China’s First Court Decision under the Antimonopoly Law: A Misreading of the Law?

Posted by Wentong Zheng

On October 23, 2009, the Shanghai No. 1 Intermediary People’s Court in China handed down a decision in what became China’s first case under the Antimonopoly Law (“AML”) decided by a court (see here for a press report of the case in Chinese and here for a summary of the case in English).   In its decision the Shanghai court rejected the plaintiff’s claim that the defendant abused its dominant position in China’s online literature market by taking inappropriate action aimed at enforcing its copyrights.

Because of its “firstness,” and also because of the importance of its subject matter—abuse of dominant position under the AML, this case has aroused quite some interest in the antitrust community.  Given the timing of this case, I thought I would interrupt the sequence of my planned blog entries on this space to offer my thoughts on it.  I will have more to say about China’s dominance law in general in a future post.

Unfortunately, people who are looking for guidance on the direction of China’s dominance law and think this case may offer some clues will likely be disappointed.  A close reading of the press report (the court decision itself is not available online yet) led me to believe that the plaintiff filed its claim, and the court adjudicated the plaintiff’s claim, both based on a misreading of the AML.  If my analysis below is correct, this case has no relevance to abuse of dominant position under the AML and the court should not have ruled on the AML aspects of the case at all.

First of all, here is what happened in the case.  The plaintiff is a web portal in China that specializes in publishing what is called “online literature” in China—fictions or non-fictions written by web surfers, often anonymously, that are published exclusively online.  The plaintiff commissioned and published a sequel to a popular online fiction that was first published on another online literature portal co-owned by the defendant (SNDA).  The defendant believed that the sequel infringed its copyrights in the original online fiction and asked the authors of the sequel to discontinue writing the sequel.  The authors of the sequel complied with the defendant’s request.  The defendant also requested other web portals in China not to publish the episodes of the sequel that were already written.  The plaintiff sued the defendant in court, alleging that it abused its dominant position in the online literature market by engaging in those conducts.

Now let’s look at what the AML has to say about abuse of dominant position (there is no official English translation of the AML and the translation below is my own).  Article 17 of Chapter 3 of the AML sets forth an exhaustive list of conducts that constitute abuse of dominant position and therefore are prohibited by the AML.  The prohibited conducts are: (1) selling products at unfairly high prices or buying products at unfairly low prices; (2) selling products at prices below costs without justifications; (3) refusal to deal with transaction counterparts without justifications; (4) restricting transaction counterparts to only deal with the undertaking or undertakings designated by the undertaking without justifications; (5) tying products or imposing other unreasonable conditions on the deal without justifications; (6) discriminatory treatment of equally situated transaction counterparts with respect to price or other transaction terms without justifications; and (7) other conducts that constitute abuse of dominant position as determined by the antimonopoly enforcement agency.  

According to the press report, it is Article 17(4) that the plaintiff argued the defendant violated. 

At trial the two sides had heated exchanges about how to define the relevant market and whether the defendant is a dominant player in the relevant market.  The court finally agreed with the defendant, holding that the plaintiff did not provide sufficient evidence that the defendant is a dominant player in China’s online literature market.  The court further held that, even assuming that the defendant is a dominant player, its conducts do not violate Article 17(4) because they are “justified.”

But the court did not address the most crucial issue: are the defendant’s conducts covered by Article 17(4)?  For people familiar with antitrust law, Article 17(4) apparently refers to what is known as “exclusive dealing” in the U.S. and EU.  So how could the defendant’s conducts be said to constitute exclusive dealing or anything remotely resembling exclusive dealing?  In my opinion, there is no way that the plaintiff could make that characterization.

So if my analysis is correct, the court should not have addressed the AML aspects of the case at all.  The defendant’s conducts do not fall within the scope of Article 17(4).  Nor do they fall within the scope of the other sections of Article 17.  If China had an equivalent of FRCP 12(b)(6), this case would be an ideal candidate to be dismissed for failure to state a claim upon which relief can be granted.  But since China does not have an equivalent of FRCP 12(b)(6), I understand that the court was obligated to take up the case.  But the court should have come out very clearly saying that this case has nothing to do with the AML and should have addressed the copyrights issue only.

But apparently both the plaintiff and the defendant—and the court—believe that this case is covered by the AML.  So could there be something else not reported by the press that makes the defendant’s conducts one of the prohibited conducts?  That is possible, but not very likely.  A more plausible explanation, at least to me, is that both parties and the court simply misread the AML.  As we know, the drafters of the AML heavily borrowed terms and concepts from the antitrust law of the U.S. and EU—“exclusive dealing” among one of them.  But the vast majority of the Chinese public—and perhaps a significant majority of lawyers and judges, too—are not familiar with the business contexts from which those borrowed terms and concepts arise.  Given the terseness of the AML text, they would have difficulties understanding what those terms and concepts really mean.  When an average person in China (lawyers and judges included) reads the AML and sees the words “restriction,” “transaction counterparts,” and “deal” juxtaposed against one another in the same sentence, it is tempting for him or her to misread the law by concluding that the sentence may somehow describe the complained conducts.

This case is not the first case in which this kind of misreading happened.  In September 2008, the Chinese press reported (see here for the report in Chinese) that shortly after the AML went into effect, a lawsuit was filed under the AML in the southwestern city of Chongqing against one of the major state-owned banks.  The plaintiff company had a checking account with the defendant bank, which charged an account management fee for any accounts with deposits less than a certain amount.  The plaintiff’s account was assessed the account management fee pursuant to the bank’s policy, but the plaintiff had refused to pay the fee because it believed the charge was unreasonable.  When the plaintiff tried to withdraw funds from the checking account using a cashier’s check, the bank refused to accept the check because of the nonpayment of the fee.  In the lawsuit, the plaintiff alleged that the bank abused its dominant position through its “refusal to deal” under Article 17(3) and “discriminatory treatment of equally situated transaction counterparts” under Article 17(6).  I believe that by now anyone familiar with antitrust law will have been amazed by the novel meanings the terms “refusal to deal” and “discriminatory treatment” have taken on in China.  But the court took the plaintiff’s arguments seriously, and accepted the case for official adjudication.  As of today, I have not seen any press reports that the court has reached a conclusion in that case.

This kind of misreading drives home the deep skepticism the drafters of the AML had towards enforcement of the AML by private actions through the courts.  As I recall, the earlier drafts of the AML used to contain one entire chapter devoted to private actions.  In the final draft, private right of action is still allowed but the provision granting it has been reduced to one single sentence, which by the way is ambiguous and conveniently hidden in a non-conspicuous place (Article 50: “Undertakings that are engaged in monopolistic conducts and cause damages to other parties assume civil liabilities in accordance with law.”  Unsuspecting eyes may not even recognize that Article 50 talks about private right of action).

Exit question: So far I have assumed that the terms and concepts used in the AML have the same meaning as their Western counterparts—e.g., “refusal to deal” in China has the same meaning as “refusal to deal” in the U.S. and EU.  But could the AML really mean something else when it uses those terms and concepts?  For example, could the drafters of the AML really have intended “refusal to deal” to capture the refusal by the Chongqing bank to deal with its customers?  I do not think that is the case.  But if it were, it would represent an enormous expansion of the reach of antitrust law.  Either way, the Supreme People’s Court had better come out with an interpretative ruling clearly detailing what types of conducts are prohibited under the abuse of dominant position provisions of the AML.  I bet all of us would want to know.