Preamble

On November 18, 2022, the Supreme People’s Court of the People’s Republic of China (the “SPC”) published an announcement soliciting public comments on the draft of Provisions of the Supreme People’s Court of the People’s Republic of China on Several Issues concerning the Application of Law in the Trial of Monopoly-related Civil Dispute Cases (the “Draft”). Compared with the Provisions of the Supreme People’s Court of the People’s Republic of China on Several Issues concerning the Application of Law in the Trial of Civil Dispute Cases Arising from Monopolistic Conduct (the “2012 Interpretation”) issued by the SPC in 2012, which is the first judicial interpretation on China’s antitrust law, the Draft encompasses 52 articles and provides much more detailed interpretations on lots of procedural and substantive matters involved in antitrust civil litigation. When the Draft is formally adopted and comes into effect in the future, the 2012 Interpretation will be voided.

The key changes in the Draft can be divided into four categories: (1) provisions introduced or amended for being in alignment with the amendment to the Anti-monopoly Law of the People’s Republic of China (the “AML”) in 2022; (2) provisions reflecting the judicial opinions held by the people’s court in the antitrust jurisprudence; (3) provisions drawing on the provisions issued by China’s antitrust law enforcement authority; (4) provisions with groundbreaking content to some extent. The Draft includes responses to multiple complex and controversial issues in judicial practice. This article intends to introduce the key changes in the Draft with two parts, the procedural matters (Part I: Changes to Procedural Matters) and the substantive matters (Part II: Changes to Substantive Matters).

Brief regarding the changes to substantive matters: Articles 16 to 19, Articles 20 to 29, and Articles 30 to 43 of the Draft separately set out the provisions on the definition of the relevant market, the determination of monopoly agreement, and the determination of abuse of dominance, which include specified provisions on key issues in the fields of platform economy and intellectual property. In addition, the Draft introduces detailed provisions on civil liability from Articles 44 to 50.

1. Specifying the methods of defining the relevant market in monopoly civil dispute case.

Articles 17 to 19 of the Draft provide on how to define the relevant market in monopoly civil dispute case, and the provisions drawing on the content of the Guidelines on the Definition of Relevant Market issued by the Anti-monopoly Commission of the State Council and the Anti-monopoly Guidelines of the Anti-monopoly Commission of the State Council in the Field of Platform Economy (the “Guideline for Platform Economy”). The key provisions include the following:

Paragraph 1 of Article 17 of the Draft provides: “When defining the relevant product market and the relevant geographic market in which the undertaking compete with each other with respect to specific products or services (hereinafter collectively referred to as the “Products”) during a certain period, the people’s court may, on the basis of the specific products directly involved in the alleged monopolistic conduct, conduct a demand substitution analysis from the perspective of the demanders; if the competitive constraint caused by supply substitution on undertakings is similar to that of demand substitution, the people’s court may also conduct a supply substitution analysis from the perspective of the suppliers.” This article clarifies the principle and basic method of defining the relevant market in a monopoly civil dispute case, i.e., a demand substitution analysis and/or supply substitution analysis may be conducted on the specific products directly involved in the alleged monopolistic conduct.

Paragraph 2 of Article 17 of the Draft provides: “The people’s court may adopt the analysis method of the hypothetical monopolist test when defining the relevant product market and the relevant geographic market, and generally choose the hypothetical monopolist test method of price rising; and if the competition between undertakings is mainly shown in terms of quality, diversity, innovation and other non-price competition, the hypothetical monopolist test method of quality declining and cost rising may be adopted.” This article provides for different hypothetical monopolist test methods based on whether the competition between undertakings concerned is mainly shown in terms of price.

Before the issuance of the Draft, the people’s courts have already applied the hypothetical monopolist test (the “HMT”) in the context of non-price competition. For example, In Qihoo v. Tencent, the SPC held that the HMT, as a kind of analysis method to define the relevant market, is generally applicable, but the choice of HMT method needs to be determined on a case-by-case basis. In the fields where product differentiation is very obvious, and quality, service, innovation, consumer experience, and other non-price competition have become the important methods of competition, it is inappropriate to adopt the test of “small but significant and non-transitory increase in price” (the “SSNIP”). Under such circumstances, alternative methods of HMT shall be adopted, such as the test of “small but significant non-transitory decrease in quality” (the “SSNDQ”).

2. Introducing provisions on the determination of competitive relationship and the theory of “Single Economic Entity”.

(1) Specifying how to determine the competitive relationship between undertakings.

Article 17 of the Anti-monopoly Law of the People’s Republic of China (the “AML”) sets forth the provisions regarding horizontal monopoly agreement, that is, the undertakings with competitive relationship reaching an agreement, decision or other concerted practice to exclude or restrict competition. Therefore, to determine whether undertakings have reached or implemented a horizontal monopoly agreement, the first thing is to determine whether they have a “competitive relationship”. For undertakings with no “competitive relationship”, even if the agreement reached by them may have the effect of excluding or restricting competition, it shall not fall within the scope of horizontal monopoly agreements prohibited by Article 17 of the AML.

Paragraph 1 of Article 21 of the Draft provides: “Undertakings with a competitive relationship as provided for in Article 17 of the Anti-monopoly Law refer to two or more actual or potential undertakings that are at the same stage of production and operation, provide products with close substitution relationship, make independent business decisions, and assume legal liability.”

This new provision of the Draft specifies how the people’s courts determine the competitive relationship between undertakings. Actually, before the issuance of the Draft, the people’s courts have already adopted the above methods and principles in precedents. For example, in Shanghai Huaming v. Wuhan Taipu, the SPC held that, the competitive relationship under the Anti-monopoly Law is defined as two or more undertakings at the same operation stage of production or distribution of products, that provide substitutable products or have a realistic possibility of entering into the same relevant market. (Note: For a detailed introduction, please see, Why Settlement Agreements in Patent Litigation were Deemed as Monopoly Agreements? — — Analysis Of the Judgement and Criteria for Determining Monopoly Agreement by the Supreme People’s Court)

(2) Introducing the theory of “Single Economic Entity”.

Paragraph 2 of Article 21 of the Draft provides: “Two or more undertakings that shall be deemed as a single economic entity do not constitute an undertaking with a competitive relationship as mentioned in the preceding paragraph. To make a judgment, the people’s court shall take into account the specific situation and consider factors such as whether the undertaking has control over other undertakings concerned or can exert a decisive influence on them, whether such two or more undertakings are controlled by the same third party or have decisive influence thereon.”

This is the first time that the SPC explicitly indicates that the theory of “Single Economic Entity” can be applied to determine whether undertakings have a competitive relationship in an anti-monopoly dispute case. The Draft does not specify how to identify “control” or “decisive influence”, but based on the anti-monopoly law enforcement practice, especially in the merger control review cases, the determining factors are not limited to the factors for the identification of control under the company law, the security law or the financial audit regulation. All of the relevant factors such as the equity structure, the appointment of senior management, and the control of business and financial arrangements may be identified as determining factors of “control” or “decisive influence”.

For example, in the penalty decision against three calcium gluconate active pharmaceutical ingredient (“API”) suppliers — Shandong Kanghui Medicine (“Kanghui”), Weifang Puyunhui Pharmaceutical (“Puyunhui”) and Weifang Taiyangshen Pharmaceutical (“Taiyangshen”) — for abuse of dominance imposed by the State Administration for Market Regulation (the “SAMR”) on 9 April 2020, the SAMR identified a de facto controlling relationship among the three API suppliers even if they have no equity relationship, with each registered as an independent legal entity. The SAMR held that both Puyunhui and Taiyangshen were controlled by Kanghui and carried out their business under the instructions of Kanghui: (1) Kanghui regarded Puyunhui and Taiyangshen as its departments and coordinated relevant matters through work contact forms; (2) when Kanghui took the inventory of API products, the inventories of Puyunhui and Taiyangshen were also counted; (3) Kanghui carried out its business by sending instructions to Puyunhui and Taiyangshen and exerted a full control of the transactions of API products distributed by Puyunhui and Taiyangshen.

Where two or more undertakings are deemed as a single economic entity, it may not only affect the judgment on whether the agreement reached by them constitutes a horizontal monopoly agreement, but also affect the judgment on whether they have dominant position in the relevant market considering that their market share will be aggregated as that of one single economic entity. For example, in the above-mentioned penalty decision against the three API suppliers, when the SAMR determined the dominance of the three API, their market share in the relevant market were aggregated as a single economic entity.

3. Amending the provisions on the determination of monopoly agreement.

(1) Specifying the determining factors of “other concerted practices”.

Article 16 of the AML provides: “For the purposes of this Law, monopoly agreement refers to agreement, decision or other concerted practice that excludes or restricts competition.” According to Article 5 of the Interim Provisions on Prohibition of Monopoly Agreements (the “Provisions on Monopoly Agreements”) issued by the SAMR, “… other concerted practice refers to a practice carried out by undertakings in the absence of a definite agreement or decision between undertakings which nevertheless has been coordinated in substance.”

Paragraph 1 of Article 20 of the Draft provides: “The people’s court shall consider the following factors when determining other concerted practice under Article 16 of the AML: (1) whether there is consistency or relative consistency in the market conducts of undertakings; (2) whether there has been communication or exchange of information between undertakings; (3) market structure, competition status, market changes and other situations in the relevant market; and (4) whether the undertakings can provide reasonable explanations on the consistency or relative consistency of their conducts.” Paragraphs 2 and 3 of Article 20 of the Draft introduce the provisions on the burden of proof. (Note: For more details, please see, Part I: Changes to Procedural Matters)

The factors for determining “other concerted conducts” listed in the Draft are basically the same as the provisions in Article 6 of the Provisions on Monopoly Agreements. Actually, before the issuance of the Draft, the people’s courts have already determined whether the defendants have carried out “other concerted conduct” based on the above-mentioned factors in precedents. For example, in Li Bingquan v. Xiang Pin Tang, the SPC determined whether the five defendants had carried out “other concerted conduct” from the following aspects: (1) the purchase records submitted by the plaintiff could prove that the five defendants had sold the same water product at the same price; (2) a preliminary assumption that the undertakings concerned had exchanged information or intentions could not be made only based on the fact that the similarity of prices of the same water product in the limited area; (3) the plaintiff failed to provide evidence regarding the market structure, competition status, market change and other circumstance of the relevant market. Considering the factors such as the similarity of the water product concerned, the limited area where the undertakings concerned sold the products, the transparency of product price, and the limited number of undertakings, the SPC determined that the existing evidence submitted by the plaintiff is insufficient to exclude the possibility of independent pricing by the five defendants.

(2) Specifying how to determine whether the vertical monopoly agreements have the effect of excluding or restricting competition.

Paragraph 1 of Article 18 of the AML provides: “Conclusion of any of the following monopoly agreements between undertakings and their trading counterparts is prohibited: (1) fixing the price of products for resale to a third party; (2) restricting the minimum price of products for resale to a third party; and (3) any other monopoly agreement as determined by the anti-monopoly law enforcement authority of the State Council.” In practice, the first two monopoly agreements are generally referred to as “Price-related Vertical Monopoly Agreements” or “Resale Price Maintenance Agreements” (the “RPM agreement”), while the third circumstance is generally referred to as “Non-price Vertical Monopoly Agreements”.

The amendment to the AML adds a new provision as Paragraph 2 on the determination of the RPM agreement: “An agreement specified in Item (1) or (2) of the preceding Paragraph shall not be prohibited if the undertakings concerned can prove that such agreements do not have effects of excluding or restricting competition.” Based on the amendment to the AML, the undertakings can argue that the agreement with the content specified either in Item (1) or Item (2) of Paragraph 1 of Article 18 of the AML does not constitute the RPM agreement prohibited by the AML if they can prove that such agreement does not have effects of excluding or restricting competition.

Article 26 of the Draft provides: “When reviewing and determining whether an alleged monopolistic conduct has the effect of excluding or restricting competition in accordance with Paragraph 1 of Article 18 of the Anti-monopoly Law, the people’s court may comprehensively consider the following factors: (1) whether the defendant has significant market power in the relevant market; (2) whether the agreement has adverse competition effects such as raising the entry barrier to market, hindering more efficient distributors or distribution models, or restricting inter-brand competition; and (3) whether the agreement has favorable competition effects such as preventing free-riding, promoting inter-brand or intra-brand competition, safeguarding brand image, improving pre-sale or after-sale service levels, or promoting innovation. Where the defendant has significant market power in the relevant market, the favorable competition effects that can be proved by the documented evidence are insufficient to outweigh the adverse competition effects, the people’s court shall rule that the agreement has the effect of excluding or restricting competition.”

This provision specifies how to determine whether the vertical monopoly agreements have the effect of excluding or restricting competition. The theoretical bases of the determining factors such as preventing free-riding and the promotion of inter-brand competition are the same as those set out in the Anti-monopoly Guidelines of the Anti-monopoly Commission of the State Council for the Automobile Industry (the “Guideline for Automobile Industry”).

(3) Circumstances where the people’s court may preliminarily determine that the agreement concerned does not constitute a vertical monopoly agreement.

Article 27 of the Draft provides: “If the defendant can prove any of the following circumstances, the people’s court may preliminarily determine that agreement concerned does not constitute a monopoly agreement stipulated in Paragraph 1 of Article 18 of the Anti-monopoly Law: (1) the transaction counterparty of the agreement is an agent of the undertaking, and does not bear any substantive commercial or operational risks; (2) the defendant’s market share in the relevant market is lower than the standard established by the anti-monopoly law enforcement authority of the State Council, and it also satisfies the other conditions specified by the anti-monopoly law enforcement authority of the State Council; or (3) the agreement is implemented within a reasonable period to incentivize the transaction counterparty to promote new products.”

In addition to specifying the application of the “Safe Harbor” rule in vertical monopoly agreement disputes (Note: For more details, please see, Part I: Changes to Procedural Matters), the Draft also involves two other circumstances where the people’s court may preliminarily determine that the relevant agreement does not constitute a vertical monopoly agreement. These circumstances are also included in the Guideline for Automobile Industry. Specifically, Part (2) of Article 6 of the Guideline for Automobile Industry lists the common situations where undertakings in the automobile industry may apply for exemption of resale price restrictions on a case-by-case basis pursuant to the AML, including:

  • Short-term restrictions on sub-sale price of new energy vehicles. In order to conserve energy, protect the environment and avoid “service free rider”, the short-term fixing of sub-sale price and specifying the minimum sub-sale price of new energy vehicles are necessary for encouraging the dealers to strive to promote the new energy products, make greater sales efforts, and expand the market demands for the new products, which may promote the successful release of new products into the market and give the consumers more choices.
  • Sub-sale price restrictions in sales by a dealer that only plays the role of an intermediary party. Sale by a dealer that only plays the role of an intermediary party refers to the sales where the auto supplier and a particular third party or a particular end customer directly agree on the sales price, and only have the dealer to complete the vehicle delivery, funds collection, invoice issuing or other parts of selling steps. In such transactions, the dealer assists in completing the transaction by playing the role of the intermediary party only, different from the dealer in the general sense.

Article 18 of the AML stipulates that the vertical monopoly agreement is a monopoly agreement concluded between the undertaking and its counterparty, but it does not provide for the definition of the “counterparty”. In practice, vertical monopoly agreements are usually concluded either between the manufacturer and the wholesaler/retailer or the wholesaler and the retailer. Item (1) of Article 27 of the Draft specifies that the people’s courts may preliminarily determine that the agreement concerned does not constitute a vertical monopolistic agreement if the counterparty is an agent and does not bear any substantive commercial or operational risks. In determining whether the counterparty shall be deemed such an agent, the key considerations may include whether the counterparty is responsible for the costs of the supply of goods, the storage of goods, the damages caused to third parties, and certain investments for selling the goods.

(4) Introducing provision on the determination of the organizer and facilitator of monopoly agreement, and the joint and several liability borne by them.

The amendment to the AML introduces new provision under Article 19 stating that “An undertaking shall not organize other undertakings to reach a monopoly agreement or provide substantive assistance for other undertakings to reach a monopoly agreement.” In addition to the provisions on horizontal monopoly agreements (i.e., monopoly agreements concluded between competitive undertakings) and vertical monopoly agreements (i.e., monopoly agreements concluded between undertaking and its trading counterparty), the amendment introduces the above provisions on circumstance theoretically referred to as “Hub and Spoke Conspiracy”. In addition, the amendment to AML keeps the provisions on the prohibition against the industry associations from organizing undertakings to conduct monopolistic conducts.

Paragraph 1 and 2 of Article 28 of the Draft introduces provisions that the plaintiff has the rights to claim that the undertaking or organization of undertakings which conduct organization or provide substantive assistance for other undertakings to conclude or implement a monopoly agreement bear the joint and several liability for the damages caused by the monopoly agreement concerned. Paragraph 3 and 4 of Article 28 of the Draft separately provides how to determine “organize other undertakings to reach a monopoly agreement” and “provide substantive assistance for other undertakings to reach a monopoly agreement” stipulated in Article 19 of the AML.

According to Paragraph 3 and 4 of Article 28 of the Draft, (1) “organize” refers to conducts such as forming, leading, planning, manipulating, directing and initiating that play a decisive or dominant role in concluding or implementing a monopoly agreement; (2) “provide substantive assistance” refer to conducts such as guiding the occurrence of illegal intent, providing convenience, serving as an information channel and assisting in imposing punishments, which play a direct and important role in promoting the conclusion or implementation of a monopoly agreement. The Provisions on Prohibition of Monopoly Agreements (Draft for Comments) published by the SAMR on June 27, 2022, also sets forth provisions on how to determine “organize” and “provide substantive assistance”. The key factors and theoretical basis of the provisions under this document are basically the same as that of the Draft, but this document has not been formally adopted either.

4. Amending the provisions on the determination of market dominance and abuse of dominance.

(1) Introducing provision on the determination of market dominance which includes rebutting the assumption of collective dominance.

The Draft introduces provisions on the determination of market dominance of the undertakings concerned in monopoly dispute cases under Article 30, Article 32, Article 34, Article 35 and Article 36. The provisions are basically consistent with the relevant content of the Interim Provisions on the Prohibition of Abuse of Dominant Market Position (the “Provisions on Abuse of Dominant Market Position”), the Provisions of the State Administration for Market Regulation on the Prohibition of Abuse of Intellectual Property Rights to Exclude or Eliminate Competition (the “Provisions on the Abuse of Intellectual Property Rights”) and the Guideline for Platform Economy and the opinions formed in administrative enforcement. These new and amended provisions reflect the connection between administrative enforcement and judicial practice. Limited to the length of this article, we will not elaborate on this section, but only introduce the provisions on rebutting the assumption of collective dominance.

Article 36 of the Draft provides: “Where the people’s court presumes that two or more undertakings collectively have dominant market position in accordance with Item (2) and (3) of Paragraph 1 of Article 24 of the Anti-monopoly Law, such presumption may be rebutted if the undertaking has evidence to prove either of the following circumstances: (1) there is substantial competition between such two or more undertakings; or (2) such two or more undertakings, as a whole, are subject to effective competitive constraints from other undertakings in the relevant market.” These are detailed interpretations of the provisions under Paragraph 3 of Article 24 of the AML, which stipulates that “Where an undertaking presumed to hold a dominant market position is able to provide evidence that it does not hold such a dominant market position, it shall not be deemed to hold the dominant market position.” Although “substantial competition” and “effective competitive constraints” are yet to be further clarified by the people’s court, the opinions held by the people’s court in precedents can be used for reference.

In Ma Lijie v. China Mobile Communications Group Henan, the SPC for the first time mentioned the factors and standards for determining the collective market dominance. The SPC held that “Based on the common sense regarding the market operation, if multiple undertakings in the relevant market adopt different behaviors in respect of the same business, this is usually a normal result of market competition among the undertakings, and thus it is unnecessary to consider determining the collective market dominance. Therefore, only when multiple undertakings in the relevant market adopt the same behaviors in respect of the same business which reflects the consistency of behavior, it is necessary to consider determining the collective market dominance. For this reason, to determine whether multiple undertakings have formed a collective market dominance, in addition to examination of their market shares, factors such as the consistency of their behaviors also need be considered.”

(2) Introducing provision on the determination of abuse of dominance.

The Draft introduces provisions on the determination of abuse of dominance conducted by the undertakings concerned in monopoly dispute case under Article 37 to 43. The provisions draw on the content of with the relevant content of the Provisions on Abuse of Dominant Market Position, the Guideline for Platform Economy, the Provisions on the Abuse of Intellectual Property Rights, the Anti-Monopoly Guidelines of the Anti-Monopoly Commission of the State Council in the Field of Intellectual Property Rights (the “Guideline for Intellectual Property Rights”), and the opinions formed in administrative enforcement. These new and amended provisions reflect the connection between administrative enforcement and judicial practice. Limited to the length of this article, we will not elaborate on this section.

