Since introduction of the Anti-Monopoly Law (AML) in China in August 2008, there have been very few judicial precedents in China. A very significant case was submitted to the Guangdong High Court less than one year ago. This case involves two software giants, namely Beijing Qihoo Technology Co. Ltd. (Qihoo), and Tencent Technology Co. Ltd. (Tencent).
On 18 April 2012, the High People’s Court of Guangdong held a public hearing in the first instance for the high-profile lawsuit filed by Beijing Qihoo Technology Co. Ltd. (Qihoo) against Tencent Technology (Shenzhen) Co. Ltd. (Tencent) and Shenzhen Tencent Computer System Co., Ltd. (Tencent Computer). Substantially Qihoo accused Tencent for abusing its dominance in the field of online instant communications services and claimed damages of RMB 150,000,000 (
http://kluwercompetitionlawblog.com/2012/05/10/qihoo-360-v-tencent/
).
As requested by the court, the hearing was divided into four sessions, dedicated to each of the four issues: 1) market definition; 2) dominant position, 3) abusive conducts and 4) legal liabilities. The hearing focused on the first three issues and both sides called in expert witnesses and had fierce debates over each of these issues
.
A more detailed article on this case is available at the following web-site:
Market Definition:
Market definition is the threshold issue of an abuse of dominance claim. Qihoo argued that the relevant market is the mainland China market for online instant communication services, encompassing integrated text, voice and video services. Qihoo found that emails, social networks, microblogs, as well as traditional communication methods, such as telephone/mobile phone are not close substitutes of online instant communication services.
How to define the relevant commodity market
Qihoo’s view: the QQ instant messaging software and relevant service market shall constitute an independent commodity market, because according to its unique pricing and profit mode, it is difficult for it to be replaced by any other messaging service. In this market, there is no substitution relationship between geographical areas because of its unique Chinese language and cultural background, so the market shall be defined as the domestic market of China.
Tencent’s view: the plaintiff’s market definition is incorrect. In addition to QQ, there are various instant messaging services in the market, such as MSN, microblog, e-mails and MiTalk. The instant messaging service itself is only one of several communication services, and there is a demand substitution relationship between it and traditional communication products such as SMS, mobile phones and telephone, and e-mails, microblog, SNS and other social networking services. Because of the openness and interoperability of the internet, the users of instant messaging are not limited to those in Mainland China.
Dominant Position
Article 19 of the AML sets forth a presumption that if an operator has more than 50% of the share in a relevant market, the operator shall be presumed to have dominance in the relevant market. This presumption is rebuttable; yet the burden is shifted to the defendant to prove that it is not dominant.
Does QQ have a monopoly status?
Qihoo’s view: the defendants have a dominant position. (1) The market share of QQ significantly exceeds one-half, as specified in the Anti-Monopoly Law. According to data from iResearch (a research company based in Beijing), the market share of the defendants amounts to 76.2 per cent; the study report issued by CNNIC (
China Internet Network Information Center
) also shows that the penetration rate of QQ software is 97 per cent. (2) According to the financial reports of the defendants for 2010, the annual revenues of the defendants amount to RMB 1.96 billion and their profitability is well above that of similar companies. (3) From the perspective of technological conditions, the patents of the defendants in instant messaging account for more than 80 per cent of those of the whole country.
Tencent’s view: the defendants do not have a dominant position. (1) There is significant difference between iResearch’s definition of market share and the provisions of the Anti-Monopoly Law in terms of such standards as time and sales volumes, so the weight of evidence is low. Additionally, the CNNIC data refers to the penetration rate rather than to the market share. (2) One user may create multiple QQ accounts, so the number of users is not equivalent to the market share. The users are generally sensitive to price. According to the survey conducted by the famous website eNet, once the QQ software becomes a fee-based tool, 81.71 per cent of the customers will be lost. This indicates the defendants have no market pricing power.
Abusive Conduct
Article 17 of the AML provides that a company having a dominant market position is prohibited from engaging in various abusive conducts to eliminate or restrict competition.
Dispute III: Did the defendants abuse a dominant market position?
Qihoo’s view: the defendants committed acts of restricting transactions and tie-in sales. On 3 November 2010, Tencent issued a letter to QQ users, forcing them to uninstall the 360 software and refusing the users of the 360 browser access to QQ spaces. The QQ doctor and QQ software housekeeper operated by the defendants and the products of the plaintiff both belong to security software products, so the forced uninstalling impeded normal competition. Furthermore, the defendants tied the QQ software housekeeper and the QQ messaging software, and forced the users to install the QQ doctor in the name of upgrade. The tie-in sale violated the anti-monopoly provisions.
Tencent’s view: the defendants do not constitute an abuse. QQ took incompatibility measures against the 360 products because the plaintiff used infringing software, namely, the 360 privacy protector, Koukou Guard, and other software to commercially defame and maliciously destroy QQ. This is a “self-help” and is legitimate. Meanwhile, the packing of the QQ software with the QQ software housekeeper does not constitute a tie-in sale, instead, it belongs to software integration. Both products are installed free of charge and the users may uninstall them conveniently.
(Decision (in Chinese) available at the following web-site:
http://www.gdcourts.gov.cn/gdcourt/front/front!content.action?lmdm=LM43&gjid=20130328040159946185
)
This case shows the importance of the Anti-Monopoly Law and also its deficiencies. According to incomplete statistics, there have been no less than 14 civil lawsuits based on the AML brought before China’s courts since the AML came into force. Only two of the cases concern an agreement allegedly prohibited by the AML. The remainder concern abuse of dominant market position. Of those, two were settled, three are still pending, six ended with withdrawal or non-prosecution or losing the lawsuit, and the remaining one is unknown. As far as is publicly available, none of the plaintiffs in the above cases ever won a single case, for which there seem to be a common reason: it is difficult for the plaintiff to meet its burden of proof.
To address the apparent imbalance in the failure ratio between plaintiffs and defendants, in April 2011, China’s Supreme People’s Court issued a call for comments on a draft regulation titled “Relevant Issues Concerning the Application of Law in the Trial of Civil Monopoly Dispute Cases” (Draft Regulation). The proposed Draft Regulation seeks to build a working judicial framework for civil disputes under the AML. However, the Draft Regulation does not totally shift the burden of proof required of a plaintiff in an abuse of dominance case.
According to Article 9 of the Draft Regulation, the plaintiff in an abuse of dominance case nonetheless bears the burden to prove what constitutes the relevant market, whether the defendant has dominance and the monopolistic conduct of the defendant that amounts to abuse of its dominance. Once the plaintiff proves the aforementioned facts, the defendant then bears the burden of proof to show the legitimacy of and/or justification for its actions.
– Cristiano Rizzi