China’s NDRC Provides Guidance Regarding Licensing of Standard-Essential Patents in Qualcomm Decision

On Mar. 2, 2015, China’s National Development and Reform Commission (“NDRC”) published its decision in the Qualcomm case, which resulted in a $975 million fine against Qualcomm for alleged violations of the Anti-Monopoly Law. The decision provides useful guidance with respect to the NDRC’s views regarding several intellectual property licensing practices involving standard-essential patents (“SEPs”).

The NDRC determined that Qualcomm holds a dominant market position for its SEPs for CDMA, WCDMA and LTE wireless communications. In addition to having a dominant market position for these patents, there are barriers to entry, including switching costs, for others to enter the market. The NDRC also found that Qualcomm has a dominant market position in three baseband chip markets:  the CDMA baseband chip market, the WCDMA baseband chip market, and the LTE baseband chip market. The NDRC found that the company abused its market position in these markets in the following ways:

Qualcomm charged excessive royalties. First, Qualcomm engaged in portfolio licensing that included expired patents in the portfolio. In doing so, Qualcomm did not provide licensees with lists of patents covered by the licenses, and did not demonstrate that newly added patents were of the same value as patents that were expiring. Even if that were true, the NDRC said that it was unreasonable not to provide licensees with a list of patents when Qualcomm offered long-term or even non-fixed term licenses. Second, Qualcomm required some licensees to provide royalty-free grantback licenses for relevant wireless communications patents that are not SEPs. The NDRC determined that this practice is not reasonable, and that Qualcomm should take into account the value of grantback licenses when negotiating licensing terms. Third, Qualcomm required licensees to pay royalties based on the price of the finished product, which the NDRC concluded misappropriated value based on unpatented components.  Finally, Qualcomm included in its license portfolio non-SEPs that some licensees did not want to license. The NDRC also noted that the practice of requiring royalty-free grantbacks could discourage licensees from technical innovation and have the effect of restricting or eliminating market competition.

Qualcomm unreasonably bundled the sale of non-SEPs with SEPs as a package at a constant licensing rate. The NDRC rejected Qualcomm’s three reasons for bundling non-SEPs with SEPs: (1) it offered to license SEPs separately but licensees prefer the package of non-SEPs and SEPs; (2) it is difficult to differentiate non-SEPs from SEPs so licensees are at risk if they license only SEPs; and (3) bundling non-SEPs with SEPs does not restrict competition and licensees are free to license a competing technology. The NDRC did not accept these explanations, finding that some licensees were not offered a license to SEPs only; non-SEPs and SEPs can be differentiated on a patent list; and bundling non-SEPs with SEPs restricted competition in the market for non-SEPs, hampered innovation, and harmed consumers.

Qualcomm imposed a “no-challenge” requirement on the sale of baseband chips. The NDRC objected to Qualcomm’s practice of requiring purchasers of baseband chips to enter into an agreement that provided that the purchaser would not challenge the license agreement. It found that given the nature of the issues it identified in Qualcomm’s license agreements, it was improper for Qualcomm to require licensees to waive their right to challenge the agreements.

The NDRC’s decision orders Qualcomm to cease engaging in the identified practices:  (1) Qualcomm must provide patent lists, and it cannot require royalties for expired patents; (2) it cannot require grantbacks without consideration; (3) it must cap royalty rates at 3.5 percent (4G) and 5 percent (3G), and apply those royalty rates to modified royalty base representing 65 percent of the net sales price of the overall terminal unit; (4) it cannot bundle non-SEPs without reasonable cause; (5) it cannot require acceptance of royalties for expired patents, grantbacks without consideration, bundling non-SEPs without reasonable cause, or “no-challenge” clauses as conditions for supplying baseband chips. In addition, the NDRC imposed a fine equal to 8% of Qualcomm’s revenue within China for 2013, which was 76.102 billion yuan, resulting in a fine of 6.088 billion yuan (US$975 million).

The NDRC’s decision is available here.