China: Antitrust Litigation

In 2015, the National Development and Reform Commission (NDRC) continued to actively enforce the antimonopoly law (AML), but only a handful of AML cases were either filed with or adjudicated by the courts. Even though the number of total AML-related litigations was limited, the areas of enforcement spanned surprisingly diverse fields, including internet services, renewable sources, education and rare earth metals. These AML cases addressed many novel legal issues and signify a significant change in the courts’ attitude towards AML enforcement, especially against government entities and state-owned enterprises.

Mishi v Qihoo 360

In April 2015 the Beijing High People’s Court issued its second instance decision on the AML dispute between Beijing Mishi Technology Co, Ltd (Mishi) and Beijing Qihoo Technology Limited (Qihoo), in which Qihoo successfully defended itself from Mishi’s abuse of market dominance and defamation claims.

The dispute between Mishi and Qihoo arose in 2014 when Mishi discovered that 360 Safeguard, Qihoo’s popular security software, blocked Mishi’s invitation messages for downloading its Emiage and Mi-qia applications by designating Mishi’s invitation messages as spam. Emiage and Mi-qia, even if already installed, could not function properly as 360 Safeguard blocked certain messages and removed content. Mishi also claimed that Qihoo bundled its call-show software, which competes with Emiage, with 360 Safeguard.Subsequently, Mishi filed AML and unfair competition claims with the Beijing No. 2 Intermediate People’s Court, claiming that by relying on its market dominance derived from 360 Safeguard, Qihoo restricted the options of its customers to use only call-show and tied call-show with 360 Safeguard in violation of the AML. In addition, Mishi claimed that Qihoo’s actions had damaged Mishi’s business reputation.

Relevant market

As in a typical AML case, the court first addressed the relevant product and geographic markets. During the litigation, Mishi argued for a relevant product market of mobile security software and services, covering competing software for mobile phones, including Tencent Mobile Manager, LBE Privacy Guard, and Baidu Mobile Guard, which share similar security functions such as system cleaning, software management and ad blocking. Qihoo, on the other hand, argued that the relevant product market should cover a broader scope not limited to security software for mobile devices, including PC security software, specialised security software, security plug-ins, app platform, as well as enterprise security software. In its decision, the Court focused its analysis on the interchangeability and substitutability of products, and agreed with Mishi’s position that the relevant market should be the market for mobile phone security software, multifunctional or specialised.

As for the geographic market, Chinese courts are more inclined to consider China as the appropriate market in internet-related disputes, following the Supreme People’s Court’s decision in Qihoo v Tencent, in which the Supreme People’s Court opined that the legal framework for internet services in China has imposed significant difficulties for foreign internet companies to enter the market in China.In this case, the Court also noted that foreign internet services and software providers face high barriers to enter the Chinese market, and held that the appropriate geographic market is mainland China.

Dominant market position

Under the AML, a company with dominant market position has the ability to control price, quantity or other trading conditions, or to block or restrict other companies from entering the market. Primarily, courts will look at market share to assess dominance. Companies with more than 50 per cent relevant market share will be presumed to possess market dominance.

In this case, Mishi provided multiple research reports that showed that 360 Safeguard possesses a high percentage of market share. In comparison, other security software, such as Tencent Mobile Manager (the second largest) and Phone Guardian, combined for less than 30 per cent of the market share. The term ‘market penetration rate’ was also introduced in the evidence, which showed that 360 Safeguard reached 70 per cent of the total 340 million users by the middle of 2013. This particular information came from statements on Qihoo’s own website.

In response, Qihoo vigorously objected to conflating penetration rate with market share, arguing that market share refers to the sale percentage of the overall products, whereas penetration rate focuses on the user percentage. As competing software may be installed on one cellphone simultaneously, penetration rate is very likely higher than the market share. The Court accepted Qihoo’s argument in its decision, stating that ‘the penetration rate is a stock number which cannot correctly reflect market dynamics.’ The Court then concluded that Mishi did not sufficiently prove market dominance.

Abuse of market dominance

After ruling in favour of Qihoo on the issue of market dominance, the Court went on to hold that Qihoo did not engage in abusive activities. The Court further noted that it is legitimate for 360 Safeguard to block Mishi messages even if market dominance were found, as long as Qihoo provides a reporting system to resolve disputes, as Mishi’s messages contained long web links and were disseminated indiscriminately for business promotion.

We can observe from the Mishi v Qihoo, and Qihoo v Tencent decisions that the courts appear unwilling to find market dominance in the internet service sector. In Qihoo v Tencent, the Supreme People’s Court found that the instant message market was highly competitive and Tencent did not have market dominance despite an alleged 97.4 per cent market penetration rate. In an early case, Renren v Baidu (2010), the Beijing High Court also found Baidu did not have market dominance in the search engine market. Thus courts to date have held that three Chinese software giants, 360, Tencent and Baidu, do not possess market dominance, in separate AML disputes.

