Since November 2013, the National Development and Reform Commission (NDRC) has been investigating Qualcomm's patent licensing practices. On 10 February 2015, the NDRC closed the investigation, and Qualcomm announced that it had agreed to pay a fine of nearly $ 1 billion (RMB 6.088 billion). The fine is the highest in China's antitrust enforcement history.
In its decision, the NDRC found that Qualcomm was dominant in the markets for licensing CDMA, WCDMA and LTE wireless communications standards essential patents and for baseband chipsets, and had abused its dominance by charging unfairly high royalty fees, bundling standard essential patents (SEPs) with non-SEPs and imposing unfair conditions on the sales of its baseband chips for managing mobile handset radio functions.
The NDRC is one of the three antitrust enforcement authorities in China, responsible for investigating suspected price-related anti-competitive conduct, including price-related anticompetitive agreements and abuses of dominance. The NDRC applies China's Antimonopoly Law (AML), the country's first comprehensive competition/antitrust law, which came into effect on 1 August 2008.
This fine is the largest paid by any company to date for infringement of any Chinese law. In addition, Qualcomm undertook to make changes to the licensing of its wireless SEPs, which include: (1) charging royalties for its patents in China (3.5 or 5 per cent, depending on the technology) on 65 per cent of the net selling price of each device rather than the full price as previously; (2) providing lists of all its patents when licensing Chinese licensees and not charging licence fees for expired licences; (3) not requesting cross-licences from Chinese licensees without payment; (4) not bundling licences of wireless communication SEPs with non-SEPs without any justification; and (5) promising, in relation to its baseband chips, not to force Chinese licensees to agree to any licence that imposes unreasonable conditions, and not to prohibit prospective licensees from challenging the terms of its agreement.
Interestingly, in accepting Qualcomm's commitments, the NDRC commented that it welcomed Qualcomm's continued investment in China, and supported Qualcomm in its policy of charging reasonable royalties. By effectively determining Qualcomm's royalty levels the NDRC has gone further than other global antitrust authorities and there are inevitably some concerns about where such intervention might end. This statement is therefore a welcome signal by the NDRC that it sees intervention in the field of IP rights as having limits. Qualcomm has indicated that it will not contest the fine, and its share price rose following the announcement.
What does Qualcomm case mean for doing business in China?
For some years now, businesses have been aware that their mergers and acquisitions may attract close scrutiny by the Chinese authorities. Many businesses, however, have not appreciated the speed with which the Chinese authorities have embraced the enforcement of the other areas of antitrust law, namely the prohibitions of anti-competitive agreements and abuses of dominance. It is significant that the NDRC has not limited its enforcement activities to traditional manufacturing and service sectors, but has rapidly turned its attention to electronics and in particular the complex IP/antitrust interface, an area that the European Commission, for example, is investigating only cautiously even 50 years after the adoption of the EU competition rules.
The large fine imposed on Qualcomm highlights the importance of compliance with Chinese competition law. As in other jurisdictions, an effective compliance programme will help companies to minimise the risks of violating Chinese antitrust law. The AML has been in effect for more than 6 years. However, few companies operating in China, whether domestic or international, have developed or implemented effective Chinese competition compliance programmes.
Companies which already have global antitrust compliance programmes need to adapt them to the Chinese enforcement context, because the AML, although based on the EU model, is materially different to both EU and US antitrust law.
In the same way that commitments accepted and published by the European Commission in a range of cases over the last few years have acted as templates for compliance programmes, the commitments given by Qualcomm in this case will provide a useful starting point for businesses in a similar position to Qualcomm's that now wish to establish their own compliance programmes.