Jurisdiction - China
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China – NDRC Released The Complete Administrative Sanction Decision For The Qualcomm Case.

17 March, 2015

 

 
After nearly three weeks since the press release, NDRC released the complete Administrative Sanction Decision for the Qualcomm case (“Decision”) on March 2, 2015. The Decision shows that it was issued on February 9, 2015, one day before the press release. We understand that one major reason for postponing the Decision’s release is probably that NDRC took some time to redact the confidential commercial information of the companies concerned.
 
Due to the relatively complicated nature of the IP abuse cases, the competition authorities tend to be very cautious in handling such type of cases. Although the length of the Decision is not comparable with those of other competition authorities such as the European Commission, NDRC has extensively discussed the relevant key points throughout the text of the Decision, which would provide some useful references for similar cases in terms of market definition, assessment of dominance, determination of abusive behaviors, and imposition of penalties.
 
Market Definition
 
As a first step of assessment of market dominance, NDRC defined the relevant markets in a relatively narrow way by substitutability analysis. With respect to standard essential patents (“SEPs”), NDRC has adopted the same position as that taken by the trial and appellate courts in the Huawei v. IDC case in China, i.e. license of each SEP can be deemed as an independent product market. As to the baseband chips, NDRC has found that it can be further segmented into CDMA, WCDMA and LTE by different technology standards. It is not expressly held whether the SSNIP test was also applied in this definition, though the effects of price change are appropriately considered both from the demand and the supply dimensions. Moreover, the tendency of a narrow definition of chip products indicated by NDRC is also in line with what MOFCOM has showed in its merger control reviews.
 
Assessment Of Dominance
 
Under Article 17 of the AML, a market dominant position is defined as “a market position of an operator to control the price, output or other trading conditions on the relevant market or to prevent or affect the entry of the relevant market by other operators.” Market share is an often-used indicator of a market dominant position. Under Article 19 of the AML, if a company’s market share in the relevant market reaches 50%, it will then be presumed with a dominant position. However, such a presumptionis rebuttable with adequate evidence to the contrary. Apart from market share, other factors for assessing the market power of a company include: (1) its ability to control the sales or inputs market; (2) its financial and technical capabilities; (3) the extent to which other companies will depend on the company for transactions; and (4) barrier to entry, etc.
 
In the Decision, NDRC did not solely rely on the market share data to evaluate Qualcomm’s market power. Instead, the authority has fully considered the afore-mentioned factors, even in each SEP license market where Qualcomm is deemed as occupying a 100% market share.
 
It is noteworthy that, as to baseband chips, the market shares quoted by NDRC are calculated by the sales value which was quite significant and Qualcomm argued that its market share calculated by the sales volume would be much lower. This argument was not accepted by NDRC, which further held in the Decision that “the higher average price of Qualcomm is also an indicator of certain market dominance.” We understand that the rationale would be more clear if it is expressed or explained in a way that “the ability to maintain a higher average price in a long period could be an indicator of market power.”
 
Determination Of Abusive Behaviors
 
The abusive behaviors of Qualcomm as found by NDRC include charging unfairly high royalty fees in the SEPs markets, tying the SEPs with the non-SEPs and imposing unreasonable trading conditions in the baseband chip market.
 
As to unfairly high royalty fees, unlike the Huawei v. IDC case, NDRC did not explain “unfairly high” by comparing the fees charged on different licensees. Instead, according to the authority, “unfairly high” is indicated by charging royalty fees for outdated SEPs, compulsory free cross-license and an unreasonable calculation basis. No complicated math is adopted in the Decision and most analysis is conducted qualitatively.
 
Moreover, NDRC deems tying SEPs license with non-SEPs as abusive, which is consistent with the Huawei v. IDC courts. NDRC also deems abusive Qualcomm’s conditioning the sale of baseband chips on the chip customers signing a license agreement.
 
The Decision shows that Qualcomm has raised various arguments as justifications but NDRC did not accept them. It tells us that any justifications would be subject to the discretion of the antitrust agencies and would not be easy to prove.
 
Imposition Of Penalties
 
NDRC ordered Qualcomm to cease the illegal behaviors in several aspects, for instance, providing licensees with a patent list and adjusting the calculation basis for royalty fees. It seems that Qualcomm’s rectification plan sets out detailed rules for implementing the NDRC order. In addition, NDRC has calculated the fines on the basis of Qualcomm’s total turnover in China in 2013, which appears different from other NDRC cases. In the previous cases, NDRC’s basis for fine calculation seemed to be a company’s turnover of the relevant products in the China market for the last fiscal year. With this said, it may still be too early to say that the principle has been entirely changed, but the calculation basis may become a variable that we should keep our eyes on.
 
In summary, the Decision seems to demonstrate more consistency and interaction among different relevant authorities (e.g. NDRC, MOFCOM, and the courts) with regard to the antitrust issues as involved in this case. Although more detailed analysis is not presented in the Decision, we believe that it would provide very useful guidance for future cases of IP abuse in restraint of competition.
 
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
 
Jiaming Liu, Jun He
liujiaming@junhe.com
 

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