China’s Anti-Monopoly Law (AML) has been in effect for over 18 months, and to date most headlines generated by the law relate to merger control decisions by China’s Ministry of Commerce (Mofcom). Outside of Mofcom’s reviews, enforcement of the law has been relatively limited. The regulatory bodies charged with enforcing the law’s ‘conduct rules’ (rules governing day to day trading behaviour) appear reluctant to initiate cases before key measures explaining how the rules will be applied in practice are finalised, and until recently it seemed China’s courts were similarly hesitant to progress the hearing of AML-related civil actions.
The prospects for AML-related litigation appear to be changing, however. Several high-profile decisions have been handed down in recent months, and it is understood that the volume of cases being filed has grown as a result. Notwithstanding that there is yet to be a successful AML-related civil action, an increasing number of Chinese citizens and activist lawyers appear to believe civil actions under the law offers their best hope for seeking to remedy perceived abuses of power and fair competition principles by government departments and corporations alike.
In this update (the first in a two-part series) we summarise the basis for civil action rights under the AML, before turning to examine five of the more notable cases concluded so far. Part II of this update series, to be published shortly, will then seek to identify the major lessons from these cases that should be heeded by companies operating in (or selling into) China.
ANTI-MONOPOLY LITIGATION UNDER THE AML
Article 50 of the AML entitles individuals and business operators to bring civil actions for damages against entities that engage in a violation of the AML. Building on this principle, it has now been confirmed that third parties can file AML-related lawsuits with the intermediate courts of a province, autonomous region or municipality. These courts will have first instance jurisdiction over AML cases, and have assigned the task of conducting relevant hearings to existing IP tribunals or new specialized AML panels under their administration.
This is generally perceived as a positive development, as the intermediate courts (and in particular the existing IP tribunals) have a reputation for being more sophisticated forums, and boasting more qualified judges, than other courts in China. It can be argued that they are also less susceptible to the influence of political interests or advocates of local protectionism.
More detailed rules on the handling of AML-related civil actions are understood to be in development, and there are reports these rules include provision for “double damages” orders to encourage litigation in this area.
In the interim, other civil action procedures are being developing on a ‘case by case’ basis, stimulating great interest in each decision that is handed down, and the processes employed to reach that decision.
Five notable cases so far
During the first few months of the law’s operation, there were many reports of complainants seeking to lodge AML-related claims with China’s courts. However, it seems a large number of these claims were rejected on technical grounds, or faced lengthy delays before acceptance.
An example is the GAQSIQ case, which was the first AML-related civil action to receive significant media attention. In this case, lodged in August 2008, four companies engaged in developing electronic anti-counterfeiting technology filed a suit with the Beijing No.1 Intermediate People’s Court against China’s General Administration of Quality Supervision, Inspection and Quarantine (GAQSIQ). GAQSIQ is a government body involved in standard-setting and quality inspections.
The plaintiffs in this case alleged that GAQSIQ abused its power in violation of the AML’s administrative monopoly provisions, by requiring that certain products be promoted on an electronic supervision website in which GAQSIQ has a significant equity interest before those products could be approved for manufacture and sale in Beijing.
The case generated great interest, as an initial test of the utility of both the AML civil action mechanism and the rules seeking to curb anti-competitive behaviour by government bodies. However, about a month after the suit was filed, the Beijing court dismissed the case on the grounds that the statute of limitations for raising claims against GAQSIQ under China’s Administrative Litigation Law had expired. The correctness of this finding was questioned by some commentators, and there were suggestions the court may have been looking for a way to defer hearing civil actions until the regulatory bodies charged with developing a full framework of regulations and guidance documents to explain how the AML conduct rules should be applied in practice had progressed this task.
CHINA MOBILE CASE
The next major case that was widely reported in China was the China Mobile case. In this action, filed with a district court in Beijing on 4 March 2009 and subsequently transferred to the Beijing No. 2 Intermediate People’s Court, activist lawyer Mr Zhou Ze alleged that China Mobile had abused its dominant position in China’s mobile telecommunications market by engaging in unlawful price discrimination.