5. Introducing provisions on the key issues in the field of platform economy.

The Draft provides specified provisions on the key issues in the field of platform economy which draw on the content of the Guideline for Platform Economy, and the opinions formed in administrative enforcement. In addition, the Draft introduces reference provisions to the relevant provisions of the E-commerce Law of the People’s Republic of China (the “E-commerce Law”). Limited to the length of the article, we will not elaborate on this section of the content, but only introduce the provisions on the Most-Favored-Nation Clause and interconnection issues in the field of platform economy.

(1) Introducing provisions on Most-Favored-Nation Clause.

Article 24 of the Draft provides: “Where the agreement between an undertaking operating internet platform and an undertaking using the internet platform requires that the undertaking using the internet platform provides the same or more preferential transaction conditions on the internet platform as other transaction channels, the people’s court may, according to the plaintiff’s claims and the specific circumstances of the case, handle the case as follows: (1) where there is a competitive relationship between the undertaking operating internet platform and the undertaking using the internet platform, the people’s court shall review the case in accordance with Article 17 of the Anti-monopoly Law; (2) where there is no competitive relationship between the undertaking operating internet platform and the undertaking using the internet platform, the people’s court shall review the case in accordance with Article 18 of the Anti-monopoly Law; (3) where the plaintiff claims that the undertaking operating internet platform abuses the dominant market position, the people’s court shall review the case in accordance with Article 22 of the Anti-monopoly Law and Article 22 of the E-commerce Law; and (4) where the plaintiff claims that the undertaking operating internet platform violates Article 35 of the E-commerce Law, the people’s court shall review the case in accordance with the provision of this article.”

The above new provisions of the Draft set forth how to determine whether the Most-Favored-Nation Clause (the “MFN Clause”) in the field of platform economy constitutes illegal monopolistic conduct. MFN Clause is originally a term used in international economic trade which means the “best available terms”. With the development of the digital economy, the MFN Clause has been used more widely in digital publishing, e-commerce, online travel, online insurance and other sectors. On the one hand, the MFN Clause helps to reduce transaction costs and buyer risks, but on the other hand, it may also have a foreclosure effect and facilitate the collusion between undertakings. Therefore, the MFN Clause falls under the scope of antitrust regulations in lots of key antitrust jurisdictions such as the United States and the European Union. Before the issuance of the Draft, Paragraph 2 of Article 7 of the Guideline for Platform Economy also set forth provisions on the MFN Clause: “If an undertaking operating internet platform requires the undertaking using the internet platform to provide the platform with transaction conditions equal to or more favorable than those provided to other competitive platforms in terms of price, quantity, or other aspects of the product, it may constitute a monopoly agreement or abuse of the dominant market position.”

So far, China’s antitrust enforcement authorities and people’s courts have not determined whether the MFN Clause constitutes monopolistic conduct in any published precedents. In the penalty decision against Eastman (China) for abuse of dominance imposed by the Shanghai Administration for Market Regulation (the “Shanghai AMR”), the Shanghai AMR identified that the MFN Clause concerned as a method to impose transaction restriction but did not mention whether the MFN Clause itself constituted monopolistic conduct.

According to the above new provisions of the Draft and the relevant provisions of the E-commerce Law, when determining whether the MFN Clause in the field of platform economy constitute illegal monopolistic conduct, the people’s court shall, according to the plaintiff’s claims and the specific circumstances of case, conduct the following analysis methods:

  • Based on whether there is a competitive relationship between the undertaking operating internet platform and the undertaking using the internet platform, the people’s court shall review the case in accordance with the relevant provisions on horizontal monopoly agreements or vertical monopoly agreements under the Anti-monopoly Law.
  • If the plaintiff claims that the undertaking operating internet platform abuses its market dominance, the people’s court shall review the case in accordance with the relevant provisions on the abuse of dominance under the Anti-monopoly Law, and also Article 22 of the E-commerce Law which provides that “The E-commerce undertaking which owns market dominance due to its technical advantages, number of users, ability to control related industries, and other undertakings’ dependence on such E-commerce undertaking in terms of transactions, it is not allowed to abuse its market dominance to exclude or restrict competition.”
  • If the plaintiff claims that the undertaking operating internet platform violates Article 35 of the E-commerce Law which provides that “The undertaking operating E-commerce platform shall not use the service agreement, transaction rules, technology or other means to impose unreasonable restrictions or conditions on the transactions, the transaction price and transactions with other undertakings of the undertakings who use the platform, or to charge unreasonable fees from the undertakings using the platform”, the people’s court shall review the case in accordance with the provision of this article.

(2) Introducing provisions on interconnection issues in the field of platform economy.

In recent years, China’s authority has been greatly promoting the interconnection between the platforms due to its importance for the development of national economy and the protection of consumer welfare. The Provisions on Abuse of Dominant Market Position and the Guideline for Platform Economy stipulate that refusing other undertakings to use essential facilities may constitute abuse of dominance and provide the considerations for determining essential facilities.

The Draft also set forth provisions regarding the interconnection between the platforms, which provides that the refusal to make one’s products, platforms or software systems compatible, and the refusal to share one’s technologies, data or platform interface may be deemed as monopolistic conducts. Paragraph 2 of Article 39 of the Draft provides: “Where an undertaking having a market dominance refuses to make its products, platforms or software systems, etc. compatible with other certain products, platforms or software systems, etc. provided by other undertakings without justified reasons, or refuses to share its technologies, data or platform interface, the people’s court may comprehensively consider the following factors and make the determination in accordance with Item (3) of Paragraph 1 of Article 22 of the Anti-monopoly Law: (1) the economic, technical and legal feasibility of the undertaking to implement compatibility or share its technologies, data or platform interface; (2) the substitutability of the products, platforms or software systems and the reconstruction costs of platforms or software systems; (3) the degree of dependence of other undertakings on the products, platforms or software systems of the undertaking concerned to carry out effective competition in the upstream market or downstream market; (4) the impact of refusal of compatibility or sharing on the innovation and introduction of new products; (5) whether refusal of compatibility or sharing substantially excludes or restricts the effective competition in the relevant market; and (6) the impact of implementation of compatibility or sharing on the business activities, legitimate rights and interests of the undertaking concerned.”

6. Introducing provisions on the key issues in the field of intellectual property.

The Draft provides specified provisions on the key issues in the field of intellectual property which draw on the content of the Provisions on the Abuse of Intellectual Property Rights, the Guideline for Intellectual Property Rights, and the opinions formed in administrative enforcement. Limited to the length of the article, we will not elaborate on this section of the content, but only introduce the provisions on the Reverse Payment Agreements.

Article 23 of the Draft provides: “Where the agreement reached and implemented by the drug patent right holder and the generic drug applicant meets all the following conditions, the people’s court may preliminarily determine that it constitutes a monopoly agreement as provided in Article 17 of the Anti-monopoly Law: (1) the drug patent right holder gives or promises to give the generic drug applicant a large amount of benefits compensation in monetary or other forms; and (2) the generic drug applicant promises not to challenge the validity of the patent right of the generic drug or delay to enter the relevant market of the generic drug. Where there is evidence that the benefits compensation referred to in the preceding paragraph is only made up for the cost of resolving the dispute relating to the patent of the generic drug or there are other legitimate reasons, the people’s court may determine that it does not constitute a monopoly agreement as provided in Article 17 of the Anti-monopoly Law.”

The above-mentioned provision specifies how to determine whether the Reverse Payment Agreements, also known as the “Pay-for-delay Agreements”, constitute illegal monopolistic conducts in judicial practice. Prior to the insurance of the Draft, people’s courts have clarified in precedents that the Reverse Payment Agreements may have the effect of excluding or restricting competition and constitute the monopoly agreement regulated by the AML.

On December 17, 2021, the SPC ruled on the application for withdrawal of appeal in AstraZeneca v. Jiangsu Aosaikang Pharmaceutical and for the first time made a preliminary antitrust review on the “reverse payment agreement of pharmaceutical patents”. In the process of reviewing the withdrawal of the appeal application, the SPC found that the settlement agreement in question was in line with the appearance of a “reverse payment agreement of pharmaceutical patents”, i.e. the drug patent right holder promises to compensate the generic applicant for direct or indirect benefits (including disguised compensation such as reducing the generic applicant’s non-benefits), and the generic applicant promises not to challenge the validity of the drug-related patent rights or delay entering the market of the patented drug. The applicant promises not to challenge the validity of the patent right of the drug or delay the entry into the market of the patented drug. The SPC pointed out that such agreements may have the effect of excluding or restricting competition and thus constitute the monopoly agreement prohibited by the AML. In this case, the SPC specified the method of conducting an antitrust review on the “reverse payment agreement of pharmaceutical patents”: by comparing the actual situation where the agreement was signed and fulfilled with the hypothetical situation where the agreement was not signed or fulfilled, the people’s court may focus on the possibility that drug-related patent rights are invalid due to the request for invalidation where the generic drug applicant does not withdraw that, and then, based on this possibility, analyze whether and to what extent relevant agreement causes harm to competition on the relevant market.

7. Specifying that plaintiff may bring lawsuit against the undertaking who benefits from the administrative monopolistic conducts.

Article 4 of the Draft provides: “Where the plaintiff files a civil lawsuit with a people’s court in accordance with the Anti-monopoly Law against the undertaking that benefits from the suspected abuse of administrative power to exclude or restrict competition by an administrative authority or an organization authorized by laws or regulations to administer public affairs, and requests the undertaking to bear civil liability, if the administrative conduct concerned has been legally identified as the abuse of administrative power to exclude or restrict competition, the people’s court shall accept the case.”

Chapter V of the AML sets forth the provisions on the conduct of abuse of administrative power to exclude or restrict competition (“administrative monopolistic conduct”), and Paragraph 1 of Article 61 of the AML provides that “Where administrative authorities and organizations authorized by laws and regulations to administer public affairs abuse their administrative powers to exclude or restrict competition, the superior authorities shall order them to make corrections; the directly liable persons in charge and other directly liable persons shall be punished.” However, the above provisions do not clarify whether an undertaking benefiting from an administrative monopolistic conduct (e.g., where the administrative authorities abuse their administrative power to request all the entities to buy the relevant products from certain undertaking) shall be held liable for any liabilities.

According to Article 4 of the Draft, where there is effective ruling that the administrative conduct concerned constitute an abuse of administrative power to exclude or restrict competition, the plaintiff may file a lawsuit against the undertakings who have benefited from the administrative monopolistic conduct. It remains to be further clarified in relevant regulations and judicial practices regarding how to determine the civil liability of the undertaking who benefit from the administrative monopolistic conduct.

8. Specifying that the people’s court may request the defendant to conduct certain acts to restore the market competition status.

Article 44 of Paragraph 2 of the Draft provides: “Where ruling that the defendant ceases the alleged monopolistic conduct is not sufficient to eliminate the effect of excluding or restricting competition, the people’s court may, based on the plaintiff’s claims and the specific circumstances of the case, order the defendant to take the legal liabilities of making specific acts to restore competition.”

According to the above provisions, in addition to legal liabilities such as compensating the plaintiff for the economic damages, if the defendant is found to have conducted illegal monopolistic conducts, the people’s court may rule that the defendant needs to take certain actions to restore competition, which will improve the effectiveness of judicial remedies. According to China’s antitrust law enforcement practice, we understand that the conducts ordered by the people’s court to restore competition in judicial practice may include terminating the exclusive agreement, terminating the additional unreasonable transaction conditions, terminating the discriminative transaction clauses, and guaranteeing the supply of products to the downstream enterprises, etc.

9. Specifying how to calculate the damages suffered by the plaintiff from the alleged monopolistic conduct.

Article 45 and 47 of the Draft introduce provisions on how to calculate the damages suffered by the plaintiff from the alleged monopolistic conduct, the main contents of which are as follows:

Firstly, the damages suffered by the plaintiff due to the alleged monopolistic conduct include direct damages and reduced acquirable benefits. The following factors may be referred to in determining the damages suffered by the plaintiff due to the alleged monopolistic conduct: (1) product prices, operating costs, profits, market shares, etc. in the relevant market before, after and in the course of implementation of the alleged monopolistic conduct; (2) product prices, operating costs, profits, etc. in comparable markets that are not affected by the monopolistic conduct; (3) product prices, operating costs, profits, market shares, etc. of comparable undertakings that are not affected by the monopolistic conduct; and (4) other factors that can reasonably prove the damages suffered by the plaintiff due to the alleged monopolistic conduct.

Secondly, if the defendant can prove that the plaintiff has transferred all or part of the damages to others, the people’s court may deduct the transferred damages when determining the amount of compensation. The newly added provisions of Paragraph 4 of Article 45 of the Draft are based on the “Passing-on” theory for the compensation in anti-monopoly civil dispute, that is, a circumstance where an undertaking suffering from monopolistic conducts transfers its damage to other entities. Based on the anti-monopoly practices and theories, a buyer (e.g., being forced to purchase a product at an unfairly high price) suffering damages from monopolistic conducts can “pass on” the damages to its downstream undertakings or consumers by resale of the products, raising prices or other means. In such a case, if such a buyer brings an action to claim against the undertaking who conducts the monopolistic conducts, the damages already passed on to other undertakings shall be deducted from compensation claimed for by the buyer. As for the “passed on” damages, the downstream undertakings or consumers may file a lawsuit against the monopolistic conducts concerned claiming for compensation.

Third, where the plaintiff has evidence to prove that the alleged monopolistic conduct has caused damages to it, but the amount is difficult to be determined, the people’s court may determine a reasonable compensation amount based on the plaintiff’s claim and evidence, and taking into account the nature, extent, duration and benefits obtained of the alleged monopolistic conduct. It is often very difficult to determine what specific effect of excluding or restricting competition is caused by monopolistic conducts on the relevant market (for example, what proportion of rise in the price of the products is due to the monopolistic conducts). In light of that, the Draft provides that if the plaintiff has proved that it has suffered from the alleged monopolistic conduct, the people’s court may determine a reasonable compensation amount based on the specific circumstances.

Fourth, where multiple alleged monopolistic conducts are combined with each other and cause indivisible overall damages to the plaintiff in the same relevant market, the people’s court shall take into account the overall damages when determining the damages. Where multiple alleged monopolistic conducts are independent from each other and cause damages to the plaintiff in different relevant markets, the people’s court may take into account such conducts separately when determining the damages.

10. The participants of a horizontal monopoly agreement are not entitled to claim for damages caused by that but can still claim for compensation of “reasonable expenses spent for the investigation and stopping of monopolistic conduct”.

Article 48 of the Draft provides: “Where an undertaking of a horizontal monopoly agreement files a claim against the other undertakings who have reached or implemented the agreement for compensation of damages incurred during the period of participating in the agreement in accordance with Article 60 of the Anti-monopoly Law, the people’s court shall not uphold the claim.”

The provisions added here in the Draft set forth the opinion held by people’s court in judicial practice, that is, the participants of horizontal monopoly agreement are not entitled to claim for damages caused by the implementation of such agreement. However, it should be noted that, according to the opinion held by people’s court in precedents, participants of horizontal monopoly agreement can still claim for the damages of the reasonable expenses for investigating and stopping the monopolistic conduct. For example, in Shanghai Huaming v. Wuhan Taipu, the SPC rejected the appellant’s claim for economic damages but upheld the appellant’s claim for compensation of reasonable expenses incurred due to bring the lawsuit. In this case, the SPC held that upholding the reasonable expenses claimed for by the plaintiff for bringing the lawsuit against horizontal monopoly agreement are conducive to disclosing and stopping monopolistic conduct, which shall be taken into consideration. (Note: For a detailed introduction, please see, Why Settlement Agreements in Patent Litigation were Deemed as Monopoly Agreements? — — Analysis Of the Judgement and Criteria for Determining Monopoly Agreement by the Supreme People’s Court)

*Thanks Liu YAN and Yuanyuan LIU for their contributions in this article.

[1]Case Number: (2013) Min San Zhong Zi No.4
[2] Case Number: (2021) Zui Gao Fa Zhi Min Zhong No. 1298.
[3]Case Number: (2021) Zui Gao Fa Zhi Min Zhong No. 1020.
[4]Case Number: (2021) Zui Gao Fa Zhi Min Zhong No. 1977.
[5]Case Number: (2021) Zui Gao Fa Zhi Min Zhong No. 388.
[6][1]Case Number: (2013) Min San Zhong Zi No.4
[2] Case Number: (2021) Zui Gao Fa Zhi Min Zhong No. 1298.
[3]Case Number: (2021) Zui Gao Fa Zhi Min Zhong No. 1020.
[4]Case Number: (2021) Zui Gao Fa Zhi Min Zhong No. 1977.
[5]Case Number: (2021) Zui Gao Fa Zhi Min Zhong No. 388.
[6]Case Number: (2021) Zui Gao Fa Zhi Min Zhong No. 1298.

Preamble

On November 18, 2022, the Supreme People’s Court of the People’s Republic of China (the “SPC”) published an announcement soliciting public comments on the draft of Provisions of the Supreme People’s Court of the People’s Republic of China on Several Issues concerning the Application of Law in the Trial of Monopoly-related Civil Dispute Cases (the “Draft”). Compared with the Provisions of the Supreme People’s Court of the People’s Republic of China on Several Issues concerning the Application of Law in the Trial of Civil Dispute Cases Arising from Monopolistic Conduct (the “2012 Interpretation”) issued by the SPC in 2012, which is the first judicial interpretation on China’s antitrust law, the Draft encompasses 52 articles and provides much more detailed interpretations on lots of procedural and substantive matters involved in antitrust civil litigation. When the Draft is formally adopted and comes into effect in the future, the 2012 Interpretation will be voided.

The key changes in the Draft can be divided into four categories: (1) provisions introduced or amended for being in alignment with the amendment to the Anti-monopoly Law of the People’s Republic of China (the “AML”) in 2022; (2) provisions reflecting the judicial opinions held by the people’s court in the antitrust jurisprudence; (3) provisions drawing on the provisions issued by China’s antitrust law enforcement authority; (4) provisions with groundbreaking content to some extent. The Draft includes responses to multiple complex and controversial issues in judicial practice. This article intends to introduce the key changes in the Draft with two parts, the procedural matters (Part I: Changes to Procedural Matters) and the substantive matters (Part II: Changes to Substantive Matters).

Brief regarding the changes to procedural matters: Articles 1 to 15 of the Draft address the procedural matters which mainly include the clarification that the arbitration agreement cannot be deemed the natural basis for excluding the jurisdiction of the people’s courts over monopoly civil disputes, the issues regarding the jurisdiction of the people’s courts over monopoly civil disputes, and the relationship between administrative enforcement and private litigation. In addition, the Draft introduces provisions on the parties’ burden of proof on the substantive issues.

1. Clarifying that arbitration clause cannot automatically exclude the statute jurisdiction of the people’s courts over monopoly civil disputes.

Article 3 of the Draft provides: “Where a plaintiff files a civil lawsuit with a people’s court pursuant to the Anti-monopoly Law, and the defendant raises an objection citing the existence of a contractual relationship and an arbitration agreement between parties, this shall not affect the acceptance of a monopoly civil dispute case by the people’s court. However, where the people’s court determines that the case is not a monopoly civil dispute case after acceptance, the people’s court may rule on rejection on this case pursuant to the law.”

The arbitrability of monopoly civil dispute has been a controversial topic in China for a long time. Neither the AML nor the Arbitration Law of the People’s Republic of China provides clear provisions on this issue, and the SPC has held different opinions on this issue in judicial practice. Article 3 of the Draft clarifies that the arbitration clause shall not affect the acceptance of a monopoly civil dispute case by a people’s court, even if that case arises from a contractual dispute which contains arbitration clause; and if the people’s court finds that it is not a monopoly civil dispute case after acceptance, the people’s court can dismiss the case accordingly. After the people’s court dismisses the case, the parties can resolve their disputes pursuant to the arbitration clause.

In multiple precedents (for example, Beijing Longsheng. v. Honeywe), the SPC ruled that arbitration clause could not be deemed the natural basis for excluding the jurisdiction of the people’s courts over monopoly civil disputes. The SPC held that in cases where the identification and handling of monopolistic conduct go beyond the rights and obligations relationship between the relevant parties, the content of such disputes and the object of trial are far beyond the scope of the agreed arbitration clauses. Therefore, the people’s courts have the statute jurisdiction over the case even if there are valid arbitration clauses.

Based on case research accessible to the public, only in one precedent, Shanxi Changlin v. Shell, did the SPC rule that the monopoly civil dispute should be governed by the valid arbitration clauses agreed by the parties and thus dismissed the case. However, according to a 19 September ruling posted on 15 November by the SPC, the SPC decided to review this case due to the protest lodged by the Supreme People’s Procuratorate (the “SPP”). According to the ruling posted by the SPC, the SPP concluded that this case falls under the circumstances specified in the sixth item of Article 207 of the Civil Procedure Law of the People’s Republic of China (the “Civil Procedure Law”) — which provides that a people’s court should retry a case if there is a mistake in the application of laws in the original ruling or adjudication — and lodged the protest. There is possibility that the original ruling on Shanxi Changlin v. Shell will be invalid if the people’s court rules that there are mistakes in the application of laws, thus solving the inconsistency of judicial opinions in precedents.

