Qualcomm to Pay the Highest Fine Ever Imposed In China for Violation Of Chinese Antitrust Laws In Patent Licensing Practices

In a recent landmark decision, China’s National Development and Reform Commission (NDRC) found that patent licensing schemes used by Qualcomm violate China’s Anti-Monopoly Law. Qualcomm was ordered by the NDRC to rectify its patent licensing schemes to ensure compliance with China’s laws and pay a fine of RMB 6.088 billion (almost $US 1 billion).

There has always been an interesting interplay between intellectual property rights and antitrust laws: whereas the former grants the rights holder a certain monopoly, the latter has the purpose of curtailing monopolies. Patents confer a monopoly that may provide a very significant commercial benefit to their proprietor but may give rise to antitrust issues – particularly aggressive patent licensing practices. Indeed, antitrust laws can, and often have set a limit on certain patent licensing practices that may be illegal under antitrust laws. This is especially true for standard essential patents (SEPs)¹ which may, if not regulated, enable their owners to control the relevant market.

Also in China, where the ever-improving IP regime and the more sophisticated legal system mean better protection for owners of IP rights, there is growing tension between IP rights and antitrust laws. This was recently demonstrated in the Qualcomm case, in which the company’s patent licensing schemes were investigated by China’s NDRC² for violations of China’s antitrust laws³.

Qualcomm, a leader in the field of digital communication products, is one of the best examples of effective and successful use of IP strategy for generating revenues. For many years, Qualcomm has been effectively licensing its strong and extensive patent portfolio and licensing receipts are a substantial part of its income. In 2013 and 2014 Qualcomm has generated approximately 30% of its revenues – close to USD 8 billion per year – from licensing⁴. China’s booming mobile telecommunications industry has been a great source of business for Qualcomm in recent years.

NDRC, which one of its roles is to investigate monopolistic practices, initiated its investigation relating to Qualcomm in 2013. The NDRC was concerned with the effect of Qualcomm’s patent licensing practices, including its royalty rate and licensing package, on the price of digital communication products in China⁵.

Following a year-long investigation, the NDRC recently issued its decision on Qualcomm’s patent licensing practices in China⁶. The NDRC found that Qualcomm has a dominant market position in both the licensing of SEPs in the mobile communication market and in the market for baseband chips for the CDMA, WCDMA and LTE standards, and that it had exploited this dominant market position in violation of China’s antitrust laws.

The NDRC held that Qualcomm used its dominant market power in order to impose unfair license terms on Chinese companies and implemented illegal licensing practices, contrary to the provisions of China’s Anti-Monopoly Law. Specifically, the NDRC held that the following practices used by Qualcomm were in violation of China’s laws: (1) tying SEPs with non-SEPs in a single package, forcing Chinese companies to pay for licenses to patents that they did not require; (2) tying expired patents with valid patents, so that Chinese companies essentially paid royalties for patents that are no longer valid; (3) refusing to provide a complete list of all the patents included in the license; (4) demanding that licensees undertake not to challenge the license terms even if they find them unfair; and (5) requiring licensees to grant Qualcomm a royalty-free cross-license to their own patents. The NDRC further held that the royalties charged by Qualcomm from Chinese companies were too high in market terms, inter alia due to the fact that they were unreasonably calculated based on the net selling price of the final product. The NDRC ordered Qualcomm to pay a fine of RMB 6.088 billion⁷ (almost US$ 1 billion) – the highest fine ever imposed in China.

In order to alleviate NDRC’s concerns, Qualcomm agreed to the following: (1) to amend its licensing schemes in China so that SEPs can be licensed separately from non-SEPs and exclude expired patents; (2) to provide a full list of patents included in the license; (3) to refrain from demanding royalty-free cross-licenses from licensees as a condition for granting a license to its SEPs⁸; (4) to refrain from demanding that licensees undertake not to challenge unfair license terms; and (5) to lower the royalty base rate in China⁹.

It should be noted that Qualcomm chose to collaborate with the NDRC investigation. After the NDRC issued its decision, Qualcomm stated that it accepts the NDRC’s decision, will not challenge it and will implement a rectification plan as per the NDRC’s decision¹⁰.

The Qualcomm decision is another indication of the coming of age of China’s legal system. Where once the combination of little understanding of IP with the desire to show that China does enforce IP rights permitted foreign IP owners to exploit their IP rights almost as they pleased, today China is well underway towards having a mature, sophisticated and well regulated legal system. Owners of IP rights may now enjoy substantially better protection and enforcement, but they should also take notice of the effect of the evolving legal system on their ability to license their IP. The importance of compliance with China’s laws cannot be underestimated.

¹ A standard essential patent (SEP) is a patent that is necessary for a recognized industry standard. Every industry participant that wants to operate under the relevant standard will need to obtain a license from the owner of the SEP.

² The NDRC is a major state organ with broad planning, investigation and control powers that has substantial influence over China’s macroeconomic development. More information about the NDRC and its functions can be found at the agency’s website (https://en.ndrc.gov.cn/mfndrc/).

³ Qualcomm’s patent licensing schemes were investigated for violations of Article 17(5) of China’s Anti-Monopoly Law and Article 329 of the Contract Law of the People’s Republic of China.

⁴ Qualcomm Inc. annual report for the fiscal year ended September 28th 2014 – available at Qualcomm’s website (https://www.qualcomm.com/info/investor-relations).

⁵ Mobile communication devices are a booming industry in China, with several large-scale players such as Huawei, ZTE, Lenovo, Xiaomi, Meizu and others. These manufacturers rely on technologies of chipset manufacturers such as Qualcomm, and therefore must obtain licenses for Qualcomm’s patents – including SEPs.

⁶ The full-text of the decision (in Chinese) was released by the NDRC on March 2nd 2015.

⁷ According to the NDRC decision, this amount constitutes 8% of Qualcomm’s sales in China in the year 2013.

⁸ Qualcomm agreed to negotiate cross-licenses in good faith and provide fair compensation.

⁹ Qualcomm agreed to charge its licensee in China a royalty rate of 5% for licenses of 3G technologies (CDMA and WCDMA) and 3.5% for 4G technologies (LTE) – calculated using a royalty base of 65% of the net selling price of the device in which the technologies are incorporated.

¹⁰ “Qualcomm and China’s National Development and Reform Commission Reach Resolution”, Qualcomm press release dated February 9th 2015 (available at Qualcomm’s website).