Authors : Wan Jia, Hannibal El-Mohtar

I. Is China’s insurance market worth investing in?

It is no secret that China’s insurance industry presents good upside growth opportunities. According to the 2018 Report on Global Insurance and Market Research released by Allianz Group, “Nearly 80% of the total 60 Billion Euros increase in global premiums came from China, and China witnessed a continuously strong growth momentum in life insurance, replacing Japan and becoming the biggest life insurance market in Asia.”

That many foreign insurers are bullish on China is also nothing new. Last month, the CFO of Manulife Financial Corp said the company would be “very happy” to increase its 51% stake in the Manulife-Sinochem Life Insurance Company Ltd., their joint venture with Sinochem Finance Co. Ltd. As far back as 2018, Sun Life Chief Executive Dean Connor expressed openness to increasing their 25% stake in their Sunlife Everbright Life Insurance joint venture to 51%.

II. What are the new rules on foreign investment for insurance companies in China?

What has attracted the growing interest of foreign insurers are the regulatory changes permitting greater market access for foreign investors.

As of January 1, 2020, foreign investors are allowed full ownership of Chinese life insurance companies. Additionally, in the China-US Phase One Trade Deal (the “P1 Deal”), China also agreed to remove the foreign equity caps for pension health insurance. China also committed to remove all discriminatory regulatory requirements and processes, and expeditiously review and approve license applications from foreign investor.

That’s not to say there’s no uncertainty. In the first four months of 2018, premium income at China’s Life Insurers tumbled by 13.6 per cent year on year for the first four months of 2018, after the industry regulator (China Banking and Insurance Regulatory Commission, “CBIRC”) cracked down on issuing short-term policies it blamed for causing financial instability.

III. What are the growth prospects for Insurtech in China?

“Insurtech” refers to technology used to disrupt or innovate within the insurance sector. One prominent form of Insurtech is Usage Based Insurance (UBI), which relies on algorithms to analyze the insured’s data, together with external information, to generate a bespoke risk score. One UBI example, known as “pay-as-you-drive” insurance, collects mileage information through telematics (including the car’s “black box”) and relays the insured’s driving behaviour to the insurer in real-time.

China is one of the fastest growing Insurtech leaders in the world. Thanks to heavy investment from Alibaba, Tencent, and Baidu, the sector now features an e-commerce ecosystem that is 50 times larger than that of the United States. For those who can capitalize on the growth of the Chinese insurance market, the potential for returns are vast.

This is particularly so for insurers who can move into the e-insurance space. Chinese consumers are leapfrogging traditional written insurance policies and going straight to digital policies, many of them hyper-targeted micro-policies supported by big data gathered from e-commerce giants like Tmall.

For instance, one company, ZhongAn launched four years ago as the first China online-only insurer. It provides a micro-premium model through Wechat, a Chinese social messaging platform similar to Facebook Messenger. It has since sold 6 billion policies to nearly 500 million people, and in Q1 of this year it reported net profits of CNY327m ($46m) for the first three months of this year, outperforming the insurance industry at an increase of 15.6% over the corresponding period last year. Yet, it still only has 1 percent of the market. ZhongAn recently launched a joint venture in Hong Kong and received its online insurance license in May.

Combining the huge consumer base with the heavy investment in e-commence sector, there is imaginable space for Insurtech in China’s future.
IV. Do I need an ICP license to gain access China’s Insurtech market?

A commercial Internet content Provider license (an “ICP”) allows a company to sell to Chinese consumers through a web domain and house the server within China. It is issued by the Chinese Ministry of Industry and Information Technology (the “MIIT”). An ICP a) ensures compliance with Chinese laws internet laws (i.e., gives the investor peace of mind that the site won’t be blocked) and b) allows for faster online service for visitors. Another ICP variant, the Bei’an (filing), also allows foreigners to create a Chinese website, but the Bei’an website may only be used for promotional purposes and does not support online transactions.

As of 2015, foreigners are legally allowed to apply for and hold ICPs through Wholly Foreign Owned Enterprises (WFOEs). See Notice of the Ministry of Industry and Information Technology on Removing the Restrictions on Foreign Equity Ratios in Online Data Processing and Transaction Processing Business (Operating E-commerce) [2015], This means that the Variable Interest Entity (VIE), an oft-used but more complex investment for the Chinese tech industry, is not necessary to obtain an ICP and enter the Chinese Insurtech market.

However, is an ICP truly necessary? Defying the internet laws in China can result in your website being blocked, permanently, among other serious risks to be avoided.

That said, an ICP isn’t strictly necessary to sell insurance products in China. If a foreign insurer wishes to sell insurance products through an existing ecosystem like Wechat, as ZhongAn does, then they may be able to rely on Wechat’s ICP. To do so, they would need to first obtain a WFOE, obtain an insurance permit from CBIRC, and then obtain approval to sell online insurance products from the Insurance Association of China (the “IAC”). Once this permitting process is complete, the foreign insurer can use a commercial Wechat account (“Gongzhonghao” 公众号), or another ecosystem with an ICP, as a platform to legitimately sell localized insurance products.

However, if a foreign insurer wishes to rely on their own platform, then an ICP will be necessary. Selling insurance policies through a mobile application, or processing transactions locally through a website, will both require an ICP.

V. What other key considerations are there for participating in China’s Insurtech market?

Big data is essential to any insurer’s Insurtech strategy, and in the China market that means collecting and storing personal information about Chinese citizens. This engages a bevy of compliance obligations for foreign and domestic insurers alike.

China’s data privacy laws initially followed the US’ more lax approach to privacy protection, but more recently have changed to more closely mirror Europe’s more stringent GDPR rules, and now include strict provisions on privacy, security, and data localization. Under Article 37 of China’s Cybersecurity Law (2017, the “CSL”, English text), Chinese citizens’ personal data, together with critical business data collected during operations in China, must be stored within mainland China, and companies must undergo a security assessment before exporting such data across the border. Also since 2017, rules for the protection of personal data, and responsibility for data protection, are now included within the Chinese Civil Code (Article 111).

There are severe penalties for failure to comply with the CSL. Public security organizations ( police) may levy fines of up to RMB1,000,000 Yuan when service providers infringe on users’ personal data in violation of CSL Articles 22 (malware and remedial measures), or 41–43 (data consent, notice on use and purpose of collection, mandatory breach notifications, and the user’s right to delete or amend personal data on request). Violating CSL Article 27 by “engaging in activities harming cybersecurity” or aiding and abetting the commission thereof results in an equally serious fine. For comparison, the GDPR imposes fines as high as 4 percent of a company’s turnover from the previous year. Personal data privacy and security are increasingly prominent features of digital data compliance regulations around the world, and as we can see, China is no exception.

Recently, additional rules were introduced under the CSL. As of June 1, new rules came into effect (in accordance with the CSL together with the PRC’s National Security Law) in the form of the 2020 Measures on Cybersecurity Review (the “Measures”). Under the Measures, companies buying networking products and services that could affect national security, Critical Information Infrastructure (“CII”) operators, must undergo cybersecurity evaluations for vulnerabilities.

It is unclear which kinds of companies will be designated as CII operators, but companies in the financial and insurance sectors will in all likelihood be affected (and may have their procurements monitored directly by the People’s Bank of China). This is because according to Article 20 of the Measures, products and services that can be reviewed include a wide range of equipment and programs that are essential to providing Insurtech services :
• core network equipment (核心网络设备),
• high-performance computers and servers (高性能计算机和服务器),
• mass storage equipment (大容量存储设备),
• large scale databases and applications (大型数据库和应用软件),
• network security equipment (网络安全设备),
• cloud computing services (云计算服务), and
• other network products that may have an impact on CII (以及其他对关键信息基础设施安全有重要影响的网络产品和服务).

The Cyber Security Office, located within the National Internet Information Office, is to review cybersecurity filings and may review and set other standards and regulations in accordance with the law. Of concern to foreign Insurtech investors, one factor it is allowed to consider in reviewing filings is the “risk of supply disruption due to political, diplomatic, and trade factors” (the Measures, para 9(3)).

Moreover, additional rules are already scheduled for implementation. On October 1, 2020, the Information Security Technology – Personal Information Security Specification (GB/T 35273-2020) (the “PI Specification”) comes into effect and replaces the November 2017 version (GB/T 35273-2017). Under the PI Specification, the definition of “Personal Sensitive Information (“PSI”) is expanded to include information created by the Personal Information Controller (“PI Controller” which is the organization that decides the purpose and ways to process Personal Information, “PI”) which, if leaked or mismanaged, may harm the security, personal reputation, or health of the PI subject (3.2). The definition of “Consent” is narrowed to require clear authorization expressed through an affirmative act, unless implied consent is given (3.6). Importantly for Insurtech investors, User Profiling (“UP”) may not result in discrimination based on ethnicity, race, religion, disability, or disease. PI Controllers also must ensure that their UP does not endanger “national security, honor or interests, incite subversion of state power, instigate secessionist activities, or disseminate terrorism, radicalism, ethnic hatred, violence or obscenity” (7.4). When providing their business functions, PI Controllers must also give users the ability to control the degree and extent of “Personalized Display”: the display of information and search results for products or services based on the individual’s PI, such as their internet browsing history (3.16). PI Controllers with more than 200 employees or the PI of more than 1 million individuals must nominate PI Protection Personnel (PPP) and establish a PI Protection Department (11.1). These rules are not exhaustive, and there are other regulations on PI processing, collecting and storing personal biometric information, third-party connection management, and bundled consent for multiple business functions.


