China: Settling Conduct Matters with the SAMR
On 1 August 2008, China’s first comprehensive competition law (the Antimonopoly Law (AML)) came into effect. Article 45 of the AML provides the general rules on settlement. Both the Interim Provisions on Prohibiting Monopoly Agreements (IPP-MA) and the Interim Provisions on Prohibiting Abuse of Dominant Market Positions (IPP-AD) further provide detailed rules on settlement. In addition, the Antimonopoly Committee of the State Council issued the specific Guidelines on Undertakings’ Commitments in Antimonopoly Cases (the Commitment Guidelines) on 4 January 2019. The Commitment Guidelines specify when and how the antimonopoly authority, the State Administration for Market Regulation (SAMR), will suspend and terminate an investigation. Together, the above rules and guidelines constitute the Chinese competition settlement regime. The regime is narrower than the settlement regimes in the EU and US because it only applies to the application of suspending or terminating ongoing investigations and does not apply to the settlement of fines or other penalty measures.
To some extent, the Chinese commitment regime is similar to the EU commitment decisions. There is no equivalent measure in China to the EU cartel case settlement rules under which a settlement is used by the EU Commission to speed up the procedure for adoption of a cartel decision when the parties admit to the EU Commission’s objections, and in return receive a 10 per cent reduction in fine. To avoid any confusion, however, in this chapter the Chinese settlement regime refers to the commitment regime in China.
According to Article 22 of the IPP-MA, Article 29 of the IPP-AD and Article 2 of the Commitment Guidelines, undertakings involved in suspected monopoly agreements and abuse of dominance (together, ‘monopoly conduct’) can apply to the antimonopoly enforcement authorities for the suspension of the investigation. According to Article 22 of the IPP-MA and Article 2 of the Commitment Guidelines, however, parties involved in price-fixing, market allocation or restriction of production and sales among competitors are not allowed to apply for settlement because such conduct is considered as hardcore cartel practice and, therefore, very harmful to the market.
The enforcement authorities, which include the SAMR at the national level and provincial administration for market regulation at the provincial level, can grant approval for settlement applications. The settlement procedure is the same for both the SAMR and its provincial equivalents. Therefore, this chapter uses the SAMR to represent AML enforcement authorities at both the national and provincial level.
The undertaking involved can apply for settlement after an investigation has been commenced and before the pre-notice of administrative punishment is issued. In practice, settlement is applied for after an on-site investigation has been conducted. In principle, the SAMR will not accept a settlement application once the pre-notice of administrative punishment has been issued because at this stage it will have collected sufficient evidence to prove the wrongdoing and, therefore, has no need to accept settlement. Accepting the settlement application at this stage would not reduce any investigation costs.
Before applying for settlement, undertakings are encouraged to communicate with the SAMR. During communications, the SAMR may inform the undertaking of the basic facts, and the possible impact, of the suspected monopoly conduct.
Undertakings must send applications in written form, and these must detail the suspected monopoly conduct, its possible impacts, the commitments, the explanation as to how the commitments can remove or delete the impacts of the monopoly conduct, and the timetable for executing the commitments.
The SAMR will issue a written acceptance once it has received the settlement application. However, this acceptance does not mean that the SAMR grants the application. Following receipt of a written acceptance, an undertaking can still discuss its commitments with the SAMR. The SAMR can invite third parties, industry authorities, industry associations and experts to provide their opinions on the involved commitments.
If the SAMR believes the suspected monopoly conduct will impact many undertakings and consumers, it can publish the commitments and request public opinions thereon, which must be received within 30 days. After the public consultation, the SAMR can ask the undertaking to refine its commitments to accommodate certain public opinions. Once the SAMR is satisfied by the commitments offered by the involved undertaking, it will issue a suspension decision that will suspend the investigation against the undertaking, which will include:
- the facts, and impact or potential impact, of the suspected monopoly conduct;
- the committed actions required by the undertaking to remove the impact or potential impact of the suspected monopoly conduct;
- the committed period and the measures for meeting the commitments;
- requirements of regular reporting to the SAMR during the committed period;
- SAMR monitoring measures; and
- consequences of failing to meet the commitments.
Similar to the other commitments, the committed period is negotiable as it is not provided for in the settlement rules and it is always decided on a case-by-case basis. In practice, it normally lasts several months.
The involved undertaking must strictly follow and fulfil its commitments during the committed period. Otherwise, the SAMR will revoke its suspension decision and resume its investigation into the undertaking. Under this circumstance, the undertaking may not reapply for suspension of the investigation unless it can present new facts.
If the undertaking meets its commitments, the SAMR will issue a termination decision, which will terminate the investigation and close the case. According to Article 15 of the Commitment Guidelines, the termination decision will include:
- the suspected monopoly conduct;
- the measures taken by the undertaking to remove the impact of the suspected conduct;
- the undertaking’s performance of the commitments;
- the SAMR’s monitoring report on the performance of the commitments; and
- the termination notice.
