Antimonopoly & Unilateral Conduct

Last verified on Wednesday 24th May 2017

China

Susan Ning, Hazel Yin and Han Wu
King & Wood Mallesons

    Overview

  1. 1.

    What is the legal framework governing unilateral conduct by companies with market power?

  2. There are multiple legislations that govern unilateral conduct by companies with market power in China.

    The Anti-monopoly Law of the People's Republic of China (AML) which was enacted in 2008 sets out the legal framework governing monopolistic conducts, including bilateral monopolistic conduct, ie, monopoly agreement and unilateral conduct, ie, abuse of dominance.

    The enforcement authorities, the National Development and Reform Commission (NDRC) and the State Administration for Industry and Commerce (SAIC) have each issued rules providing more guidance for finding abusive conducts.

    The SAIC promulgated the Rules of the Industry and Commerce Administration Authorities on the Prohibition of the Abuse of Market Dominating Position Behaviours (SAIC Rules on Abusive Conduct), which focuse on prohibition of non-price related unilateral conduct by companies with market power.

    The NDRC promulgated the Provisions against Price Fixing (NDRC Rules), which govern when the relevant abusive business arrangements are price-related.

    The SAIC has also promulgated the Provisions on the Prohibition of Abuse of Intellectual Property Rights to Eliminate or Restrict Competition (SAIC IP Rules), setting out provisions against abuse of dominance through intellectual property rights. The SAIC IP Rules have come into effect since 1 August 2015.

    The NDRC is delegated by the Anti-monopoly Commission of the State Council (AMC) to draft the six antitrust guidelines including the Antitrust Guidelines on Abuse of Intellectual Property Rights (NDRC IP Guidelines), the Antitrust Guidelines for Automotive Sector (NDRC Auto Guidelines), the Guidelines on Commitments Made by Business Operators in Antitrust Cases (NDRC Commitment Guidelines), and the Guidelines on Determining the Illegal Gains Generated from Monopoly Conduct and Setting Fines (NDRC Fining Guidelines), which include provisions applicable to unilateral conducts. These draft guidelines have been published by the NDRC in the first half of 2016 to solicit public comments, and the final versions are expected to be issued by the AMC.

  3. 2.

    What body or bodies have the power to investigate and sanction abuses of market power?

  4. The SAIC and the NDRC are both responsible for regulating abuses of market dominance. Specifically, NDRC is responsible for price-related violations and SAIC is responsible for non-price related violations.

    Monopoly power

  5. 3.

    What role does market definition play in market power assessment?

  6. Market definition plays an important role in market power assessment. According to the Guidelines of the Anti-monopoly Commission of the State Council on the Definition of a Relevant Market, the definition of a relevant market is generally the starting point for the analysis of a monopolistic conduct and an important step for antitrust law enforcement. In practice, defining relevant market is the first step for assessing the market power of business operators.

  7. 4.

    What is the approach to market definition?

  8. The Guidelines of the Anti-monopoly Commission of the State Council on the Definition of a Relevant Market provides guidance in defining relevant market.

    The Guidelines lay down substitution analysis as the basic methodology for market definition. The substitution analysis mainly focuses on the analysis on demand-side substitution which considers the interchangeability or substitutability of both product market and geographic market from customer perspective. However, if supply-side substitution has similar competitive restraints as demand-side substitution, it shall be taken into consideration as well. In general, where other business operators can switch to provide interchangeable product quickly without substantial reinvestment or high additional risk, supply-side substitution shall be assessed in defining the market. 

  9. 5.

    How is market power or monopoly power defined?

  10. According to the AML, monopoly power or a dominant market position refers to the ability of a business operator to control the prices, quantities or any other terms of transaction in the relevant market or to obstruct and affect the entry of other business operators into the relevant market.

    Moreover, the SAIC Rules on Abusive Conduct further clarify that ‘other terms of transaction’ refers to factors other than price and quantity which can have actual influence on market transactions, including ‘quality of the commodities, payment conditions, delivery methods, after-sale services and others’.

    The SAIC Rules on Abusive Conduct also elaborate that if a business operator has the ability of excluding other operators from entering into the relevant market, or delaying other operators to enter the relevant market, or if the business operator is able to raise entry cost that could make effective competition impossible in the market, even where other operators are able to enter the relevant market, the business operator may also be recognised as having market power. 

    The draft NDRC Auto Guidelines specify that an automaker which is not in a dominant market position in the new car sales market under article 17 and 18 of the AML may be considered as having market dominance in the aftermarket of its branded cars given the lock-in effect and compatibility issue of auto aftermarket.

  11. 6.

    What is the test for finding of monopoly power?

  12. The AML provides several factors for evaluating monopoly power: (i) the market share of the business operator in the relevant market and the competition status in the relevant market; (ii) the ability of the business operator to control the sale market or the procurement market for raw materials; (iii) the financial strength and technological capabilities of the business operator; (iv) the extent of reliance by other business operators on transactions with the business operator; (v) the level of ease or difficulty for entry by other business operators into the relevant market; and (vi) any other factors relating to the determination of dominant market position of the business operator.

    The draft NDRC IP Guidelines set out a few specific factors to be considered when assessing whether a business operator holding IPRs has market power, including (i) possibility and relevant cost for the trading counterpart to switch to substitute IPs; (ii) reliance of the downstream market on the products provided by using such relevant IPRs; and (iii) countervailing power of the trading counterpart against the business operator holding IPRs.

