China: Antitrust Litigation
This is an Insight article, written by a selected partner as part of GCR's co-published content. Read more on Insight
The year 2014 marked the 6th anniversary of the promulgation of the PRC Anti-Monopoly Law (AML) and saw a continued increase in the willingness of China’s competition authorities to initiate investigations and issue large and unprecedented penalties. This includes the much talked about investigations by the National Development and Reform Commission (NDRC) into the automobile sector on the grounds of horizontal price fixing and vertical resale price maintenance (RPM). Probes into other sectors have also been intensifying, ranging from concrete manufacturers to multinational telecommunication companies.
While somewhat overshadowed by the more publicised NDRC investigations, over the past year the Chinese court system has also taken a more open and active approach to antimonopoly litigation. Most noticeable is the courts’ willingness to expand the scope of civil and administrative antimonopoly litigations to include cases such as civil suits against cartel organisers, administrative suits against government agencies’ abuse of administrative power and challenges against competition authorities’ penalty decisions at a court of law, all of which have been cases of first impression. This demonstrates the court system’s growing confidence and capabilities in hearing groundbreaking cases based on novel causes of actions under the AML. Some of 2014’s more noticeable cases are highlighted below.
Qihoo v Tencent
On 15 October 2014, the Supreme Court in China released its decision in Qihoo 360 Technology Limited v Tencent Technology (Shenzhen) Limited, the first ever Supreme Court case involving anti-monopoly issues. In its decision, the Supreme Court affirmed the first instance ruling made by the Guangdong High Court in favour of the defendant Tencent, and provided in-depth discussion on a number of issues relevant to the abuse of market dominance analysis that will provide important guidance for future anti-monopoly disputes.
Competitors Qihoo and Tencent have been embroiled in a long-term battle where Tencent is a leader in instant messaging (IM) service among China’s internet users and Qihoo 360 is an important player in computer security software and apps management. Each company intended to take advantage of its competitive edge in its traditional market with an aim to further explore other new frontiers. In the process, clashes between the two inevitably arose. In November 2010, in response to Qihoo’s accusations of privacy invasion by Tencent’s flagship QQ instant messenger, Tencent publicly released a letter announcing their decision of forbidding its users from using Qihoo 360 security software and requested Qihoo’s software to be uninstalled from QQ users’ computers. For about three days, Tencent even forced its QQ users to choose between Tencent QQ and Qihoo 360 by making their respective software program incompatible on a single PC. The dispute quickly escalated into a lawsuit brought on 31 March 2011, where Qihoo alleged before the Guangdong High Court that Tencent had been abusing its dominant market position by forcing its users to choose between QQ and 360 and by tying QQ Apps Manager with QQ instant messenger. The court of first instance ruled in favour of Tencent and found no abuse of dominance.
Scope of the relevant market
In appeal, with regard to the relevant market, the Supreme Court noted that delineation of the relevant market is an important means to evaluate the defendant’s market power and the alleged abusive activities’ influence on market competition, but it is not the end itself. Thus, it is not necessary to clearly and explicitly define the scope of the relevant market in every abuse of market dominance case as long as the same goal can be achieved. In addition, the Supreme Court held that, since the state of market competition in this case is dynamic in nature and constantly changing, the relevant market analysis should not be restricted to a specific point in time. On the contrary, how market competition developed in a sufficient time period, including both before and after the lawsuit is filed, should be considered.
While the Supreme Court affirmed the Guangdong High Court’s first instance decision, it found the Guangdong High Court’s use of the small but significant and non-transitory increase in price test (SSNIP) misguided in determining the scope of the relevant product market. According to the Supreme Court, an SSNIP test would not work well in situations where the competing products are not homogeneous and market participants mostly compete in non-price related areas, such as quality, services, inventiveness and user experience, as in this case. The Supreme Court also rejected the Guangdong High Court’s finding of the global geographic market, holding that the relevant geographic market should be limited to mainland China due to the relevant consumers’ preferences and regulatory barriers.
