MOFCOM Focuses On Competition Impacts of SEPs on The Chinese Market Review of Nokia's Equity Acquisition of Alcatel-Lucent

Transcription

1 MOFCOM Focuses On Competition Impacts of SEPs on The Chinese Market Review of Nokia's Equity Acquisition of Alcatel-Lucent Michael Gu 1 Partner, AnJie Law Firm Background On October 19, 2015, the Ministry of Commerce ("MOFCOM") announced the first conditionally approved merger review case in 2015, namely the case of Nokia's acquisition of Alcatel-Lucent's equities. It is the second time that Nokia has become the protagonist in a MOFCOM merger review case due to mobile communications standard essential patents ("SEPs") 18 months after MOFCOM conditionally approved the case of Microsoft's acquisition of Nokia's device and service divisions in April In early April 2014, when reviewing the case of Microsoft's acquisition of Nokia's device and service divisions, MOFCOM thought this concentration might have adverse impact of excluding or restricting competition on China's smart phone market after considering that Microsoft owns a number of important patents in the field of smart phones and Nokia holds thousands of SEPs in the field of communication technologies. After several rounds of negotiations, MOFCOM finally accepted the commitments with remedy plans respectively proposed by Microsoft and Nokia, and thereby conditionally approved this concentration. Specifically, Nokia, as the seller, made relevant commitments to strict compliance with the FRAND (fair, reasonable and non-discriminatory) principle in respect of related SEPs. In the recent case of acquisition of Alcatel-Lucent's equities, Nokia, as the acquirer, has made more stringent commitments to a larger extent in respect of its telecommunications SEPs, including telecommunications SEPs owned by Alcatel-Lucent. Case Profile On April 15, 2015, Nokia and Alcatel-Lucent signed a deal memo, confirming that Nokia would acquire Alcatel-Lucent by way of public offer at a consideration of about EUR15.6 billion. On April 21, 2015, MOFCOM received the filing for concentration of undertakings regarding this deal, and believed upon review the filing materials and documents were incomplete and thus requested the applicant to make supplement. On June 15, MOFCOM accepted the case and began the preliminary review; on July 14, MOFCOM decided to implement further review of this concentration of undertakings. Upon further review, the MOFCOM concluded that this concentration of undertakings might exclude or restrict the competition in the licensing market for communication SEPs. Nokia then submitted to MOFCOM its remedial measures on October 8, On October 12, the MOFCOM decided to extend the period of further review to December 10, However, only a week later, the MOFCOM concluded the review on October 19, and 1 Michael (Zhengping) Gu is a founding partner of AnJie Law Firm based in Beijing. Michael specializes in competition law and M&A. Michael can be reached by michaelgu@anjielaw.com, or telephone at (86 10)

2 expressed that it would accept the remedial measures proposed by Nokia, and published the announcement on conditional approval of this concentration. The case is one of the few cases granted with conditional approval soon after entering the third stage. According to the review result announced by MOFCOM, the anti-monopoly issue likely to arise from this concentration is not from the wireless communication network equipment and services market. In the market of wireless network access equipment, core network system equipment and network infrastructure services, Nokia will not form an absolute control in the market after such acquisition as it still faces strong competition from Huawei, Ericsson, ZTE and other enterprises. However, as Nokia and Alcatel-Lucent respectively has larger shares in 2G, 3G and 4G communication SEPs, Nokia will have a huge patent advantage in the communications industry after completion of the deal. Therefore, MOFCOM, on the basis of defining the relevant market, focused on assessing the potential damage to the competition in the Chinese market of mobile terminals and wireless communications network equipment caused by Nokia after it enhances and upgrades its leading position in the communication SEPs market. Definition of Relevant Market Almost all the issues concerning anti-monopoly review are related to the definition of relevant market as the exact definition of the relevant market is the basis and premise for analysis. However, MOFCOM adopted a practical approach and gave some flexibility to the definition of market in this case. 1. Relevant product markets There are four relevant product markets involved in this case in total, namely, the wireless network access equipment market, the core network system equipment market, the network infrastructure service market as well as the licensing market of communication technology-related SEPs. Both the wireless network access equipment and the core network system equipment are wireless communication network equipment. However, MOFCOM conducted analysis by the fact that the two types of products can be separately purchased, customers' choice preference, and from other perspectives, and then decided to review the case by taking the two types of products as two separate markets. The most eye-catching and core relevant product market in this case is the licensing market of communication technology-related SEPs, which is also the main battlefield for overlaps and conflicts regarding anti-monopoly and intellectual property fields in recent two years. Whether it is the dispute over patent licensing between Huawei and IDC or there cord-high penalty of CNY6 billion imposed by the National Development and Reform Commission ("NDRC") upon Qualcomm earlier this year, SEP has always been the focus. The "S" or standard in SEP refers to a commonly or repeatedly used normative document that is formulated and published by a standard setting organization (SSO) or alliance upon agreement. A technical standard involves the technologies that must be applied to meet the standard in production activities. The establishment and implementation of technical standards guarantee the interchangeability, compatibility and 2