    The draft NDRC IP Guidelines further clarify that in order to identify whether a standard essential patent holder (SEP holder) possesses market dominance, the following factors could be considered: (i) market value and application of the relevant standard; (ii) whether substitute standard exists; (iii) industry’s dependency level on relevant standard and switching cost of using substitute standard; (iv) evolution and compatibility of different generations of relevant standard; and (v) how likely the relevant technology incorporated into the standard will be replaced.

  13. 7.

    Is this test set out in statute or case law?

  14. The tests are set out in statute.

  15. 8.

    What role do market shares play in the assessment of monopoly power?

  16. Market share is an important indicator of monopoly power. Normally the greater market share a business operator has, a stronger market position the business operator is deemed to have. When the market share of a business operator reaches certain threshold, such as 50 per cent, or the combined market shares of several business operators reach certain thresholds, such as two business operators holding an aggregate of two-thirds of the market share in the relevant market, the business operators may be recognised to have dominant market position, unless it can be proved otherwise.

    However, market share is not the conclusive factor in assessing monopoly power, the enforcement agencies may also consider other factors as mentioned in question 6.

  17. 9.

    Are there defined market share thresholds for a presumption of monopoly power?

  18. Article 19 of the AML presents three scenarios of certain market share thresholds with which the business operators would be presumed to have dominant market position: (i) a business operator holds half of the market share in the relevant market; (ii) two business operators hold an aggregate of two-thirds of the market share in the relevant market; or (iii) three business operators hold an aggregate of three-quarters of the market share in the relevant market. With regard to the collective dominance, if one business operator holds less than 10 per cent of the market share, it shall not be presumed to have dominant market position.

    However, business operators presumed to be dominant under the above provision can present opposite evidence to overturn the presumed dominance.

  19. 10.

    How easily are presumptions rebutted?

  20. As mentioned above, market share is by far the most important factor when determining market power. The AML sets presumptions of market dominance if business operators reach certain market share thresholds. However other factors are also very important in finding monopoly power.

    We notice that in practice, such a presumption has been successfully rebutted based on other factors in the assessment of monopoly power. For example, in the Qihoo 360 v Tencent case, though the plaintiff submitted that Tencent holds an 87.6 per cent share in the instant messaging software and service market, the Supreme People’s Court ruled that Tencent has no dominant position in the relevant market based on reasons such as the absence of ability of raising price without losing substantial amount of client, and the dynamic market character where business operators are able to gain substantial market share or lose substantial market shares in a short period of time.     

  21. 11.

    Are there cases where companies with high shares have been found not to exercise monopoly power?

  22. Yes, as mentioned in question 10, in the Qihoo 360 v Tencent case, though the plaintiff submitted that Tencent holds an 87.6 per cent share in the instant messaging software and service market, the court found that Tencent has no monopoly in the relevant market.

  23. 12.

    What are the lowest shares with which companies have been found to exercise monopoly power?

  24. According to publicly available information, we understand that the lowest market share with which company has been found to exercise monopoly power is in the Qualcomm case. In the WCDMA baseband chip market, Qualcomm’s market share based on the sales volume was below 50 per cent, and Qualcomm’s market share based on the sales revenue was 53.9 per cent. The NDRC found Qualcomm to have monopoly power in the WCDMA baseband chip market.

  25. 13.

    How important are barriers to entry and expansion for the assessment of monopoly power?

  26. According to article 18(5) of the AML, ‘the level of ease or difficulty for entry by other business operators into the relevant market’ is one of the key factors to be considered when assessing monopoly power of a business operator in the relevant market. In practice, barrier to market entry and/or expansion has been taken into consideration in assessment of monopoly power. One example is the Qihoo 360 v Tencent case where the Supreme People’s Court found that there had been a large number of new entrants in the relevant market and several of them gained substantial market shares within short period of time and have thus considered the low market entry barrier in concluding the lack of market power. In the Qualcomm case, the NDRC held that Qualcomm’s dominance in the market of licensing of each relevant wireless communication SEP was supported by the high entry barriers in the relevant market.

  27. 14.

    Can the lack of entry barriers negate a finding of monopoly power?

  28. As mentioned in question 13, in the Qihoo 360 v Tencent case, the conclusion of lack of dominance was supported by the low entry barriers. Nevertheless, the Supreme People’s Court also analysed several other factors in its assessment of Tencent’s market power, including dynamic competition in the market, the extent of reliance by other companies on Tencent, etc.

    Therefore, though it is difficult to conclude that the lack of entry barriers alone is able to negate the finding of monopoly power, it is one of the important factors being considered.

  29. 15.

    What kind of barriers to entry are typically considered in the analysis?

  30. When determining to what extent it is easy or difficult for other operators to enter into the relevant market, the SAIC Rules on Abusive Conduct provide the factors to be considered such as the entry costs, market access system, the ownership of necessary facilities, sales channels, capital and technical requirements.

  31. 16.

    Can countervailing buyer power negate a finding of monopoly power?

  32. Countervailing buyer power is one of the factors that the AML enforcement agencies will consider when determining whether a business operator has monopoly power.

    According to the AML and the SAIC Rules on Abusive Conduct, when assessing a business operator’s market power, the extent of reliance of other operators on this operator is one of the factors considered. More specifically, facts such as the volume of transactions between the operator and other operators, the duration of trading relationship and to what extent it is easy to shift to other trading partners would be taken into consideration. For example, in two dominance cases, SAIC found that customers have limited bargaining power against the water supply companies as water supply is a natural monopoly industry in China and this fact supported the finding of dominance.