The dominant market position
The Supreme Court held that all relevant factors in article 18 of the AML must be considered in evaluating whether a defendant has market dominance. While the Supreme Court acknowledged that Tencent’s share in the relevant market for its popular instant messaging service exceeds 80 per cent, it nonetheless found that Tencent does not have market dominance because of low barrier to entry, large number of market competitors, Tencent’s inability to control trading conditions such as the price and quantity of the products, and the ability for consumers to switch to competing products with ease. The Supreme Court’s holding in this section affirms the recent trend moving away from the market share-dominated analysis common in early antimonopoly cases.
The Supreme Court confirmed the first instance court’s findings that the IM services market is fully competitive and erratic. Business undertakings like Apple, China Unicom and China Mobile have all launched their own IM services. Since no one is willing to pay for IM services and all competing IM services are free of charge, users can immediately switch to another service cost-free if they find the latter more favourable. The ‘user lock-in’ effect is an overstatement given that users often employ multiple IM services simultaneously with overlapping social networks. Thus, the Supreme Court found that Tencent, even with its enormous financial and technological strengths, has neither the power over pricing or other trade terms, nor the ability to block other business operators.
Abuse of market dominance
After finding that Tencent does not have market dominance, the Supreme Court went on to analyse whether the alleged actions would be abusive had Tencent had the requisite market power. In particular, the Supreme Court noted that in cases where the scope of the relevant market and the strength of defendant’s market power are not clear, starting with analysis upon the alleged abusive activities’ impact on market competition may help evaluate the defendant’s position in the relevant market.
With regard to whether Tencent forced its users to choose between its popular instant messaging service and Qihoo’s security software is abusive, the Supreme Court concluded that it is not, largely because other competitors gained notable market share at the expense of Tencent as a result, indicating its insignificant negative impact on consumer interest and market competition. This is different from the analysis of the Guangdong High Court, which found that Tencent’s action would have been illegal if it were committed by a company with the dominant market position. In addition, with regard to whether Tencent committed illegal tie-in sales by bundling its popular instant messaging service with its own security software, the Supreme Court concluded that it is permissible under the AML because of Tencent’s proffered justifications, its lack of impact on the state of market competition, and the availability of the option for consumers to delete the tied product from their systems after the product is installed.
The SPC’s ruling has set a high standard for proving market dominance and abuse, especially in the highly dynamic internet and IT industry. However, major internet and IT industry leaders should be mindful that where there is sufficient evidence proving dominance, abuse and injury, especially where sophisticated economic analysis warrant, antimonopoly liability will still apply.
InterDigital’s ongoing AML litigations in China
Huawei v InterDigital
Huawei Technologies Co Ltd v InterDigital Inc is another high-profile case that attracted wide attention from legal professionals as well as from the general public in 2014. In October 2013, the Guangdong High Court issued its final judgments in both the contract and AML cases, affirming lower courts’ decisions and holding that InterDigital (IDC) abused its dominance by charging Huawei anti-competitive licensing fees and engaging in tying arrangements and discriminatory treatment. The Court also affirmed a fair reasonable and non-discrminatory (FRAND) royalty rate of no more than 0.019 per cent for InterDigital’s Chinese standard essential patents (SEPs). But a redacted version of the judgment was not released to the public until April 2014.
The plaintiff Huawei, a major global supplier of telecommunication equipment, brought a suit against IDC and its subsidiaries before the Shenzhen Intermediate court in late 2011. Huawei alleged that IDC abused its dominant market position by engaging in excessively high pricing and tying arrangements in SEP licensing. Before this suit, Huawei and IDC had engaged in multiple negotiations with respect to the licensing fee of IDC’s patents involved in this case, but failed to reach an agreement.
The Guangdong High Court’s analysis of the relevant market mainly depends upon the substitutability of the relevant products or services. As compliance with a technical standard is mandatory, once patented technology is incorporated into a technical standard, manufacturers of the products will have to implement the patented technology to their products or services with no substitutable technology available. Based upon that theory, the Court concluded that due to the SEPs’ uniqueness and non-substitutability, as well as the territoriality principle of intellectual property rights, every licensing market of each SEP constitutes an independent relevant product market, and each country of the relevant product market constitutes an independent relevant geographical market.