China’s Insurtech market continues to grow at breakneck speed. Foreign insurers are currently underrepresented in this market, even as former market barriers to entry continue to fall. This market presents great potential for foreign insurers, and Western insurers in particular have centuries of experience to share with their Chinese counterparts.
While investing in China is never simple for foreign companies, in light of the 2020 foreign investment reforms it is now without a doubt more practical than ever. A WFOE, the requisite insurance permits, and a Gongzhonghao are now enough for a foreign insurer to get started in China’s Insurtech market. No ICP is necessary; neither is a complex VIE investment vehicle headquartered in the Cayman Islands.

However, in leveraging big data to support their Insurtech operations, foreign investors must take great care to adhere to China’s CSL. Data localization, security review requirements, and increased protections for Chinese citizens’ personal and data privacy together present compliance challenges more commonly seen in Europe with the GDPR. These rules, especially the new rules coming into force on October 1, 2020, may disproportionately affect Insurtech and other investors that rely the most on big data.

Still, sustainable growth, social benefits, and increased competitiveness lie ahead for those willing to seize the opportunities presented by China’s Insurtech market. Organizations that are slow to embrace these new opportunities may later find it harder to enter the Chinese market due to increased competition. As home grown Chinese Insurtech companies expand abroad, established insurers who overlook the Chinese market may also find it harder to compete and retain their existing prominence in the global market.

China’s Luckin Coffee (Luckin), seen as Starbucks’ main contender in the country, has seemingly run short on luck.

On May 12, the coffee chain fired its chief executive Jenny Zhiya Qian and chief operating officer Jian Liu. And on May 19, New York’s Nasdaq requested the company to delist from the exchange.

These are only the latest events in the company’s massive accounting scandal. The saga began in April, when it became known that Luckin fabricated US$310 million in its 2019 sales. Its stock subsequently plummeted by around 80%.

D&O has been lukewarm in the Chinese market since its first appearance around two decades ago.” Hao Zhan, Anjie Law Firm

In May 2019, Luckin Coffee completed its Nasdaq IPO. But before its listing, the company purchased a US$25 million directors’ and officers’ liability insurance (D&O) underwritten by several insurers – including majors Ping An, China Pacific Insurance Company (CPIC), Allianz and Zurich.

As of May, it is understood that Ping An has already received and is processing a D&O claim from Luckin. The Shenzhen-based insurer has not yet responded to a request for comment.

Corporate governance in China has undergone greater regulatory scrutiny in the last decade. Alongside regulatory developments, this latest episode involving coffee and falsified books, means that D&O insurance may stand to make gains in-country.

Limited uptake
D&O cover protects a company’s senior leadership and any potential legal claims against them, however, D&O has had a poor uptake in China.

Hao Zhan, managing partner at Beijing-headquartered Anjie Law Firm, told InsuranceAsia News (IAN): “D&O has been lukewarm in the Chinese market since its first appearance around two decades ago.”

Zhan added that interest has been limited to Chinese companies listed in overseas securities markets, or financial institutions under strict scrutiny from the Chinese regulator.

The D&O purchase rate among listed companies in China has been around 2% since 2002. In the US, the uptake is around 90%, and around 80% in the EU, Canada and even Singapore.

There has been low traction for this type of coverage as a result of PRC legislation loopholes regarding corporate directors’ and officers’ liability, notes Zhan. General provisions exist in PRC Company Law to address D&O liability he says, but the lack of concrete guidelines and detailed penalties mean that in reality, claims have rarely been filed.

Zhan added: “The power of the majority shareholder to manipulate a company’s governance structure also hinders [parties] from claiming damages.”

Global markets are pinning their hopes that China’s financial institutions are maturing and corporate governance evolving.

AIG pronounced in 2017: “D&O is still in its relative infancy throughout Asia, but this is likely to change — especially in China. Risks and liabilities that didn’t exist in past years loom large for growing Chinese businesses… that require complex corporate governance standards.”

Regulatory developments
Many attribute the focus on corporate governance to the new securities law that Beijing passed in March.

“[It] punishes companies’ securities violations by including provisions that put in greater investigation efforts for fraudulent offering, information disclosure which violates the provisions, failure by intermediaries to carry out due diligence, as well as market manipulation, insider trading, making use of unpublished information to carry out securities trading, and other acts which seriously disrupt market order,” noted Zhan.

The state’s public records show that 23 companies in 2019 purchased D&O. In 2020, 72 companies in Shanghai and Shenzhen alone have announced plans to buy D&O coverage.

Inquiries and purchases have been on the rise — as more questions are being asked about relevant D&O litigation due to the pandemic outbreak.

Looking at April, right after the Luckin scandal broke and the new regulations were passed, there were 30 listed companies who issued D&O plans — more than twice the amount than in the previous quarter.

And prior to 2020, the state was already paying greater attention to corporate governance. 2018 saw the PRC Company Law revised in corporate governance-related issues — such as the effectiveness of corporate resolutions, the shareholders’ representative litigation, remedy measures of minority shareholders and more, says Zhan.

That year, the China Securities Regulatory Commission also issued guidelines on governance of listed companies, moving to market-oriented and law-based reform.

Rule changes in Hong Kong have previously seen an uptake in policy purchases.

A case study, AIG saw a 47% increase from 2012 to 2016 — in the latter year, the firm paid out US$13.6 million in claims from its Asia Pacific D&O policies. The leap in uptake came after the Hong Kong Stock Exchange revised its rules to a “comply and explain regime . . . compelling virtually all publicly-listed companies to take up a D&O policy,” according to Jason Kelly, AIG’s head of international financial lines.

Regulatory enforcement action was the main driver of growth — with the insurer estimating regulatory investigations accounting for up to 90% of claims cost in Hong Kong.

More change ahead
Companies who purchase D&O can allow for their execs  to make decisions without the threat of personal liability and thus inspire creative company decisions – something that will be beneficial to a weaker economy.

Zhan explains: “D&O… complies with the trend of protecting the rights and interests of investors. Although there exists the [notion] that D&O insurance [may] encourage bad behaviour – with the developing pace of the securities and insurance markets, D&O can give great imagination to Chinese underwriters.”

And just like most things in recent months, D&O has also been impacted by Covid-19. Inquiries and purchases have been on the rise — as more questions are being asked about relevant D&O litigation due to the pandemic outbreak.

As China’s regulations and enforcement become more geared towards similar goals, the development of D&O is one to watch closely.

Authors: Zhan Hao、Wan Jia


In the beginning of 2020, Luckin Coffee event brought the attention from the insurance, legal and security industries to the directors and officers liability insurance policy (“D&O”) in China. In this event, Luckin Coffee, which is listed in the US and called Chinese Starbucks, found trapped in the security fraud scandal, and some class actions have been filed in the US against Luckin Coffee and its officers.

When Chinese society found D&O insurance coverage behind those American litigations, Luckin Coffee event inspired curiosity towards to D&O insurance, and insurance sector quickly remembers this transplanted product.


The uneven road for D&O insurance in China

During the previous years, D&O insurance actually has been lukewarm in China market after its first appearance around two decades ago, and the patronage to this transplanted insurance product has been limited to Chinese companies listed in the overseas security market or some financial institutions under the stringent scrutiny from China regulator.

The reason for such embarrassing performance is obvious, which is relevant to the loophole in PRC legislature about the liability of corporate directors and officers.

First, even though some simple and general provisions exist in PRC Company Law to address the loyalty and diligence responsibility for directors and officers, but the lack of the concrete guidelines and detailed penalty usually results in the fact that rare claims have been filed towards directors or officers in reality. The derivative action has been injected into the docket of Chinese tribunal for quite some years, but the practicality of action is so premature that potential plaintiffs are hesitant to file a real action against those directors and officers.

Second, the governance structure of some companies is abused by the majority shareholder or actual controller, who would ignore the interest of minority shareholders or beneficiaries, and let alone the creditor’s right. When the majority shareholder or actual controller pull strings behind corporate mask, directors or officers are manipulated, and this multifaceted tragedy stop victims from claiming damages for directors or officers.

Third and last, the precondition for the security fraud litigation, which requests the regulatory penalty be imposed to swindler before the civil actions, has hider Chinese security investors from filing litigation during the past years.

To perfect the directors and officers liability, improve the corporate governance structure and address the protection towards investors, the hail for claim to directors and officers is loud, but the business volume for D&O underwriter has been miserable.

Coincidentally, in 2020 China D&O insurance market comes across two events, the revision of Chinese Security Law and Luckin Coffee event, which are beneficial for the take-off of D&O insurance.

The newly revised Chinese Security Law strengthens the liability for directors and officers, and this revision possibly leads to the increase of claims under D&O insurance, or at least in theory.

Luckin Coffee event dominated the headline of Chinese media for almost two weeks after it announced that its COO committed fraud, and the news ranges from the fraudulent details, China security authority denouncement and D&O insurance coverage. Even under the background of corona viruse, Luckin Coffee stimulates the fierce discussion among the insurance, legal and security circles in China.

