To Understand Abuse of Market Dominance in Anti-Monopoly Law

2010/7/5By You Minjian,[Anti-Monopoly]

  In December 2009, the Shanghai Higher People’s Court decided an antitrust lawsuit on network literature, which became the first antitrust case since the enforcement of China’s Anti-Monopoly Law on August 1, 2008. The case is of benchmarking importance and reference value for the judgment of anti-monopoly cases in the future.
   
  Facts
  
  The plaintiff, Beijing Sursen Electronic Technology Co., Ltd. (Sursen), operates an e-book portal at www.du8.com, which was approved by Ministry of Information Technology. The Defendants are Shanghai Shanda Networking Development Co., Ltd. (SNDA) and Shanghai Xuanting Entertainment Information Technology Co., Ltd. (Xuanting). They jointly operate www.qidian.com, a well-known website for original Chinese literature. Both of the defendants are in the online literature business.
  
  A pseudonym author named “I eat tomatoes” published his work Star Change at Qidian.com, which became popular among Internet readers. The work easily got 100 million hits after it was published. After the work was completed in May 2008, Sursen commissioned Kou Bin and Li Yapeng, under the pen name “I eat no tomatoes” , to write Star Change Sequel and publish it at Du8.com. Since the two works have similar pennames and the sequel followed the characters, plots and environment, readers could find it difficult to distinguish between the two works. Under the pressure of public opinion and as requested by Qidian.com, Kou Bin and Li Yapeng stopped writing the sequel for Du8.com and issued a statement of apology to the previous writer “I eat tomatoes” on Qidian.com.
  
  Sursen then sued SNDA and Xuanting, claiming that the two companies abused their dominant market position to restrain trade and asking the court to confirm that the actions of the two companies constituted an abuse of market dominance (in China’s online literary market). At the same time, Sursen requested that the defendants immediately remove the apology posted from the two authors, make an apology and pay compensatory damages.
  
  After hearing the case, Shanghai No.1 Intermediate People’s Court deemed that the two defendants’ acts were legitimate and did not constitute a monopoly and unfair competition. Therefore the court rejected the plaintiff’s claim. The plaintiff was not satisfied with the decision and appealed to the Shanghai Higher People’s Court. The Higher Court agreed with the plaintiff/appellant’s claim that the defendants had a dominant market position. However, the Court held that the plaintiff had failed to support its claim by providing evidence sufficient for defining the relevant market and measuring the market position, and therefore did not sustain the claim and rejected its appeal.
  
  The case mainly involved two controversial points. The first was whether or not the defendant had a dominant position; the second was whether the actions of the defendant constituted an act of abusing market dominance.
  
  How to understand dominant market position
  
  Dominant market position is a basic concept in anti-monopoly law. Anti-monopoly law protects against the “abuse” of a dominant market position, but does not oppose the existence of a market dominant position itself. Furthermore, if the claimee does not have a dominant market position, there is no need to determine whether conduct constitutes an abuse. According to Paragraph 2 of Article 17 of the Anti-Monopoly Law, “for the purposes of this law, dominant market position refers to the undertaking(s) having the ability to control the price, quantity or other trading conditions of products in a relevant market, or to hinder or affect other undertakings to enter the relevant market.” Paragraph 2 of Article 12 also provides that, “a ‘relevant market’ in this law refers to the territorial area within which the undertakings compete against each other during a time period for relevant products.”
  
  I. Segmentation of the relevant market
  
  According to these provisions, defining the relevant market is the fundamental prerequisite for identifying market dominance. Different segmentation of the relevant market will surely lead to the difference in market share. Take the world’s top perfume brand Chanel for example. If its relevant market is defined as the cosmetics market, its market share can be ignored. However, if the relevant market is narrowed down into the specific field of luxury perfume, Chanel’s brand influence and market share must be greatly increased. If the relevant market for Microsoft products is defined as the entire digital product market, it is necessary to use a magnifying glass to see Microsoft’s share; even if the relevant market is narrowed down to the software products including embedded software, system control, programming and debugging, financial management, publishing and printing, construction engineering, graphics, online games, virus prevention and control, etc., Microsoft’s market share is still negligible.
  
  In this case, the plaintiff has failed to define the relevant market. At least three market segments were mentioned in its pleadings and trial, including China’s network literature market, domestic original literature market and the network original literature market. According to the provisions of Paragraph 2 of Article 12 of Anti-Monopoly Law, the definition of the relevant market in the sense of anti-monopoly law is determined by the “range of goods” and “geographical scope” where a commodity or service needs to compete with others. Therefore, the plaintiff should provide evidence on its claim.
  
  The plaintiff illustrated three markets, including China’s Internet literature, domestic original literature and network original literature. China’s network literature has the commodity range of network literature and the market scope of domestic network; domestic original literature covers the range of original literature and the scope is the domestic market, including both electronic carriers of online networks as well as offline paper carriers; network original literature refers to the original literature published on Internet and its market range is the Internet. Since the network has no boundary, its market range, if not specifically restricted, should be the whole world. The three markets claimed by the plaintiff have quite different geographic scopes and product ranges. Therefore, it was hard for the court to recognize the plaintiff’s claim.
  
  II. Proving dominant market position
  
  According to Article 18 of the Anti-Monopoly Law, the following factors will be taken into consideration in calculating dominant market position: market share in relevant market, and the competition situation of the relevant market; ability to control the sales markets or the raw material purchasing markets; financial status and technical conditions of the undertaking; the degree of dependence of other undertakings; entry to relevant market by other undertakings; and other factors related to find a dominant market position.
  
