China’s Record $1 Billion Fine Against Qualcomm Could Signal A Tough New Antitrust Cop On The Block

A View from Constantine Cannon’s London Office

By Yulia Tosheva and James Ashe-Taylor

China’s imposition of a nearly $1 billion fine on Qualcomm, the world’s largest supplier of smartphone chips, is noteworthy not just because it is a record-breaking antitrust fine for China, but also because it serves as a warning for international companies that antitrust enforcement now spans the globe.

As reported on February 9, 2015, China’s National Development and Reform Commission (NDRC) reached a long-awaited settlement with Qualcomm, following a 14-month antitrust investigation into Qualcomm’s patent licensing practices.

The San-Diego based chipmaker, which makes about half of its global revenue in China, agreed to pay a record fine of $975 million, the highest penalty ever imposed in Chinese antitrust enforcement history. The size of Qualcomm’s fine is larger than the total amount of antimonopoly fines imposed by the NDRC in 2014.

Although Qualcomm expressed disappointment with the NDRC’s decision, it welcomed the end of the investigation. “We are pleased that the resolution has removed the uncertainty surrounding our business in China, and we will now focus our full attention and resources on supporting our customers and partners in China and pursuing the many opportunities ahead,” the company stated.

The NDRC found that Qualcomm abused its dominant position in the market for the licensing of CDMA, WCDMA and LTE wireless communications standard essential patents by charging exorbitant patent royalties, and bundling standard essential patents with non-standard essential patents. The NDRC found that Qualcomm had also abused its dominant position in the market for baseband chips by imposing unfair conditions on its sales of those chips. The NDRC stated that Qualcomm’s business practices “restricted market competition, hampered technical innovation, harmed consumers’ interests, and violated the country’s anti-monopoly law.” The company charged “exorbitant” licensing fees and imposed “unreasonable” conditions on sales of chips, the Chinese regulator said in a statement.

In addition to paying the record fine of nearly $1 billion, Qualcomm has agreed to make significant changes to the licensing of its wireless standard essential patents. As part of the settlement, the company agreed to lower its patent rates in China and to offer its 3G and 4G essential Chinese patents separately from other patents. Qualcomm announced that it will not pursue further legal proceedings contesting the NDRC’s findings. “We are pleased that the investigation has concluded and believe that our licensing business is now well positioned to fully participate in China’s rapidly accelerating adoption of our 3G/4G technology,” said Derek Aberle, president of Qualcomm.

Qualcomm’s fine ranks among the highest antitrust fines imposed on a technology company around the world. So far, Microsoft has been fined more than 2.2 billion euros for antitrust violations in Europe. Intel, one of Qualcomm’s main competitors, is still fighting a 1.06 billion euro antitrust fine imposed by the European Commission in 2009 in the European Courts.

Qualcomm has been subject to increased antitrust scrutiny by authorities around the world. In 2007, the European Commission initiated proceedings against Qualcomm concerning its patent licensing practices. Although the European regulator closed the investigation in 2009, it stated that the case “has raised important issues about the pricing of technology after its adoption as part of an industry standard.” In 2014, the European Commission started a new investigation against Qualcomm over rebates and financial incentives for selling and marketing chipsets. The company’s patent licensing business is also subject to an ongoing investigation by the U.S. Federal Trade Commission. In 2009, the South Korean antitrust agency fined Qualcomm $208 million for abuse of a dominant position involving charging discriminatory royalties and imposing exclusionary rebates. Also in 2009, the Japanese competition authority ordered Qualcomm to modify its patent licensing practices.

The Qualcomm fine highlights the importance of compliance with Chinese competition regulations, which were substantially reformed in 2008. While the number of foreign companies facing antitrust scrutiny in China is growing, the approach of Chinese antitrust authorities to individual cases is still difficult to predict. In 2014, the Chinese antitrust regulator opened an investigation against Microsoft over alleged bundling of its web browser and media player, an issue which led to a massive fine in Europe a decade ago. This investigation into Microsoft is still ongoing.

– Edited by Gary J. Malone