Authors: Michael Gu / Charles Xiang
On 2 January 2020 the State Administration for Market Regulation (SAMR) released a revised draft of the Anti-monopoly Law of the People’s Republic of China (AML) for public comment. The proposed reform of the AML was listed on the formal legislative agenda in 2018 and the revised draft is the SAMR’s key step to amending the law. Although the finalisation of the revised draft will be subject to several rounds of discussion by various government agencies and must be approved by the National People’s Congress, it signals the SAMR’s enforcement priorities and indicates the legislative trends that could have a profound impact on China’s antitrust enforcement landscape.
In general, the revised draft follows the current AML’s basic framework; however, it significantly enhances the legal liability of AML violators. It also clarifies practical issues such as ‘controlling rights’, improves merger control review procedures and introduces a new type of monopoly behaviour and methodology for identifying dominance in the internet sector.
This article highlights key changes proposed by the revised draft and discusses why these changes matter for business entities from a practical point of view.
Promoting innovation as an underlying goal of AML
The revised draft states that, apart from safeguarding fair competition, the AML also aims at promoting innovation (Article 1). It is widely recognised that the primary purpose of antitrust law is to protect competition; however, there is doubt about the relationship between competition and innovation, as some argue that monopoly is the driving force behind innovation. It is worth clarifying that the goal of antitrust is to recognise the importance of promoting innovation as well as safeguarding fair competition.
In recent years, innovation has been an increasingly important competition concern in antitrust enforcement. For example, in some merger cases (eg, Dow/DuPont), the antitrust authority considered the innovation factor as an important element in deciding whether the proposed transaction would have a negative impact on competition. Further, in some abuse of standard essential patent (SEP) cases (eg, FTC v Qualcomm), the SEP holders tend to use their innovative contributions as justification for the alleged anti-competitive behaviour. It is expected that the factor which is stifling or fostering innovation will be of greater importance in evaluating competitive effects.
Unified definition of monopoly agreements and influence on vertical agreements
Article 14 of the revised draft states that monopoly agreements are defined as agreements, decisions and other concerted practices that eliminate or restrict competition. This definition applies to both horizontal and vertical monopoly agreements, since the definition has been moved from Article 13 of the current AML – which covers only horizontal monopoly agreements – and placed before the prohibition on horizontal monopoly agreements (Article 15) and vertical monopoly agreements (Article 16).
Under the current AML, it is unclear whether the antitrust authority must demonstrate that a vertical agreement can “eliminate or restrict competition” to identify vertical monopoly infringement. In practice, the antitrust authority usually adopts a ‘per se illegal’ or so-called ‘principally prohibition plus exemption’ approach in determining vertical monopoly agreements (in particular, resale price maintenance cases). The separately placed provision of the definition of the monopoly agreement might prompt the antitrust authority to change its practice in future.
However, the Supreme Court’s decision in Yutai v Hainan Provincial Price Bureau indicates that in administrative litigation cases, the antitrust authority may not be required to prove the actual anti-competitive effects in vertical monopoly cases. In contrast, in private litigations, the court tends to use the ‘rule of reason’ approach in deciding vertical monopoly cases. Plaintiffs are often required to show the alleged vertical monopoly agreement has the effect of eliminating or restricting competition.
Further guidance must be provided under the revised draft in order to end the divergence between the enforcement authority and the court with regard to the identification of vertical monopoly agreements.
Prohibition on organising or facilitating to conclude monopoly agreements
The revised draft proposes a new provision (Article 17) that expressly prohibits any undertakings from organising or facilitating other undertakings to conclude monopoly agreements. Further, Article 53 of the revised draft provides that the organisers or facilitators of monopoly agreements will be held equally liable as the participants in monopoly agreements.
While the term ‘facilitation’ is unclear under the revised draft, it seems that the ‘hub-and-spoke’ conspiracy and similar kinds of anti-competitive behaviour would be regulated by this proposed new article. A hub undertaking, which is not a horizontal competitor to other spoke undertakings, can be held liable for organising or facilitating horizontal monopoly agreements. For example, in US v Apple, the US Court of Appeals held that through the proposed most-favoured-nation arrangements, Apple (despite the fact that it is not a competitor of book publishers) facilitated those major book publishers by giving them incentives to raise e-book prices, and the court recognised Apple as a genuine participant in the alleged horizontal monopoly agreement.
