By Susan Ning and Hazel Yin
On April 18, the Guangdong Higher People’s Court held the first court hearing for the abuse of dominance action filed by Qihoo(the operator of 360 safety software)against Tencent(the operator of QQ instant messaging software)under the Anti-Monopoly Law ("AML"). Qihoo accused Tencent for abusing its dominance in the market of online instant communications services and claimed damages of RMB 150,000,000. The court hearing lasted for more than 8 hours, and attracted an audience of almost 400 people.
As requested by the court, the hearing was divided into four sessions, dedicated to each of the four issues: market definition, dominant position, abusive conducts and legal liabilities. The hearing focused on the first three issues and both sides called in expert witnesses and had fierce debates over each of these issues.
Market definition is the threshold issue of an abuse of dominance claim. Qihoo argued that the relevant market is the mainland China market for online instant communication services, encompassing integrated text, voice and video services.
Following the State Council’s Guideline on Relevant Market Definition, Qihoo mainly employed the demand-side substitutability test and reached into the conclusion that the integrated text, voice and video services constitute the smallest antitrust market from the consumers’ perspective. Qihoo found that emails, social networks, microblogs, as well as traditional communication methods, such as telephone/mobile phone are not close substitutes of online instant communication services. Moreover, this market is of particular relevance for purposes of this dispute because Tencent’s abusive conducts that are challenged in this dispute are related to this market.
The geographic market is defined as the mainland China market, in particular because of the preference of Chinese consumers, legal barriers in China on overseas service providers, and the distinct competitive dynamics in China.
Article 19 of the AML sets forth a presumption that if an operator has more than 50% of the share in a relevant market, the operator shall be presumed to have dominance in the relevant market. This presumption is rebuttable; yet the burden is shifted to the defendant to prove that it is not dominant.
Various sources of independent third-party data employing different measures, including active usage, penetration rate, and use frequency all lead to the same conclusion that Tencent has more than 50% of the shares of the relevant market.1
Moreover, network effects/locked-in effects of its instant communication services also significantly contributed to Tencent’s dominance. Refusal to interoperate with other service providers reinforced Tencent’s dominance and together with network effects/locked-in effects caused significant barriers to entry and expansion.2
Article 17 of the AML provides that a company having a dominant market position is prohibited from engaging in various abusive conducts to eliminate or restrict competition.
In this case, Qihoo claimed that Tencent abused its dominance in the instant communications market by (1) forcing consumers to choose between QQ and Qihoo products in November 2010, constituting a violation of Article 17 (4) of the AML against exclusive dealing; and (ii) bundling QQ safety software with QQ IM software without valid reasons, constituting a violation of Article 17 (5) of the AML against bundling.
In the end, the court closed the hearing without rendering a judgment.
Ever since the AML was enacted, AML private litigations, in particular abuse of dominance actions have been very active. Yet up till now, there has been no case where the court ruled in favor of the plaintiff. In most of the cases, the plaintiff’s claims were rejected by the court for failure of meeting the burden of proving the defendant’s dominance.
This is the first AML litigation where the plaintiff engaged in in-depth analysis and presented ample evidence to prove the defendant’s dominant position. 3The burden of proof shall then shift to the defendant to prove that it does not have a dominant position.
The 360/QQ dispute will not be an easy case in any jurisdiction, and posed particular challenges for both Chinese legal practitioners and the courts, in particular considering the AML itself is only less than four years old. Nevertheless, we expect to see this case bringing about development of the AML judicial practice as it proceeds.
* Qihoo is represented by attorneys from the antitrust and IP litigation group of King & Wood Mallesons.
1.Unlike the Microsoft/Skype merger case in the European Commission ("Microsoft/Skype"), where market share is considered to be of limited value in evaluating the market position of the service providers, the competitive dynamics in the Chinese market is vastly different (e.g. QQ’s market share has consistently been very high, with no comparable competitors, and no successful entry/expansion in the relevant market for the past five years) and can only suggest a conclusion to the contrary.
2.Unlike Microsoft/Skype, where network effects are considered to be mitigated by a relatively small "inner-circle", QQ users’ contact circle is significantly larger and the network effects are reinforced by QQ’s refusal to interoperate with other service providers.
3.Qihoo engaged RBB Economist to present an economic report and also invited RBB economists to testify at the court hearing.