Microsoft may have a viable legal defence against its first ever anti-monopoly claim in China, given the prevalence of pirated Microsoft products in the country and how “market share” is defined by the Chinese authorities.

When lawyer Dong Zhengwei, a partner with Beijing-based Zhongyin law firm grabbed the headlines by alleging that Microsoft was using its dominant market share to manipulate software prices in China and calling for a US$1bn fine to be imposed on the global software giant, Microsoft global VP Zhang Yaqin was quick to reply with an interesting counter argument: “Microsoft did not even have the preconditions of conducting monopoly activities in China,” he said “genuine Microsoft products have a very low market share in China because its products are widely pirated.”

Pirated goods

According to 2006 figures from the Business Software Alliance, an industry group that tracks the illegal software trade, an estimated 82% of software installed on computers in China were pirated. The BSA calculated that sales lost due to software piracy in China were about US$3.9 billion in 2005 alone.

Lawyers ALB spoke to said that in determining a “dominant market position”, the Anti-Monopoly Law will mainly focus on whether a company has  the power to control the price, sales volume and other trading conditions of its products.

“Obviously, sales of fake goods beyond the control of the genuine producers, and it is unreasonable to count fake goods into the determination of market share.  Thus, as a victim of fake goods, I won't be surprised if Microsoft's market margin in China is much smaller than most people have expected,” said Michael Zhang, a senior legal consultant at Sheppard, Mullin, Richter & Hampton’s Shanghai office.

Relevant market

Dominance of a company’s preponderant market share is also determined by its “relevant market”. “There is a presumption of single firm dominance with a market share of 50%, though dominance may also be found where a lower market share exists. In order to establish the market share, it is necessary to define the “relevant market”, said Kirstie Nicholson, Of Counsel at Lovells in Shanghai. “It is not clear whether the relevant software market in China comprises only genuine products or includes fakes.  With no case law to look to for guidance, it is not clear at this stage how the Anti-Monopoly Enforcement Agency will approach the question of market definition,” she said.

The case has sparked global interest for several reasons. China’s Anti-Monopoly Law (AML) – which took effect on August 1 – is closely based on anti-competition law in the European Union, where Microsoft faced a series of anti-trust investigations in the past decade and was fined more than US$613m in 2004 by the European Commission.

As China finds its feet with its new Anti-Monopoly Law and puts more bite into its Intellectual Property laws, this case will be one to watch closely as the software giant is both an alleged perpetrator of software monopoly and a victim of pirates.

China's Anti-Monopoly Law (AML) took effect last month on August 1. The provisions relate mainly to anti-competitive monopoly agreements, abuse of dominant position, and abuse of administrative power. Interestingly, the abuse of property rights are also provided for in the new legislation under section 55 of the AML. Business operators can be taken to task for eliminating or restricting market competition by abusing intellectual property rights.