An Overview of Recent FRAND Remedies in China

By Yong Bai, Dayu Man, & Michael Yan¹

Introduction

A great deal has been written about the meaning and effect of the “fair, reasonable, and non-discriminatory” or “reasonable and non-discriminatory” (“FRAND”) commitments in the context of antitrust scrutiny of licensing of standard-essential patents (“SEP”). Outside the patent licensing/standardization sphere, however, FRAND commitments have also been accepted by competition authorities around the world as behavioral remedies to maintain the supply of, or promote access to, critical inputs, networks, or infrastructures.

Accepted commitments to supply products or provide services on FRAND terms (“FRAND remedies”) are found in merger decisions across a range of sectors such as telecommunications, semiconductors, specialty equipment, military, agriculture, and retail. Unlike in the field of standardization, FRAND remedies are by nature merger-specific and at the mercy of market tests and remedy negotiation dynamics. Therefore, the criteria for “FRAND” and the scope of FRAND remedies may vary from case to case even if imposed by the same competition authority for transactions in the same sector. On the other hand, since “FRAND” is inherently a high standard mainly suitable to restrain entrenched market power and FRAND remedies often require protracted supervision of commercial activities associated with high administrative costs, there seems to be a consensus that, in principle, FRAND remedies should be imposed in limited scenarios.

In recent years, FRAND remedies have been more frequently used in China than in other jurisdictions. Out of ten conditional approvals published by the State Administration for Market Regulation (“SAMR”) between 2020 and today, seven decisions included FRAND remedies. These decisions encapsulate the typical criteria for “FRAND” and the acceptable scope of FRAND remedies in the context of China’s merger remedy practice.

In Section II, we summarise all the FRAND remedies imposed under the merger context in China since 2020 with an analysis of the prevailing practice of SAMR. We conclude that there is a trend of expansive use of FRAND remedies. Moreover, there is a tendency that SAMR is pursuing standardized language for FRAND remedies while preserving the option to consider innovative FRAND commitments.

In Section III, we present a brief comparative study of the FRAND remedies of SAMR and of its global peers that reveals some key conceptual difference in the benchmarks and scope of FRAND remedies. We also discuss the divergence between in the mechanisms to monitor compliance of FRAND commitments between China and EU.

Overview of Recent FRAND Remedies Imposed by SAMR

Since 2020, 70% of the conditional approvals published by SAMR adopted FRAND remedies. The three residual cases were either conditional upon pure structural remedies (i.e. Danaher/GE BioPharma and Eaton/Danfoss) or approved with remedies similar to FRAND commitments (i.e. MTS/ITW). The seven remedy packages that included FRAND remedies were purely behavioral reliefs with one exception: Siltronic/Global Wafers, in which a hybrid of divestiture and standalone conduct commitments were imposed. Notably, six of the seven cases were related to the semiconductor industry across different value chains. We have summarised the terms of the FRAND commitments and main theory of harm for the seven cases and MTS/ITW in an Annex for ease of reference.

Standard and Content of FRAND Remedies

SAMR’s recent record demonstrates an increasingly clear pattern of FRAND remedies. As shown in Table 1 above, FRAND remedies in China are generally continuous supply orders comprised of four common elements:²

1. Maintain existing commercial agreements
2. No discriminatory treatment in terms of key supply terms (including price, delivery time, after-sales service)
3. Quality of service/after-sale service should be no less favourable than pre-merger level
4. No refusal to, restrictions of, or delay in supply

These limbs shape the standard of FRAND supply and have salient implications for external customers of the merged entities. For existing customers, the FRAND requirement means that the mergers should not impact existing supply agreements, and the merged entities should not arbitrage by decreasing quality of service, product, or after-sale service. As to potential customers, the merged entities should refrain from price (as well as other supply terms) discrimination against them, i.e. supply terms should be similar under equivalent conditions, and decline of the general level of service or after service associated with the underlying products would also be deemed as non-compliance with FRAND commitments. Moreover, the merged entities have a general duty to deal with actual or potential purchasers (on FRAND terms, if interpreted appropriately) in terms of the underlying products. It derives from the above that, in general, “FRAND” terms are measured through historical lens (vertical comparison) and “peer review” among customers (horizontal comparison).

Despite the above commonalities, some nuances or variances are also noticeable:

a) More stringent standard of FRAND price

SAMR has not shied away from adopting more stringent FRAND standards. In Intel/SK Hynix, the merged entity was required to supply all of its products to the Chinese market on FRAND terms, and the prices of the key relevant products (PCIe enterprise SSDs and SATA enterprise SSDs) in China would not be deemed FRAND if they exceeded the average prices in the past 24 months under equivalent terms (subject to fair and reasonable increase in new contracts based on inflation and/or input price). In MTS/ITW, SAMR imposed price caps for the relevant product based on historical average prices adjustable upon inflation and/or input price increase, while also considering costs of R&D and individualied configuration in terms of prices of new products.