    We are not aware of cases where countervailing buyer power alone can negate a finding of monopoly power.

  33. 17.

    What if consumers can easily switch between suppliers?

  34. Ease of switching between suppliers is also one of the factors that should be considered when finding monopoly power.

    In the Qihoo 360 v Tencent case, the Supreme People’s Court found that the network effect of instant messenger does not substantially increase customer reliance on Tencent’s product as the product is free and consumers can easily switch between suppliers. The Court held that low customer stickiness supports the conclusion that Tencent does not have monopoly power in the relevant market. 

  35. 18.

    Are there any other factors that the regulator considers in its assessment of monopoly power?

  36. In addition to the key factors mentioned above, in practice, the authorities will also consider other factors such as dynamic competition status, profit model, the development trend of the relevant market, etc.

  37. 19.

    Are any entities or sectors exempt from the antimonopoly regime?

  38. According to article 56 of the AML, the AML shall not apply to cooperative or collaborative acts between agricultural producers and rural economic organisations in business activities such as the manufacture, processing, sale, transportation and storage etc of agricultural products.

  39. 20.

    Can companies be deemed to hold collective monopoly power?

  40. Yes. As mentioned in question 9, the AML stipulates that if two business operators have a combined market share of over two-thirds in the relevant market, or three business operators have a combined market share of over three-quarters in the relevant market, the business operators can be deemed to have dominant market positions. But if one of the business operators holds less than 10 per cent of the market share, it shall not be presumed to have a dominant market position.

  41. 21.

    Can the exercise of joint monopoly power or tacit oligopolistic collusion be treated as an infringement?

  42. Yes. For example, in 2011, the NDRC investigated two pharmaceutical companies that jointly controlled the entire supply of promethazine hydrochloride, an API for production of an antihypertensive drug. The two companies were found to have significantly raised the price of the API without justifiable reasons and the NDRC fined them for abusing collective dominant market position.

  43. 22.

    Has the competition authority published guidance on how it defines markets and assesses market power?

  44. Yes. As mentioned above, the Anti-monopoly Commission of the State Council has issued the Guidelines on the Definition of a Relevant Market. The SAIC Rules on Abusive Conduct also include some provisions on how to assess market power.

    Abuse of monopoly power

  45. 23.

    Is there a general definition for what constitutes abusive conduct? What does it entail?

  46. Instead of providing a general definition for what constitutes abusive conduct, the AML provides a list of conducts that are abusive if engaged by a dominant business operator. 

  47. 24.

    What are the general conditions for finding an abuse?

  48. According to the AML, normally, four elements should be presented to prove an abuse of dominance violation: (i) the business operator has a dominant market position; (ii) the business operator has committed an abusive conduct; (iii) the conduct has anti-competitive effects; and (iv) there are no justifiable causes for the conduct.

  49. 25.

    Is there a list of categories of abusive or anti-competitive conduct in the applicable legislation?

  50. Yes. According to article 17 of the AML, the following abusive conducts are prohibited if the relevant business operator has dominant position in the relevant market:

    1. selling products at unfairly high prices or buying products at unfairly low prices;
    2. selling products at prices below cost without any justifiable causes;
    3. refusing to trade with a trading counterpart without any justifiable causes;
    4. restricting their trading counterpart so that it may conduct deals exclusively with themselves or with the designated business operators without any justifiable causes;
    5. implementing tie-in sales or imposing other unreasonable trading conditions at the time of trading without any justifiable causes;
    6. applying discriminatory treatments on trading prices or other trading conditions to their trading counterparts with the same standing without any justifiable causes; or
    7. other forms of abusing the dominant market position as determined by the Anti-monopoly Law Enforcement Agency under the State Council.

    The SAIC Rules on Abusive Conduct and the NDRC Rules lay down more specific guidance on the implementation of article 17 of the AML.

  51. 26.

    Is this list open or closed?

  52. The list above in question 25 enumerates six typical kinds of abusive conduct, but the list is not exhaustive. As item 7 of article 17 presents, in practice the antitrust enforcement agencies can determine other forms of conduct as abusive.

  53. 27.

    Has the competition authority published any guidance on what constitutes abusive conduct?

  54. Yes.

    Two AML enforcement agencies, the NDRC and the SAIC, have each enacted administrative rules within their own jurisdiction on the basis of the above high-level provisions, laying down more specific guidance on the implementation of article 17 of the AML.

    The SAIC Rules on Abusive Conduct provide specific guidance on finding of refusal to deal, exclusive dealing, tying, imposing other unreasonable trading conditions, and discriminatory treatments.

    The NDRC Rules provide guidance on finding of selling products at unfairly high prices or buying products at unfairly low prices as well as selling products at prices below cost without any justifiable causes.

    The SAIC IP Rules also set out provisions on the abuse of dominance that relate to the exercise of IP rights.

    The draft NDRC Auto Guidelines provide guidance on the abusive conducts in automotive sector, especially with respect to auto aftermarket, such as restriction on the manufacturing of dual-branded spare parts, exclusive supply of after-sales spare parts, restriction on access to repair technical information, etc.

    The draft NDRC IP Guidelines set out several types of abusive conducts in relation to the exercise of IPRs. In addition to the conventional IP related abusive conducts, the draft Guidelines also provide guidance on abuse of injunction relief, specifying that “if a SEP holder with market dominance forces the licensee to accept the proposed unfairly high licensing fees or unreasonable licensing conditions by seeking for injunctive relief, it may eliminate or restrict competition.”

  55. 28.

