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China – NDRC Fined Qualcomm RMB 6.088bn For Abuse Of Market Dominance.

18 February, 2015

 


On February 10, 2015, NDRC announced that it fined Qualcomm Inc. (“Qualcomm”) RMB 6.088 billion for having breached the PRC Anti-Monopoly Law (the “AML”) by abusing its dominant position in the markets of certain standard-essential patents for 3G/4G wireless communications and in the market of baseband chip. This is the largest administrative fine imposed against a company for violating the AML which came into effect in 2008. According to the NDRC press release, the behaviors of Qualcomm that constituted abusing of dominant position include: 1) charging unfairly high loyalty fees; 2) tying non standard-essential patents for 3G/4G to standard-essential patents without justifiable reasons; and 3) imposing unreasonable trading conditions in the sale of baseband chips. NDRC holds that such abusing behaviors have eliminated or restricted competition in violation of the AML.

The NDRC investigation against Qualcomm was initiated in November 2013 and multiple meetings between the Qualcomm executives and the NDRC officials were held in the course of the investigation. According to the NDRC press release, Qualcomm initiatively offered the agency a rectification plan that modifies certain of its business practices in China, which is deemed as cooperating in the investigation. The key terms of the rectification plan, according to the press release of Qualcomm1 , include: 1) Qualcomm will offer licenses to its current 3G and 4G essential Chinese patents separately from licenses to its other patents and it will provide patent lists during the negotiation process; 2) 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; 3) For licenses of Qualcomm’s 3G and 4G essential Chinese patents for branded devicessold for use in China, Qualcomm will charge royalties of 5% for 3G devices and 3.5% for 4G devices that do not implement CDMA or WCDMA, in each case using a royalty base of 65% of the net selling price of the device; 4) 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 January 1, 2015; 5) Qualcomm will not condition the sale of baseband chips on the chip customer signing a license agreement with terms that the NDRC found to be unreasonable or on the chip customer not challenging unreasonable terms in its license agreement .

It is held by NDRC that the above rectification plan meets its requirements. That being said, considering the nature, length and degree of Qualcomm’s abusing behaviors, in addition to ordering it to cease illegal practices, NDRC imposed a fine that amounts to 8% of Qualcomm’s turnover in the China market in 2013.

Since the complete Administrative Sanction Decision has not been released yet, the legal issues involved in the case are not clearly addressed in the NDRC’s current short press release.

Firstly, as a first step of market dominance assessment, market definition is not elaborated in the press release. It is said that NDRC may have found each standard-essential patent as an independent and separated market. If that is true, it seems that the agency takes the same position as that taken by the trial and appellate courts in the Huawei v. IDC case in China.

Secondly, as regards unfairly high loyalty fees, it is still unknown what the parameters and the test are for a loyalty fee to be deemed “unfairly high”. Since the IP rights are born as “exclusive”, the usual cost benchmark may not be appropriate as the measuring parameter.
Thirdly, in previous cases, NDRC’s basis for fine calculation seems to be a company’s turnover of the relevant products in the China market for the last fiscal year. In the NDRC press release for the current Qualcomm case, it is unclear whether a similar turnover (i.e. that of the relevant products in China market) or a different turnover (e.g. the turnover of all products in the China market) was used. It is too early to say that NDRC’s practice on fine calculation may have changed since this case.

Lastly, the nature of the rectification plan seems to be perceived and presented a bit differently in the press releases of NDRC and Qualcomm. For the former, such a plan is offered initially by the company as a type of cooperation, while for the latter, the plan looks more like a final settlement with the government. Nevertheless, unlike the US antitrust practice, the AML does not explicitly provide for such a settlement between a company and the government.

We expect that NDRC would release the complete Administrative Sanction Decision in thenear future with elaborations on relevant antitrust issues.

End Notes:

1 See Qualcomm’s press release filed to SEC at http://www.sec.gov/Archives/edgar/data/804328/000123445215000031/qco m29158kex991.htm.

Jun He 4

For further information, please contact:

Yingling Wei, Partner, Jun He
weiyl@junhe.com

Xuefei Bai, Jun He
baixf@junhe.com

Stanley Wan, Jun He
wanxing@junhe.com

Dongping Liu, Jun He
liudp@junhe.com


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