2. Further strengthening the centralized jurisdiction of people’s courts as the court of first instance over monopoly civil disputes.

Article 5 of the Draft provides: “The intellectual property court or the intermediate people’s court designated by the Supreme People’s Court shall have jurisdiction over civil monopoly dispute cases as the court of first instance.”

In light of the complexity of monopoly civil disputes, China’s judicial system has been strengthening the centralized jurisdiction over monopoly civil disputes, which includes having certain courts of first instance to exercise the jurisdiction. Since 2017, the National People’s Congress has successively decided to establish intellectual property courts in Beijing, Shanghai, Guangzhou, and Hainan, and the SPC has subsequently agreed to establish intellectual property tribunals inside the intermediate people’s courts in Chengdu, Nanjing, Suzhou and other more than twenty cities. The intellectual property courts/tribunals have cross-regional centralized jurisdiction over the monopoly civil dispute cases as the court of first instance.

The 2012 Interpretation, after the revision in 2020, provides that there are three kinds of people’s court as the court of first instance: 1) the intellectual property court; 2) the intermediate people’s court designated by the SPC; 3) the intermediate people’s court of a city where the people’s government of a province, autonomous region, or municipality directly under the Central Government is located or a city under separate state planning.

The Draft deletes the third kind of people’s courts and provides that only the first two kinds of people’s court have the jurisdiction over civil monopoly dispute cases as the court of first instance: 1) the intellectual property court; 2) the intermediate people’s court designated by the SPC, further strengthening the centralized jurisdiction over monopoly civil disputes. It is foreseeable that if the above changes are officially adopted, more intellectual property tribunals or intellectual property courts will be established in China to exercise centralized jurisdiction over monopoly civil disputes.

3. Introducing provision on the territorial jurisdiction of the people’s courts over the monopolistic conducts that occurred outside the territory of China.

Article 7 of the Draft provides: “Where a monopolistic conduct occurred outside the territory of the People’s Republic of China has the effect of excluding or restricting domestic market competition, and a party concerned files a civil lawsuit in accordance with the Anti-Monopoly Law against the defendant who has no domicile within the territory of the People’s Republic of China, the lawsuit shall fall under the jurisdiction of the people’s court at the place where the domestic market competition is directly and materially affected and the result occurs; if it is difficult to determine the place where the result occurs, the lawsuit shall fall under the jurisdiction of the people’s court at the place that has other appropriate connection with the dispute or at the domicile of the plaintiff.”

Before the release of the Draft, the SPC has already determined in multiple precedents, especially in precedents involving the licensing of standard essential patents (the “SEP”), that where a party files a lawsuit in China for damages suffered from the monopolistic conduct occurred outside the territory of China, the place where the alleged monopolistic conduct has the effect of excluding or restricting competition within the territory of China can be a connecting point for the determination of the jurisdiction over the case.

  • For example, in TCL v. Ericsson, the SPC held that in light of the special features of the SEP licensing market, the relevant negotiations and disputes in foreign jurisdictions might directly, substantively, and significantly exclude or restrict TCL Shenzhen’s participation in the market competition within the territory of China, and the domicile of TCL Shenzhen, namely Shenzhen, Guangdong Province, can be regarded as the place where the infringement results occurred, and therefore, Guangdong Shenzhen Intermediate People’s Court has jurisdiction over this case.

4. Amending the provisions on opinions of professional institutions/experts on specialized issues.

Article 12 of the Draft amends the provisions of the 2012 Interpretation on opinions of professional institutions/experts on specialized issues, mainly including the following aspects:

Paragraph 1 of Article 12 of the Draft provides: “The parties may apply to the people’s court for one or two persons who have the relevant expertise in the fields involved, economics and other fields to attend the court trial and explain the specialized issues relating to the case”, which provides for a detailed interpretation on “have the relevant expertise” in the 2012 Interpretation. In light of the characteristics of monopoly disputes, this article specifies that the professional institutions/experts mainly refer to the experts in the relevant market and economists.

Paragraph 2 of Article 12 of the Draft provides: “… the professional institution or experts may be determined by the parties through negotiation; if no agreement is reached, the people’s court shall make the designation …” and deletes “upon the consent of the people’s court” in the 2012 Interpretation, specifying the principle that the parties are free to choose experts and carry on the responsibilities on their own.

Paragraph 3 of Article 12 of the Draft provides: “Where a party entrusts of its own accord the relevant professional institution or experts to provide market research or economic analysis opinions with respect to specialized issues of the case, and such opinions lack of reliable facts, data or other necessary basic information, or lack of reliable analysis methods, or the evidence or reasons provided by the other party are sufficient to rebut such opinions, the people’s court shall not accept such opinions.” Although expert opinions have been frequently used in monopoly civil litigation, there are no explicit provisions on the examination standard of such opinions. This article indicates that the people’s courts shall adopt a stricter examination standard where a party entrusts of its own accord the relevant professional institution or experts to provide opinions; it also explains that the people’s court’s examination standards on opinions of professional institutions/experts include reliable facts, data, basic information, and methods of analysis.

5. Clarifying the relationship between public and private enforcement.

After being revised in 2022, Article 11 of the AML provides: “The State shall improve the anti-monopoly regulatory system, strengthen anti-monopoly regulatory power, enhance regulatory capacity and the modernization level of regulatory system, strengthen the public and private enforcement of Anti-monopoly Law, hear monopoly cases in a lawful, fair and efficient manner, improve the mechanism for connecting administrative enforcement with the judicial practice, and maintain the fair competition order.” On 17 November 2022, the SPC held a press conference of the judicial practice regarding anti-monopoly and anti-unfair competition, with a focus on the need to “continue to strengthen communication and cooperation with administrative enforcement departments”. There are multiple articles in the Draft clarifying the relationship between public and private enforcement.

Article 11 of the Draft provides: “Where a determination decision made by an anti-monopoly law enforcement authority on monopolistic conduct is not subject to administrative litigation within the statutory period or has been confirmed by an effective ruling of the people’s court, the plaintiff who claims for the constitution of such monopolistic conduct in the relevant civil monopoly dispute case does not bear the burden of proof regarding that, unless there is sufficient evidence to the contrary. Where necessary, the people’s court may require the anti-monopoly law enforcement authority who has made the determination decision to provide an explanation on the relevant information.” This article clarifies that the antitrust administrative decision can be used as evidence in private litigation, which reduces the plaintiff’s burden of proof and litigation costs, and thus will to some extent encourage relevant entities to file following-on civil actions after the anti-monopoly law enforcement authority makes the administrative decision.

Article 14 of the Draft provides: “If an anti-monopoly law enforcement authority is investigating an alleged monopolistic conduct, the people’s court may, depending on the circumstances of the case, rule to suspend the trial proceed of this case.” It should be noted that, different from the circumstances stipulated in Article 153 of the Civil Procedure Law where the people’s court “shall” rule to suspend the trial proceed, this article provides that the people’s court “may” rule to suspend the trial proceed, meaning that the people’s court has the discretion to make the decision based on the circumstances of the case, and the ongoing anti-monopoly administrative investigation does not necessarily trigger a suspension of the trial proceed of relevant case.

Pursuant to the provisions of AML, the competitor, the upstream/downstream undertaking, the end consumer and other relevant entities who claim for the damages due to monopolistic acts have the right to file a lawsuit to the people’s court, requesting the undertaking who conduct monopolistic acts to bear civil liability. However, in practice, it is often difficult for the plaintiff to provide sufficient evidence to prove either the constitution of monopolistic conduct or the damages suffered from that. To improve the possibility of being effectively remedied, it is common for a claimant to consider filing a report with the anti-monopoly law enforcement authority while filing a lawsuit with the people’s court on the monopolistic conduct concerned at the same time. Based on Article 14 of the Draft, under the circumstance where an anti-monopoly administrative investigation and a civil lawsuit proceed concurrently, the people’s court may use its discretion to determine whether suspending the trial proceed.

Article 15 of the Draft provides: “When hearing a civil dispute case, if the people’s court finds that relevant conduct of a party is suspected of violating the Anti-monopoly Law, or deems that the alleged monopolistic conduct is in violation of the Anti-monopoly Law which may be subject to administrative penalty, and the anti-monopoly law enforcement authority has not initiated an investigation, the people’s court may forward the clues of the suspected illegal conduct to the anti-monopoly law enforcement authority.” This new provision strengthens the connection between public and private enforcement, and the trial of monopoly litigation will become a more important channel for the AML enforcement authority to obtain clues of illegal monopolistic conducts.

6. Amending the provisions on the parties’ burden of proof regarding multiple issues.

Articles 16 to 19, Articles 20 to 29, and Articles 30 to 43 of the Draft separately set out the provisions on the definition of the relevant market, the determination of monopoly agreement, and the determination of abuse of dominance. With respect to the burden of proof regarding these issues, on the basis of the principle of “the burden of proof lies with the party asserting a proposition” in civil litigation, the Draft provides detailed provisions as follows:

(1) Differentiated provisions on the plaintiff’s burden of proof for market definition depending on the type of alleged monopolistic conduct.

Article 16 of the Draft differentiates provisions on the party’s burden of proof for market definition depending on the type of alleged monopolistic conduct.

Alleged monopolistic conductPlaintiff’s burden of proof for market definition
Abuse of dominanceWhere the plaintiff claims that the party alleged to have engaged in monopolistic conduct has significant market power or dominant market position on the ground of its market share in the relevant market, the plaintiff shall define the relevant market and provide evidence or reasons.
Horizontal monopoly agreements listed in Items (1) to (5) of Article 17 of the AML.Vertical monopoly agreements listed in Items (1) and (2) of Article 18 of the AMLThe plaintiff has no burden of proof for the definition of the relevant market.
ExceptionsIf the evidence provided by the plaintiff is sufficient to directly prove that the undertaking has significant market power, the undertakings alleged for abusing dominance has the market dominant position, or the alleged monopolistic conduct has the effect of excluding or restricting competition, the plaintiff will no longer bear the burden of proof for the definition of the relevant market.

These new provisions of the Draft reflect the judicial opinions held by the people’s court on the burden of proof for market definition in different kinds of monopoly disputes. The below cases can be taken as examples:

  • In Art Kindergarten v. Liujiayi Kindergarten, the SPC held that “as the horizontal monopoly agreements listed in Paragraph 1 of Article 13 of the AML generally have the obvious effect of excluding or restricting competition, and the harmful consequences are generally relatively serious among various types of monopolistic conduct, and it is generally not necessary to clearly and precisely define the relevant market in determining whether the undertakings have reached and implemented the horizontal monopoly agreements listed in Paragraph 1 of Article 13 of the AML.”
  • In Qihoo v. Tencent, the SPC held that “even if the relevant market is not clearly defined, the direct evidence of excluding or restricting competition can be used to analyze the market position of the defendant and the influence of the alleged monopolistic conduct on the market. Therefore, it is not necessary to explicitly and clearly define the relevant market in every case involving abuse of dominant market position.”

(2) Burden of proof on the determination of monopoly agreement.

a  For the determination of “other concerted practices”, the plaintiff only bears the burden of proof for some but not all of the determining factors.

Article 16 of the AML provides: “For the purposes of this Law, monopoly agreement refers to agreement, decision or other concerted practice that excludes or restricts competition.” According to Article 5 of the Interim Provisions on Prohibition of Monopoly Agreements (the “Provisions on Monopoly Agreements”) issued by the State Administration for Market Regulation (the “SAMR”), “… other concerted practice refers to the practice carried out by undertakings in the absence of a definite agreement or decision between undertakings which nevertheless has been coordinated in substance.”

Paragraph 1 of Article 20 of the Draft provides: “The people’s court shall consider the following factors when determining other concerted practice under Article 16 of the AML: (1) whether there is consistency or relative consistency in the market conducts of undertakings; (2) whether there has been communication or exchange of information between undertakings; (3) market structure, competition status, market changes and other situations in the relevant market; and (4) whether the undertakings can provide reasonable explanations on the consistency or relative consistency of their conducts.

According to the provisions on burden of proof set forth in Paragraph 2 and 3 of Article 20 of the Draft, after the plaintiff has provided preliminary evidence proving the two items either of Item (1) and (2) or Item (1) and (3) of Paragraph 1, the burden of proof shall be shifted to the defendant, and the defendant bears the burden of proof for the reasonable explanation on the consistency or relative consistency of relevant conducts (i.e., Item (4) of Paragraph 1). It should be noted that, although it is generally not necessary to clearly and precisely define the relevant market when determining whether undertakings have reached horizontal monopoly agreements, since Item (3) of Paragraph 1 involves “market structure, competition status, market changes and other situations in the relevant market”, where the plaintiff claims that the defendant has carried out “other concerted practice” based on the Item (1) and (3) of Paragraph 1, the plaintiff may need to bear the burden of proof on definition of the relevant market.

Compared with the monopoly agreement reached in the form of an agreement or decision, “other concerted practice” is highly concealed which makes it highly difficult for the plaintiff to provide sufficient evidence on the determination of such conduct. Therefore, compared with other kinds of monopoly agreement, a lower standard of evidence is adopted for the determination of the concerted practice. In Li Bingquan v. Xiang Pin Tang, the SPC clarified for the first time that the plaintiff only needs to provide preliminary evidence for the first three factors in consideration of “other concerted practice” which include “first, whether the market conducts of the undertakings are coordinated and consistent; second, whether there has been communication or exchange of information between the undertakings; third, the market structure, competition status, market changes and other situations in the relevant market.” The above new provision in the Draft further clarifies and reduces the plaintiff’s burden of proof for “other concerted practice”.

b New provisions introduced on the burden of proof for vertical monopoly agreements in alignment with the amendment to the AML.

Paragraph 1 of Article 18 of the AML provides: “Conclusion of any of the following monopoly agreements between undertakings and their trading counterparts is prohibited: (1) fixing the price of products for resale to a third party; (2) restricting the minimum price of products for resale to a third party; and (3) any other monopoly agreement as determined by the anti-monopoly law enforcement authority of the State Council.” In practice, the first two monopoly agreements are generally referred to as “Price-related Vertical Monopoly Agreements” or “Resale Price Maintenance Agreements” (the “RPM agreement”), while the third circumstance is generally referred to as “Non-price Vertical Monopoly Agreements”. The amendment to the AML adds new provision as Paragraph 2 of Article 18 on the determination of the RPM agreement: “An agreement specified in Item (1) or (2) of the preceding Paragraph shall not be prohibited if the undertakings concerned can prove that such agreements do not have effects of excluding or restricting competition.

Before the issuance of the amendment to the AML, the anti-monopoly law enforcement authority adopted the principle of per se illegal to identify the RPM agreement, which means if the undertakings concerned reach or implement an agreement with the content specified either in Item (1) or Item (2) of Paragraph 1 of Article 18 of the AML, the authority may directly determine that such agreement constitute the RPM agreement prohibited by the AML, without the need to prove that it has an effect of excluding or restricting competition. After the amendment to the AML came into effect, the undertakings can argue that the RPM agreement concerned does not constitute the RPM agreement prohibited by the AML if they can prove that such agreement does not have effects of excluding or restricting competition.

Paragraph 1 and 2 of Article 25 of the Draft provide: “Where the alleged monopolistic conduct is a monopoly agreement as listed in Item (1) or (2) of Paragraph 1 of Article 18 of the Anti-monopoly Law, the defendant shall bear the burden of proof that such agreement does not have an effect of excluding or restricting competition. Where the alleged monopolistic conduct is a monopoly agreement as provided in Item (3) of Paragraph 1 of Article 18 of the Anti-monopoly Law, the plaintiff shall bear the burden of proof that such agreement has the effect of excluding or restricting competition.” These new provisions clarify the burden of proof for vertical monopoly agreements in alignment with the amendment to the AML.

New provisions introduced on defendant’s burden of proof where it claims for the application of “Safe Harbor” rule in alignment with the amendment to the AML.

The amendment to the AML provides new provision as Paragraph 3 of Article 18: “If the undertaking is able to prove that its market share in the relevant market is lower than the standard established by the anti-monopoly law enforcement authority of the State Council, and it also satisfies the other conditions specified by the anti-monopoly law enforcement authority of the State Council, the agreement shall not be prohibited.” This provision establishes the “Safe Harbor” rule for vertical monopoly agreements based on market share and other conditions. The Provisions on Prohibition of Monopoly Agreements (Draft for Comments) published by the SAMR on June 27, 2022, stipulates the conditions for the application of the “Safe Harbor” rule, but this document has not been formally adopted yet and thus there is still no valid provisions regarding the conditions for the application of the “Safe Harbor” rule yet.

Paragraph 3 of Article 25 of the Draft provides: “Where the alleged monopolistic conduct is a monopoly agreement stipulated in Paragraph 1 of Article 18 of the Anti-monopoly Law, and the defendant can prove that its market share in the relevant market is lower than the standard established by the anti-monopoly law enforcement authority of the State Council, and it also satisfies the other conditions specified by the anti-monopoly law enforcement authority of the State Council, the plaintiff shall bear the burden of proof that the alleged agreement has the effect of excluding or restricting competition.” Item (2) of Article 27 of the Draft provides: “If the defendant can prove any of the following circumstances, the people’s court may preliminarily determine that the agreement concerned does not constitute a monopoly agreement stipulated in Paragraph 1 of Article 18 of the Anti-monopoly Law: … (2) the defendant’s market share in the relevant market is lower than the standard established by the anti-monopoly law enforcement authority of the State Council, and it also satisfies the other conditions specified by the anti-monopoly law enforcement authority of the State Council.”

These new provisions of the Draft clarify for the party’s burden of proof for the application of the “Safe Harbor” rule in alignment with the amendment to the AML: after the defendant provides evidence that its market share in the relevant market is lower than the standard, and it also satisfies the other conditions, the burden of proof shifts to the plaintiff; the plaintiff needs to provide evidence that the alleged agreement has the effect of excluding or restricting competition to rebut the defendant’s claim.

New provisions introduced on defendant’s burden of proof where it claims for the application of exemption rule.

Article 20 of the AML establishes the exemption rule for monopoly agreements under statutory circumstances. Article 29 of the Draft provides: “Where the party alleged to have engaged in monopolistic conduct defends itself according to Items (1) to (5) of Paragraph 1 of Article 20 of the AML, it shall provide evidence to prove the following facts: (1) the alleged monopoly agreement is necessary to achieve relevant purposes or effects; (2) the alleged monopoly agreement can achieve relevant purposes or effects; (3) the alleged monopoly agreement will not seriously restrict competition in the relevant market; and (4) consumers can share the benefits arising therefrom.”

This article of the Draft specifies the defendant’s burden of proof in applying the exemption rule for monopoly agreements, and the four elements provided for in the Draft are basically consistent with the provisions in the Provisions on Monopoly Agreements and the standards adopted by anti-monopoly law enforcement authority in practice.

(3) Introducing provision on the defendant’s burden of proof to rebut the assumption of collective dominance.

Article 24 of the AML lists the circumstances where undertakings can be presumed to have a dominant market position based on its market shares, and Item (2) and (3) of Paragraph 1 of Article 24 stipulate the circumstances where two or more undertakings collectively hold the dominant market position. Paragraph 3 of Article 24 of the AML provides: “Where an undertaking presumed to hold a dominant market position is able to provide evidence that it does not hold such a dominant market position, it shall not be deemed to hold the dominant market position.”

Article 36 of the Draft provides: “Where the people’s court presumes that two or more undertakings collectively have dominant market position in accordance with Item (2) and (3) of Paragraph 1 of Article 24 of the Anti-monopoly Law, such presumption may be rebutted if the undertaking has evidence to prove either of the following circumstances: (1) there is substantial competition between such two or more undertakings; or (2) such two or more undertakings, as a whole, are subject to effective competitive constraints from other undertakings in the relevant market.”

According to the above-mentioned provisions, where the plaintiff provides evidence to prove that the defendant’s market share meets the standard for the presumption of collective dominance, the burden of proof shifts to the defendant. The defendant may rebut the presumption of collective dominance by providing evidence that there is substantial competition between two or more undertakings concerned, or that two or more undertakings concerned, as a whole, are subject to effective competitive constraints from other undertakings in the relevant market. (Note: For more details, please see, Part II: Changes to Substantive Matters)

7. Other novel and amended provisions on procedural matters.

(1) The same plaintiff shall file lawsuit as one case for the same alleged monopolistic conduct.

Article 10 of the Draft provides: “The same plaintiff shall file in one lawsuit for the same alleged monopolistic conduct. Where more than one lawsuit is filed to split the same alleged monopolistic conduct based on factors such as the geographical region of impact, duration, circumstance of implementation and scope of damage without justified reasons, the people’s court shall only hear the case which is accepted first and shall not accept the other cases; where the people’s court has accepted the other cases, the people’s court shall rule on rejection of that.”

