Targeting tying practices in China

Nate Bush and Ning Qiao
[email protected] and [email protected]


Many prominent abuse of dominance cases in China have involved tying claims. Although Chinese courts and regulators have articulated similar principles for identifying anti-competitive tying and bundling practices, whether these principles are applied consistently remains to be seen.

According to a 2009 report by the International Competition Network, tying is generally defined as occurring when a dominant firm (or a firm with substantial market power) sells one product (the tying product) only on the condition that the buyer also purchases a separate product (the tied product) or agrees not to purchase the tied product from other suppliers. Bundling is generally defined as the sale of goods and services that could be viewed as separate products in a combined bundle.

Provisions for the Prohibition of Acts of Abusing Intellectual Property Rights to Eliminate or Restrict Competition

Article 9: A business operator with a dominant market position may not, in the course of exercising its intellectual property rights, engage in tied sales satisfying both of the following conditions, without a valid reason, in order to eliminate or restrict competition:

(1) forced bundling or combination of different goods for sale in a manner that runs counter to trading practice or consumption habits, etc. or that ignores the functions of the goods; and
(2) carrying out of the tied sales causes the dominant position of the business operator in the market for its tying product to extend into the market for the tied product, thereby eliminating or restricting the competition of other business operators in the market for the tying product or tied product.

The PRC Anti-monopoly Law (AML) addresses tying as abuse of dominance. Article 17 bars dominant firms from “selling goods through a tying arrangement without legitimate reason or imposing other unreasonable trade conditions in the course of trading.” In 2010, the State Administration for Industry and Commerce (SAIC) adopted measures extending this prohibition to bundling, by prohibiting dominant firms from “forcibly engaging in bundle sales or combined sales of different products in violation of the trading practices and consumption customs or in disregard of the functions of products.” Analogous implementing rules adopted by the National Development and Reform Commission (NDRC) in 2010 did not specifically address tying, presumably because the NDRC's jurisdiction over pricing-related violations of the AML would not clearly reach non-price tying or bundling practices (although the NDRC has not abstained from addressing tying issues). In 2015, the SAIC issued new rules against the abuse of intellectual property setting forth a more nuanced test for anti-competitive tying.

Although these rules are literally limited to IP licensing, they reflect recent decision of Chinese courts and regulators.

The SPC on Qihoo v Tencent

China's principal judicial decision on tying is the 2014 opinion of the Supreme People's Court (SPC) sustaining the dismissal of Qihoo's abuse of dominance claims against Tencent. Qihoo maintained that Tencent dominated the market for instant messenger (IM) services with its flagship “QQ” service, and that Tencent abused its dominance by integrating an application with security functions (competing with Qihoo's own security software) into free upgrades for the QQ IM software (and other abuses). The SPC found that Tencent lacked dominance, but nevertheless examined and rejected Qihoo's specific allegations of tying and other abuses.

The SPC listed the elements of a tying offense under Article 17.5 of the AML. The tying and tied products must be independent. The seller must possess a dominant position in the market for the tying product, and must force the purchaser to accept the tied product. The challenged tying practice must have a negative impact on competition, and must be “unjustified,” inconsistent with “trade practices or consumers' habits,” or disregard “product functions.” The SPC acknowledged the risk that a dominant firm might leverage market power from the tying product to the tied product, but also stressed potential “positive effects under certain circumstances to improve product quality, reduce costs, boost sales, ensure safety and improve efficiency.”

Under this rubric, the SPC rejected Qihoo's tying claims. First, the SPC made a controversial finding that Tencent lacked dominance in the IM market. Second, it found that Tencent did not actually compel users to utilize the application manager software as a condition for using the IM service. Although the application manager installed automatically along with the IM installation, users could easily remove it without disturbing the IM functions. Third, the SPC found it “reasonable” to package the IM and application manager software to improve the performance of the IM service and protect account data. Fourth, it found “no reliable evidence” that Tencent “would extend its leading position in the instant messaging market to the safety software market by the alleged tie-in sale” based on the lack of evidence of any significant change in market shares.

The NDRC on Qualcomm

The NDRC applied similar principles in determining that Qualcomm tied the licensing of standard essential patents (SEPs) to the licensing of non-standard essential patents (non-SEPs) in violation of the AML.

First, the NDRC found Qualcomm dominant in the markets for the “tying product” by licensing its SEPs for wireless communications.

Second, the NDRC determined that Qualcomm had actually forced licensees to purchase the “tied products” - licenses to Qualcomm's non-SEPs - as a condition of licensing its SEPs. The NDRC found Qualcomm “continuously” refused to provide licensees with separate lists of SEPs and non-SEPs, and “usually did not provide the licensees with the licensing offer which only covers Wireless SEPs.” Consequently, “some licensees had to accept the Wireless Non-SEPs licenses in order to obtain Qualcomm's Wireless SEP licenses.”

Third, the NDRC considered Qualcomm's justification that “it is difficult to distinguish Wireless SEPs and Wireless non-SEPs and if a licensee is only granted with Wireless SEPs, it may be subject to litigation risks.” The NDRC made the factual finding that Wireless SEPs and Wireless non-SEPs can be separated and licensed respectively, and that it is customary to define the scope of SEPs in the terms of the licensing agreement. It rejected Qualcomm's implied efficiency defense, finding that even if separating “may involve certain costs and increase the complexity in the patent licensing negotiation, it should not constitute a justifiable reason for tying the Wireless non-SEPs to the licensing of Wireless SEPs.”

Fourth, the NDRC considered the competitive effects, reasoning that wireless device manufacturers might otherwise “design around” non-SEPs or select “different competitive substitution technologies based on the advantages, disadvantages and other considerations of patent technologies.” Though Qualcomm maintained that device manufacturers remained free to utilize competing technologies, the NDRC concluded that a reasonable licensee usually would not bear extra expenses to design around or seek any substitute technology. Consequently, there was no opportunity or possibility for participating in competition for any substitute technologies which compete with the Wireless non-SEPs held by Qualcomm. Though the NDRC's published decisions do not identify specific competing technologies or vendors excluded from licensing competition with Qualcomm's non-SEPs, it concluded that the tying practice “materially eliminated and limited the competition in the relevant Wireless Non-SEPs licensing market, obstructed and restrained technology innovation, and harmed the interests of consumers.” The NDRC thus applied many of the principles articulated by the SPC in finding that Qualcomm's tied licenses of SEPs and non-SEPs in violation of the AML.

The SAIC steps up enforcement

The SAIC is increasingly targeting tying. In 2015, it announced the suspension of investigations of a Chinese travel agency for tying FIFA World Cup tickets to the purchase of other travel services and of a provincial telecommunications company for tying fixed-line telephone and broadband internet services after the companies committed to remedy their misconduct. It also fined a local state-owned monopoly distributor of tobacco products Rmb4.33 million (US$700,000) for bundling popular and unpopular brands of cigarettes to force retailers to carry undesired brands.

Publication of these decisions may be a prelude to future enforcement efforts. The SAIC has publicly acknowledged pending investigations of Tetra-Pak and Microsoft, which have both faced charges of tying or bundling in other jurisdictions. Companies should be sensitive to the potential liabilities for tying or bundling strategies in China.