According to the Court, the uniqueness and non-substitutability of SEPs implied that IDC is the only supplier of its SEPs in the relevant market. Therefore it is reasonable to conclude that IDC holds a full market share in every licensing market of each essential patent, and has the ability to block or affect the entry of other business undertakings into the relevant markets. The Court further held that since IDC does not engage in any substantive manufacturing activity, Huawei is unable to constrain IDC by way of cross-licensing. Thus, the Court concluded that IDC has the ability to control the price, quantity, and other trade terms of SEP licences during negotiations.
Abuse of market dominance
In the AML case, the Court took a comparative approach by focusing on evidence of a prior 2007 licence agreement between IDC and Apple as a key benchmark for defining IDC’s FRAND obligations. The Court held that licensing fees for SEP should reflect and be limited to their value to the technology, and patent holders are not entitled to extra benefits when their patents become industry standards. The Court further held that IDC’s offers to Huawei were not FRAND and that the ongoing suits filed by IDC before the US court and the US International Trade Commission were meant to force Huawei to accept the stringent licensing terms and constitute an abuse of IDC’s market dominance.
In addition to excessive and discriminatory pricing, the Court also found that IDC was engaged in tying arrangements by packaging its essential and non-essential patents in violation of its market dominance. Based on the above findings, the Court ordered IDC to cease its monopolistic acts and compensate Huawei for its loss in the amount of 20 million renminbi.
InterDigital’s petition for retrial
While the judgments of the Guangdong High Court were final and binding, InterDigital has publicly acknowledged that it has petitioned the Supreme Court for a retrial of the FRAND royalty rate dispute. There is little public information about the progress of the retrial case and it is presumably ongoing.
ZTE v InterDigital and Arima v InterDigital
In April 2014 and July 2014, Chinese telecommunications company ZTE and Taiwan-based technology company Arima filed abuse of market dominance complaints against InterDigital in Shenzhen and Nanjing courts, respectively. Both cases are currently pending and public information is limited.
Lou v Beijing Seafood Wholesale Trade Association
On 9 April 2014, the Beijing High Court issued its final judgment in the first-ever horizontal cartel civil suit in China, affirming the Beijing Intermediate Court’s decision in favour of the plaintiff, Mr Lou Binglin (Lou), a seafood merchant who refused to participate in fixing the prices of Zhangzidao scallops organised by Beijing Seafood Wholesale Trade Association, of which he and dozens of other merchants were members. This is the first civil horizontal cartel case heard by a Chinese court.
In this case, the plaintiff Lou was not required to prove restrictive effect of market competition as article 7 of the Provisions of the Supreme People’s Court Regarding Law Application in Adjudicating Anti-Monopoly Law Civil Dispute (the Provisions) provides for burden shifting in antimonopoly cases involving horizontal agreements (ie, the horizontal agreements’ restrictive effects on competition are presumed), unless the defendant can prove that the agreement concerned does not have the effect of eliminating or restricting market competition.
Unlike in Rainbow Medical v Johnson & Johnson, an RPM case issued in 2013, the Court in this case did not conduct a rigorous four-prong test to analyse the reasonableness of the vertical restraints, nor did any party present expert opinions on the economic impacts of the horizontal arrangement. Instead, the Court held, at various points, the opinion that the horizontal restraints in question ‘itself’, ‘in essence’, ‘in nature’ and ‘objectively’ had the effect of eliminating or restricting competition, and the defendant ‘failed to provide sufficient evidence to prove the contrary’. Therefore, the Court held that the defendant had violated article 13 of the AML and that the contested price-fixing provisions are void. Interestingly, although neither China’s AML nor the court expressly adopts the ‘illegal per se’ rule with regard to horizontal price fixing as in the United States, the Beijing High Court’s opinion in this case, in addition to the shifting of the burden of proof required by the Provisions, shows a manifest disapproval of horizontal arrangement as a matter of competition policy.