The same monopolistic conduct may have effects in different geographical regions (for example, selling products at an unfairly high price in multiple provinces), may last for different periods (for example, there are interruptions in the implementation period of the same conduct), may have been implemented in different circumstances (for example, reaching the same RPM agreement with the same distributor in online platforms and physical stores), and may have a broad scope of damage (for example, the undertakings may not only be deprived of the right to choose other platforms but also punished by the same “choose one” rule).

If the plaintiff splits up the same alleged monopolistic conduct and files a number of lawsuits separately, it will not only waste judicial resources but also may constitute duplicate lawsuits. Therefore, the Draft provides that the same plaintiff shall file in one lawsuit for the same alleged monopolistic conduct. However, it should be noted that if the plaintiff files a lawsuit against the defendant on different monopolistic conducts, it does not apply for this article, but for such cases, the people’s court may decide to conduct a joint trial if the relevant provisions apply.

(2) New provisions introduced on the civil public interest litigation in alignment with the amendment to the AML.

Article 13 of the Draft provides: “Where the monopolistic conduct of undertaking damages social and public interest, the people’s procuratorate at or above the level of city with subordinate districts may file a public interest civil lawsuit with the people’s courts, and the Interpretation of the Supreme People’s Court and the Supreme People’s Procuratorate on Several Issues Concerning the Application of Law in Procuratorial Public Interest Litigation Cases shall apply. However, where there are special provisions on the jurisdiction of civil monopoly disputes under this interpretation, such special provisions shall apply.”

The amendment to the AML provides in Paragraph 1 of Article 60 that where the monopolistic conduct of undertaking damages social and public interest, the people’s procuratorate at or above the level of city with subordinate districts may file a public interest civil lawsuit with the people’s courts, thereby clarifying for the first time the application of civil public interest litigation in anti-monopoly cases at the legalization level. The Draft introduces Article 13 to keep in alignment with the amendment to the AML. With the introduction of provisions on the anti-monopoly procuratorial public interest litigation, there are likely to be more and more anti-monopoly procuratorial public interest litigation cases in the near future, especially in the fields closely related to the people’s livelihood such as platform economy, public utilities and medicine. (Note: For a detailed introduction, please see, Prosecutorial Civil Public Interest Litigation of Antitrust Case under the New China’s Anti-monopoly Law)

(3) Clarifying how the AML applies before and after the amendment took effect.

Article 51 of the Draft provides: “When hearing monopoly civil cases, the people’s court shall apply the laws effective at the time when the alleged monopolistic conduct takes place. Where the alleged monopolistic conduct occurred before the implementation of the Decision of the Standing Committee of the National People’s Congress on the Revision of the Anti-monopoly Law of the People’s Republic of China and continues after the implementation of that, the revised Anti-monopoly Law shall apply.”

*Thanks LiuYANand Yuanyuan LIU for their contributions in this article.

[1] Case Number: (2022) Zui Gao Fa Zhi Min Zhong No. 1276.
[2]Case Number: (2019) Zui Gao Fa Min Shen No.6242, (2019) Jing Min Jie Zhong No.44.
[3]Case Number: (2019) Zui Gao Fa Zhi Min Zhi Zhong No. 32.
[4]Case Number: (2021) Zui Gao Fa Zhi Min Zhong No. 2253.
[5]Case Number: (2013) Min San Zhong Zi No.4
[6]Case Number: (2021) Zui Gao Fa Zhi Min Zhong No. 1020.

Welcome to Our Yearend Antitrust Practice Review

Standing at the beginning point of the new year, we take the opportunity to deliberate  and reflect on the last twelve months. 2022 has been an extremely busy and productive year for AnJie Broad Antitrust Team. Together, we have accomplished several milestones and have much to be proud of. Whilst against a challenging macro-economic and geopolitical backdrop, we are pleased to highlight the significant accomplishments and encouraging momentums the team has achieved.

Merger Control

In 2022, China’s antitrust authority SAMR has conditionally approved 5 deals in total; they are Siltronic/GWC, Xilinx/AMD, Coherent/II-IV, Avinex/Eastern Air Logistics and Asiana/Korean Air. Among these 5 cases, the team had deep participation in 4 of them. In Siltronic/GWC and Asiana/Korean Air, the team, as the filing party’s counsel, successfully secured  clearance from SAMR for the clients.

Antitrust Private Litigation

With the revised Anti-Monopoly Law (2022) specifically advocating the enhancement of antitrust judicial practice, the team also observed the increasing number of antitrust private actions being lodged before Chinese courts. In 2022, the team represented the parties in 16 antitrust private litigations. Among them, 2 have been closed with the second instance judgment being handed down within the year; 14 cases are still pending, in which 6 were appealed to the Supreme People’s Court and 8 are still under the first instance trial. As to the cause of action, abuse of market dominance accounts for the majority in cases the team handled in 2022, 14 out of 16; and the remaining 2 were related to horizontal monopoly agreements. Echoing the global enforcement trend against digital economy, 4 cases the team represented in the year were against Chinese internet giants. Notably, the case Huaming v. Taipu (Docket No.:(2021) Zui Gao Fa Zhi Min Zhong No.1298) was selected as Top Ten Typical Antitrust Cases by the Supreme People’s Court. Generally speaking, PRC courts handle around 40 antitrust private litigation annually. In 2022, the antitrust litigations handled by the team involve the intermediate people’s courts and high people’s courts in Beijing, Shanghai, Harbin, Huhhot, Changchun, Yinchuan, Ningbo and Wuhan, as well as the Supreme People’s Court. The team has also been assisting a domestic company with responding to an US antitrust class action in 2022.  

Government Investigation

We have been continuously and diligently assisting clients with responding to the antitrust authority in 6 antitrust investigations in 2022, 4 of which were commenced before 2022. Among them, 3 investigations were against horizontal monopoly agreements, 1 against abuse of dominant market position, and 1 against price resale maintenance (RPM). The cases that the team defended in the year extended to automobile, public utility, construction, electronics and manufacturing. One investigation was initiated after the revised Anti-Monopoly Law entered into force, thereby several novel and challenging issues were touched for the first time, such as application of new law or old law, how to apply the “rule of reason” in RPM pursuant to the new law, and how to apply the “safe harbor” before supplementary rules are released.

Government Support

In 2022, the team has been actively contributing to support the antitrust authority’s work. Specifically, in the Calcium gluconate case, the ever first antitrust administrative litigation solely against SAMR up to date, the team represented SAMR before Beijing Higher People’s Court in the first instance trial. In several investigation initiated by a provincial antitrust regulator, the team provided comprehensive legal advice. The team’s partner Dr. Zhan Hao was engaged by Beijing AMR and Shandong AMR as the antitrust expert of their pools; another partner of the team Ms. Song Ying was also engaged by Beijing AMR as the supporting antitrust expert.

Competition Compliance

As China has been actively advocating the competition compliance, strengthening the approach of pre-regulation, we observed that a growing number of businesses attached more importance to the establishment and improvement of its competition compliance system. In the year, the team spared no effort to back companies in conducting the competition compliance due diligence review, drafting competition compliance manuals, implanting compliance requirements into the business workflow, devising compliance toolkits, conducting mock dawn raids, delivering competition compliance trainings and providing other compliance assistance. The team’s competition compliance work in the year covered diverse sectors, to name a few, e-commence, consumer goods, new energy, oil & gas, food, pharmaceuticals, insurance, automobile, aviation, public utility and etc.

Publications

In 2022, the team continues to be industrious in contributing to various Chinese and global publications in the competition law field, with the intention to spread and share the practical experience and observations as much as possible. For instance, we were invited to contribute the China Chapter of Dominance and Monopolies, Legal 500 Comparative Guide on Competition Litigation, Lexology GTDT Market Intelligence Merger Control, Global Legal Insights: Merger Control and Global Legal Insights: Cartel. The team also delivered its comprehensive analytical articles on the Amended Anti-Monopoly Law and the draft Antitrust Judicial Interpretations for consultation, in the first hours after they were released. For years, the team has been operating an academic and professional e-publication platform through a WeChat Official Account (see the QR code below), through which to release the freshest competition law news, enforcement decisions, judicial judgements or academic and practitioner articles on a daily basis. By the end of 2022, this platform has around 8000 followers in total.

Awards and Accolades

Leading organizations in China and abroad continued to widely recognize the team in Antitrust/Competition field in 2022, which include but not limited to the following: Chambers & Partners and LegalBand rated the team’s partner Dr. Zhan Hao as “Band one PRC Antitrust/Competition Lawyer”. Who’s Who Legal and LegalBand awarded Dr. Zhan as “leading PRC antitrust lawyer”. China Intellectual Property Forum rated Dr. Zhan as “Top 10 Renowned Antitrust Lawyer”. Another partner of the team Ms. Song Ying was also recommended as the leading PRC antitrust lawyer by Chambers& Partners, Who’s Who Legal and LegalBand in 2022. Other partners have also won multiple awards. In the 2022 list of Global Recommended Firms and Lawyers in Competition Law published by Global Competition Review (GCR), the firm once again was recognized as a “Highly Recommended Law Firm.” Notably, Dr. Zhan was honored by ICC Competition Commission as the “China ambassador” to bridge the competition law communication and exchange between China and the world. In 2022, Beijing Digital Economy and Digital Governance Rule of Law Research Association was set up. Because of our forward-looking research on antitrust in the digital economy, Dr. Zhan Hao was elected as the Vice President.

Acknowledgements

Together we continued to focus on the work of creating meaningful value to our clients and the whole competition law society in 2022. We are proud of our valued team members and hope each of them takes a moment to reflect on what we’ve accomplished – without their hard work, none of it would be possible. We would be remiss if we didn’t recognize our partners in other countries as well. Our close collaboration with our counterparts in other jurisdictions such as the US, EU, South Korea, Japan, UK and Canada, allows us to provide full-fledged high-quality service to our clients operating globally. We would also like to extend this opportunity to thank our clients, antitrust regulators, judges, scholars and lawyer fellows in the competition law field. Working with each of you bestows us the opportunity to learn more and become better. Looking ahead to 2023, AnJie Broad Antitrust Team will continue to dedicate to providing the first-tire antitrust legal services to our clients, and we will bear the persistent commitment of sharing and spreading our practical experience and contributing to the whole competition community. As always, thank you for your always support and look forward to seeing you again in the promising 2023.

I. Introduction

When referring to insurance, the first term that comes up with one’s mind is likely to be insurers, which are mostly known to operate insurance businesses. Nowadays, with the growth of the insurance industry, other entities also emerge such as insurance agents, brokers, and loss adjustors. These entities play different roles to prosper the industry in many ways, for example, to provide more value-added services to their clients and to ensure the smooth process of insurance. Among them, an entity called Third Party Administrator abbreviated as “TPA” is picking up steam, especially in the health insurance field. Currently, there is not yet a unified definition of TPA in a worldwide manner as they conduct various functions and are subject to dissimilar regulatory requirements under different jurisdictions. However, in most cases, TPAs are known to help insurers “collect and process information during the process of insurance, underwriting, and claims, and improves their risk management and control capabilities[1]”. It is commonly recognized that insurers are outsourcing some of their activities to TPAs, because of the TPA’s expertise in certain fields.

In China, along with the expansion of the insurance market in these years, more insurance entities, including insurers and reinsurers, would like to develop their cooperation with TPAs. In this case, it is anticipated that more TPAs will be founded in the future, with their products and services expected to be more diversified and abundant. As increasing aspects are covered by the TPA with its multiple business models, a concern arises about whether it may step into the restrictive area from the perspective of insurance regulations. Therefore, this article aims to explore the possible connection between TPA’s business scope and insurance activities under the legal and regulatory framework of the People’s Republic of China (“the PRC”, for the purpose of this article, excluding jurisdictions as Hong Kong SAR, Macao SAR, and Taiwan).

II. Insurance Activities under the PRC Law

In the PRC, the insurance industry, as a significant financial sector, is heavily regulated and supervised where not only laws apply, but also several regulations, mainly promulgated by the China Banking and Insurance Regulatory Commission (“CBIRC”, previously known as China Insurance Regulatory Commission or “CIRC”) as the primary regulator. These laws and regulations aim to comprehensively cover legal and compliance issues in the insurance industry. Specifically in the view of insurance activities, according to Article 6 of the Insurance Law of the People’s Republic of China (“Insurance Law”):

“Insurance business must be conducted by insurance companies established in accordance with this Law and other insurance entities as stipulated in laws or administrative regulations. No other entity or individual may operate insurance business”. [2]

As the fundamental source of law in this regard, the Insurance Law sets a principle that only insurance entities established and approved in accordance with relevant laws and regulations are eligible to conduct insurance business in the PRC. Nevertheless, the law does not further elaborate a definitive concept of the insurance business. In practice, concretely speaking, activities such as underwriting, policy issuance, premium collection, claims assessment, and claims payment are generally deemed as typical insurance businesses.

As for the regulatory perspective, specifically to insurance intermediary activities, for the insurance broker as an example, Article 36 of the Provisions on the Regulation of Insurance Brokers provides:

“An insurance broker may engage in all or part of the following activities: (1) designing insurance plans for policyholders, selecting insurance companies, and handling insurance purchase procedure; (2) assisting the insureds or beneficiaries in claims; (3) reinsurance brokerage business; (4) providing clients with disaster or loss prevention or risk evaluation, risk management consulting services; and (5) other insurance broker-related businesses prescribed by the China Insurance Regulatory Commission.”[3]

As for insurance agents, it distinguishes between professional and sideline agents. Article 41 of the Provisions on the Regulation of Insurance Agents states:

“A professional insurance agency may engage in all or part of the following businesses: (1) sales of insurance products as an agency; (2) collection of insurance premiums as an agency; (3) loss investigation and claims settlement of insurance-related services as an agency; and (4) other relevant businesses as prescribed by the insurance regulator under the State Council.”[4]

Its Article 42 continues as “A sideline insurance agency may engage in the businesses prescribed in (1) and (2) of Article 41 hereof as well as other businesses approved by the insurance regulator under the State Council.”[5]

In terms of loss adjustors, Article 43 of the Regulations on Insurance Loss Adjustors provides:

“A loss adjustor may operate all or part of the following business: (1) pre-underwriting and post-underwriting inspection, valuation, and risk assessment on the subject of insurance or the insureds; (2) post-claim survey, inspection, loss assessment, and claims settlement of the subject of insurance and disposition of their residual value; (3) risk management consulting; and (4) other business as provided for by the CIRC.”[6]

Furthermore, in the Circular Concerning Banning the Illegal Insurance Institutions and Illegal Insurance Activities issued by the CIRC on July 30, 2008, illegal insurance activities include an unapproved entity conducting “activities in which fees are collected from the public in the name other than insurance premiums, but the obligations promised to be performed include liability of insurance benefits payment or other similar liabilities”. Also, illegal insurance intermediary activities include an unapproved entity to “provide intermediary services for the purpose of facilitating the conclusion of an insurance contract between policyholders and insurers with service fee charged”. As for the regulatory practice, according to the sanction issued by CBIRC’s Beijing Bureau on December 29, 2021, because of illegal conducting insurance intermediary activities, a technology company’s profit was confiscated and fined 2,127,000 yuan, and the relevant illegal activities were banned. [7]The sanction was issued in accordance with Article 159 of the Insurance Law. [8]

As can be seen above, the insurance business is strictly regulated by laws and regulations, with the CBIRC as the regulator supervising the insurance industry. Only certain licensed entities are allowed to operate insurance businesses and doing so without a required license or approval could result in sanctions in accordance with applicable laws and regulations.

III. TPA’s Business and Insurance Activities

As TPAs mainly serve insurance entities, their business is tightly connected to insurance activities. Among those, healthcare management service seems as one of the most popular TPA activities, where the TPA provides healthcare management services such as healthcare service provider network, physical examination, online treatment, health consultation, medicine delivery, and other related services to the insureds or applicants of health insurance. On this matter, according to the Circular of the General Office of the China Banking and Insurance Regulatory Commission on Standardizing the Health Management Services of Insurance Companies issued by the CBIRC on September 6, 2022, “For healthcare management services [9]that cannot be carried out by themselves, insurance companies may cooperate with health management service providers, medical institutions, rehabilitation service providers and nursing service providers to enrich healthcare management service and meet the diversified and personalized health needs of customers.”[10] In this case, the regulator recognizes TPA’s participation in health management and considers it as the important supplement to insurers’ healthcare management related to health insurance.

Furthermore, in practice, in providing healthcare management services and others, many TPAs are not satisfied to only offer value-added services but would like to deeply contribute to insurance product development, policy management, underwriting, claims, reporting, etc. for improving their competitiveness and value by maximizing their involvement in above activities. For instance, in claims processing, some TPAs authorized by the insurance company would decide whether to pay compensation in accordance with policy terms, conditions, and liability exclusions; or in policy management, some TPAs would communicate with policyholders on inquiries raised related to policy execution and servicing, and issue certificates of insurance by themselves. Although those could be general practices worldwide, it would trigger compliance issues as they may step into insurance activities in the PRC as stated above. Taking policy conclusion as an example, Article 13 of the Insurance Law stipulates as “An insurance contract shall be concluded when a policyholder applies for insurance and the insurer agrees to underwrite the insurance. The insurer shall issue an insurance policy or other insurance certificate to the policyholder in a timely manner.” Hence, by law, only insurers are entitled to issue an insurance policy or certificate of insurance and TPAs are not eligible for this activity.  

Here, since TPAs dedicate to enriching their products to provide multiple services, it is hard to analyze each service in detail. Moreover, as the boundary between TPA business and insurance activities is not explicit from the perspective of law, and there are only a handful of sanction cases observed at this moment, it would be difficult to make a clear conclusion on this matter. However, general advice for TPAs lies in refraining from making any decision on insurance-related activities, where such decisions should be ultimately made by licensed insurance entities. It means TPA’s insurance-related business should only stay on the advisory or supporting level. Furthermore, TPAs should also refuse to directly engage in typical insurance activities such as concluding policies, collecting premiums, or issuing benefits.

IV. Conclusion

With more global TPAs expanding their business to the PRC and arising of domestic TPAs, attention should be paid to their operating compliance. As the insurance industry is heavily regulated by PRC laws and regulations and strictly supervised by the regulator, unlicensed status does not release the TPA’s compliance obligations, particularly on its business activities aspect. In fact, although TPAs may wish to promote their involvement in the insurance sector, they should also constrain themselves with the boundary of the insurance activities, as wrongfully stepping into such field would lead to sanctions.

[1]VHS, “Understand the health insurance TPA track, from service outsourcers to industry innovation drivers” https://www.vhsinsurtech.com/news/shownews.php?id=489&lang=en.
[2]Insurance Law of the People’s Republic of China, entered into force on April 24, 2015, Article 6.
[3]Provisions on the Regulation of Insurance Brokers, adopted on February 1, 2018, entered into force on May 1, 2018, Article 36.
[4]Provisions on the Regulation of Insurance Agents, adopted on November 12, 2020, entered into force on January 1, 2021, Article 41.
[5]Ibid, Article 42.
[6]Provisions on the Regulation of Insurance Loss Adjustors, adopted on February 1, 2018, entered into force on May 1, 2018, Article 43.
[7]Jing Yin Bao Jian Fa Jue Zi, No. [2021] 43.
[8]Insurance Law, Article 159, “any acts establishing professional insurance agents and insurance brokers, or illegally engaging in the insurance agency business or brokerage business without obtaining the insurance agency business permit or insurance brokerage business permit in breach of this Law shall be banned by the insurance supervision authority, confiscating the illegal proceeds and imposing a fine of one to five times legal proceeds; where there is no illegal proceeds or the illegal proceeds is less than 50,000 yuan, a fine ranging from 50,000 yuan to 300,000 yuan shall be imposed.”
[9]Circular of the General Office of the China Banking and Insurance Regulatory Commission on Standardizing the Health Management Services of Insurance Companies, Yin Bao Jian Ban Fa No. [2020] 83, Article 1, “The healthcare management services provided by insurance companies refer to the monitoring, analysing and evaluating of customers’ health and intervening in the factors endangering customers’ health to control the occurrence and development of diseases and maintain a healthy status, including health physical examination, health consultation, health promotion, disease prevention, chronic disease management, medical service, and rehabilitation care.”
[10]Circular of the General Office of the

I. Introduction

With international trade flows boosting, international commercial arbitration is becoming increasingly accepted among parties as an efficient means of resolving international economic and trade disputes, due to its confidentiality, flexibility, speed and enforceability. In the event of non-compliance with an arbitral award by the losing party, it is critical for the winning party to be able to enforce the award against the losing party in accordance with relevant governing law.

