The Asia-Pacific Antitrust Review 2019

China: Overview

19 March 2019

AnJie Law Firm

Introduction

The year 2018 marked the tenth anniversary of the implementation of the Anti-Monopoly Law of the People's Republic of China (AML). The year also witnessed a number of key developments in China's competition law landscape that will set the stage for the next years to come. Most notably, in 2018, the three AML enforcement agencies were consolidated into one, the leapfrogged appeal mechanism for antitrust civil and administrative litigation was been introduced, and the number of merger reviews saw further growth.

Statistically, according to the State Administration for Market Regulation (SAMR), at state-level in 2018, China commenced investigation in over 32 conduct cases of monopoly agreement and abuse of dominance, concluding 15, and abuse of administrative power was rectified in some 54 cases. In 2018, the SAMR concluded review of 448 concentrations of undertakings, a growth of 35 per cent as compared with 2017.

Consolidation of antitrust enforcement agencies

In March 2018, as part of the reform of administrative institutions, China officially launched the scheme to establish a uniform market authority, the SAMR, and reorganised the AML enforcement powers previously vested under three agencies (the National Development and Reform Commission, the State Administration for Industry and Commerce, and the Ministry of Commerce) into the Anti-Monopoly Bureau (AMB) under the SAMR (see Chart 1 for the AMB's enforcement powers and organisational structure).

At the end of 2018, the SAMR introduced a 'general authorisation' mechanism under which the provincial-level subsidiaries of the SAMR can independently initiate and investigate AML violations within their own territories (as opposed to the original position where 'case-by-case authorization' was required from state-level authority for its provincial-level subsidiaries to take actions against AML violations). This could be the catalyst for more AML enforcement activities at provincial-level in the next years.

Chart 1: Enforcement powers and organisational structure of the AMB

Safe harbour for monopoly agreements proposed

At the beginning of 2019, the SAMR published, for public consultation, the Provisions on the Prohibition of Monopoly Agreements (Draft for Comments). The draft proposed a safe harbour under which monopoly agreements can be presumed legal unless otherwise proven to the contrary:

  • where the combined market share held by the undertakings parties to the agreement between competitors does not exceed 15 per cent of the relevant market, or where the market share held by each of the undertakings party to a vertical agreement does not exceed 25 per cent of the relevant market; and
  • if the agreement in question does not belong to the explicitly specified circumstances.

The explicitly specified circumstances are:

  • agreements between competitors to fix price, restrict output, divide market, restrict new technology and products, and collectively boycott; and
  • vertical agreements that fix resale price or setting minimum resale price.

Being only a draft, the proposed safe harbour is yet to be harmonised with similar provisions ­governing the motor vehicle industry and intellectual property rights already published or proposed.

Human resource deficiency

As it seems now, the AMB may suffer from a deficiency in human resource, with just 41 positions being allocated at the state level, and four of the seven enforcement divisions' focus primarily on merger review work and one division on abuse of administrative power, leaving just two divisions pursuing investigation of monopoly agreements and abuse of dominance. This reality suggests that, at its inception, the AMB will have to prioritise its enforcement tasks when it comes to monopoly agreements and abuse of dominance. To what extent the general authorisation mechanism will come to aid the human resource deficiency is something to be observed.

Legislation

The AML, the various implementing provisions and the guidelines issued by the AML enforcement agencies form the competition law rules in China.

Amendments to the AML

Amendments to the AML have been called for years, and according to the legislative plan of the standing committee of the People's Congress, priority will be given to amending the AML in the next five years. The amendments could focus on resale price maintenance, abuse of inte­llectual property rights, non-price vertical agreements and the elevation of the cap of fines for gun-­jumping in concentration of undertakings, among others.