Yingding v Sinopec

Another notable AML case was litigated between Yunnan Yingding Biological Energy Co, Ltd (Yingding), and Sinopec Corp and Sinopec Yunnan Petrochemical Company (collectively SINOPEC). Yingding is a producer of biodiesel, a renewable energy source derived from plant seed oil and waste oil. Yingding established a plant in Kunming City with 15,000 tonnes capacity, but was unable to sell its products, allegedly due to SINOPEC’s refusal to accept Yingding’s biodiesel into its retail channels. In January 2014, Yingding filed an AML suit accusing SINOPEC of abusing its market dominance.

In the first instance decision issued at the end of 2014, the Kunming Intermediate People’s Court found SINOPEC liable for abuse of its market dominance. However, this decision has since been vacated by the Yannan High People’s Court and the case was remanded.

Relevant market & market dominance

As both the first and second instance decisions are not publicly available, information about this case mainly derives from media coverage. In the first instance case, the Kunming Intermediate People’s Court set the relevant market as the sales market of product oils, finding that ‘Sinopec Yunnan owns 50 per cent of the market, according to evidence presented by Plaintiff and life experience.’ It is interesting to note that the judges appear to have injected their own ‘life experience’ into the market analysis, likely taking into consideration that Sinopec Corp is one of the two largest refiners and producers of petroleum and petrochemical products (along with China National Petroleum Corporation). In the second instance, SINOPEC vigorously objected to the finding of market dominance with several pieces of new evidence and at least two expert testimonies. In particular, it argued that the relevant market should be the market for fatty acid methyl ester (FAME), which is the main ingredient for biodiesel, and SINOPEC does not have a dominant position in this market.

This case is different from many other AML disputes as the parties are trying to draw different, yet overlapping, relevant markets to support their respective market analysis. According to Article 4 of the Product Oil Measures (Ministry of Commerce People’s Republic of China, No. 23), product oils include gasoline, kerosene, diesel, biodiesel and other substitutable fuels. Due to the scope of SINOPEC’s operation in the petroleum refinery and production, a relevant market covering product oils, as proposed by Yingding, may lead to SINOPEC having greater market power than a relevant market limited only to FAME.

Abuse of market dominance

Premised upon SINOPEC’s possession of market dominance, the Kunming Intermediate People’s Court found that SINOPEC abused its dominance by not accepting Yingding’s biodiesel into its retail channels. Such refusal, as found by the Court, not only violates the AML but also the laws of production and distribution of renewable resources. During the second instance proceeding, one highly debated issue was whether SINOPEC has any justifiable cause for the refusal. Under the AML, the market participants with sufficient market power may choose its trading partners as long as there are justifiable reasons for their actions. According to SINOPEC, three authorities have tested the quality of Yingding’s biodiesel and found it ‘below standard’. A petrochemical expert of SINOPEC stated that biodiesels even complying with national standards, may still impose significant risk. Yingding vigorously objected to the ‘low quality’ argument and noted that when it made multiple requests to SINOPEC with respect to cooperation of marketing biodiesel, SINOPEC never brought up any issue concerning the quality of its products.

The Yunnan High People’s Court ruled in favour of SINOPEC and sent the case back to Kunming Intermediate People’s Court for further proceedings. This case highlights the difficulty and dilemma for producers of renewable energy sources to, on one hand, compete with the large state-owned producers of fossil fuels in the market and, on the other, rely on these large fossil fuel producers for marketing, distribution and sale of their products. The outcome of this case may have a significant impact on how the producers of renewable energy sources operate in the current market.

Thsware v Guangdong Education Department

The dispute between Shenzhen Thsware Technology Co, Ltd (Thsware) and Guangdong Education Department concerns the alleged abuse of administrative powers. Despite the AML dedicating an entire chapter to the abuse of administrative powers, enforcement is rather rare. The Thsware case is the first and only case in which the administrative government was found liable for AML violation by a court. Currently the case is waiting for the second instance judgment.

This case relates to national and provincial competitions for engineering cost management. At the end of 2013, the Ministry of Education set up competitions for the ‘skill of engineering cost management.’ In 2014 the competition committee, led by the Guangdong Education Department and several associations, issued the technical specifications and competition guidelines (the Guidelines), requiring all candidates to use the engineer software provided by Glodon Software Company Limited (Glodon) for the purpose of the competitions. Other software companies – including Thsware,  a direct competitor of Glodon – objected to this designation. Thsware products had been used in several national and provincial competitions in the past, but after the issuance of the Guidelines, all training schools essentially had to buy Glodon software in order to properly prepare and train their students for the competitions. Thsware argued many students may then prefer to use Glodon software after graduation. Thsware thus sued the Guangdong Education Department under the AML before the Guangdong Intermediate People’s Court.

