China: Second Chinese "Dominance" Decision Issued Under The China Anti-Monopoly Law

On December 18, 2009, a Chinese court ruled in favor of Baidu, Inc. ("Baidu"), allegedly the largest Chinese search engine company, in a lawsuit filed by Tangshan Renren Information Service Company ("TRISC"), an online information platform. TRISC alleged that Baidu abused its dominant market position by downgrading TRISC in Baidu search results. This is the first Internet-related anti-monopoly lawsuit decided under the Chinese Anti-Monopoly Law ("AML"), which took effect in August 2008.

Background

TRISC operates an online platform linking medicine manufacturers with distributors and users. TRISC claimed that Baidu abused its dominant position in the Chinese search engine market by lowering its search ranking in Baidu search results. TRISC alleged Baidu caused TRISC's website to be listed at the very end of Baidu users' search results, causing TRISC to lose traffic and revenues. In December 2008, TRISC filed its lawsuit in the Beijing No.1 Intermediate People's Court (the "Court") against Baidu for alleged abuse of dominant market position, requesting an award of $163,000 for lost revenues.

Baidu replied that its downgrading of TRISC in search results was a legitimate action under its listing policy because TRISC had allegedly used a robot to automatically post junk posts on various online forums and websites and sent out spam messages (so-called "junk links") to boost its ranking in Baidu's search results.

Relevant Laws and Court Decision

TRISC based its abuse of dominance claims specifically on the subsection (4) of paragraph 1 of Article 17, the exclusive dealing provision that prohibits restricting another party to dealing only with itself or with selected third parties without valid justification.

Under Article 19 of the AML, an entity with a market share of 50% or more is presumed dominant. The Court did not find that Baidu had a dominant position. The Court did find that the relevant market for the determination of whether Baidu was dominant was the search engine market in China. The court's approach in defining the relevant market is notable. The court made reference to the Guidelines on the Definition of Relevant Markets promulgated by the Antimonopoly Commission. Based mainly on the demand substitutes, the Court defined the relevant market as the "search engine service market." The defendant argued that the search service provided by Baidu was a free, non-profit service, therefore was not covered by the AML, and thus could not be a relevant product market under the AML. The court rejected the defendant's claim on the ground that the defendant derived advertising and other revenues from the operation of the service, even though the service to the user is free, and concluded that the search engine service market constitutes the relevant market. The Court also defined the relevant geographic market as "China," reasoning that service providers located in China are closer competitors due to the differences in culture, language, and habits of Chinese users.

After trial on the merits, the Court rendered its substantive decision in favor of Baidu on the following grounds:

(1) The evidence was insufficient to sustain the claim that Baidu was dominant. The plaintiff had submitted only a few statements from various media regarding Baidu's alleged market share, which did not include any details of the methods used for calculating the market share. The court therefore found such sources of data did not provide a sufficiently scientific and objective analysis to prove a dominant position.

(2) Baidu's alleged blockage of TRISC's website was justified. The plaintiff had admitted that it had engaged in the practice of creating junk links, and the defendant's policy of prohibiting junk links had been posted on its website and was applicable to all websites. Baidu did not offer any proof that it had actually punished other junk-linkers, but the court accepted Baidu's assertion that this approach to punishing junk listings was designed to ensure the accuracy and integrity of the search results for the benefit of search engine users. On this basis, the court decided that, even assuming Baidu to have a dominant market position, the alleged conduct did not constitute an abuse of dominance under Article 17, because there was a legitimate justification for Baidu's alleged conduct.

(3) The court also found that TRISC did not prove that its reduction of advertisement spending and Baidu's subsequent actions caused the decrease of visits to its website.

Importance of this Decision

The decision is only the second decision rendered by a Chinese court under the AML, after the Shanghai No. 1 Intermediate People's Court issued the first in an abuse of dominance case decided last month (the Shanda-Sursen Case, as discussed in a prior Jones Day alert) (www.jonesday.com/pubs/pubs_detail.aspx?pubID=S6733). These developments suggest that lawsuits under the AML are becoming a meaningful weapon for competitors and antitrust litigation is likely to rise. These two judgments also appear to indicate that there are some common understandings of the AML by the Chinese courts:

(1) Both judgments reiterated that AML does not prohibit the dominant market position itself, only conduct that constitute an abuse of a dominant market position.

(2) Both courts required a high level of proof of a dominant market position. In the Shanda-Sursen Case, the court dismissed the case because the plaintiff did not define the relevant markets. The decisions refused to base such a finding solely on media reports or the parties' own statement about market shares and took an apparently skeptical view about market share reports by third parties if the underlying calculation method was not disclosed so that the court could make its own judgment of whether the market shares calculation was scientific and objective. Given the difficulty of obtaining authoritative information on market shares in China, the courts' imposition of this evidentiary burden on plaintiffs, rather than shifting the burden of proof on this issue to defendants, may create a substantial impediment to plaintiffs' prevailing in many abuse of dominance cases.

(3) Both courts were open to considering practical business justifications and indicated that the alleged abusive conduct was justified. In contrast to the rigorous proof required of plaintiffs on the issue of dominance, the courts seemed to accept the defendants' asserted justifications with little proof that the justifications provided the benefits claimed.

In its Baidu decision, the Beijing No.1 Intermediate Court appeared to require proof of anticompetitive effects, "an injury on the competition order," to sustain a finding of abuse of dominance. Article 17 of the AML, which lists all forms of abuses, appears not to require the effect on competition; however, article 6 in the General Provisions Chapter prohibits abuses of a dominant market position that eliminate or restrict competition. Though outside the chapter on abuses of dominance, article 6 may provide a basis for courts to require proof of an effect on competition as a prerequisite for a finding of a violation of article 17.

Compared to the fairly rigorous enforcement to date of the concentration provisions of the AML by MOFCOM, the Chinese courts thus far have appeared to take a relatively conservative approach in their application of the AML, placing high burdens of proof on complainants and relatively lower burdens on defendants on issues such as the existence of dominant position, valid justifications for allegedly abusive conduct, and the lack of anticompetitive effects from any alleged abuses.

Transcripts of live broadcasting of the antimonopoly case against Baidu (in Chinese) can be found here: http://www.chinacourt.org/zhibo/zhibo.php?zhibo_id=1865 (www.chinacourt.org/zhibo/zhibo.php?zhibo_id=1865)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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