Introduction

On October 19 2015 the Ministry of Commerce (MOFCOM) announced the first conditionally approved merger of 2015, concerning Nokia's acquisition of Alcatel-Lucent. This marked the second time that Nokia has been the subject of a MOFCOM merger review relating to mobile communications standard-essential patents, after MOFCOM conditionally approved Microsoft's acquisition of Nokia's device and service divisions in April 2014. In this earlier case, MOFCOM considered that the concentration could inhibit or restrict competition in China's smartphone market in light of Microsoft's ownership of a number of important smartphone-related patents and Nokia's holding of thousands of standard-essential patents for communication technologies. After several rounds of negotiations, MOFCOM finally accepted the commitments and remedy plans proposed by Microsoft and Nokia and conditionally approved the concentration. As the seller, Nokia committed to comply with the fair, reasonable and non-discriminatory (FRAND) principle in respect of related standard-essential patents.

In its recent acquisition of Alcatel-Lucent, Nokia notably made more stringent and comprehensive commitments in respect of its telecommunications standard-essential patents, including those previously owned by Alcatel-Lucent.

Case profile

On April 15 2015 Nokia and Alcatel-Lucent signed a memorandum confirming that Nokia would acquire Alcatel-Lucent by way of public offer for a sum of around €15.6 billion. On April 21 2015 MOFCOM received the filing for concentration of undertakings regarding this deal. On review, it found that the filing materials and related documents were incomplete and thus requested supplementary information. On June 15 2015 MOFCOM accepted the case and began the preliminary review. On July 14 2015 MOFCOM conducted an in-depth review of the concentration. MOFCOM concluded that the concentration could inhibit or restrict competition in the licensing market for telecommunications standard-essential patents. Nokia then submitted its remedial measures to MOFCOM on October 8 2015. On October 12 2015 MOFCOM extended its review period to December 10 2015. However, only a week later MOFCOM concluded the review by accepting Nokia's proposed remedial measures and announcing its conditional approval of the concentration. This was one of the few cases granted conditional approval soon after entering the third stage.

According to MOFCOM, the competition issues likely to arise from the concentration did not relate to the wireless telecommunications network equipment and services market. It held that following the acquisition, Nokia would not assume absolute control of the market of wireless network access equipment, core network system equipment and network infrastructure services, as it would still face strong competition from Huawei, Ericsson, ZTE and other enterprises. However, as Nokia and Alcatel-Lucent had larger shares in second, third and fourth generation (2G, 3G and 4G) telecommunications standard-essential patents, Nokia would have a significant patent advantage in the telecommunications industry following conclusion of the deal. Therefore, based on the relevant market, MOFCOM focused on assessing the potential adverse effect Nokia's enhanced leading position in the telecommunications standard-essential patent market could have on competition in the market of mobile terminals and wireless communications network equipment.

Relevant market

Most issues concerning anti-monopoly review relate to the precise definition of the relevant market, as this forms the basis of assessment. However, in this case MOFCOM adopted a practical approach and afforded some flexibility to the definition of the relevant market.

Relevant product markets

Four relevant product markets were involved in the case:

  • the wireless network access equipment market;
  • the core network system equipment market;
  • the network infrastructure service market; and
  • the licensing market for communication technology-related standard-essential patents.

Both wireless network access equipment and core network system equipment fall within the scope of wireless communication network equipment. However, MOFCOM considered (among other things) that the two types of product can be purchased separately and thus interpreted them as two separate markets.

The most significant product market in the case was the licensing market for communication technology-related standard-essential patents. In recent years standard-essential patents have become the main point of contention within the grey area between competition and IP law, as evidenced by the patent licensing dispute between Huawei and IDC and the record Rmb6 billion penalty imposed on Qualcomm in early 2015 for its abuse of standard-essential patents (for further details please see "Abuse of dominance in relation to intellectual property: the Chinese perspective" and "Antitrust agency renders milestone decision on SEP case", respectively). The 'standard' in the term 'standard-essential patent' refers to a commonly used normative document that is formulated and published by a standard-setting organisation or alliance upon agreement. A technical standard involves the technologies that must be applied to meet the standard in production activities. The establishment and implementation of technical standards guarantee the interchangeability, compatibility and versatility of products and services. A patent – as a legal monopoly – entitles its owner to the exclusive use of the patented technology. The combination of technical standards and patents forms standard-essential patents – patents necessary for the implementation of certain technical standards.

