Current anti-monopoly work in China

On April 8, the Chinese Ministry of Commerce held a special press conference on anti-monopoly work. Shang Ming, Director General of the Anti-monopoly Bureau, briefed the media on MOFCOM’s conditional approval of Microsoft’s acquisition of Nokia device and service business, as well as its handling of illegal concentrations of undertakings. The detail of the press conference is as follows:

Friends of the press, good morning! Today, I would like to update you on two things relating to the anti-monopoly work recently. First is that the Ministry of Commerce conditionally approved Microsoft’s acquisition of Nokia’s device and service divisions. Second is MOFCOM’s disclosure of information regarding administrative penalties for those undertakings failing to notify according to law the Ministry of Commerce of their participation in concentrations.

First, I will introduce to you the anti-monopoly review of Microsoft’s acquisition of Nokia’s device and service business. As we all know, in the telecom sector there was an acquisition case last year that created major market repercussions. This case involved two companies: one is Microsoft, the global software giant, and the other is Nokia, a bellwether of the telecom industry. Currently, the review has concluded, with MOFCOM approving the acquisition on a conditional basis. Considering that the case had attracted wide attention and was itself rather complicated, I would like to make the following briefings to you so as to help the public better understand it:

I. Basic facts

On September 2, 2013, Microsoft signed a Stock and Asset Purchase Agreement with Nokia, according to which, Microsoft would purchase all the device and service (mobile phone) business of the latter. In exchange Microsoft would pay Nokia EUR 5.44 billion (45.862 billion RMB), EUR 3.79 billion of which would be for the purchase of Nokia’s device and service business, and the remaining EUR 1.65 billion would be for patent agreements and future stock options.

Before the deal, Microsoft produced Windows Phone, a smart phone operating system, but didn’t make its own smart phone handsets. After this deal, Microsoft would enter into the smart phone device production industry, and realize a vertical integration. Following the deal’s completion, Nokia would basically exit the mobile handset market, while retain all invention patents related to telecommunications and smart phone.

II. Review Process

On September 13, 2013, a notification was filed at the Ministry of Commerce concerning the review of the concentrations of undertakings in Microsoft’s acquisition of Nokia’s device and service business. In reviewing the files, the Ministry of Commerce deemed the notification documents and materials incomplete, and requested the notifying parties to make supplementary submissions. On October 10, after confirming that the supplemented documents and materials were consistent with the requirements of Article 23 of the Anti-monopoly Law, the Ministry then accepted the notification and began the preliminary review of the case. On November 8, the Ministry decided that a further review should be conducted concerning the concentration of undertakings. As a result of the further review, the Ministry of Commerce considered that the concentration of undertakings may have the effect of eliminating or restricting competition in China’s smart phone market. On February 8, 2014, with consent from the notifying parties, the Ministry of Commerce decided to extend the duration of the further review.

This deal has been under anti-monopoly reviews in 16 countries and regions around the world, including the US, the EU, Canada and China. So far, the competition authorities of 15 countries and regions including China have come to decisions.

As we have seen, it took a rather long time for us to review the case. The reasons are that first, it was a very complex case, and one of the most complex cases we have ever dealt with since the Anti-monopoly Law came into being. This case involved both intellectual property right issues and anti-monopoly issues, many of which posed new challenges to anti-monopoly enforcement. Second, it would have a greater impact upon the Chinese market than on other jurisdictions, and therefore China had to pay more attention to the concentrations of undertakings, and to spend more time on collecting evidence and making analysis. China is a major producer and consumer of mobile phones. In 2012, a total of 1,180 million mobile handsets were produced in China, accounting for 75% of the world’s total, which was 1,580 million. In 2013, total sales of smart phones in China were 320 million, accounting for 34% of the global market. It would have a greater impact on China than on the EU or the US because of the sheer scale of the industry and the size of the market. During the review, the panel produced a list of Microsoft patents on which the Android phones are highly dependent after conducting screening and technical analysis one by one of the 40,000 strong patents held by Microsoft, in order to determine whether the concentration might have the effect of eliminating or restricting competition in China’s smart phone market. In the review, the panel also used economic analysis and market research to discover competition issues. In the course of resolving these issues, the panel also had to hold many discussions with the notifying parties. In a nutshell, it took us this long because of the major impact of the case on the Chinese market, and the complexities in resolving the competition issues brought about by the acquisition.