To date, there are no published cases in which undertakings have failed to meet commitments, resulting in the SAMR resuming investigations.
Before submitting a settlement application, undertakings can discuss commitments with the SAMR, to better understand the key issues. Such communication is very useful for undertakings because, as well as providing information on the authority’s key competition concerns, it should also enlighten them as to the evidence the SAMR holds. Knowing this will help undertakings avoid simply giving up their defence of no wrongdoing by pursuing a settlement or committing more than that necessary to address the competition concerns.
According to Article 7 of the Commitment Guidelines, commitments taken by an undertaking can include structural measures, behavioural measures or combined structural and behavioural measures. In addition, commitments must be enforceable by the undertaking. If the undertaking needs the help of a third party to meet its commitments, it shall submit the written consent of the third party. In addition, the Commitment Guidelines provide that behavioural measures include adjusting pricing policies, deleting or changing restricted trade conditions, opening networks or platforms, and licensing patents, know-how and other intellectual rights. Structural measures include divestiture of tangible assets and intangible rights such as intellectual property rights.
Whether a settlement application will be granted or not depends on whether the SAMR is satisfied by the commitments offered by the undertaking. According to Article 11 of the Commitment Guidelines, the following factors will be considered when assessing the settlement application:
- the attitude of the undertaking;
- the nature, duration, consequences and social impacts of the suspected monopoly conduct; and
- the commitments and anticipated results of such commitments.
Given the drawback of potential fines for violating the AML, it should not be a problem for the applicant to show the right attitude if it plans to apply for settlement. One key issue arises from the nature, duration, consequences and social impacts of the suspected monopoly conduct. An SAMR official recently stated that if the impacts of the suspected monopoly conduct are very severe and the duration is more than several years, the SAMR would be reluctant to grant a settlement. The extent to which impacts would be considered severe is unclear.
Another key issue is whether the commitments will remove the impacts of the suspected monopoly conduct. In practice, this is not always easy because undertakings prefer to offer as few commitments as possible, while the SAMR wants to see sufficient commitments to remove the impacts of the suspected monopoly conduct. Against this background, undertakings may take a conservative approach and offer limited commitments in their initial proposed commitments to establish whether the SAMR will accept these or demand more commitments. However, this conservative approach needs to be managed and cannot constitute minor commitments that do not address any substantial competition concerns because doing so may be interpreted by the SAMR as the undertaking having a bad attitude. In addition, both the undertaking and the SAMR can jointly invite other undertakings, sector authorities, industry associations and experts to discuss the commitments, if the undertaking and the SAMR agree to do so. Without this agreement, neither the undertaking nor the SAMR can invite any third party to join the commitment discussions. It remains to be seen how this will be enforced as it is not easy to find a fair procedure to select participants. The current published cases have no indication of whether such procedure has been triggered.
Managing fines and payments
According to Article 45 of the AML, fines or monetary payments will not be imposed or required as part of the settlement commitments. In other words, undertakings involved will not face any fines imposed by the SAMR if their proposed settlement is accepted. This is because, under Article 3 of the Commitment Guidelines, the SAMR decision on suspending or terminating an investigation does not include a conclusion on whether the suspected conduct is illegal. In other words, the acceptance of settlement conditions is not considered an admission of any wrongdoing. This is one of the attractions of applying for settlement. However, undertakings may still face private enforcement action because the settlement does not prevent a consumer or competitor from taking such action, although a customer or competitor seeking private enforcement in Chinese courts has to prove the illegality of the suspected behaviour to obtain compensation for damages.
Non-monetary settlement requirements
There have only been five settlement cases published to date, none of which were conducted by the SAMR or its predecessor. These decisions were made by provincial-level AML enforcement authorities. There is no publicly available information on settlement cases handled by the SAMR. Nevertheless, the following cases are of relevance as the settlement procedure is the same (there are no local settlement rules in China).
- Jinghua Pharmaceutical Group Nantong Co, Ltd: in this case, the Jiangsu Administration for Market Regulation (a provincial AML enforcement authority in Jiangsu province) investigated Jinghua Pharmaceutical Group Nantong Co, Ltd for suspected abuse of dominance (refuse to deal).
- Yancheng ENN Gas Co, Ltd: in this case, the Jiangsu Administration for Market Regulation investigated Yancheng ENN Gas Co, Ltd for suspected abuse of dominance. Yancheng ENN Gas is a Sino-foreign joint venture.
- Inner Mongolia Autonomous Region Branch of Agricultural Bank of China: in this case, the Inner Mongolia Autonomous Region Administration for Industry and Commerce (a provincial AML enforcement authority in Inner Mongolia) investigated Inner Mongolia Autonomous Region Branch of Agricultural Bank of China for suspected abuse of dominance (imposing unfair conditions).
- Shanghai Medical and Health Service Centre and Shanghai Medical and Health Development Foundation: in this case, the Shanghai Administration for Industry and Commerce (a provincial AML enforcement authority in Shanghai) investigated Shanghai Medical and Health Service Centre and Shanghai Medical and Health Development Foundation for a suspected joint boycott.
