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C O V E R
S T O R I E S
Qihoo versus Tencent:
Roadmap or Anomaly?
B Y N AT E B U S H , L I N I N G S H A N , A N D N I N G Q I AO
M
EDIA COVERAGE OF CHINESE
enforcement of the Antimonopoly Law
(AML) often spotlights administrative
investigations involving multinational
companies or Chinese state-owned enterprises (SOEs).1 The National Development and Reform
Commission (NDRC) recently fined Qualcomm RMB6.088
billion (approximately US$975 million)—the largest penalty imposed to date under the AML—for abuse of dominance, while the NDRC and the State Administration of
Industry and Commerce (SAIC) have also trumpeted probes
targeting state-owned telecommunications companies and
utilities.
But when China’s Supreme People’s Court (SPC) issued
its first decision under the AML on October 8, 2014, it faced
a showdown between two homegrown private-sector Internet
giants: Tencent and Qihoo.2 The SPC upheld the March
2013 decision by the Guangdong Higher People’s Court
rejecting Qihoo’s claims that Tencent had violated the AML
rules against abuse of dominance by rendering its “QQ”
instant messaging (IM) service incompatible with Qihoo’s
security software and by bundling new application manager
software with IM software upgrades.
The SPC articulated a flexible approach to abuse of dominance claims, focusing on actual market dynamics rather
than market shares in gauging dominance and on the actual
competitive effects rather than the form of the challenged
conduct in defining abuse. But while this outcome may be
welcomed by multinationals fearing future abuse of dominance claims in China, it remains to be seen how far the
SPC’s effects-based approach will extend to future investigations and litigation.
China’s Fast and Fractious Internet Sector
China’s Internet sector offers a unique laboratory for observing the application of the AMLs’ rules against abuse of dominance in disputes between large private-sector Chinese
companies. China’s online ecosystem evolved as entrepreNate Bush is a partner in the Singapore and Beijing offices of O’Melveny
& Myers LLP. Lining Shan and Ning Qiao are senior legal consultants with
the firm.
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neurs adapted foreign business models and devised innovative services catering to China’s 632 million Internet users.
While state-owned enterprises (SOEs) and multinationals
tower over many other industries in China, privately owned
domestic companies prevail in the Internet space.
This is no accident. Beyond the inherent linguistic and
cultural barriers facing non-Chinese Internet firms, the
“Great Firewall” of governmental surveillance, censorship,
and access restrictions impairs foreign companies’ efforts to
court Chinese users from offshore, while restrictions on direct
foreign ownership in numerous online and brick-and-mortar services restrain many foreign firms from operating directly onshore.
But while China’s government tightly regulates Internet
activity for consumer protection and “public security” reasons, online services are neither a focal point for industrial
policy (such as solar cells, semiconductors, smartphones, and
steel) nor a bastion of SOE’s (such as telecommunications or
energy). In the absence of state-backed national champions
or foreign giants, niche start-ups could mature into colossal
private companies.
Many of China’s Internet titans now offer diverse services from platforms built around core products, such as Baidu’s
search engine, Alibaba’s online retailing site, and Sina’s
Weibo microblogging site. Tencent’s flagship product is
“QQ,” its instant messaging (IM) service, but it offers a
palette of social media, gaming, entertainment, search, and
other services alongside QQ. Qihoo is best known for offering a range of security software applications under its “360”
brand, but it also offers various other applications. Like many
other Internet companies, Tencent and Qihoo offer basic
services for free, while earning revenue from premium services and advertising. Qihoo’s Annual Report summarizes
competition at both the “application” and “platform’ level:
“We compete in the Internet security market with other
companies providing anti-virus software. . . . We also compete with PRC-based Internet companies that, like us, build
Internet platforms to offer value-added services and online
advertising services.” Qihoo labels Tencent its “primary competitor in this market.” 3
China’s Internet titans increasingly clash, vying for user
attention and advertiser funds by upgrading existing services, developing and acquiring new products, and raising their
profiles through marketing stunts and public feuds. The
Ministry of Industry and Information Technology (MIIT)
and other authorities oversee their commercial practices, as
illustrated by the SAIC’s probe of Alibaba’s alleged sale of
counterfeit goods in violation of the Anti-Unfair Competition Law (AUCL).4
Brawls between Internet companies also reach the courts.
In June 2014, the Beijing First Intermediate People’s Court
announced that 33 of its 110 AUCL cases since 2010 involved
disputes between Internet companies, warning that victims
often became offenders through retaliation.5 This announcement followed rulings that Baidu violated the AUCL by disseminating rumors that Qihoo had leaked customer passwords, while Qihoo also violated the AUCL by releasing
security software that interfered with Baidu’s search engine.
The “3Q War”
The first AML case to reach the SPC stemmed from similar
frictions between Qihoo and Tencent, which finally ignited
in an incident known as the “3Q War” or “Choose One
from Two.” In September 2010, Qihoo announced that its
new “360 Privacy Protector” application had discovered that
“certain instant messaging software” accessed users’ personal data without permission. The culprit went unnamed, but
a screenshot of Tencent’s QQ logo accompanied the report.
