Law360: 3 Lingering Questions Following China’s Qualcomm Ruling

Washington, DC – March 31, 2015 – The article co-authored by Lei Mei and titled “3 Lingering Questions Following China’s Qualcomm Ruling” was published in IP Law360, Competition Law360, and Technology Law360.

A copy of the published article is reproduced below (with corrections of two words):

On Feb. 9, 2015, Chinese antitrust authorities imposed a record 6.088 billion RMB (about $975 million) fine on Qualcomm Inc. after finding that Qualcomm’s patent licensing activities violated China’s Anti-Monopoly Law. A close review of this highly anticipated ruling by China’s National Development and Reform Commission, however, reveals three lingering questions that could impact Qualcomm’s and other patent owners’ future patent licensing activities.

Timeline of China’s Investigation of Qualcomm

On Nov. 25, 2013, the NDRC started an anti-monopoly investigation of Qualcomm. On Dec. 12, 2013, the NDRC said that it has acquired evidence of alleged monopoly by Qualcomm, but did not give details. On Feb. 12, 2014, Qualcomm submitted a rectification application to suspend the investigation. The NDRC confirmed that it had received Qualcomm’s rectification commitment and stated that it would decide after further consideration.

On Feb. 19, 2014, the NDRC announced that because industry associations and their lawyers reported Qualcomm’s alleged monopolistic prices to the NDRC, it “started the investigation according to the law.” This was the first time that the NDRC officially announced its anti-monopoly investigation of Qualcomm.

On April 3, 2014, Qualcomm President Derek Aberle visited the NDRC with six deputy presidents and a Chinese lawyer, exchanged the views on relevant issues. On July 24, 2014, the NDRC said that it had verified Qualcomm’s monopolistic facts. On Aug. 13, 2014, Chinese anti-monopoly expert Zhang Xinzhu, who Qualcomm retained as an expert, was dismissed from China’s State Council’s Anti-Monopoly Commission for violating the working group discipline.

On Feb. 9, 2015, Qualcomm agreed to pay a $975 million fine as part of a long-awaited settlement, which also includes several changes to Qualcomm’s practices in licensing patents for mobile phones sold in China.

The NDRC Ruling

The NDRC found that Qualcomm abused its market dominance in three areas: (1) charged unfairly high patent licensing fees; (2) tying nonwireless communications standard-essential patents in its license without legitimate reasons; and (3) attached unreasonable conditions in its baseband chip sales.

As a result, the NDRC ordered Qualcomm to (1) provide a patent list and stop charging patent fees for expired patents, (2) cease imposing grant-back conditions without paying reasonable considerations, (3) cease to base its wireless SEPs royalties on the wholesale net sales prices of handset devices for products sold and used within China, (4) stop tie-in sales of nonwireless SEPs without justifiable cause, and (5) stop imposing unfair terms in license agreements when selling baseband chips.

The NDRC further imposed a fine amounting to 8 percent of its Chinese sales in 2013, which total 6.088 billion RMB (about $975 million).

3 Questions

1. Why 8 Percent?

Pursuant to Article 47 of China’s Anti-Monopoly Law, where any business operator abuses its dominant market status in violation of this Law, it is subject to a fine of 1 percent to 10 percent of the sales revenue in the previous year. The NDRC’s fine of 8 percent of Qualcomm’s 2013 sales in China falls within this range.

The question, however, remains as to how the NDRC came up with this 8 percent number. It appears that the NDRC took into account that Qualcomm’s violation was severe and maybe Qualcomm was not perceived as having a cooperative level during the investigation that would warrant a lower fine.

In contrast, in a separate antitrust investigation in the automobile industry in 2014, the NDRC did not impose fines on certain companies because they cooperated with the NDRC and provided important evidence. That investigation involved a monopoly agreement pursuant to Article 46 of China’s Anti-Monopoly Law.

Article 46 provides that where any business operator voluntarily reports the conditions on reaching a monopoly agreement and provides important evidence to the Anti-Monopoly Authority (e.g., the NDRC), the Anti-Monopoly Authority may, at its discretion, “mitigate or exempt the business operator from punishment.”

Unlike Article 46, Article 47 governs abuse of market dominance and does not provide any mitigation or exemption provision on the face of the statute. However, a business operator’s cooperation can be taken into account when the Anti-Monopoly Authority exercises its discretion in calculating the exact percentage of the sales from the previous year for the fine.

Conversely, pursuant to Article 52, if a business operator refuses to provide related materials and information, provides fraudulent materials or information, conceals, destroys or removes evidence, or refuses or obstructs investigation in other ways, the Anti-Monopoly Authority has the discretion to impose additional fines.

