On 15 November 2011, Qihoo issued proceedings against Tencent in the Guangdong Higher Court, asserting that Tencent had abused its dominant position, marking the beginning of the first anti-monopoly case in the internet arena. Qihoo lost the first trial and appealed. On 16 October 2014, the Supreme Court handed down its final decision, rejecting Qihoo's appeal and upholding the first-instance court judgment. This was the first anti-monopoly case heard by the Supreme Court. The Supreme Court's judgment elaborates detailed fundamental principles of anti-monopoly law, in particular in the context of abuse of dominance, which offers guidance and rules for future anti-monopoly litigation, especially those concerning abuse of dominance.
On 15 November 2011, Beijing Qihoo Technology Co., Ltd ("Qihoo") issued proceedings against Tencent Technologies (Shenzhen) Co., Ltd and Shenzhen Tencent Computer System Co., Ltd.("Tencent") in the Guangdong Higher People's Court, asserting that Tencent had abused its dominant position in the Chinese instant messaging ("IM") software and services market, which had eliminated and restricted competition. This marked the beginning of the "first anti-monopoly case in the internet arena" called by the media. Qihoo claimed that: i) Tencent had abused its dominant market position by requiring its users to choose between QQ, Tencent's IM software, and Qihoo's software; ii) Tencent had bundled its QQ safety software (QQ Doctor) with its IM software, by requiring mandatory installation of QQ Doctor through routine updates of QQ Software Manager, which constituted bundling.
In response, Tencent argued that it did not have dominant position in the relevant market and its conduct did not constitute an abuse of a dominant market position: requiring users to choose between QQ and 360 (the "Either-or Request") was merely to protect Tencent from being harmed by Qihoo's discrediting Tencent and interfering QQ software's normal operation using allegedly illegal plug-ins such as 360 Privacy Protector, Koukou Safeguard, and the packaged update of QQ software did not constitute bundling.
On 20 March 2013, Guangdong Higher People's Court held that Tencent did not hold a dominant position in the relevant market and it dismissed all of Qihoo's claims. Qihoo appealed the judgment of the first-instance court to the Supreme Court. On 16 October 2014, a year and a half after the appeal hearing, the Supreme Court handed down its final decision, rejecting Qihoo's appeal and upholding the first-instance court judgment. The four year battle between Tencent and Qihoo was thus brought to an end.
This was the first anti-monopoly case heard by the Supreme Court, and the Supreme Court's judgment elaborates detailed fundamental principles of anti-monopoly law, in particular in the context of abuse of dominance. Although the facts involved in the present case are particularly complicated, and the result has triggered a heated public debate, the principles articulated by the Supreme Court offer guidance and rules for future anti-monopoly litigation, especially those concerning abuse of dominance.
- The definition of the relevant market
1.1 The plaintiff bears the burden of proof for defining the relevant market.
The Supreme Court pointed out that, in abuse of dominance cases, it is the plaintiff which assumes the burden of proof for defining the relevant market. This had not been clearly stipulated in the Provisions of the Supreme People's Court on Several Issues concerning the Application of Law in the Trial of Civil Dispute Cases Arising from Monopolistic Conduct, which came into effect on 1 June 2012.1 If the court finds the parties' assertions about the definition of the relevant market irrational, the court should define the relevant market ex officio, to the extent possible, in order to draw correct conclusions about whether the relevant undertaking is dominant. However, the Supreme Court acknowledges that, sometimes it is difficult to clearly define the relevant market due to limited access to evidence and data, as well as the complexity of the competition.
Pursuant to the principles mentioned above, it can be inferred that while the case is complicated or the data is not available, the boundary of the relevant market might not be clearly defined, and the plaintiff should assume the consequences of an incomplete the relevant market definition. Such burden is relatively heavy for the plaintiff.
1.2. Market definition is not an essential step in abuse of dominance cases
Although it was widely understood in the industry that an accurate market definition was fundamental to determining dominance, the Supreme Court indicated in its judgment that it is not necessary to clearly define relevant market in every abuse of dominance case. The definition of the relevant market is a tool, rather than the aim of competition analysis, which is employed to evaluate an undertaking's market power and the impact of its conduct on competition. The Supreme Court considered that it is also possible to evaluate an undertaking's market position and the impact of its alleged monopoly conduct through direct evidence of an elimination or restriction of competition, without a clear market definition2.