Factually, D&O insurance goes to the spotlight this time, but there are not many people know that D&O coverage has been litigated quite some times in Chinese courts, while most of litigations did not go into public due to settlement. The disputed issues about those D&O insurance cases are comprehensive and of interest worth being noted.


The scope of insureds

One of the disputed points is about the scope of the insureds. In some countries outside China, there are three D&O models, called side A, side B and side C.

Side-A provides coverage to individual directors and officers when their losses are not indemnified by the company as a result of law prohibition or financial incapability of the company. However, exclusions may apply if a company simply refuses to pay the legal costs of a director or officer. Side-B provides coverage for the company (organizations) when it indemnifies the directors and officers (corporate reimbursement). Side-C provides coverage to the company (organizations) itself for security-related claims brought against it.

In China market, all those three coverages could be found. With respect to Side-B policy, the insureds are the companies rather than individuals. The occurrences regarding D&O often are about the scandals of China-domiciled corporations, which have been listed in American stock market, but were involved in security fraud, and aroused class actions in the US. For most cases, the final controller for such listed corporations are Chinese citizens or residents, but some CEO, CFO and COO are not Chinese citizens or residents. Thus when facing investigation or class action, the final controller sometimes chose to ignore the claims or investigations simply since the controller has no intention to sustain the corporation, but those directors and officers could not afford such ignorance. After paying for legal costs in the action against directors or officers on their own, directors or officers could not find or force corporation to reimburse themselves. When they approach Chinese insurers for insurance compensation, it is not a surprise to expect the refusal because those individuals are not insureds under Side-B policy.


The disclosure duty of applicant

In accordance to Article 16 of PRC Insurance Law, the insurance applicant shall fully disclose the risks relevant to the contemplated policy. Different from the other jurisdictions, PRC law only requests applicant to answer the specific inquiries from insurer. Without inquiry, even if applicant might know the potential exposure to risk, it is not obligatory for applicant to disclose such information. With respect to the D&O insurance sold in China market, the majority of applicants bought policy through brokers, and actually brokers handled the inquiry procedure and collected the disclosed information. Since China law does not allow the general inquiry from insurer, how to construct the valid and specific inquiries would be challenging to insurers and its agents.

The rhetoric issue always trigger dispute about the contents of disclosure, and it finally touches the utmost good faith doctrine in PRC Insurance Law. Among the often-asked questions by insurers, how to interpret the previous circumstances before the policy inception, how to define the information known or should have been known by applicants, and how to verdict the violation of Sarbanes-Oxley Act are focuses for the confrontation between insured and insurer. Since those D&O insurance policies are governed by PRC law, but their wording is full of jargons extracted from American law in the meantime, naturally the interpretation of policy also becomes hot debate in court trial.

For the information already known or should have been known by insurer, applicant is not obligatory to disclose such information to insurer. Some interesting episodes were about US investigation, which was denied to be known by applicant during the process of insurance application, but in fact the investigation information had been public in the website of SEC or other sources before policy inception. Should those imputed information be deemed as being known by insurer already, or would tribunal could impose a duty of due care to Chinese insurers to scrutinize the foreign authority websites in English?


The conflict and connection for the different layers coverag

In China market, some D&O policies are in the form of excess insurance, in which the primary insurer is first responsible for defending and indemnifying the insured in the event of a covered or potentially covered occurrence or claim. An excess policy provides specific coverage above an underlying limit of primary insurance. The dilemma for such multiple layers insurance is the primary insurer is foreign one, but the second or above insurers are Chinese ones. The second or above layers insurers shall follow the indemnification decision from the underlying layer insurer, or they could make decision at their own discretion?

Things would be more complicated if the different layers policies use laws from different jurisdictions as governing laws.

During the previous cases, tribunal preferred to take approach in which upheld the different layer insurers to have independent decisions to handle the claim unless otherwise stipulated in the policy.


The separation of liabilities

If one specific officer fails in his/her disclosure obligation or triggers the exclusion clause such as intentional act, could it excuse insurer from liability to other insureds? In most D&O policies, there are clauses to separate the insurance liability among the insured directors or officers, but those standard clauses encounter lots of challenges in trail. It is hard to believe that a CEO’s fraudulent behavior could be segregated from other subordinate officers, or a CFO could make fraudulent financial statements without approval or knowledge from the directors or CEO.

In those scenarios, how to allocate the burden of proof between insured and insurer would be of essence for trial result. It is obviously unfair to impose a higher standard of burden of proof to insurer, who is an outsider to a corporation. In the meantime, the absence of discovery procedure in China litigation disables insurer with practical means to discern the real picture of fraud, to clearly figure out the collusion of directors and officers.

Some desperate insurers want to depend on the police to dig out the fraud details, but Chinese police seldom investigates the suspected crime because the suspected crime happens outside of China, and victims usually are not Chinese citizens.

Today, accompanied by the security law amendments and some fraud occurrences, D&O insurance stumbles to spotlight again after a long period of silence in China. With the developing pace of security market and insurance market, the refreshed D&O insurance gives imagination to Chinese underwriters.

Authors: Michael Gu / Sihui Sun / Grace Wu [1]



The year 2019 marked the 11th anniversary of the implementation of the Anti-monopoly Law and was also the first full calendar year since the State Administration for Market Regulation (SAMR) took over the role as China’s single centralised antitrust enforcement agency.

The SAMR maintained a consistently rigorous and prudent attitude towards merger control review in 2019. The overall case handling efficiency has been improved in view of the fact that the total number of cases concluded increased while the average time for case reviews was reduced. The SAMR concluded 465 cases in 2019. Among them, the SAMR unconditionally approved 460 cases and conditionally approved five cases. As to the cases that were conditionally approved, the SAMR imposed various tailored conditions. There was no prohibited merger case in 2019. In addition, the SAMR investigated more non-filing cases and imposed more penalties on non-filers compared with 2018. In particular, a total of 16 penalty decisions against non-filers of merger cases were published throughout 2019, which was the highest annual figure over the past decade.



On 7 January 2020 the SAMR released a draft of the Interim Provisions for Merger Control Review (the Interim Provisions) for public comment[2]. The Interim Provisions incorporate all major regulations for merger control review into one consistent and easy-to-follow comprehensive regulation, although no substantial new changes have been proposed thereunder. The final version of the Interim Provisions is expected to be adopted in mid-2020.

On 2 January 2020 the SAMR released a revised draft of the Anti-monopoly Law for public comment (the Revised Draft)[3]. Although the Revised Draft follows the current Anti-monopoly Law’s basic framework, it significantly enhances the legal liability of Anti-monopoly Law violators. For example, in accordance with Article 55 of the Revised Draft, the proposed penalty will be up to 10% of the non-filer’s annual sales in previous year instead of the maximum amount of fine Rmb500,000 under the current Anti-monopoly Law, which is clearly insufficient for deterring non-filers. It also clarifies practical issues such as ‘controlling rights’ for merger filing purposes. At present, there is no clear timetable for the finalisation of the Revised Draft or the promulgation of the new Anti-monopoly Law.


Unconditionally cleared cases

The SAMR unconditionally approved 460 cases in 2019 – slightly higher than the previous year (444 cases). As regards simple cases, 341 were concluded in 2019 (73.3% of all cases). The proportion of simple cases decreased compared with 2018 (81.53% of all cases). On average, simple cases took 15 days to be concluded, which was a slight reduction from the 16-day conclusion rate in 2018. Almost all simple cases were cleared within 30 days of formal acceptance by the SAMR. This demonstrates that simple case procedure plays an active role in enhancing the efficiency of concentration filing, particularly in the sense of reducing reviewing time.

However, in practice, strict rules concerning the material and data required by the SAMR still apply. In particular, during the pre-review stage (ie, before official case acceptance), notified parties must often submit detailed materials. Therefore, this requirement may also extend the wait time before case filing.

The Revised Draft introduces a ‘stop-clock’ clause that specifies the following 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 authority; or
  • remedy discussions with the authority.

This proposed ‘stop-clock’ clause would tackle the problem that in its absence, the notifying parties can only withdraw and refile the case when the statutory review period is running out.


Conditionally cleared cases

In 2019 the SAMR conditionally approved five cases, a relatively stable number compared with 2018 (four cases). Figure 1 (below) illustrates the number of cases conditionally cleared between 2009 and 2019.

Figure 1

In 2019 four conditionally cleared cases were approved with behavioural conditions and the remaining one was approved with both structural and behavioural conditions. All of the five conditionally approved cases in 2019 were withdrawn and resubmitted before the expiry of the first statutory merger review period (ie, 180 days). This shows that the SAMR is becoming more prudent in reviewing mega mergers which may raise competition concerns. Withdrawal of the filing also provides notifying parties with certain flexibility and more time to communicate with the SAMR. From the first submission of filing materials to a case being conditionally concluded, the review process for the above five cases lasted a minimum of 263 days[4] and a maximum of 562 days[5]. 


Novelis’ acquisition of Aleris

On 12 December 2019 the SAMR conditionally approved Novelis’s acquisition of Aleris[6]. Novelis is a leading producer of aluminium rolled products and the world’s largest recycler of aluminium. Aleris is a global leader in manufacturing and sales of aluminium rolled products.