In addition to price caps, SAMR has also required the merged entity to offer Chinese customers prices that “no less favourable” than pre-merger level in Xilinx/AMD, and in Acacia/Cisco, “more favourable” than pre-merger level. It is unclear whether existing contracts are subject to these requirements and whether SAMR considers that the current prices offered by the respective merged entities would not be fair and reasonable post closing.

b) FRAND commitments beyond the duty to supply

Recent FRAND remedies are not limited to duty to supply. In Xilinx/AMD, the merged entity was also obliged to maintain its level of investment in the domestic R&D of CPU, GPU, and FPGA post closing. In Wabco/ZF, the FRAND remedies extended to the provision of opportunities to develop an AMT controller to Chinese customers on FRAND terms to ensure future supply. According to the published remedy package, the merged entity could not reject reasonable commercial requests for development (unless there is a valid justification). Moreover, the merged entity could not hamper any joint development arrangement regarding AMT between its customers and other AMT suppliers. In Mellanox/Nvidia, the merged entity was not only required to continue supply of relevant products, but also provide customers, distributors, and OEMs with the opportunity to purchase and stockpile these products for one-year consumption on FRAND terms.

These examples of special FRAND obligations may provide little precedential value, since there are obvious traits indicating special national economic concerns as well as stakeholder’s involvement. However, it is evident from these mutations that SAMR is ready to accept innovative FRAND commitments beyond the duty to supply or license if conceptually sufficient and embraced by market tests.

Coverage of FRAND Remedies

As a conspicuous feature, the scope of the products/services subject to FRAND commitments may be more expansive than the products identified with competition concerns. For example, although the competition concerns of the Intel/SK Hynix transaction were only identified on the relevant markets for PCIe enterprise SSDs and SATA enterprise SSDs, one of the conditions imposed on the transaction was to continue to provide all products to the Chinese market on FRAND terms. Similarly, in Siltronic/Global Wafers, the merged entity was required to continue to supply all types of wafers on FRAND terms, while the competition concern in China, which was contemplated to be mainly resolved by a divestiture, lied only in potential coordinated effects on the market for 8-inch zone melting wafers.

Conglomerate mergers such as Cypress/Infineon and Xilinx/AMD are more subtle examples of the expansive product coverage of FRAND commitments. In each case the merged entity was considered to have the incentive and ability to leverage its market power in one or two relevant markets to foreclose competition in one or more neighboring market(s) through tying/bundling, refusal to deal, and/or degradation of Interoperability. However, although a no tying/bundling order and interoperability remedies were already in place, the supply of products in the neighboring markets (where the merged entities were not perceived to have significant market power) were also subject to FRAND requirement in each case.

The above feature easily leads to the view that FRAND remedies in China are not always aimed to only restraining the abuse of entrenched market power resulting from mergers. One of the reasons is that the authority may deem FRAND remedies can be used to address potential adverse impact on national economic development in addition to substantive competition concerns. Moreover, third-party stakeholders that are likely to be affected by or have an interest in a merger may see SAMR’s market test and remedy negotiation as the opportunity to secure its commercial advantage, which may also explain the broad scope of FRAND remedies in some cases.

Comparative Study of FRAND Remedies in China and in Other Jurisdictions

FRAND remedies to mergers are by no means exclusive to China. Remedies enabling access to key infrastructure, networks, key technology, including patents, know-how or other intellectual property rights, or essential inputs are commonly referred to as “access remedies” in the EU Commission’s guidance on commitments³ and the CMA’s merger remedies guidance.⁴ In particular, the CMA’s merger remedies guidance provides that “[i]n certain circumstances, it may be possible to simplify the specification of an access remedy by obliging the merged entity to supply a particular product on fair, reasonable and non-discriminatory (FRAND) terms, where supplies to external customers are provided on the same or similar terms as apply to its own businesses.” ⁵  The EU Commission’s guidance on commitments states that “[n]ormally, the parties grant such access to third parties on a non-discriminatory and transparent basis.”⁶ In practice, the EU Commission has accepted a number of such commitments also on fair and reasonable terms.

Table 1: Examples of EU merger cases involves non-SEP FRAND remedies

FRAND remedies are also seen, though less frequently, in other jurisdictions, such as Japan⁷ and Singapore⁸. Even in the US where behavioral remedies are discernibly disfavoured, FRAND-like conditions were also imposed⁹.