The most difficult aspect of abuse of dominance cases is how to determine whether the defendant has a dominant position. Defendants of abuse of dominance actions often lost their cases because of their failure in discharging the burden of proof. The Supreme Court's suggestion above is beneficial to plaintiffs to a certain extent as it lighten the burden of proof for defining the relevant. However, the Supreme Court did not give further guidance on the application of the above approach in practice. In fact, the Supreme Court did not adopt this approach in this case. Instead, it defined the relevant market clearly as IM software and services in Chinese mainland.
1.3. In industries where product differentiation is significant and the basis of competition is not price-related, the SSNIP test should be applied cautiously
The Supreme Court firstly confirmed the general applicability of the Hypothetical Monopolist Test. Next, the Supreme Court analysis why it was inappropriate to use the "the Small but Significant and Non-transitory Increase in Price (SSNIP)" test in the internet industry, where the common commercial model is providing free service as the first-instance court did. The Supreme Court indicated that the market would be defined too broadly if the SSNIP test was used to define a market where product differentiation is significant and competition is based on non-price related factors, so it was inappropriate to do so. The Supreme Court further suggested that, in such an industry, the "Small but Significant and Non-transitory Decrease in Quality" ("SSNDQ") test could be used to define the market instead. Given the difficulty of evaluating quality from a quantitative perspective and the limited availability of relevant data, the Supreme Court expressed a preference for a qualitative analysis when applying the SSNDQ test. In the judgment, when the Supreme Court analyzed whether the emails and SMS should be included in the relevant product market and defined the relevant geographic market, it considered whether IM service users would transfer to other kinds of services if there was a small but substantial non-transitory decline in the quality of IM services.
When we define the relevant market in the future, if we are facing a market where product differentiation is significant and the basis of competition is on non-price-related factors, the party involved may consider using the SSNDQ test and adopt qualitative analysis to define the relevant market.
1.4. In dynamic markets, the market conditions and developments in technology should be taken into account
The Supreme Court held a view that where the market is dynamic, the market definition should consider the market changes and reactions with realistic possibility in the foreseeable future, for example, market changes and reactions within a given time period (such as a year) assuming the alleged abusive conduct of the hypothetical monopolist continues during such period, should be taken into account to judge whether such alleged abusive conduct would receive any competition restrains from other operators. When analyzing whether mobile-end IM services should be included into the relevant product market, the Supreme Court considered the trend of mobile-end IM services replacing PC-end IM services at the time the alleged abusive conduct took place.
The above view of the Supreme Court gives the parties more scope to argue about the relevant market and, in particular, could enable the alleged dominant undertaking to widen the relevant product market by reference to future changes in the market.
1.5. The impact of two-sided profit models on the definition of relevant market
The common commercial model for online application platform providers is to use free basic services as their core operation to attract a large number of users, supply advertising services and chargeable value-added services to their user-base, and then to earn profits from the comprehensive information platform built thereafter. The Supreme Court addressed the issue of how to define the market under such two-sided profit model in its judgment.
The Supreme Court pointed out in its analysis that the basis of competition among online application platform providers is the core products/services (such as Tencent's IM service and Qihoo's internet security service). The distinction between Tencent's core IM service and Qihoo's core internet security service is obvious and it is clear that these are not substitutable for one another from the perspective of the users. The Supreme Court therefore explored whether Tencent had extended its dominant position in the IM service sector to the internet security software sector. This mainly involved the fight for free users. If the Supreme Court concluded that the relevant market included online application platforms, this would broaden the market and increase the competitive constraints on Tencent's IM services, thereby underestimate Tencent's actual market power.
The Supreme Court held that the competition of platforms in the internet industry did not overcome the boundaries set by their free core products/services, and was not strong enough to impose competition restrains on operators. Therefore, the Supreme Court held that the relevant product market was the IM services market rather than online application platforms.