In this case, the parties overlapped in two markets – namely, the interior aluminium autobody sheets market and the exterior aluminium autobody sheets market. Since the relevant product markets’ competition structure in China was different from that in other jurisdictions, and the main foreign-invested operators all have local production in China, the relevant geographic market was defined as China.

Novelis was the largest player in the abovementioned markets and Aleris ranked third in both markets. After transaction, the market share of Novelis and Aleris would reach 70% to 75% in the interior aluminium autobody sheets market and 75% to 80% in the exterior aluminium autobody sheets market. Further, the level of market concentration would be highly increased. After transaction, there would be only four main competitors in the interior aluminium autobody sheets market and two main competitors remaining in the exterior aluminium autobody sheets market. Apart from that, the SAMR also assessed factors such as:

  • the elimination of Aleris’s competition restraints on Novelis;
  • the incentive of the merged entity to eliminate or restrict competition after the transaction;
  • the entry barriers to the relevant markets; and
  • the recognition of downstream customers.

The SAMR approved the proposed concentration with both structural and behavioural conditions. Given that the relevant products that Aleris sold in China were mainly exported from Europe, Aleris was required to divest its entire business relating to interior and exterior aluminium autobody sheets in the European Economic Area. Further, the merged entity was prohibited from supplying cold-rolled sheet to its business partners in order to maintain market competition.

In addition, the proposed acquisition was initially filed for a review under the simplified procedure, and the SAMR accepted the case on 30 September 2018. Due to an objection raised by a third party during the public consultation period, the SAMR found that the proposed acquisition did not meet the standards for the simplified procedure and thus revoked the acceptance of the case and asked the notifying party to re-file it under the regular procedure. The notifying party resubmitted the case under regular procedure on 1 November 2018 and it was formally accepted on 13 December 2018. This back and forth shows that the notifying party should choose the most appropriate procedure to file in order to avoid waste of time. The merger control review could be delayed for months if the SAMR revokes the case acceptance when the notified concentration does not meet the standards for the simplified procedure.


Cargotec’s acquisition of TTS Group

On 5 July 2019 the SAMR conditionally approved Cargotec’s acquisition of TTS Group[7]. The acquirer of the transaction was MacGregor Group, a subsidiary of Cargotec. The MacGregor Group is principally engaged in the sale and service of products in the marine transportation cargo handling sector. The TTS Group is mainly engaged in the sale and service of hatch covers, ro-ro equipment for commercial vessels, ship cranes and winches. The transaction was filed on 15 June 2018, following which the parties were required to provide supplemental material. The SAMR formally accepted the case on 26 July 2018 and decided to conduct further review on 22 August 2018. Before the expiry of the review period, the parties withdrew the filing on 11 January 2019. The SAMR accepted the refiling on 14 January 2019 and the review process was prolonged until 9 July 2019.

In this case, the parties had overlaps in several markets, including hatch covers, ro-ro equipment for commercial vessels, ship cranes, winches and related after-sale services. The SAMR conditionally approved the proposed acquisition with behavioural remedies, including:

  • ensuring the independence of relevant businesses;
  • maintaining respective competition;
  • not raising the prices of related products in the Chinese market; and
  • not refusing or restricting supplies of the products to Chinese customers.

In addition, the SAMR adopted the ‘firewall guidance handbook and training’ remedy proposed by the filing parties. The parties committed to create an internal firewall between their respective employees, separate their competition-sensitive information and workplaces, issue a detailed firewall guidance handbook and conduct training. Setting up an internal firewall and the application of related remedies will improve the efficiency and feasibility of the implementation as well as the supervision of the behavioural remedies. Although these types of measure have been adopted in previous behavioural remedy cases, the Cargotec case provides guidance on the practical aspects of implementing them.

The above mentioned measures on the firewall management were proposed again in a subsequent case in 2019 – namely, II-VI’s acquisition of Finisar[8]. In this case, the SAMR imposed the behaviour conditions on the parties of setting up a firewall and supplying the product in accordance with fair, reasonable and non-discriminatory (FRAND) principles. Particularly, the SAMR put forward the requirement of ‘firewall guidance handbook and training’ on the implementation of behavioural remedies.

In the five cases that were conditionally approved in 2019, most of the conditions attached were only behavioural remedies. In contrast to structural remedies, behavioural remedies have a high degree of flexibility, which can avoid excessive intervention of the antitrust agencies in concentration. However, it also requires more regulatory supervision post merger. Compared with EU and US antitrust enforcement agencies’ preference for structural remedies, the Chinese antitrust enforcement agency seems more comfortable imposing behavioural conditions to address competition concerns.


Penalties on non-filers

In recent years, the antitrust authorities have never relaxed their supervision of non-filing cases. By the end of 2019, the SAMR had released 46 non-filing cases and imposed total fines of Rmb16.1 million on 68 undertakings. In 2019, the SAMR significantly strengthened its supervision of and penalties on non-filing parties. Sixteen cases were published and 21 undertakings were punished with a total fine of Rmb6.25 million. The largest fine issued was Rmb400,000, while the smallest was Rmb200,000. The SAMR initiates investigations on non-filing cases by means of self-observation, third-party reporting and voluntary reporting by notifiable parties.

Notably, the SAMR has been going after non-filers even where their failure of notification occurred many years ago. Each of Pierburg and Xingfu Motorcycle was fined Rmb350,000 for their failure to notify a proposed joint venture before its establishment[9], while the joint venture was established in 2013. This case shows that the SAMR shows no mercy for non-filers that failed to fulfil their notification obligations a long time ago.

The SAMR also investigated several non-filing cases involving minority equity investments in 2019. For instance, MBK Partners, LP (MBK) was fined Rmb350,000 for its failure to notify its acquisition of a 23.53% stake in Shanghai Siyanli Industrial Co Ltd. Further, Dejin Enterprise was fined Rmb300,000 for its failure to notify its acquisition of a 29.99% stake in Huitong Energy. Whether an acquisition of relatively small equity (eg, less than 30% equity) constitutes a change of control must be determined on a case-by-case basis. According to Article 23 of the Revised Draft, ‘control’ 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. Given the remarkable increase of non-filing fines and the robust enforcement towards non-filings in recent years, undertakings should consider whether there is a change of control in each transaction.

At present, the maximum amount of fines imposed on non-filers is Rmb500,000, which is clearly insufficient to deter non-filers. In accordance with Article 55 of the Revised Draft[10], the proposed penalty will be up to 10% of the non-filer’s annual sales in previous year. This adjustment will greatly increase the deterrence of illegal acts in relation to the violation of merger filing regulations if the proposed change is adopted in future.



The SAMR has become more stringent and detail oriented with respect to its analysis of relevant markets and the competition impact of mergers. It is expected that the SAMR’s merger control enforcement will maintain its professionalism and stability in 2020.

Further, the large number of non-filing cases and the increased fines indicate that the SAMR is gradually strengthening its enforcement crackdown on non-filers. Moreover, the proposed revision of the Anti-monopoly Law is expected to increase the size of penalties for non-filers. Enterprises should acknowledge the thresholds and criteria of merger filing in order to fulfil their obligations to avoid penalties and any adverse consequences of closing a transaction.


[1]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:, or telephone at (86 10) 8567 5959. Sihui Sun and Grace Wu are associates of AnJie Law Firm.

[2]The original Chinese version is available at the SAMR’s website: t20200107_310322.html.

[3]The original Chinese version is available at the SAMR’s website: t20200102_310120.html.

[4] II-VI’s acquisition of Finisar case, the announcement is available at the SAMR’s website: fldj/tzgg/ftjpz/201909/t20190920_306948.html.

[5] JV between DSM and Zhejiang Garden Biochemical case, the announcement is available at the SAMR’s website:

[6] The announcement is available at the SAMR’s website:

[7]The announcement is available at the SAMR’s website:

[8]The announcement is available at the SAMR’s website: t20190920_306948.html.

[9] The original Chinese penalty decision is available at the SAMR’s website: xzcf/201911/t20191114_308483.html.

[10]The original Chinese version is available at the SAMR’s website: t20200102_310120.html.

Although at the backdrop of Covid-19 outbreak, China’s merger review practice has not been negatively affected. Currently, the average review time is 8 days shorter than that in last year. According to public statistics, the first quarter of 2020 witnessed completed review of 111 filings by China’s antitrust authority, the State Administration for Market Regulation (“SAMR”), with a slight year-on-year growth of 0.9%.

With the period of economic downturn, people may have the question or anticipation: May SAMR relax its scrutiny standard to encourage M&A activities? The recent merger review practice in China answered it at least does not apply to the semiconductor sector.

On the 8th and 16th of 2020 April, SAMR respectively released the first and second case it imposed remedies in this year. Both of them are related to semiconductor sector, and they are Infineon/Cypress deal and the Nvidia/Mellanox deal. Although it may be a coincidence, it at least suggests two things: First, the mergers and acquisitions in semiconductor areas are still active in spite of the influence of worldwide Covide-19 pandemic. Second, China keeps the vigilant and stringent  antitrust scrutiny on global semiconductor mergers.

