NDRC and Qualcomm Reach Resolution of Antimonopoly Law Complaint

Qualcomm announced yesterday, February 9, that it has reached a resolution with China’s National Development and Reform Commission (NDRC) regarding the NDRC’s investigation of Qualcomm under China’s Antimonopoly Law (AML). The NDRC has issued an Administrative Sanction Decision finding that Qualcomm has violated the AML. Qualcomm has stated that it will not pursue further legal proceedings contesting the NDRC’s findings and that it will implement a “rectification plan” that modifies certain of its business practices in China.  Qualcomm has also noted that while it is “pleased” with NDRC’s review and approval of this rectification plan, it is “disappointed” with the results of the investigation.  Key aspects of the rectification plan are:

Qualcomm 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 offer, it will provide fair consideration for such rights.

For licenses 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 license agreement with terms that the NDRC found to be unreasonable or on the chip customer not challenging unreasonable terms in its license 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 license agreement.

The NDRC imposed a fine on the Company of 6.088 billion RMB (approximately USD 975 million), which Qualcomm will not contest. Qualcomm will pay the fine on a timely basis as required by the NDRC.

The settlement appears to identify certain issues which likely were actively negotiated, including, the smallest “unit” based upon which royalties may be collected, compensation and negotiation for cross-licenses from Chinese licensees, dates of  application of newly imposed licensing terms, royalties and licensing practices for  essential and non-essential 3G and 4G patents, calculation of any different Chinese domestic market royalties,  sales of chips in conjunction with royalties and calculation of a fine.   It is unclear from this announcement how significant a difference the prospective licensing terms are from Qualcomm’s current licensing regime, and the impact, if any, on this new licensing scheme on Qualcomm’s global licensing practices.  It is also unclear  at this time how proportional this penalty and rectification program is compared to other NDRC investigations.

One thought on “NDRC and Qualcomm Reach Resolution of Antimonopoly Law Complaint

  1. dieterernst says:

    Many thanks for this extremely useful analysis.
    Qualcomm’s acceptance of the NDRC terms indicate that the pull of the China market for mobile devices is well and alive.
    But how will this affect Qualcomm’s cross-licensing model which so far has protected companies like Xiaomi and Oppo in China (although not in India)?

    Xiaomi has QC equity investment—so is it realistic to assume that both parties will work something out no matter what? In other words, can Xiaomi realistically expect to continue its strategy (“achieve scale economy by cutting down royalty cost”)?

    Is it fair to conclude from your statement below, that, as always, ambiguity is built into this important NDRC decision?

    (“It is unclear from this announcement how significant a difference the prospective licensing terms are from Qualcomm’s current licensing regime, and the impact, if any, on this new licensing scheme on Qualcomm’s global licensing practices.”)
    Thanks again for this invaluable blog series.

    Dr. Dieter Ernst
    Senior Fellow
    East-West Center, Honolulu
    1601 East-West Road
    Honolulu, HI 96848-1601
    Tel: (808) 944-7321
    Fax: (808) 944-7399
    E-Mail: ernstd@EastWestCenter.org
    http://www.eastwestcenter.org/about-ewc/directory/dieter.ernst
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    Ernst, D., 2014, Upgrading India’s Electronics Industry – Regulatory Reform and Industrial Policy. An East-West Center Special Study, East-West Center, Honolulu: 90 pages.http://www.eastwestcenter.org/pubs/34426, See also: http://ssrn.com/abstract=2395030
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    Ernst, D., 2011, China’s Innovation Policy is a Wake-up Call for America, in Asia Pacific Issues, May, available at http://www.EastWestCenter.org/pubs/3820
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    “China’s Emergent Political Economy – Insights from the IT Industry” (with Barry Naugthon), in C. McNally, editor, China’s Emergent Political Economy – Capitalism in the Dragon’s Lair Routledge” Routledge, 2008

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