- Determining market dominance
The judgment of the Supreme Court in this regard was not surprising and was consistent with original meaning of Article 18 and Article 19 of Anti-Monopoly Law ("AML"). What has caused intensive debate is that the Supreme Court determined Tencent did not have dominance in the relevant market, even though Tencent's market shares in both the PC-end IM service market and the mobile-end IM service exceeded 80%. The Supreme Court reached this conclusion after a comprehensive analysis of Article 18 of the AML3. We can infer that in dynamic markets such as internet industry, it is relatively difficult to ascertain an operator has dominance. Also the Supreme Court further indicated that on the day that Tencent implemented the Either-or Request, the number of its competitors' users actually increased, and this shows that Tencent did not have prominent dominance in IM service market. This analysis was in line with the Supreme Court's view that it can use direct evidence of elimination or restriction of competition to evaluate the defendant's market position.4
Regarding the platform competition discussion, the Supreme Court considered that competition between online application platform was not the main concern when defining the relevant market, but that it should be considered when determining market dominance and controlling power of undertakings. However, the Supreme Court did not take into account the impact of the two-sided market in its analysis of market dominance. For example, if Tencent could take advantage of its large user base and market share in its free service market to increase its market share in the chargeable value-added services market, can we conclude on the power of Tencent in free market due to such fact? On this point, the Supreme Court did not discuss about it, so how this analysis method should be used in practice could only be tested in other cases.
- Abuse of a dominant market position
The Supreme Court did not state whether Tencent's Either-or Request constituted a refusal to deal, which is prohibited by Article 17 the AML. Instead, the Supreme Court focused on the effects of the request on consumers and on competition.
As to the alleged bundling of services by Tencent, the Supreme Court set out the following criteria for "tying and bundling" for the purposes of Article 17 of the AML: 1) the tied product/service is distinct from the tying product/service; 2) the undertaking in question has a dominant position in the tying product/service market; 3) the dominant undertaking imposes certain restrictions on the consumers so that the consumers have no choice but to accept the tying product/service with the tied product/service; 4) tying/bundling is not justifiable, in the sense that it conflicts with trade customs and trade habits or ignores the tying product's functions; and 5) the alleged tying/bundling has an negative impact on competition.5 The summary and the criteria illustrated by the Supreme Court can be used as guidelines for understanding and proving abusive tying and bundling practices in the future.
- The effect of eliminating or restricting competition imposed by dominance
When analyzing the effect of Tencent's conduct, including the Either-or Request and the bundling, the Supreme Court only focused on the actual effects, and not on the likely effects, of such conduct. This approach is somewhat different from the European Commission and United States. The European Court and European Commission give great importance to the potential anti-competitive effects of the conduct in question, especially the foreclosure effect in dominance cases.6 The U.S. antitrust cases indicate that the American courts also pay close attention to the potential effects of conduct by dominant undertakings and the object of eliminating and diminishing competition.7 The Supreme Court's approach is perhaps specific to the particular circumstances in the present case. Given that the Supreme Court decided that Tencent did not have a dominant position in the relevant market, it may be that its findings that Tencent's conduct did not eliminate or restrict competition was only to corroborate its findings about Tencent's dominance.
In addition, the Supreme Court tried to distinguish the harm to "Competitors" from the harm to "Competition" in its analysis. Although there was evidence which showed that Qihoo's market share on the security software market had declined to some extent and that Tencent's market share on the security software market had risen, the Supreme Court maintained that the focus of the AML is on whether normal market competition conditions have been distorted or destroyed, rather than on the harm to individual operators. However, the Supreme Court did not elaborate on this point. Given that the two harms are often intertwined in practice, it would have been very valuable if the Supreme Court had clarified the difference between these two types of harm in principle.
- The justification of the conduct
The Supreme Court made a distinction between whether one's conduct was justifiable and whether such conduct had anti-competitive effects. The Supreme Court believes these two issues are connected but different. The burden of proving that conduct was justifiable was not equal to the burden of proving that the conduct did not have the effect of elimination and restriction competition. In fact, from the constitutive components of tying and bundling summarized by the Supreme Court, "tying and bundling do not have justification" and "tying and bundling has negative effect on competition" could also be classified as two different elements. Regrettably, the Supreme Court did not provide more specific detail about how to determine the justification of conduct and thus leaves room for the practice to explore and summarize.