  1. Introduction of The Infineon/Cypress Deal

The Infineon/Cypress deal was notified with SAMR on August 8, 2019 and approved with remedies on April 8, 2020. SAMR identified horizontal overlaps in four relevant markets, which are automotive microcontrollers (MCUs), industrial MCUs, consumer MCUs and power management chips. The neighboring relationship in five pairs of relevant markets are also identified and they are automotive MCUs/automotive IGBT, automotive MCUs/automotive NOR flesh memory, automotive MCUs/automotive wireless connection chip, automotive MCUs/automotive gate driver, consumer wireless connection chip/security chip respectively.

The relevant geographic market is defined as worldwide, in line with most of semiconductor precedents. Through the comprehensive competitive analysis, SAMR concluded that this deal may lead to effects of eliminating or restricting competition in the automotive MCUs worldwide market, because of the neighboring relationship between Cypress automotive MCUs and Infineon automotive IGBT, and between Infineon automotive MCUs and Cypress automotive NOR flesh memory.

Specifically, for the automotive IGBT, Infineon’s market share is 35-40% worldwide and 55-60% in China. For automotive NOR flesh memory, Cypress has a market share of 65-70% worldwide and 30-35% in China, ranking on No. 1. Under such market competition landscape, SAMR elaborated its competition concerns from three perspectives.

First, SAMR believed that the filing parties may conduct tying practice because of the above neighboring relationship. When downstream customers refuse to accept the tying, the entity ex post the merger (the “party”) is capable of forcing them to accept the tying through refusal to deal. Second, SAMR concerned that the party can develop the all-in-one product and creasing to sell automotive IGBT, automotive NOR flesh memory and automotive MCU separately. Third, it is suspected that the party can also decrease the interoperability between its NOR flash memory products and third-party MCU products.

In the end, SAMR accepted four behavioral remedies proposed by the filing parties and approved this deal. The final remedies as follows will be automatically expired in five years.

First, the party are prohibited from tying sales of automotive IGBT and automotive MCU or sales of automotive NOR flesh memory and automotive MCU in China, without justifiable reasons. Other unreasonable conditions must not be imposed on those sales, and refusal to sell those products separately are prohibited to Chinese customers either. Second, if the all-in-one product or solution is feasible from technological perspective, the party should undertake to continue to offer Chinese customers a choice of purchasing automotive IGBT, NOR flesh memory and MCU separately. Third, the party should undertake to ensure the automotive NOR flesh memory sold to Chinese customers are in compliance with the interface standard commonly accepted by industry, and to ensure the standard compliant automotive MCUs sold by third parties interoperable with the party’s automotive NOR flesh memory. Fourth, the party should supply those products to Chinese customers on fair, reasonable and non-discriminatory (“FRAND”) principle.

  1. Introduction of The Nvidia/ Mellanox Deal

The Nvidia/Mellanox deal was notified with SAMR on April 24, 2019. The withdraw and refile was applied in February of 2020, and SAMR ultimately approved this deal with remedies on April 16, 2020. In this case, SAMR identified vertical relationship between data center server and general ethernet adapter. The neighboring relationship in two pairs of relevant markets are additionally identified and they are GPU accelerator/private network interconnection equipment and GPU accelerator/high speed ethernet adaptor respectively.

The relevant geographic market is defined as worldwide, in line with most of semiconductor precedents handled by SAMR and MOFCOM. Through competitive analysis, SAMR identified competition concerns in the above-mentioned neighboring markets, including GPU accelerator, private network interconnection equipment and high speed ethernet adaptor both in China and worldwide.

Specifically, for GPU accelerator market, Nvidia’s market share is 90-95% worldwide and 95-100% in China. As to private network interconnection equipment, Mellanox’s worldwide and China market share are 55-60% and 80-85%. For high speed ethernet adaptor, Mellanox’s market share is 60-65% worldwide and 65-70% in China, ranking on No. 1 and being much more than other market players. Under such market structure, SAMR illustrated its competition concerns from four angles.

First, similar to the Infineon/Cypress case, SAMR believed that the entity after the deal (the “party”) can conduct tying because of the above neighboring relationship and the significant market power in each market. When downstream customers refuse to accept the tying, the party is capable of forcing them to accept the tying through refusal to deal. Second, SAMR concerned the party can decrease the interoperability between its GPU accelerator and third-party network interconnection equipment or between its network interconnection equipment and third-party GPU accelerator. Third, it is found that the party can access to competitive sensitive information from other GPU accelerator and network interconnection equipment manufacturers and thus possibly gain unfair competitive advantages.

In the end, SAMR accepted seven behavioral remedies proposed by the filing parties and approved this deal. Two remedies were made confidential in the released announcement and the other five are set out as follows. Those remedies can be applied for removal after six years.

First, it is prohibited from tying or imposing unreasonable conditions on sales of Nvidia GPU accelerator and Mellanox network interconnection equipment in China. It is prohibited from hindering or restricting customers to separately purchase the above products or discriminating those customers on service quality, price, soft function and etc. Second, the party should supply those products and related software and accessories to China on FRAND terms. Third, the party should warrant continuous interoperability between GPU accelerator and third-party network interconnection equipment, and between Mellanox high speed network interconnection equipment and third-party GPU accelerator. Fourth, the party should continue its open source commitment for the point-to-point communication software and collective communication software for Mellanox high-speed network interconnection equipment. Fifth, the party should adopt protective measures on information accessed from other accelerator and network interchange equipment manufacturers.

  • Commentary

By looking at these two recent decisions on semiconductor, in combination with review of those PRC precedents, the following key observation or commentary could be shared.

First, semiconductor mergers usually go through a relatively long period with pull-and-refile being the frequent phenomenon.

For instance, the Nvidia/Mellanox lasted around one year with withdraw-and-refile being applied once. For the Infineon/Cypress deal, the total review period is 8 months, which is already relatively desirable, compared to most of other remedy cases in semiconductor sector. Specifically, the merger review procedure costed around 13 months in MediaTek/MStar deal, about 15 months in ASE/Silicon Precision deal, around 9.5 months in KLA-Tencor/Orbotech deal, about 7.5 months in NXP/Freescale deal, and about 7 months in Broadcom/Brocade deal. Among them, except for the Broadcom/Brocade and Infineon/Cypress, all of other cases involved the withdraw-and-refile procedure.

Second, neighboring relationships between the filing parties in semiconductor mergers have attracted increasing attention and competition concerns from SAMR.

Notably, in both Infineon/Cypress and Nvidia/Mellanox, SAMR had competition concerns on markets with neighboring relationship, rather than on the horizontal overlaps or vertical relationship markets. Whether or not the party ex post the transaction may conduct trying, refusal to deal or may decrease interoperability between products is the focus of SAMR antitrust scrutiny. In addition, as in Broadcom/Brocade and Nvidia/Mellanox, the possibility of accessing competitor’s sensitive information becomes a concern as well.

Third, the remedy type imposed mainly depends on where the competition concerns come from.

The current enforcement in China suggests, where competition concerns come from horizontal overlaps between the filing parties, structural remedy or quasi-structural remedy such as hold-separate is frequently adopted. When competition concerns come from vertical or neighboring relationship, SAMR mostly only imposes behavioral remedies. Furthermore, when concerns come from the complementary synergy caused by the neighboring relationship, the remedial measure very often involves prohibition of trying the products with neighboring relationships.

For instance, the remedies in MediaTek/MStar and ASE/Silicon Precision are hold-separate, and NXP/Freescale involved structural divestiture, because competition concerns in those three cases all come from horizontal overlaps. While the Broadcom/Brocade, KLA-Tencor/Orbotech, Infineon/Cypress and Nvidia/Mellanox deal involved only behavioral remedies, because competition concerns arises from vertical or neighboring markets.

Fourth, relevant stakeholders are solicited for opinions in various ways.

China’s antitrust authority usually solicits opinions from competent  industry authority, industry associations, key competitors and downstream customers. In all of those semiconductor mergers including the above Infineon/Cypress and Nvidia/Mallenox, the above-mentioned four types of stakeholders were solicited for comments. In NXP/Freescale, industry experts were solicited for opinions additionally.

In the process of soliciting opinions, opinions of competent  authority and trade associations are more important. For the semiconductor industry, there are mainly two competent  authorities. One is the Electronic Information Department of the Ministry of Industry and Information Technology (MIIT), with the Integrated Circuit division being the competent division. The other is the High-tech Industry Department of the National Development and Reform Commission (NDRC). One of the major industry associations is China Semiconductor Industry Association.

In summary, from the past and most recent China’s merger review practice on the semiconductor sector, the antitrust scrutiny is continuously rigorous and cautious. In the preparation of merger filing in China, companies in this industry need to take it seriously and carefully. It is suggested that antitrust lawyers to be involved in the early stage of transaction negotiation, so that favorable transaction terms may be included by assessing the antitrust risks comprehensively and measure to shorten the review period could be planned in advance.

Authors: Michael Gu / Charles Xiang[1]



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[2]), 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[3]), 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[4] 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[5], 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[6], 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.


[1]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:, or telephone at (86 10) 8567 5959. Charles Xiang is an associate of AnJie Law Firm.