- Lenovo (Beijing) Co, Ltd: in this case, the Beijing Administration for Market Regulation (BAMR) (a provincial AML enforcement authority in Beijing) investigated Lenovo for suspected resale price maintenance.
Because all settlement cases are subject to the same settlement rules and there are no settlement cases dealt with by the SAMR, the Lenovo case is used as an example to demonstrate non-monetary settlement requirements. The BAMR investigated Lenovo on 9 November 2017 for suspected minimum resale price maintenance. On 13 July 2018, Lenovo submitted the application letter of Lenovo (Beijing) Co, Ltd for suspending antimonopoly investigation (application letter). In its application letter, Lenovo committed to take the following measures:
- to conduct a full review of all documents in relation to sales and services to assess whether there was any violation of the AML. If any suspected conduct is identified, a correction or termination shall be enforced;
- to lower the sales price to retailers and issue a notice adjusting the maintenance service price; and
- to provide training to all employees; in particular, to employees in marketing, sales, legal, regional and service departments, to prevent monopoly conduct.
On reviewing Lenovo’s application, the BAMR recognised that the company had actively cooperated with the authority during the investigation and that it had deeply acknowledged the severity of the suspected conduct and proposed sufficient measures to remove the impacts of the suspected conduct. Therefore, the BAMR granted Lenovo’s application for suspending the investigation on 16 September 2019. In its suspension decision, the BAMR required Lenovo to submit the written report on its performance of the commitments by 30 November 2019.
During the committed period, the BAMR monitored Lenovo’s commitments performance by conducting an on-site visit and questioning its retailers. On 28 November 2019, Lenovo submitted the written report on its performance of the commitments to the BAMR. Satisfied that Lenovo had met its commitments, the BAMR issued a decision to terminate the investigation on 3 March 2020.
Several points can be established from the Lenovo case. First, undertakings do not need to rush a settlement application decision as long as applications are submitted before the pre-notice of administrative punishment has been issued (it took Lenovo eight months to apply for settlement). Second, the BAMR reviewed Lenovo’s commitments thoroughly and did not grant its application immediately (it took two months for the BAMR to approve Lenovo’s application, although there is no public information on whether there was any further negotiation of the commitments between Lenovo and the BAMR during this time). Third, Lenovo’s commitments clearly follow Article 11 of the Commitment Guidelines, which sets a good example for other undertakings considering applying for settlement.
From the above cases, we can see that undertakings need to honour their commitments to the authority although commitments are decided on a case-by-case basis. In general, such non-monetary settlement requirements must address the authority’s competition concerns. Cooperation, reporting and conduct limitation obligations cannot be avoided. Common commitments include:
- ceasing the suspected monopoly conduct;
- providing antitrust training to employees; in particular, employees in key departments, such as marketing, sales and legal departments; and
- reporting the execution of the commitments to the authority during the committed period.
In addition, according to Article 14 of the Commitment Guidelines, the involved undertakings can apply to amend their commitments if their own conditions or market conditions on which the SAMR’s suspension decision was based are materially changed during the committed period. The SAMR will review the application and issue its decision to the applicant in written. Again, if the changes to the existing commitments will impact other undertakings, consumers or society as a whole, the SAMR will solicit public opinion.
Managing risk to individuals
Unlike the US antitrust laws and the UK competition laws, the AML does not punish individuals for monopoly conduct, although individuals can be punished for refusing to provide required documents, providing fake documents or preventing an investigation. Therefore, there is no need to include commitments relating to individual employees or executives in the proposed settlement commitments. As demonstrated in the Lenovo case, however, commitments to provide training to employees are encouraged. In addition, undertakings must make sure that their employees and executives follow the commitments strictly.
1 Zhaofeng Zhou is a managing partner at Fieldfisher China.
2 The IPP-MA and the IPP-AD were issued on 26 June 2019 by the then newly established State Administration for Market Regulation.
3 The Commitment Guidelines were published in the 2019 Antimonopoly Regulations and Guidelines, Antimonopoly Bureau of the State Administration for Market Regulation, China Industry and Commerce Publisher. It is the first time that Chinese antimonopoly authorities have issued guidelines via a published book.
4 Article 9 of Council Regulation 1/2003 providing for a modernised framework for antitrust scrutiny of company behaviour.
5 For the official decision, see www.samr.gov.cn/fldj/tzgg/xzcf/201903/t20190308_291810.html.
6 For the official decision, see www.samr.gov.cn/fldj/tzgg/xzcf/201903/t20190325_292290.html.
7 For the official decision, see www.samr.gov.cn/fldj/tzgg/xzcf/201802/t20180208_301596.html.
8 For the official decision, see www.samr.gov.cn/fldj/tzgg/xzcf/201802/t20180201_301595.html.
9 For the official decision, see www.samr.gov.cn/fldj/tzgg/xzcf/202003/t20200309_312674.html.