China Overview

Introduction

China’s Antimonopoly Law (AML) came into force on 1 August 2008. The AML prohibits monopoly agreements, abuses of dominant market positions, anticompetitive concentrations, and administrative monopolies. These four areas form the substantive basis for antitrust litigation in China.

Antitrust litigation in China can be classified into two broad categories: civil and administrative litigations. Antitrust civil litigation concerns disputes arising from monopoly agreements, abuses of dominant market positions or concentrations conducted by business operators (including private individuals, legal persons and other organisations). Antitrust administrative litigation concerns disputes arising from administrative monopolies conducted by public authorities or competent organisations, as well as antitrust decisions or penalties made by antitrust authorities (for judicial review). Moreover, when antitrust authorities do not carry out investigations as requested by complainants, antitrust lawsuits can be brought against them for failure to perform their duties in ordinary, but antitrust-related, administrative litigation. Antitrust administrative litigation against administrative monopolies is an important feature in China. We will explore how these various types of litigations developed in the past 2019 and the first half of 2020.

Statistics on antitrust litigation in 2019

Based on the cases publicised by Chinese courts, there were around 40 newly filed first-instance antitrust civil actions in China, which is the lowest level in the past seven years (72 cases in 2013, 86 in 2014, 156 in 2015, 156 in 2016, 114 in 2017 and 66 in 2018).[2] It seems antitrust civil litigation has been declining since the peak years of 2015 and 2016.

However, these figures may not represent the entire trend of antitrust litigation in China. First, they may only include proceedings brought under the AML and may not include civil cases where an antitrust defence or counterclaim is made. For example, it is increasingly common to have defendants in contract cases claim that the contract is void due to a breach of the AML. Second, the figures do not cover antitrust administrative litigation, which is growing in number and is an important tool of businesses to protect their interests. Third, the figures cannot reflect the significance of some important cases. For example, China’s Supreme People’s Court (SPC) upheld in Huili v. Shell (2019) that arbitration clauses cannot preclude the courts’ jurisdiction over antitrust disputes involving monopoly agreements.

If it is true that first-instance antitrust civil litigation (including antitrust defences and counterclaims) is declining, this is perhaps owing to the extremely low win rate for claimants. There is no discovery mechanism in China and claimants have lost mainly owing to a failure to meet the burden of proof. The SPC has recognised this issue and is looking for solutions. It is possible that there will be some breakthroughs in the SPC’s new antitrust-related rules which are in the process of drafting now according to its 2020 legislation plan. At present, the public enforcement of the AML led by the State Administration for Market Regulation (SAMR) and its branches at the provincial level still has a dominant position in China compared to the private enforcement.

New leapfrog appeal system of the SPC

According to a decision issued by the National People’s Congress on 26 October 2018 and a follow-up regulation by the SPC, from 2019, appeals in antitrust civil litigation and against administrative penalties in antitrust administrative litigation, if tried by the intellectual property courts and intermediate people’s courts in the first instance, shall be directly submitted to the SPC (and heard by its intellectual property court established on 1 January 2019), skipping the provincial high people’s courts. This sets up a ‘leapfrog appeal’ mechanism.

The objectives of this reform are to promote consistency in rulings, strengthen the protection of IP rights and optimise the business environment. Although the main objectives are targeted at IP rights, they are equally applicable to antitrust litigation. Currently, rulings by different courts have been inconsistent. For instance, some local courts have adopted the rule of reason in cartel cases. There have been accusations of local protectionism, where rulings have been made against business operators registered in other provinces or countries. The leapfrog appeal will help make improvements in this regard.

It should be noted that the leapfrog appeal mechanism does not apply to all antitrust litigation. For antitrust civil litigation, it may not apply to cases simply involving antitrust defences. For antirust administrative litigation, the mechanism will only apply to cases challenging SAMR’s administrative decisions or penalties whose first-instance trials are at Beijing’s First Intermediate People’s Court. As for cases challenging the administrative decisions or penalties of the provincial administrations for market regulation, as well as cases against administrative monopoly and failure to perform duties, they are currently not within the scope of the leapfrog appeal mechanism.

In 2019, the intellectual property court of the SPC heard nine second-instance antitrust cases under the leapfrog appeal mechanism.[3] Other than that, the SPC’s other divisions (e.g., the IP Tribunal) heard another nine antitrust cases (which are either second-instance cases filed before the establishment of the leapfrog appeal mechanism or retrial cases that had gone through the first-instance and second-instance trials).[4] These 18 antitrust cases set a new record of the SPC, and some of them also set precedents of the SPC for certain important antitrust issues. For example, Huili v. Shell (2019) heard by the SPC under the leapfrog appeal mechanism tested the arbitrability issue before the SPC for the first time.

