MOFCOM doles out preventative medicine

Nate Bush
[email protected]

China's Ministry of Commerce (MOFCOM) plays an increasingly decisive role in the global gauntlet of antitrust merger review, often imposing remedies on transactions cleared unconditionally elsewhere. Its approvals of Microsoft's acquisition of Nokia's mobile phones and smart devices on April 8 2014 and of Merck's acquisition of AZ Electronic Materials SA on April 30 2014 underscore MOFCOM's willingness to impose – and supervise – broad behavioural remedies to prevent possible future anti-competitive conduct.

Changed incentives

In assessing Microsoft's acquisition of Nokia's phone business, MOFCOM focused on the possible incentives for both parties to change their licensing practices after the transaction. It observed that Microsoft holds both standard essential patents (SEPs) for communication technologies as well as non-standard essential patents (non-SEPs) required to utilise Google's Android mobile operating system. Although Microsoft had a longstanding practice of licensing these patents to phone makers, its acquisition of Nokia's competing mobile phone business would change its incentives to continue licensing its relevant IP to Nokia's rivals.

Remarkably, MOFCOM not only confined its analysis to the competitive effects of the “concentration” of Microsoft (the buyer) and Nokia's handset business (the target), but also examined the potential anti-competitive effects of the transaction on the licensing practices of Nokia (the seller). Even though Nokia would transfer its handset manufacturing business to Microsoft, it would retain its immense patent portfolio. After exiting the handset business, Nokia would no longer depend on cross-licenses of competitors' patents for its own products or be vulnerable to potential infringement claims. Unshackled, Nokia may increase prices or otherwise assert patent rights more aggressively in the future. The European Commission (EC) had explicitly raised concerns that Nokia might begin acting as a “patent troll,” but concluded that concerns about the seller's future conduct “falls outside the scope of the EU Merger Regulation.” While the EC had pledged to “remain vigilant and closely monitor Nokia's post-merger licensing practices under EU antitrust rules,” MOFCOM construed China's merger rules to reach post-transaction actions of the seller.

Future licensing, enforcement and transfers

MOFCOM mildly concluded that “Microsoft may exclude and restrict competition in China's smart phone market on the strength of its Android program licensing” and that “the concentration may result in patent abuse by Nokia.” It did not articulate that such conduct would be probable or likely.

Nevertheless, MOFCOM extracted elaborate commitments from both Microsoft and Nokia to prevent these risks. As for its SEPs, Microsoft committed to honour existing FRAND commitments and not to seek injunctions or exclusion orders against smart phones made in China, demand cross-licensing (except for other SEPs relevant to the same standard) or transfer the patents to third parties unwilling to comply with these commitments. Regarding its non-SEPs for Android, Microsoft pledged to continue offering non-exclusive licences to smartphone manufacturers located in China at consistent or more favourable royalty rates and other licensing terms. Microsoft agreed not to transfer certain Android patents for five years, and thereafter only to buyers willing to comply with the other conditions. Nokia made similar commitments: to continue honouring FRAND commitments; not to seek injunctions against good-faith licensees; not to condition licensing of SEPs on acceptance of non-SEPs; to only transfer its SEPs to third parties who agree to honour applicable FRAND terms; and to maintain its valuation practices for calculating FRAND royalty rates. Microsoft's commitments apply for eight years and Nokia's for five years, during which both parties must submit annual compliance reports to MOFCOM.

These remedies principally mandate Microsoft and Nokia to maintain existing licensing practices during the remedy period, ostensibly preserving the status quo in relevant markets. However, the concrete prohibition against seeking injunctions or exclusion orders to enforce non-Chinese patents in other jurisdictions may reflect the government's concerns about the frequency of such actions targeting Chinese products. The enforcement of patent licensing commitments against later patent transferees that fail to comply with remedial commitments is also unclear.

Precaution against tying

In Merck/AZ, MOFCOM found that Merck is the leading producer of liquid crystals used in LCD products (with market shares of 60% worldwide and 70% in China), while AZ is a leading producer of photoresist used in LCD products (with market shares of 35% worldwide and over 50% in China). As a precaution, MOFCOM required Merck to commit to not tie sales of liquid crystals and photoresist and to conduct any licensing of liquid crystal patents on commercially reasonable and non-discriminatory terms.

Microsoft/Nokia and Merck/AZ extend MOFCOM's record of asserting jurisdiction to police the post-transaction conduct of transaction parties through broad behavioural remedies. This raises the possibility that the same conduct may be scrutinised by MOFCOM under the merger remedy regime and by the National Development and Reform Commission and the State Administration of Industry and Commerce under general rules against anti-competitive conduct. Merger parties should also consider the risks to abstain from commercial practices that might not otherwise violate the AML in order to secure clearance – and the possibility of accelerating clearance by offering such reassurances to MOFCOM.