Why Qihoo v Tencent breaks new ground

The Supreme People's Court (SPC) released its decision on the four-year dispute between Qihoo 360 and Tencent on October 16 2014.

In a ruling that runs to over 100 pages, the SPC has affirmed the decision of Guangdong Higher People's Court in 2013 but corrected certain aspects. This was a landmark judgment that set new standards for the Chinese courts' approach to antitrust cases, especially of the internet industry. It is also one of the most detailed analyses in the world of competition in modern internet businesses.

“This judgment showed that the SPC is taking a more flexible approach in establishing dominance and defining the market,” said Michael Han of Fangda Partners. “In practice, obstacles and thresholds for plaintiffs will be much lower than before if the lower courts follow the same approach.”

In November 2010, Tencent required its instant messaging users to choose between its own and Qihoo 360's software. Qihoo 360 filed a lawsuit in 2011 alleging that Tencent was violating the PRC Anti-monopoly Law (AML) by abusing its dominance in the market. The Guangdong Higher People's Court disagreed in 2013, citing insufficient evidence that Tencent held a dominant position in instant messaging. Qihoo then appealed the decision to the SPC.

Defining the relevant market

To practitioners, the most interesting lesson drawn from the SPC's decision was that parties do not always need to define the relevant market in antitrust cases.

While this has been thought of as an abuse of dominance case, Qihoo 360 failed to prove that Tencent had abused its dominant market position. “The SPC is now saying dominance can be established without clearly defining the product's relevant market,” said Han. “This is in line with recent trends, such as in the US, where they draw conclusions on abusive conduct or dominance based on an economic analysis without taking a clear position on what the relevant market is in the first place,” he added.

While the Guangdong court drew its conclusions based on the SSNIP [small but significant and non-transitory increase in price] test, the SPC ruled that other tests such as SSNDQ [small but significant and non-transitory decrease in quality] can be applied to define the relevant market.

“The SSNIP test is one of the typical frameworks most jurisdictions rely on, but in this case, the SPC decided it wasn't the most appropriate tool as the internet services were provided for free,” said Maxime Vanhollebeke of Norton Rose Fulbright. “It opted for a more pragmatic approach by looking at other characteristics.”

The instant messaging services offered by Tencent presented a two-sided market, meaning that while the platform and product themselves were free for users, the company made revenue off advertisements. The SPC held that the business model between free and charged services was ultimately different and therefore a pricing inquiry test such as SSNIP was not strictly applicable, as it would have resulted in an incorrect assessment of the relevant market.

“The approach taken [by the SPC] was quite sophisticated, as rather than simply applying the rulebook, it instead carefully debated how market definition would make sense in such challenging and new economies,” said Vanhollebeke.

Market dominance and abuse of conduct

Another key feature was that the decision reflected the SPC's “effects-based” approach in determining abuse of dominance, meaning that when assessing market position abuse, the effects of the conduct must be carefully considered. The SPC concluded that Tencent did not hold a dominant position in the market and “in theory, it could have stopped its analysis there, but it still went on to give reasons it believed abuse of conduct did not have anticompetitive effects on the market,” said Vanhollebeke. This was welcomed by practitioners as a contrast to the more traditional formulaic approach taken in some other jurisdictions.

The AML provides that a supplier is dominant if it has more than 50% market share. However, the judgment was encouraging to practitioners as it indicated that while the SPC acknowledged Tencent's market share was greater than 80%, it was willing to consider arguments to rebut the AML presumption.

“The SPC made it clear that even if you can prove the defendant holds a high market share, it does not necessarily mean he also holds a dominant position in the market,” said Han. Vanhollebeke agreed, saying that the SPC set the bar relatively high for making a successful abuse of dominance claim in China. The burden of proving dominance rests on the plaintiff and this case clearly indicates that a plaintiff cannot simply rely on market share data to establish dominance, he added.

However, experts noted that this case concerned the internet industry specifically and that market share could still play a significant role in future cases in traditional sectors.

Taking the lead

Over 100 pages long, the SPC's decision presented many lessons and opportunities to learn for practitioners, antitrust enforcement agencies and lower courts.

“[The judgment] offered guidance and useful information for enforcement agencies, as it showed that especially for such complicated cases, it is crucial to have seasoned data analytics and tools,” said Han. It also provided a substantial guide and set a good example for the agencies (the SAIC and NDRC), which have received much criticism for their lack of transparency as they usually do not publish their decisions, and if they do, they are two to three pages long at the most.

The decision is also expected to make it easier for plaintiffs to bring a case against someone for market position abuse, leading to more lawsuits in China.


By Katherine Jo