McDermott Will & Emery has a strategic alliance with MWE China Law Offices, a separate law firm based in Shanghai. This China Law Alert was authored by MWE China Law Offices lawyers Henry (Litong) Chen and Alex An and McDermott lawyer Frank Schoneveld.
Recently, the High People’s Court of Guangdong held a public hearing for a high-profile lawsuit involving two software giants and alleged abuse of a dominant market position. This is the first anti-monopoly case accepted by the court, and the claimed amount is RMB 150 million (approximately US$23.8 million). With few judicial precedents in China, this case will be watched closely, and its outcome is expected to have far-reaching implications.
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) for their alleged abuse of a dominant market position. This case is understood to be the first anti-monopoly case that was accepted by the High People’s Court of Guangdong, and the claimed amount is RMB 150 million (approximately US$23.8 million).
Since introduction of the Anti-Monopoly Law (AML) in China in August 2008, there have been very few judicial precedents in China, so this case will be watched closely to see what approach is taken by the Guangdong Court. This case involves two software giants, and its outcome is expected to have far-reaching implications for internet development and, in particular, for the field of instant messaging software.
On 27 September 2010, Qihoo released its newly developed 360 “privacy protector” (360) which is specifically used for looking at whether the software of its competitors, especially Tencent’s QQ Software, infringes upon users’ privacy. In response, Tencent alleged the 360 browser was promoted by pornographic websites.
Thereafter, Tencent, Kingsoft, Baidu and other companies issued a joint statement to boycott 360. In response to the boycott, Qihoo launched a “Koukou Guard”, pointing a finger at Tencent’s QQ Security Guard as a malicious spy software. On 3 November 2010, Tencent released a letter to QQ Software users, requiring the users to select only one company’s software, that is, either they delete the 360 software or exit the QQ software. Later, on 20 November, China’s Ministry of Industry and Information Technology required the two companies to immediately stop all acts damaging the legitimate rights and interests of the users. At this point, the matter was quieted down. (View Applications of China’s New Personal Information Protection Standards to learn more.)
On 14 December, the Chaoyang Court of Beijing accepted the lawsuit filed by Tencent against Qihoo for unfair competition, and in April 2011, the court rendered a judgment at first instance, ordering Qihoo to compensate Tencent in the amount of RMB 400,000 for the anticompetitive activities of Qihoo. In October 2011, Tencent filed a lawsuit against Qihoo for unfair competition, requesting the High Court of Guangdong to order Qihoo to pay compensation of RMB 125 million (approximately US$19.8 million). Qihoo filed a challenge to jurisdiction and later, because it was dissatisfied with the ruling made by the High Court of Guangdong failing to dismiss the jurisdictional challenge, appealed to the Supreme People’s Court. The Supreme People’s Court has not made a final ruling regarding the challenge to jurisdiction.
In October 2011, Qihoo filed an apparent tit-for-tat lawsuit to the High Court of Guangdong, requesting the court to order Tencent to immediately stop the abuse of its market position. On 18 April 2012, this case was the subject of public hearings.
Claims of Plaintiff and Defendant
In the trial, the plaintiff Qihoo alleged that as the provider of the 360 Security Guard software and services for years of diligent operation, it has become a leader in the field of internet security software in China and has the right to fair competition and faithful operation in the market. The defendant Tencent is the copyright owner of the QQ software and Tencent Computer is the actual operator of QQ. They obtained a dominant position in the field of instant messaging software, and are expected to comply with the additional responsibilities for maintaining a healthy competitive environment. However, they abused their dominant position by eliminating and impeding competition and the development of their competitors in this field, which is a civil tort that violates the AML. They therefore have civil liability according to the law.
Qihoo is of the opinion the defendants forced many QQ software users to select QQ and abandon or uninstall the 360 software, thus causing a heavy loss to Qihoo, so Tencent must be fully liable for the damage caused. Meanwhile, Tencent also trumpeted “violation of the ethical bottom-line” by the plaintiff, so the reputation of Qihoo is significantly impaired. Therefore, the plaintiff requested the court to order the two defendants to immediately stop the civil tort of abusing the dominant market position, to compensate the plaintiff for an economic loss of RMB 0.15 billion and to make a public apology.
In response, the two defendants argued there was no factual or legal basis for the plaintiff to define the relevant commodity market of this case as the instant messaging software and service market and to define the relevant geographical market of this case as Mainland China. Tencent pointed out that in addition to QQ, there are several other companies in instant messaging and numerous other instant messaging tools in the market, and the users of QQ are not limited to those in Mainland China; therefore, the two defendants have no dominant market position in the field of instant messaging and did not abuse the alleged dominant position to eliminate competitors and restrict transactions.
The two defendants also argue there is no legal basis supporting the plaintiff’s claim for an apology, and this case involves no name right, reputation right or honor right of a legal person. In summary, the two defendants requested the court to dismiss all claims of the plaintiff.
It was understood that in the trial, both the plaintiff and the defendants hired large teams of lawyers for the litigation, and also engaged experts and scholars to give testimony as “expert witnesses”. The plaintiff engaged English scholars, including a former official of the Office of Fair Trading in London, England, and an adviser to RBB in Europe. Tencent engaged the general secretary of the Information Research Center of the Chinese Academy of Social Sciences and an associate professor of law at the Central University of Finance and Economics.
The plaintiff requires the court to perform a judicial review of the abuse by the defendants of the dominant market position in the instant messaging software and relevant service fields. According to the provisions of the Anti-Monopoly Law, the following factors are relevant when determining whether an undertaking has a dominant market position and whether the undertaking abuses the dominant market position: the market share of the undertaking in the relevant market, the ability of the undertaking to control the sales market, the financial and technological conditions of the undertaking, the extent of reliance on the undertaking by other undertakings, etc. The hearing also focused on these factors.
Dispute I: 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.
Dispute II: 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, the market share of the defendants amounts to 76.2 per cent; the study report issued by CNNIC 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.
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.
Since the introduction of the China AML in August 2008, Chinese courts have experimented with various methods of civil dispute adjudication based on breach of the AML. In general, China’s courts have very limited judicial experience with such cases. A number of civil cases have been brought before the courts, but few, if any, have resulted in a successful judgment for breach of the AML.
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. It remains to be seen whether or not the court will alleviate the burden of proof required of plaintiffs in the finalized regulation.