Telecommunications standard-essential patents are often licensed as a package, due to the large number of such patents. However, in terms of demand substitution, they can be subdivided for individual sale. MOFCOM held that such subdivision was irrelevant to the assessment of this case and thus undertook a general investigation of the licensing market for telecommunications standard-essential patents. This was consistent with MOFCOM's previous decision in its review of Microsoft's acquisition of Nokia's device and service business.

In the penalty decision against Qualcomm and Huawei v IDC, the National Development and Reform Commission (NDRC) and the Guangdong Provincial High Court respectively adopted the same approach to defining relevant markets and assessing market dominance. Both held that each wireless standard-essential patent licence can constitute a separate relevant product market and that each standard-essential patent constitutes 100% market share in each licensing market. However, because Qualcomm licensed its wireless standard-essential patents as a portfolio, the NDRC defined the relevant product market as the assembly of the relevant separate product markets. The NDRC and MOFCOM – in defining standard-essential patent markets in the telecommunications sector – thus focused on the comprehensive effect of patent licences on market competition. Although the definition may differ in practice, there is no disagreement in principle.

In short, whether from the perspective of demand substitution or supply substitution, each standard-essential patent is likely to be indispensable and unique. However, given that rights holders generally license standard-essential patents as a package, the relevant authority may conduct an overall assessment – rather than subdivide the relevant markets – with reference to the particular licensing method when defining the relevant market. MOFCOM is thus somewhat flexible in defining the market. In this case, MOFCOM considered it necessary to divide the wireless telecommunications network equipment market into two separate markets; however, when standard-essential patents were involved, it found market subdivision unnecessary. It thus appears that definition of the relevant market is used primarily to assess competition effects and, if the conclusion of the competition assessment will not be affected, the definition may be less strict.

Relevant geographic market

From a geographical perspective, MOFCOM did not specify whether the global market would be affected by the concentration; it merely noted that the focus of its investigation was the domestic market. MOFCOM held that despite the international standardisation of wireless telecommunications network equipment and the fact that import restrictions, transportation costs and technical requirements did not constitute major constraints, the competitors were not fully competitive on a global scale. Further, there were still differences in the telecommunications standards and technologies used in different countries and regions, as well as certain restrictions on competitors imposed by some countries for security reasons. As such, the key investigation of wireless telecommunications devices focused on the impact on the Chinese market.

Similarly, as the licensing market for telecommunications standard-essential patents is global, patent holders tend to look for licensees worldwide and use globally packaged licensing. Therefore, the possibility remains that the relevant geographic market will be defined as global. However, in view of the idiosyncrasies of the Chinese telecommunications standard-essential patent licensing market, MOFCOM focused on the impact on the Chinese market in this case.

This approach to defining the relevant geographic market has been applied in prior cases. For example, during the review of Google's acquisition of Motorola in 2012 – relating to the product market for mobile intelligent terminals and mobile intelligent terminal operating systems – MOFCOM also focused on the Chinese market after taking full account of the state of competition in the global market.

Competition analysis

MOFCOM found that the concentration was less likely to inhibit or restrict competition in the three relevant fields (wireless network access equipment, core network system equipment and network infrastructure services), and its assessment in this regard is noteworthy. All of the restrictive conditions that it imposed on the concentration related to the licensing of telecommunications standard-essential patents, which illustrates that potential competition risks arising in the standard-essential patent licensing process are still the primary focus of anti-monopoly enforcement.