[2]The full decision is available in Chinese at:

[3]The District Court decision is available at:

[4]See (2018) Supreme Court’s Judgement (Xing Shen) No.4675

[5]The Second Circuit Court decision is available at:

[6]The full decision is available in Chinese at:

Authors: Zhan Hao, Song Ying, Yang Zhan

On January 2, 2020, the State Administration for Market Regulation (“SAMR”) officially published the Draft Amendment to the Anti-Monopoly Law (“Draft Amendment”) in order to solicit public opinions, showing the authority’s sharp claws toward monopoly behaviors. This significant development is based on a 12-year-long experience of antitrust enforcement ever since the Anti-Monopoly Law (“AML”) has been enacted in 2008. The Draft Amendment conveys the signal to the public that the Chinese authority will increasingly strengthen enforcement on monopoly conducts. This article provides a summary of main changes in the Draft Amendment together with some comments, as well some practical implications thereof.


I. Monopoly agreement

Article 17 prohibits undertakings from organizing or assisting other undertakings to conclude monopoly agreements.

Article 53 provides that undertakings which (i) have no turnover in the preceding year or (ii) conclude but not implement monopoly agreement can be imposed fines at no more than RMB 50 million. For undertakings which implement monopoly agreements, the authority shall order to cease monopoly conducts, confiscate illegal gains and impose fines at 1%-10% turnover in the preceding year. The foregoing provisions are also applicable to those organizing or assisting other undertakings to conclude monopoly agreements.


First, hub-and-spoke conspiracy has been only implied in the scope of monopoly agreement in the current AML , but now the Draft Amendment provides an explicit legal basis of the “hub”part. It is expected that further provisions on hub-and-spoke conspiracy will be provided in lower-level legislation, such as regulations by SAMR, if this provision is included in the final Amendment.

Second, the Draft Amendment increases hundredfold top fines from RMB 500 thousand yuan up to RMB 50 million yuan for punishing those undertaking that concluded but not implements yet the monopoly agreements.

Third, according to the Draft Amendment, undertakings with no turnover will also receive the fine. The current AML has no specific wording addressing such scenario. In practice, in some cases in 2019 (e.g. penalties on horizontal monopoly agreements among 3 vehicle safety technology testing companies in Xianning, Hubei Province, and horizontal monopoly agreements among 8 concrete companies in Hengzhou, Zhejiang Province), SAMR confiscated illegal gains and ordered to cease monopoly conducts, but did not impose fines against undertakings which have no turnover in the preceding year. However, the Draft Amendment will retake the exemption of fines from those undertakings with no sales.

Fourth, undertakings assisting the conclusion of monopoly agreement are also explicitly prohibited under the Draft Amendment.


II. Abuse of market dominance

Article 21 of the Draft Amendment provides that network effects, economies of scale, lock-in effects, ability of controlling and processing relevant data and other factors should also be considered in determining market dominance of internet undertakings.


In recent years, competition issues in internet sector have attracted much attention from the antitrust authority. Published on July 1, 2019 and effective on September 1, 2019, the Interim Provisions for Prohibiting Abuse of Market Dominance (the “Interim Provisions”) has embodied a provision specific on internet sector. Specifically, it provides that network effects, economies of scale, lock-in effects, ability of controlling and processing relevant data and other factors should be taken into consideration when determining the market dominance in internet sector, which is consistent with the Draft Amendment.


  • Merger control review

Article 23 defines “control” as the right or actual status of a business operator that has or may have a decisive influence, directly or indirectly, individually or jointly, on the production and operation activities or other major decisions of other business operators.

Article 24 provides that the authority can formulates and updates filing thresholds according to economic development, scale of the industry and other factors and shall make it public in a timely manner.

Article 30 provides that the time required under the following circumstances shall not be included in the time limit for the merger review procedures:

  • suspension period of merger review procedures upon application or consent of the filing parties;
  • period of submitting supplementary documents and materials by undertakings as required by the authority;
  • period of negotiating restrictive conditions between the authority and the filing parties

The specific provisions on stopping the clock of merger review shall be separately formulated by the anti-monopoly authority under the state council.

Article 55 Under any of the following circumstances, the anti-monopoly law enforcement agency shall impose a fine of not more than 10% of business operators’ turnover in previous year: (i) implementing a concentration with failure to file, (ii) implementing a concentration after filing but not receiving clearance, (iii) violation of additional restrictive conditions; (iv) implementing a concentration in violation of blocking decision.


First, the Draft Amendment emphasizes that when defining ‘control’, the key point is to assess whether there are controlling/veto rights over the business operations of the target.

Second, SAMR might be authorized to update filing thresholds since they have been established in 2008. With no further detailed provisions, some expect that the SAMR might annually adjust the filing thresholds, which would be similar to antitrust authorities in other main jurisdictions.

Third, “stop the clock” rule might be introduced in Chinese antitrust legislations for the first time. SAMR would have greater discretion to extend the review period for non-simplified or conditionally-cleared cases. The authority may have less needs to request filing parties to withdraw in order to gain more time to deal with complex and high-profiled cases.

Last, for gun-jumping cases, the current AML provides the legal liability could be a fine capped with RMB 500,000 on the party which is obliged to pre-file to SAMR. In the Draft Amendment, SAMR can impose no more than 10% of the sales turnover in the preceding year, which is similar to that for monopoly agreements and abuses of dominance. For those large-scale companies with fully-integrated production lines, the cost of closing without approval from the authority would be extremely high.


III.Implications of the Draft Amendment

Although the Draft Amendment has not been effective so far, the implications conveyed by the authority is still very impressive. Market players active in China should pay more attention to the development of China anti-monopoly laws, especially given the potential significant changes and lifted liability. The regulation boundaries of anti-monopoly behaviors are increasingly refined. Cooperation with the authority’s investigation will be expected and required more as a legal baseline rather than a simple attitude. Furthermore, the introduction by Draft Amendment of new types of monopoly conduct, such as hub-and-spoke, will urge the market players and their outside and in-house legal counsel to borrow more experience form international precedents like in the EU and U.S. Obviously, the China antitrust legislation and enforcement is expected to be further enhanced in future.

2019 is the first year since the re-organization of China’s antitrust enforcement agency was completed. New legislations and enforcement actions during the past year have thus attracted much attention from practitioners and in-house counsels, with a view to gaining an insight into the enforcement trends and priorities, if any, of the new agency. This article is intended to underline the most significant developments in legislation, public enforcement and private litigation in 2019.

I. Legislative Developments

A.The Anti-Monopoly Law (Draft Amendment)

To respond to the challenges encountered in the enforcement of AML and to satisfy the actual needs of China’s evolving economic activities, the new antitrust agency of China, the State Administration for Market Regulation (“SAMR”), expended a great amount of efforts on the amendment of the Anti-Monopoly Law (“AML”) in 2019. Immediately after the close of 2019, SAMR published the draft amendment to AML on January 2, 2020, to solicit public comments (“Draft Amendment”). Although the Draft Amendment is far from the final version, changes in the draft version are worthy of close examination, as it will shed light on possible future enforcement trends and business operators are advised to conduct internal risk assessment by considering those possible changes.

Five key changes in the Draft Amendment are summarized below.

First, a provision pertaining to factors for determination of dominance in the internet sector is added in the Draft Amendment to AML. The proposed factors include network effects, economy of scale, lock-in effect, and capability of controlling and processing data. As such, it is once again highlighted that the internet sector has become, and may continue to be for some period, one of the enforcement priorities in China.

Second, for the merger control regime, a new rule to stop the clock of the review process is introduced in the Draft Amendment, although details are absent on the stop-the-clock rule. This revision may be against the backdrop that in cases where remedies are negotiated, it turns out the statutory review period is usually not adequate for SAMR to reach a final decision.

Third, pursuant to the Draft Amendment, antitrust enforcement agencies could seek assistance from public security personnel in the course of antitrust investigation. The explicit provision for the use of police force signals a potential reinforcement of inspection and investigation measures in the public enforcement of the AML, especially for dawn raid investigations.

Forth, statutory punishment is more stringent for unimplemented monopoly agreements. Under the current AML, business operators which have concluded but not implemented the monopoly agreement shall be assessed a fine of no more than RMB 500,000 (approximately USD 70,000) together with confiscation of illegal gains. Under the Draft Amendment, the statutory fine will be increased to RMB 50,000,000 (approximately USD 7,000,000) for unimplemented monopoly agreements and for business operators with no revenue in the preceding year.

Fifth, statutory punishment becomes harsher for gun-jumping in merger control regime. It is frequently under criticism that the current level of punishment has no deterring effect at all, as the amount of fine is limited to RMB 500,000 (approximately USD 70,000). The Draft Amendment has lifted the penalty level to “below 10% of the turnover in the preceding year”.

B.Three New Regulations

The most remarkable legislative achievement in 2019 is the promulgation by SAMR of three new antitrust regulations, which took effect on September 1, 2019.

The three new regulations are the Interim Provisions on Prohibition of Monopoly Agreements (“Monopoly Agreement Regulation”), the Interim Provisions on Prohibition of Abuse of Dominant Market Positions (“Abuse of Market Dominance Regulation”), and the Interim Provisions on Prohibition of Abuse of Administrative Power in Eliminating or Restricting Competition (“Administrative Abuse Regulation”).

