China’s NDRC Concludes Qualcomm Investigation, Imposes Changes in Licensing Practices

On March 2, 2015, China’s National Development and Reform Commission (“NDRC”), the agency responsible for investigating price-related violations of China’s Anti-Monopoly Law (the “AML”), published a decision (the “NDRC Decision”) regarding its investigation into alleged anticompetitive conduct by Qualcomm Incorporated (“Qualcomm”), the world’s largest smartphone chipmaker. Qualcomm was found to have engaged in anticompetitive conduct relating to the licensing of standard essential patents (“SEPs”) for wireless communication technology and baseband chip sales.

NDRC ordered Qualcomm to cease certain anticompetitive conduct and pay a fine of RMB 6.088 billion (~$975 million), the largest penalty imposed to date under the AML. Qualcomm announced that it would not contest the NDRC Decision and agreed to change certain of its patent licensing and baseband chip sales practices in China.

The most important aspect of the NDRC Decision is that SEP licensors of Chinese patents are now required to pay reasonable rates for cross-licenses of Chinese patents. This could have a major impact, especially if this principle is followed elsewhere, considering that a licensee should in principle be able to charge royalties for cross-licensed patents on the same basis as the royalties charged by the licensor, subject to appropriate adjustments to reflect any differences in the innovative value of the licensed and cross-licensed patents.

While 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 (although the license will no longer include Qualcomm’s non-SEPs), the NDRC Decision does not require that royalties be based on the “smallest saleable component” (the chip), as some had advocated. Nor does the NDRC Decision require Qualcomm to lower its royalty percentages, except if and to the extent patents expire without being replaced by new patents of equal value.

Another implication of the NDRC Decision is that licensors must not tie SEPs to non-SEPs, although voluntary portfolio licenses are not prohibited.

While the royalty reduction applies to all devices sold for use in mainland China, the benefits of the other remedies appear to be largely limited to device makers that manufacture in mainland China. Since Qualcomm is subject to a non-discrimination obligation under its FRAND obligations, however, device makers that manufacture outside mainland China are expected to argue that they are entitled to the same treatment, at least for sales in mainland China in competition with Chinese OEMs and possibly elsewhere.

This memo provides (i) a background on NDRC’s investigation; (ii) an overview of the Qualcomm decision; (iii) an analysis of the implications for other technology companies doing business in China; and (iv) a discussion of key procedural aspects of NDRC’s investigation.