  In practice, it is still difficult to fully consider all of these factors in determining whether a party holds a dominant market position and there is no specific objective quantitative standard. Therefore, Article 19 of the Anti-Monopoly Law provides a per se rule, which states that undertakings meeting any of the following criteria can be assumed to be have a dominant market position: the relevant market share of one undertaking accounts for one-half or above; the joint relevant market share of two undertakings accounts for two-thirds or above; or the joint relevant market share of three undertakings accounts for three-quarters or above.
  
  In this case, the plaintiff had tried to provide evidence based on Article 19 of the Anti-Monopoly Law to prove that the defendant had a dominant market position. The plaintiff submitted notarized web pages from the defendants’ site and related media, which contained comments on the status of the defendants in the industry. However, the High Court decided that the evidence from the defendants’ websites and third-party sites was insufficient. Though there were statements on market share with the figures of “80%”, “95%”, etc., it was hard to find out how they calculated this data, what the specific figures were or whether they were accurate. Therefore, the Court believed that the plaintiff’s statement on the defendants’ market positions were not based on market intensity, and its evaluation of dominant market position lacked verifiable measurements, so that the Court did not accept the plaintiff’s claim.
  
  One lesson from the court’s decision is that neither media coverage nor the assertions of the claimee will be sufficient to determine the specific share for market dominance alone. Third-party surveys and detailed data are needed here. To support the claim that an undertaking has a dominant market position, parties need to do third-party surveys and provide a foundation and basis for data calculation. Personal feelings are not admissible evidence. It also reflects the cautiousness in the judicial attitude towards the application of the per se rule. Although advertisements can legally be treated as evidence in principle, the publicity information in this case was clearly insufficient to prove the defendants’ market share.
  
  How to understand abuse of market dominant position
  
  A lot of media coverage has linked having a dominant market position directly with a violation of the Anti-Monopoly Law, intentionally or unintentionally. I think it is kind of misleading. When analyzing the pure legal meaning, the Anti-Monopoly Law aims to restrict monopolies obtained by an illegal means, such as undue concentration. It does not restrict the market share achieved by legitimate business expansion and operation. Thus, corporate size and market share are factors that are considered in evaluate monopolistic behaviors, but monopoly status itself does not necessarily mean illegal. With reference to the anti-monopoly practices from abroad, it has proven to be unreasonable to treat the size of the monopoly enterprise as the fundamental criterion for deciding whether or not to take anti-trust measures.
  
  Having a dominant market position itself is not illegal. Only the abuse of such a status falls under the jurisdiction of anti-monopoly laws. The first paragraph of Article 17 of the Anti-Monopoly Law lists seven acts which constitute an abuse of dominant market position, in which the second, third, fourth, fifth and sixth acts have the pre-condition that the actions are done, “without legitimate reasons.” Therefore, selling below cost, restricting trade or refusing to trade are all permitted acts. They only constitute abusive acts if they are done with the pre-condition of “without legitimate reasons.”
  
  In this case, the plaintiff claimed that the defendants coerced the two writers of the Star Change Sequel to stop writing and to publish an apology statement on Qidian and prevented other sites from reproducing the work. Their behaviors are in line with the provision of the fourth act listed in the first paragraph of Article 17 of the Anti-Monopoly Law, i.e. requiring its counterparty to trade exclusively with it or trade exclusively with the appointed undertakings without legitimate reasons.
  
  After trial, the High Court concluded: First of all, the plaintiff’s evidence did not prove that the defendants coerced the writers. Secondly, the dispute was triggered by the Star Change Sequel. The plaintiff’ statement at Du8.com and the two writers’ apology statement establish that Star Change Sequel was created because the work Star Change, which was published by “I eat tomatoes” at Qidian.com, was popular with Netizens. After the work was completed, the plaintiff entrusted Kou Bin and Li Yapeng to write Star Change Sequel. The two authors used a similar penname and continued with the fictional characters, plots, environment and other factors set in Star Change. Such a writing approach would mislead readers and make them believe the two works have some close connection. Its purpose was to take advantage of the existing popularity of Star Change and attract those who love Star Change to pay attention to the Sequel. Since the plaintiff’s above acts were improper, the behavior of the two defendants was reasonable, even if they had indeed asked the two authors to stop writing and other sites to stop reproducing the sequel. The fourth act listed in the first paragraph of Article 17 of the Anti-Monopoly Law has a prerequisite for determining whether or not an act constitutes an abuse of market dominance, i.e. to check whether the action has legitimate reasons. Therefore, it does not matter whether the two defendants’ acts constituted a restriction on trade practices; the court found that the two defendants did not abuse their dominant market positions because of the legitimacy of their acts.
  
  Conclusion
  
  The promulgation and implementation of the Anti-monopoly Law is a milestone in the history of China’s legislation. However, the implementation of anti-monopoly law has been accompanied by endless controversies in every country. Anti-monopoly is an exotic area in China’s legal system, so it lacks sound local resources for self-growth and independent improvement. China’s legislative, law enforcement and judicial sectors are all quite unfamiliar with anti-monopoly law and have virtually no independent experience. They mainly depend on foreign experiences and theoretical research at the literary level. Anti-monopoly is a complex issue involved with legal, policy, economic and social factors and should be considered thoroughly from various perspectives. The verdict of this case has fully elaborated the recognition of dominant market position as well as the definition of abusing acts, and expounded the reasons profoundly, which is of high reference value.
  
  (Translated by Li Yu)
  
  

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