There are widespread concerns among the disputed parties on whether the arbitral awards issued outside China can be effectively enforced through Chinese courts. The concerns are mostly due to the lack of knowledge of the Chinese legal system and its practice. This article will provide an overview of the procedure for enforcing foreign arbitral awards under the Chinese legal scheme. It will also briefly touch on the potential grounds for Chinese courts declining to enforce foreign arbitral awards.

Ⅱ.LegalScheme for Recognition and Enforcement in China

The legal framework governing recognizing and enforcing foreign arbitral awards in China is three-tiered, namely, international treaties or agreements signed by China, legislation passed by the National People’s Congress (NPC) and its Standing Committee, and the Opinions or Notices issued by the Supreme People’s Court of China (SPC).

  • New York Convention

In 1958, the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) was signed at the United Nations Conference. There are over 150 contracting states to the New York Convention which provides conditions for contracting states to recognize and enforce foreign arbitral awards. It officially came into force in China on 22 April 1987.

China made two reservations when joining the New York Convention. One is that the Convention applies only to the recognition and enforcement of awards made in the territory of another contracting State. It is known as “reciprocity reservation”. The other one is that the Convention is to be made only to the differences arising out of legal relationships, whether contractual or not, that are considered “commercial” under national law. It is known as “commercial matters reservation”.

  • The Civil Procedure Law

The Civil Procedure Law of PRC sets down the principles for the recognition and enforcement of foreign arbitral awards within China’s civil procedural legal system. Article 290 of the Civil Procedure Law stipulates that where an arbitral award of a foreign arbitration institution needs recognition and enforcement by Chinese courts, the parties involved should apply directly to an Intermediate People’s Court at the location of the respondent’s residence or the location of the respondent’s properties. The court would handle the matter under international treaties (i.e. New York Convention) concluded by China or under the principle of reciprocity. Once granted after review and examination by a Chinese court, the enforcement shall be executed under the procedure stipulated in the Civil Procedure Law.

  • Notices issued by SPC

To facilitate the implementation of the New York Convention in China, SPC issued a Notice on Enforcement of the Convention on the Recognition and Enforcement of Foreign Arbitrational Awards in 1987 (the “1987 Notice”), which clarifies the rules applicable to the New York Convention including jurisdiction, filing deadlines, standards of review for recognition and enforcement, etc.

To further clarify the rules on recognizing and enforcing foreign arbitrational awards, a Notice on Relevant Issues of the People’s Court Dealing with Foreign Arbitration was issued by SPC in 1995 and was further revised in 2008 (the “2008 Notice”). It clarifies the circumstances under which Chinese courts may refuse to recognize or enforce foreign arbitral awards. Additionally, it also strengthens the supervision of local courts on recognizing and enforcing foreign arbitral awards by establishing an internal reporting system. Under this reporting system, when an intermediate court is inclined to refuse to recognize or enforce a foreign arbitral award, it is required to report to the People’s High Court (appellate court) for further review. If the People’s High Court has the same inclination, the case has to be submitted to SPC for final review and examination before a refusal of the application can be issued. From this Notice, we can conclude that the attitude of Chinese courts is still dominated by ruling in favour of recognition and enforcement of foreign arbitral awards.

Ⅲ.Recognition and Enforcement Procedure

The party to an arbitral award can file the application with an Intermediate People’s Court that has jurisdiction. If the respondent is a natural person, the party seeking recognition and enforcement shall apply with the Intermediate People’s Court of the place where the respondent is domiciled in China. If the respondent is a legal entity, the application shall be filed with the Intermediate People’s Court in the location where the principal place of business of such legal entity is situated. Alternatively, the application can be filed with the Intermediate People’s Court of the place in which the respondent’s property is located.

Technically speaking, recognition and enforcement are two separate proceedings that can be dealt with by the same court. In practice, the recognition proceedings are heard by the Civil Division of the Intermediate People’s Court which manages cross-border legal issues. Upon a successful application for recognition, the Enforcement Division of that court will handle the enforcement procedure thereafter.

Pursuant to Article 4 of New York Convention, the applying party should supply the Chinese court with the authenticated award (or certified copy), the original agreement that includes the arbitral clause or an arbitration agreement (or certified copy). If the said award or agreement is not made in Chinese, the applying party shall provide a translation of these documents. The translation shall be certified by an official or sworn translator or by a diplomatic or consular agent.

Regarding the time limit for the application, pursuant to Civil Procedure Law[1] and the Interpretation on Civil Procedure Law[2] issued by SPC, the application shall be submitted within two years, calculated from the last day of the performance period specified in the arbitral award. If the award did not contain any performance period, the party should be given a reasonable period to perform. Thus, it would be more reasonable to calculate from the second day of service of the arbitral award on the party, rather than from the date of issuing the arbitral award[3].

It is worth noticing that there have been cases in practice where enforcement applications have been dismissed outright for exceeding the application deadline. Therefore, it is recommended that the successful party in the arbitration takes the initiative to apply for recognition and enforcement of the award as soon as it becomes available, leaving the losing party little time to create obstacles for the enforcement.

IV.Property Preservation Measure During Recognition and Enforcement Procedures

As a temporary measure taken by the Chinese courts in civil disputes, the function of property preservation is to guarantee the effective enforcement of judgments by freezing and seizing the assets of the respondent before the final decision/judgment is delivered, to prevent the respondent from transferring its assets during the proceedings.

Even though property preservation is a common method utilized in civil litigation in China, it remains controversial whether the courts should grant this interim measure in recognition and enforcement of foreign arbitral awards proceedings. Neither New York Convention nor domestic laws or notices issued by SPC has provided clear guidance on this issue. Due to the blankness of international and domestic laws on this issue, some courts have rejected the property preservation application with the view that such an application lacks legal grounds[4]. Nevertheless, there are cases where the courts have granted property preservation applications in recognition and enforcement of foreign arbitral awards proceedings, taking into account the original design intention of the property preservation system.[5]

In practice, different courts may make different rulings and it is a case-by-case situation. We anticipate direct guidance will be provided through legislation at the domestic level to resolve the dilemma.

V.Grounds of Denial: Conditions Affecting Enforcement

Article 4 of the 1987 Notice and Article 5 of the New York Convention set out the following circumstances in which the courts may refuse an application for recognition and enforcement of a foreign arbitral award:

First, the arbitration agreement or clause is entered into by a person with limited capacity or is void under the applicable laws. Second, there are violations of due process in arbitral proceedings. For example, the party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was unable to present his case for reasons not attributable to that party. Third, the dispute settled by the award was exceeding arbitral authority. If the award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, the court may refuse to recognize or enforce the award. Fourth, the improper composition of the arbitral tribunal would result in a denial of recognition or enforcement of an arbitral award. Fifth, the award has not yet become binding on the parties or has been set aside or suspended by a competent authority of the country in which that award was made. Sixth, recognition and enforcement of an arbitral award may be refused if the subject matter over which the two parties disagree is not capable of settlement by arbitration under the law of China.  For example, disputes arising from marriage, adoption, and guardianship are expressly excluded from arbitration by the Arbitration Law in China. Seventh, the application shall be refused if the recognition or enforcement of the award would be contrary to the public policy in China.

The first five circumstances will only be examined by the courts upon the request of a party. However, the last two circumstances (arbitrability and public policy) are reviewable by the Chinese courts ex officio.

Unlike litigation proceedings, when hearing cases of application for recognition and enforcement of foreign arbitral awards, the Chinese courts only examine procedure issues, i.e. whether there is a valid arbitration agreement or clause, whether there are any procedural violations, whether it violates PRC public policy, etc. The Chinese court will not review substantive issues, such as the rights and obligations of the parties. Ensuring the legality of the signed arbitration agreement or clause and the procedure of the arbitration proceedings is therefore crucial to the recognition and enforcement of foreign arbitral awards in China.

VI.Conclusion

Based on our research from the judgement database, there are 243 cases involving recognizing and enforcing foreign arbitral awards from 2001 to 2022, of which only 43 cases resulted in the refusal of recognition or enforcement. The case results yielded show that the refusal is mainly due to procedural defects, with the largest case number involving ineffectual arbitration agreements or procedure defects. The less frequently invoked ground is the violation of public policy.

In recent years, the courts in China have adhered to the strict application principle in refusing to recognize and enforce foreign arbitral awards to create an “arbitration-friendly” environment. It is foreseeable that the judicial environment in China will become more and more favourable to the development of arbitration under the influence of a series of initiatives to support the development of arbitration in China, especially by SPC.

 


[1] Article 246

[2] Article 545

[3] As per the explanation provided by SPC in the Response to the Application for Recognition and Enforcement of Arbitral Award by McCaw Nepton Limited

[4] See Korea Line Corporation v. HNA Group Co., Ltd. (2016) Xiong 72 Xie Wai Ren No.1

[5] See OUELIPPO HEALTH CARE LIMITED v. LIN Gaoshen (2019) Hu 01Xie Wai Ren No.5

Preface

The revised Anti-Monopoly Law of the People’s Republic of China (“New AML”) entered into force on August 1, 2022. The New AML introduces in the second paragraph of Article 60 that “where the monopolistic conduct of an undertaking damages social and public interest, the people’s procuratorate at or above the level of city with subordinate districts may file a public interest civil lawsuit with the people’s courts”, thereby clarifying for the first time the application of civil public interest litigation in anti-monopoly cases at the legalization level.

On the very same day the New AML took effect, the Supreme People’s Procuratorate (“SPP”) issued the Notice on Actively and Soundly Carrying out Public Interest Litigation Prosecution Works in the Antitrust Field in accordance with the Anti-monopoly Law (“Notice”). The Notice underscores that the people’s procuratorate should actively and soundly carry out Public Interest Litigation Prosecution works in the field of anti-monopoly with the focus on the Internet, public utilities, medicine, and other sectors of livelihood security. This article, with a view to facilitating companies to foresee the relevant risks, intends to introduce the system of civil public interest litigation brought by the people’s procuratorates (“Prosecutorial Civil Public Interest Litigation”) and the focal issues of its application in the anti-monopoly field.

Major Issues:

  • The procedural law basis ofProsecutorial Civil Public Interest Litigation.
  • How to determine the jurisdiction of the procuratorates and courts over the anti-monopoly case of Prosecutorial Civil Public Interest Litigation?
  • What procedures shall be completed by the procuratorates in reviewing the anti-monopoly case of Prosecutorial Civil Public Interest Litigation?
  • What investigative techniques can the people’s procuratorate take in Prosecutorial Civil Public Interest Litigation?
  • The differences between hearings in Prosecutorial Civil Public Interest Litigation and thosein the anti-monopoly administrative investigation.
  • The claims that the people’s procuratorate can filein the anti-monopoly case of Prosecutorial Civil Public Interest Litigation.
  • Whether the people’s procuratorate can request the anti-monopoly enforcement authority to initiate an investigation on monopoly behavior.
  • The platform economy has come under the spotlight of Prosecutorial Civil Public Interest Litigation, hence more attention is required on company compliance works in this field.

I. The Procedural Law Basis of Prosecutorial Civil Public Interest Litigation

Pursuant to Article 20(4) of the Organic Law of the People’s Procuratorates of the People’s Republic of China (“Organic Law of the People’s Procuratorates”), the scope of authority enforced by the people’s procuratorates includes “filing public interest lawsuit in accordance with the law”. Article 58 of the Civil Procedure Law of the People’s Republic of China (“Civil Procedure Law”) stipulates in principle regarding the civil public interest litigation, providing that, “For conduct that pollutes the environment, infringes upon the legal interests of vast consumers, or otherwise damages the public interest, the authority or relevant organization as prescribed by law may institute an action in a people’s court. Where the people’s procuratorate finds in the performance of functions any conduct that undermines the protection of the ecological environment and resources, infringes upon consumers’ lawful rights and interests in the field of food and drug safety, or any other conduct that damages social interest, it may file a lawsuit with the people’s court if the authority or organization prescribed in the preceding paragraph does not file a lawsuit. If the authority or organization prescribed in the preceding paragraph files a lawsuit, the people’s procuratorate may support the filing of a lawsuit.”[1]

The aforesaid legal provisions establish the procedural law basis for people’s procuratorates to initiate civil public interest litigation. On this basis, the Supreme People’s Court (“SPC”) and the SPP issued the Interpretation of the Supreme People’s Court and the Supreme People’s Procuratorate on Several Issues concerning the Application of Law for Cases regarding Prosecutorial Public Interest Litigation (2020 Amendment) (“Interpretation of Prosecutorial Public Interest Litigation”) in March 2018; the SPP issued the Rules for the Handling of Public Interest Litigation Cases by the People’s Procuratorates (“Rules for Handling Cases”) in June 2021, which drawn up detailed provisions on the issues concerning the filing, investigation, prosecution, and trial of Prosecutorial Civil Public Interest Litigation. Furthermore, the SPC has promulgated a series of judicial interpretations and regulations for the proceedings of specific civil public interest litigation cases, including the Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Environmental Civil Public Interest Litigation (“Judicial Interpretation of Environmental Civil Public Interest Litigation”), the Interpretation of the Supreme People’s Court on Several Issues concerning the Application of Law in the Trial of Civil Public Interest Actions regarding Consumption (“Judicial Interpretation of Consumer Civil Public Interest Litigation”).

II. Jurisdiction of Anti-monopoly Civil Public Interest Litigation Case

Jurisdiction of the People’s Procuratorates over Anti-monopoly Civil Public Interest Litigation

Pursuant to the first paragraph of Article 14 of the Rules for Handling Cases, “When people’s procuratorates handle civil public interest litigation cases, the primary people’s procuratorates in the place of occurrence of the illegal act, the place of resultant injury, or the place of residence of the violator of law have jurisdiction over the opening of cases.” Pursuant to Article 15 of the Rules for Handling Cases, “People’s procuratorates at or above the districted city level have jurisdiction over significant and complicated cases within their jurisdictions. A public interest litigation case in which the scope of public interest injury involves not less than two administrative divisions may be under the jurisdiction of their common higher people’s procuratorate.”

The SPP provided special provisions under the Notice on the jurisdiction of the people’s procuratorates over the anti-monopoly case of civil public interest litigation:

  • The people’s procuratorates at or above the level of city with subordinate districts in the place of occurrence of the illegal act, the place of resultant injury, or the place of domicile of the offenders shall have jurisdiction over the anti-monopoly cases of civil public interest litigation.
  • The people’s procuratorates at the provincial level or the SPP shall directly file cases of significance, sensitivity, and/or complexity such as cases involving the compliant operation of leading Internet companies, Internet industrial policies, industry standards, and international competition.

Jurisdiction of the People’s Courts over Anti-monopoly Civil Public Interest Litigation

Regarding the jurisdiction of the people’s court in the anti-monopoly case of Prosecutorial Civil Public Interest Litigation, while there remain no specific regulations or published cases, we understand that, based on the relevant provisions of Prosecutorial Civil Public Interest Litigation and antitrust civil litigation, theoretically, the following conclusions can be reached.

  • As regards the anti-monopoly civil public interest litigation in the first instance filed by people’s procuratorates at the level of city with subordinate districts, the jurisdiction shall lie with the intellectual property courts or intermediate people’s courts.
  • With respect to the anti-monopoly civil public interest litigation in the first instance instituted by provincial people’s procuratorates, the jurisdiction shall fall upon the high people’s courts.
  • As for the anti-monopoly civil public interest litigation in the first instance brought by the SPP, the jurisdiction of the Intellectual Property Tribunal of the SPC shall prevail.
  • All the anti-monopoly civil public interest litigation of second instance shall be under the jurisdiction of the Intellectual Property Tribunal of the SPC in theory.

The relevant provisions are as follows:

  • Pursuant to thefirst paragraph of Article 5 of the Interpretation of Prosecutorial Public Interest Litigation, “for a first-instance civil public interest litigation case filed by a people’s procuratorate at the city (branch or prefecture) level, the intermediate people’s court at the place where the infringement occurs or in the domicile of the defendant shall have jurisdiction over the case.” Pursuant to Article 16 of the Rules for Handling Cases, “where the jurisdiction over opening cases by a people’s procuratorate does not correspond to the jurisdiction over litigation by the people’s court either in the level or geographical area, the people’s procuratorate with jurisdiction may open a case, and if a litigation case needed to be filed, the case shall be transferred to the people’s procuratorate with the same level corresponding to the jurisdiction of people’s court.”
  • Pursuant to Article 3 of the Provisions of the Supreme People’s Court on Several Issues concerning the Application of Law in the Trial of Civil Dispute Cases Arising from Monopoly Conduct (“Judicial Interpretation of Monopoly Civil Disputes”) and Article 1 of the Several Provisions of the Supreme People’s Court on the Jurisdiction of Civil and Administrative Cases of Intellectual Property of the First Instance, first-instance monopoly-related civil dispute cases shall be under the jurisdiction of intellectual property right courts, intermediate people’s courts of the cities where the people’s governments of provinces, autonomous regions and municipalities directly under the Central Government are located and cities under separate state planning as well as intermediate people’s courts designated by the Supreme People’s Court.
  • Pursuant to Articles 19 and 20 of Civil Procedure Law, exceptions exist in the hierarchical jurisdiction of anti-monopoly civil litigation in the first instance: 1) cases with significant impact within the jurisdiction shall be under the jurisdiction of the highpeople’s courts; 2) monopoly civil cases with national significance or cases that the SPC considers should be heard by it, shall be heard by the SPC.
  • Pursuant to Article 2(1) of Provisions of the Supreme People’s Court on Several Issues Concerning the Intellectual Property Tribunal, appeals filed against the judgments and rulings of first-instance civil cases of monopoly conducts rendered either by high people’s courts, intellectual property courts or intermediate people’s courts shall be herd by the Intellectual Property Tribunal of the SPC.

III. Procedures for the People’s Procuratorate to Review Civil Public Interest Litigation Cases

According to the relevant provisions of Interpretation of Prosecutorial Public Interest Litigation and Rules for Handling Cases, the main procedures for the people’s procuratorate to handle civil public interest litigation cases include:

  • Registration and filing of case clues.The people’s procuratorate adopts a unified registration and filing management system for public interest litigation clues, among which major case clues shall be filed with the people’s procuratorates at a higher level. Based on Article 24 of Rules for Handling Cases, “the sources of clues to public interest litigation cases include: (1) accusations and reports filed by natural persons, legal persons, and unincorporated organizations with people’s procuratorates; (2) discoveries made by people’s procuratorates in handling cases; (3) discoveries made on administrative enforcement information sharing platforms; (4) transfers from state authorities, social groups, deputies to the People’s Congress, and members of the People’s Political Consultative Conference; (5) report from the news media, public opinion and others; and (6) other discoveries in the performance of duties.”
  • Evaluation and preliminary investigation of case clues.Upon obtaining the case clues, the people’s procuratorates shall evaluate the authenticity and verifiability of the public interest litigation case clues, and if necessary, proceed with the preliminary investigation to form a Preliminary Investigation Report.
  • Stage of filing cases. Where a people’s procuratorate deems after an assessment that the national interest or public interest is injured and that there might be an illegal act, it shall file a case for investigation. Where procurators propose to file or not file a case after evaluating the clues to a case, they shall fill out a Case Opening Approval Form, append thereto a Preliminary Investigation Report after preliminary investigation, and make a Decision to File a Case or Decision Not to File a Case after report to the chief procurator for decision.
  • Stage of A people’s procuratorate shall, prior to an investigation, formulate an investigation plan to determine the outline, methods, and steps of the investigation and a list of evidence to be collected, among others. The evidence for a people’s procuratorate to handle public interest litigation cases includes documentary evidence, physical evidence, audio-visual recordings, electronic data, witness testimony, statements by the parties concerned, forensic expert opinions, other expert opinions, and transcripts of inspection.
  • Pre-litigation announcement.Where the people’s procuratorate intends to file a public interest lawsuit after investigation, it shall make an announcement according to law for a period of 30 days. After 30 days, the people’s procuratorate may file a lawsuit with the people’s court in the absence of an eligible subject to file a lawsuit. For instance, in the first civil public interest litigation case for the protection of juveniles on the Internet in 2021, the People’s Procuratorate of Yuhang District of Hangzhou City, Zhejiang Province, performed the pre-litigation announcement procedure before bringing a lawsuit against a viral domestic short video company.
  • Filing a litigation case.To file a civil public interest litigation case, a people’s procuratorate shall submit the following materials: (1) the written complaint of the civil public interest litigation, with duplicates thereof provided based on the number of defendants; (2) the preliminary evidentiary materials proving that the act of the defendant has damaged the public interest; (3) the evidentiary materials proving that the public announcement procedure and other pre-litigation procedures (if applicable) have been performed.

