We would like to ensure that you are still receiving content that you find useful – please confirm that you would like to continue to receive ILO newsletters.
23 October 2018
On 23 August 2018 the Shenzhen Intermediate People's Court issued its judgment in the private antitrust litigation brought by domestic software company Shenzhen Micro Source Code Software Development Co Ltd (SMSCSD) against tech giant Tencent. Tencent scored another victory following its win before the Supreme People's Court in 2014 in the antitrust suit brought by Qihoo 360, a Chinese internet security company.
Although it has risen in recent years, the annual number of private antitrust litigations in China is low compared with private litigations on other causes of action, such as IP infringement and anti-unfair competition actions. Further, when it comes to the digital market, it is often necessary to refine the conventional antitrust analytical framework by incorporating the specific economics of the digital market. Therefore, this case provides much-needed fodder for practitioners.
This article examines the court's key findings from a practical perspective in order to provide an understanding of China's antitrust judicial practice.
SMSCSD markets its software products through online channels – primarily, the WeChat Official Account platform operated by Tencent. The WeChat Official Account platform is a function of Tencent's WeChat software that enables businesses and individuals to conduct marketing and promotional activities. Businesses and individual registrants of the WeChat Official Account platform can publish content of their choosing, such as short articles and videos, to WeChat users who follow that official account. SMSCSD alleged that Tencent possessed a dominant position in the China mainland market for mobile instant messaging and social platform services and had abused this dominance by blocking SMSCSD's WeChat Official Accounts and engaging in discriminatory practices. After an 18-month first-instance trial, the Shenzhen court dismissed all of SMSCSD's claims in its judgment.
In trying abuse of market dominance cases, the Chinese courts will usually determine:
The Shenzhen Intermediate People's Court's findings in this regard were as follows.
Relevant market definition: focus on disputed conduct
In the first-instance proceeding, SMSCSD defined the relevant market as the mobile instant messaging and social platform services market in mainland China, on which Tencent's WeChat is an active competitive product.
However, the Shenzhen court's judgment has clarified that the relevant market in antitrust cases should be defined based on the potential harm to competition caused by the disputed conduct. Therefore, it is necessary to pin down which goods or services the disputed conduct points to and then conduct a substitutability analysis based on those goods or services. This approach is particularly critical for the internet sector, as internet companies frequently integrate multiple value-added services into their basic service. Absent the initial step of product determination, the trial will be out of sync with the injuries alleged by the plaintiff.
In line with the above approach, the Shenzhen court found that the disputed conduct pointed to the WeChat Official Account service rather than the WeChat instant messaging service, although both are integrated in the overarching WeChat software. Accordingly, the court rejected the market definition provided by SMSCSD and defined the relevant product market as the market for providing marketing and promotional services through internet platforms.
Notably, the Shenzhen court examined the demand-side substitutability between the WeChat Official Account platform and other marketing channels, such as self-run websites, Weibo, video sharing platforms, social network platforms and search platforms before concluding the market definition. Arguably, the court's definition on the sole basis of qualitative analysis can be augmented with a more comprehensive study that involves both qualitative and quantitative metrics.
Dominant market position: number of users unclear
SMSCSD submitted data on WeChat's average monthly active users and average daily active users to support its allegation that Tencent had market dominance.
The Shenzhen court held that the data submitted by SMSCSD was not specific to the appropriate relevant market, as defined above. Therefore, it could not serve as an objective basis for the calculation of Tencent's market share in the mainland China market for providing marketing and promotional services through internet platforms.
In addition, the court stressed that the number of users of a platform is not of its purported monopoly or market power because users in the internet sector frequently register with multiple competing platforms. As such, the average number of active users cannot reliably reflect a platform's true market power. Further, SMSCSD produced no evidence that Tencent had acquired market power regarding the value-added services through its basic service. As a result, the Shenzhen court dismissed the plaintiff's allegation of Tencent's dominant market position.
The court correctly held that the number of users is not evidence of a platform's market power. Unfortunately, it failed to provide guidance on the long-time controversial question of which factors may be relevant or appropriate in assessing a platform's market share or power.
As regards whether WeChat's large user base could enable Tencent to possess dominant powers in the market that WeChat Official Account competed in, the plaintiff could have strengthened its allegation by drawing on the economic theory of indirect network effects. 'Indirect network effects' refer to the situation where an uptick in the utility of one side of a platform to its customers will attract more users of another side of that platform. Therefore, where indirect network effects apply, the larger the user base of one side of a platform, the more market power of another. For instance, the rise of users of the Taobao platform will make this platform more attractive to sellers and vice versa. It is fair to say that the indirect network effects applies to the WeChat ecosystem in the present case because as the appeal of WeChat Official Account platform to its customers increases, more users will subscribe to the platform and specific WeChat Official Accounts will in turn get more exposure.
Abusive behaviour: anti-competitive purpose or effects must be shown
SMSCSD alleged that:
However, SMSCSD produced no evidence to prove the discriminatory treatment allegation.
The Shenzhen court clarified that in order for the Anti-monopoly Law to prohibit a refusal to deal, the following conditions must be met:
It is commendable that the Shenzhen court clarified that a showing of the purpose or effect of eliminating or restricting competition is a requisite condition of an abusive refusal to deal. Antitrust law is not a regulatory framework, but rather aims to maintain competitive processes and thereby promote consumer welfare. In the business world, refusal to deal frequently occurs and may have various valid business reasons. In principle, businesses are free to decide whether to deal and who to deal with, regardless of whether they have a dominant position. Antitrust law should intervene only in exceptional circumstances where the competitive process or consumer welfare is harmed. A question left open by the court in this case is whether an abusive refusal to deal can be found where only an anti-competitive purpose is shown (and no anti-competitive effects occur). This issue has been hotly debated among academics and practitioners.
The Shenzhen court's judgment is cogent in terms of both the decision and its reasoning, although a few issues have been left answered, such as:
It can be argued that the main reason for the court to leave these questions unresolved is the disparity in capability between the plaintiff and defendant. For one thing, the plaintiff was at a disadvantage in collecting sufficient evidence, such as market data, and did not apply to the court for assistance in the evidence investigation. Further, the plaintiff failed to provide an in-depth economic analysis, which is usually important for cases involving platform businesses due to the digital market's distinctly complicated nature.
For further information on this topic please contact Hao Zhan, Ying Song, Stephanie Wu Yuanyuan or LV Hongjie at AnJie Law Firm by telephone (+86 10 8567 5988) or email (firstname.lastname@example.org, email@example.com, firstname.lastname@example.org or email@example.com). The AnJie Law Firm website can be accessed at www.anjielaw.com.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription.