In what appears to be a case of first impression under China’s Anti-Monopoly Law (AML), the Shanghai First Intermediate People’s Court rejected a plaintiff’s contention that a defendant’s action to enforce its copyright was in violation of the AML.

Though not yet published by the court, the decision has been widely reported in the news media. At the core of the dispute is the defendant’s effort to enforce its copyright. An author started a serialized novel on a Chinese literature Web portal of the defendant, Shanghai’s Shanda Interactive Entertainment Ltd. Shanda owned the copyright under a contract between the author and Shanda. The author stopped writing soon after the novel became popular. Two other authors, without Shanda’s authorization, then started a sequel on the website of Beijing Scholar’s Electronic Technology Company – a company specializing in online books. There were significant similarities between the original story and the sequel including pen names, titles and the use of the same characters. Shanda threatened the sequel’s authors with legal action and requested search engines to rebuff search requests to locate the sequel. Under this threat, the two authors stopped the sequel and posted an apology on Shanda’s website.

Beijing Scholar responded by bringing an action against Shanda in Shanghai, alleging that Shanda’s assertion of copyright infringement was an abuse of its dominant position in the online book market in violation of the AML.

Beijing Scholar did not seem to dispute that the sequel infringed Shanda’s copyright. Under China’s Copyright Law, a person who has produced derivative work by recomposing, translating, commenting on or compiling the work of another is afforded his or her own copyright to the new work. However, the original author is protected under the Copyright Law’s broad definition of the moral and property rights, and the person who plans to produce derivative work is required to obtain the original author’s permission and pay compensation.

Because copyright infringement was not directly at issue, the Shanghai court focused only on Beijing Scholar’s AML claim. The court first found that Beijing Scholar had not established that Shanda had a dominant position in the online book market. The court observed:

  1. Beijing Scholar had the burden of proving that Shanda had a dominant position in the online book market. It was insufficient for Beijing Scholar to meet its burden by relying only on Shanda’s claim on its website that it had an 80-percent market share, which the court considered as merely “puffery.”
  2. Beijing Scholar itself had claimed to be the world’s largest e-book portal – how did this earlier assertion jibe with the company’s claim that Shanda had a dominant market position?

The court further ruled that even if Shanda had a dominant position in the online book market, its action would still not constitute an abuse under the AML. The court found that Shanda’s action was reasonable in view of the sequel’s use of similar title and pen name, and its adoption of the original story’s characters and plot.

Interestingly, the Shanghai court did not appear to have applied Article 55 of the AML, the provision that applies the AML to the elimination or restriction of market competition by abusing IP rights. Article 55 has created a significant amount of anxiety among foreign companies in China. For many foreign companies, IP forms a core part of their business strategy in China. Questions have been raised about whether Article 55 merely clarifies that abuse of IP rights is within the purview of the AML or whether it creates a separate, wider prohibition. The fear is that the provision might be manipulated to hinder or deter foreign companies’ legitimate efforts to enforce their IP rights against Chinese competitors. It also reinforces broader concerns about the enforcement of IP rights in China.

The court’s decision does not directly address foreign companies’ concerns about Article 55. Nevertheless, the decision is significant because it is the first case in China to adjudicate the issue of whether an IP enforcement action violates the AML. It is reassuring that the court chose to apply the AML’s general principles in analyzing whether the IP enforcement action violated the AML, suggesting that Article 55 should not be construed as providing a separate category for abuse of IP rights. The court’s analysis of “dominant market position” seems to imply that for an IP enforcement action to run afoul of the AML the IP owner must have a dominant position in the relevant market. The decision also suggests that an IP owner’s effort to enforce its IP rights does not constitute “abuse” under Article 55 as long as the effort is “reasonable” in view of the infringing activities.

China’s Supreme Court is presently drafting a judicial interpretation on the procedures for AML civil litigation. And, agency authorities entrusted with the interpretation and enforcement of the AML are preparing guidance for its application to IP enforcement. Therefore, the Shanghai court’s decision notwithstanding, it still remains to be seen whether Article 55’s prohibition against abuse of IP rights extends to the enforcement activities of non-dominant IP owners, and what enforcement activities constitute abuse of IP rights under Article 55. The answers to these questions will go a long way toward determining how much impact the AML will have on IP enforcement in China.