IV. Investigative Techniques the People’s Procuratorate Can Take in Civil Public Interest Litigation Cases

Pursuant to Article 35 of Rules for Handling Cases, “when handling public interest litigation cases, a people’s procuratorate may conduct investigations and collect evidence in the following manners: (1) consulting, retrieving, and copying case materials related to law enforcement and litigation files, among others; (2) questioning the staff of administrative organs, offenders, administrative counterparts, interested persons, witnesses, among others; (3) collecting documentary evidence, physical evidence, audio-visual recordings, electronic data, and other evidence from relevant entities and individuals; (4) seeking the advice of professionals, relevant departments, or industry associations; (5) commissioning appraisal, assessment, audit, inspection, testing, and translation; (6) inspecting physical evidence and scenes; (7) other necessary manners of investigation. A people’s procuratorate shall not adopt such compulsory measures as restricting personal freedom and placing under seal, seizing, or freezing property when conducting investigations and collecting evidence.”

For example, in July 2020, the People’s Procuratorate of Yuhang District of Hangzhou City, Zhejiang Province, when handling the child molestation case against Xu XX, found clues to a civil public interest litigation case on the infringement of children’s personal information by a company in Beijing and carried out a preliminary investigation with Internet technology. The procuratorate built on the comprehensive evidentiary materials, including the amount of personal information collected and processed by the application and testimony from the application users, to prove the fact that the application had collected and processed children’s personal information. The supporting evidentiary materials cited by the procuratorate include: screenshots of the user‘s service agreement, privacy protection policy, application interface, and testimony to prove that the child users of this application can register to use it without the consent of their guardians; evidence obtained through the adoption of “blockchain” forensics equipment to verify that the application collects and handles children’s personal information by means of implied consent of guardians, one-time authorization of general consent and other methods. In addition, the prosecution collected and fixed the evidence of infringement upon the personal information rights of hundreds of children to establish the harmful consequences. The prosecution also had the confession made by Xu and others to demonstrate the causal relationship between the infringement and the damage consequences.

V. Hearings in Prosecutorial Civil Public Interest Litigation

Pursuant to Article 44 of Rules for Handling Cases, “a people’s procuratorate may organize a hearing in accordance with rules, attend to the opinions of the hearing officers, administrative authorities, violators of law, persons subject to administrative action, victim representatives, and other relevant parties, and learn the relevant issues. The written material formed at the hearing is an important reference for the people’s procuratorate to handle the public interest litigation case in accordance with the law.”

For example, in a series of criminal cases with incidental civil public interest litigation filed by the People’s Procuratorate of Pingjiang County, Hunan Province against Zhang XX et al. on illegal fishing of aquatic products and destruction of ecological resources, the procuratorate, for a better effect of punishment as well as education, so as to guide the public to consciously protect the ecological environment, decided to hold a pre-litigation public hearing on September 24, 2020, in Meixian Town, where the similar cases frequently occurred. The hearing was attended by the deputies to the People’s Congress, members of the CPPCC, People’s Supervisors, and representatives of local people, who served as the hearers. The discussion centered on the critical issues of whether the illegal fishing behavior in this series of cases undermines public welfare, the damaging effect of the behavior concerned on aquatic ecological resources, the ecological restoration approach, and the punishment.

What should be noted in this respect is that, unlike anti-monopoly administrative investigation practice, in which the antitrust enforcement authority “should” inform the party involved of its right to request a hearing, the people’s procuratorates are not obliged to hold a hearing during the review of a case, but “may” hold a hearing based on the investigation of a specific case.

  • Pursuant to the first paragraph of Article 63 of Law of the People’s Republic of China on Administrative Penalty, “before making the following decisions on administrative penalties, an administrative authority shall notify the party of the right to request a hearing, and where a party requests a hearing, the administrative authority shall organize a hearing:(1) a large amount of fines; (2) confiscation of a large amount of illegal income or a large value of illegal property; (3) downgrade of qualification, or revocation of license; (4) suspension of production, closure of business, or restriction of operation; (5) other severe administrative penalties; (6) other circumstances as prescribed in laws, regulations, and rules.” Since antitrust administrative penalties typically result in significant fines, confiscation and other penalties, the rule that “shall notify the party of the right to request a hearing” is usually triggered in practice.
  • Pursuantto the first paragraph of Article 4 of Provisions of the People’s Procuratorates on the Hearing Work for Case Examination, “when the people’s procuratorate handles the examination of the necessity of custody, decision not to prosecute, criminal petition case, civil litigation supervision case, administrative litigation supervision case, or a public interest litigation case, if there is a significant social impact or a major dispute in the determination of facts, the application of the law, the handling of the case, and therefore needs to listen to the opinions of the parties and other relevant personnel in person, a hearing may be held upon the approval of the Procurator-General.” Based on the Rules for Handling Cases and the foregoing provisions, the People’s Procuratorate has the authority which is not an obligation to decide whether to hold a hearing in Prosecutorial Civil Public Interest Litigation.

VI. Claims that the People’s Procuratorate Can File in Civil Public Interest Litigation

Different from a private civil lawsuit, the premise of the people’s procuratorate to file a public interest civil lawsuit is that the behavior of the defendant damages the “public interest”. As to the claims that the People’s Procuratorate can file in civil public interest litigation, especially whether compensation for damages can be claimed, that depends on the type of case and the specific circumstances.

  • Pursuant to Article 18 of the Judicial Interpretation of Environmental Civil Public Interest Litigation, “for any conduct that pollutes the environment and damages the ecology, which has damaged the public interest or has the major risk of damaging the public interest, the plaintiff may request the defendant to assume the civil liabilities including but not limited to the cessation of the tortious act, removal of the obstruction, elimination of the danger, restoration to the original state, compensation for damages, and apology.” Pursuant to Article 21 of the Judicial Interpretation of Environmental Civil Public Interest Litigation, the “compensation for damages” refers to “the damages resulting from the loss of service functions from the time when damage is caused to the ecology and environment to the completion of remediation and the losses resulting from permanent damage to ecological and environmental functions”.
  • Pursuant to the first paragraph of Article 13 of the Judicial Interpretation of Consumer Civil Public Interest Litigation, “in a consumer civil public interest litigation, the plaintiff requests that the defendant should assume such civil liabilities as ceasing the infringement, removing obstacles, eliminating dangers, and offering apologies, the people’s court may support such request.”While the law explicitly provides that consumers are entitled to “compensation for damages”, the aforesaid judicial interpretation does not specifically incorporate “compensation for damages” in the scope of claims in consumer civil public interest litigation cases. The people’s procuratorates have claimed punitive damages in certain civil public interest litigation cases filed with respect to the protection of rights and interests of consumers, which were upheld by the people’s courts.

Pursuant to the first paragraph of Article 60 of the New AML, “the business operators that carry out the monopoly conduct and cause damages to others shall bear the civil liability according to law.” Pursuant to Article 14 of the Judicial Interpretation of Monopoly Civil Disputes, “where a defendant’s monopoly conduct has caused any losses to the plaintiff, the people’s court may, in light of the plaintiff’s claims and the finding of facts, order the defendant to cease infringement, compensate for losses, and otherwise assume civil liability in accordance with law. According to the plaintiff’s claim, the people’s court may include the plaintiff’s reasonable expenses on investigation and prevention of the monopoly conduct in the scope of compensation for losses.”

The questions of what claims the people’s procuratorate can bring up in the anti-monopoly case of Prosecutorial Civil Public Interest Litigation, whether losses compensation may be covered and how to calculate losses, etc., remain to be subsequently confirmed in subsequent detailed regulations, judicial interpretations, and practice.

VII. The People’s Procuratorate may Issue Prosecutorial Recommendations to the Anti-monopoly Enforcement Authority

Pursuant to Article 21 of the Interpretation of Prosecutorial Public Interest Litigation, “where the people’s procuratorate finds in the performance of functions that any administrative authority assuming supervision and administration functions in such fields as the protection of the ecological environment and resources, food and drug safety, protection of state-owned property, and the assignment of the right to use state-owned land exercises functions in violation of any law or conducts nonfeasance, which infringes upon national interest or public interest, it shall issue prosecutorial recommendations to the administrative authority, and urge it to perform functions in accordance with the law. The administrative authority shall, within two months upon receipt of a written prosecutorial proposal, perform its duties and make a written response to the people’s procuratorate. If there is a such emergency where the damages of the state interests or public interests continue to expand, the administrative authority shall make a written response within 15 days. Where the administrative authority fails to perform its duties according to the law, the people’s procuratorate shall file a lawsuit with a people’s court.”

Based on the foregoing provision, theoretically, if the people’s procuratorate obtains clues concerning monopoly conduct and, upon assessment, found it “infringes upon national interest or public interest”, it may, in addition to considering filing a civil public interest lawsuit, simultaneously issue prosecutorial recommendations to the anti-monopoly enforcement authority (i.e., the State Administration for Market Regulation and the corresponding provincial market supervision administration). The anti-monopoly enforcement authority, upon receipt of the prosecutorial recommendation, shall verify and respond in writing to the people’s procuratorate within the period stipulated in law.

The people’s procuratorate has previously issued prosecutorial recommendations to the market supervision authorities in many places on issues such as the protection of personal information and consumer rights. For example, in the case conducted by the People’s Procuratorate of Lucheng District of Wenzhou City, Zhejiang Province to urge the protection of patients’ personal information, Zhang XX et al., suspected of criminal offenses, were held criminally liable in accordance with the law, however, the companies involved were not punished accordingly for Zhang XX and Lu XX’s marketing of their business by taking advantage of their illegally obtained personal information of maternity and others. On August 29, 2019, the People’s Procuratorate of Lucheng District of Wenzhou City, Zhejiang Province, issued a pre-litigation prosecutorial recommendation to the Administration for Market Regulation of Lucheng District of Wenzhou City, Zhejiang Province (“ Lucheng District AMR”), urging it to investigate and deal with the illegal acts conducted by the relevant company, and to take effective methods to intensify the crackdown on illicit operations infringing upon consumers’ personal information within their respective authority. In July 2020, after the receipt of the prosecutorial recommendation, Lucheng District AMR imposed an administrative penalty on the concerned photographic company, ordering rectification of the parties concerned, confiscating illegal proceeds of RMB 4,000, and imposing a fine of RMB 34,000; the training company involved was ordered to make rectification and fined RMB 30,000. Meanwhile, Lucheng District AMR carried out district-wide specific actions and associated publicity campaigns against the misappropriation of consumer personal information.

The New AML only explicitly stipulates that the people’s procuratorates can initiate civil public interest litigation cases against monopoly conducts that undermine the public interest of society but the issue of prosecutorial recommendations to administrative authorities and administrative public interest litigation are within the statutory power as specified in the Organic Law of the People’s Procuratorates and relevant provisions. Consequently, for monopoly behaviors found by the people’s procuratorate in the exercise of its power to be detrimental to the public interest of society, in addition to filing civil public interest litigation, it may as well propose to the SAMR or the corresponding provincial market supervision authority to launch an anti-monopoly investigation. Undertakings who conduct monopoly behavior may take the risk of being the target of civil public interest litigation and administrative investigations and penalties simultaneously.

VIII. The Platform Economy has Come under the Spotlight of Prosecutorial Civil Public Interest Litigation

On August 1, 2022, while the AML took effect, the SPP issued the Notice, which underscores that the people’s procuratorate should actively and soundly carry out Public Interest Litigation Prosecution works in the field of anti-monopoly with the focus on the Internet, public utilities, medicine, and other sectors of livelihood security. Prior to the publication of the Notice, the SPP had repeatedly clarified its intention to strengthen the jurisdiction on prosecutorial public interest litigation in the platform economy.

  • On March 8, 2022, Jun ZHANG, the Chief Procurator of the SPP, proposed in the Work Report of the SPP in 2022 people’s procuratorate would “reinforce anti-monopoly, anti-profiteering and anti-unfair competition justice, with the view of supporting and directing the standardized and healthy growth of capital.”
  • On March 3, 2021, at a press conference of the SPP, Weilie HU, the Chief Procurator of the Eighth Prosecutorial Department of the SPP, mentioned the promotion of Internet platform anti-monopoly and anti-unfair competition public interest litigation to strengthen the regulation on the platforms’ behavior of “either-or choice”, false propaganda, credit speculation by scalping, bidding for ranking, illegal sales promotion, illicit data collection, illegal push notification and other acts that may disrupt the order of market competition.
  • On January 25, 2021, Xinjian ZHENG, member of the Procuratorate Committee of the SPP and the Chief Procurator of the Fourth Prosecutorial Department of the SPP, delivered at a press conference that the SPP is proactively guiding all the provinces to improve the handling of public interest litigation cases related to the protection of citizens’ personal information, anti-monopoly and anti-unfair competition on Internet platforms.

Since 2020, numerous Prosecutorial Civil Public Interest Litigations have been filed in emerging areas including the platform economy, covering issues of consumer rights defense, safeguard of minors, data security, personal information security, etc. For instance, on April 22, 2021, the SPP released 11 typical cases of public interest litigation on personal information protection handled by people’s procuratorates, addressing issues such as unauthorized collection, use, and leakage of users’ personal information. Based on the Performance of the Fifth Anniversary of the Comprehensive Implementation of Public Interest Litigation released by the SPP in June 2022, between November 2019 and June 2022, the nationwide people’s procuratorates dealt with more than 100,000 cases in emerging fields, among which 4,000 cases in the field of personal information protection and 180 cases in the field of anti-monopoly and anti-unfair competition.

Against the background of the current normalization of strict antitrust regulation, with the introduction of the Prosecutorial Civil Public Interest Litigation system in the New AML, a growing volume of antitrust cases of Prosecutorial Civil Public Interest Litigation are likely to emerge in future judicial practice, particularly in fields closely relevant to people’s livelihood, such as platform economy, public utilities, and pharmaceuticals. Therefore, we recommend that companies in the relevant fields prioritize antitrust compliance, promptly review their business practices to identify any antitrust compliance risks, and closely update information regarding antitrust legalization and practice.


[1]Note: Besides civil public interest litigation, the people’s procuratorates are as well entitled to initiate administrative public interest litigation, as provided for in the fourth paragraph of Article 25 of the Administrative Litigation Law of the People’s Republic of China, that “where the people’s procuratorate finds in the performance of functions that any administrative authority assuming supervision and administration functions in such fields as the protection of the ecological environment and resources, food and drug safety, protection of state-owned property, and the assignment of the right to use state-owned land exercises functions in violation of any law or conducts nonfeasance, which infringes upon national interest or public interest, it shall offer prosecutorial recommendations to the administrative authority, and urge it to perform functions in accordance with the law. If the administrative authority fails to perform functions in accordance with the law, the people’s procuratorate shall file a lawsuit with the people’s court in accordance with the law.” Nevertheless, the administrative public interest litigation system falls outside the scope of this article, hence this article will not elaborate further on it.

*Appreciation goes to our firm’s interns Xin XU, Jiawei LIU, and Yuxuan LIU for their contributions to this article.

On the 7 July 2022, the Cyberspace Administration of China (“CAC“) promulgated the Measures for the Security Assessment of Outbound Data Transfers (“Measures“), which are due to take effect on 1 September 2022.

The Measures contain 20 Articles that we have grouped into the following 11 themes:

  1. Purpose and scope – Articles 1 & 2
  2. Important data – Article 19
  3. Security Assessment triggers – Article 4 & 14
  4. Data transfer legal documents – Article 9
  5. Ex-Ante Self-assessments – Article 5
  6. Security Assessment applications – Article 6
  7. Security Assessments – Article 3, 8, 10, 11 & 14
  8. Security Assessment timescales – Article 7, 12 & 13
  9. Confidentiality obligations – Article 15
  10. Liability – Article 16, 17 & 18
  11. Effective date and transitional period – Article 20

We explore each theme below before discussing some issues raised at a press conference held by the CAC on 7 July 2022.

Purpose and scope

Article 1 of the Measures states that their purpose is “to regulate outbound data transfer activities, protect personal information rights and interests, protect national security and social and public interests, and promote a safe and free flow of data across borders

Article 2 then provides that the measures apply to Security Assessments of outbound data transfers involving important data and personal information collected and generated by data processors through their operations in China. Accordingly, it seems that the Measures do not apply extraterritorially to personal information collected and generated by data processors from outside of China.

Important data

Important data is presently an unclear legal concept with no overarching definition. At a conceptual level, it seems that the legal obligations relating to important data lie somewhere in the middle of a spectrum between personal information and state secrets.

The Measures define important data in the context of outbound data transfers only. At this time, only one other source of law defines important data, namely the Several Provisions on Vehicle Data Security Management (Trial) (“Trial Provisions“). We compare the definition in the Measures with that in the Trial Provisions, omitting its enumerated examples, below. 

The Measures:

For the purposes of these Measures, the term “important data” means any data, the tampering, damage, leakage, or illegal acquisition or use of which, if it happens, may endanger national security, the operation of the economy, social stability, public health and security, etc.

The Trial Provisions:

The term “important data” refers to any data that, once tampered with, sabotaged, leaked or illegally obtained or used, may lead to endangerment of national security or public interests, or infringement of the lawful rights and interests of an individual or organisation, including…

One might note that both definitions are risk-based but, except for endangering national security, the risks identified vary slightly. What this means in practice and how multiple definitions of important data will interact are unclear.

As the CAC was involved in the drafting of both regulations, the differences seem to highlight the following core definition:

Data that may harm the interests of the nation, public, or persons if breached.

Security Assessment triggers

A data processor must apply to provincial CACs for a Security Assessment in advance of outbound data transfers in the following circumstances:

  • transfers of important data;
  • it is a Critical Information Infrastructure operator (“CIIO“);
  • it is a personal information processor that has processed the personal information of more than 1,000,000 individuals;
  • it has made cumulative outbound transfers of the personal information of more than 100,000 individuals since 1 January of the previous year;
  • it has made cumulative outbound transfers of the sensitive personal information of over 10,000 individuals since 1 January of the previous year; and
  • the transfer falls within other situations prescribed by the CAC.

Whether a company might be identified as a CIIOs remain unclear in many industries. Nevertheless Article 10 of the Regulations on the Security Protection of Critical Information Infrastructure, states that the authorities will inform a company that it is CIIO once identification takes place. Therefore, for practical purposes, companies can consider themselves as not being CIIOs until the authorities tell them otherwise.

It is understood that many companies, and multinationals in particular, would prefer to see a rise in the transfer thresholds that trigger Security Assessments.

Data transfer contracts

The Measures state that contracts, which it refers to as legal documents, between the data exporter and data importer for outbound data transfers should cover:

  • the purpose and method of the outbound data transfer, the data scope, and the data processing purpose and method;
  • the data retention location and duration, and obligations when the data retention period expires, the transfer purpose completes, or the agreement ends;
  • restrictions against onward data transfers to others;
  • security measures to be adopted when a material change occurs concerning the overseas recipient, the destination country’s legal, regulatory and cybersecurity environment, or a force majeure event occurs which makes it difficult to ensure data security;
  • remedial measures, liability for contractual breaches and dispute resolution mechanisms for breaching data security protection obligations; and
  • requirements for proper emergency disposal and ensuring that individuals can safeguard their personal information rights and interests when their data is exposed to risks, such as being tampered with, damaged, leaked, lost, relocated, or illegally acquired or used.

On a related note, on 30 July 2022, the CAC issued the Draft Provisions on Standard Contracts for the Export of Personal Information, which also deal with outbound data transfers and contain a draft Standard Contract for use in situations that would not trigger a Security Assessment under the Measures. While contracts drafted under Article 9 may have some similar features to the draft Standard contract, companies should not automatically assume that signing a Standard Contract would meet the requirements of the Measures or vice versa.

Please see China Releases Draft Standard Contract for Cross-border Data Transfers by Samuel Yang and Cross-Border Data Transfers: A Comparison of the EU And Chinese Standard Contractual Clauses by Samuel Yang and Chris Fung for more information about the draft Standard Contract.

Ex-Ante Self-assessments

After a Security Assessment is triggered, but before a Security Assessment application occurs, a data processor is obliged to conduct a Ex-Ante Self-assessment. Data processors are required to address the following matters during Ex-Ante Self-assessments:

  • the legality, legitimacy, and necessity of the outbound data transfer and the overseas recipient’s data processing in relation to the purpose, scope, method, etc.;
  • the outbound data’s quantity, scope, type and sensitivity, and the risk the outbound data might pose to national security, public interests, and the lawful rights and interests of individuals and organisations;
  • whether the overseas recipient’s responsibilities and obligations, and their management measures, technical measures and capabilities to perform such responsibilities and obligations can ensure the security of the outbound data;
  • the risk of the outbound data suffering data breaches, including unauthorised onward transfers, during and after the outbound data transfer, and whether individuals have unobstructed channels to safeguard their rights and interests in their personal information and other data;
  • whether the data security protection responsibilities and obligations are sufficiently stipulated in the data transfer contract or other documents; and
  • any other matters that might affect the security of the outbound data.

Some of the factors described above are also covered by personal information protection impact assessments (“PIPIAs“) required under the Personal Information Protection Law (“PIPL“). We believe it would be cheaper and more efficient for companies to combine all assessment factors under both the PIPL and the Measures within a single consolidated Ex-Ante Self-assessment.

