Competition Law

China rules on adjusted royalty base for SEP licensing


Earlier this month the Chinese Anti-trust authority (NDRC) gave its decision in the Qualcomm matter involving Chinese Anti-Monopoly Law (AML).  This decision is a landmark decision where Qualcomm was found to have engaged in anti-competitive conduct relating to the licensing of standard essential patents (“SEPs”) for wireless communication technology and baseband chip sales.  The original decision is available here.  While a summary of the decision (based on Google translate) is also provided in this post, I have put in my comments in italics and I compare the approach taken by Indian courts / competition commission and the Chinese NDRC.  Image from here. Long post follows.

Highlights

The most important aspect of the decision is that the royalty base for (Qualcomm’s) SEPs is reduced to 65% of the device wholesale price, which mitigates the royalties at least to some extent (non-SEPs are not a part).  And the NDRC Decision does not require that royalties be based on the “smallest saleable component” (the chip), as some US Courts decided and the IEEE recommended.  The decision also does not Qualcomm to lower its portfolio royalty percentages, except if and to the extent patents expire without being replaced by new patents of equal value.


Compare this in the Indian context where the play is on percentages.  No Indian decision (all are interim) even discuss the issue of an appropriate royalty base.  Consider the following – if royalty % is imposed on the net selling price of a device, there is no relationship between the (SEP) patented technology and taxes, freight, shipping, packing, local levies & duties, accessories, dealer discounts, advertising etc.  All these must be discounted before applying the %.


It is interesting to note that just before the NDRC came out with the decision, the IEEE (a standard setting organization) issued a set of guidelines that encouraged imposing royalties for SEPs on the smallest saleable patent practicing unit or the SSPPU or simply put the chipset.  More interestingly, the Chinese authorities allowed the practice to charge on wholesale value of end product!!  (See our post on this here). This decision provides another different method on determining the royalty payable for use of SEPs.


ANALYSIS OF THE NDRC DECISION

1. Factors considered in determining Qualcomm’s dominance

In the decision, the NDRC defined four relevant markets: (i) the license market of SEPs for wireless communication technology, which is a collection of each independent license market constituted by each SEP held by Qualcomm, (ii) CDMA baseband chip market, (iii) WCDMA baseband chip market, and (iv) LTE baseband chip market. The NDRC found that Qualcomm had dominance in each of the above markets.

In determining Qualcomm’s dominant position in each of the relevant markets, the NDRC kept its focus on factors like market share, Qualcomm’s control over the relevant market, downstream customers’ reliance on Qualcomm’s technology/products and market entry barriers.

With respect to the license market for SEPs, the NDRC found that Qualcomm had 100% market share in the market, as it is the only holder of the SEPs.  This approach is the same as what is adopted in the Huawei v. InterDigital case which was decided by Guangdong High People’s Court in October 2013.  We had discussed the Huawei v. InterDigital on this blog here, and also the same as that taken by the Competition Commission of India in the information filed by both Micromax (discussed here) and Intex (here) where ownership of an SEP was taken to be a position of dominance, as no alternative source of the SEP was available. 

With respect to the baseband chip markets, the NDRC found that Qualcomm ranked 1st in the baseband chip markets during the period from 2007 to 2013. Qualcomm had 93.1% in CDMA baseband chip market, 53.9% in WCDMA baseband chip market, 96% in LTE baseband chip market. Based on the above data, the NDRC reasoned that Qualcomm had some control over the relevant markets considering its ability to maintain its leading position for such a long period of time. The NDRC determined that Qualcomm had dominant position in the WCDMA baseband chip market with 53.9% market share (a tab above 50%) and that there were other important market players, like MediaTek, Intel and Broadcom, holding market shares of 15.5%, 11.8% and 9.3% respectively. The NDRC reasoned that even though there were other players in the market, choices for downstream mobile device manufacturers were limited and Qualcomm’s chipsets had advantages over other products in respect of technology, functionality and brand.