Tencent denied the allegations, and joined four other Internet
companies in a public declaration denouncing Qihoo for
unfair commercial conduct, requesting regulators to investigate Qihoo and adopt new rules for Internet competition,
and exhorting other companies to refuse to cooperate with
Qihoo.6
On October 29, 2010, Qihoo released “Koukou Guard,”
a new security application marketed as protecting QQ users’
personal data from unauthorized access by Tencent.7 Tencent
responded that Koukou Guard disrupted many features of
QQ, and threatened legal action against Qihoo.8 Then
Tencent resorted to self-help. On November 3, 2010, Tencent
announced that its QQ IM service would no longer operate
on computers in which Qihoo “Koukou Guard” had been
installed.9 Tencent modified its online IM application so QQ
users were unable to utilize QQ accounts without first removing Qihoo applications from their devices. This deliberate
non-interoperability lasted just one day. The MIIT and other
agencies jointly ordered Tencent to restore interoperability
and Qihoo to withdraw Koukou Guard (which they promptly did). On November 21, 2010, MIIT publicly censured
both Tencent and Qihoo for their conduct, and ordered both
companies to apologize to the public (which they promptly
did).10
This episode spurred the MIIT to issue new rules against
unfair commercial practices in the Internet sector with the
stated objectives of “regulating the order of the Internet information service market” and “protecting the interests of service providers and users.” 11 These measures prohibited various
alleged tactics of Tencent and Qihoo, including “fabricating
or disseminating false facts” or “disparaging the services” of
other Internet companies, “maliciously causing incompatibility” with other Internet companies’ products, “deceiving,
misleading or forcing users to use or not to use” other Internet companies’ products, and “maliciously modifying or
deceiving, misleading or forcing users into modifying” other
Internet companies’ products.12
The “3Q War” also spawned three lawsuits between
Tencent and Qihoo. Tencent prevailed in two separate actions
against Qihoo for spreading false information damaging
Tencent’s commercial reputation in violation of the AUCL
in connection with the “360 Privacy Protector” and “Koukou
Guard” programs, with the SPC eventually confirming a
damages award of RMB5 million against Qihoo in February
2014.13
Qihoo pursued Tencent under the AML. In November
2011, Qihoo filed a lawsuit against Tencent before the Higher
People’s Court of Guangdong Province, seeking RMB 150
million (approximately US$24 million) in damages alleging
that Tencent had abused its dominance of the IM market in
violation of the AML by (1) rendering its IM services incompatible with Qihoo’s security software and (2) bundling IM
service upgrades with Tencent’s own security software. The
court of first instance (the trial court) dismissed Qihoo’s
claims in March 2013 on grounds that Qihoo failed to define
the relevant market properly and to submit evidence “sufficient to prove that [Tencent] has a monopoly position in the
relevant product market.”
Qihoo appealed to the SPC. The SPC’s published opinion identified five key questions to be resolved: (1) how to
define the relevant market; (2) whether Tencent possessed a
dominant market position; (3) whether Tencent’s conduct
constituted abuse; (4) whether the trial court committed
procedural errors; and (5) whether Tencent was liable for
any resulting damages.
Market Definition
A Tool, Not a Necessity. The SPC framed market definition as an analytical tool rather than a necessary step in assessing abuse of dominance under the AML. Qihoo complained
that the trial court failed to define the relevant product market explicitly, but the SPC explained that “even without a
clear definition of relevant market, it is possible to assess the
market position of the [defendant] and the possible impact
of the alleged monopolistic practices upon the market by
using direct evidence of the elimination or restriction of
competition.” This approach dovetails with U.S. precedents
where direct evidence of anticompetitive effects avoided the
need for elaborate market definition under the Sherman
Act.14 At any rate, the SPC viewed the trial court’s factual
findings as effectively defining the relevant product market.
In the same vein, the SPC recalibrated a basic tool of market definition to measure competition among free online
services. The trial court had ostensibly defined the relevant
product market as encompassing the smallest possible set of
discrete goods and services such that a hypothetical monopS P R I N G
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olist could profitably implement a “small but significant and
non-transitory increase in price” (SSNIP). The SPC found
this conventional SSNIP test inappropriate in markets for
free IM and security software services since any price would
represent an infinite increase. The SPC suggested that other
hypothetical monopolist methodologies focused on quality
and consumer experience (such as a “small but significant
and non-transitory decrease in quality” test) would be more
appropriate, even though they entailed greater reliance on
qualitative rather than quantitative analyses. The SPC’s reformulation of the hypothetical monopolist test to address the
nuances of free online services by focusing on functionality
and quality rather than price resonates with the European
Commission’s approach to market definition in Microsoft/
Skype and the U.S. antitrust agencies’ 2010 Horizontal Merger Guidelines.15
Product Market Definition: Apps or Platforms? The bulk
of the SPC’s analysis was devoted to defining the relevant
product market for Tencent’s IM services. (Neither the trial
court nor the SPC engaged in any detailed discussion of the
security software market in which Qihoo allegedly suffered
injuries.) The record included written reports and testimony
from economists engaged by each party, statistics and industry analyses published by third parties, and documentation of
the functionality of various online services. Upon reviewing
the trial record and additional evidence submitted by the
parties on appeal, the SPC defined the relevant market to
include all instant messaging services (including any combination of text, video, and voice messaging). The SPC found
the trial court erred by including all social networking site
and microblogging services (as opposed to their discrete
instant messaging functions). The SPC rebuffed Qihoo’s
efforts to narrow the relevant market to include only integrated instant messaging services combining text, voice, and
video functions, and likewise rebuffed Tencent’s efforts to
broaden the relevant market to include all email and SMS
services.