Further, the scope of Article 17 of the revised draft may not necessarily be limited to organising or facilitating horizontal monopoly agreements, so organisers or facilitators of vertical restraints could also be caught by Article 17. For example, if two distributors jointly entrust a retailer to adopt the same resale price, only those two distributors would be punished for fixing resale prices according to the current AML. However, under the revised draft, the retailer could be identified as the facilitator of a monopoly agreement and thus be penalised by the antitrust authority as well.
Dominance in internet sector
Due to widespread concern about competition status in the internet era, the internet sector has attracted great attention from the antitrust authority. Article 21 of the revised draft specifically states that, in determining internet companies’ dominant position, factors including the network effect, economies of scale, lock-in effect and abilities to possess and process relevant data must be considered.
Although this does not imply that internet companies (especially so-called ‘internet giants’) can be easily caught by the AML in future, it does reflect the antitrust authority’s growing concern about the competition status of internet industries and its focus on internet giants’ potentially exclusionary behaviour. For instance, the SAMR has launched an investigation of Tencent Music Entertainment Group for alleged abusive licensing practices. Further, some big e-commerce platforms have been accused of forcing merchants to deal exclusively with them, rather than with competing online platforms. Given the record fines imposed on several internet giants by the European Commission and the United States’ follow-up antitrust intervention in the internet sector, it is no surprise that Chinese regulators might also adopt tougher measures to crack down on online anti-competitive behaviour in future.
Nevertheless, the Chinese courts seem to insist on their prudent approach for identifying internet companies’ dominant position and abusive activities. In Qihoo v Tencent, the Supreme Court explicitly stated that the market shares of online markets might be a misleading factor to properly assess market power, and that dynamic competition and innovation allow consumers to easily switch to other competitors’ products or services. It will be interesting to see whether the courts may change their views on exclusionary practices in the online markets in future.
Significant increase of fines for antitrust law violations
To enhance the deterrent effect of the AML, the revised draft significantly increases penalties (in particular, the maximum fines) that can be imposed on AML violators. The proposed harsher penalties are summarised below.
Among these amendments, it is particularly notable that a breach of the merger filing obligation may incur a more severe penalty under the revised draft compared with the current AML, as the maximum fine would be increased to 10% of the filing party’s previous year’s sales. This would incentivise filing obligators to notify their transactions in order to avoid a huge fine.
Further, although the fines for monopolistic behaviour under the current AML remain unchanged, it is still controversial as to which basis (ie, the revenue for the relevant market products or the revenue for all products) should be used by the antitrust authority to calculate specific fines for individual cases. In practice, the enforcement authority has adopted different methods in different cases. For example, in some cases the authority calculates revenue on the basis of relevant products in the relevant geographic market (eg, the particular provincial market), while in other cases they may calculate the overall revenue of the alleged undertaking in China, or even worldwide. Such inconsistency due to lack of guidance must be clarified by the final revised draft.
Definition of ‘controlling rights’ clarified
The revised draft elaborates the definition of ‘controlling rights’ for notifiable cases. According to Article 23 of the revised draft, the term ‘controlling rights’ refers to an undertaking’s rights or actual status to, directly or indirectly, individually or jointly, exert or potentially exert a decisive influence on another undertaking’s production and operation activities or other major decisions.
The legislative intent of Article 23 is to further standardise and guide the concentration of undertakings, especially for cases where an undertaking’s acquiring of minority shareholding might constitute acquiring control. In practice, there have been many cases in which the notifying obligation has been triggered on the acquisition of minority shares, but many companies (especially some equity investment funds) have been punished for failure to notify their transactions due to a possible misunderstanding of controlling rights (among other reasons). Given the tougher penalty and the authority’s robust enforcement towards non-filings in recent years, undertakings should deliberately consider whether there is a change of control in each merger case. The elaboration of controlling rights under the revised draft is in line with recent enforcement practice, by which the antitrust authority tends to interpret controlling rights broadly.