  1. Licensing practices that violate the AML

Qualcomm was found to run afoul of Article 17(1) and 17(5) of the AML by engaging in three types of conducts, i.e. charging unfairly high royalties, tying SEPs with non-SEPs and imposing unfair conditions on the sale of baseband chips.  Each of these is dealt in greater detail below:

A. Unfairly High Royalties: The NDRC determined that Qualcomm charged unfairly high royalties based on the following three factors:  (i)  Qualcomm refused to disclose its patent list and included expired patents in its patent portfolio licensed to Chinese licensees; (Note that in the Indian context, the decisions issued so far do not indicate that Ericsson has disclosed any complete list of SEPs / patents to any of the parties. All lists have been ‘exemplary lists).  (ii) Qualcomm requested that Chinese licensees grant back their patents free of charge, and refused to deduct the value of such patents from royalty fees or to pay for such patents in other ways; and (iii) Qualcomm charged relatively high royalty fees and unreasonably used the net sale price of the whole mobile devices which incorporated its technology as the base for its royalty fees.  (This is the case here in India as well – It makes no sense to give royalties to a patentee for non-technical components which clearly have no impact or relationship with the patents.  Taxes, duties, levies, packaging, accessories, charger, ear phones, advertisement, dealer discounts, etc. have no relationship to the patent.)

Note that the factors listed above have been modified to suit the SEP fact scenario.  The factors listed in Article 11 of the NDRC’s Anti-Price Monopoly Provisions, provide that in determining unfairly high price, the factors that should be considered are: (i) whether the sales price of a product is noticeably higher than the price of other undertaking; (ii) when costs are stable, whether the sales price was raised beyond a normal range; and (iii) whether the level of price increase is noticeable higher than the increase in cost.  The considerations also differ from the ones taken into by the Huawei vs. InterDigital case, in which case the court emphasized on the relatively low royalties that InterDigital charged other mobile device manufactures, like Apple and Samsung.  Here, unlike the Huawei v. InterDigital case, the NDRC did not set a specific royalty rate for Qualcomm’s SEP licensing.  Qualcomm was allowed to propose new rates and make the rates as part of it’s commitments.

B. Calculation basis of royalties:  The decision may also be a significant relief to the SEP owners. This is because the decision maintains and allows charging a % on the selling price.  It has been a practice of the recent past that SEP royalties were on the net selling price or end product price.  The decision however, forbids setting a high royalty rate while using the net wholesale price of device as calculation basis at the same time. Following such order, Qualcomm has committed to charge royalty at wholesale price offset by a percentage (35%). The factors included: (i) Including expired patents in licensing package: The NDRC considered the Qualcomm’s failure or refusal to provide patent list and inclusion of expired patents in the package as unreasonable. Qualcomm argued that new patens continue to be added to the portfolio and therefore expired patents would not drag down the value of the license. However, the decision puts the onus on the patentee to prove the value of newly added patents in order to justify no change in the level of royalties. Otherwise adding new patents to the license package will not serve as a justification for including expired parents in the package while maintaining the royalties on the same level.

(ii) Patent grant-backs:  Like the US Anti-trust laws, the decision look at grant-back requirements under the rule of reason and determine that grant backs are not per se illegal.  Qualcomm’s grant back clause was questioned as it requires licensees to license their non-SEPs back and to waive their right to enforce patents free of charge.   The NDRC noted that Qualcomm could not deny the value of patents held by the licensees, and that such practice (if allowed) would impose restriction on competition through suppressing licensees’ innovation impetus and granting Qualcomm free-riding competitive advantages.tute

C. Tying:  Qualcomm’s practice of tying its SEPs with non-SEPs was found to be illegal. The concern here being forcing the licensees to license non-SEPs from Qualcomm will deprive any substitute technologies of the opportunity to compete with Qualcomm’s non-SEPs, and thus would eliminate or restrict the competition in the relevant markets.

DImposition of Unfair Conditions:  The NDRC found that Qualcomm abused its dominant position in the baseband chip markets by threatening to refuse selling baseband chips to Chinese enterprises if they did not sign patent license agreements containing unreasonable terms, and prohibiting the licensees from challenging such license agreements. Compare the situation with the Indian patent act that provides (section 140) that a such a clause (restriction to challenge patents/agreement) is void.

 

 

Rajiv Kr. Choudhry

Rajiv Kr. Choudhry

Rajiv did his engineering from Nagpur University in 2000 in electronics design technology. He has completed his LL.B. from Delhi University, Law Center II in 2006, while working as an engineer at ST Microelectronics in NOIDA. After his LL.B., he went on to The George Washington Univeristy, Washington DC to do his LL.M. in 2007. After his LL.M., he has worked in the US at a prestigious IP law firm based out of Philadelphia. Till 2014, he was Of-Counsel to a Noida based IP law firm where he specialized in advising clients on wireless, telecommunication, and high technology. Rajiv is the founder of Tech Law Associates, a New Delhi based law firm specializing in IP law, with a focus on high - technology, and patent law. His core IP interest areas are the intersection of technology and IP, Indian IP policy, innovation, and telecommunications patents. He is also an inventor with pending applications in machine-to-machine communications domain (WO2015029061).

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