Bright Side of Fines

By+Wang+Jun

The National Development and Reform Commission （NDRC） announced on February 10 that American company Qualcomm Inc.， the worlds largest integrated circuit （IC or “chip”） maker， will be fined 6.09 billion yuan （$975 million） after a 14-month investigation. The fine amounts to 8 percent of Qualcomms sales revenue in China in 2013.

One of the key reasons for the penalty is the unfair and excessively high royalties Qualcomm collected from Chinese smartphone makers.“Qualcomm refused to provide a patent list to its customers in China and out-of-date patents were included in the licensing package and charged，” the NDRC said in the statement on February 10. Other major breaches of the Chinese anti-monopoly law include product bundling and adding unreasonable conditions to the sale of baseband chips.

“Qualcomms actions have precluded and restricted market competition， impeded and restrained technology innovations and development， and damaged interests of customers，”said the NDRCs statement. “This has violated the Anti-Monopoly Law of China， which prohibits market players holding a dominant market position from abusing the position by selling products at unfairly high prices， implementing tie-in sales or imposing other unreasonable trading conditions without justifiable causes.”

Qualcomm said in a press release on the same day that it will not pursue further legal proceedings contesting the NDRCs findings， and has agreed to implement a rectification plan that modifies certain business practices in China and fully satisfies the requirements of the NDRCs order.

This marks the highest monetary penalty since Chinas Anti-Monopoly Law came into effect as of 2008. According to Xu Kunlin， Director General of the NDRCs Bureau of Price Supervision and Anti-Monopoly， the NDRC and various provincial price-super- vising authorities fined a total of 1.8 billion yuan （$288 million） for price monopolies in 2014， up by 50.7 percent from a year ago. This means the penalty Qualcomm will pay is three times the total fine China collected for price monopolies last year.

Wang Junlin， head of Yingke Law Firms Antitrust and Anti-Unfair Competition Committee thinks this penalty demonstrates the NDRCs determination to implement the antitrust law， but it doesnt change Qualcomms profit model.

“Is Qualcomms model of calculating royalties on the basis of whole devices reasonable？ Is there price discrimination between China and foreign countries？ All these issues need to be further investigated，” said Wang. “If Qualcomm has indeed abused its market ascendancy， related parties may report it to the supervising authority or raise litigations.”

The investigation

Qualcomm has a history of accusations by other companies to the NDRC regarding its hold over the chip industry， including two U.S. companies in 2009， a U.S. company in 2014 and a handful of Asian entities， including the China Communications Industry Association， which filed seven accusations of monopoly against Qualcomm.

In mid-November 2013， investigators raided Qualcomms China headquarters in Beijing and its Shanghai office. On December 13， the NDRC announced it was investigating Qualcomm under monopoly charges. The company quickly fought back， arguing their behavior abides by Chinese laws.

In May 2014， Qualcomm denied its monopoly status in a report. In July， top executives of Qualcomm visited the NDRC. After a meeting， Qualcomm changed its tone， saying that it was under monopoly investigation. During the process of investigation， the NDRC held 28 meetings with Qualcomm.

The NDRC said in the February 10 statement that after investigation and analysis， it has proven that Qualcomm has market ascendancy in standard-essential patents licensing for CDMA， WCDMA and LTE， and it abuses this position.

“Our purpose is to maintain fair competition in the industry. Some practices have hindered the innovation capability of other companies. This is not beneficial for the industry or its customers，” said Xu on February 10.

“Chinas restructuring needs technical innovation， but innovation is not relying on policies or financial allocation，” Xu said. “Fundamentally， it needs an environment of fair competition， so anti-monopoly law enforcement is very important for China， and it will definitely strengthen in the future.”

Rectification plan

Qualcomms press release confirmed that the company will implement a rectification plan.

“Qualcomm has agreed to implement a rectification plan that modifies certain of its business practices in China and that fully satisfies the requirements of the NDRCs order，”said the companys press release. “Although Qualcomm is disappointed with the results of the investigation， it is pleased that the NDRC has reviewed and approved the companys rectification plan.”

According to Qualcomm， it will offer licenses to its current 3G and 4G essential Chinese patents separately from licenses to its other patents， and it will provide patent lists during the negotiation process. If Qualcomm seeks a cross license from a Chinese licensee as part of such an offer， it will negotiate with the licensee in good faith and provide fair consideration for such rights.

For licenses of Qualcomms 3G and 4G essential Chinese patents for branded de-vices sold for use in China， Qualcomm will charge royalties of 5 percent for 3G devices（including multimode 3G and 4G devices） and 3.5 percent for 4G devices （including three-mode LTE-TDD devices） that do not implement CDMA or WCDMA， in each case using a royalty base of 65 percent of the net selling price of the device.

Qualcomm will give its existing licensees an opportunity to elect to take the new terms for sales of branded devices for use in China as of January 1， 2015.

Qualcomm will not condition the sale of baseband chips on the chip customer signing a license agreement with terms that the NDRC found to be unreasonable or on the chip customer not challenging unreasonable terms in Qualcomms license agreement.

Problems remaining

The NDRCs decision doesnt change Qualcomms profit model， which collects royalties based on the prices of whole devices， instead of certain components of smartphones.

Wang Xiaoye， a research fellow at the Institute of Law of the Chinese Academy of Social Sciences， said that Qualcomms calculation of royalties based on the price of whole devices instead of single chips is unfair and unreasonable， charging on the components that are not related to Qualcomms patents.

“Qualcomms standard-essential patents for cellular communications can only realize communications function via baseband chips， while baseband chips are only part of cell phones. With the development of smartphones， the communications function is less important，” said Huang Wei， a partner of Beijing Tianyuan Law Firm. “Calculating royalties based on the selling prices of whole devices cannot reflect the true value of Qualcomms patents， and consumers will have to suffer unreasonably high prices.”

He said that， for similar cases in foreign countries， the courts are increasingly inclined to calculate royalties by considering the percentage of a patent in whole devices.

Meanwhile， the NDRCs penalty didnt involve confiscating the illegal gains.

According to Article 47 of Chinas AntiMonopoly Law， where the business operators abuse their dominant market position in violation of this law， the anti-monopoly law enforcement agency shall order them to stop such violations， confiscate the illegal gains and impose a fine of 1 percent up to 10 percent of the total sales volume made in the previous year.

“In fact， the penalty of confiscating illegal gains has been seldom implemented since Chinas anti-monopoly law came into effect，”said Sheng Jiemin， head of the Institute of Economic Law at the Peking University. “That is because it will be very complicated to determine the amount of illegal gains. Technical difficulties include how to determine the starting time of illegal gains， how to determine what gains are illegal among the total sales revenue and profits， and whether costs should be deducted from illegal gains.”