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09 October 2018
The recently shelved mega-takeover of Netherlands-based NXP Semiconductors by US company Qualcomm, while notable for several reasons, highlighted China's dependence on foreign technology in the semiconductors field. As a US company whose exports to China generate around 65% of its revenue,(1) Qualcomm's takeover attempt aimed to procure emerging new technologies – including mobile payments, automated vehicles and the Internet of Things (IoT) – in order to lessen its dependence on dwindling smartphone sales.
Qualcomm develops and supplies mobile phone chips that enable cellular telecoms standards (eg, the Universal Mobile Telecommunications System and long-term evolution) and understands first-hand the significant source of revenue that can be generated from licensing rights that are essential to the implementation of standard-essential patents (SEPs). However, a chief concern among Chinese companies was that the takeover would present Qualcomm with the opportunity to extend its licensing business into highly promising emerging fields. As it turned out, they need not have worried.
China's ambitious agenda in the IoT industry encourages companies to develop and adopt their own technological standards. This standardisation is necessary to integrate the varying equipment, software and service applications of a digital IoT ecosystem into multiple technologies across the value chain. Despite the expectation of free licensing schemes for service level technology, such integration necessarily draws on a multitude of patents, including SEPs, for the various information and communications technologies that the European Telecommunications Standards Institute has standardised for fixed, mobile, radio, converged, broadcast and internet technologies. Although IoT developers need access to licences covering the relevant technological standards, undertakings that have invested heavily in researching and developing the methods and processes for incorporation into those standards also require a fair return on their investment. It is such standardisation, and the requirement to licence SEPs on fair, reasonable and non-discriminatory grounds, that has ultimately led to the mass proliferation of communications devices.
Confronting this technological convergence presents a challenge for China. Despite the emergence of major Chinese SEP holders – such as Huawei, Lenovo and ZTE in advanced manufacturing and Baidu, Alibaba and Tencent in advanced network services – Chinese companies remain largely dependent on licensing SEPs from leading owners overseas, such as Qualcomm. Smaller players which have no SEPs and cross-licence are widely exposed to the full burden of licensing fees and litigations, in addition to royalty rates that may not always be appropriate to the specifics of the Chinese market.(2)
The government has, to the extent possible, promulgated policies to encourage IoT development and promote the widespread adoption of its own technological standards. For instance, the government provides preferred tax breaks to IoT manufacturers and hosts a special fund that requires public entities to have an IoT initiative. In addition, it has set out an action plan to expand the pool of available IP addresses through establishing and transitioning from the current IPv4 to an IPv6 network by 2025.(3) This is seen as a vital step for integrating internet-connected devices as they further grown in number.
However, the Chinese courts have still had to play an active role in addressing disputes and concerns surrounding the practices and price negotiations of SEP licensors. Despite establishing a framework for SEP licensing, as seen in Huawei v InterDigital Corporation, a reliance on court precedents, standards setting and patents themselves may be insufficient to increase the efficiency of SEP licensing negotiations going forward. In particular, and without further standard-setting guidance, concerns may arise based on the level of the value chain at which SEP licensing for IoT should occur, as has been the case in Europe. Some large SEP licensors (eg, Qualcomm and Ericsson) argue that the rates applicable to such licences should vary depending on the use made of the final product incorporating the technology. It thereby follows that licences for IoT devices should be granted to downstream producers and sellers, since the final intended use of the product provides an appropriate measure for applying relative rates – even at a discount (eg, where a low power fan draws less utility from its 5G connection than the latest mobile phone). However, this overlooks manufacturers higher up the supply chain.
It is generally recognised that granting licences to other manufacturers rather than final product implementers would generally lower SEP licensors' overall cut of the value to be derived from the IoT industry. It has also been argued that use-based licensing will not only allow for SEP licensors to effectively appropriate some of the value created by new and novel products, but also open the door to charging royalties on their improvements, extracting patents in return and effectively creating a 'patent umbrella' which excludes rival component manufacturers.(4) Simultaneously, not making licences available at all levels in the supply chain could be considered both unfair and discriminatory.(5) While licensing SEPs to other upstream manufacturers would exhaust those IP rights at the chipset level, it could also help to prevent possible misuses of market power. The stakes involved are not insignificant, since the value of a fully realised IoT industry is seen by some as comparable to that of a second industrial revolution.
Despite the Chinese regulators' efforts in assigning resources, introducing reform and tackling excessive behaviour in a range of competition cases, an argument can be made for the adoption of further standardising licensing policies. An alternative would be for Chinese companies to sign up to specialised international patent pools for IoT-related SEPs, such as that initiated by Ericsson.(6) This may exemplify a simpler model for cooperative patent licensing, but otherwise remains contentious in the adoption of use-based valuation measures. However, further measures setting out guidelines and promoting the efficient licensing of SEPs will play a role in encouraging the innovation-driven growth of China's IoT industry.
For further information on this topic please contact Hao Zhan, Ying Song, Stephanie Wu Yuanyuan or Sharif Hendry at AnJie Law Firm by telephone (+86 10 8567 5988) or email (firstname.lastname@example.org, email@example.com, firstname.lastname@example.org or email@example.com). The AnJie Law Firm website can be accessed at www.anjielaw.com.
(1) Further details are available here.
(2) Further details are available here.
(3) Further details are available here.
(6) Further details are available here.
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