Authored by He Jing ( and Dong Xue from AnJie Law Firm

On May 22 2014, China’s National Development and Reform Commission (NDRC) announced the suspension of the investigation against Inter Digital Communications (IDC), a US wireless technology developer, as the company had submitted detailed  measures to address the regulator’s concerns. What is interesting is the differences in the IDC measures between the press release of NDRC and that of IDC. NDRC states that:

1) IDC will not charge Chinese enter- prises discriminatory and excessive patent licensing fees.

2) IDC will not bundle standard-essential patents (SEPs) with non-SEPs in the patent licence.

3) IDC will not require a Chinese manufacturer to agree to a royalty-free, reciprocal cross-licence.

4) IDC will not force Chinese enterprises to accept unreasonable licence conditions through direct legal action.

On the same day, IDC released its detailed commitments to NDRC. Comparing the two versions, one thing that is missing from the IDC version is the lack of the commitment of non- excessive pricing as listed in the NDRC version. While there is no official way to verify this, the disparity of the press release again highlights the issue of the excessive pricing under the Chinese antimonopoly law and the possible dilemma faced by the SEP license holders.

One of the potential issues for SEP licence holders under the Chinese anti- monopoly law is whether its licensing rates will be considered as “excessive pricing”. The Chinese anti-monopoly law lists excessive pricing as one of the violations for abusing dominant market position under its Article 17, which is widely believed to be influenced by the European anti-monopoly law tradition. There is a prevailing view in China that each SEP patent holder has a dominant market position in the licence market for that SEP. So the next question is to what extent the FRAND rate offered by a SEP patent owner will be considered as “excessive”?

Not surprisingly, few rules have been given as to the calculation of excessive pricing in FRAND royalty rate. Article 11 of the Regulation of Anti-pricing Monopoly issued by NDRC stipulates the calculation approaches for excessive pricing, including comparing the price in the transactions with/between other business operators, reviewing the increase range of the price with the stable cost, and comparing the increase ranges of the sales price with that of the cost. Unfortunately, it is very hard to apply these rules to the FRAND rate. For example, in the telecommunication industry, cross-licensing is very common in practice, which makes the comparison between difference licences more complicated. An SEP licence is unique as each SEP has only one exclusive owner.

While the legislation does not pro- vide clear guidance, local courts have tried to explore the possible calculation approaches in lawsuits.  In a recent case decided in 2013 involving Huawei and IDC, a local court calculated the excessive pricing by comparing both the licence fee rate and the lump sum payment imposed on Huawei with IDC’s licence with Apple. The court concluded that the licence fee rate imposed on Huawei is 100 times of that on Apple and the lump sum payment is 35 times. However, there are many controversies among the legal community whether such licences are really comparable.

Now, it appears that Chinese courts and regulators are getting increasingly familiar with the so-called top-down approach in comparing what should be the appropriate rate in FRAND licensing context. Very often the court or the regulator would start the calculation with the smallest salable unit, say a Wi-Fi chip. The second step is to use a suit- able economic model to figure out the maximum royalty burden for the entire set of SEPs covering the Wi-Fi chip. Finally, the court or regulator figures out the suitable royalty rates for the patents by apportioning the total royalty between that and the rest of SEPs.

This approach is appealing to the courts or regulators probably because the method is relatively easy to implement. The alternatives that may be favoured by patent licensors require a lot more convincing data and a model to support the final outcome.

Chinese courts and regulators are expected to handle more cases related to FRAND royalty rate and examine foreign patent owners’ licensing activities under the grounds of “excessive pricing”. It will be interesting to see more published reports by Chinese courts or regulators in using this or other approaches.