III. The main issues found in the review and discussions held with the notifying parties

The anti-monopoly review examined the vertical relevance between Microsoft’s Windows Phone operating system, related patents of smart mobile devices, and Nokia’s smart phone business. In addition, the review also examined the impact of the transaction on the standard-essential patents for mobile communications held by Nokia.

The review found that Microsoft might use its patents on smart mobile devices to eliminate or restrict competition in China’s smart phone device market. Android is a mainstream smart phone operating system in the market. Although it is not owned by Microsoft, it uses Microsoft’s patents. In Microsoft’s Android licensing program used in smart phones running the Android operating system (Android phones), there are hundreds of patent technologies held by Microsoft. Android phones account for over 80% of the market share in China. Technical analysis showed that the patents held by Microsoft are indispensable for performing main and basic functions of the Android mobile phones, and there are no effective alternatives. Microsoft is capable of restricting competition in the downstream smart phone market through using its Android licensing program.

Upon completion of the concentration, Microsoft will enter into the field of manufacturing of mobile devices, thus achieving the integration of the operating system and production of smart phones. Overall speaking, Microsoft will be less dependent on handset manufacturers for promoting the Windows Phone operating system. To obtain a favorable market position for its mobile terminal devices, Microsoft has the motive to raise the loyalty fees.

China is a large mobile phone producing country as well as a big consumer of mobile phones. 75% of mobile handsets in the world were manufactured in China, while 34% of the world’s smart phones were sold in the Chinese market. Should Microsoft raise the royalty fees, Chinese mobile phone manufacturers would be forced to either exit the market, or transfer all or part of the cost to smart phone consumers. The former instance would impair market competition while the latter would directly hurt consumer interests.

Nokia may eliminate or restrict competition in relevant markets through the licensing of its standard-essential patents after the completion of transaction. Nokia owns thousands of communication standard-essential patents, and is a market leader in terms of the total number and quality of patents. As all smart phone manufacturers must use Nokia’s standard-essential patents, Nokia through these patents could control the market of mobile devices. Since Nokia would exit the market of mobile phone devices and services when the deal is completed, it might introduce unreasonable changes to its pricing strategy with regard to the standard-essential patents, which may lead to changes in the competition pattern of China’s smart phone market. As a result, the overall cost of the smart phone manufacturers on IPR would increase, leading eventually to the impairment of end consumers’ interests.

In the process of the review, by using such means as economic analysis, market research and technical analysis we have proved that the M&A of Microsoft and Nokia could lead to competition problems, and have therefore requested the parties to address our concerns.

IV. Solutions submitted by the notifying parties and the evaluations of them

On March 6 and 27, 2014, Nokia and Microsoft submitted their final solutions respectively. The Ministry of Commerce, after conducting a market assessment, decided that the solutions provided could reduce the negative effect of the concentration of undertakings on competition.

1. The commitments of Microsoft include: (1) Do not seek injunctive relief on Android phones produced by Chinese manufacturers based on the standard-essential patents. (2) Use non-exclusive license on Android phones using Microsoft’s patents, and the fees and other licenses after the transaction will not exceed the current level; Microsoft may give preferential treatment based on market conditions and the specific circumstances of the licensee. (3) For non standard-essential patents, injunctive relief will only be sought in the case that the potential licensee may not negotiate in good faith. (4) The commitment on standard-essential patents will be permanently effective, whereas the commitment on nonstandard-essential patents will be valid for eight years.

2. The commitments of Nokia include: (1) Continue to follow the fair, reasonable and non-discriminatory (FRAND) principles on standard-essential patent license, and do not pursue licensing terms that are not in compliance with the FRAND principles. (2) Do not prevent the implementation of the standard-essential patents through the injunctive relief to the licensee acting in good faith. (3) Do not make tie-in sales with the license of standard-essential patents. (4) The transferee of Nokia’s standard-essential patents should also be bound by the obligations under these commitments as well as the FRAND principles. (6) Nokia promised not to deviate from the current FRAND piecework rates, but would allow reasonable adjustments based on these factors. (7) These said commitments will be permanently effective.

It is worth noting that it is necessary to read the official announcement in its entirety so as to understand the solutions. Otherwise, one may come to inaccurate conclusions. The review has been completed, and the related announcement has been released on MOFCOM’s website. This M&A review has demonstrated the professionalism and capabilities of Chinese regulatory authorities to handle complex cases.