The SPC also rejected Tencent’s proposal to define the relevant market expansively to reflect the competition among
“Internet platforms” to attract users and advertisers. Tencent
suggested that defining markets based on discrete applications
(such as search, IM, or security) masked the important competitive constraints from rival Internet platforms vying for the
same users’ attention and the same advertising funds by offering different suites of services. Even though Qihoo’s own
SEC filings highlight competition among Internet platforms,
Qihoo dismissed the notion of an “application platform” as
a “broad commercial concept that cannot constitute a relevant market under the AML.”
The trial court recognized that the competition between
Internet companies for users and advertisers was the actual
“underlying reason” for the “3Q War,” but emphasized
demand-side substitutability in defining relevant product
markets. The SPC similarly acknowledged “competition in
Internet sector to some extent presents features of the com5 6
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petition among platforms,” and that “Internet operators compete with each other by attracting users’ attention and soliciting advertisers in an effort to obtain profit from advertising
business and value-added services.” However, the SPC considered the key question to be whether the competitive constraint from rival Internet platforms across diverse applications exceeds the pressure from competing suppliers of the
same type of application. The SPC reasoned that consumers
primarily select applications rather than platforms, and platforms offering different types of applications (such as IM versus search) are not substitutable. The SPC also noted that
Qihoo’s core contention was that Tencent sought to leverage
its dominance in IM services into the security software market, so defining a relevant market for “Internet platforms”
would understate Tencent’s own market power.
The SPC suggested that platform competition would be
considered “in a more proper way” when evaluating the market position and market power of the parties rather than in
defining the relevant product market. In its later discussion
of dominance, the SPC observed that platform competition
“constrained” Tencent’s ability to “control quality,” as IM
service providers must “keep improving service quality and
developing new services” in order to attract users for free
services and profit from advertising and premium services.
The SPC also pointed to the integration of IM with other
applications such as search, dating, online shopping, gaming,
micro-blogging, or music as evidence of innovation by competitors within the IM product market, and repeatedly suggested that IM search providers face competitive constraints
from products “outside the relevant market.” The SPC effectively treated the competition among Internet platforms as
increasing the competitive constraints from threat of new
entry into discrete application markets by established platforms seeking to diversify their offerings. Even though platform rivalry animated the animosity between Tencent and
Qihoo, the SPC assessed Qihoo’s claims in terms of separate
IM and security software markets.
Geographic Market: Within the Great Firewall. The SPC
faulted the trial court’s finding of a global market, siding with
Qihoo in defining the geographic market as China. The SPC
explained that the geographic market should be defined by
determining whether competitors outside a proposed market
would “pose effective competition constraint to the hypothetical monopolist in the target territory if there is any change
in such competition factor as price and quality.” Applying
these principles, the SPC emphasized evidence that the “vast
majority” of Chinese IM users choose domestic services for
linguistic, commercial, and social reasons, with domestic IM
services accounting for over 97 percent of all Chinese users’
IM activity. The trial court had erred by mistaking the possibilities that some Chinese customers might use foreign IM
services or that some foreign customers might use Chinese IM
services as demonstrating a competitive constraint from foreign IM service providers. It also erred in overlooking numerous regulatory barriers to entry for foreign investors, includ-
ing measures limiting foreign investment to minority stakes in
joint ventures. Qihoo had observed that the “quite different
political and social environment” in China as well as the “very
complex” legal framework presented barriers to entry for foreign suppliers, but the SPC did not discuss potential social or
political barriers. (Unsurprisingly, neither the parties nor the
court discussed the effect of censorship protocols on the speed
and reliability of access to foreign IM services by consumers
within China.)
Dominance
The finding that Qihoo had failed to prove that Tencent possessed a dominant market position in the Chinese IM market
was among the most controversial elements of the trial court’s
original decision. Critics pointed to frequent reports of astronomical market shares from third-party sources and from
Tencent itself. The SPC nevertheless affirmed, outlining
a flexible approach to gauging dominance based on direct
evidence of the actual competitive dynamics of the relevant
market.
Article 17 of the AML defines a “dominant market position” as the position of business operators that are “able to
control price or quantity of products or other transaction
terms in the relevant market or to block or affect the entry
of other business operators.” Dominance may be established
through a multi-factor analysis of market structures and
competitive dynamics under Article 18 of the AML. Article
19 establishes rebuttable presumptions of dominance based
solely on market share; firms with market shares exceeding
50 percent may be presumed dominant. The plaintiff bears
the burden of proving that the defendant possesses a dominant position in the relevant market.16
Critically, the SPC eschewed reliance on high market
shares as evidence of dominance. The SPC stressed that the
market-share based presumptions of dominance are rebuttable. “In general, the higher the market share and the longer
the period of time during which it is held, the more likely it
is to be a preliminary indication of dominance; however
market share is simply one rough and potentially misleading
index in determining dominant market position.” The SPC
cautioned that high market shares could be particularly misleading in the Internet sector given the fluid boundaries of
discrete product markets and dynamic pace of innovation.