Looking outward from China, we note the following key divergence of the notion in remedy design:

Benchmark of FRAND in Vertical Mergers

For vertical mergers where FRAND remedies are imposed to resolve foreclosure concerns, FRAND means that the merged entity should not treat its external customers or suppliers less favourably than its own businesses. In Worldline/Equens/PaySquare before the EU Commission, Worldline’s software (Poseidon) gives it a “near monopolistic position” on the upstream market for the application software designed specifically for network service provider (“NSP”), and PaySquare had a 5% to 10% share in the downstream markets for NSP activities. One of the competition concerns was that Worldline might pursue a strategy to raise the licensing fee it charged to the competitors of PaySquare. To address such concern, the EU Commission approved a commitment to “enter into non-exclusive, non-transferable, non-assignable Poseidon licensing agreements and non-exclusive maintenance service agreements with third-party NSPs, without right to sub-license, upon request, under fair, reasonable and non-discriminatory terms and on no worse terms than the ones granted to PaySquare”¹⁰. Similarly, to secure the EU Commission’s approval of Telia/Bonnier, Telia committed to license its certain channels on no less favourable terms to TV service providers than the ones available to the merged entity.

In contrast, SAMR does not seem to have adopted similar language. In Acacia/Cisco and Wabco/ZF where SAMR identified vertical concerns, the merged entities were required to maintain existing commercial agreements and impose similar supply terms under equivalent conditions (non-discriminatory treatment), and the supply terms offered to the in-house businesses were not expressly used as benchmarks of FRAND.

Scope of Product/Service

FRAND remedies identified in other jurisdictions are usually related to the product or service in which the competition concern is identified. Taking Time/Penguin as an example, when reviewing Times Publishing Limited’s (“TPL”) acquisition of the target companies from Penguin Random House Limited (‘‘PRH’’), the Competition and Consumer Commission of Singapore (“CCCS”) noticed that the acquisition entailed an exclusive distribution agreement between the target companies with certain publishers affiliated with PRH. Prior to the acquisition, the PRH or the target companies were not affiliated with any book retailer in Singapore, and books published by PRH were then sold by different distributors to retailers. CCCS considered that the merged entity will have a greater ability and incentive to discriminate or restrict supply of the publishers’ titles to retailers other than TPL’s affiliated retailers because of the exclusive distribution agreement. To address the competition concerns, CCCS accepted TPL’s commitment to supply third-party retailers books on a FRAND basis during the period of exclusive distribution, and the scope of books was only limited to those published by the publishers or in which the publishers controls rights.

In contrast, as discussed previously, business subject to FRAND commitments in China can extend to products irrelevant to the competition concern. Directly related to this feature, it is worth mentioning that SAMR is willing to attach FRAND commitments to the remedy packages addressing various types of horizontal, vertical, and conglomerate concerns, while FRAND remedies in other jurisdictions are primarily used to address foreclosure issues.

Procedural Safeguard

Effective enforcement of FRAND remedies is a difficult task for competition authorities around the world. First, like other behavioral remedies, enforcement of FRAND remedies requires the regulation and supervision of the merged parties’ commercial activities, which can be costly and ineffective, especially in markets where regulatory oversight had not been in place. Moreover, the assessment of whether prices conform to FRAND standard is not a mechanic process: the non-discriminatory limb requires case-by-case evaluation of the equivalence of conditions of offers, and FRAND prices for new or modified products are notoriously onerous to determine. What leads to more challenges is that FRAND remedies typically require supervision of quality of product/service as well (since ensuring quality level is necessary and typically integral to FRAND remedies in China as well as in other jurisdictions to prevent profitable evasion of FRAND price restrictions). That said, complaints from third parties may serve as effective channels to identify non-compliance of FRAND commitments. As beneficiaries of FRAND commitments, firms dealing with the merged entities may raise concerns to the monitoring trustee or competition authority that the supply terms they received are not FRAND enough. In this sense, procedural safeguard to protect third parties is critical to the success of FRAND remedies.

The EU Commission has introduced fast-track dispute resolution and arbitration mechanisms in addition to monitoring trustees for the purpose of supervising compliance with FRAND commitments. For example, the EU Commission’s decision in Telia/Bonnier provides for an optional “fast track dispute resolution” that third parties may choose to claim non-compliance of FRAND commitments, under which any third party may send a written request to the merged entity (with a copy to the monitoring trustee) setting out in detail the reasons why commitments have not been  observed, and the merged entity and the third party will use their best efforts to resolve all differences of opinion and to settle all disputes that may arise through cooperation and consultation within a reasonable period of time. Although the monitoring trustee shall present its own proposal, should they fail to resolve their differences, the third party may serve a request for arbitration and the merged entity is committeed to honoring any existing agreement with the third party (even after the expiration of any such existing agreement on the current terms) until arbitration is completed before the relevant arbitral tribunal.

