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Microsoft/Nokia: MOFCOM Conditions Spell Out Patent Holders’ Responsibilities – Analysis

Joy C. Shaw and Lisha Zhou, PaRR, April 2014

See Lisha Zhou's resume See Joy C. Shaw's resume

- Some restrictions on seeking injunctions could apply extraterritorially
- First time MOFCOM articulates concerns over deal impact on industry
- Not clear China authority’s conditions are stricter than those imposed in Taiwan

In conditions imposed on parties of the Microsoft/Nokia transaction, China’s Ministry of Commerce (MOFCOM) spelled out the responsibilities and liabilities of patent holders more clearly than any other antitrust regulator, which could have far-reaching ramifications for high-tech companies in future, industry sources said.

MOFCOM conditionally cleared Microsoft’s proposed acquisition of Nokia last week on the last day of the phase III review period. The 8 April decision – with 10,579 Chinese characters excluding addendums – is the longest ruling MOFCOM has ever issued.

Some of the restrictive conditions, such as those involving the use of injunctions by holders of standard-essential patents (SEPs) or patents related to de facto standards, could be applied extraterritorially, they suggested. Microsoft’s commitments to not require SEP licensees to cross-license also departs from the US tech giant’s current practice, said a source at an Android handset manufacturer.

Otherwise, attorneys said MOFCOM’s lengthy conditional clearance decision presents few surprises or novel legal arguments. The decision is rather a compromise resulting from negotiations between the deal parties and Chinese handset makers, said a Chinese handset industry group source who had participated in the negotiation. “Under the constraints of the Anti-Monopoly Law, we recognise that MOFCOM has tried its best and made a lot of effort,” this source said.

Chinese handset makers had lobbied for stronger protection against a potential patent licensing rate hike by Nokia once the deal is done, he said. But that was not included in the final conditions. In the middle of negotiations, Nokia had offered to guarantee a royalty rate of no higher than 2% per unit product price after the transaction, but that was rejected by the Chinese industry group, the source said.

“We think that Nokia’s offer was not quite meaningful, because the licensing rate currently is under 1%,” the source said.

The source, from an Android phone manufacturer, said the restrictive condition on Microsoft and Nokia on applications of injunctions could potentially help any handset makers with China presence because of the implied extraterritorial effect.

According to the conditions related to Microsoft’s SEPs, the US company pledged it would not seek an injunction or exclusion order on the basis of those SEPs against smartphone manufacturers in China.

Because this condition does not specify it is valid only for injunctions pursued in China, one could interpret it as meaning that Microsoft also cannot seek injunctions over those SEPs in the US against companies in China, including Chinese units of foreign firms, suggested the same source. However, it is worth noting that Microsoft is not known as a company that seeks injunctions over SEPs anyway, he added.

The commitment is in line with Chinese courts’ rulings last year in the landmark antitrust lawsuitHuawei Technologies v. InterDigital, where the Guangdong High People’s Court and the Shenzhen Intermediate People’s Court decided that InterDigital’s application for injunctive relief in the US against Huawei was inappropriate.

“MOFCOM cleverly expressed China’s view through its merger review decision on issues that are still debated and uncertain elsewhere,” said the source from an Android phone manufacturer.

Unlike Microsoft, which commits to not assert injunctions on SEPs, Nokia’s pledge contained a caveat: Nokia can seek injunctions on SEPs, if potential licensees did not sign and abide to fair, reasonable and non-discriminatory (FRAND) licensing terms.

Meanwhile, Microsoft even committed to not seek injunctions over non-SEPs unless the potential licensees did not engage in good-faith negotiations. This is a breakthrough, said a third competition expert following the case.

“Normally SEP owners are not entitled to seek injunctions against willing licensees, he noted. “But now Microsoft has even committed not to seek injunctions in relation to de facto standard patents,” he added.

Another sign of progress is that MOFCOM not only provided competition analysis of the deal in its conditional clearance decision, but also addressed the impact the merger would have on China’s smartphone industry, said the competition expert. This is the first time that MOFCOM has not avoided the discussion about impact on industry.

In the past, even if MOFCOM had imposed remedies to reduce the deal’s effect on industry, the authority seldom articulated analysis of such concerns in its decisions, said the competition expert.

“It’s progress,” he commented. At least people would know which concerns were competition-related, and which ones relate to impact on the industry, and which remedies were necessary to address them, respectively, the same source added.

Compared with the Taiwan Fair Trade Commission’s (TFTC) conditional clearance, a lawyer following the case said MOFCOM’s remedies are stricter because the Chinese authority imposed much lengthier and more detailed remedies on Microsoft and Nokia, including the injunction rules, commitments related to cross-licensing, and the disclosure of relevant patent families that raise competition concerns; but the competition expert disagreed.

One marked difference between the two decisions is that the TFTC requires Microsoft not to engage in unfair pricing and discriminatory treatment involving smartphone-related patent licensing to hinder smart mobile device makers’ free choice of mobile operating system.

On that relevant point, MOFCOM’s conditions show Microsoft commits to keep royalties fees no higher than current levels, but at the same time it can consider giving favourable treatment with regards to new licenses or the renewal of license to an existing licensee depending on the unique circumstances, pointed out the competition expert.

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