Specifically, Zhou alleged that China Mobile was acting in a discriminatory fashion by supplementing his mobile service usage fees with a monthly service fee that was not charged to other customers. He sought damages and an order requiring China Mobile to stop charging the disputed fee component going forward. Interest in the case was heightened by the fact that China Mobile is a state-owned-enterprise, and the AML contains ambiguous provisions suggesting such enterprises may be at least partially exempt from the law.
However, on 23 October 2009 the court announced that the customer and China Mobile had settled the dispute. According to media reports, China Mobile agreed to cease charging Zhou Ze the disputed fee and also agreed to pay him RMB1,000, which amount was referred to as a token of the company’s gratitude for Zhou’s input on pricing issues.
The first case in which a Chinese court determinatively applied the AML was the Shanda case in late 2009. Specifically, on 23 October 2009, the Shanghai No. 1 Intermediate People’s Court announced that it was dismissing the alleged abuse of dominance case filed by Beijing Shusheng Electronic Technology (a technology company operating the web portal www.du8.com) against Shanda Interactive Entertainment Limited and one of its subsidiaries (which operate literature websites).
The plaintiff’s primary claim in the case was that the defendants abused their dominant position in China’s online reading market by compelling a writer to stop producing a sequel to a popular novel (originally published by the defendants) which had been commissioned by the plaintiff. The plaintiff alleged that this constituted an abuse of a dominant market position in the online literature market, and asked the court to order the defendant to cease the relevant practices, and to compensate the plaintiff for their losses.
The court denied the relief requested by the plaintiff, holding that the plaintiff had failed to prove that the defendants held a dominant position in the relevant market. The court also found that the defendants’ conduct was justified in the circumstances (and thus could not constitute unlawful abuse of any dominant market position), as it aimed to protect their IP rights by preventing the plaintiff from misleading the public into believing the unauthorized sequel was written by the same author as the original.
On 18 December 2009, in the Baidu case, the Beijing No. 1 Intermediate People’s Court also dismissed an AML-related claim on the basis that the plaintiff had failed to establish that the defendant held a dominant position.
Specifically, the court ruled for Baidu (a leading Chinese internet search company) in relation to an action brought by Tangshan Renren Information Services Co. (which operates an online medical consulting service). The plaintiff alleged that Baidu held a dominant position in the China search engine market, and had abused this position in violation of the AML by taking steps to limit public access to the plaintiff’s website. The plaintiff claimed that after it reduced its spending on Baidu’s bid-for-ranking system (pursuant to which companies could pay for greater exposure in the form of higher rankings in search-result listings), Baidu took steps to give the plaintiff a less prominent listing in its search engine results.
The plaintiff’s evidence was deemed insufficient to prove that Baidu held a dominant market position. Additionally, the court appeared to accept Baidu’s claim that the low ranking achieved by the plaintiff’s website was due to the standard operation of the Baidu search engine algorithm rather than targeted ‘retaliation’ against the plaintiff by Baidu due to reduced spending.
BEIJING NETCOM CASE
Just six days letter, in the Beijing Netcom case, the Beijing No.2 Intermediate People’s Court handed down a similar decision.
This case concerned the terms of Beijing Netcom’s mobile service contracts. The plaintiff, Mr. Li Fangping, alleged that Beijing Netcom held a dominant position in the mobile services market in Beijing, and had engaged in discriminatory treatment in violation of the AML’s abuse of dominance prohibition by imposing certain terms for customers who were not permanent Beijing residents. Specifically, Li’s concern was that such customers were required to either provide a guarantee for their fixed-line telephone service bills or pay in advance - in which latter case they would not qualify for certain discounts or preferential packages offered by China Netcom to pay-after-call customers.
In addition to finding that the plaintiff had not proved the defendant’s dominance, the Beijing court commented that the defendant’s conduct appeared to be a legitimate measure to avoid debt collection problems, and was not discriminatory - as permanent Beijing residents with a history of overdue payments were also required to join the pre-payment plan.
Business operators who may have viewed the AML regime with suspicion and questioned whether China’s courts were equipped to deal with antitrust cases will doubtless be encouraged by these cases, as they demonstrate that an appropriately high bar will be set for the establishment of AML-related claims.
However, companies operating in or selling into China will need to remain vigilant, and heed the key lessons from these cases, to minimise the risk of becoming the AML’s next major headline.
In Part II of this update to be published shortly, we will set out five key lessons that can be taken from the reported civil action to date.