New and integrated rules of the SAMR

Since its formation, the SAMR has published a number of new rules and has made efforts to unify the substantive and procedural rules previously published by the three former AML enforcement agencies. The following is a list of the new or draft rules published by the SAMR so far:

  • Notice of the SAMR on the General Authorization of Anti-monopoly Enforcement.
  • Interim Measures of the SAMR on Hearings Relating to Administrative Penalty.
  • Interim Provisions of the SAMR on Procedures Relating to Administrative Penalty.
  • Guiding Opinions on the Notification of Concentration of Undertakings (29 September 2018 revision).
  • Guiding Opinions on the Documents and Materials in Concentration of Undertakings Notifications (29 September 2018 revision).
  • Guide to the Anti-Monopoly Review of Concentration of Undertakings (29 September 2018 revision).
  • Notes on the Implementation of the Notification Form for the Anti-monopoly Review of Concentration of Undertakings (29 September 2018 revision).
  • Guiding Opinions on the Notification of Simple Cases in the Concentration of Undertakings (29 September 2018 revision).
  • Guiding Opinions on the Standardization of the Case Names of the Notification of Concentration of Undertakings (29 September 2018 revision).
  • Provisions on the Suppression of the Abuse of Administrative Power to Exclude and Restrict Competition (Draft for Comments).
  • Provisions on the Prohibition of Monopoly Agreements (Draft for Comments).
  • Provisions on the Prohibition of Abuse of Dominance (Draft for Comments).

Guidelines

The AML and the implementing provisions are often too general, so guidelines become an important way of understanding the requirements of the AML. So far, nine guidelines and draft guidelines have been published, covering the following topics respectively; among them, the guidelines on leniency, exemptions, motor vehicle and intellectual property rights are to be published in 2019, according to the SAMR:

  • market definition;
  • price-related conducts by industry associations;
  • pricing conducts of undertakings in relation to drugs in short supply and active pharma­ceutical ingredients;
  • leniency (draft);
  • commitments (draft);
  • exemptions (draft);
  • identification of illicit gains and setting fines (draft);
  • motor vehicle industry (draft); and
  • abuse of intellectual property rights (draft).

Monopoly agreements

Cartel and resale price maintenance (RPM) remain conducts in which stable enforcement activities have been observed in China, and in 2018, the SAMR and its predecessors also impugned ­collective boycott conducts. The following sets out the key cases relating to monopoly agreement in 2018; however, more cases have been concluded at provincial level (note especially that Guangdong Province has been relatively active in AML enforcement of conduct violations).

The home decor shopping mall collective boycott case

In March 2018, the Shandong subsidiary of the SAIC issued a decision finding six companies that operate home decoration and furniture shopping malls to have exercised collective boycott. The six companies entered into agreements to restrict all their tenants (home decoration and furniture retailers) from participating in sales activities organised by various media, websites and third-party sales platforms that are competitors to the six companies. Each of the six companies was fined just 100,000 yuan because they were found to have only reached, but not yet implemented, the restrictive agreement.

The Rizhao accounting firm cartel

In May 2018, SAIC's Shandong subsidiary fined 14 accounting firms for forming a certified ­public accountants self-disciplinary committee to divide the market for auditing, capital validation and other professional services. The accountings firms were fined between 1 per cent and 1.5 per cent of their respective turnover in the preceding year. It is worth mentioning that this case was triggered by findings from investigating another cartel of Linyi City, Shandong Province, to which 25 accounting firms were members.

The Shenzhen towboat cartel

In June 2018, the SAMR issued infringement decisions on four towboat operators in the Shenzhen Port Area for the exchange of information on the general trend of towboat service rates and aligning strategies for negotiating towboat service rates. The four companies were each fined 4 per cent of their respective turnover in the preceding year.

The Shenzhen tally cartel

In July 2018, the SAMR fined two tally companies in Shenzhen each 4 per cent of their respective turnover in the preceding year for price fixing and market division. The highlight of this case is the application of the single economic entity doctrine. The two companies have the same shareholder, which holds 50 per cent of the stake in each of the two companies; however, one of the companies has a shareholding structure of 50/50, and the other 50/29/21. The SAMR analysed from the shareholding structures of the two competing companies and concluded that the shareholding structure of 50/50 does not give its shareholders the 'relative controlling shareholder position', whereas the shareholding structure of 50/29/21 does. The SAMR further examined the actual operation and management of the two companies and found that, after a new competitor entered the market, the two companies stopped the relevant coordination conducts and started to compete normally. The SAMR thus concluded that the two companies constitute 'competitors' for the purpose of the AML, and therefore the relevant conduct to coordinate price and dividing markets constituted a monopoly agreement.