Curiously, the SPC also warned against inferring dominance
from high market shares resulting from a firm’s “greater market efficiency or provision of superior products” (even though
such strengths are commonly the foundation of market
power) or in circumstances where “products outside the relevant market create relatively strong competitive constraints”
(even though such observations may raise questions of market definition or the treatment of likely entrants as market
participants).
The SPC then separately addressed each indicia of dominance listed in Article 18 of the AML, starting with “market
shares” and “conditions of competition” under Article 18(1).
The finding that Qihoo had failed to prove that
Tencent possessed a dominant mar ket position in the
Chinese IM mar ket was among the most controver sial
elements of the trial cour t’s original decision.
The SPC noted evidence that Tencent’s market share exceeded 80 percent in both desktop and mobile IM. Nevertheless,
the SPC found that competition in the Chinese IM market
was “vigorous” and “innovative,” emphasizing the availability of numerous competing IM services and the frequency of
product upgrades and introduction of new features. With
respect to the “ability to control” price, quality, or other conditions in the IM market under Article 18(2), the SPC found
that the prevalence of business models offering free core services eliminated the possibility of controlling “price,” while the
numerous competitors maintained pressure to improve the
quality and features of these free services. The SPC stressed
evidence that Chinese consumers frequently switch IM services and concurrently utilize multiple services. With respect
to “financial and technical capabilities” under Article 18(3),
the SPC found that Tencent faced formidable competitors
with comparable financial and technological resources,
including Alibaba, Baidu, Microsoft, and China Mobile.
In discussing the “extent of reliance” by consumers on
Tencent under Article 18(4), the SPC found that Tencent’s
product is not indispensable for any consumers, as numerous
alternatives are available and switching IM services is easy.
Qihoo maintained that Tencent derives substantial market
power from its enormous established user base through network effects, as the opportunity to communicate with multitudes of current QQ users enhanced the value of the QQ
service to individual users and deterred switching to rivals
with smaller networks. The SPC rejected the factual premises of this argument, observing that “it is completely possible
that only a few or a handful of contacts” would be involved
in the migration to another IM service, and dismissed the
possibility that a user would consider all of its contacts to be
important as “highly doubtful.” Instead, the SPC again
emphasized evidence that over 90 percent of Chinese IM
users concurrently use more than two types of instant messaging services, so that “users may gradually create highly
overlapped social networks based on different instant messaging services,” so that “the influence caused by network
effects and customer retention are greatly mitigated.” The
SPC also viewed the history of MSN’s plunge from its initial
position as global IM market leader to single-digit market
shares as demonstrating the weakness of network effects in
the IM sector.
With respect to “barriers to entry” under Article 18(5), the
SPC cited the history of entry by new IM services as demonS P R I N G
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strating the absence of technical and regulatory barriers, dismissing concerns that the low market shares of recent entrants
reflected entry barriers. “Low market share does not necessarily mean weak market competition constraint. As long as
it is possible to enter the market quickly and expand market
share effectively, it is sufficient create an effective competitive
constraint on the existing competitors.”
Finally, the SPC considered Qihoo’s claim that Tencent’s
dominance had been demonstrated by the absence of any
material effect on the market shares of Tencent and its competitors in the IM market as a result of the 3Q War. The SPC
rejected the factual premises of this argument, citing evidence that competing IM services saw substantial increases in
users (although starting from relatively small market shares)
in the period following the dispute.
Based on these factual findings, the SPC concluded that
Tencent lacked dominance in the Chinese IM market. The
complete record of all written submissions and testimony is
not public, which makes scrutinizing the court’s factual findings difficult.17 The court’s willingness to discount network
effects based on a brief discussion of the “possibility” of
small-group migrations to alternate IM services and concurrent use of overlapping networks seems an unsatisfactory
response to one of the plaintiff’s core arguments. Regardless
of any infirmities in the court’s factual findings in this specific case, the decision demonstrates that the presumptions of
dominance based on market shares are not insurmountable.
An Effects-Based Test for Abuse
Although finding that a defendant lacks a dominant market
position generally obviates further inquiry into abusive conduct, the SPC nevertheless proceeded to consider whether
Tencent’s conduct constituted abuse. The SPC’s explanation
of the general framework for assessing abuse of dominance
claims under the AML may be one of the most significant
contributions of the opinion to Chinese competition law.
Article 6 of the AML broadly prohibits dominant firms from
“abusing” their dominant market positions “to eliminate or
restrict competition.” Article 17 then prohibits “abuse of
dominant market position” by engaging in specified commercial practices “without justification” or through “unfair”
pricing, as well as any other practices deemed to constitute
abuse by the enforcement authorities. Neither the AML
nor any implementing regulations define the term “abuse.”
Although enforcement authorities’ implementing rules
describe specific “justifications” for some specific abuses, neither the AML nor any published implementing measures
set forth the general principles or methodologies for gauging the elimination or restriction of competition or determining whether an allegedly abusive practice is “without
justification.”