Improvements for merger review procedures
The revised draft proposes a number of provisions to improve the merger review process.
First, the revised draft introduces the so-called ‘stop-clock’ clause that specifies three conditions to discontinue the timelines for merger review:
- on application or consent by the notifying parties;
- supplementary submissions of documents and materials at the request of the antitrust authority; or
- remedy discussions with the antitrust authority.
This would tackle the problem that in the absence of the stop-clock clause, the notifying parties can only withdraw and refile the case when the statutory review period is running out. However, the stop-clock clause might also increase the uncertainty of the review process if detailed guidelines are lacking.
Second, the revised draft stipulates that the antitrust authority may formulate and revise the filing thresholds based on factors including the level of economic development and the scale of the industry.
Further, for those transactions that do not meet the filing thresholds but may eliminate or restrict competition, the antitrust authority will initiate investigations according to Articles 24 and 34 of the revised draft. Although this provision is not new given that it is already included in a State Council level regulation, the incorporation of this provision into the AML implies the antitrust authority’s determination to intensify the investigation on such types of transaction in future. Therefore, transaction parties are advised to carefully assess the potential competition impact of their transaction even if the thresholds have not been triggered. Particularly, transactions in the new economy sector (eg, Didi/Uber) would be under tougher scrutiny for the potential competition harm even though the parties’ revenues are well below the filing thresholds.
Potential criminal liability for monopolistic behavior
While the current AML stipulates that obstructing investigations could constitute a criminal offence, there is no provision indicating any criminalisation of anti-competitive behaviour in the Chinese legal system, except that bid-rigging could be criminally penalised in accordance with the Tendering and Bidding Law. The revised draft seems to introduce more criminal liability for monopolistic behaviour. Despite the fact that the specific criminal charges of monopolistic behaviour must be stipulated by the Criminal Law, it does reflect the antitrust authority’s call for more deterrent effects under the AML, and therefore the relevant stakeholders (eg, the senior management of business entities) must pay close attention to this proposed amendment.
No suspension of investigations of hardcore cartel cases
Although the current AML allows investigated parties to apply for suspension of investigations in all types of monopoly case, the revised draft narrows the applicable scope and specifies that the anitrust authority cannot suspend investigations against anti-competitive horizontal agreements that involves price fixing, sales or output restrictions or market allocation. Therefore, infringers of resale price maintenance and abuse of dominant position will be entitled to apply for the suspension of investigations if they can provide sufficient remedy to address competition concern and meet other criteria.
Through the active law enforcement over the past decade, the AML has contributed significantly towards safeguarding fair competition and boosting continuous innovation. Though there are still some unaddressed issues (eg, non-pricing vertical restraints and safe harbour rules for monopoly agreements), the revised draft indicates the start of an encouraging revision and it paves the way of further improvements in terms of both law making and enforcement. It is expected that the AML will play an increasingly vital role in economic development going forward and business entities are advised to be well prepared for more stringent antitrust compliance challenges in future.
Michael Gu is a founding partner of AnJie Law Firm based in Beijing. Michael specializes in competition law and M&A. Michael can be reached by email: firstname.lastname@example.org, or telephone at (86 10) 8567 5959. Charles Xiang is an associate of AnJie Law Firm.
The full decision is available in Chinese at:
The District Court decision is available at: https://www.ftc.gov/system/files/documents/cases/qualcomm_findings_of_fact_and_conclusions_of_law.pdf
See (2018) Supreme Court’s Judgement (Xing Shen) No.4675
The Second Circuit Court decision is available at: https://www.justice.gov/atr/case-document/file/624326/download
The full decision is available in Chinese at: http://wenshu.court.gov.cn/website/wenshu/181217BMTKHNT2W0/index.html?pageId=28c3596f68878489c9f8d57c4d05bf56&s21=%E8%85%BE%E8%AE%AF%20%E5%9E%84%E6%96%AD%20%E5%A5%87%E8%99%8E