The Guangxi firework cartel

In July 2018, SAIC's Guangxi subsidiary fined three firework providers between 5 per cent and 8 per cent of their respective turnover in the preceding year for dividing markets in the regulated firework market in one of the district under Qinzhou City of Guangxi Province.

The Guangxi driving school cartel

In July 2018, the NDRC's Guangxi subsidary fined 11 driving schools in Beihai City for fixing the price of management fees they charge students. The fine was between 1 per cent and 4 per cent of their respective turnover in the preceding year. The Beihai Driver's Training Association was also fined and is being referred to the relevant authority to cancel its business registration.

The glacial acetic acid API cartel

This case concerns three companies that have supplied 100 per cent of glacial acetic acid active pharmaceutical ingredients (API) in the Chinese market since 2017. Glacial acetic acid is used in the production of hemodialysis concentrate for the treatment of advanced kidney failure and ­uremia, among other things. The three companies were found to have exchanged price and output-­related information, and agreed to elevate the price for glacial acetic acid API. The ­conduct resulted in a hike in the price of glacial acetic acid API from 9.3 yuan per kilo to 28 yuan per kilo when supplying to hemodialysis device companies, and 33 yuan per kilo when supplying to pharma companies. The three companies were each fined 4 per cent of their respective sales turnover in the preceding year by the SAMR.

The Tianjin port yard cartel

Sixteen companies that are competitors in operating container yard services at the Tianjin port were fined between 2 per cent and 5 per cent for fixing comprehensive surcharge and unloading fees in a cartel participated in by 27 competing companies. One company was exempted from the fines for being the first to report the offence. These companies discussed – through meetings, telephone, email and proposals – a price alliance and implemented it.

The Henan engineering testing services cartel

The SAIC's Henan subsidiary impugned three engineering testing service companies for setting up a service hall that carries out 'concentrated testing services' in Puyang City, Henan Province. The three firms jointly appointed managers, distributed testing businesses and refused to offer independent testing services. The violation was identified as market division and the three companies were fined between 6 per cent and 7 per cent of their respective turnover in the preceding year.

The natural gas RPM

In 2018, two subsidiaries under the China National Petroleum Corporation in Daqing City, Heilongjiang Province, were fined 6 per cent of their respective turnover in the preceding year for limiting the minimum resale price of 13 compressed natural gas primary filling stations in the downstream market.

Abuse of dominance

In contrast with the steady investigation on monopoly agreements, there was only one case concerning abuse of dominance that was ­concluded in 2018.

The port services case

In January 2018, SAIC's Hubei province subsidiary found Hubei YinXinTuo Holdings Co, Ltd, a port service provider that operates load and unload, scheduling and steering services at the YinXinTuo Port, to have abused its dominant position on the market for cargo vehicle roll-on roll-off port services in the Yichang-Chengdu Line on the River Chuan (Reservoir Area). The impugned was found to have favoured a company H over the latter's competitors by way of allocating orders to H whenever the boats of H arrive, as well as allocating to H orders that are more lucrative and leaving H's competitors with orders with less value. The impugned was fined 6 per cent of its annual turnover in 2016 for its discriminatory practice.

Increased application of the collective dominance doctrine

In January 2019, the SAMR published two infringement decisions finding two chlorphenamine API manufacturers to have collectively abused their dominant position. Chlorphenamine API is an important input and has been used to manufacture over 2,000 medicines treating colds and allergies. The two companies, Erkang Pharma and Jiushi Pharma, were found to have an aggregate market share of over 90 per cent in the chlorphenamine API market in China, with Erkang Pharma alone occupying just over 10 per cent of the market share. The two companies were found to have colluded with each other to carry out abusive market conducts including refusal to supply, excessive pricing, tie-in and imposition of unreasonable conditions. The fine was 8 per cent and 4 per cent of their respective turnover in the preceding year. This is the second case in China in which the doctrine of collective dominance was applied. The previous case involving its application was another in the pharma sector that was concluded in 2018, and in which Second Pharma and Handewei Pharma were found to have collectively abused their dominant position in the sales of Isoniazid API (for manufacturing drugs treating tuberculosis) at excessively high prices and refusal to deal. Handewei Pharma also occupied just over 10 per cent of the market share in the relevant market.

