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|Su Sun has worked on mergers reviewed by China’s Ministry of Commerce (MOFCOM) and has conducted economic analysis on issues such as patents and standards on behalf of both Chinese and non-Chinese clients. He has published extensively on antitrust developments in China.|
Five years after China’s Antimonopoly Law took effect, the pace of both antitrust enforcement and private litigation has increased. While many have focused on the merger reviews and cartel investigations conducted by the Chinese enforcement agencies, recent developments in private antitrust litigation in China also merit attention. In particular, the Chinese courts have shown an increasing interest in reviewing economic evidence and analysis in adjudicating antitrust disputes. Three recent cases stand out as the most prominent examples of this trend.
Rainbow v. Johnson & Johnson was the first resale price maintenance (RPM) case in China. Johnson & Johnson sold medical equipment and products, such as suture thread used in surgeries, to hospitals in China. Rainbow was a long-time distributor of Johnson & Johnson. When Rainbow submitted bids on suture thread to a hospital in Beijing that were lower than the minimum resale price Johnson & Johnson had stipulated in their distribution agreement, Johnson & Johnson revoked Rainbow’s right to distribute its products. The Shanghai No. 1 Intermediate Court ruled for Johnson & Johnson in 2012, but the decision was reversed by the Shanghai High Court in 2013. Both sides hired economic experts who debated issues, such as product and geographic market definition, whether Johnson & Johnson had dominance in the relevant markets, and what the RPM agreement’s effect was on intra-brand competition and inter-brand competition. Some academic studies done by U.S. scholars were cited by the plaintiff’s expert. The experts on the two sides also provided different interpretations of the price data. In the Shanghai High Court’s final decision, the judges discussed the merits of such economic evidence. Though there seemed to be room to sharpen and expand some of the economic analyses, both sides clearly realized the importance of economic evidence in this case, and the Shanghai High Court weighed both sides’ economic analyses in adjudicating the dispute.
Another high profile case was Qihoo v. Tencent. Qihoo is a leading antivirus software provider, and Tencent offers QQ, a leading instant messaging software in China. In an earlier lawsuit, Tencent alleged that Qihoo’s antivirus software interfered with the functionality of Tencent’s QQ, for example, by blocking its pop-up advertisements, and thus competed unfairly and harmed Tencent’s legitimate business interests. In an antitrust countersuit, Qihoo alleged that Tencent redesigned QQ to be incompatible with computers running Qihoo’s antivirus software, forcing users to choose between the two, and by doing so, abused its market dominance. The two sides’ economic experts submitted reports and also testified in court hearings on the definition of the relevant market, whether Tencent had a dominant position in the relevant market, and if so, whether Tencent abused such market dominance. In 2013, the Guangdong High Court ruled that Qihoo failed to define a narrow relevant market that only included QQ, MSN and Skype, and failed to prove Tencent’s dominance in the relevant market. The very lengthy court decision reflects the complexity of the case. For example, instant messaging is a two-sided market, and such markets have been recognized to have different properties from traditional markets. The Guangdong High Court in its decision applied a hypothetical monopolist test to define a broad relevant market, even though such a price test may not be well suited for a two-sided market where the user of the software does not pay a monetary price for using the service. The court also evaluated a significant amount of factual evidence in defining the relevant market and analyzing the dominance issue. This antitrust case is currently under appeal at the Supreme People’s Court. (In February 2014, the Supreme People’s Court affirmed the Guangdong High Court’s decision in favor of Tencent in the earlier unfair competition case.)
A case involving intellectual property that attracted a lot of attention was Huawei v. InterDigital. Huawei is a leading wireless communications device maker headquartered in Shenzhen in Guangdong province, and InterDigital is a non-practicing entity based in the United States. InterDigital holds a significant number of patents in wireless communications technology, including patents that are essential to the 2G, 3G and 4G wireless standards. The two parties failed to reach a licensing agreement after several rounds of negotiations. InterDigital filed lawsuits in 2011 against Huawei (and others) at the U.S. International Trade Commission and in U.S. district court for allegedly infringing seven of its U.S. patents related to 3G technologies. Huawei responded by suing InterDigital in the Shenzhen Intermediate Court. In one complaint, Huawei claimed that InterDigital abused its dominant position in licensing standard essential patents (SEPs) in the 3G wireless communications standard by imposing tying and discriminatory and other unreasonable conditions, and by initiating lawsuits seeking injunctions against Huawei in the United States. Separately, in another complaint, Huawei alleged that InterDigital violated its commitments to license SEPs at a fair reasonable and non-discriminatory (FRAND) royalty rate and asked the court to determine the appropriate FRAND rate. In February 2013, the Shenzhen Intermediate Court ruled that InterDigital abused its market dominance in licensing its standard essential patents, and the FRAND rate should not be more than 0.019% of Huawei’s product price. Upon InterDigital’s appeal, the Guangdong High Court affirmed the lower court’s decision in December 2013. The parties have since reached a settlement agreement on their global patent disputes. The Shenzhen Intermediate Court’s decision on the FRAND rate was about two months before April 2013, when a U.S. court for the first time determined a FRAND rate. (That determination was in Microsoft v. Motorola.) The Shenzhen court recognized some issues the U.S. court considered as important in determining FRAND rates for SEPs, such as royalty stacking, and tried to find comparable licenses to calculate the appropriate FRAND rates.
China’s judiciary has become more confident in deciding difficult antitrust cases that involve a significant amount of factual evidence and complex economic analyses. The courts’ increasing reliance on economic evidence and expert opinions in adjudicating antitrust disputes should be considered by parties planning strategies for antitrust litigation in China.