SPC’s position on the arbitrability of antitrust civil litigation

Jurisdictional issues are frequently raised by the defendants in antitrust civil litigation due to uncertainties in law or simply due to their strategies. One major jurisdictional uncertainty in law is the arbitrability of antitrust disputes. On one hand, China’s Arbitration Law does not exclude the arbitrability of antitrust disputes. On the other hand, the SPC’s rules require the courts to accept antitrust disputes, but are silent on the circumstances involving arbitration clauses. As a result, different courts had made contrary rulings.

Shenzhen Intermediate People’s Court ignored the arbitration clause in Yulong v. Ericsson (2016) where Ericsson was accused of abusing dominance. Jiangsu High People’s Court did not allow arbitration in Songxu v. Samsung (2016) which involved abuse of dominance and vertical monopoly agreement issues, and expressly said that antitrust disputes affect the public interest, beyond the interest of the contract parties. However, Beijing High People’s Court admitted arbitration in Changlin v. Shell (2019) where Shell was accused of abusing dominance.

This conflict of views towards the arbitrability of antitrust disputes was partly resolved by the SPC’s second-instance ruling in Huili v. Shell (2019) where Shell was accused of organising cartels. The SPC upheld the first-instance ruling by Hohhot Intermediate People’s Court, and reasoned that (1) the AML is a public law in nature, (2) the determination and handling of horizontal monopoly agreements are beyond the legal relationship between the contract parties, and (3) no existing arbitration laws clearly support the arbitrability of antitrust disputes. The SPC reiterated such position later in State Grid Shanghai v. VISCAS (2019) which also involves cartels. Additionally, it is reported that the SPC held the same position in another Huili v. Shell (2019) involving vertical monopoly agreements. Based on the SPC’s aforesaid reasoning (1) and (3), it appears that arbitration clauses might not preclude the courts’ jurisdiction over other types of antitrust cases such as abuse of dominance cases.

The SPC did not say that the antitrust disputes are not arbitrable, and thus it is still possible that the courts might enforce the arbitration award on antitrust disputes, provided that the contract parties have no dispute in the choice of arbitration and the award does not violate public interest.

Progress made in antitrust civil litigation

Civil antitrust litigation is still taking shape in China. The total number of case filings, as indicated above, is relatively small compared to other jurisdictions. Having no class action procedure nor treble damages, and with a high standard of proof established by the cases so far, potential plaintiffs lack reasonable motivation to bring proceedings against large companies directly.

However, there are also good reasons to believe in a promising future. Procedurally, the civil litigation system in China provides ample flexibility for antitrust lawsuits. Both follow-on and stand-alone claims are allowed. Both direct and indirect purchasers have standing to sue, as confirmed by Tian Junwei v. Beijing Carrefour and Abbott (2014). There are also various means of redress available to antitrust plaintiffs in addition to monetary damages, including injunctive relief or declaratory judgment of an invalid contract. The Civil Procedural Law also provides for the possibility of public interest litigation brought by consumer associations or the procuratorate organs, though this has not been tested in practice yet.

From the perspective of substantive antitrust law, the SPC’s increasing role in antitrust lawsuits via the new leapfrog appeal system will, it is believed, stimulate more cases. The SPC’s landmark decisions in Qihu 360 v. Tencent (2014) and Wu Xiaoqin v. Shanxi Broadcast & TV (2016) have revealed some of its stances on antitrust issues. Though very limited in number, these cases have shown that complex antitrust analysis is not alien to the SPC and that a pro-plaintiff decision is also likely as in Wu Xiaoqin v. Shanxi Broadcast & TV. Such pro-plaintiff decision has inspired lower courts to follow suit where suitable, and 2019 has witnessed the progress made by lower courts.

Within the 50 most representative cases of 2019 published by the SPC, there is only one antitrust case, Wu Zongqu v. Yongfu Water Supply (2019).[5] Nanning Intermediate People’s Court ruled in favour of the claimant – a consumer who was required by the water supply utility to purchase both water supply service and water meter/pipeline installation service. The court held that the defendant had abused its dominant market position in the water supply market by tying two distinct services.