The purposes of issuing the three new regulations are for one thing unifying the fragmented rules prior to the re-organization of antitrust agencies, and for another providing clear guidance both for business operators in complying with China’s antitrust rules, and for enforcement agencies in taking enforcement actions by a uniform standard.

Compared with the old rules, the three new regulations are more self-contained in that they combine both substantive and procedural provisions. Before the re-organization, the former antitrust agencies, NDRC and SAIC, issued separate regulations to deal with substantive and procedural issues respectively.

Furthermore, based on experience accumulated from past enforcement actions, the new regulations have clarified SAMR’s position on a few old issues. For example, the Monopoly Agreement Regulation implicitly clarifies that the per se approach is to be taken for the five types of horizontal monopoly agreement and resale price maintenance, which are explicitly enumerated in the AML, and the rule of reason approach for other types of monopoly agreement which are not enumerated in the AML. Furthermore, it is made clear that the commitment regime is not applicable to a few hardcore restrictions, including price fixing, restriction of sales and market partitioning between competitors. Detailed rules on the leniency regime are also added in the Monopoly Agreement Regulation.

In addition, SAMR’s increasing attention to a few emerging issues could also be observed in the new regulations. For instance, in the Abuse of Market Dominance Regulation, there is one provision specifically addressing determination of market dominance in the internet sector and another provision solely pertaining to assessing market dominance in the area of intellectual property. The Abuse of Market Dominance Regulation also outlines factors the agencies will take into consideration in determining collective dominance, such as market structure, market transparency, product homogeneity and behavior uniformity.

C.Notice of SAMR on Authorization of Antitrust Enforcement

Before the re-organization, the provision on authorization of antitrust enforcement by the national agency to provincial agencies is discrepant between NDRC and SAIC. SAIC took a case-by-case authorization approach, while NDRC took the general authorization approach. At the beginning of 2019, SAMR released a notice to adopt the general authorization approach, which established China’s two-level antitrust enforcement system involving the national and provincial level enforcement agencies in parallel.

This notice also sets up the working mechanism for authorization, including general authorization to provincial level enforcement departments, designation of enforcement powers, commissioned investigations, and cooperation in investigations. These rules are also incorporated in the Monopoly Agreement Regulation and Abuse of Market Dominance Regulation to some extent.

It should be noted that the unified general authorization system will confer more autonomy on provincial antitrust agencies to initiate investigations. As such, implicit competition between provincial agencies may encourage more enforcement activities going forward.

D.Antitrust Guidelines (Draft for Public Comment)

No official version of antitrust guidelines was released in 2019, but legislative efforts were indeed made in guideline drafting. On November 28, 2019, SAMR published the draft Guidelines on Antitrust Compliance of Business Operators to solicit comments from the public. This legislative activity implies SAMR attaches great importance to the advocacy of antitrust compliance, in parallel with enforcing the AML by investigating and penalizing business operators.

The Antitrust Compliance Guidelines are mainly composed of general principles, compliance management system, key compliance risks, management of compliance risks, and safeguard of compliance management. These guidelines serve the purpose of providing business operators with more guidance on establishing a sound internal antitrust compliance system. However, in what way a sound compliance system may affect business operators in antitrust enforcement is not articulated. For instance, whether the establishment of a sound internal compliance system could reduce legal liabilities of business operators in the course of antitrust investigation is not clear yet.

II. Enforcement Developments

A.Merger Control

Despite the adversities of China-US trade friction and sluggish global economic growth, the number of merger filings is approximately the same as that in 2018. In total, SAMR completed review of 432 merger filings in 2019, slightly lower than 448 cases in 2018. In 2019, remedial conditions were imposed in five cases (four remedy cases in 2018) and no prohibition decision was made.

The 5 remedy cases are (1) the KLA Tencor/Orbotech case; (2) the Cargotec/TTS case; (3) the II‐VI Incorporated/Finisar case; (4) the Zhejiang Huayuan Biotechnology/ Royal DSM case; and (5) the Novelis/Aleris case. In all of these cases, the filing parties withdrew and refiled with SAMR, with the average time from submission of filing to issue of approval being 387 days. Of the five remedy cases, hold-separate remedy was imposed in three cases, structural remedy was imposed in one case and behavioral remedy was imposed in one case. The supervision period was set as 5 years in three cases and 3 years in one case. For a comparison between 2019 and previous years, please refer to the following figure.

Enforcement against gun-jumping was continuously strengthened in 2019, with 17 fine tickets being issued. This trend is reflected in the below figure, which depicts the number of enforcement cases in each year since 2014 when penalties on gun-jumping were first made public. Although the penalty on gun-jumping is limited RMB 500,00 (approximately USD 70,000) under existing laws, the potential reputational harm on gun-jumpers may produce some deterring effects. Specifically, as SAMR publishes every penalty decision on its official website, the violators’ corporate image will be more or less damaged. If the penalized company is a listed company, its stock prices may react negatively. Even for non-listed companies, such penalty may also affect their future financing. 

B.Enforcement Against Monopoly Agreement and Abuse of Market Dominance

In 2019, SAMR published enforcement decisions on 18 cases in total, most of which were issued by provincial Administration for Market Regulation (provincial “AMR”). The 18 decisions include two investigation termination decisions, three investigation suspension decisions, and 13 penalty decisions. Seven cases involved abuse of market dominant position, eight cases were related to horizontal monopoly agreements and three cases pertained to vertical monopoly agreements. Sectors involved in the investigations include pharmaceuticals, automobile, construction materials, public utilities and consumer goods.

Penalties imposed on foreign-invested companies include Jiangsu AMR’s fine ticket against Toyota China for resale price maintenance and Shanghai AMR’s fine ticket against Eastman China for abuse of market dominance. The former fine was fixed at 2% of Toyota’s turnover in the preceding year in Jiangsu province or RMB 87,613,059.48 (approximately USD 12,516,100). The latter fine amounted to 5% of Eastman China’s turnover in the preceding year or RMB 24,378,711.35 (approximately USD 3,482,600).

With regard to the behaviors being investigated in 2019, the Eastman decision showcased novelty to some extent. Specifically, this is the first case where minimum purchase requirement and take-or-pay clause were found in violation of the AML in China. In addition, the investigation termination decision on Horien and Hydron by Shanghai AMR and the investigation suspension decision on Lenovo by Beijing AMR evidenced that the commitment regime is applicable to vertical monopoly agreements in practice.

III. Antitrust Litigations

One significant change in antitrust judicial practice in 2019 is that the Supreme People’s Court has become the second-instance court for all antitrust litigation cases from January 1, 2019 onward, regardless of whether the first instance court is an intermediate people’s court or a high people’s court.

There is no official statistics on the number of China’s antitrust litigations in 2019 yet. According to public sources, substantive judgments in antitrust litigations are not many, and most of high-profile cases, such as the Hitachi Metal case and the MLily Case, are still pending.

One milestone case is the Hainan Yutai case in which the Supreme People’s Court addressed the long-existed conflict of approach between enforcement agencies and Chinese courts in treating resale price maintenance. Specifically, antitrust agencies in past enforcement actions have taken a per se illegal approach to resale price maintenance, while Chinese courts adopted a rule of reason approach, as manifested in cases such as the Johnson-Johnson case, the Hankook case and the Gree case. In the Hannan Yutai case adjudicated in an administrative retrial by the Supreme People’s Court (published in 2019), the Supreme People’s Court recognized that the legal standards applicable to vertical monopoly agreements are different in public enforcement and private proceedings, which in a sense dispelled a lot of expectations for the SAMR to change its per se approach.

Another landmark jurisdictional ruling was rendered by the Supreme People’s Court in the Shell case and addressed the issue of arbitrability of antitrust civil disputes. For a few years, the topic of whether antitrust civil disputes could be arbitrated had been hotly debated in China. While there were few precedential decisions in connection with this issue for people to better understand what China’s judicial position is, the local courts have presented discrepant attitudes toward this issue in the past. Nevertheless, the Supreme People’s Court made clear its stance in the above-mentioned ruling that arbitration clauses could not preclude the jurisdiction of Chinese courts over antitrust civil disputes. The ruling can be viewed as an official judicial voice in this regard and may be relied upon.

IV. Outlook

In 2020, the internet, automobile, public utilities and consumer goods sectors are still expected to be on the radar of China’s enforcement priorities. Public enforcement is foreseen to be more active, given that the provincial AMRs had been completed their institutional reform and are ready to flex muscles, many publicized high-profile cases may come to an end, and improvements have been made to the reporting and leniency regimes to facilitate finding of antitrust violations. Merger control activities are expected to be stable with enforcement against gun-jumping likely strengthened further. In the judicial arena, courts’ opinions on complicated issues, such as the essential facility doctrine, platform market and pass-on defense, may be looked upon closely in those high-profile cases.

Authors:Chen Lin, Han Jinwen


In a recent landmark decision, the China Supreme People’s Court (“SPC”) overturned its previous views of the last decade and held that branded products produced through OEM may constitute trademark infringement if a third party owns the registered trademark in China.