Article 16 of the AML expressly forbids trade associations from organising or sponsoring anti-competitive arrangements. In Lou v Beijing Seafood Wholesale Trade Association, the trade association argued that it was not the organiser of the horizontal restraint, but only an implementer of an upstream scallop supplier’s pricing policy. It was effectively arguing that it was serving as a platform to carry out RPM by the upstream supplier, rather than implementing its own horizontal price fixing. But the Court noted that the trade association had more than 30 members and designed detailed rules to publish a fixed price, implement price fixing and penalise members’ failure to follow the set price. Furthermore, the Court pointed out that the prices were not necessarily the same as that ordained by the upstream supplier, nor was there evidence that the actual sale price set by the association was determined by the supplier. The Court held that the upstream scallop supplier only set the minimum resale price, but the trade association went further to fix the exact price of scallops in the market, which constituted the association’s own decision, distinctive from the upstream supplier.
The Court in this case did not make any attempt to define the relevant product or geographic market in its opinion, which may indicate that the court did not consider the definition of relevant market necessary in adjudicating horizontal restraint cases. Nor did the Court award any damages to the plaintiff since, inter alia, the plaintiff failed to provide sufficient evidence that it had suffered losses and the alleged loss of expected profit lacked evidentiary proof.
This case was brought by an injured party without competition authorities having taken any prior administrative enforcement actions. It thus exemplifies the relationship between the court and the competition authorities in China and their roles in resolving anti-monopoly disputes concerning horizontal cartels under the AML. The fact that the Beijing court accepted Lou’s civil complaint and issued a final judgment made it clear that the courts can provide another forum for these types of dispute resolutions parallel to or even independent from the competition authorities.
There are two types of administrative suits in China under the AML. The first type may be initiated by parties that wish to challenge administrative decisions by competition authorities at a court of law, such as fines imposed by NDRC or SAIC on cartels or RPMs, for example. The second type can be filed by private parties against government agencies for the agencies’ alleged abuse of administrative power to eliminate or restrict competition. The year 2014 saw, for the first time in history, both types of cases accepted and heard by the Chinese courts.
It is also noteworthy that on 1 November 2014, the Standing Committee of the National People’s Congress of China adopted the 2014 amendments to the PRC Administrative Procedure Law, which will become effective on 1 May 2015. One of the amendments specifically provides that courts may accept actions against administrative agencies that allege their abuse of administrative power to eliminate or restrict competition under Chapter 5 of the AML. Examples of the abuse include, without limitation:
- administrative agency’s designation and compulsory sale of specific products by specific undertakings;
- local government’s discriminatory treatment of businesses or products from other localities; and
- regional blockade of free flow of goods and services.
The amendments thus codified the private parties’ rights to challenge decisions of the administrative agencies in court on the AML ground.
Nanjing Construction v Jiangsu Price Bureau
This is the first case in China in which the decision of the AML enforcement agency was challenged in court. But unfortunately, the case was dismissed on procedural grounds and the court did not provide analysis on the merits of the plaintiff’s arguments.
In January 2013, the Jiangsu Provincial Price Bureau, the NDRC’s provincial counterpart, established a department dedicated to tackling price-related monopoly acts in the economically developed region in Eastern China. Towards the end of 2013, the Bureau had launched investigations in several industry sectors, including a fine of tens of millions of renminbi against 37 concrete product suppliers in the Nanjing area.
Three of the 37 concrete product suppliers were not satisfied with the penalties imposed and decided to bring administrative suits against the Bureau to challenge its decision. The cases were accepted on 28 April 2014. Although the penalty decision has never been disclosed, the court held two public hearings in July and September, which revealed that each of the plaintiffs was fined about 2.5 million renminbi for their participation in the concrete cartel. The plaintiffs did not dispute the existence of the cartel, but argued that the agreement was never implemented and therefore the amount of fines was excessively high, and requested the court to reduce the amount of fines.
