China's MOFCOM Grapples With Open Source Issues In Google-Motorola Deal

by Sheppard Mullin Richter & Hampton LLP
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[author: Becky Koblitz]

This past February the US Department of Justice (“DOJ”) and European Commission (“Commission”) cleared Google Inc.’s acquisition of Motorola Mobility Holdings Inc. without any conditions. In contrast, on May 19, 2012 the Chinese Ministry of Commerce (“MOFCOM”) approved the acquisition subject to what some observers believe were over-cautious conditions linked to a lack of experience and institutional resources.

Google Inc. is a provider of internet search and online advertising services as well as the developer of an open source (free of charge) mobile operating system called Android. Motorola Mobility Holdings Inc. manufactures smartphones and computer tablets, and owns approximately 17,000 issued patents and 6,800 applications, including standard essential patents (“SEPs”). In general, SEP’s are important in terms of implementing certain telecommunication standards such as 3G or 4G/LTE and WiFi and WiMax in smartphones.

MOFCOM determined that Google’s acquisition of Motorola had the effect of eliminating or restricting competition in the markets of operating systems and patents, but approved the acquisition with three conditions:

  1. Google must continue to distribute Android, its mobile operating system, without any charges and under an open source license for the next five years;
  2. For the next five years Google must treat all original equipment manufacturers in a non-discriminatory manner with respect to the Android platform; and
  3. After the acquisition, Google’s commitments to license Motorola’s patents should continue to comply with the existing fair, reasonable and nondiscriminatory (“FRAND”) terms of the standard setting organizations.

Google was also required to appoint an independent party to monitor its activities with regard to these three conditions. The monitoring for the first two conditions will be for the next five years and can be waived if the market changes. If Google loses control over Motorola, the second condition will become null and void. The monitoring of the third condition is indefinite.

With regard to the first condition, MOFCOM noted that Google’s operating system, Android, occupied 73.99 percent of the market share in China during the fourth quarter of 2011, while Nokia’s Saipan had 12.53 percent and Apple’s iOS had 10.67 percent, such that Google’s Android dominated the market of operating systems. For comparison purposes, the DOJ found that for the US market at the end of 2011, Google’s Android accounted for approximately 46 percent of the U.S. smartphone operating system platform subscribers, Apple iOS had about 30 percent, RIM approximately 15 percent and Microsoft approximately 6 percent. MOFCOM believed that the reason Android is able to maintain such a large market share is because Google offered it on a free and open access basis. Therefore, MOFCOM reasoned, if Google starts charging for Android, this will have a negative impact in the sense that those who invested in the Android—including manufacturers of smart phones, software developers and end users—will incur additional costs. The open source aspect of Android is Google’s business model. Neither the DOJ nor the Commission mentioned that Google had any plans to change the way it distributed the Android system, nor did MOFCOM refer to such plans. The Commission noted that “Google’s revenue is mostly derived from online advertising and to a certain extent from mobile online advertising.” MOFCOM’s concern about Google's large market share is thus arguably misplaced, as the open source nature in and of itself allows all users’ access to Android. The idea of providing something free of charge is a novelty and anomalous to Chinese business culture, and it may be because of this difference in business cultures that MOFCOM wanted in black and white a confirmation that Google would continue to offer the Android as an open source operating system.

With regard to the second condition, similar to the Commission, MOFCOM considered whether Google would be likely to prevent Motorola’s competitors from using Google’s Android operating system (the DOJ did not address this issue). However, contrary to the Commission’s position that it is unlikely that Google would restrict the use of Android solely to Motorola, “given that Google’s core business model is to push its online and mobile services and software to the widest possible audience”, MOFCOM apparently believed that Google “is likely to” favor Motorola over other original equipment manufacturers. Again, MOCOM wanted in black and white Google’s confirmation of what Google would do anyway, that it would not discriminate against other manufacturers of smartphones/tablets.

With regard to the third condition, similar to the Commission and DOJ, MOFCOM considered issues of access and strategic use of the SEPs with respect to their effects on competition. Both the DOJ and the Commission acknowledged that it is possible to misuse patents to the detriment of competition and expressed concern about how Google would exercise its rights gained through the patents, but found that the present acquisition was not indicative of how Google would use the SEPs. Both agencies were willing to take a “wait and see” approach, i.e., continue to monitor Google’s use of the SEPs in the wireless device industry, particularly in the smartphone and computer tablet markets. MOFCOM took its analysis a step further and required a confirmation from Google that it would comply with the FRAND terms of licensing, similar to the previous two business activities, something Google would do anyway. Perhaps MOFCOM required this confirmation because it would be more difficult for the enforcement agencies, the National Development and Reform Commission and the State Administration of Industry and Commerce, to monitor Google’s actions in the future.

In addition, there are administrative costs related to the employment of a supervisor which Google will bear and which may be passed on to consumers. These costs include payment for the services as well as internal costs for setting up a system within Google to comply with the conditions. In the end, the comfort that MOFCOM gains with these conditions likely will be embedded in the costs borne by the consumer. Perhaps over time, as MOFCOM’s experience grows, it will feel more secure in taking more of a “watch and see” as opposed to a micro-manage approach. This acquisition shows once more that for off-shore acquisitions that have been cleared by other jurisdictions, Chinese antitrust clearance is not to be taken for granted, but neither has it varied dramatically to date.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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