3 versatility of products or services. The patent, as a legal monopoly, entitles its right holder to the exclusive right to use a specifically patented technology. The combination of technical standards and patents forms standard essential patents, namely the patents necessary for the implementation of certain technical standard. The licensing of telecommunications technology-related SEPs is often granted by patent holder in package due to the large number of such patents. In terms of demand substitution, there is possibility that the communication technology-related SEPs can be further subdivided item by item. MOFCOM believed that the subdivision would not affect the conclusion of the anti-monopoly review for this concentration and thus carried out overall investigation into the licensing market of telecommunications technology-related SEPs. This is consistent with the opinion held by MOFCOM in the case of Microsoft's acquisition of Nokia's device and service business last year. In the penalty decision against Qualcomm imposed by the NDRC earlier this year and the case of Huawei against IDC (an American company) heard by Guangdong Provincial High Court in 2013, both of which involved SEPs, the NDRC and the Guangdong Provincial High Court adopted basically the same approach to define the relevant markets and analyze the market dominance, and both held that every single wireless SEP license could constitute a separate relevant product market and that each SEP occupied 100% market share in each of the specific licensing market of SEPs. However, as said by the NDRC in the case of Qualcomm, because Qualcomm licensed its wireless standard essential patents in portfolio, the relevant product market is defined as the assembly of relevant product markets that were separately constituted by various wireless SEPs licenses owned by Qualcomm. In terms of the practical effects of case review, the NDRC and MOFCOM, when defining the SEPs markets in the telecommunications sector, focused on the comprehensive competitive effect of patent licenses on the markets. Although the definition may be different in form, there is no disagreement in nature. In short, whether from the perspective of demand substitution or supply substitution, every SEP is likely to be essential and unique; however, given that a SEP is generally licensed by the right holder in a package license to the licensee, overall investigation, rather than further subdivision, may be conducted on the SEPs in question by referring to the licensing modes for the definition of the relevant market. It can be seen that the MOFCOM is somewhat flexible in defining market. As for the wireless network access equipment and core network system equipment both belonging to wireless telecommunications network equipment, MOFCOM thought it was necessary to be divided into two markets; on the other hand, when SEPs were involved, MOFCOM believed subdivision might be unnecessary. The author believes that the definition of market is used for analysis of competition, and if the analysis results of competition will not be affected, the definition of market may be less strict. 2. Relevant geographic market From the geographical perspective, MOFCOM did not specify whether the global market was involved, but pointed out that the focus of its investigation was the domestic market. MOFCOM 3

