The SPC offers flexible antitrust analysis

Nate Bush and Lining Shan
[email protected] and [email protected]

On October 16 2014, China's Supreme People's Court (SPC) issued its first decision under the PRC Anti-monopoly Law (AML), upholding the March 2013 decision by the Guangdong Higher People's Court rejecting claims by Beijing Qihoo Technology (Qihoo) that Tencent Technology (Shenzhen) and Shenzhen Tencent Computer System (collectively, Tencent) had violated the AML provisions on abuse of dominance.

The SPC decision caps a longstanding feud between two titans of China's domestic internet industry. Tencent provides various internet services, including its free instant messaging (IM) service QQ. Qihoo provides antivirus and network security software. In October 2010, Qihoo launched QQ guard, a security application marketed as protecting QQ users from unauthorised access to their personal data through QQ. Tencent condemned QQ Guard for interfering with key features of the QQ IM service. On November 3 2010, Tencent announced that QQ service would no longer operate on computers where QQ Guard had been installed. Within hours, the Ministry of Information Industry and Technology (MIIT) and other agencies ordered Tencent to cease its incompatibility measures and ordered Qihoo to withdraw QQ Guard. This spat ultimately led to specific MIIT rules against unfair commercial practices in the internet sector in 2012, and spawned three private lawsuits between Tencent and Qihoo. Tencent prevailed in two prior actions against Qihoo for spreading false information damaging Tencent's commercial reputation in violation of the PRC Anti-Unfair Competition Law (AUCL), with the SPC confirming an Rmb5 million damages award in February 2014.

The AML case was the final melee. In November 2011, Qihoo sued Tencent under the AML for abusing its dominance of the IM market by rendering its products incompatible with Qihoo's; and bundling its IM services with security software. Qihoo's claims were dismissed in March 2013 for failure to define the relevant product markets properly or to establish Tencent's dominance of the IM market. Qihoo appealed.

The SPC affirmed the dismissal of Qihoo's claims in a 115-page opinion delving deeper into the nuances of abuse of dominance under the AML and the unique dynamics of the internet.

Product market definition

Whereas the trial court only considered the possible market boundaries, the SPC clearly defined the relevant product market as IM messaging services. The SPC acknowledged that product markets for most relatively homogenous goods and services may be defined by determining whether a hypothetical monopolist in an alleged market could profitably implement a “small but significant and non-transitory increase in price” (the so-called SSNIP test). However, given the distinctive competitive dynamics of internet platform markets providing consumers with free services sustained by third party advertising revenues or collateral value-added services, other methodologies focused on quality and consumer experience (such as the “small but significant and non-transitory decrease in quality” test) are more appropriate.

Dominance

The AML sets a rebuttable presumption that market shares exceeding 50% confer dominance. The SPC confirmed that this presumption can, in fact, be overcome with evidence demonstrating the absence of market power. Although Tencent's shares of the China PC and mobile IM markets exceed 80%, the SPC concluded that Tencent's shares of the markets for these free services conferred no ability to determine pricing, quality or other aspects of competing services.

Abuse

The AML prohibits dominant firms from engaging in various ostensibly abusive practices without justification. The SPC confirmed that abuse of dominance claims should be evaluated by weighing both the positive and negative impacts of the challenged conduct on consumers and the competitive process on case-by-case basis. The SPC found the one day interruption in the compatibility of QQ with Qihoo products had minimal impact on the IM market, and actually stimulated competition by spurring increased use of alternative IM services. The SPC also recalled that Tencent was reacting to Qihoo actions which the SPC previously found to violate the AUCL. The SPC similarly found a lack of evidence that Tencent's bundling of IM services with security software leveraged Tencent's position in IM into the security software market and that consumer benefits from the integration of IM services with security software could justify bundling.

Role of economic analysis

Both parties presented expert evidence from economists, and the SPC's decision reflects consideration of economic analysis in defining markets, gauging dominance and assessing anticompetitive and procompetitive effects.

Towards flexibility

The SPC's decision proves the possibility of overcoming presumptions of dominance and allegations of anticompetitive effects with case-specific economic evidence and analysis. This outcome may reflect the absence of state-owned enterprises, foreign multinationals or key industrial policy stakes in the dispute, or the backdrop of prior litigation under the AUCL. While several aspects of the SPC's analysis are controversial, the court's flexible, economics-oriented approach and detailed reasoning contrasts with the rigid, sparse analysis of recent administrative enforcement decisions under the AML. The prospects of different outcomes on the same facts in litigation before Chinese courts and investigations by local agencies further complicate the challenges of antitrust compliance in China.