Security Assessment applications

Applications for Security Assessments should contain:

  • a completed Security Assessment application form;
  • a copy of the Ex-Ante Self-assessment report;
  • a copy of the outbound data transfer contract; and
  • any other materials the CAC requires.

Security Assessments

Article 3 of the Measures provide that Security Assessments of outbound data transfers should combine ex-ante assessments and ongoing supervision, and Ex-Ante Self-assessment and Security Assessment.

The substantive content of CAC Security Assessments overlap significantly with Ex-Ante Self-assessments, except in relation to the following:

  • the impact of data security protection policies, legislation and the cybersecurity environment of the country or region where the overseas recipient is located in relation to the security of the outbound data, and whether the overseas recipient’s data protection level meets the requirements of Chinese laws, administrative regulations and mandatory national standards;
  • compliance with Chinese laws, administrative regulations and departmental rules; and
  • other matters the CAC deems necessary to assessed.

We note that item 1) above seems to describe something like transfer impact assessments under the EU’s GDPR and that data processors are not required to cover such things in their Ex-Ante Self-assessment report.

Given the limited resources of government departments, it is doubtful that they would make such assessments on a case-by-case basis. Therefore, we wonder how such assessments are made, whether a central transfer impact assessment list exists at this time (which one might regard as China’s answer to adequacy decisions), whether such a list will become publicly accessible, and how it will be managed and updated.

The CAC may terminate Security Assessments if it requires additional materials, and a data processor refuses to submit them.

Article 14 of the Measures states that the results of a Security Assessment are valid for two years unless retriggered by any of the following situations:

  • any change to the outbound data transfer’s purpose, method or scope, the data type, or the overseas recipient’s data processing purpose or method which will affect the security of the outbound data or extend retention periods;
  • any change to data security protection policies, legislation, the cybersecurity environment or any other force majeure event where the overseas recipient is located,
  • any change in the actual control of the data processor or overseas recipient or any change to the data transfer agreement affecting the security of the outbound data; or
  • any other circumstances that may affect the security of the data.

Data processors will need to apply for a reassessment after expiration. The CAC have stated that: “When the validity period expires and it is necessary to continue to carry out data export activities, the data processor shall re-apply for evaluation 60 working days before the validity period expires.”

Security Assessment timescales

Security Assessment applications should be submitted to provincial CAC offices, which should conduct a completeness check of the application documents within 5 working days. Thereafter, the national CAC will then review the application documents and decide whether to accept the application within 7 working days, after which the central CAC will begin a substantive review, which should take a maximum of 45 working days from the date of issuing a written acceptance of the application. Accordingly, in normal circumstances, the entire process of applying for and undergoing a Security Assessment might take up to 57 working days (approximately 2.5 months).

However, the Measures allow the CAC to extend the deadline for completing a Security Assessment “as appropriate” if the “case is complicated or there are materials to be supplemented or corrected…” This power to extend deadlines has not explicit upper limit.

Should a data processor object to Security Assessment results, it must apply for a reassessment within 14 working days of receiving the assessment results. Article 15 provides that the results of a reassessment are final.

Confidentiality obligations

Institutions and staff that participate in Security Assessments are legally bound to keep confidential any information that they learn during their Security Assessment work. This includes state secrets, personal privacy, personal information, trade secrets, confidential business information, and other data.

Liability

Where any organization or individual discovers that a data processor has conducted any outbound data transfer in violation of the Measures, they may report it to the CAC.

In the event that the CAC finds out that an outbound data transfer which passed a Security Assessment no longer comply with the Measures while implementing data transfers, it has the power to notify the data processor to stop making such transfers. Should the data processor need to continue making such transfers, it should make “rectification as required” before applying for a reassessment.

The implications of the CAC’s ability to stop previously approved transfers for non-compliance with the measures are unclear at this time. However, it may be the case that the CAC has an implied power of interpretation and construction in relation to data transfer contracts and can determine whether they are being correctly performed.

Violations of the Measures are punishable under the Cybersecurity Law, the Data Security Law, the PIPL, and other laws and regulations depending on the data processor, the data types and the nature of the violation. We note that violations of the PIPL attract the highest penalties, specifically, up to CNY 50 million or 5% of the violator’s revenue in the previous year. We note that on 21 July 2022, DiDi Global was fined CNY 8 billion for various data security violations. This suggests that the CAC is willing to issue large fines for violations of data laws.

Effective date and transitional period

The Measures will come into force on September 1, 2022. Data processors may only make relevant outbound transfers from 1 September 2022 after passing a Security Assessment. More specifically the CAC has stated: “The data processor can carry out data export activities in strict accordance with the declared items after receiving the written notification of passing the assessment.”

First, the application will not be accepted. For those that do not fall within the scope of the security assessment, after receiving a written notification from the national cybersecurity and informatization department, the data processor may carry out data export activities through other legal channels prescribed by law. The second is to pass the safety assessment. The data processor can carry out data export activities in strict accordance with the declared items after receiving the written notification of passing the assessment. The third is failing to pass the safety assessment. If the data export security assessment is not passed, the data processor shall not carry out the declared data export activities.

For outbound data transfers carried out before 1 September 2022, “rectification” shall be completed within 6 months after 1 September 2022. It is unclear if this means that the data processor must pass the Security Assessment within this 6-month grace period, or perhaps the submission of an application for Security Assessment within this period would be sufficient. Nevertheless, given these deadlines, possible delays, the 2022 spring festival holidays and other factors, we recommend that data processors should endeavour to submit their applications for Security Assessments as soon as possible.

Summary

The requirements for Security Assessment apparently add a layer of onerous compliance burdens to the operations of many businesses. The various thresholds of personal information that trigger Security Assessments are low and may affect many multinational companies doing business in China. These new requirements also create some uncertainty, particularly among entities that depend on cross-border transfers of data to conduct business. This uncertainty will not be resolved until the Measures take full effect and the processing of Security Assessments becomes standardised in practice.

Businesses that will likely be subject to the Security Assessment regime should act now –  take stock of their data flows, renegotiate their cross-border data transfer contracts and ensure that their data protection practices align with the requirements of the Measures and other Chinese laws and regulations. Businesses that operate in areas of higher risk may also wish to begin creating contingency plans in case they are prohibited from transferring certain data out of China.

Disclaimer

Nothing in this article is intended to be legal advice to its readers. This article was written for the purposes of academic discussion only. The views of its authors do not reflect the views of regulators.

Background

On 1 November 2021, the Personal Information Protection Law of the People’s Republic of China (“PIPL”) took effect and became the first Chinese law dedicated to protecting the personal information rights of individuals. However,     due to a lack of implementation regulations and clarity, many companies face a situation where they are unsure how to comply with the PIPL in some areas.

Nowhere is this more of an issue than with Article 38 of the PIPL, which provides several conditions (or legal paths)  that must be met before a cross-border data transfer may occur. According to Article 38, entities may send personal data to foreign recipients by taking one of the following legal paths:

Legal Path 1  Government Security Assessment: A security assessment organised by the national cyberspace authority has been passed by the entity in accordance with Article 40 of this Law;

Legal Path 2  Standard Contract: A contract in compliance with the standard contract provided by the national cyberspace authority has been concluded with the overseas recipient, establishing the rights and obligations of  both parties.

Legal Path 3  Certification: the entity has acquired a certification of personal information protection by a           professional certification institution in accordance with the regulations of the national cyberspace authority; and

On Legal Path 1 (Government Security Assessment), please see China Issues Cross-border Data Transfer Security Assessment Rules. For Legal Path 2 (Standard Contract), please see China Releases Draft Standard Contract for  Crossborder Data transfers and Crossborder data transfers: A Comparison of the EU and Chinese Standard

Contractual Clauses.

This article discusses China’s new rules on Legal Path 3 (Certification).

TC260 Issues Rules for Legal Path 3 (Certification)

On 24 June 2022, the National Information Security Standardization Technical Committee (also known as “TC260”)   issued its  “Technical Specifications for the Certification of CrossBorder Processing of Personal Information              (“Specifications”). The  Specifications state the criteria that MNCs or other economic or business entities and            overseas processors should meet to obtain certification as described in Article 38 of the PIPL (i.e., Legal Path 3). At a high level, TC260’s  Specifications seem to describe something like the Binding Corporate Rules (“BCRs”) under the  GDPR.

Please note that the Specifications are not compulsory. In other words, parties to cross-border personal information transfers can decide if they want to go through this Legal Path 3 and obtain certification or go through other Legal    Paths as they think appropriate to legitimatise their cross-border data transfers. However, if they choose to put   themselves under this certification regime, the rules under the Specifications are binding on them and relevant   certification institutions.

Applicability of the Specifications

The  Specifications describe certification scenarios, certification applicants and those who should bear responsibility  for cross-border personal information transfers. Within an MNC, one of its entities in China can apply for certification and undertake to assume legal responsibility for the MNC’s global organisation, while for an overseas entity having a not substantial presence in China, its specialised agency or designated representative in China can apply for   certification and undertake to bear legal responsibility for the overseas entity.

Legally Binding Documents

Parties to cross-border personal information processing activities must sign legally binding and enforceable  documents (“LBDs”) to ensure that the rights and interests of individuals are fully protected. At a minimum, LBDs should contain:

  1. The relevant parties involved in cross-border personal information processing;
  2.  The purpose of cross-border personal information processing and the types and scope of personal information;
  3.   Measures to protect the rights and interests of individuals;
  4.  Undertakings by each party to comply with uniform personal information processing rules and ensure that thelevelof personal information protection is not lower than the standards stipulated by relevant Chinese laws and regulations on the protection of personal information;
  5. Undertakings to accept the supervision of certification bodies;
  6.    Provisions stating that relevant Chinese laws and regulations on the protection of personal information governthe arrangements;
  7.  Details of the organisational bodies that will bear legal responsibility within China; and
  8.  Provisionsforcompliance with other legal and regulatory obligations.

Uniform Processing Rules

Uniform processing rules, described in 4. above, must contain:

  •   Theparticularsof cross-border personal information processing, including the type, sensitivity, quantity, etc., of personal information;
  • The purpose, method, and scope of cross-border personal information processing;
  •   Thestartand end time of overseas storage of personal information and the processing method after expiration;
  • Transitcountries involved in cross-border personal information processing;
  •   Resources and measures required to protect the rights and interests of individuals; and
  •    Rulesforcompensation and disposal of personal information security incidents.

DPO

Both the data exporter and foreign data importer must appoint a person to take charge of personal information protection. The persons in charge must have relevant knowledge and experience and be a part of the decision-  making level of their entity. Their duties include:

  •    Clarifyingorganisationalpersonal information protection objectives, basic requirements, work tasks, and protection measures;
  •  Ensuring the availability of human resources, financial support and materials for personal information protection withinthe organisation;
  •    Guidingandsupporting relevant personnel in carrying out the organisation’s personal information protection efforts and ensuring that personal information protection efforts achieve the expected goals; and
  •    Reportingto the organisation’s leaders on personal information protection and promoting the continuous improvement of personal information protection efforts.

Personal Information Protection Organisation

Both the data exporter and foreign data importer should set up personal information protection internal organisations that are tasked with preventing “unauthorised access and leakage, falsification and loss of personal information” and undertaking the following duties:

  •    Formulatingandimplementing plans for cross-border personal information processing;
  •    Organising and carrying out personal information protection impact assessments (“PIPIAs”);
  •    Supervisingcross-borderpersonal information transfers under rules agreed to by the relevant parties; and
  •    Acceptingandhandling requests and complaints from data subjects.

Personal Information Protection Impact Assessments (PIPIAs)

Specification is provided on what a PIPIA should contain in cross-border transfer scenarios. In particular, a PIPIA must cover:

  1.   Whethertheprovision of personal information to overseas countries complies with laws and administrative regulations;
  2. The impact on the rights and interests of individuals;
  3.   Theimpactof the legal environment and network security environment of overseas countries and regions on the rights and interests of individuals;
  4.  Other matters necessary to safeguard the rights and interests of personal information.

Items 2. and 4. above mirror the requirements of the PIPL, while Items 1. and 3. are more specific to cross-border     transfer impact assessments and suggest the need for specialised country-by-country transfer impact assessments   similar to those used for GDPR purposes. For Item 3 ., we note that the precise meanings of “legal environment” and “network security environment” are currently unclear.

Individual Rights

Individuals have various rights over their personal information under the PIPL. Those rights include a right to access, right to correct, right to complete, right to erasure, right of portability and right to refuse processing. In addition to  those rights, the  Specifications provide that individuals are beneficiaries of LBDs and have the right to request a       copy of the relevant LBD provisions relating to individuals’ legal rights and interests.

Being a beneficiary to LBDs might, theoretically, increase the range of rights available to individuals over and above those found in the PIPL. This is especially so if MNCs operating in multiple jurisdictions take a unified highest            standard approach to personal information protection at a global level.

The right to access relevant LBD provisions raises issues from a confidentiality perspective. Thus, it would be wise to stipulate such matters in a standalone document to ensure that disclosures to individuals remain appropriate.

The  Specifications also provide that individuals should be allowed to litigate in the Chinese courts of their habitual place of residence against the parties to the cross-border data transfers.

Obligations of the Parties to CrossBorder Data Transfers

The provisions within the  Specifications on processor obligations generally reflect the terms of the PIPL. However, further requirements are imposed on parties to cross-border data transfers, including:

  •    Whensituationsarise where it is difficult to ensure the security of personal information transferred across borders, such processing must be “promptly terminated”.
  •   Theresponsibleparty in China should compensate individuals for breaches arising in the context of cross-border data processing activities.
  •   Thepartiesto cross-border data transfer activities should undertake to follow Chinese data protection laws,     accept their application and enforcement, and cooperate with Chinese regulators’ enforcement activities, such as answering their inquiries and accepting routine inspections.

Conclusions

The  Specifications make Legal Path 3 (Certification) of Article 38 of the PIPL possible – though not fully actionable as China has not published a list of certification institutions to handle certification applications from entities.  Nevertheless, the Specifications have provided a skeleton of the certification regime for cross-border data transfers. We believe that the Chinese authorities may issue regulations, and TC260 may also issue further guidance to  substantiate this certification regime.

It should be noted that, while an entity can choose between Legal Path 3 (Certification) and Legal Path 2 (Standard Contract) to legitimatise its cross-border data transfers, Legal Path 1 (Government Security Assessment) is not

optional – as long as statutory triggers exist, an entity will have to participate in a Security Assessment by the CAC

(For more information see China Issues Crossborder Data Transfer SecurityAssessment Rules).

At this stage, it is difficult to forecast if Legal Path 3 (Certification) would be more popular than Legal Path 2   (Standard Contract). In addition to signing a cross-border data transfer contract, the Specifications essentially require that both the data exporter and the overseas data recipients are subject to a set of unified data protection rules   which are aligned with Chinese laws and subject to Chinese regulators’ supervision. We believe the compliance  efforts would be more costly than “simply” signing the Standard Contract. However, it is possible that this   certification path might be welcomed by some companies who see certification as a type of status or quality mark to signal to consumers that their personal information will be protected to higher standards.

As cross-border data transfers are a rapidly developing area of law, MNCs and overseas processors processing the personal information of people in China are advised to monitor developments in this area closely .

On 30 June 2022, the Cyberspace Administration of China (“State Internet Information Department” or “CAC“)  issued the Draft Provisions on Standard Contracts for the Export of Personal Information (“Draft Provisions“) for public consultation. The deadline for feedback is 29 July 2022.

The Draft Provisions contain a draft Standard Contract for the Export of Personal Information (“Standard Contract“).  The Standard Contract consists of nine articles and two appendices.

This article provides an in-depth analysis of the articles in the Draft Provisions and their potential impact on multinational companies.

Provisions on Standard Contract on the Export of Personal Information (Draft for Public Consultation)

Article 1: These Provisions are formulated on the basis of the “Personal Information Protection Law of the People’s Republic of China” so as to standardise personal information export activities, protect personal information rights  and interests, and promote the safe and free flow of personal information across borders.

Article 2: Where personal information processors conclude contracts with overseas recipients to provide personal    information outside the territory of the People’s Republic of China in accordance with subparagraph (3) of the first   paragraph of Article 38 of the “Personal Information Protection Law of the People’s Republic of China”, they shall   follow these Provisions to sign a standard contract for the export of personal information (hereinafter referred to as “Standard Contracts“). Other contracts concluded between the personal information processor and the overseas  recipient related to the outbound activities of the personal information shall not conflict with the standard contract.

Analysis of Articles 1 and 2:

1. Articles 1 and 2 explain the purpose and legal basis for formulating the Draft.

2. Article 2 provides: “Other contracts concluded between a personal information processor and an overseas recipient related to the outbound activities of personal information must not conflict with the Standard Contract. ”

3. This means that, in addition to signing the Standard Contract with an overseas recipient, a Chinese enterprise that chooses to use a Standard Contract also needs to:

a) check other contracts it has signed with the overseas recipient related to the export of personal information to ensure that they do not conflict with the Standard Contract, and supplement or modify such other contracts according to the actual situation; and

b) clearly state in other contracts that in the event of a conflict with the terms of the Standard Contract, the Standard Contract prevails.

Article 3: Those carrying out personal information export activities on the basis of standard contracts shall adhere to a combination of independent contracting with file management to prevent security risks to the export of personal  information and ensure the orderly and free flow of personal information in accordance with the law.

Analysis of Article 3:

1. According to the expression “independent contracting” in Article 3, signing a Standard Contract is not a mandatory legal obligation. However, enterprises should note that for all data export paths permitted under Article 38 of the Personal Information Protection Law (“PIPL”), Chinese enterprises and overseas recipients must either sign (i) Standard Contracts, (ii) other similar contracts or (iii) legally binding and enforceable documents. See our analysis of Articles 4 and 5 below for details.

2. For the “file management” requirement, see our analysis of Article 7 below.

Article 4: Where personal information processors meet all the following criteria, they may provide personal information overseas by signing a standard contract:

(1) Non-critical information infrastructure operators;

(2) Handling less than 1 million persons’ personal information;

(3) Cumulative provision of personal information of less than 100,000 people overseas since 1 January of the previous year;

(4) Cumulative provision of sensitive personal information of less than 10,000 people outside the country since 1 January of the previous year.

Analysis of Article 4:

  1. Under Article 4, a processor of personal information who meets the relevant requirements “may”, as opposed

to “must“, sign a Standard Contract to legalise the export of personal information. This is because Article 38 of the PIPL stipulates several different legal paths for personal information to leave China. They include:

(1) Critical information infrastructure operators and personal information processors handling personal  information that reach the number of personal information processors provided for by the state network information departments for outbound conduct shall pass a security assessment organised by the state   network information departments;

(2) Conduct personal information protection certification through professional bodies in accordance with the provisions of the state network information departments;

(3) Conclude a contract with an overseas recipient in accordance with a standard contract formulated by the State Internet Information Department, stipulating the rights and obligations of both parties;

(4) Other requirements provided for by laws, administrative regulations, or the State Network Information Department.

  1. According to the above provisions, Chinese enterprises that are not “criticalinformation infrastructure              operators and personal information processors who process personal information to the amount prescribed by the State Internet Information Department” may (i) sign the Standard Contract or (ii) obtain personal                 information protection certification through a professional body to transfer personal information overseas.
  2.  Therefore, for Chinese enterprises that choose path (ii), signing a Standard Contract is not required. However, it shouldbe noted that although a Chinese enterprise that chooses path (ii) does not need to sign a Standard   Contract, it will still need to sign a “legally binding and enforceable document” with the overseas recipient in      accordance with the Technical Specification for the Certification of Cross-border Processing Activities of  Personal Information, which was officially issued by the National Information Security Standardization Technical Committee (also known as TC260) on 24 June 2022. Such a document should at least specify the following:
  3. a)Personaldata processors and overseas recipients carrying out cross-border personal information processing activities;
  4. b)Thepurpose of cross-border processing of personal information and the types and scope of personal information;
  5. c)Measuresto protect the rights and interests of Personal Information Subjects;
  6. d)Theoverseas recipient undertakes to comply with the unified rules for the cross-border handling of        personal information, and ensures that the level of personal information protection is not lower than the  standards stipulated by the relevant laws and administrative regulations of the People’s Republic of China on the protection of personal information;
  7. e)Theoverseas recipient undertakes to accept the supervision of the certification body:
  8. f)Theoverseas recipient undertakes to accept the jurisdiction of the laws and administrative regulations of the Peoples Republic of China on the protection of personal information;
  9. g)Clearlydefine the organisations that bear legal responsibility within the territory of the People’s Republic of China:
  10. h)Otherobligations stipulated by laws and administrative regulations that shall be 
  11. Article 4 clearly restricts the application of Standard Contracts and prohibits their use in circumstances where:
  12. a)     Criticalinformationinfrastructure operators export personal information;
  13. b)     Personalinformationprocessors have processed the personal information of more than 1 million people;
  14. c)     The cumulative export of personal information exceeds 100,000 people since 1 January of the previous year;and
  15. d)    Thecumulativeexport of sensitive personal information exceeds 10,000 people since 1 January of the previous
  16. 8.     Those circumstances are the personal information export activities of “criticalinformationinfrastructure            operators and personal information processors who handle the number of personal information specified by the state network information department“, as stated in Articles 38 and 40 of the PIPL. Such transfers should be      preceded by an application for a Security Assessment under the Measures for Security Assessment of Data         Export (Draft) (29 October 2021) rather than the signing of a Standard Contract.
  17. Several categories of Chinese enterprises that should apply for security assessments do not need to legalise    theirpersonal information exports by signing a Standard Contract. Instead, and according to the Measures for Security Assessment of Data Export (Draft for Comments), they should sign a contract with the overseas           recipient that includes but is not limited to the following:

(1) The purpose, method, and scope of data exported, and the purpose and method of processing data by overseas recipients;

(2) The place and period of time for which the data is kept overseas, as well as measures for handling     outbound data after the retention period is reached, the agreed purpose is completed, or the contract is terminated;

(3) Restrictive clauses restricting overseas recipients from transferring outbound data to other organisations or individuals;

(4) The security measures that the overseas recipient shall adopt when there is a substantial change in its actual control or business scope, or when the legal environment of the country or region in which it is       located makes it difficult to ensure data security;

(5) Liability for breach of contract and binding and enforceable dispute resolution clauses for breach of data security protection obligations;

(6) When risks such as data leakage occur, properly carry out emergency response, and ensure smooth channels for individuals to safeguard personal information rights and interests.