4 thought that despite the international standardization of wireless telecommunications network equipment and the fact that import restrictions, transportation costs and technical requirements did not constitute major constraints, competitors were not fully competitive on a global scale, there were still differences in the telecommunications standards and technologies used in different countries and regions, and there were also certain restrictions imposed on the competitors by some countries out of security consideration; therefore, the key investigation in wireless telecommunications devices was focused on the impact on the Chinese market. Similarly, as the licensing market of telecommunications technology-related SEPs is globalized, the patent holders tend to look for licensees worldwide and use the way of globally packaged licensing, therefore there is possibility that the relevant geographic markets will be defined as a global market. However, in view of the particularity of Chinese telecommunications SEPs licensing market, MOFCOM investigation highlighted the impacts on the Chinese market. MOFCOM's approach of defining relevant geographic market has been applied in prior cases. In the case of Google's acquisition of Motorola mobile in May 2012, in respect of the product market constituted by mobile intelligent terminals and mobile intelligent terminal operating systems, MOFCOM also placed the focus on the investigation in the Chinese market after taking full account of the state of competition in the global market when defining the geographic market. Competition Analysis When making competition analysis on the case, MOFCOM identified that there was less possibility for this concentration in the three fields (including wireless network access equipment, core network system equipment, and network infrastructure service) to cause the effect of excluding or restricting competition, and its approach of identification and analysis is worthy of recognition. All the restrictive conditions imposed by MOFCOM for this concentration centered on the licensing of telecommunications technology-related SEPs, which shows that the potential anti-monopoly risks in the SEPs licensing process are still the focus of anti-monopoly enforcement. 1. The fields of wireless network access equipment, core network system equipment, and network infrastructure service MOFCOM analyzed the horizontal overlapping in those three related product markets of Nokia and Alcatel-Lucent, and concluded that in the three markets and some of their related segments, the combined market shares of the parties were within the range from 0% to 35% and the acquisition of Alcatel-Lucent would not enhance Nokia's market position in substance or result in absolute control over the markets. Meanwhile, there were strong and active competitors such as Huawei, ZTE and Ericsson in each segment that could form effective competitive constraints on Nokia and the market competition situation would not change substantially, thus Nokia, upon completion of the acquisition, would not have the ability to exclude or restrict competition in the relevant markets. It should be noted that MOFCOM, when analyzing the three relevant product markets, 4

5 comprehensively investigated various factors including dynamic market share, competitors' activity and competition constraining force, and trends in market share, rather than just considering the static market share. The post-merger Nokia was not simply presumed to have the ability to exclude or restrict competition due to its largest market share or leading position in several fields. For example, in the segment of 2G wireless network access equipment market (could be divided into the GSM market and CDMA market), MOFCOM found after review that the two parties had horizontal overlapping in GSM market and the combined market share was large (more than 30%, with the market share ranking first), but it did not determine the potential competition impact by market share alone; instead, it took full consideration of the development trend of market shares of both parties and turnover as well as other related factors (including the continuous decline in the combined turnover of the two parties by 66% in recent three years and the existence of several active competitors in the market at the same time). As we all know, the competition in the high-tech and Internet field is highly dynamic, which is quite different from the situation in traditional industry that the market dominance can be determined by virtue of market share alone, so MOFCOM applied more comprehensive and systematic factors for consideration based on the characteristic of individual case when conducting relevant competition analysis. In addition, MOFCOM also revealed in the announcement that it had not received any opinion from competitors or upstream or downstream enterprises indicating Nokia might exclude or restrict competition in Chinese wireless network access equipment market upon completion of such acquisition. It can be seen that the feedback from a third party also has a certain influence on the review of the MOFCOM. 2. Licensing market of telecommunications technology-related SEPs According to the review of MOFCOM, the proportion of patents held by Nokia in the licensing market of 2G and 3G telecommunications SEPs would increase from [25-35%] to [35-45%] after the concentration, with the gap between Nokia and Qualcomm (which ranks second in the market) further widened, and that Nokia's rank in the licensing market of 4G telecommunications SEPs would jump from second to first. Overall, with the licensing market of telecommunications SEPs becoming more concentrated, the share of patents held by Nokia would increase significantly. The telecommunications SEPs, as major obstacle to the downstream market access, is critical to the manufacturing industries of mobile terminals and wireless telecommunications devices, and in particular, using telecommunications SEPs is a prerequisite for entry into the market. Therefore, the right holders of telecommunications SEPs have control over the use of the standards, and the effective competition in downstream market may be distorted if the right holders abuse their rights to exclude or restrict competition, such as refusal to license, charging high license fees or engaging in discriminatory licensing. Upon completion of this concentration, the number and scope of SEPs held by Nokia would be increased, which would greatly enhance Nokia's strength in patent licensing negotiations. MOFCOM noticed that most manufacturers of wireless telecommunications network equipment and mobile terminals were weak in terms of patents; whether in patent quantity or quality, they had no basis for cross-licensing with Nokia, and thus lacked effective counter weight to Nokia in 5

