Jack Ellis

Qualcomm confirmed this week that it has reached an agreement with China’s National Development and Reform Commission (NDRC), which recently completed an antitrust investigation into the US company’s patent licensing activities in the country. Under the terms of the settlement, Qualcomm will pay a fine of RMB 6.088 billion (US$975 million) in addition to making a number of changes to the ways in which it licenses its 3G and 4G-relevant standards-essential patents (SEPs) in the country. However, the NDRC’s decision could have repercussions for all SEP holders doing business in China.

For Qualcomm, the fine amounts to an inconvenience (albeit a significant one, in monetary terms) considering that, as of March last year, it held reserves of $30 billion in cash and marketable securities. Of much more concern to the US company – and to other SEP owners – will be the conditions imposed on it by the NDRC. We will have to wait until the agency releases its decision to find out precisely what those stipulations will be, but Qualcomm mentioned the following in a press release announcing the settlement:

  • Qualcomm will offer licences to its current 3G and 4G essential Chinese patents separately from licences to its other patents and it will provide patent lists during the negotiation process. If Qualcomm seeks a cross-licence 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 licences of Qualcomm’s 3G and 4G essential Chinese patents for branded devices sold for use in China, Qualcomm will charge royalties of 5% for 3G devices (including multimode 3G/4G devices) and 3.5% for 4G devices (including 3-mode LTE-TDD devices) that do not implement CDMA or WCDMA, in each case using a royalty base of 65% 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 licence agreement with terms that the NDRC found to be unreasonable or on the chip customer not challenging unreasonable terms in its licence agreement. However, this does not require Qualcomm to sell chips to any entity that is not a Qualcomm licensee, and does not apply to a chip customer that refuses to report its sales of licensed devices as required by its patent licence agreement.

It is the fourth bullet point above which is likely to prove the biggest headache for Qualcomm as it continues to do business in China. “The first part [of the bullet point] seems to indicate that Qualcomm will stop the practice of ‘bundling’ the sale of baseband chips with their patented chips,” Benjamin Bai, a Shanghai-based partner at law firm Allen & Overy, told IAM. “But we don’t yet know what the other potential ‘unreasonable terms’ could be.”

According to Nongfan Zhu, a partner at King & Wood Mallesons in Beijing, the case could well lead to an increase in lawsuits for SEP holders licensing their assets in China. “These changes will put more restrictions on Qualcomm and other SEP owners,” he told me. “From that perspective, I do see that there will be more litigation in order to clarify the settlement terms. In fact, we have already seen some cases in China as per the InterDigital settlement.” (In October 2013, the Guangdong Higher People’s Court found that InterDigital’s patent licensing demands of Huawei constituted an abuse of its dominant market position under China’s Anti-Monopoly Law.)

Relatively speaking, competition compliance is a very recent addition to the Chinese business landscape, with the country’s Anti-Monopoly Law only having been implemented in August 2008. The government agencies tasked with enforcing this law – principally, the NDRC, the State Administration for Industry and Commerce (SAIC) and the Ministry of Commerce (MOFCOM) – all have, to some extent, the promotion of domestic industry and consideration of national economic policy as parts of their wider remit (you can see an outline of the NDRC’s objectives here). This has led to concerns that these regulators are predisposed to protectionism and are biased in favour of Chinese companies. That Qualcomm has received a hefty fine and looks likely to have substantial limitations placed on its licensing activities will exacerbate these anxieties for SEP holders in the China market.

But the impact of the NDRC decision might also raise major concerns for Qualcomm’s Chinese licensees – among whom you will find most, if not all, of the country’s leading wireless device manufacturers. One Beijing-based consultant at a Chinese law firm told me that Qualcomm’s reported practice of ‘reverse licensing’ – whereby licensees to the relevant patents are required to make a commitment not to sue fellow Qualcomm licensees for infringement of their own rights – could be deemed as an ‘unreasonable term’ where it is included in the company’s licensing deals, and therefore may be prohibited in the NDRC’s final decision. Without the concord enabled by Qualcomm’s reverse licensing, patent-rich industry incumbents such as Huawei and ZTE will have greater opportunities to demand licence fees from newer market entrants like Xiaomi and Oppo. As such, the door will be opened for more patent spats between Chinese competitors in the wireless device space.   

While Qualcomm is likely looking at lower licensing revenues from China from now on, the fact that the NDRC has completed its investigation and has agreed to the company’s rectification plan does have some positives for it and its shareholders. At least some of Qualcomm’s Chinese licensees had ceased paying fees while the NDRC investigation was ongoing, and the majority of these will presumably have to restart their payments, albeit on different terms. “I expect this to end the uncertainty hanging over Qualcomm’s head in China,” said Bai. “With this settlement, it can move on.” But on the flipside, as a result of the Qualcomm investigation many Chinese wireless device and telecoms companies may now be looking at a worrisome future where their chances of becoming embroiled in patent disputes are considerably higher. For some, though, there will be an increased opportunity to monetise their IP assets. With Qualcomm's role reduced, China's domestic patent licensing market could be about to take off in a big way.