  1. Article4 is also consistent with Article 38 of the PIPL, which only stipulates that “personal information   processors” may sign the “Standard Contract“. However, it does not explicitly address whether “entrusted   processors” under the PIPL can or should sign the Standard Contract. For readers more familiar with the GDPR, “personal information processors” are roughly equivalent to data controllers, while the concept of “entrusted  processors” is roughly equivalent to data processors.
  2.   In servingclients, wehave observed that some business models involve data transfers from (i) a Chinese   personal information processor to (ii) a domestic entrusted processor to (iii) an overseas sub-processor.  Domestic personal information processors and domestic entrusted processors often disagree over which party should sign the Standard Contract with the overseas sub-processor.
  3.  Webelievedomestic personal information processors should usually bear the primary obligation for signing a  Standard Contract containing a clear mechanism describing the parties’ obligations and responsibilities with an overseas subcontractor to enable a domestic entrusted processor to provide data to said overseas  subcontractor.
  4.  Analternativeapproach would be for a domestic personal information processor, domestic entrusted processor and overseas subcontractor to sign a tripartite Standard Contract. However, this would require further clarity     regarding the mechanism for domestic entrusted processors to provide data to overseas subcontractors and each party’s contractual obligations and responsibilities.

Article 5: Before personal information processors provide personal information overseas, they shall carry out a personal information protection impact assessment in advance, focusing on the following content:

(1) The legality, legitimacy, and necessity of the purpose, scope, and methods of processing personal information by personal information processors and overseas recipients;

(2) The quantity, scope, type, and sensitivity of outbound personal information, and the risks that personal  information may bring to the rights and interests of personal information that may be brought about by the export of personal information;

(3) The responsibilities and obligations undertaken by the overseas recipient, as well as whether management and technical measures and capabilities for performing responsibilities and obligations can ensure the security of outbound personal information;

(4) The risk of personal information being leaked, damaged, altered, or abused after leaving the country, and  whether the channels for individuals to safeguard personal information rights and interests are unobstructed, and so forth;

(5)The impact of personal information protection policies and regulations on the performance of standard contracts in the country or region where the overseas recipient is located;

(6) Other matters that might affect the security of personal information leaving the country.

Analysis of Article 5:

  1.   Article5 refinesthe requirements for personal information protection impact assessments before exporting personal information under the PIPL by providing additional detail and specification.
  2.   It is worth noting that Chinese enterprises need to assess “theimpact of personal information protection policies and regulations of the country or region where the overseas recipient is located on the performance of standard  contracts“, which is not a small task. Going forward, Chinese enterprises will need to rely more heavily on advice from overseas legal professionals and assistance from overseas recipients.

Analysis of Article 6:

  1.   Article6 providesan overview of the Standard Contract. Regarding the specific content of the Standard

Contract, we will analyse and interpret it separately.

Article 7: Personal information processors shall file a record with the provincial-level internet information department for the area where they are located within 10 working days of the standard contract taking effect. The following materials shall be submitted for filing:

(1) standard contracts;

(2) personal information protection impact assessment reports.

The personal information processor is responsible for the authenticity of the materials filed. After the standard contract takes effect, the personal information processor may carry out personal information export activities.

Analysis of Article 7:

  1.     TheArticle7 filing provisions are new legal requirements without any precedent in the PIPL. The Standard Contract and the personal information protection impact assessment report on the export of personal       information will need to be filed with the government.
  2.     Consideringthatmany enterprises will need to make filings, national administrative resources are limited, and other factors, filing management within provincial CACs may only consist of formality reviews. Based on           informatisation trends in China, the CAC may establish an online filing system to facilitate filings.

Article 8: Where any of the following circumstances occur during the validity period of a standard contract, the personal information processor shall re- sign the standard contract and file it for the record:

(1) Where the purpose, scope, type, sensitivity, quantity, method, retention period, storage location, and purpose or method of handling personal information handled by overseas recipients change, or extend the period for personal   information to be retained abroad;

(2) Where changes in personal information protection policies and regulations in the country or region where the overseas recipient is located may affect personal information rights and interests;

(3) Other circumstances that might affect the rights and interests of personal information.

Analysis of Article 8:

  1.    Consideringtherequirements of Articles 5 and 6 above, the content of Article 8 seems reasonable at face value.
  2.    However, determiningwhetherthe “personal information protection policies and regulations ofthe country or  region where the overseas recipient is located” has “changed” and “may affect the rights and interests of  personal information” is a big challenge for even the largest multinational enterprises. It seems that Chinese      enterprises will be expected to keep abreast of changes in policies and regulations related to overseas personal information protection. This may require them to retain overseas legal professionals on an ongoing basis.
Article 9: Institutions and personnel participating in the filing of standard contracts shall preserve the confidentiality of personal privacy, personal information, commercial secrets, confidential business information, and so forth that  they learn of in the course of performing their duties, and must not leak or illegally provide or use them to others.

Analysis of Article 9:

  1.    Some enterprises, especiallymultinationalenterprises, may have concerns about whether the Standard Contract and the personal information protection impact assessment report filing mechanism may cause information leakages. Article 9 seems to be an attempt to pre-empt such concerns.
  2.   Theexpression”confidential business information” has also appeared in the Measures for the Security  Assessment of Data Export (Draft for Public Consultation). How the CAC will define it in practice remains to be seen.
Article 10: Where any organisation or individual discovers that a person handling personal information has violated these Provisions, they have the right to make a complaint or report to the provincial level Internet information  department.

Analysis of Article 10:

  1.    Complaintsandreports may come from a personal information processor’s (possibly disgruntled) employees or Personal Information Subjects.
  2.   Wespeculatethat, in the future, the CAC could publish lists of enterprises that have completed the filing procedures and that Personal Information Subjects could use such lists to determine whether a personal information processor has fulfilled its filing obligations to make targeted reports.
Article 11: Where provincial-level Internet information departments discover that personal information outbound     activities through the signing of standard contracts no longer meet the requirements for security management of personal information export in the course of actual processing, they shall notify the personal information processors in writing to terminate personal information export activities. Personal information processors shall immediately   terminate personal information export activities upon receipt of the notice.

Analysis of Article 11:

  1.   Asmentionedabove, many enterprises may need to make filings, and state resources are limited. As such, filing management by the CAC may only consist of a formality review. However, given the content of Article 11,  provincial-level CACs may also adopt methods such as spot checks, focusing on specific enterprises or industries

and making investigations based on whistle-blowing leads to conduct targeted substantive reviews of outbound personal information transfers.

Article 12: Where personal information processors follow these Provisions to conclude standard contracts with  overseas recipients to provide personal information overseas, and any of the following circumstances occur, the       provincial-level Internet information department is to follow the provisions of the “Personal Information Protection Law of the People’s Republic of China” to order corrections within a time limit; Where they refuse to make  corrections or harm the rights and interests of personal information, order them to stop activities of exporting  personal information, and punish them in accordance with law; Where a crime is constituted, criminal responsibility is to be pursued in accordance with law.

(1) Failing to perform filing procedures or submitting false materials for filing;

(2)Failing to perform the responsibilities and obligations stipulated in the standard contract, infringing on the rights and interests of personal information, causing harm;

(3) Other circumstances affecting the rights and interests of personal information arise.

Analysis of Article 12:

  1.    Itisworth noting that a “failure to sign the Standard Contract” is not a violation of these Provisions. However, as discussed above, the legal paths for exporting personal information are limited to those stipulated in Article 38   of the PIPL, which are:

(1) Critical information infrastructure operators and personal information processors handling personal  information that reach the number of personal information processors provided for by the state network information departments for outbound conduct shall pass a security assessment organised by the state   network information departments;

(2) Conduct personal information protection certification through professional bodies in accordance with the provisions of the state network information departments;

(3) Conclude a contract with an overseas recipient in accordance with a standard contract formulated by the State Internet Information Department, stipulating the rights and obligations of both parties;

(4) Other requirements provided for by laws, administrative regulations, or the State Network Information Department.

  1.    IfaChinese enterprise fails to sign a Standard Contract and fails to meet the requirements of other personal      information export routes, it will not be punished for violating the provisions of Article 12. However, it will have violated Article 38 of the PIPL and may need to bear legal liability.
Article 13: These Provisions shall take effect as of

Analysis of Article 13:

  1.   Wehopethat when the CAC issues the final version of the above provisions, it will fully consider the time required for enterprises to comply with the new regulations (legal analysis, translation, negotiation with  overseas recipients, etc.) and provide a reasonable time for enterprises to comply before the official         implementation date.

On 7 July 2022, the Cyberspace Administration of China (“CAC“) issued the Measures for the Security Assessment of  Outbound Data Transfers (“Measures“), which will take effect on 1 September 2022. The Measures underwent three rounds of public consultation in 2017, 2019 and 2021 before they were finalised.

In its final form, the Measures contain 20 articles. We have identified 11 topics within the Measures that cover:

No. Topic Articles
1. Purpose and scope 1 & 2
2. Important data 19
3. Security assessment triggers 4 & 14
4. Data transfer legal documents 9
5. Self-assessments 5
6. Security assessment applications 6
7. Security assessments 3, 8, 10, 11 & 14
8. Security assessment timescales 7, 12 & 13
9. Confidentiality obligations 15
10. Liability 16, 17 & 18
11. Effective date and transitional period 20

In the following, we shall discuss each of the topics that we have identified in turn.

Purpose and Scope  Articles 1 & 2

The stated purpose of the Measures is “to regulate outbound data transfer activities, protect personal information rights and interests, protect national security and social and public interests, and promote a safe and free flow of   data across borders” (Article 1).

Article 2 goes on to state that the measures apply to security assessments of outbound data transfers involving important data and personal information collected and generated by data processors through their operations in     China. Based on Article 2, it seems that the Measures do not apply to personal information collected and generated by data processors from outside of China.

Important Data  Article 19

The Measures contain a definition of important data in the context of outbound data transfers. Important data is a nebulous concept in Chinese laws and regulations which requires further elaboration by the CAC and relevant industry regulators. For now, the term has only been further defined in the field of automotive data and in a few    draft regulations. Below we compare the definition in the Measures with the core of the definition in the Several    Provisions on Vehicle Data Security Management (Trial) (“Trial Provisions“).

Measures for the Security         Assessment of Outbound Data Transfers Several Provisions on Vehicle Data Security Management   (Trial) Comments

For the purposes of these Measures, the term “important data” means any data, the tampering, damage, leakage, or illegal acquisition or use of which, if it happens, may endanger national security, the operation of the economy, social stability, public health and security, etc.

The term “important data” refers to any data that, once tampered with, sabotaged, leaked or illegally obtained or used, may lead to endangerment of national security or public interests, or infringement of the lawful rights and interests of an individual or organisation, including the following data:

[Examples omitted]

Both definitions are risk-based, though the consequences that they consider differ slightly. We have made bold the more significant differences.

As the CAC was involved in the preparation of both regulations, the differences suggest that the definition of important data will generally be: data that, if breached, may endanger the interests of the nation, public or persons.

Security Assessment Triggers  Articles 4 & 14

An entity must declare intended outbound data transfers by a data processor to provincial CACs and seek security assessments if the data processor:

1)   intends to transfer important data;

2)   is a Critical Information Infrastructure operator (“CIIO“) intending to transfer personal information;

3)  is a personal information processor who has processed the personal information of over 1 million people;

4)  has cumulatively made outbound transfers of the personal information of over 100 thousand people since 1 January of the previous year;

5)  has cumulatively made outbound transfers of the sensitive personal information of over 10 thousand people since 1 January of the previous year; and

6)   falls within other situations prescribed by the CAC.

Whether companies will be regarded as CIIOs remain unclear in many industries. Despite the uncertainty in existing and future regulations,a more straightforward judgement would be that a company is not a CIIO unless it has been notified by a competent authority that it has been identified as a CIIO.

It is understood that many companies would prefer to see a rise in the threshold transfer volumes of personal information that trigger security assessments.

Security assessments can also be retriggered in one of the following circumstances:

1)  there is a change in the particulars of processing by the overseas recipient, which will affect the security of the data, or the period for retaining data is to be extended;

2)  there is any change in the data security protection policies and legislation and cybersecurity environment, or a force majeure event occurs where the overseas recipient is located,

3)  there is a change in the actual control of the data processor or overseas recipient or any change to the data transfer agreement, which will affect the security of the outbound data; or

4)   any other circumstance exists that may affect the security of the data.

Data Transfer Legal Documents  Article 9

The Measures state that the legal documents between the data exporter and data importer for outbound data transfers should cover:

1)   the purpose and method of the outbound data transfer, the scope of data, and the purpose and method of the data processing;

2)   the data retention place and period, and obligations when the retention period expires, the transfer purpose completes, or the agreement is terminated;

3)   restrictions against onwards transfers of outbound data to others;

4)  security measures to be adopted when material changes occur in relation to the overseas recipient, the  legal, regulatory environment and cybersecurity environment of the destination country, or a force majeure event occurs that makes it difficult to ensure data security;

5)   remedial measures, liability for breach of contract and dispute resolution in the event data security protection obligations are breached; and

6)  requirements for proper emergency disposal and ensuring the channels and ways for individuals to safeguard their personal information rights and interest when data is exposed to the risk of security breaches.

On a related note, the CAC also issued the Draft Provisions on Standard Contracts for the Export of Personal Information on 30 July 2022, which also deal with outbound data transfers and contains a draft Standard Contract   that was prepared for use in situations that would not trigger the security assessments under the Measures. While they certainly have some similarities, companies should not assume that signing the Standard Contract would meet the requirements in the Measures.

Selfassessments  Article 5

After a security assessment is triggered, but before a security assessment application is made, a data processor    should conduct a self-assessment. Data processors need to address the following factors during self-assessments:

1)   the legality, legitimacy and necessity of the transfer and the purpose, scope and manner of data processing by the overseas recipient;

2)   the quantity, scope, type and sensitivity of the outbound data, and the risks the outbound data might pose to national security, public interests, and the lawful rights and interests of individuals and organisations;

3)  whether the responsibilities and obligations undertaken by the overseas recipient and the management and technical measures and capabilities of the overseas recipient to perform such responsibilities and obligations can ensure the security of the outbound data;

4)   the risk of the outbound data suffering from data breaches, including unauthorised onward transfers, during and after the outbound data transfer, and whether individuals have smooth channels to safeguard their rights and interests in their personal information and other data;

5)  whether data security protection responsibilities and obligations are sufficiently stipulated in the data transfer agreement or other documents; and

6)   other matters that may affect the security of the outbound data transfer.

Some of the factors described above are also subjects of the personal information protection impact assessment  (“PIPIA“) required under the Personal Information Protection Law (“PIPL“). We believe it would be cost-effective for  companies to consider all assessment factors under both the PIPL and the Measures and make one consolidated self- assessment.

Security Assessment Applications  Article 6

Applications for security assessments should contain:

1)   an application form;

2)   a self-assessment report;

3)   a copy of the outbound data transfer agreement; and

4)   other materials required by the CAC.

Security Assessments  Articles 3, 10, 8, 11 & 14

According to Article 3 of the Measure, a security assessment of outbound data transfers should combine ex-ante assessment and ongoing supervision and self-assessment and security assessment.

The substantive content of a security assessment by the CAC overlaps significantly with the above-mentioned self- assessments, except for the following matters:

1)   the impact of data security protection policies and legislation and the cybersecurity environment of the         country or region where the overseas recipient is located on the security of the outbound data; whether the data protection level of the overseas recipient meets the requirements of Chinese laws and administrative   regulations and the mandatory national standards;

2)  the compliance with China’s laws, administrative regulations and departmental rules; and

3)   other matters to be assessed the CAC deems necessary.

We note that item 1) above seems to describe something which is similar to the “transfer impact assessment” in the EU and that data processors are not expected to cover such things in their self-assessment report. As government    departments have limited resources, we doubt that they will make such assessments on a case-by-case basis.  Accordingly, we wonder whether a central transfer impact assessment list exists at this time, whether it will become accessible in the future, and how it will be managed and updated.

The CAC can terminate security assessments if the CAC requires additional materials and a data processor refuses to submit them.

Under Article 14, the results of a security assessment are valid for two years unless a retriggering event occurs. Data processors will need to apply for a reassessment after expiration.

Security Assessment Timescales  Articles 7, 12 & 13

Security assessment applications need to be submitted to the relevant provincial CAC, which should confirm the        completeness of documents within a maximum of 5 working days. Then the application documents will be provided to the central CAC for substantive review, which should take a maximum of 45 working days from the date of issuing a written acceptance of the application. Accordingly, in normal circumstances, the entire process of applying for and undergoing a security assessment might take up to 50 working days (approximately 2.5 months).

However, the Measures allow the CAC to extend the deadline for completing a security assessment “as appropriate” if the “case is complicated or there are materials to be supplemented or corrected…”

If a data processor objects to the assessment results, it should apply for a reassessment within 14 working days of the receipt of the assessment results. According to Article 15, the results of a reassessment are final.

Confidentiality Obligations  Article 15

Institutions and staff that participate in security assessments must keep confidential, as required by law, any   information that they learn during their work. This includes any state secret, personal privacy, personal information, trade secret, confidential business information, and other data.

Liability  Articles 16, 17 & 18

Any person may report violations of the Measures to the CAC.

If the CAC discovers outbound data transfers that have passed a security assessment no longer conform to the  Measures during the implementation of data transfers, it may notify the data processor to terminate such transfers. If the data processor needs to continue making such transfers, it should make “rectification as required” before

applying for a reassessment. The full implications of this are unclear at this time, but it suggests that the CAC may     eventually interpret or construe data transfer agreements and decide whether they are being properly performed,   or they might attach conditions to the transfers following their assessments or both.

Violations are to be dealt with under the Cybersecurity Law, the Data Security Law or the PIPL, and other laws and     regulations depending on the data processor, the data and the nature of the violation. We note that violations of the PIPL may attract the highest penalties, specifically, up to CNY 50 million or 5% of the violator’s revenue in the  previous year.

Effective Date and Transitional Period  Article 20

The Measures take effect on 1 September 2022. This means that any relevant outbound transfers from 1 September 2022 should only be carried out after data processors have passed security assessments. For outbound data transfers carried out before 1 September 2022, “rectification” shall be completed within 6 months after 1 September 2022. It is unclear if this means that the data processor must pass the security assessment within this 6-month grace period, or perhaps the submission of an application for security assessment within this period would be sufficient.     Nevertheless, given these deadlines, possible delays, the 2022 spring festival holidays and other factors, werecommend that data processors should endeavour to submit their applications for security assessments as soon as  possible.

Summary

The requirements for security assessment apparently add a layer of onerous compliance burdens to the operations of many businesses. The various thresholds of personal information that trigger security assessments are low and   may affect many multinational companies doing business in China. These new requirements also create some  uncertainty, particularly among entities that depend on cross-border transfers of data to conduct business. This uncertainty will not be resolved until the Measures take full effect and the processing of security assessments becomes standardised in practice.

Businesses that will likely be subject to the security assessment regime should act now –  take stock of their data flows, renegotiate their cross-border data transfer contracts and ensure that their data protection practices align     with the requirements of the Measures and other Chinese laws and regulations. Businesses that operate in areas of higher risk may also wish to begin creating contingency plans in case they are prohibited from transferring certain   data out of China.