    Is certain conduct per se abusive (without the need to prove effects) and under what conditions?

  56. There is no certain conduct that is per se abusive in the AML. The effect of eliminating or restricting competition normally should be proved in assessment of abusive conduct. 

  57. 29.

    To the extent that anti-competitive effects need to be shown what is the standard to demonstrate these effects?

  58. Neither the AML nor the relevant rules or regulations set out more details for the standard to demonstrate anti-competitive effects. In practice, the antitrust enforcement agencies or the court will make the assessment on a case-by-case basis.

  59. 30.

    Does the abusive conduct need to harm consumers?

  60. A direct adverse effect on the interests of customers is one way of finding anti-competitive effects. However, immediate damage to the consumers is not a specifically required element in finding abusive conduct. For example, in a predatory pricing case, where a business operator with dominant market position sells products at a price below cost, there will not be any evidence of immediate damage to the consumers at the earlier stage. 

  61. 31.

    What defences are there to allegations of abuses of monopoly power?

  62. A business operator alleged of having abused monopoly power is entitled to defend its conduct by raising justifications. Both the SAIC and the NDRC have provided specific explanation of what constitutes ‘justifiable causes’ for abusive conduct.

    Under the SAIC Rules on Abusive Conduct, when determining whether there is any justification, the SAIC will consider if the accused conduct is adopted to realise normal operations of the business operator and to achieve normal benefit or if the accused conduct has positive effects on the efficiency of the economy, public interests and economic development.

    On the other hand, the NDRC Rules provide justifiable causes that may be applied for different price-related behaviours. For example, justifiable causes that may be raised as defence in an exclusive dealing case include: (i) to ensure product quality and safety; (ii) to maintain brand image or improve services; and (iii) to remarkably reduce cost, enhance efficiency and to enable the consumers to share the benefits derived therefrom.

  63. 32.

    Can abusive conduct be objectively justified?

  64. Yes. As mentioned in question 31, abusive conduct can be justified. Nevertheless, the AML provides objective justifications for cartels, such as improving technology and enhancing efficiencies, which do not apply to abusive conduct. 

  65. 33.

    What objective justifications have been successful?

  66. In practice, business operators may try to convince the antitrust enforcement agencies to accept the same objective justifications applicable to cartels in an abuse of dominance case. However, based on publicly available information, we are not aware of any precedent in China where these objective justifications have been successfully applied.

  67. 34.

    How is the burden of proof distributed in an abuse analysis?

  68. In private litigation, according to the Provisions of the Supreme People's Court on Application of Laws in the Trial of Civil Disputes arising from Monopolistic Practices, the plaintiff would bear the burden of proof in proving that the business operator has market dominant position, the existence of abusive conducts and the antimonopoly effects of the conduct. On the other hand, the alleged business operator shall bear the burden of proof in proving the existence of any justifiable causes.

    In antitrust investigations, the legal enforcement agencies generally would follow the same rules on burden of proof. 

  69. 35.

    What are the legal conditions to establish an abusive tie?

  70. Article 17(5) of the AML prohibits a dominant market player from imposing tie-in sales or other unreasonable trading conditions without justifiable causes.

    In general, the following elements should be met for a tie-in sale to be established: (i) the tying and tied goods are two distinct products; (ii) the tie-in arrangement is of a forcible nature; (iii) the tie-in arrangement has the effect of foreclosing competition; and (iv) there is no justification for the practice. 

  71. 36.

    What are the legal conditions to establish a refusal to supply or refusal to license?

  72. Article 17(3) of the AML prohibits a dominant market player from refusing to deal with a trading counterpart without justifiable causes. Article 4 of the SAIC Rules on Abusive Conduct and article 13 of the NDRC Rules lay out the different forms of ‘refusal to deal’ that could take place in practice.

    According to the SAIC Rules on Abusive Conduct, the following non-price related conducts may constitute refusal to deal: (i) reducing the volume of current transactions with trading counterparts; (ii) delaying or suspending current transactions with trading counterparts; (iii) refusing to enter into new transactions with trading counterparts; (iv) setting restrictive conditions, making it difficult for trading counterparts to continue the transactions; or (v) refusing to allow trading counterparts to use its essential facilities on reasonable terms during their production and operations.

    According to the NDRC Rules, setting an excessively high sales price or low purchase price without justifiable causes may also be viewed as refusal to deal. In other words, refusal to deal can take the form of either direct refusal or indirect refusal by way of setting stringent trading conditions.

    Moreover, according to the SAIC IP Rules, refusal to license certain IP rights may also be found problematic if the IP right is deemed as essential facility or after the IP has become an essential patent for a standard.

  73. 37.

    Do these abuses require an essential facility?

  74. With respect to IP licensing, essential facility is required in finding of refusal to license. However, in general, essential facility is not a mandatory requirement in finding refusal to deal as an abusive conduct. As mentioned in question 36 above, refusal to offer ‘essential facilities’ is only one type of refusal to deal as specified by the SAIC Rules on Abusive Conduct. 

    The draft NDRC IP Guidelines specify that when antitrust enforcement agencies analyse or assess whether refusal to license by IPR holders with market dominance could be justified or not, several factors could be taken into consideration, including whether such IPR is essential for a potential competitor to enter into the relevant market and whether there is any substitute IPR that is reasonably accessible by the potential entrant.

  75. 38.

    What is the test for an essential facility?