Abuse of administrative power

Article 32 of the AML prohibits administrative agencies from abusing its administrative power to force individuals or entities to use products of a designated company. The Thsware case appears to be a textbook example for article 32 violation. During the first instance proceeding, Thsware presented Sheng Jiemin from Peking University as its AML expert. Sheng pointed out that under the Guidelines, Glodon will become the largest and likely the only player in the market for training software under the protection of the administrative authority. The Guangdong Education Department argued that it was merely following the Ministry of Education, which in early 2014 also identified Glodon software as the preferred choice for national competitions. Thus, to better prepare the candidates for national competitions, the same software had to be used for the provincial competitions as well.

The Guangdong Education Department’s defence may turn out to be problematic as the national competition was reportedly cancelled because of the potential AML violations arising from the Ministry of Education’s designation of Glodon software. According to the public reports, a team of experts assembled by the Ministry of Education concluded that there was significant risk of AML violation associated with such designation, which led to the Ministry of Education’s cancellation of the national competitions.

Other key issues

The key issue with respect to the abuse of administrative power is whether the administrative agency has restricted or eliminated market competition with its administrative power. As the administrative power is granted by law, which implies dominance, the court will not engage in the analysis of market dominance in this type of case. In addition to the administrative decision itself, the process by which the administrative agency made the decision should also be scrutinised for AML analysis. In this case, before it designated Glodon as the sole software provider, the Guangdong Education Department did not solicit public opinion, conduct a scientific review of the competing products, or analyse the impact of its decision on market competition. Thus, the procedure for Guangdong Education Department’s selection of Glodon software may also be flawed.

Furthermore, even if a fair and reasonable procedure is followed, the decision may nonetheless be subject to AML scrutiny if there is no sufficient justification for the decision’s negative impact on market competition. In this case, the national and provincial competitions have used software from different providers without any issues for many years, and there is apparently no need for the authority to favour one software provider over its competitors. Based on this analysis, the first instance court found the Guangdong Education Department to be in violation of article 32 of the AML.

The hearing for the second instance of the Thsware case was held around June 2015 and judgment is still pending. Regardless of how the Guangdong High Court may rule in this case, this is a milestone case for AML development concerning abuse of administrative powers.

Seven rare earth companies v Hitachi Metals

This is a case concerning disputes over licence of standard essential patents (SEPs). This case has only passed the evidence exchange phase and no judgment has been issued. Nonetheless, this case has garnered widespread attention due to the industry stakeholders and legal issues involved.

The dispute between Hitachi Metals Ltd (Hitachi) and several Chinese rare earth companies started several years ago, before the filing of the lawsuit. Early in 2012, Hitachi filed a 337 investigation against three Chinese rare earth companies before the US International Trade Commission, requesting for injunctions against the importation of neodymium iron boron and downstream products into the US. Later, the parties reached a settlement. Currently, eight Chinese companies have entered into patent licence agreements with Hitachi, but some did not. In counteraction, seven Chinese rare earth companies established an industry association and began to seek invalidation against the key Hitachi patents. The seven companies also filed an AML suit against Hitachi with the Ningbo Intermediate People’s Court, in parallel to the invalidations actions claiming abuse of market dominance. The evidence exchange hearing was held on 21 September 2015.

It should be noted that Hitachi claims in this case that none of the patents have been declared essential and do not qualify as SEPs, although the plaintiffs argued that Hitachi had claimed it is not commercially viable to bypass the patents at issue. The court in this case would have to address when a patent can be considered essential to a standard – a critical issue for SEP-related AML disputes.

InterDigital AML litigations

According to the public reports, InterDigital has engaged in AML litigations with Huawei, ZTE and Arima in the past year. InterDigital reached a settlement agreement with Arima in the middle of 2015, and the related lawsuits were withdrawn or dismissed, while the lawsuits with Huawei and ZTE are reportedly ongoing. In particular, InterDigital has sought review of the Guangdong High People’s Court’s decision in the Huawei case with the Supreme People’s Court. There have been no public reports with regard to the progress of the Supreme People’s Court’s review since the retrial petition was filed in early 2014. Legal practitioners, industry professionals and scholars hope that the Supreme People’s Court can take this opportunity to provide guidance on SEP-related AML issues.

Conclusion

The Chinese courts faced a diversified AML caseload in 2015. Many new issues have emerged intertwining the AML and laws of other sectors (eg, the Renewable Resource Law, Administrative Review Laws). These complicated issues further break new ground by addressing potential abuse of Chinese state-owned enterprises and administrative agencies, which indicates a heightened sense of AML protection among Chinese companies. As a number of interesting cases initiated this year are still pending before courts, we expect that 2016 will be a busy and fruitful year for AML civil enforcement.