Landmark Decision for Chinese Antitrust Enforcement

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Summary: China's National Development and Reform Commission has fined Qualcomm a record 6.088 billion Yuan (US $975 million), for abusive patent licensing practices. The fine is the largest ever imposed in China and is one of the largest antitrust penalties ever levied by a regulator on a single company.

Largest ever Chinese antitrust fine

  • China's National Development and Reform Commission (NDRC) has fined Qualcomm a record 6.088 billion Yuan (US $975 million – 8% of Qualcomm's 2013 total Chinese turnover), for abusive patent licensing practices.
  • The fine is the largest ever imposed in China and is one of the largest antitrust penalties ever levied by a regulator on a single company (comparable to the European Commission's €1.06 billion fine on Intel in 2009 for abuse of dominance).
  • Qualcomm has also agreed commitments to address the NDRC's concerns. These include reduced royalty rates and enhanced patent buy-back rights for Chinese licensees. 3G and 4G smartphone chips will now cost less to license in China than elsewhere, giving Chinese manufacturers an advantage over global rivals.
  • This case has reconfirmed China’s position as one of the leading antitrust jurisdictions, along with the US and EU.

A landmark investigation

After complaints from a number of Chinese smartphone manufacturers, NDRC opened its investigation in November 2013 with a ‘dawn raid’ of Qualcomm’s Beijing and Shanghai offices. NDRC found that Qualcomm had abused its dominance in the markets for Standard Essential Patent (SEP) licensing of certain wireless technology as well as baseband chips by:

  • Charging excessive royalties, including charging for expired patents and requiring mandatory fee-free grant-back of customers’ patents;
  • Bundling sales of SEP and non-SEP licences, making customers buy both types; and
  • Imposing unfair terms for baseband chip sales, and refusing supply to customers who challenged those terms.

Remedies favour both sides

Qualcomm settled the case by agreeing a package of remedies, in addition to the $975 million fine. The remedies ban fee-free grant-back of customers’ patent licences and bundling of non-SEP licences, and require Qualcomm to change its unfair terms.

Most importantly, while royalty fees will be reduced, Qualcomm retains the commercial structure of its licensing model. Certain of Qualcomm’s royalty fees will now be calculated based on a maximum of 65% of the smartphone price rather than 100%. However, fees will not be charged per chip, as feared. Qualcomm expects revenue growth despite the penalty.

The remedies also demonstrate the role of industrial policy in China’s antitrust regime. China’s smartphone makers will enjoy lower input prices than global rivals, with reduced licensing fees for phones sold in China. While export prices may not change, the remedies may boost domestic consumption of Chinese-made goods.

China’s focus consistent with peers

The intersection of technology, IP rights and competition law is in focus globally.

For example, the EU and India are continuing to investigate Google, and US, Chinese and multiple European authorities are investigating online retail issues. This case also chimes with the European Commission’s willingness to intervene in high-tech markets (e.g. the 2009 Rambus decision).

China is a leading antitrust enforcer

This case is another significant milestone for China's antitrust enforcers and demonstrates the importance of ensuring robust global antitrust compliance. Regulators in China and elsewhere in the region are increasingly active and willing to enforce competition law against multinational corporations and investors, as demonstrated by numerous recent merger (e.g. Xstrata/Glencore, Seagate/Samsung) and cartel decisions (e.g. LCD, autoparts) affecting foreign firms in China.

 

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