V. Conditional approval and enforcement supervision

The solutions by Microsoft and Nokia could reduce the potential threats to market competition as a result of the deal. After the deal is completed, the Ministry of Commerce will supervise the honoring of the commitments made by both Microsoft and Nokia according to law. We hope that both parties would strictly stand by and honor their commitments. The conditional approval of the concentration of undertakings is only a precaution to prevent possible future behaviors that may impair competition. Should there be an abuse of dominant position or other ‘monopolistic behavior’ in the future, apart from the effective supervision by the M&A reviewing authorities, other anti-monopoly law-enforcement departments will also investigate and deal with such behavior according to the relevant provisions of the Anti-monopoly Law with a view to maintaining the fair market competition environment.

According to the Anti-Monopoly Law of the People’s Republic of China (hereinafter referred to as the Anti-Monopoly Law) and the Provisions of the State Council on Thresholds for Prior Notification of Concentrations of Undertakings (hereinafter referred to as the Provisions) , where a concentration of undertakings reaches any of the thresholds set out by the State Council, the undertaking(s) concerned shall file a prior notification, and no such concentration may be implemented without the clearance of prior notification. Since the implementation of the Anti-Monopoly Law, MOFCOM performs its duty according to law, and has conducted anti-monopoly reviews on more than 700 concentrations of undertakings. It is proved that the anti-monopoly reviews on concentrations of undertakings have played an important role in preventing monopolistic behaviors, protecting fair market competition, improving economic efficiency, safeguarding the interests of consumers and the public, and promoting the sound development of the socialist market economy.

Since the enactment of the Anti-Monopoly Law and the Provisions, most of the undertakings have filed a prior notification according to the law. But we have also noticed that there were still some undertakings who implemented concentrations without prior notifications, thus violating the stipulations of the Anti-Monopoly Law and the Provisions. Therefore, the Ministry of Commerce released on December 30, 2011 the Interim Measures for Investigating and Handling Failures to Notify According to Law of the Concentration of Undertakings (effective on February 1, 2012), which reinforced the investigation into and penalties on illegal concentrations of undertakings. Since the enforcement of the Interim Measures, the Ministry of Commerce investigated in and imposed penalties on a series of such cases according to law, and based their different situations made corresponding decisions as to how the cases should be handled.

To enhance the transparency of the investigation and punishment of the illegal concentrations of undertakings and further urge undertakings to make prior notification according to law, the Ministry of Commerce released in the News section of the MOFCOM website on March 20, 2014, that for those fail-to-notify cases the filings of which were accepted after May 1, 2014, the Ministry would publish its administrative penalty decisions on its website. At the same time, the Ministry of Commerce also posted a fax and telephone number for (65198998) to accept reports from any entity and individual on suspected illegal concentrations of undertakings.

After its release, the above news has attracted wide attention from the society. Firms and intermediary agencies have called to consult us. Some of the media organizations present today have also timely cited the information. Here, on behalf of the Anti-Monopoly Bureau, I would like to thank you. In response to the concerns from all parties, I would like to take this opportunity to make the following clarifications:

Firstly, for those fail-to-notify cases filed and accepted before May 1, the administrative penalty should be imposed according to law if the review found such administrative penalties necessary. There is no impunity granted to previous behaviors. It is just that publishing the administrative penalty decisions is not mandatory for such cases.

Secondly, for those cases filed and accepted after May 1, the Ministry of Commerce should make administrative punishment decisions according to law if the review found such administrative penalties necessary, and the decision should be published on MOFCOM’s website.

Thirdly, publishing the administrative penalty decisions is a measure MOFCOM takes to administer by law, further enhance enforcement transparency, provide an early warning to related businesses of the potential risks, show respect to those law-abiding businesses, and ensure that those that break the law are held accountable.

Finally, what I want to stress is that, in the course of future reviews and handling of concentrations of undertakings, the Ministry of Commerce will continue to strictly administer according to law, earnestly safeguard the lawful rights and interests of the notifying parties, the informer and the third party, make legal, reasonable, objective and fair decisions, prevent and terminate monopolistic behaviors, protect market competition order, defend the interests of the consumers and the public, and promote the sound development of the socialist market economy. We welcome media scrutiny. We invite friends from the press to report to us concentrations without prior notifications, and provide us with related leads.



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