As the first private action in relation to abuse of dominance heard by the Supreme Court, this case is by no means the most straightforward, particularly given the complicated facts and multitude of data. Further, the online business model is somewhat different from conventional industries. This case is certainly not an ideal, text-book example of abuse of dominance private actions, with simple facts and a straightforward application of the law.
However, we believe there is still much to be learnt from the Supreme Court's judgment, mainly because: i) Supreme Court has applied and deduced different anti-monopoly law principles which lie in the Chinese AML and are widely accepted by other prominent antitrust jurisdictions; ii) the Supreme Court has set out detailed rules on practical issues of certain dominance cases based on current laws, regulations and court provisions. Further, the Supreme Court conducted a relatively detailed anti-monopoly analysis about competition in the internet industry and the online business model while taking the industry features into account, which can serve as a guide for future litigation. Finally, due to the characteristic of this case, the judgment touched upon certain anti-monopoly law principles and industry features, without further discussion. We look forward to clarification of these principles and industry features by the courts and the practice in future litigation.
1 Art.8 of Provisions of the Supreme People's Court on Several Issues concerning the Application of Law in the Trial of Civil Dispute Cases Arising from Monopolistic Conduct stipulates that, where the alleged monopolistic conduct is an abuse of a dominant market position as described in Article 17.1 of the Anti-Monopoly Law, the plaintiff shall assume the burden to prove that the defendant has a dominant position in the relevant market and has abused its dominant market position. The defendant shall assume the burden to prove a defense to justify its conduct.
2 The European Commission acknowledges that market definition is a tool to identify and define the boundaries of competition between firms in its Notice on the definition of the relevant market for the purposes of Community competition law (Official Journal C 372, 09/12/1997 P.0005 – 0013). However, in contrast to the Supreme Court's standpoint, the European Courts have repeatedly stated that the relevant market is essential to evaluate whether an undertaking has market dominance: Case 6/72 Continental Can v Commission and Case 27/76 United Brands v Commission.
3 Article 18 AML stipulates that the dominant market position of an undertaking shall be determined on the basis of the following factors: (1) its share on the relevant market and the competitiveness of the market; (2) its ability to control sales or purchases of raw and semi-finished materials; (3) its financial strength and technical conditions; (4) the extent to which other businesses depend on it in transactions; (5) barriers to entry in the relevant market; and (6) other factors related to the determination of the dominant market position held by an undertaking.
4 See the above analysis of 1.2
5 Guidance on the European Commission's Enforcement Priorities in Applying Article 82 to Abusive Exclusionary Conduct by Dominant Undertakings (the "European Commission's Guidance") pointed out that the Commission will normally take action under Article 82 where an undertaking is dominant in the tying market and where, in addition, the following conditions are fulfilled: (1) the tying and tied products are distinct products; and (2) the tying practice is likely to lead to anticompetitive foreclosure.
6 Guidance on the Commission's Enforcement Priorities in Applying Article 82 EC Treaty to Abusive Exclusionary Conduct by Dominant Undertakings emphasizes the effects of the abusing behavior and applies equally efficient competitor test on the exclusionary behavior based on price. Assuming that there is a competitor as efficient as the undertaking in question, the test focuses on whether such equally efficient competitor will be foreclosed by the alleged acts. The test is employed by the European Court to considerable extent.
7 The judgment of UNITED STATES V.ALUMINUM CO. OF AMERICA et al.(148 F. 2d 416) indicated that restricting output by America Aluminum Co. had already affected the price or would affect the price in the future, so the conduct violated Article 1 of Sherman Act. The Court held that there was no need to prove that the conduct had already produced actual effects on prices, because if the restrained supply agreement was implemented, it would affect the prices, which would have the same effect as price fixing.
The judgment of ASPEN SKING COMPANY V. ASPEN HIGHLANDS SKING CORPORATION (472 U.S. 585(1985)) indicated that there were two factors in determining the conduct of abusing market dominant position in Article 2 of Sherman Act: first, operators have monopoly power in the market; second, operators obtain, sustain or utilize the monopolist position out of the intent of anti-competition and foreclosure.
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