Tale of Two Cases: Chinese Courts Will Proceed Cautiously With Anti-Monopoly Law

The enactment of China's Anti-Monopoly Law (AML) in August 2008 was a significant step for a country edging ever closer to a truly modern economy.

In many ways, the AML follows the lead of the American and European antitrust regimes by providing broad guidelines regarding abuse of dominance, cartels and merger review. The statute also gives private parties (as well as the government) a right of action against offenders.

To date, most of the focus surrounding the AML has been on merger review. High-profile cases featuring multinationals such as Coca-Cola and Panasonic have dominated the business news headlines (see "Merger Measures," p. 38), and many commentators expected that focus to continue. But a new trend stemming from the AML is inching its way into the public consciousness.

"Somewhat unexpectedly, private civil cases alleging abuse of dominance are beginning to appear," says Carole Handler, an antitrust partner at Wildman Harrold Allen & Dixon.

So far all but one of the cases alleging abuse of dominance have culminated without an adjudication on the merits. Most have been lodged against government organizations, industry associations and large companies. Along with several other cases, one suit against the General Administration of Quality Supervision, Inspection and Quarantine of the People's Republic of China produced a ruling that the limitation period had expired. The remaining cases settled or the parties withdrew them.

But one of the settled cases, Zhou v. China Mobile Communications Corporation, provides significant clues as to the way Chinese authorities and courts will treat these suits from a procedural perspective. And Beijing Sursen Electronic Co. and Shanghai Shanda Network Development Co., which did produce a final decision from the court, provides important insights on how the Chinese courts will approach the substantive provisions of the AML.

Power Play

The AML prohibits companies from abusing dominant market positions by eliminating or restricting competition. The law defines "dominant position" as one that permits a company to control price, quantity or other trading terms in a market, or to restrict or affect other firms' entry into the market.

Regulators and plaintiffs in private suits can establish that a dominant position exists by showing a market share of 50 percent or more, a company's actual ability to control a market, the extent to which other market participants depend on the allegedly dominant concern or other economic factors such as entry barriers.

In China Mobile, a consumer sued his state-owned cell phone company, the largest mobile provider in the world, for abusing its dominant position. Alleging that the network charged multiple fees for substantially similar services, he sought to recover his mobile fees for the past two years. The parties settled the case in October 2009 for an amount slightly less than what the plaintiff had claimed.

Shortly thereafter, the Beijing High People's Court published a regulation, Hierarchical Jurisdiction over Cases of the First Instance of IPR [intellectual property rights] Disputes. The regulation stated that AML-related IPR disputes under the court's jurisdiction would be tried by the Beijing municipal intermediate courts rather than district courts. While this initial regulation is limited to IP-related AML disputes, commentators expect that as further cases arise that are not in the IP-context, they will also likely be transferred to the intermediate court under a future regulation. They point to the fact that the Specialized AML Panel established by the Shanghai No. 2 Intermediate Court has announced that the intermediate courts in its jurisdiction would preside over all first instance private disputes with an AML component.

Sursen Says

On the same day China Mobile settled, the Shanghai No. 1 Intermediate People's Court released its decision in Shanda-Sursen.

The case arose from a copyright dispute between Beijing Sursen Electronic Co. and Shanghai Shanda Network Development Co. regarding a serialized novel published on Shanda's online Chinese literature portal, which features books that surfers can read as they're being written. Shandha held the copyright for the novel, but the author stopped writing. Two other authors published a sequel on Sursen's Web site without authorization from Shanda, which threatened the authors with legal action and instructed search engines to eliminate the sequel from their results.

Consequently, the authors stopped publishing the sequel and issued an apology on Shanda's Web site. The public apology, however, raised the ire of surfers accustomed to free offerings.

After discussion forums challenged the legality of Shanda's behavior as anti-competitive, Sursen sued Shanda in April 2009 for violating the AML by abusing its dominant position in the market.

But the court found that Shanda did not have a dominant position in the "online literature market."

The court decided Shanda's claim that it had an 80 percent market share was mere "puffery," and the obligation remained on the plaintiff to make its claim, which it had failed to do. Besides, Sursen itself had claimed to be the world's largest e-book portal.

Alternatively, even if Sursen established Shanda's dominant market position, Shanda's conduct was justified to prevent the plaintiffs from misleading the public by inducing it to believe that the original work and the unauthorized sequel had been written by the same authors.

It was therefore reasonable for Shanda to order the new writers to stop publishing, and the existence of valid justification for that conduct precluded a finding of abuse.

"The decision amounts to a ruling that reasonable efforts to enforce IP rights are not abusive under the AML," says Song Zhu, a partner at Squire, Sanders & Dempsey. "It bodes well for foreign companies trying to enforce IP rights in China."

Proceed With Caution

Initial indications, then, are that Chinese courts will proceed cautiously in considering abuse of dominance claims. Indeed, with the dismissal in Shanda-Sursen, there is not yet a single decision in China finding that such abuse existed.

"Commentators are divided over whether these rulings will stimulate a proliferation of private actions," Handler says. "Reactions in the press range from suggestions that the impact will be minimal to predictions that these decisions are harbingers to class actions."

The AML specifically allows class actions but does not specifically address suits by individuals.

"The courts have not addressed this issue and could rule that only class actions are permitted," Handler says.

However that may be, private AML actions appear to have at least passed the litmus test.

"There's no longer any doubt that civil litigation of this kind is viable in the Chinese courts," says Roy Zou, counsel at Hogan & Hartson's Beijing office.

Contributing Author

Julius Melnitzer

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