Significantly, the SPC prescribed an effects-based test for
determining whether challenged conduct constitutes abuse:
Even if the business operator sued has a dominant market
position, negative effects and potential positive effects of
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such acts on consumers and competition should still be
assessed comprehensively to determine whether or not it
constitutes an abuse of dominant market position, so as to
decide whether or not such act is legitimate.
The SPC’s approach resembles the effects-based approach of
U.S. courts under Section 2 of the Sherman Act and the
European Commission’s 2009 guidance on abuse of dominance claims more than the form-based approach of recent
European court decisions. This represents the most authoritative statement to date of the general test for defining abusive conduct under the AML.
Exclusive Dealing or Monopoly Leveraging?
Qihoo alleged that Tencent abused its dominance in the IM
market by deliberately terminating the interoperability of
Tencent’s IM services with Qihoo’s security software, compelling QQ users to discontinue use of Qihoo products
(presumably switching to the security features of Tencent’s
applications).
It is unclear, however, whether the courts assessed this
conduct as exclusive dealing under Article 17 (4) of the AML
or as another exclusionary abuse under the catch-all of Article
17(7). The trial court reasoned that the “choose one from
two” strategy was designed “to force users to transact with
[Tencent] exclusively instead of with 360” and concluded
that “such act is, by its nature, a restriction of transactions.”
This conclusion was widely viewed as finding that such conduct by a dominant firm would constitute exclusive dealing.
The SPC similarly framed the issue as whether or not
Tencent’s conduct qualified as “a restriction on dealing which
is prohibited by the AML.” The SPC explained that “according to Article 17 of the AML, if business operators with
dominant market position restrict their counter-parties to
transact with them exclusively or to transact with other parties designated by them exclusively without justifiable reasons, such acts constitute an abuse of a dominant market
position.” This parrots the language of Article 17(4), which
bars dominant firms from “restricting, without any justification, their counter-parties to transact with such business
operators exclusively or to transact with other parties designated by such undertakings exclusively.”
Article 17(4) targets archetypical exclusive dealing practices that compel customers to purchase solely from a dominant firm or its designees. Tencent’s conduct, however, did
not actually compel users to select security software from
Tencent or from any other specific vendors; it only foreclosed Tencent QQ users from concurrently using security
software from Qihoo. A liberal reading of Article 17(4) reaching Tencent’s tactics might sweep in almost any exclusionary
practice.
The challenged conduct might be better characterized as
a form of monopoly leveraging, on the theory that Tencent
leveraged market power in one market (IM), into a second
marker (security software), through anticompetitive actions.
The catch-all prohibition of other abuses under Article
17(7) of the AML could capture such monopoly leveraging
offenses.
Neither the SPC nor the trial court explicitly referred to
either Article 17(4) or 17(7) in evaluating this claim. In
assessing Qihoo’s tying claim, in contrast, the SPC expressly invoked Article 17(5) and explained the elements of a
tying offense in detail. Both Qihoo and the courts may have
had incentives to sidestep this issue. Read literally, Article
17(7) applies to “other abuses” as defined by the administrative enforcement agencies such as the NDRC and SAIC—
not the courts. Some Chinese practitioners and jurists have
suggested that this limitation might require novel theories of
abuse under Article 17(7) to be recognized in prior administrative enforcement actions before plaintiffs can seek damages before the courts.18 While empowering the enforcement
agencies to set the boundaries of Article 17(7) might screen
out frivolous or unsound theories of abuse, it might also lock
out worthy claims that clash with the agencies’ overall policy agendas.
Neither the enforcement authorities nor the courts have
clearly addressed the handling of private actions alleging
abuses not specific under Article 17(1) through (6), and the
SPC passed a chance to do so in this case. In any event, the
SPC’s approach may offer greater guidance for general abuse
of dominance claims under Article 17(7) rather than for conventional exclusive dealing cases under Article 17(4).
The Shadow of Prior Decisions
In determining whether Tencent’s non-interoperability measures constituted abuse, the SPC faced a fact pattern cluttered
with prior judgments. The MIIT had intervened to stop the
allegedly abusive conduct and restore interoperability after
just one day, then publicly chastised both parties’ conduct
and issued rules barring such tactics in the future. The SPC
explicitly noted its own prior ruling that Qihoo “developed
and operated Koukou Guard software to assist or abet damaging the safety and integrity of QQ software and its services and promote its own products by disparaging QQ software
and its services, which constituted unfair competition in violation of the principle of good faith and customary business
ethics.” These prior decisions impacted the SPC’s analysis of
the actual motivations and effects of Tencent’s conduct.
Although the trial court had ultimately dismissed Qihoo’s
claims for failure to prove that Tencent was dominant, its
brief discussion of abuse favored Qihoo. It focused on the
immediate object of Tencent’s conduct, summarily concluding that it was a “restriction of competition.” The trial
court also rejected Tencent’s justification defense. While
acknowledging that Qihoo’s software functions and public
claims actually jeopardized Tencent’s valid interests, the trial
court found that Tencent’s proper remedy was to sue Qihoo.
