3Q case and the role of market share in determining dominance

By Wang Yadong and Qin Wen, Run Ming Law Office
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On 16 October 2014, the Supreme People’s Court Intellectual Property Tribunal publicly issued its judgment in the 3Q case, which is a market dominance abuse suit by Beijing Qihoo Technology against Tencent Technology (Shenzhen) and Shenzhen Tencent Computer System. The court dismissed all the claims of Qihoo and upheld the initial judgment that Tencent did not abuse market dominance.

王亚东 Wang Yadong 润明律师事务所 执行合伙人 Executive Partner Run Ming Law Office
Wang Yadong
Executive Partner
Run Ming Law Office

In terms of judicial practice, this is the first anti-monopoly case heard by the Supreme People’s Court. In the 70,000-word judgment of the court – which explains the applicability of various rules in the Anti-Monopoly Law (AML) – the interpretation of the role of market share in judging a company’s market dominance is noteworthy.

Dominant market position

Article 17 in the AML provides that dominant market position means a market position held by undertakings that are capable of controlling the prices and quantities of commodities or other transaction terms in a relevant market, or preventing or exerting an influence on the access of other undertakings to the market.

Article 18 in the AML provides that the dominant market position of an undertaking shall be determined on the basis of the following factors: (1) its share of a relevant market and the competitiveness of the market; (2) its ability to control the sales market and the purchasing market of raw and semi-finished materials; (3) its financial strength and technical conditions; (4) the extent to which other business undertakings depend on it in transactions; (5) the difficulty that other undertakings find in entering a relevant market.

秦文 Qin Wen 润明律师事务所 合伙人 Partner Run Ming Law Office
Qin Wen
Partner
Run Ming Law Office

Market share

Article 19 of the AML provides that the conclusion that an undertaking holds a dominant market position may be deduced from several circumstances, including that the market share of one undertaking accounts for half of the total in a relevant market.

However, if an undertaking that is considered to hold a dominant market position has evidence to the contrary, it shall not be considered to hold a dominant market position.

In determining what constitutes a dominant market position, there have been discussions about different options including the methods based on market outcome, market behaviour and the market structure. Some scholars hold the opinion that the method based on market structure refers to the circumstance in which an undertaking that has considerable market share holds a dominant market position.

The US courts used to regard market share as the sole criterion when they determined the monopoly of an undertaking, or dominant market position. However, US courts subsequently defined monopoly as the capacity of an undertaking to control price and limit competition in the case US v E I du Pont in 1956, because market share is not the only criterion to determine market dominant position.

Combined methods

The AML has apparently combined the above-mentioned methods for determining a dominant market position; confirming the significance of market share in determining market dominant position and regarding market share as the leading criterion, while specifying that an undertaking with market share that has exceeded a certain percentage may be deduced to hold dominant market position.

However, it has not regarded it as the only determining criterion and provides that an undertaking which is deduced to hold a dominant market position but has evidence to the contrary, shall not be determined to hold a dominant market position.

The 3Q case

Based on the facts determined by the Supreme People’s Court, Tencent holds over 80% market share in both the fields of personal computing and mobile instant messaging services (or relevant markets), and the closest competitor, Aliwangwang, has only 4.4% and 6.8%, respectively. It means, on the basis of relevant regulations of the AML, Tencent should be deduced to hold the dominant market position because it has such a high market share.

However, in this case, the Supreme People’s Court decided: “The status and effect of market share in determining dominant market position shall be based on specific circumstances.”

The authors believe that traditional industries have relatively slow progression in market share because they are quite restricted by physical factors. As a result, a higher market share leads easily to stronger competitiveness and dominant market position.

In contrast, emerging industries like high-tech are under limited influence of physical factors and could have swift changes in market share. For example, the increase in market share of WeChat, or Weixin, has been unimaginable for traditional industries since it was launched in 2011.

The ruling

Noting the difference between the market of instant messaging services and traditional markets, the Supreme People’s Court determined that Tencent did not hold the dominant market position. This decision aligns with the competition of specific industries when combining various factors including the competition of relevant markets, the ability of the defended undertaking to control the prices and quantities of commodities and other transaction terms, the financial strength and technical conditions of the undertakings, the extent to which other undertakings depend on the defended undertaking, and the difficulty for other undertakings of entering relevant markets.

In anti-monopoly cases, the determination of market dominance abuse is a process combining various factors. Although market share is essential in the determination, it should not be regarded as its only base for judgment and its effects vary in various fields and in judicial practice.

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