Antitrust In China – 2019 Year In Review.

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Asia Pacific Legal Updates

 

8 January, 2020

 

Antitrust In China – 2019 Year In Review.

 

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.

 

  1. Legislative Developments
  1. 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”.

 

  1. 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.

 

  1. 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.

 

  1. 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.

 

  1. Enforcement Developments
  1. 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. 

 

  1. 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.

 

  1. 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.

 

  1. 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. 

 

For further information, please contact:

 

Zhan Hao, Managing Partner, AnJie law firm

zhanhao@anjielaw.com