Forcing end-users to choose between Tencent or Qihoo
exceeded the scope of “necessary” self-help authorized under
China’s Civil Code, and was thus unjustified.19 Qihoo
invoked the trial court’s finding on appeal; once Tencent was
recognized as dominant, this improper conduct should be
readily condemned as an “obvious abuse.”
Unlike the trial court, the SPC looked beyond the immediate object of the challenged conduct to focus on the actual
motivations and effects. In assessing Tencent’s “motives,” the
SPC framed Tencent’s actions as a defensive reaction to
Qihoo’s unlawful conduct rather than an offensive effort to
exclude Qihoo. Tencent’s IM had long been compatible with
Qihoo’s security software, and the incompatibility measures
were only imposed after Qihoo released Koukou Guard. “It
is particularly worth noting that the background of the implementation of [Tencent’s] incompatibility is that [Qihoo]
developed and operated Koukou Guard to specifically target
[Tencent’s] QQ software and engaged in unfair competition,
and [Tencent] was forced to react.” The SPC also noted there
was “no evidence sufficient to show” that the incompatibility was intended to “prevent potential competitors from entering” or otherwise “eliminate or restrict competition” in the
IM market. (It is unclear whether the SPC intended to apply
this finding to the security software market from which Qihoo
claimed to have been excluded.) Whereas the trial court had
focused on the immediate exclusionary objective of the
“choose one from two” measures, the SPC focused on the
subjective motivation of responding to Qihoo.
The SPC did not, however, directly reach Tencent’s justification defenses. Given the MIIT’s prior public criticisms of
both parties, explicitly blessing the deliberate non-interoperability as a “justified’ strategy may have been untenable.
Indeed, the SPC warned that the absence of significant harm
to consumers “does not mean that [Tencent] was beyond criticism for its implementation of the incompatibility.”
In assessing impacts on “consumers’ interests,” the SPC
found that the product incompatibility “inconvenienced”
consumers but did not “significantly” impact consumer interests because ample alternatives were available for both IM and
security software products.
The SPC also considered the effects on “competition” by
examining changes in market share in the IM and security
software markets following the one-day incompatibility period. While acknowledging the limitations of the available
data, the SPC concluded that competition had actually intensified in the IM market. Tencent’s market share fell 1 percent,
the number of users of several rival IM services rose, and
other competitors accelerated their market entry plans. The
SPC further speculated that Tencent’s market share would
have fallen further if the interoperability had not been
restored so quickly.
Turning to the security software market, the SPC acknowledged evidence of “certain negative impacts” on Qihoo.
However, the SPC clarified that “the AML, however, focuses on whether or not a healthy market competition mechanism is distorted or damaged rather than the interests of
individual business operators.” The SPC cited Qihoo’s
experts in finding that weekly users of two specific applications fell 10% and 12% following the incident, but also
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cited Tencent’s experts as finding that Qihoo’s overall share
of the safety software market dipped only 3.3%, from 74.6%
to 71.3%, while Tencent’s share nudged up 0.57%, from
3.89% to 4.46%. These figures suggest that Qihoo’s share
of the security software market remained well above the 50
percent threshold for the presumption of dominance under
the AML, while Tencent’s minute share barely budged. The
SPC characterized the effects of the one-day interruption of
interoperability as “subtle,” finding no “significant” elimination or restriction of competition in the security software
market. Based on these factual findings, the SPC concluded that
the incompatibility implemented by [Tencent] has caused
inconvenience to users, but it did not have an obvious effect
of eliminating or restricting competition. This, on one hand,
proves that the incompatibility implemented by [Tencent]
did not constitute an abuse of dominant market position
prohibited by the AML, and on the other hand, substantiates
the conclusion that [Tencent] does not hold a dominant
market position.
On the same facts, similar monopoly leveraging claims
before U.S. courts under Sherman Act Section 2 would have
met the same fate following Trinko.20 Even if Tencent were
found to possess monopoly power in the IM market and to
have engaged in anticompetitive or exclusionary conduct, it
would be difficult to prove that Tencent had a dangerous
probability of success in monopolizing the security software
market.
Different facts may, of course, have yielded different outcomes. If the MIIT had not intervened to restore interoperability, protracted incompatibility between Tencent’s QQ
and Qihoo’s security software might have led to substantial
erosion of Qihoo’s share and gains in Tencent’s share in the
security software market. Faced with evidence of a material
reduction in competition, it is unclear how the courts would
have viewed Tencent’s defense that the need to protect QQ
users (and Tencent’s reputation) from the technical interference by Qihoo products “justified” the deliberate incompatibility. If Tencent had acted without the provocation of
Qihoo’s prior violations of the AUCL, the SPC might not
have looked far beyond the exclusionary object of the deliberate incompatibility measures to require evidence of significant anticompetitive effects.
Tying
Qihoo also claimed that Tencent violated the AML rules
against tying by integrating a new application management
program with security functions (called “QQ Guanjia,” or
“QQ Housekeeper”) into free upgrades for the QQ IM software.
The SPC first articulated 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
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tying practice must have a negative impact on completion,
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.”
The SPC affirmed the trial court’s dismissal of this claim.