Related product markets

MOFCOM assessed the horizontal overlap in the three related product markets of Nokia and Alcatel-Lucent (wireless network access equipment, core network system equipment and network infrastructure services). It concluded that in the three markets and some of their related segments, the combined market share of the parties ranged from 0% to 35% and the acquisition of Alcatel-Lucent would not enhance Nokia's market position or give it absolute control of the markets. Strong and active competitors remained in each segment (eg, Huawei, ZTE and Ericsson) that could serve as effective competitive constraints on Nokia and the market competition situation would not change substantially. Therefore, on completion of the acquisition, Nokia would be unable to inhibit or restrict competition in the relevant markets.

In analysing the three relevant product markets, MOFCOM comprehensively investigated various factors, rather than mere static market share, including:

  • dynamic market share;
  • competitors' activities and competition constraining force; and
  • market share trends.

The post-merger Nokia was not presumed to have the ability to exclude or restrict competition due to its largest market share or leading position in several fields. For example, in the 2G wireless network access equipment market (which could be subdivided into the Global System for Mobile (GSM) and Code-Division Multiple Access markets), MOFCOM found that the two parties had horizontal overlap in the GSM market and that the combined market share was large (more than 30%, ranking first in market share). However, it did not determine the potential competition impact by market share alone; instead, it took full consideration of development trends in the market shares of both parties and turnover, as well as other related factors (including the 66% decline in combined turnover of the two parties in the previous three years and the existence of several active competitors in the market at the same time). Competition in the high-tech and internet sectors is highly dynamic, in contrast to the situation in more traditional industries, where market dominance can be determined by virtue of market share alone. As such, in this case MOFCOM considered more comprehensive and systematic factors.

MOFCOM also noted that it had not received any opinions from competitors or upstream or downstream enterprises indicating that Nokia might inhibit or restrict competition in the Chinese wireless network access equipment market following completion of the acquisition. This shows that feedback from third parties (or a lack thereof) can also influence MOFCOM reviews.

Licensing market for telecommunications standard-essential patents

According to MOFCOM, the proportion of patents held by Nokia in the licensing market for 2G and 3G telecommunications standard-essential patents would increase from 25%-35% to 35%-45% following the concentration, further expanding the gap between Nokia and Qualcomm (which ranks second in the market) and allowing Nokia's rank in the licensing market for 4G telecommunications standard-essential patents to jump from second to first. Overall, with the licensing market for telecommunications standard-essential patents becoming more concentrated, the share of patents held by Nokia would increase significantly.

Telecommunications standard-essential patents, which constitute a major obstacle to downstream market access, are critical to the manufacturers of mobile terminals and wireless telecommunications devices – their use is a prerequisite for entry into the market. Therefore, holders of telecommunications standard-essential patents have control over the use of standards and effective competition in the downstream market may be distorted if such rights holders abuse their rights to inhibit or restrict competition (eg, by refusing to license, charging high licence fees or engaging in discriminatory licensing).

On completion of the concentration in question, the number and scope of standard-essential patents held by Nokia would increase, which would greatly enhance Nokia's strength in patent licensing negotiations. MOFCOM noticed that most manufacturers of wireless telecommunications network equipment and mobile terminals were weak in terms of patents; whether in patent quantity or quality, they had no basis for cross-licensing with Nokia and thus lacked effective counterweight to Nokia in patent licensing negotiations. MOFCOM noted that China is the number-one mobile phone producer in the world, but the industry's average profit margins are relatively slim; after completion of the concentration, if Nokia were to make any unreasonable change to its standard-essential patent pricing strategy, the competition landscape in the relevant domestic markets would be affected, potentially resulting in the inhibition or restriction of competition and ultimately harming consumer interests.

Through several rounds of negotiations, MOFCOM and Nokia reached an agreement on October 8 2015. Based on the remedial measures submitted by Nokia, MOFCOM conditionally approved the concentration.

Restrictive conditions

According to the MOFCOM announcement, Nokia made a series of commitments in respect of its telecommunications standard-essential patents as of completion of the deal, including the following:

  • Based on the principle of equality, if the licensee acts in good faith, Nokia will cease its pursuit of a standard-essential patent injunction to prevent the implementation of standards with FRAND commitments.
  • When transferring a standard-essential patent to a third party in future, Nokia will promptly submit details of the transfer to its existing Chinese licensees and any other Chinese enterprises that are in active licensing negotiations with it. More importantly, if the transfer of certain standard-essential patents to a third party has any significant impact on the value of Nokia standard-essential patent portfolios that have been licensed or will be licensed to Chinese enterprises, the existing Chinese licensees (including potential licensees) will have the right to renegotiate and determine loyalty rates.
  • Nokia will transfer corresponding FRAND obligations to the new owners for all future transfers of standard-essential patents.
  • Nokia will accept MOFCOM supervision in respect of the performance of its commitments and report to MOFCOM regarding the progress of such performance.

Comparing the restrictive conditions imposed by MOFCOM in this deal with those imposed on Microsoft's acquisition of Nokia's device and service divisions, it can be seen that Nokia's pledged commitments essentially remained the same. However, for this deal MOFCOM put more weight on the competition features of the relevant Chinese industries, strengthened the protection mechanism for Chinese manufacturers and intensified supervision over Nokia's implementation of its commitments.

Echoes of the first and third restrictive conditions imposed in this most recent case can be found in the previous case regarding Microsoft's acquisition of Nokia's device and service divisions. In both cases, MOFCOM added similar conditions regarding the obligations that should be performed by Nokia in compliance with FRAND principles. However, the second restrictive condition imposed in the most recent case was not included in the previous case. It seems that implementation of this condition will further protect the relevant rights and interests of existing and potential Chinese licensees, thus enabling China's mobile phone, telecommunications equipment and terminal manufacturers to avoid any adverse effect arising from Nokia's potential abuse of patent rights to a certain extent, as well as any unreasonable charges. Moreover, the fourth restrictive condition imposed in the latest case – the commitment to accept the supervision of and reporting to MOFCOM – not only requires Nokia to report standard-essential patent transfers to third parties, but also extends the reporting requirements to "standard-essential patent transfers to third parties and the contracts signed". It is thus clear that MOFCOM is determined to expand and strengthen its supervisory powers. The fourth condition also mentioned that "Nokia commits to notify all of Nokia's patent spin-offs to Chinese companies", which is consistent with the second restrictive condition, highlighting its obligations to Chinese companies.

Comment

MOFCOM has thus far concluded more than 1,000 concentration cases, including 25 conditionally approved cases and two prohibited cases. In the past few years, an average of four cases were conditionally approved or prohibited each year. However, during the last 10 months of 2015 only one was conditionally approved; all other resolved cases were unconditionally approved, which seems to reflect MOFCOM's more prudential attitude in issuing conditional approval. At the same time, it is reassuring that the review of this latest case reflected a more rigorous and mature approach to competition analysis, and that the additional conditions imposed were clearer and more pragmatic.

From the two conditionally approved mergers involving Nokia and the NDRC's investigation of Qualcomm and IDC, it is clear that the anti-monopoly regulations governing IP rights (especially standard-essential patents) have become increasingly important and challenging in terms of review and enforcement. In April 2015 the State Administration for Industry and Commerce (SAIC) promulgated the Provisions on the Prohibition of the Abuse of IP Rights to Exclude or Restrict Competition, China's first special anti-monopoly rules combatting the abuse of IP rights. The NDRC and MOFCOM are also preparing to introduce new relevant provisions. The Anti-monopoly Commission of the State Council is also expected to integrate the rules formulated by the NDRC, SAIC and MOFCOM in 2016 and finally issue uniform guidelines for anti-monopoly regulation of IP rights.

For further information on this topic please contact Michael Gu at AnJie Law Firm by telephone (+86 10 8567 5988) or email (michaelgu@anjielaw.com). The AnJie Law Firm website can be accessed at www.anjielaw.com.

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