6 patent licensing negotiations. MOFCOM believed that China is the number one mobile phone producer in the world, but the industry's average profit margins are relatively slim; after the completion of this concentration, if Nokia made any unreasonable change in its SEPs pricing strategies, competition landscape of China's relevant markets would be affected, resulting in effects of excluding or restricting the competition in the markets and ultimately harming the interests of consumers. Through several rounds of negotiations, MOFCOM and Nokia reached an agreement on October 8, 2015, and based on their medial measures submitted by Nokia, MOFCOM approved the concentration with conditions. Restrictive Conditions According to the MOFCOM announcement, Nokia has made a series of commitments in respect of telecommunications SEPs owned by it as at the day of completion of the deal, the main contents include: 1. Nokia undertakes that, under the premise of equality, if the licensee acts in good faith, it will give up seeking an SEP injunction to prevent the implementation of standards with FRAND commitments; 2. When transferring a SEP to a third party in the future, Nokia has the obligation to promptly notify the details of the patent transfer to its existing Chinese licensees and any other Chinese enterprise that is in active licensing negotiation therewith. What is more important, Nokia undertakes that if the transfer of some SEPs to a third party has any significant impact on the value of Nokia SEP portfolios that have been licensed or will be licensed to Chinese licensees, the existing Chinese licensees (including potential licensees) have the right to renegotiate and determine the loyalty rates; 3. Nokia will ensure that it will transfer corresponding FRAND obligations to the new owners upon transfer of a SEP in the future; and 4. Nokia accepts the supervision from MOFCOM in respect of the performance of its commitments and report to MOFCOM regarding the performance progress. Comparing these restrictive conditions imposed by MOFCOM in this deal with those in the Microsoft s acquisition of Nokia s device and service case one and a half years ago, it can be seen that, commitments pledged by Nokia basically stay the same, however, in the review of this deal, MOFCOM put more weight on the competition features in relevant Chinese industries, strengthened protection mechanism of Chinese manufacturers and intensified supervision over Nokia s implementation of commitments as well. Hints can be found for the first and third points included in the restrictive conditions imposed this time in the previous case of Microsoft's acquisition of Nokia device and service business. In both cases, MOFCOM has added similar conditions in terms of relevant obligations that should be performed by Nokia in compliance with the FRAND principles. The second point of the restrictive conditions imposed this time has not been mentioned in the previous case. The author believes that implementation of this condition will further protect the relevant rights and interests of existing and potential Chinese licensees, enabling China's mobile phone, telecommunications equipment and terminal manufacturers to avoid the adverse impact arising from Nokia's possible abuse of patent rights to a certain extent and unreasonable charges. In addition, the fourth point of the 6

7 restrictive conditions imposed this time on the commitment to accepting the supervision of and reporting to MOFCOM, compared with the previous case, not only requires Nokia to report SEP transfers to third parties, but also expands the contents to be reported to "SEP transfers to third parties and the contracts signed". It is thus clear that MOFCOM is determined to deepen and strengthen its supervision enforcement.. The fourth point also mentioned that "Nokia commits to notify all of Nokia s patent spin-offs to Chinese companies", which is consistent with the second point of the restrictive conditions, highlighting the obligation it should perform for Chinese companies. Conclusion and Outlook Up to now, MOFCOM has concluded about more than 1,000 cases of concentration of undertakings, including 25 conditionally approved cases and two prohibited cases. In the past few years, an average of 4 cases were conditionally approved or prohibited every year. However, over the past ten months this year, there was only one conditionally approved case and all the other heard and closed cases have been unconditionally approved, which seems to reflect that MOFCOM starts to hold a more prudential attitude upon making a decision of conditional approval. At the same time, we are also pleased to see that the review of this case has reflected that the competition analyses made by MOFCOM become more rigorous and mature and the additional conditions imposed become clearer and more pragmatic. From the two conditionally approved merger cases involving Nokia and the NDRC s investigation cases against Qualcomm and IDC, it is easy to see that the anti-monopoly regulation regarding intellectual property rights (especially SEPs) has become more and more important and difficult for the anti-monopoly review and enforcement. In April this year, the State Administration for Industry and Commerce promulgated the Provisions on the Prohibition of the Abuse of Intellectual Property Rights to Exclude or Restrict Competition, China's first special anti-monopoly rules against the abuse of intellectual property rights, and currently the NDRC and MOFCOM are also tightening up their schedules to come up with relevant provisions for the same field. The Anti-Monopoly Commission under the State Council is also expected to integrate the rules formulated by the said three law enforcement authorities next year and finally issue unified guidelines for the anti-monopoly regulation in the field of intellectual property rights. 7