In the previous Pretul case (2015) and Dongfeng case (2017), SPC held that OEM products do not constituted trademark infringement since the products were all exported abroad rather than entered into the Chinese market, thus it should not be considered as “use of a trademark” and would not cause confusion to consumers in China.  This was the mainstream opinion of the last decade in China.  However, in this recent judgment, the SPC overturned the previous opinion and concluded that OEM products might also cause confusion to the public since the consumers were able to get to the OEM products due to development of e-commerce, Internet and China’s economy.

The changed opinion of the SPC will provide possibilities to trademark rights owners in China to seize branded products “authorized” by pirated trademark owners in foreign countries.  It also shows a firm attitude of the Chinese government in all-round protecting intellectual property rights.

Case Background

The claimant, Honda Motor Co., LTD (“Honda”), is the owner of “”, “” and “” trademarks, which have been registered on vehicles, motorcycles, etc. in class 12 goods since late 1980s.

The defendant is Chongqing Heng Sheng Group Limited (“Heng Sheng”).  Heng Sheng contracted with a Burma company named Meihua Company Limited (“Meihua”) and was requested to produce 220 sets of motorcycle parts bearing “HONDAKIT” trademark.  According to the contract, the produced motorcycle parts would be exported by Heng Sheng’s affiliate Chongqing Hengsheng Xintai Tradding Co., Ltd. (“Xin Tai”).  To prove its trademark rights, Meihua provided “HONDAKIT” trademark registration on “vehicle” etc. class 12 goods, which is in the name of the managing director of MEIHUA.

In June 2016, Kunming (provincial capital of Kunming) customs seized these “HONDAKIT” products on the grounds of infringement on Honda’s trademarks.  However, after realized that the seized motorcycle parts were OEM products, Customs expressed that they could not decide whether the products were infringing because of the SPC’s attitude on OEM products.

To get a clear answer, Honda filed a civil litigation against the OEM manufacturer Heng Sheng and exporter Xin Tai on the grounds of trademark infringement in September 2016. In the first instance, the intermediate court of Dehong Dai and Jingpo Autonomous Prefecture ruled that these OEM products constituted trademark infringement and the 2 defendants should pay RMB300k (USD42,681) to Honda.  However, in the second instance the Yunnan Higher People’s Court overturned the first instance judgment by exactly following the SPC’s earlieropinion on OEM products.

Honda chose to keep fighting and filed a retrial application with the SPC.  On September 23, 2019, the SPC issued the retrial judgment and made the aforesaid change.  The SPC firstly demonstrated that, although Meihua owned the registered trademark for “HONDAKIT” in Burma, in this case the trademark in actual use was confusingly similar with Honda’s Chinese trademarks “”, “” and “”, because (1) “HONDA” was in bigger fonts than “KIT”, (2) “H” was in initial letter, and (3) there was also a wing device on the products.  Obviously Meihua was using its trademark in bad faith.  Secondly, the SPC emphasized that although it was OEM products and were not sold in China directly, they may still cause confusion to Chinese consumers, because with development of e-commerce, Internet and China’s economy, as well as frequent overseas travel, the Chinese consumers had accessed to these OEM products. As a conclusion, the SPC decided to reverse the second instance judgment and affirmthe first instance judgment.

Significance of the SPC’s Judgment

Obviously the SPC’s judgment is good news to owners of Chinese trademarks.  China is no longer a hotbed for overseas pirated trademark owners.  Rights owners of Chinese trademarks can enforce their rights against infringing products in processing in China rather than wait for the OEM products to be sold in other countries/ areas where the rights owners have registered trademarks too.  Manufacturers in China will be more careful when accepting international orders, and as a result it will also reduce the occurrence of infringing OEM products.

In addition, the burden of proof of Chinese trademark holder is likely to be relieved because the SPC also specified in the judgment that (1) a mark used on the products should be considered as “use of a trademark”, as long as the mark has the function of identifying the source of products, (2) the “relevant public” should be defined as people related to OEM products, include manufacturers, exporters as well as consumers, (3) it is not necessary to prove that confusion actually happens.

It should also be noted that the SPC clarified in the judgment that the OEM case should be reviewed case by case, which means that the “HONDAKIT” is not likely to become a guide case at this moment.

However, it is still an example of China’s endeavor to protect intellectual property.  In November 2019, the General Office of the CPC Central Committee and the General Office of the State Council jointly published “Opinions on Strengthening Protection on Intellectual Property” (“the Opinions”), and clearly put forward two goals (1) significantly reduce IP infringement by 2022, and (2) achieve higher level of social contentment on IP protection..  The opinions also clearly listed specific measures for achieving the goals, include improving damages, enforcing punitive damages systems, preventing bad faith trademark filings, establishing and publishing repeated infringers and intentional infringers etc. It is predictable that there will be more and more encouraging judicial results in the following several years in China.

Authors: Zhan Hao、Wan Jia

Regarding the premium revenue, now China is the second biggest insurance market in this world, but regulators and insurance undertakings always feel cross due to the lack of insurance innovation, especially for the insurance product. More specifically, most of sold insurance products in China were transplanted from the foreign markets, and the so-called localization only means translation in some cases. China insurance regulator, the former CIRC and now CBIRC, occasionally criticized PRC insurers in this regard: some insurers plagiarized the coverage, structure and actuarial model from the foreign products, yet cast the least weight to the Chinese business environment and consumer practice.

In the meantime, PRC insurers feel puzzled when facing such criticism. In a market with short insurance history and shallow-rooted insurance culture, the innovation is not an easy piece.

Finally, the occurrence of the liability insurance for the conservatory measure in civil proceedings, a.k.a., Litigation Property Preservation Liability Insurance (hereinafter referred to as “LPPL”) changed such practice and it has become a typical insurance innovation to satisfy the market demand and address PRC insurance specialty that well tallies with its judicial system.

In accordance to PRC civil procedure law and arbitration law, before or in the course of the civil litigation or arbitration, plaintiffs or claimants could apply the competent court to take the conservatory measures against defendants or respondents, i.e., to freeze the real asset, banking account, creditor’s right against third party, IPR, stock and other assets owned by the opposing parties. The purpose of such measure is to prevent defendants and respondents from transferring assets, and to facilitate the coming enforcement of judgment and arbitral award. PRC procedure law stipulates that, when applying for the conservatory measure prior to the proceedings, plaintiffs or claimants shall provide the guarantee before the proceedings. When applying for the conservatory measure in the proceedings, the court would normally request plaintiffs or claimants to provide the guarantee as well. Theoretically speaking, such guarantee should be equal to the claim amount. When the proceeding is over, if plaintiffs or claimants lost the case and such conservatory measures caused damage to the opposing parties, the opposing parties could claim the compensation in another proceeding.

Previously, plaintiffs and claimants intended to rely on the banks or the guarantee companies to provide such guarantee to courts in case their own asset is not adequate to provide a full guarantee. After some years, banks were reluctant to be involved in such business because this guarantee obligation would be reflected on its balance sheet. As to the guarantee companies, the court were to reluctant to accept guarantee from the guarantee companies due to its limited insolvency capacity and some scandals for this industry. Meanwhile, the litigation and arbitration cases soar in China because China society faces fundamental changes that citizens would prefer to resort to court rather than community or working unit (Chinese traditional dispute resolution means), to resolve disputes. Thus, it is not unnatural for courts and relevant parties to look for the appropriate means to minimize the giant gap between the fierce demand for guarantee and insufficient provider for such service.

Taking those conflicts into account, Jintai P&C insurer located in Yunan, the hinterland of China, innovated LPPL, which distinguished itself from the traditional liability products and is collective products to satisfy the dual demand from court and insured.

After plaintiffs and claimants (insurance applicant. also insured) and insurer reach an agreement, insurer will give the guarantee letter (similar to bond in other jurisdictions) to court, to ensure court to take the conservatory measures against the opposing parties. In the guarantee letter, insurer shall pledge to compensate the loss suffered by the opposing parties if such conservatory measure is proved to be wrongdoing and cause damages. After the end of litigation or arbitration, if the opposing parties claim damages from insured (plaintiffs or claimants) due to the wrongful conservatory measure, insurer shall assume the liability within the coverage.

Precisely speaking, LPPL is dual-function product, which combines the guarantee and liability coverage, and facilitate the litigation and arbitration proceedings. The giant demand gap gives incentive to China insurers to compete in this emerging market, and Ping An pioneered nationwide. Since LPPL is a long-tail product, the occurrence of insurance claim would materialize after the two or three years, even longer, since the issuance of policy. When the opposing parties claim the damages based on the wrongful conservatory measure, the opposing parties have to initiate another litigation, thus this new proceeding would dramatically prolong the insurance benefit payment process. For this reason, loss ratio for Ping An was quite low during the beginning years, and this profitable prospect stimulated other competitors to participate in the competition soon.

For the lobby from CIRC, China Supreme Court published a judicial interpretation to intentionally address LPPL, and this act encouraged the competition for this new product. Now the main PRC insurers contribute huge resources to this product, and fierce competition makes the premium rate decrease a lot.

During the past, China insurance authority was concerned that P&C market is homochromy, in which over 70% of revenue is from motor insurance, and liability product line is not mature at all. The emergence of LPPL demonstrates the space for the growing of liability product in China, and shows the necessity for the product innovation based on the local market.