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Qualcomm's $975 Million China Settlement: Is NDRC Righting Antitrust Wrongs, or Building Industrial Policy?

Feb.13.2015

This week, one of China's three antitrust authorities, the National Development and Reform Commission (NDRC), announced a settlement with Qualcomm, Inc., closing its 14-month investigation into Qualcomm's licensing practices under China's Anti-Monopoly Law (AML). The center piece of the settlement is an eye-popping $975 million fine, which is the largest corporate penalty to date in China, and the third largest "abuse of dominance/monopolization" fine ever imposed by any antitrust agency worldwide. Despite the size of the fine, the settlement has been reported as a relative win for Qualcomm. Earlier reports suggested NDRC was seeking an even larger fine, and the behavioral aspects of the settlement, while groundbreaking, are not expected to fundamentally alter Qualcomm's business model. Indeed, it is the behavioral aspects of the settlement that may hold broader lessons for industry participants and companies doing business in and with China.

Qualcomm is the world's largest provider of wireless chipset and software technology, with its products powering the majority of all 3G devices sold. Qualcomm holds numerous standard essential patents (SEPs) in the wireless communications industry, which it broadly licenses to industry participants. In November 2013, NDRC launched an antitrust probe into those licensing practices. That investigation concluded earlier this week when the parties announced their settlement.

Although NDRC has not yet released the full Administrative Sanction Decision, according to a press release issued earlier this week, NDRC found that Qualcomm holds a dominant market position in the CDMA, WCDMA, and LTE wireless communication SEP licensing markets and the baseband chip market and asserted that Qualcomm had engaged in three main abuses:

First, NDRC asserted that Qualcomm charged unfairly high licensing fees by virtue of charging for expired patents, along with unexpired patents in its SEP portfolio, requiring royalty-free grant-backs and forcing licensees to pay for non-SEPs as part of the SEP portfolio licensing package.

Second, NDRC asserted that Qualcomm forced Chinese licensees to pay for non-SEPs, patents outside wireless communications, and/or foreign patents by including those together with its Chinese 3G and 4G SEPs in the same portfolio.

Third, NDRC asserted that Qualcomm conditioned the sale of its baseband chip on the purchaser accepting certain unreasonable licensing terms, including agreement not to challenge the license agreement.

NDRC concluded that these abuses, in combination, eliminated or restricted market competition, hindered or inhibited innovation, and harmed consumers under the AML.

As part of the settlement, NDRC required a number of corrective measures:

  1. Concerning devices sold for use in China, Qualcomm must use a royalty base of 65 percent of the net selling price of licensed device.
  2. For Chinese licensees, Qualcomm must provide a list of its patents during negotiations and must not charge for expired patents.
  3. Qualcomm cannot require licensees to provide royalty free grant-backs.
  4. Qualcomm must permit customers to purchase a license to Qualcomm's wireless SEPs separately from the rest of Qualcomm's portfolio.
  5. Qualcomm cannot condition the sale of its baseband chips on the customer accepting certain conditions that NDRC considered unreasonable, including "no challenge" clauses.

The settlement is still being analyzed, but broadly speaking commentators are noting two things: On the one hand, the settlement suggests China is willing to recognize the value of IP rights and their importance to promoting innovation – a frequent criticism in the past. On the other hand, the settlement has highly detailed restrictions on Qualcomm's licensing practices. Those details, like the appropriate royalty base, have long been considered the province of the marketplace through the negotiations and agreements of industry participants, not antitrust authorities.

Qualcomm issued a press release setting forth four specific terms as part of the rectification plan.  First, Qualcomm will offer to license its Chinese 3G and 4G SEPs separately. It will also provide patent lists during such negotiations – a departure from longstanding industry practice. And it will negotiate in good faith to fairly compensate Chinese licenses for cross-licenses. Second, Qualcomm will license its Chinese 3G and 4G SEPS for devices sold for use in China at royalty rates of 5 percent for 3G devices and 3.5 percent for 4G devices based on the 65 percent royalty base described above. Third, Qualcomm will allow its existing licensees the opportunity to elect these new terms effective January 1, 2015. Finally, Qualcomm will not condition the sale of its chips on those licensing provisions considered unreasonable by NDRC – although Qualcomm will not be required to sell chips to entities which have not purchased a license.

According to reports, Qualcomm's fine was capped at 8 percent of its 2013 China revenues, or roughly $975 million, in light of Qualcomm's cooperation with NDRC and its investment in the mobile and semiconductor industries in China spanning many years.

There are many lessons to be gleaned from NDRC's announcement and the terms of its settlement with Qualcomm. Most obvious, the settlement loudly announces NDRC's ambitions in the global antitrust enforcement stage, less than a year after the Ministry of Commerce (MOFCOM), the Chinese antitrust agency which reviews mergers, blocked the P3 shipping alliance (which had been approved by the US Federal Maritime Commission and the EC). Chinese AML antitrust enforcement is now clearly focused on more than merger control. Like MOFCOM, however, NDRC seems to be boldly going where no other antitrust agencies have gone before, and may be criticized as writing industrial policy here as much as, if not more than, antitrust policy. Chinese antitrust authorities have been criticized for favoring national interest before, but without much effect. Companies active in China should continue to pay particularly close attention to the ambitions of Chinese antitrust authorities. Equally critical is watching and understanding how antitrust agencies outside China react to this development.

Within the telecommunications sector, it will be important to watch how other industry participants react to this settlement and how the conditions Qualcomm has agreed to in China will affect its practices and industry practices in other regions.

We will post a deeper dive into these implications and more here shortly.

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