First, the SPC 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,” again citing the evidence of minimal changes in market shares in the security software market. Second, the SPC
found it “reasonable” to bundle the IM and application
manager software to improve the performance of the IM
service and protect account data. Third, the SPC concluded that Tencent did not, in fact, compel users to utilize the
application manager software as a condition of using the IM
service. Although the application manager installed automatically along with the IM upgrades, users could easily
remove it without disturbing the IM functions. Consequently, the SPC upheld the trial court’s dismissal of
Qihoo’s tying claim.
Implications For U.S. Companies
China’s recent surge in investigations targeting foreign companies for cartel activity, resale price maintenance, and abusive licensing of standard-essential patents has fueled fears of
discriminatory enforcement of the AML for industrial policy, protectionist, or political ends.21 Multinational companies
with strong IP portfolios and product lines remain concerned
that abuse of dominance charges relying on high market
shares as evidence of market power and commercial losses by
competitors as evidence of anticompetitive effect may lead to
exorbitant fines or disproportionate remedial commitments.
The SPC’s opinion in Qihoo v. Tencent equips future
defendants with the tools to advocate a flexible analysis of
abuse of dominance claims focusing on actual procompetitive
and anticompetitive effects of challenged practices. Although
the SPC’s statutory interpretations in specific cases are not
technically binding precedent for future cases under China’s
civil law scheme, SPC opinions present powerful authority in
judicial proceedings as well as administrative investigations
(albeit to a lesser extent).
But flexible tests bend both ways. The dismissal of Qihoo’s
claims against Tencent explicitly rests on factual findings
reflecting the actual effects of prior intervention by the MIIT,
prior adjudication of Qihoo’s misconduct, and the unique
dynamics of competition among providers of free online
services. It may also reflect the absence of overriding policy
interests in the outcome. Even under the flexible tests articulated by the SPC, the outcome of future abuse of dominance cases may depend heavily on the specific practices,
parties, and policy interests at stake.䡵
1
See Antimonopoly Law of the People’s Republic of China (promulgated by
the Standing Comm. Nat’l People’s Cong., Aug. 30, 2007, effective Aug. 1,
2008), available at http://www.gov.cn/flfg/2007-08/30/content_732
591.htm.
2
See Court Opinion for Appeal on Monopoly Dispute Between Qihoo
Technology Limited and Tencent Technology (Sup. People’s Ct. Oct. 8,
2014), available at http://www.court.gov.cn/zgcpwsw/zgrmfy/zscq/201
410/t20141017_3425404.htm. All quotations to the opinion in this article are based on an unofficial English translation prepared by the authors.
3
See Qihoo 360 Technology Co. Ltd., Annual Report (Form 20-F) (Apr. 25,
2014), at 7, available at http://ir.360.cn/phoenix.zhtml?c=243376&p=
irol-reportsannual.
4
The AUCL prohibits a broad range of commercial misconduct, such as false
advertising, commercial bribery, trade libel, and several anticompetitive
practices. See Anti-Unfair Competition Law of the People’s Republic of
China (promulgated by the Standing Comm. of the Nat’l People’s Cong.,
Sept. 2, 1993, effective Dec. 1, 1993), available at http://www.gov.cn/
banshi/2005-08/31/content_68766.htm.
5
See Cases on Unfair Competition on the Internet Exploding, IPR IN C HINA
(July 4, 2014), http://www.chinaipr.gov.cn/newsarticle/news/enterprise/
201407/1827294_1.html.
6
See Five Big Internet Players Including Baidu and Tencent Joined Efforts
Against 360 (Dec. 28, 2010), http://tech.sina.com.cn/i/2010-10-28/
01194797778.shtml.
7
See 360 Launched New Product—Koukou Guard, Said It Makes QQ Safe,
Fast and More User-Friendly (Oct. 28, 2010), http://tech.ifeng.com/
internet/special/360pkqq/content-1/detail_2010_10/29/2941498_0.
shtml.
8
See Tencent Responded to the Launching of Koukou Guard by 360: Will
Pursue 360’s Legal Liabilities (Oct. 28, 2010), http://www.caijing.com.cn/
2010-10-29/110555294.html.
9
See Tencent Announces It Will Stop Running QQ on Computers Installed
with 360 (Nov. 3, 2010), http://tech.ifeng.com/internet/special/360pkqq/
content-1/detail_2010_11/03/2991628_0.shtml.
10
See The Ministry of Industry and Information Technology Circulated a Notice
Harshly Criticizing Tencent and 360 and Said They Caused a Baneful Influence (Nov. 21, 2010), http://tech.hexun.com/2010-11-21/125738894.
html.
11
See Several Provisions Regulating the Internet Information Service Market
Order (promulgated by the Ministry of Indus. and Info. Tech., Dec. 29, 2011,
effective Mar. 15, 2012), available at http://zfs.miit.gov.cn/n11293472/
n11294912/n11296542/14414761.html.
12
See id. art 5.