Another more significant victory for the claimant occurred in March 2020. In Yangtze River Pharmaceutical v. Hefei Industrial Pharmaceutical (2020), at first instance, Nanjing Intermediate People’s Court ordered the defendant to pay approximately 70 million yuan damages to the claimant for excessive pricing. This set a record of damages in antitrust civil litigation in China. This case is now subject to second instance before the SPC through the leapfrog appeal system.

Interaction between courts and antitrust authorities in antitrust administrative litigation

Judicial review cases are still rare in China, and there have been only less than 10 such cases since the AML came into effect in 2008. The only case where the claimant secured a temporary win is Yutai.[6] After being fined for resale price maintenance (RPM) by a local antitrust authority, Yutai brought an antitrust administrative litigation against the authority and won the first-instance trial where the court ruled that the authority had failed to prove anticompetitive effect. However, at second-instance, and at SPC’s retrial in December 2018, the authority won and the SPC recognised that antitrust authorities do not need to prove anticompetitive effect in their public enforcement in the current political and economic context of China. After Yutai, the courts and antitrust authorities may keep using different approaches on RPM unless the AML is amended: the antitrust authorities treat RPM as per se illegal (or rule of ‘prohibition + exemption’ in their words), while the court system adopts a rule of reason approach in trying civil antitrust disputes in relation to RPM.

In 2019, there is one case challenging the fine imposed by a local antitrust authority. Three driving school associations and several driving schools brought a judicial review case against Guizhou Administration for Market Regulation for the authority fining these claimants for a cartel of tuition fixing in 2017. Both Guiyang Intermediate People’s Court (at first instance) and Guizhou High People’s Court (at second instance) supported the antitrust authority.

To date, the claimants lost in all antitrust judicial review cases (although Yutai scored a temporary win at first instance). This is partly due to the relatively straightforward nature of these cases and the superior position of the antitrust authorities in exercising discretion in enforcing the AML. Some business operators did not even bring a judicial review case. However, the increasing number of such cases indicates that judicial review may become normal practice in antitrust. First, the AML is still new in China and has not become familiar to many small- and medium-sized businesses, and they may challenge what they see as unreasonable penalties even in explicit cartel cases. Second, some immature areas in the AML such as non-price vertical monopoly agreements and the abuse of collective dominance may lead to judicial review claims, seeking declaratory relief or clarification of the rules. Third, the newly introduced leapfrog appeal mechanism may encourage the claimants and their lawyers to try their luck before the SPC. Although, on the other hand, the newly integrated SAMR has the potential to become more aggressive and have firmer stances when it is in conflict with the judiciary, and its influence might ripple into the antitrust litigation field.

The interaction between the courts and antitrust authorities is also increasingly prominent in another two areas. One is in follow-on actions. Although a growing number of claimants choose to claim damages after the defendants have been penalised by the antitrust authorities, it remains highly difficult to win. This is because the findings and decisions of the antitrust authorities are only prima facie evidence that needs to go through a second test before the courts. This issue becomes more complex where the claimants sue following the decisions of foreign antitrust authorities. The ongoing State Grid Shanghai v. VISCAS may explore and accumulate some experience in this regard. The other area is administrative litigation against antitrust authorities for failure to perform their duties to initiate investigations as requested. There were several such cases in recent years brought by consumers or companies, but none was successful. The SPC and other courts reasoned that the duties of the antitrust authorities are to protect market competition, and the collective interests of consumers and society as a whole rather than individual interests.

Administrative litigation against administrative monopolies

A unique feature of China’s AML is administrative monopoly. In recent years, the Chinese government has issued a number of policies to curb the traditional and widespread phenomenon of administrative monopoly in China, and public enforcement in this area is also quite active. This inspires more private enforcement against administrative monopoly.

In Haisi Valuation v. Fuding Ocean & Fisheries Bureau (2019), both Xiamen Maritime Court (at first instance) and Fujian High People’s Court (at second instance) ruled in favour of the claimant. In this case, the industry regulator Fuding Ocean & Fisheries Bureau issued a notice and required that when the fishermen in Fuding city need to renovate or reconstruct their fishing vessels, they should purchase valuation services only from the vessel valuation companies kept in the file of Fujian State-owned Assets Supervision and Administration Commission. The claimant then brought an administrative litigation against the industry regulator for infringing its rights to fair competition in the market for fishing vessel evaluation.

