Competition Law360
January 5, 2015

On Oct. 16, 2014, the Chinese Supreme People’s Court (“SPC”) issued its first antitrust decision since August 2008, when China’s Anti-Monopoly Law came into effect. In its lengthy opinion in Qihoo v. Tencent,[1] the SPC provides important guidelines on litigating abuse of market dominance claims. Abuse of market dominance is a major cause of action in China’s limited number of private antitrust lawsuits. This decision is significant as it sets forth the standard for courts to evaluate factual and economic evidence, assign burden of proof, and determine relevant market, the existence of market dominance and competition effects.

The Background and Case History

The lawsuit, filed in November 2011 before Guangdong High People’s Court, culminates a series of legal spats between the two Chinese Internet giants Tencent and Qihoo.[2] Tencent is a large Chinese social networking service provider. One of Tencent’s products is a popular instant messenger application — QQ IM. Qihoo is a leading Chinese Internet security software provider. Tencent offers security services through QQ Doctor to QQ IM users. In 2010, Qihoo launched a competing security software to QQ IM users — 360 Guard, which blocked QQ IM’s pop-up ads. Qihoo marketed 360 as a software to protect QQ users from Tencent’s unauthorized access to their personal data. Tencent claimed 360 blocked users’ access to several key functions of QQ IM including security protection. In response, Tencent published a public letter to QQ users, announcing that 360 was incompatible with its QQ and forcing the users to choose between 360 and QQ. Qihoo alleged many QQ users subsequently uninstalled 360.

In the lawsuit, Qihoo defined the relevant market as the IM software and services in mainland China. Qihoo alleged that Tencent had market dominance and that Tencent abused its market dominance by forcing QQ users to uninstall 360 and by bundling QQ IM with its own security software. Qihoo sought damages of RMB 150 million (roughly $24 million), an award of litigation costs and attorneys’ fees, a public apology and an injunction to ban the alleged misconduct. The amount of damages sought by Qihoo is reportedly the largest-ever amount in Chinese private antitrust litigation.

On March 28, 2013, Guangdong High People’s Court — the court of first instance — entered a judgment for Tencent and dismissed Qihoo’s claims.[3] The court held that Qihoo had failed to properly identify the relevant market and that there was insufficient evidence to determine Tencent had a dominant market position. Qihoo appealed the first instance court’s decision to the SPC.

On appeal, the SPC formed a three-judge panel and held a two-day hearing in November 2013 to hear the oral arguments.[4] The appeal focused on the market definition, the existence of market dominance and the existence of abuse of monopoly power. Both parties submitted their own economic expert testimony on these issues.

Market Definition

The SPC rejected Qihoo’s argument that the lower court failed to provide a clear and precise market definition. The SPC held courts need not do that in every abuse of dominance case because determining relevant market can be very difficult due to limited evidence and market complexity. The SPC held the lower court did not err because it had identified what should constitute the relevant market.

The SPC acknowledged that the relevant markets for most relatively homogenous goods and services can be defined by determining whether a hypothetical monopolist in an alleged market could profitably implement a “small but significant and nontransitory increase in price” (“the SSNIP test”). However, it is difficult to use the SSNIP test when non-price factors including quality, service, innovation and consumer experience are the focuses of competition in a relevant market. In this case, the relevant service providers provide free services and make profits from third-party advertising or by providing other value-added services. Applying the SSNIP test would be inappropriate. Tests focusing on quality and customer experience are more appropriate than the SSNIP test.

In determining the product market, the SPC focused on product functions, demand substitutability and cross-elasticity of demand. It affirmed the lower court’s holding that the product market includes computer-based and mobile IM services, IM services offered by social networking sites (“SNS”) and microblogs, and comprehensive and non-comprehensive IM services. The SPC held the lower court erred by including SNS and microblogs in the relevant market because the core services of those platforms have different functions and features.

The SPC held the lower court erred in concluding that the relevant market was global. The SPC directed that several factors be evaluated in determining the geographical scope, including cross-elasticity of demand, product transportation cost, trade barriers, consumers’ geographic preference, and supply across geographic areas. The SPC noted that Chinese regulations restrict the way foreign internet service providers operate in China and that it is relatively difficult for foreign providers to expand to a sufficient scale to compete with domestic providers. The SPC held it is irrelevant whether domestic companies can offer services to foreign users or foreign companies can offer services to domestic users; the key consideration is whether foreign providers can compete effectively with domestic providers. Accordingly, the SPC determined the geographical market is mainland China.

Market Dominance

While the AML presumes market dominance exists when a company has more than 50 percent of the relevant market share, the SPC held that a presumption can be overcome. Tencent had a greater than 80 percent of the relevant market. But the SPC concluded that there was insufficient evidence to suggest Tencent has market dominance in consideration of several other factors.