Shortly after the second hearing in September, the court accepted one plaintiff’s motion to withdraw the complaint and dismissed the other two plaintiffs’ complaints on the ground that the three-month statute of limitations had expired when the plaintiffs filed their lawsuits. The Court accepted evidence provided by the defendant that the attorney representing the plaintiffs committed perjury by backdating the waybill of the complaints in an attempt overcome its failure to meet the statute of limitations.
Had the concrete cartel cases been actually heard and decided by the Nanjing court on their merits, there could have been greater significance for AML jurisprudence. However, these cases at the very least demonstrate the court’s increased open-mindedness in tackling AML disputes involving competition authorities. This also provides a vivid example that administrative decisions made by Chinese competition authorities may be challenged in court not as a matter of theory, but as a matter of fact.
Shenzhen Sware Technology v Guangdong Province Department of Education
On 22 April 2014, Shenzhen-based construction data software provider Shenzhen Sware Technology Co Ltd filed an administrative suit with the Guangzhou Intermediate Court against the Guangdong Province Department of Education, alleging the agency has abused its administrative power to eliminate or restrict competition. Previously, cases of this nature were nonexistent and the court’s acceptance of this case is in itself a breakthrough. The Court held a hearing on 26 June, and the case is still pending.
In the product market of construction data software, there are three major providers, including the plaintiff Sware and its competitor Glodon, and dozens of smaller companies. The Guangdong Province Department of Education, under the guidance of two central ministries, China’s Ministry of Education and Ministry of Housing and Construction, designated Glodon as the exclusive software provider in a national contest on basic cost engineering skills for vocational college students. The plaintiff alleged that, by granting its competitor’s product exclusive status in the contest, the Department of Education underwent an opaque selection process and abused its administrative by excluding the plaintiff’s products. The plaintiff argued that its own product met all industry and national standards in the same way as its competitor’s, and there was no difference between the two products in terms of both functions and cost. The plaintiff argued that if all vocational college students are trained in its competitor’s system, it will inevitably lose competitive edge in the long term when the students graduate and enter into the work force.
There is no doubt that more decisions by various government agencies would be challenged in court moving forward, and the court will play an important role laying out the AML boundary for administrative actions.
Aftermaths of Rainbow Medical v Johnson & Johnson
As we analysed in the 2013 edition, the appellate decision of Rainbow Medical v Johnson & Johnson by the Shanghai High Court ruled in favour of the plaintiff and adopted a Chinese version of the ‘rule-of-reason approach’ in its analysis of RPM. In particular, the Court laid out a four-prong test for its analysis:
- whether the relevant market is a fully competitive market;
- whether Johnson & Johnson has a strong position in the relevant market (though not necessarily reaching a level of market dominance);
- whether the purpose of the RPM provisions is to avoid price competition in the relevant market; and
- whether the anti-competitive effect of the RPM provisions far outweighs its pro-competitive effect.
In 2014, however, there appear to have been significant split between the approaches taken by NDRC and the Shanghai court with regard to RPM jurisprudence. Following its probes on RPMs by high end white spirit makers Moutai and Wuliangye in 2013, NDRC has been very actively enforcing AML in the area of RPM in 2014. As a result, automobile companies such as FAW-Volkswagen (the Audi brand), Chrysler and Daimler, and infant formula producers such as DANONE, Mead Johnson and Abbott have all been investigated and imposed heavy fines for RPM. In all of these cases, however, NDRC applies the reasoning close to the per se illegality rule with regard to RPM without detailed competition analysis. Companies doing businesses in China should be aware of somewhat different approaches between NDRC and the Shanghai court towards RPM, and remain cautious in formulating pricing policies. Going forward, in case any decisions by NDRC are to be challenged in court, especially those RPM decisions, the court may be provided with a better opportunity to reaffirm its views on RPM.
These cases represent the Chinese courts’ growing open-mindedness, confidence and capabilities in accepting and hearing groundbreaking antimonopoly suits. In 2014, the court has played a more active role in AML rule making, interpretation, and case adjudication. More decisions in various types of AML cases will be accepted, heard and decided by the court toward the end of 2015, which will surely contribute to the shaping AML of jurisprudence and competition policy in China.