by considering a range of factors including the serious nature and  extended duration of Qualcomm’s abusive behaviour, its cooperation in the investigation and the  voluntary rectification plan offered to the NDRC.

In addition to the fine imposed, which Qualcomm stated it will not contest, Qualcomm agreed to  implement a rectification plan approved by the NDRC, the key terms of which are as follows:

  • Qualcomm will offer licenses to its current 3G and 4G Chinese SEPs separately from licenses to its other patents and will provide patent lists  during the negotiation process. If Qualcomm seeks a cross license from a Chinese licensee as part  of such offer, it will negotiate with the licensee in good faith and provide fair consideration for  such rights.
  • For licenses of Qualcomm’s 3G and 4G Chinese SEPs for branded devices sold for use in China,  Qualcomm will charge royalties of 5 percent for 3G devices2  and 3.5 percent for 4G devices3  that  do not implement CDMA or WCDMA, in each case using a royalty base of 65 percent of the net selling  price of the device.
  • Qualcomm will give its existing licensees an opportunity to elect to take the new terms for  sales of branded devices for use in China as of 1 January 2015.
  • Qualcomm will not require, as a condition of sale, customers of baseband chips to sign a  license agreement containing unreasonable terms or prohibiting customers from challenging the  license agreement.4

The fine imposed and the rectification measures suggest that the NDRC only imposed penalties on Qualcomm’s abusive behaviours in China. This appears to be in contrast to the Huawei/InterDigital case, where the courts took the view that  InterDigital’s licensing practices in respect of its US SEPs had substantial, material and  reasonably foreseen impact on the domestic production, export opportunity and export trade of  Huawei and other Chinese companies, thus applying the AML to InterDigital’s US SEPs licensing practices.

Implications

The Qualcomm case is a milestone in Chinese AML enforcement. The enforcement approach should be of  particular interest to antitrust authorities in other jurisdictions (e.g., EU, US and South Korea)  which are reportedly investigating Qualcomm for similar abusive practices. Additionally, the  decision may also impact other IPR holders (including SEPs and IPRs which constitute de facto  standards) as the results set a precedent on what may be considered reasonable royalty rates and  licensing practices in China. Furthermore, although the NDRC investigation has ended, there may be  follow-on civil suits against Qualcomm in China by Chinese companies and consumer groups.5

The Qualcomm case demonstrates NDRC’s willingness to impose significant fines in abuse of dominance  cases, in contrast to its approach in the China Unicom/China Telecom case and the InterDigital  case. It also confirms the NDRC’s growing sophistication with its ability to tackle the complexity  of the interplay between competition principles and intellectual property law.