Not every private enforcement has received satisfactory results. The Shanwei Bus case in 2018 is a good example of the weakness of private enforcement, namely, in certain circumstances, it cannot undo what has been done. Shanwei is a city in Guangdong province. Its government chartered a new bus company to operate solely in the local market and it revoked the licence of the incumbent bus operator. The incumbent operator sued the government for selecting the new operator before the normal bidding process, which violated the procedural rules and excluded competition. The court in the second instance recognised the procedural violation by the government and confirmed the existence of an administrative monopoly. However, the court refused to revoke the licence, as the new operator had been operating since 2015 and the public interest would be adversely affected if its licence was revoked: China’s Administrative Procedure Law provided for such an exception. Additionally, the Administrative Procedure Law does not support claim of state compensation from governments whose administrative monopolistic conducts are based on notices applying generally rather than targeting at specific businesses. The Pui’s Pharmaceutical v. Shenzhen Municipal Health Commission (2020) confirmed this principle.

Nevertheless, administrative litigation against administrative monopolies still maintains a good momentum and has received strong support from the courts, in the context of a strong commitment from the most senior leaders of the Chinese government to let the market play the decisive role in resource allocation.

Representative cases in 2019 and first half 2020

Huili v. Shell

Shell was sued by its former distributor Huili, as it was alleged to have conducted a series of monopoly behaviours in procurement tenders including designating winners among its distributors and fixing the quoted prices. This case was first heard by Hohhot Intermediate People’s Court in 2018, and then was brought to the SPC under the leapfrog appeal mechanism. In the lawsuit, Shell claimed that this case should not be tried by the court as an arbitration clause was included in the distribution agreements.

The SPC ruled that the AML was characterised by its public law nature, so the determination of monopolistic behaviour exceeded the rights and obligations between the parties to the contract, making the dispute exceeds the scope of the contractual relationship between the two parties. Therefore, despite the existence of the arbitration clause, the concerned disputes still fell outside the applicable scope of arbitration and the original court of trial had the jurisdiction to handle the case.

Yangtze River Pharmaceutical v. Hefei Industrial Pharmaceutical

Hefei Industrial Pharmaceutical (HIP) and two other enterprises mainly engage in medicine development and production. These three pharmaceutical companies held the only certificate for the production of desloratadine citrate disodium active pharmaceutical ingredients (APIs) in China from 2009 to 2017. Yangtze River Pharmaceutical and its manufacturing unit have long acquired this kind of APIs from the three upstream companies to produce tablets.

In May 2019, the claimants filed a lawsuit in Nanjing Intermediate People’s Court alleging that the three defendants had engaged in antitrust conduct including charging excessively high prices, exclusive dealing, tying, and attaching unreasonable trading terms, demanding 100 million yuan in compensation. The court confirmed all of the allegations, other than the tie-in arrangement, awarding Yangtze River Pharmaceutical and its unit approximately 70 million yuan mainly due to the damages caused by the excessive pricing.

In the verdict, the court explained in detail why the defendant’s actions constituted excessive pricing:

  • When determining whether the sales price of commodities is fair and reasonable, factors such as the difference between commodities, the cost of production and sales, and the time periods relevant should be taken into account.
  • When the aforementioned relevant conditions are basically unchanged, a sudden rising and falling in pricing will be unreasonable.
  • In this case, the past sales price (19,900 yuan per kg) was fair and reasonable as all parties to the transaction had no dispute over it in the past five years.
  • The defendants should prove that it raised the sales price (48,000 yuan per kg) due to the increase in production costs and environmental protection expenditure, otherwise they would have to bear adverse consequences.
  • As the defendants also used the APIs to produce formulations, the court recognised their pricing action as deliberately exerting influence on the downstream market with its dominance in the upstream market to raise the claimants’ costs and thus have an edge over the claimants in the downstream market.

Huawei v. Conversant

Huawei and its affiliates requested Nanjing Intermediate People’s Court to confirm that they did not infringe on Conversant’s patents in 2G, 3G and 4G wireless telecommunication standards when running them in mobile terminal products and network equipment and to clarify what licensing conditions should be applied to meet the fair, reasonable and non-discriminatory (FRAND) principle. This case is not an antitrust litigation but is still worth noticing as the judgment clarified the certification of standard essential patent (SEP) and the calculation method of the SEP licensing rate, which caused widespread concerns and lead to a number of antitrust disputes in China and worldwide.

When calculating the FRAND licensing rate, the plaintiffs claimed to apply the top-down approach while the defendant argued that the comparable licences approach should be employed. The former is typically implemented by using the count of SEPs to calculate the percentage of the standard value that a SEP holder is entitled to, while the latter is implemented by comparing the licence agreement at issue with previous agreements formed through commercial negotiation.