The SPC affirmed the trial court’s holding that Tencent did not have the ability to control prices because virtually all IM services are free to users and users are not willing to pay for IM services. The SPC also held that Tencent did not have the ability to control quality or other trading terms. There are multiple competitors in the IM market and competition is intensive. If Tencent lowers its service quality, a large number of IM users will switch to other services. The SPC also held that Tencent does not have the ability to block new market entrants. The investment and technology requirements for entering the IM market are relatively low as demonstrated by many market entrants in recent years. Several new entrants have much stronger financial and technological resources than Tencent and the existence of venture capital in the IM market further promotes market competition. The SPC therefore affirmed the lower court’s holding that Tencent does not have market dominance.

Abuse of Market Dominance

The SPC rejected Qihoo’s contention that Tencent’s conduct — forcing its users to choose between its QQ IM and Qihoo’s 360 — constitutes illegal exclusive dealing and tying. The SPC held that Tencent’s conduct was not abusive because there were competing substitutes for Tencent’s QQ and Tencent’s conduct will likely have minimal adverse effect on consumers. Tencent’s conduct did not have any significant anticompetitive effects. Market competition was observed to have intensified following Tencent’s conduct and other competitors gained more users. Furthermore, Tencent’s conduct was responsive to Qihoo’s attempt to damage Tencent’s reputation and to interfere with Tencent’s IM services, which the SPC had held to be unfair competition in a prior case. Thus, it is not clear Tencent had a motive to restrict competition. In addition, there is no evidence showing that Tencent’s conduct resulted in a significant loss of market share by Qihoo.

The SPC also held Tencent’s conduct did not constitute illegal tying. To establish illegal tying, a plaintiff needs to show: the products are independent of each other; the company tying the products has market dominance; the company forced consumers to accept the tying; tying is improper or unreasonable in light of customary trading practice, consumption customs or product functions; and tying harms competition. There is sufficient evidence indicating that Tencent’s bundling of IM services with its security software leveraged Tencent’s position in the IM market to the security software market. Qihoo still holds a leading position in the security software market and Tencent’s market share is less than five percent. Moreover, it is reasonable for Tencent to bundle QQ IM with its security software, because the bundling will ensure account safety and enhance software functions and value to the benefit of QQ users. QQ users were not forced to accept the bundle; they were free to choose to uninstall Tencent’s security software at any time.

Burden of Proof

The SPC specified the burden of proof in cases involving abuse of market dominance claims. Plaintiff has the burden to prove that defendant has market dominance and defendant has the burden to prove its conduct at issue is proper. The questions of whether the conduct at issue is proper and whether the conduct has an anticompetitive effect are related. But they are not the same. Defendant need not prove its conduct does not exclude or restrict competition. Furthermore, the existence of anti-competitive effects is helpful to establish that the defendant has market dominance. Therefore, the SPC did not find the lower court erred in requiring Qihoo to prove the alleged tying had anti-competitive effects when Qihoo failed to prove market dominance existed.

The Significance of SPC’s Decision

This landmark decision sets forth the legal standard for litigating abuse of market dominance claims under the AML. The SPC’s decision is based on careful case-specific economic analysis. The SPC specified plaintiffs and defendants’ respective burden of proof in monopoly cases and expressly rejected the contention that defendants need to prove their conduct does not have anti-competitive effects. While a substantial market share can create a market dominance presumption, that presumption can be overcome with analysis of specific market and competition circumstances. In determining the existence of abuse, the SPC focused on the actual competitive effects.

The decision highlights the importance of fact development and sophisticated economic expert analysis in antitrust litigation. This case is perhaps one of the few exceptions of private antitrust lawsuits in China where both sides submitted elaborate economic analysis. In China, there is no U.S. equivalent discovery process in civil litigation and parties are generally responsible for collecting information in support of their arguments. There is no information on whether Qihoo had received any assistance from the first instance court in gathering factual information.[5] Developing sufficient factual information to support an adequate economic analysis and to satisfy their burden of proof can still be challenging for private antitrust plaintiffs.

—By Jiangxiao Athena Hou, Zelle Hofmann Voelbel & Mason LLP

Jiangxiao Athena Hou is a partner in Zelle Hofmann's San Francisco office.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Beijing Qihoo Technology Co. Ltd. v. Tencent Technology (Shenzhen) Co. Ltd. & Shenzhen Tencent Computer System Co., Ltd., Civil Judgment of Supreme People’s Court of China, 2013 Min San Zhong No. 4, entered October 8, 2014. A real-time report of the first half day of the two-day hearing is available at http://live.people.com.cn/note.php?id=839131125083601_ctdzb_035.

[2] Tencent prevailed in the two prior actions against Qihoo for violating China’s Anti-Unfair Competition Law.

[3] Beijing Qihoo Technology Co. Ltd. v. Tencent Technology (Shenzhen) Co. Ltd. & Shenzhen Tencent Computer System Co., Ltd., Civil Judgment of Guangdong Higher People’s Court, 2011 Min San Chu No. 2, entered March 20, 2013.

[4] The SPC also held a one-day hearing on evidentiary issues.

[5] Courts can investigate and collect evidence if a party is unable to obtain necessary evidence due to “objective reasons.” See Civil Litigation Law, art. 64; Provisions by the Supreme People’s Court on Several Issues concerning the Application of the Law in the Trial of Civil Dispute Cases Arising from Anticompetitive Conduct, [2012] Judicial Interpretation No. 5.