The National Development and Reform Commission of China (NDRC) recently announced the long-awaited penalty decision against Qualcomm with respect to its abuse of standard-essential patents (SEPs) in the wireless telecommunications industry.(1) The NDRC imposed a penalty of Rmb6.088 billion (about $1 billion) on Qualcomm – equivalent to 8% of Qualcomm's China sales in 2013 – for its abuse of dominance in China, in addition to an order to cease illegal conduct. This landmark decision demonstrates the NDRC's determination to take a stringent stance against monopoly activities in China and its ambition to become one of the most powerful antitrust enforcement agencies in the world.
The NDRC initiated an antitrust investigation of Qualcomm as early as November 2013 based on a complaint filed with it. The NDRC issued its final decision on February 10 2015, following a 16-month investigation, numerous consultations with external experts and multiple meetings and discussions with senior Qualcomm officers. The fine imposed on Qualcomm sets the record as the highest antitrust penalty ever issued in China's anti-monopoly enforcement history – more than three times the nearly Rmb1.8 billion in fines rendered by the NDRC in 2014.
According to the NDRC's decision, Qualcomm possessed a dominant market position in the market of SEPs for code division multiple access, wideband code division multiple access, long-term evolution wireless communication and baseband chips, and had abused its dominant market positions by:
- charging unfairly excessive patent royalties by using the wholesale net selling price of the device as its royalty base;
- charging royalties for expired patents;
- requesting grant-back of licensees' patents for free;
- tying non-SEPs for wireless communication to SEPs without justification; and
- attaching unreasonable terms in baseband chip sales (Qualcomm conditioned its sale of baseband chips on the chip customer signing a licence agreement and a non-challenge agreement and coerced Chinese licensees into accepting these unfair and unreasonable licensing terms).
According to the NDRC's statements, after several rounds of negotiation Qualcomm finally proposed a rectification plan addressing the competition concerns raised during the investigation. The rectification plan related to Qualcomm's licensing of certain wireless SEPs, requiring Qualcomm:
- to use a royalty base of 65% of the wholesale net selling price of the device for branded devices sold for use in China;
- to provide patent lists to Chinese licensees during the negotiation process;
- not to charge royalties on expired patents;
- not to seek a grant-back licence of the patents from Chinese licensees free of charge;
- not to conduct tie-in sales of non-SEPs for wireless communication in licensing wireless SEPs; and
- not to condition the sale of baseband chips on the chip customer signing a licence agreement containing unreasonable terms or non-challenge clauses in its licence agreement.
The NDRC was satisfied with this rectification plan and rendered a penalty decision on the basis of this plan. Qualcomm accepted the NDRC's penalty decision and paid the fines within four days of the NDRC's announcement of the decision.
As the first investigation concluded by the Chinese antitrust agencies against the abuse of SEPs, this case epitomises the areas of conflict and compatibility in the interaction between IP law and anti-monopoly law and sheds light on how patent holders should exercise legitimate rights under the Anti-monopoly Law and refrain from abuse of power.
SEP royalty rates
Although the NDRC claimed that Qualcomm charged unfairly high royalties based on the device value rather than the chipset value, it did not require Qualcomm to change this model, instead merely requesting that Qualcomm charge 65% of the wholesale net selling price of the device. This is presumably due to the fact that the complex process of determining a fair and reasonable SEP royalty rate – involving the balance of interests among patent holders, licensees, consumers and other market participants – remains a controversial issue globally.
The NDRC's decision might also be the result of careful balance between two significant legislative purposes – namely, protecting IP rights and preventing the abuse of such rights by rights holders. Given that there is no standardised approach with regard to royalty rates for SEPs in other more mature jurisdictions, it has taken a prudent approach. The NDRC has not set a standard for 'fair and reasonable' royalty rates or directly denounced Qualcomm's rates level; it has instead left Qualcomm and its Chinese licensees to negotiate the specific rates.
Qualcomm's business practices
The significance of the NDRC's decision is not only reflected in the record fine; more importantly, the NDRC forced Qualcomm to change its longstanding business practices by, for example, cancelling the free grant-back clauses, forcing it to provide patent lists and preventing it from conducting tie-in sales.
Comparison with Huawei v Interdigital
With regard to the analytical method and application of law used by the NDRC in rendering such a decision, certain issues are worth noting – especially compared with those in Huawei v Inter Digital. In this high-profile 2013 antitrust case, the Guangdong High People's Court ruled that Inter Digital violated the Anti-monopoly Law by licensing SEPs to Huawei Technologies at unfairly high royalty rates – the same cause of action as that in NDRC's Qualcomm investigation.
In terms of the definition of the relevant market and the determination of dominant market position, the conclusions of the NDRC and the Guangdong court were almost identical.
With respect to the definition of the relevant market in a case involving SEPs, the NDRC and the Guangdong court both ruled that each SEP constituted a relevant market since each SEP had 100% market share in each licensing market of a particular standard.
In addition, with respect to the determination of dominant market position, both the NDRC and the Guangdong court concluded that a dominant market position could be presumed by the high market share of the undertaking, as stipulated by Article 19 of the Anti-monopoly Law. Therefore, these two significant cases serve as important precedents in which market share is one of the most decisive factors in determining an undertaking's dominant market position.
This case is a strong indication of the NDRC's growing competency in investigating complicated cases. Further, its innovative approach towards SEPs will serve as a valuable precedent, not only affecting the Chinese antitrust practice, but also having a broader influence on other jurisdictions.
For further information on this topic please contact Michael Gu at AnJie Law Firm by telephone (+86 10 8567 5988) or email (email@example.com). The AnJie Law Firm website can be accessed at www.anjielaw.com.
(1) The first announcement on the Qualcomm case by the NDRC is available at http://jjs.ndrc.gov.cn/gzdt/201502/t20150210_663872.html and the formal administrative punishment decision is available at http://jjs.ndrc.gova.cn/fjgld/201503/t20150302_666170.html.
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.