13
See Tencent Technology (Shenzhen) Company Limited and Shenzhen
Tencent Computer Systems Company Limited v. Beijing Qihoo Technology
Limited, Qizhi Software (Beijing) Co., Ltd, Beijing Sanji Wuxian Network
Technology Co., Ltd., (Beijing Changyao Dist. People’s Ct. Apr. 26, 2011;
Beijing 2nd Interm. People’s Ct. Sept. 14, 2011), available at http://cyqfy.
chinacourt.org/public/paperview.php?id=549582, and http://www.110.
com/panli/panli_27891191.html; Tencent Technology (Shenzhen) Company
Limited, Shenzhen Tencent Computer Systems Company Limited v. Beijing
Qihoo Technology Limited, Qizhi Software (Beijing) Co., Ltd., (Guangdong
Higher People’s Ct. Apr. 3, 2013; Sup. People’s Ct., Feb. 18, 2014) available at http://www.law-lib.com/cpws/cpws_view.asp?id=200401917814,
and http://www.court.gov.cn/zgcpwsw/zgrmfy/zscq/201402/t20140225_
387819.htm.
14
See FTC v. Ind. Fed’n of Dentists, 476 U.S. 447, 460–61 (1986) (evidence
of “actual, sustained adverse effects on competition” is “legally sufficient”
to support liability “even in the absence of elaborate market analysis.”); see
also J. Douglas Richards, Is Market Definition Necessary in Sherman Act
Cases When Anticompetitive Effects Can Be Shown with Direct Evidence?,
A NTITRUST , Summer 2012, at 58 n.9 (surveying U.S. precedent and academic commentary).
15
See Case No. COMP/M.6281 (Microsoft/Skype) Regulation (EC) No. 139/
2004 Merger Procedure (Oct. 7, 2011), at ¶¶ 10–43, available at http://
ec.europa.eu/competition/mergers/cases/decisions/m6281_20111007_
20310_2079398_EN.pdf, confirmed by Case T-79/12, Cisco Sys. Inc. v.
Comm’n (Gen. Ct. Eur. Comm’n Nov. 12, 2013) (focusing on functionality of
various free online communications services); see also U.S. Dep’t of Justice
& Fed Trade Comm’n, Horizontal Merger Guidelines 12 (Aug. 19, 2010),
available at http://www.ftc.gov/os/2010/08/100819hmg.pdf (emphasizing the value of the hypothetical monopolist test as “a useful methodological tool for gathering and analyzing evidence pertinent to customer substitution and to market definition” even when necessary quantitative data
is unavailable).
16
See Provisions of the Supreme People’s Court on Certain Issues Relating
to the Application of Law in Hearing Cases Involving Civil Disputes Arising
out of Monopolistic Acts (promulgated by the Sup. People’s Ct., May 3,
2012, effective June 1, 2012), art. 8, available at http://www.chinacourt.
org/law/detail/2012/05/id/145752.shtml.
17
Economists retained by both parties subsequently published critiques of the
SPC’s opinion. See David Evans & Vanessa Yanhua Zhang, Qihoo 360 v.
Tencent: First Antitrust Decision by the Supreme Court, C OMPETITION P OL ’ Y
I NT ’ L (Oct. 21, 2014); Sharon Pang, Qihoo v. Tencent: Economic Analysis of
the First Chinese Supreme Court Decision Under Anti-Monopoly Law, C HARLES
R IVER A SSOCS . (Feb. 2015), available at http://ecp.crai.com/ecp/assets/
Qihoo_360_v_Tencent-Economic_Analysis_of_the_First_Chinese_Supreme_
Court_Decicion_under_Anti-Monopoly_Law.pdf.
18
See Susan Ning, Kate Peng, Jia Lin & Rui Li, The Dual System of AntiMonopoly Law—The Interplay Between Administrative Enforcement and Civil
Action, C HINA L AW I NSIGHT (Sept. 12, 2013), http://www.chinalawinsight.
com/2013/09/articles/corporate/antitrust-competition/the-dual-systemof-anti-monopoly-law-the-interplay-between-administrative-enforcement-andcivil-action/; Summary Report of Seminar on the Coordination and
Connection of AML Administrative Enforcement and Civil Litigation (June
2009), available at http://www.a-court.gov.cn/platformData/infoplat/pub/
no1court_2802/docs/200906/d_622011.html.
19
See General Principles of Civil Law of the People’s Republic of China (2009
Revision) (promulgated by the Nat’l People’s Cong., Apr. 12, 1986, effective
Jan. 1, 1987, revised Aug. 27, 2009), arts.128–129, available at http://
www.npc.gov.cn/npc/lfzt/rlys/2014-10/28/content_1883354.htm; Tort
Liability Law of the People’s Republic of China (promulgated by the Standing
Comm. of the Nat’l People’s Cong., Dec. 26, 2009, effective July 1, 2010),
arts. 30–31, available at http://www.gov.cn/flfg/2009-12/26/content_
1497435.htm.
20
See Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S.
398, 414 n.4 (2004).
21
See e.g., U.S. Chamber of Commerce, Competing Interests in China’s
Competition Law Enforcement: China’s Anti-Monopoly Law Application and
the Role of Industrial Policy (Sept. 9, 2014), available at https://www.
uschamber.com/sites/default/files/aml_final_090814_final_locked.pdf;
US-China Business Council, Competition Policy and Enforcement in China
(Sept. 2014), available at https://www.uschina.org/sites/default/files/
AML%202014%20Report%20FINAL_0.pdf.
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