On Monday, the San Diego-based company announced in a statement that it has come to an agreement with China’s National Development and Reform Commission (NDRC) over a finding that Qualcomm’s licensing practices relating to its wireless standard patents constituted abuse of its dominant position in the baseband chip market.
The NDRC highlighted several of Qualcomm’s practices as anti-competitive. First, it found that Qualcomm failed to provide a list of patents to be licensed and that its licensing portfolio included expired patents. It also stated that Qualcomm’s requirement that licensees provide it with free reciprocal cross-licences to their patents was illegal. Furthermore, the NDRC stated that it was improper for Qualcomm to bundle non-essential patents with standard patents when making licensing offers. Finally, it found that Qualcomm attached unreasonable conditions to its baseband chip sales.
The behaviours, the NDRC concluded, allowed Qualcomm to charge excessively high licensing fees and distorted the market.
As part of the agreement, Qualcomm has agreed to pay the $975 million fine and to abide by certain conditions related to these findings.
First, Qualcomm will now offer its Chinese patents essential to the 3G and 4G wireless communication standards at the rate of 5% for 3G devices and 4.5% for 4G devices that do not implement the CDMA or WCDMA standard, applied to a royalty base of 65% of the net selling price. This rate applies to devices sold in China.
In addition, Qualcomm will be bound by several conditions that directly address the NDRC’s core findings. It has agreed to offer its Chinese patents essential to the 3G and 4G standards separately from other patents, provide the relevant patent lists during negotiations and to no longer charge fees for expired licences. And in situations where Qualcomm seeks a cross licence, it will take into consideration the value of those patents in the negotiations. Finally, Qualcomm has agreed to not impose unreasonable terms on its baseband chip purchasers, though this condition does not apply to non-Qualcomm licensees or customers that refuse to report its sales of licenced devices.
An active field
China has been particularly active in addressing the issue of SEP licensing. Last month, the Ministry of Industry and Information Technology, the government body which oversees the awarding of telecommunications licences, put out a call for public comments on its model SEP licensing agreement template. That draft template touched on some of the issues involved in the Qualcomm agreement, such as the royalty base. In that draft, the MIIT recommended the use of the “smallest saleable unit” as the royalty base as opposed to the sale price of the entire device.
Interestingly, the NDRC-Qualcomm agreement does not follow this approach, instead going for an approach based on the net sale price of the device rather than of a particular chip.
Another data point
The NDRC-Qualcomm agreement is another data point for practitioners looking for examples of publicly-available royalty rates set by a court or a government body. In 2013, the Guangdong High Court set much lower royalty rates (.019% of the device price) for patents held by American patent assertion entity InterDigital than the rates agreed to by Qualcomm here (a rate of 5% of 65% of the price of the device is in practice a 3.25% royalty rate), though the different patents involved likely explain part of the difference. Another important distinction may be that the InterDigital rate came from a court decision, while the rate here is one stemming from an agreement between Qualcomm and the NDRC.
Interestingly, InterDigital and the NDRC came to an agreement last year with terms similar to the Qualcomm agreement. There, Interdigital similarly agreed to offer an SEP-only option to potential licensees. It also agreed to not require licensees to give free reciprocal cross-licences.
The Qualcomm and NDRC agreements are the two known instances of a Chinese court or government body setting patent licencing rates, with several other instances coming from the US and India.
For more on the increasing government attention on the intersection between intellectual property and competition law in the Asia-Pacific region, please see the cover story of the November edition of Managing IP.