The EU Commission has also resorted to independent experts in determining whether supply terms are FRAND in the monitoring of FRAND remedies. In INWIT/Telecom Italia/Vodafone JV, the decision provided an alternative “fast track expert dispute resolution” under which experts in mobile telecommunication networks would be appointed to adjudicate on the dispute between third parties and the merged entities regarding whether the terms of hosting services are reasonable and non-discriminatory.

In contrast, supervision of FRAND remedies is always delegated to monitoring trustees in China, though SAMR is entitled to supervise on its own as a matter of law. There has not been any comprehensive report on whether the FRAND remedies are successfully implemented, but the heavy reliance on monitoring trustees poses apparent issues in China. Specifically, as law firms and accounting firms are the “usual suspects” delegated to supervise commitment compliance, they are more effective in monitoring divestiture processes and less equipped in adjudicating whether contract terms are equivalent or reasonable in the context of various sectors such as semiconductors, telecommunications, etc. Nor does SAMR itself have the expertise or resources to monitor supply terms post-closing.

It is true that third parties are not blocked from reporting to monitoring trustees or SAMR, and there were reported investigations on non-compliance arising out of third-party complaints. However, there has not been any transparent and institutionalized procedural protection for third-party claims. Another potential repercussion would be that disputes around the interpretation of a FRAND commitment may evolve into rampant litigations in lack of clear procedural guidance from the competition authorities. There is no evidence showing an arbitration clause is a panacea, but if FRAND remedies are not imposed solely out of an abundance of caution, reasonable reliance on an independent dispute resolution system may alleviate the unreasonable burden on monitoring trustees and competition authorities.

Conclusion

FRAND remedies were used intensively in recent SAMR’s decisions of conditional approval. There is a tendency that SAMR is pursuing standardized language for FRAND remedies while preserving the option to consider innovative FRAND commitments.  A closer look also reveals that the scope of products or services subject to FRAND commitments may be more expansive than those identified with competition concern.

FRAND remedies are used to address non-SEP competition concern resulting from mergers in EU, Singapore, Japan as well as other jurisdictions. Nevertheless, our comparative study shows that FRAND remedies in China can be conceptually different from others in terms of the benchmarks and scope of FRAND remedies in some cases.

As to the supervision of FRAND remedies, it is recognised that third-party complaints are important to effective supervision of FRAND remedies. However, SAMR has not adopted any institutionalized procedural protection of third-party claims and instead relied heavily on monitoring trustees who are no expert in determining whether specific supply terms are FRAND. EU has been adopting dispute resolution mechanism tailored to FRAND remedy enforcement and we believe similar mechanisms may help resolve some of the underlying enforcement issues in China.

 
Annex: Recent FRAND remedies imposed by SAMR (Jan 2020 to February 2022)

Click here for a PDF version of the article

1 Yong Bai is a partner, Dayu Man is a counsel, and Michael Yan is an associate with Clifford Chance’s Antitrust Group in Beijing.

2 As exceptions, the non-discriminatory requirement is not included in the published text of remedy package for Intel/SK Hynix, and remedy package for Cypress/Infineon does not specify the requirement to maintain existing agreements. However, it is likely that the two cases are subject to these fundamental requirements as well under the overarching principle of “continuous supply on fair, reasonable, and non-discriminatory terms”.

3 Commission notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004 (“Commission Notice”)

4 Guidance on merger remedies in Phase 1 and Phase 2 investigations (2018) (“Guidance”)

5 Commission Notice, para 62

6 Guidance, para 7.21

7 ASML/Cymer (2013) (commitment to continuously do business with competitors of ASML under fair, reasonable and non-discriminatory terms of trade)

8 Times/Penguin (2017) (commitment to supply third party retailers the full range of the relevant English books on FRAND terms)

9 Northrop Grumman/Orbital (2018) (commitment to supply solid rocket motors and related services on a non-discriminatory basis to all competitors for missile contracts)

10  Commitment package offered by Worldline, M.7873 – Worldline/Equens/Paysquare.

11] The remedy package for MTS/ITW does not contain the full term of “fair, reasonable, and non-discriminatory” but commitments similar to FRAND requirements.