On January 5th, 2013, the Xi’an Intermediate People’s Court (the “Court”) ruled in favor of a consumer who sued Shanxi Broadcast & TV Network Intermediary (Group) Co., Ltd. (“Network”), the local cable service provider, for tie-in and imposing unreasonable sales conditions by tying basic cable services with digital channel services. The Court found that the Network’s practice of selling basic cable services on the condition that the subscribers also purchase digital channel services violated Article 17(5) of the Anti-Monopoly Law (“AML”) regarding tie-in sales and imposition of unreasonable trade conditions. In reaching this decision, the court reasoned that because the Network is a lawful monopoly in the local market for cable TV, its conditioning of the sale of basic cable service on the customer’s subscription for digital channels infringes upon the customer’s freedom of choice and diminishes consumer welfare.

Alleged Tie-in of Basic Cable and Digital Channel

In this case, plaintiff Wu Xiaoqin was informed by the Network that the monthly charge for cable had increased from RMB 25 yuan to RMB30 yuan. Upon further inquiry, Wu learnt that the 5 yuan surcharge was intended for additional digital channels. Displeased with the Network’s price increase, Wu brought this antitrust action alleging that the Network’s practice of selling basic cable and digital channels as a package violates AML Article 17 (5), which prohibits tie-in and unreasonable sales conditions without justification.

Relevant Market and Dominant Position

Market definition is a preliminary step in a tie-in claim. The court sided with the plaintiff’s contention that because the Network is a lawful monopoly in Shanxi province, the relevant market should be defined as the Network’s service area and that the Network has a dominant position in the market.

Article 9 of The Provisions of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Civil Dispute Cases Arising from Monopolistic Conduct (“Judicial Interpretation”) provides that where the alleged monopolistic conduct is an abuse of the dominant position by a public utility or any other operator that has a dominant position pursuant to the law, the people’s court may, in light of the market structure and the specific circumstances of competition, determine that the defendant has a dominant position in the relevant market, unless such a determination can be overturned by contrary evidence.

China’s public utilities include water supply, electricity supply, heating, gas supply and other operators providing public services through a network or other infrastructures. Most public utilities belong to natural monopoly industries and have monopoly positions.

Unlike previous abuse of dominance cases where the courts very often dismissed plaintiffs’ claims on the ground that the plaintiffs failed to establish the defendants’ dominant position, the Court seemed to have no difficulty in finding the Network’s dominance by following the approach in the Judicial Interpretation.

Separate Products Requirement

A tie-in sale is an agreement by a party to sell one product (“the tying product”) but only on the condition that the buyer also purchases a different product (“the tied product”). To find the alleged tying arrangement as illegal under AML Article 17(5), the court first has to determine there were two different products. In this case, the Court regarded the basic cable services (price set by the provincial pricing authority) and digital channel services (price not subject to government intervention) as two separate products by taking into account demand differences and the usual course of dealing.

Anti-competitive Effects

Pursuant to Article 6 of the AML, an enterprise is prohibited from abusing its market dominance to expel or restrict competition, suggesting that anti-competitive effects resulting from the alleged abusive conduct have to be established to sustain an abuse of dominance claim. We notice that in a recent U.S. Court of Appeals Decision, Brantley v. NBC Universal, Inc., 675 F.3d 1192, plaintiffs brought an action to compel programmers and distributors of television programming to sell each cable channel separately, thereby permitting plaintiffs to purchase only those channels that they wished to purchase, rather than paying for multi-channel packages. The court dismissed the plaintiffs’ claim on the ground the plaintiffs failed to establish injury to competition.

In this case, the Network has a lawful monopoly in the market for cable services. Therefore, the alleged tying arrangement could not adversely affect competition in the cable service market because there is no competition to affect. Nevertheless, the Court does not appear to address this issue in reaching into its decision.

Instead, the court found that consumer welfare is harmed in this tying arrangement. However, the Brantley decision cited above appears to suggest that the effects of the programs bundling on consumers can be subject to severe disputes and that a more robust and sophisticated economic analysis may be needed to shed further light on the effects of the alleged tying arrangement on consumer welfare.

Conclusion

This is one of the few cases so far that the court has found in favor of the plaintiff in an antitrust private action and to the extent of our knowledge, the first published case involves tying. While it is encouraging to see courts ready to apply the AML, there are issues in this case that deserve more robust analysis. We believe that as antitrust law further develops in China, a more sophisticated antitrust analysis of tying arrangement will surface.