The court ruled that the comparable licenses approach was not applicable in this case, as the licensing rate at issue was incomparable with the one in the Unwired Planet case, which was provided by Conversant for comparison. The court then adopted the top-down method, using the following formula to calculate the rate: ‘licensing rate for single-family patents in China = industry cumulative rate in China × contribution proportion of the single-family patents’.

Haisi Valuation v. Fuding Ocean & Fisheries Bureau

Haisi Valuation is a company mainly engages in ship evaluation, monitoring and detection services. On 13 July 2018, Fuding Ocean & Fisheries Bureau, the local authority responsible for administering fishery affairs, and supervising fishing boats, issued a notice requiring local fishermen to choose a third-party evaluation agency from a list given by the Fujian State-owned Assets Supervision and Administration Commission to evaluate the construction cost of fishing boats.

Haisi Valuation held that the defendant infringed on its right of fair competition in the market for fishing vessel construction cost evaluation. Therefore, it filed an administrative lawsuit at Xiamen Maritime Court in September 2018, and the latter ruled in its favour. At second instance, the court upheld the former verdict, ruling that the defendant’s conduct had deprived the plaintiff and other qualified evaluation companies of the right of fair competition without justification, and therefore, should be deemed as an abuse of administrative power to eliminate competition, also known as an administrative monopoly behaviour.

This case is featured as one of the few administrative monopoly litigation cases won by the plaintiff. Although the AML has prohibited administrative monopoly more than a decade ago, plaintiffs have always had difficulty getting court support in dispute regarding administrative power to eliminate competition. It was not until the Siweier Co. v. Guangdong Administration for Education (2015) that the first administrative monopoly case won by the plaintiff appeared in China.

Yingding v. Sinopec

Yingding, a private bio-diesel refiner, alleged that Sinopec abused its dominance and refused to purchase and distribute Yingding’s bio-diesel. Yingding claimed that according to industrial regulations and local policy, Sinopec was obliged to distribute the bio-diesel produced by Yingding that meets national standards through its sales network. Whereas Sinopec argued that it refused Yingding on reasonable grounds as the latter did not make an effective offer and the quality of the bio-diesel it produced was substandard.

What is special about this case is that it has gone through a very lengthy trial process of nearly six years. In January 2014, Yingding filed an antitrust lawsuit at Kunming Intermediate People’s Court (Kunming court) against Sinopec and its Yunnan sales arm, and was supported by the Kunming court at first instance. In August 2015, the case was heard by Yunnan High People’s Court (Yunnan court) at second instance, which reversed the Kunming court’s ruling and remanded the case to the latter, citing procedural errors and factual concerns. The Kunming court re-tried this dispute in June 2016, and came to a new first-instance judgement ruling that Sinopec’s reasons for its refusal-to-deal with Yingding were justifiable. Yingding appealed the decision at the Yunnan court in November 2016, which heard the case in April 2017 and ruled in favour of Sinopec in August 2017.

In 2018, Yingding applied to the SPC for a retrial of the Yunnan court’s verdict. In November 2019, the SPC issued its final verdict, concluding that Sinopec’s conduct did not have an effect of eliminating or restricting competition and its refusal to deal with Yingding could be justified. The retrial application of Yingding was dismissed by the SPC.

Outlook

With the leapfrog appeal mechanism in place, the previously unsettled issue of arbitrability of antitrust disputes has been tested before the SPC. Next, more interesting issues will be put on the SPC’s table:

  • First, whether the SPC will accept the passing-on defence and how it will quantify the pass-on. Yangtze River Pharmaceutical v. Hefei Industrial Pharmaceutical is the best chance for the SPC to consider this important issue.
  • Second, whether the ubiquitous ‘choose one from two’ or exclusive dealing issue in the internet sector can be cleared. JD v. Alibaba is still ongoing at first instance in which JD accuses Alibaba of abusing its dominance in China’s B2C online retail platform market and claims damages of 1 billion yuan.
  • Third, whether the SPC will apply the exemption clause for certain trivial cartels frequently seen in previous cases.

In the meanwhile, SAMR has initiated a study project on the de minimis rule applicable to the small- and medium-sized businesses. Perhaps the SPC will be engaged in due course. Fourth, whether consumer associations are allowed to bring antitrust proceedings on behalf of consumers as a whole (they have successfully done so in other areas). Overall, antitrust litigation is one of the most dynamic fields under China’s AML regime.


Notes

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