Therefore, if a company is subject to an anti-monopoly investigation in China, it should fully cooperate with Chinese authorities and try to have the fine reduced as much as possible in the event that a violation is found.

2. What Is a Rectification Application?

An interesting procedural twist was that early in the investigation, Qualcomm promised to rectify its conduct and applied to suspend the investigation, although the NDRC did not suspend the investigation. If the NDRC had agreed to suspend the investigation, Qualcomm would likely not have been fined.

Pursuant to Article 45 of China’s Anti-Monopoly Law, if a business operator under investigation promises to eliminate the impact of the conduct by taking specific measures within the time limit prescribed by the Anti-Monopoly Authority, the Anti-Monopoly Authority may decide to suspend the investigation and specify the specific measures as promised by the business operator under investigation.

Article 45 further provides that if the Anti-Monopoly Authority decides to suspend the investigation, it shall supervise the implementation of the promise by the business operator. If the business operator keeps it promise, then the Anti-Monopoly Authority may decide to terminate the investigation.

There have been two successfully suspended investigations in China. One is the InterDigital investigation. The NDRC started investigating InterDigital in 2013. InterDigital promised that it would conduct concrete measures to eliminate the negative effect of the monopoly conducts within a time limit. The NDRC then decided to suspend the investigation in 2014.

The other is the Beijing Shankai Sports Development Co. investigation. The State Administration for Industry and Commerce started an anti-monopoly investigation of Beijing Shankai Sports Development Co. on March 19, 2014. The SAIC suspended the investigation on June 3, 2014, and entrusted the SAIC branch in Tianjin City to monitor the fulfillment of the company’s rectification commitment.

Later, SAIC found that the company fulfilled its promises within the time limit prescribed and did not act in a way that warrants the reopening of the investigation under the law. The SAIC decided to terminate the investigation on Dec. 24, 2014.

Therefore, any company under investigation for potential anti-monopoly violations should consider filing a rectification application.

3. How to Handle Expired Patents?

The NDRC stated in its decision that it was unreasonable that Qualcomm did not provide a list of licensed patents to licensees. The NDRC also stated that Qualcomm shall avoid taking royalties from the expired patents.

In theory, the NDRC’s ruling makes perfect sense. In practice, however, there are many obstacles for a licensor with a large patent portfolio to strictly comply with the ruling. Therefore, it is foreseeable that Qualcomm (and some other licensors) might have compliance issues with this ruling.

For example, a license agreement often covers current and future patents regarding the same technology. A patent owner may continue obtaining patents from many countries even after a license is signed.

The NDRC’s ruling may be interpreted to impose a duty on a licensor to provide an up-to-date list of licensed patents. A licensor may be able to comply with this requirement by maintaining an up-to-date list of licensed patents on its website, and adding a clause in the license agreement directing a licensee to check this online list.

The problem, however, is that it is quite a burden for a licensor with a large patent portfolio to specify the expiration date for each patent. For example, in the United States, a patent term may be subject to adjustments and extensions, which requires precise calculation.

In practice, most licensors with large patent portfolios do not provide expiration dates of licensed patents to licensees. The NDRC’s ruling could force some licensors to incur substantial costs to calculate exact expiration dates for the licensed patents and could potentially drive up royalty rates.

More critically, the NDRC’s ruling also seems to indicate that a licensor must evaluate the value of individual patent(s) when a licensed patent expires, even if newly issued patents are added to the list of the licensed patents. This could further drive up costs of licensing and in turn royalty rates.

Therefore, a licensor should consider submitting an exact licensing structure with a specific methodology for approval by Chinese antitrust authorities. Otherwise, there could be further compliance-related disputes.

While this article discusses three lingering questions from China’s landmark Qualcomm antitrust ruling, there are other issues as well. For example, if a licensor was found of violating Chinese anti-monopoly law when licensing its global patent portfolio including U.S. patents, could these U.S. patents become unenforceable under the doctrine of patent misuse in the United States? That, however, is the topic for another day. As many patent licensing programs are global in nature, patent owners must carefully evaluate the impact of rulings from one country in other countries.

–By Lipeng Mei and Lei Mei. Lipeng Mei is a Chinese official who has extensive experience in enforcing Chinese Anti-Unfair Competition Law and Anti-Monopoly Law. She may be reached at Lei Mei is the managing partner of Mei & Mark in Washington, D.C. He is the author of the book “Conducting Business in China: An Intellectual Property Perspective” (Oxford University Press 2012).

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.