  76. In general, according to article 4 of the SAIC Rules on Abusive Conduct, when determining whether a product constitutes an essential facility, the following factors shall be taken into consideration: the feasibility of separately investing and developing the facility, the trading partners' dependence in the facility for effectively carrying out production and business activities, the possibility for the facility owner to provide the facility and the impacts on its own production and business activities.

    When identifying whether certain IP rights may constitute essential facility, the authorities will consider (i) whether such IP rights can be reasonably substituted in the relevant market, and are necessary for other market participants in the relevant market; (ii) whether the refusal to license such IP rights will lead to adverse effect on competition or innovation in the relevant market, which harms the interests of consumers or the public interest; and (iii) whether there is no unreasonable harm for the operator to license such IP rights.

  77. 39.

    What is the test for exclusivity arrangements?

  78. Article 17(4) of the AML prohibits a dominant market player from requesting their trading counterpart to conduct deals exclusively with themselves or with the designated business operators without any justifiable causes.

    According to the AML and the relevant provisions in the SAIC Rules on Abusive Conduct and the NDRC Rules, a dominant player will be found to have engaged in exclusive dealing if it requests the trading counterparts to exclusively deal with it or with a third party it designated, or requests its trading counterparts not to deal with its competitors.

    The draft NDRC IP Guidelines set out provisions in relation to exclusive grant-back of IPRs, specifying that exclusive grant-back of IPRs may allow the licensor to obtain control over the improvement or achievement, demotivate the licensee to innovate, and thus eliminate or restrict competition.  When assessing whether an exclusive grant-back arrangement may have anti-competitive effects, the following factors could be considered: (i) whether the licensor provides substantive consideration for the exclusive grant-back; (ii) whether the exclusive grant-back is reciprocal in a cross-licensing; (iii) whether the exclusive grant-back contributes to the concentration of related IPs towards one single proprietor, leading to the control of the relevant market; (iv) whether the exclusive grant-back discourages the licensee to make subsequent improvements.

  79. 40.

    What is the test for predatory pricing?

  80. No further test or regulations have been provided for predatory pricing under the AML. Nevertheless, it is worth mentioning that it is not particularly required under the AML that a dominant player must be able to recoup its losses to establish predatory pricing. 

  81. 41.

    What is the test for a margin squeeze?

  82. Margin squeeze is not explicitly provided under the AML. It may fall into article 17(1) and article 13 of the NDRC Rules where refusing to deal with counterparties by setting unfairly high sales prices (or unfairly low purchase prices) is prohibited if the conduct cannot be justified by reasonable causes. 

  83. 42.

    What is the test for exclusionary discounts?

  84. Article 14 of the NDRC Rules explicitly provides that a dominant undertaking, without justifiable cause, is not allowed to restrict its trading party by providing price discounts which may constitute exclusive dealing. 

  85. 43.

    Are exploitative abuses also considered and what is the test for these abuses?

  86. Yes. The AML prohibits a dominant operator from selling commodities at unfairly high prices or purchase commodities at unfairly low prices. The NDRC Rules further elaborate that when determining an ‘unfairly high price’ or ‘unfairly low price’, the following factors shall be considered: (i) whether the sales price or purchase price of a commodity is remarkably higher or lower than that of the same kind of commodity respectively sold or purchased by other business operators; (ii) whether the increase in sales price of a commodity or decrease in purchasing price of a commodity exceeds the normal range when the costs are basically stable; (iii) whether the increase in sales price of a commodity remarkably exceeds the increase of its costs, or whether the reduction in purchasing price of a commodity remarkably exceeds the reduction of its costs by the trading counterparties; and (iv) any other relevant factors to be considered.

    The draft NDRC IP Guidelines provide further guidance on exploitative abuses in relation to exercise of IPRs, such as licensing IPRs with unfairly high royalties. Pursuant to the Guidelines, the following factors may be considered when analysing whether IPR holders have collected excessive royalties: (i) whether the royalties claimed by the IPR holders significantly deviate from the value of such IPRs; (ii) the licensing commitment imposed on such IPRs; (iii) the licensing history of relevant IPRs or comparable royalty standards; (iv) whether IPR holders have collected royalties beyond the covered territory or product of such IPRs; (v) whether IPR holders have forced the licensee to accept expired or invalid IPRs in the case of blanket portfolio license; (vi) whether the licensing agreements contain any licensing conditions resulting in the unfairly high royalties; and (vii) whether IPR holders have improperly forced the licensee to accept the proposed royalties.

    For example, in the Qualcomm case, the NDRC ruled that Qualcomm charged unfairly high patent royalty fees in the SEP licensing market. The NDRC pointed out in its decision that, first, Qualcomm had charged loyalty fees for expired wireless SEPs which should be free for the patent licensee; second, Qualcomm required licensees to grant back their own patents for free; third, Qualcomm insisted on relatively high royalty fees while charging royalties based on the net wholesale prices of terminal devices, which exceeded the coverage of the SEPs held by the company. 

  87. 44.

    Is there a concept of abusive discrimination and under what conditions does it raise concerns?

  88. Yes. Article 17(6) of the AML prohibits a dominant market player from applying discriminatory treatment on trading prices or other trading conditions to their trading counterparts with the same standing without justifiable causes. In addition, the SAIC Rules on Abusive Conduct set forth more detailed provisions as to the prohibited behaviours.

    With respect to non-price related violations, article 7 of the SAIC Rules on Abusive Conduct prohibits a dominant business operator from applying differential treatment to trading counterparts with the same standing without a justifiable cause. In general, these discriminatory conducts may take the form of (i) applying different transaction volume, varieties or quality grades; (ii) applying different preferential conditions such as different discounts; (iii) applying different payment terms or delivery methods; or (iv) applying different after-sale services such as warranty service and warranty period, maintenance service and maintenance period, supply of parts and components, or technical supports, etc.

  89. 45.

    Are only companies with monopoly power subject to special obligations under unilateral conduct rules?

  90. In addition to companies with monopoly power, AML also prohibits administrative organs or organisations empowered by a law or administrative regulation to administer public affairs from abusing its administrative power to eliminate or restrict competition. 

  91. 46.

    Must the monopoly power exist in the same market where the effects of the anti-competitive conduct are felt?

  92. No. A business operator who abuses its dominance to foreclose upstream /downstream market or restrict competition in those markets is also subject to AML sanctions. A business operator can be deemed to abuse its monopoly power in one market if it leverages its monopoly power to the other market and restrict or eliminate the competition in the other market.

    Sanctions and remedies

  93. 47.

    What sanctions can the competition authority impose or recommend?

  94. According to article 47 of AML, where a business operator has violated the provisions of this Law in abusing its dominant market position, the antitrust enforcement agency shall order the business operator to stop the illegal act and confiscate the illegal income. A fine of 1 per cent to 10 per cent of the sales amount of the preceding year shall be imposed.

  95. 48.

    How are fines calculated for abuses of monopoly power?

  96. According to the AML and the SAIC Rules on Abusive Conduct, when determining the exact amount of fine, the nature, extent, duration, circumstances of the illegal behaviours and other factors shall be considered. The rules particularly provide that such fines could be reduced or even waived if the business operators actively stop their behaviours of abusing market dominance.

    The draft NDRC Fining Guidelines set out the specific rules to be followed in calculating the fines for abuses of monopoly power, which involve three major steps for setting the fines:

    (i) to determine the sales value of the business operator in the preceding year;

    (ii) to determine the basic proportion of fines: the antitrust agencies will take the nature and duration of the infringement into their overall consideration; specifically, for abusive conducts, the initial proportion of fines will be set at 2 per cent or 3 per cent, which will then be adjusted on the basis of the duration of such conducts with the initial proportion increased by 1 per cent for each additional year;

    (iii) to adjust the basic proportion of fines by taking into account the relevant aggravating circumstances or mitigating circumstances.

  97. 49.

    What is the highest fine imposed for an abuse of monopoly power?

  98. By far, the highest fine imposed for an abuse of monopoly power is $975 million in the Qualcomm case, representing 8 per cent of Qualcomm’s 2013 revenue in China.

  99. 50.

    What is the average fine imposed over the past five years?

  100. According to publicly available information, the average fine imposed is around 2.5 per cent of the revenue the business operator generated from China in the previous year. 

  101. 51.

    Can the competition authority impose behavioural remedies?

  102. Yes. The antitrust enforcement agency may order the business operator to stop the illegal act. In the case of application for suspension in an investigation, the investigated business operator may also propose behavioural remedies to eliminate the anti-competitive effect in the relevant market.

  103. 52.

    Can it impose both negative and positive behavioural obligations?

  104. Both negative and positive behavioural obligations can be imposed. For example in the Qualcomm case, the NDRC required Qualcomm, among others, to provide its patent lists and not to charge royalty fees for expired patents when licensing SEPs to manufacturers of wireless communication terminal devices within the territory of China.

  105. 53.

    Can the competition authority impose structural remedies?

  106. So far no relevant statutes or practice indicate that the enforcement authority can impose structural remedies for an abuse of monopoly power.

  107. 54.

    Can companies offer commitments or informal undertakings to settle concerns?

  108. Yes. According to article 45 of the AML, the antitrust enforcement agency may decide to suspend an investigation, when the business operator under investigation undertakes to adopt specific measures to eliminate the consequences of such an act within a period approved by the agency. In the NDRC investigation towards IDC regarding unfairly high price and tying, IDC offered commitments to eliminate the adverse effects of the alleged abusive conducts and the NDRC decided to suspend the investigation. In the SAIC investigation in 2015 on the potential abusive conduct by China Telecom Ningxia branch, China Telecom Ningxia branch submitted a written report of how to fulfil its commitment to the SAIC that would eliminate the adverse effects of its alleged abusive conduct and the SAIC decided to suspend the investigation accordingly.

    The draft NDRC Commitment Guidelines set out the specific rules for business operators to offer commitments to antitrust enforcement agencies, including the circumstances where commitments could apply, timing for business operators to offer or withdraw commitments, preliminary review of offered commitments, negotiation between business operators and agencies, term of the commitments, etc. The Guidelines also provide that the commitments proposed by the business operator could be behavioural remedies such as opening access to the network, platform or other infrastructures, licensing patent, trade secrets or other IPRs, and terminating exclusive arrangement, or structural remedies, such as divesting tangible or intangible assets or other relevant interests, or a combination of both.

  109. 55.

    What proportion of cases have been settled in the past five years?

  110. According to public information, around 30 per cent of dominance cases have been settled in the last five years in China.

  111. 56.

    Have there been any successful actions by private claimants?

  112. Most of the cases investigated by NDRC and SAIC have been initiated/brought up by claimants/whistle-blowers. There are also successful litigations brought by private companies. For example, in 2014, Yingding, a bio-energy manufacturer claimed that Sinopec and the Yunnan branch of Sinopec's trading company had abused their market dominant position by refusing to incorporate the biodiesel they produced from waste cooking oil into Sinopec's distribution system, without justifiable reasons. The Kunming Intermediate Peoples' Court ruled against Sinopec by ordering Sinopec to incorporate the biodiesel manufactured by Yingding within 30 days of the ruling dated 8 December 2014 in accordance with the Renewable Energy Law and the AML. Both Yingding and Sinopec had appealed to the High People’s Court of Yunnan province, but the case was sent back to the Kunming Intermediate Peoples' Court in August 2015 for retrial. The case is still pending now.

    Appeals

  113. 57.

    Can a company appeal a finding of abuse?

  114. Yes. According to article 53 of the AML, companies that disagree with a decision of the antitrust enforcement agency may apply for administrative review or file an administrative lawsuit pursuant to the law. 

  115. 58.

    Which fora have jurisdiction to hear challenges?

  116. The fora that have jurisdiction to accept application for administrative review depend on the level of enforcement agency who has issued the challenged decision. Where the challenged decision is made by the SAIC or the NDRC, the applicant shall file application to the SAIC and the NDRC respectively. If the challenged decision is issued by provincial antitrust enforcement agency, the applicant can choose either to file the administrative review application to the provincial government or to file the application to the SAIC or the NDRC.

    Although there is no specific rules on the jurisdictions in antitrust administrative lawsuits, considering only the SAIC, the NDRC and provincial DRCs and AICs have the AML enforcement power and are able to issue abuse decisions, we understand that the Intermediate People's Courts of the cities where the DRCs and the AICs of provinces, autonomous regions and municipalities directly under the Central People's Government are located will have jurisdiction to adjudicate antitrust administrative lawsuits in the first instance.

  117. 59.

    What are the grounds for challenge?

  118. Decisions by antitrust law enforcement agencies are specific administrative conducts/acts. According to Law of the People's Republic of China on Administrative Review and Law of the People's Republic of China on Administrative Proceedings, business operators are able to submit applications for administrative review or file an administrative lawsuit if they are of opinion that specific administrative conducts or acts infringe upon their lawful rights or interests.

    The following can be the grounds for challenge of a specific administrative conduct when applying for administrative review: (i) the main facts are not clear and essential evidence is inadequate; (ii) the legal basis is used incorrectly; (iii) statutory procedures are violated; (iv) administrative authority is exceeded or power is abused; or (v) the administrative conduct is obviously inappropriate.

    As to administrative litigations, a party may challenge a specific administrative conduct, ie, the finding of abuse by law enforcement agencies in the following cases: (i) where the main evidence (in support of such act) is insufficient; (ii) where incorrect laws and regulations are applied; (iii) where statutory procedures are violated; (iv) where (such act) is performed in excess of authority; or (v) where official powers are abused.

  119. 60.

    How likely are appeals to succeed?

  120. As mentioned above, there should be appropriate grounds for the appeals to succeed. Although there are possibilities for successful appeals, it is not easy to collect the relevant evidence and win the appeal in practice.

    Topical issues

  121. 61.

    Summarise the main abuse cases of the last year in your jurisdiction.

  122. Qihoo 360 v Tencent

    In October 2014, the Supreme People’s Court made a final decision on the lawsuit between Qihoo 360 and Tencent. In the case Qihoo 360 complained that Tencent had abused its dominance in the instant messenger software and service market in mainland China, by coercing customers to choose either of them and uninstall the other. The Supreme People’s Court ruled that Tencent does not have market dominance in relevant market and that its practice does not constitute abuse.

    NDRC investigation on Qualcomm

    On 10 February 2015, the NDRC announced the penalty decision on Qualcomm, finding that Qualcomm abused its dominance on CDMA, WCDMA and LTE wireless SEP licensing market and baseband chip market, including (i) charging ‘unfairly high’ royalties; (ii) bundling non-SEP and SEP; and (iii) imposing unfair conditions on baseband chip sale. The NDRC also imposed a fine of 8 per cent of Qualcomm’s turnover in the Chinese market in 2013, a total amount of 6.088 billion yuan.

    Chongqing AIC investigation on Chongqing Qingyang Pharmaceutical

    China’s Chongqing Administration for Industry and Commerce (Chongqing AIC) has fined Chongqing Qingyang Pharmaceutical, a manufacturer of allopurinol ingredients and preparations, CNY 439,308 (USD 67,829) for abusing its dominance on the Chinese allopurinol ingredients market through refusal to deal.  

  123. 62.

    What is the hot topic in unilateral conduct cases that antitrust lawyers are excited about in your jurisdiction?

  124. As the SAIC IP Rules have been newly effective since 1 August 2015, the abuse of IP rights as one kind of unilateral conduct is hot among antitrust lawyers. It is expected that IP rights-related abusive conduct may be one of the focuses for AML enforcement in the future. 

  125. 63.

    Are there any sectors that the competition authority is keeping a close eye on?

  126. Early this year, the NDRC outlined its antitrust enforcement priorities for 2016, targeting sectors ranging from pharmaceuticals to medical devices, autos, IPRs, shipping, telecom, finance and industrial raw materials. The regulator also encourages consumers and businesses to report antitrust violations that they are aware of, in an effort to gather case leads through diversified channels.

    The NDRC and SAIC are also keeping a close eye on administrative monopoly. As of now, the NDRC has published four infringement decisions concerning administrative monopoly, in which NDRC has either imposed penalties towards the undertakings concerned, or made suggestions to the relevant authorities to rectify the administrative measures in question.

  127. 64.

    What future developments can we expect?

  128. After eight years since the AML came into effect, we have experienced quick development from both legislation and legal enforcement perspectives. The legal enforcement agencies have issued a dozen of regulations to interpret the AML and elaborate the enforcement process. We have also noticed that there is more transparency in the enforcement process and the agencies are imposing tougher penalties.

    In addition to the progress which we understand will continue in the future, we expect to see more guidelines for specific industries and certain procedural issues to be issued by the agencies. It is also expected that dawn raids will become regular enforcement approaches. Antitrust authorities are also moving to high-tech and innovative industries, and are paying more attention to complicated issues, such as patent licensing, SEP and two-sided markets, aside from traditional manufacturing industries. We also expect a rising number of private litigation in the future.

Interested in contributing to this Know-how?

E-mail our Co-Publishing Manager

Questions

    Overview

  1. 1.

    What is the legal framework governing unilateral conduct by companies with market power?


  2. 2.

    What body or bodies have the power to investigate and sanction abuses of market power?


  3. Monopoly power

  4. 3.

    What role does market definition play in market power assessment?


  5. 4.

    What is the approach to market definition?


  6. 5.

    How is market power or monopoly power defined?


  7. 6.

    What is the test for finding of monopoly power?


  8. 7.

    Is this test set out in statute or case law?


  9. 8.

    What role do market shares play in the assessment of monopoly power?


  10. 9.

    Are there defined market share thresholds for a presumption of monopoly power?


  11. 10.

    How easily are presumptions rebutted?


  12. 11.

    Are there cases where companies with high shares have been found not to exercise monopoly power?


  13. 12.

    What are the lowest shares with which companies have been found to exercise monopoly power?


  14. 13.

    How important are barriers to entry and expansion for the assessment of monopoly power?


  15. 14.

    Can the lack of entry barriers negate a finding of monopoly power?


  16. 15.

    What kind of barriers to entry are typically considered in the analysis?


  17. 16.

    Can countervailing buyer power negate a finding of monopoly power?


  18. 17.

    What if consumers can easily switch between suppliers?


  19. 18.

    Are there any other factors that the regulator considers in its assessment of monopoly power?


  20. 19.

    Are any entities or sectors exempt from the antimonopoly regime?


  21. 20.

    Can companies be deemed to hold collective monopoly power?


  22. 21.

    Can the exercise of joint monopoly power or tacit oligopolistic collusion be treated as an infringement?


  23. 22.

    Has the competition authority published guidance on how it defines markets and assesses market power?


  24. Abuse of monopoly power

  25. 23.

    Is there a general definition for what constitutes abusive conduct? What does it entail?


  26. 24.

    What are the general conditions for finding an abuse?


  27. 25.

    Is there a list of categories of abusive or anti-competitive conduct in the applicable legislation?


  28. 26.

    Is this list open or closed?


  29. 27.

    Has the competition authority published any guidance on what constitutes abusive conduct?


  30. 28.

    Is certain conduct per se abusive (without the need to prove effects) and under what conditions?


  31. 29.

    To the extent that anti-competitive effects need to be shown what is the standard to demonstrate these effects?


  32. 30.

    Does the abusive conduct need to harm consumers?


  33. 31.

    What defences are there to allegations of abuses of monopoly power?


  34. 32.

    Can abusive conduct be objectively justified?


  35. 33.

    What objective justifications have been successful?


  36. 34.

    How is the burden of proof distributed in an abuse analysis?


  37. 35.

    What are the legal conditions to establish an abusive tie?


  38. 36.

    What are the legal conditions to establish a refusal to supply or refusal to license?


  39. 37.

    Do these abuses require an essential facility?


  40. 38.

    What is the test for an essential facility?


  41. 39.

    What is the test for exclusivity arrangements?


  42. 40.

    What is the test for predatory pricing?


  43. 41.

    What is the test for a margin squeeze?


  44. 42.

    What is the test for exclusionary discounts?


  45. 43.

    Are exploitative abuses also considered and what is the test for these abuses?


  46. 44.

    Is there a concept of abusive discrimination and under what conditions does it raise concerns?


  47. 45.

    Are only companies with monopoly power subject to special obligations under unilateral conduct rules?


  48. 46.

    Must the monopoly power exist in the same market where the effects of the anti-competitive conduct are felt?


  49. Sanctions and remedies

  50. 47.

    What sanctions can the competition authority impose or recommend?


  51. 48.

    How are fines calculated for abuses of monopoly power?


  52. 49.

    What is the highest fine imposed for an abuse of monopoly power?


  53. 50.

    What is the average fine imposed over the past five years?


  54. 51.

    Can the competition authority impose behavioural remedies?


  55. 52.

    Can it impose both negative and positive behavioural obligations?


  56. 53.

    Can the competition authority impose structural remedies?


  57. 54.

    Can companies offer commitments or informal undertakings to settle concerns?


  58. 55.

    What proportion of cases have been settled in the past five years?


  59. 56.

    Have there been any successful actions by private claimants?


  60. Appeals

  61. 57.

    Can a company appeal a finding of abuse?


  62. 58.

    Which fora have jurisdiction to hear challenges?


  63. 59.

    What are the grounds for challenge?


  64. 60.

    How likely are appeals to succeed?


  65. Topical issues

  66. 61.

    Summarise the main abuse cases of the last year in your jurisdiction.


  67. 62.

    What is the hot topic in unilateral conduct cases that antitrust lawyers are excited about in your jurisdiction?


  68. 63.

    Are there any sectors that the competition authority is keeping a close eye on?


  69. 64.

    What future developments can we expect?