Merger review

In 2018, 444 filings were unconditionally cleared, four were conditionally cleared and none were prohibited. Qualcomm/NXP was aborted by the parties to the concentration pending an outcome of notification. Among the transactions conditionally cleared, the SAMR imposed structural and behavioural remedies on Bayer/Monsanto, Linde/Praxair, UTC/Rockwell Collins and behavioural remedies on Essilor/Luxottica.

Intensified sanctioning of gun-jumping

The year 2018 saw the SAMR sanction 15 concentration of undertakings that failed to be notified, even though the notification thresholds were met. Three of the 15 infringement decisions were in respect of three transactions involving Linde Hong Kong as the notification parties.

Sanctioning of failure to comply with conditions

In 2018, the SAMR (and its predecessors) sanctioned Thermo Fischer for failure to comply with a behaviour condition (maintaining discount levels to Chinese customers) imposed as part of the conditional clearance granted in the Thermo Fischer/Life Tech merger in 2014. This decision was the third of its nature following two previous infringement decisions issued to Western Digital in 2014 for non-compliance with conditions (hold-separate obligations) imposed by the MOFCOM in its 2012 conditional clearance granted to Western Digital/HGST.

Didi/Uber

The SAMR noted that the Didi/Uber merger, consummated in 2016, is still under investigation for alleged violation of gun-jumping.

Private actions

China is a jurisdiction that allows both standalone and follow-on antitrust actions. Although the number of AML private actions are growing in China, the absence of a full-fledged class action mechanism, lack of discovery mechanism and the heavy evidentiary burden on claimants have curbed the emergence of potentially more damage claims.

Antitrust appeals to be heard solely by the SPC

Another key development in the competition law landscape in China in 2018 – and almost as important as the consolidation of AML enforcement agencies – is the concentration of the power to hear and adjudicate antitrust appeals within the Supreme People's Court of China (SPC) as of 1 January 2019. Previously, first instances of antitrust civil and administrative disputes are generally heard by intermediate-level people's courts (IP courts in Beijing, Shanghai and Guangzhou are considered intermediate-level), and thereby appeals of such cases are heard by their immediate upper-level courts (ie, the relevant high people's courts). This will have the apparent effect of directing the cases to the SPC and challenging its capability to handle a potentially overwhelming number of cases. On the other side, consistency in judicial decisions is expected to be improved (see Chart 2 for the route of appeals for antitrust civil and administrative disputes as of 1 January 2019).

Continued bifurcated standards for RPM

Through a number of judgments, RPM remains a conduct receiving bifurcated treatment administratively and judicially, with the former consistently treating it as equivalent to the by-object offence in the EU, with some of the courts (eg, the Shanghai IP Court and the Guangdong Province High People's Court) applying the so-called rule of reason analysis in a number of cases. In its judgment of July 2018 in Shanghai Hankook Tires, which involved both RPM and abuse of dominance claims, the Shanghai Intellectual Property Court, quoting the analytical framework used in Ruibang v Johnson & Johnson concluded by the Shanghai Higher People's Court in 2013, reiterated its position that for RPM to constitute monopoly agreement, anticompetitive effects must be established by the claimant. In August 2018, the Guangdong Provincial High People's Court handed down the appellate judgment in Gree Electric Appliances, holding that claimants in a civil proceedings bear the burden to prove anticompetitive effects of RPM.

Chart 2: The route of appeals for antitrust civil and administrative disputes as of 1 January 2019 (as show in red colour)

Xu v Tencent

At the end of 2018, the SPC delivered its judgment in re-trial proceedings rejecting an individual in his claim against Tencent for abuse of dominance. In 2016, Xu submitted to the WeChat platform an emoji package containing cartoon images created by Xu for his 'ask a lawyer' legal consul­tation service. Tencent rejected Xu's submission on the grounds that Xu's submission does not concern emoji packages but rather a legal service. The SPC determined that the relevant market should be defined as 'internet expression promotion service', then continued to follow its stance in Qihoo 360 v Tencent, holding that high market shares are not direct evidence of establishing dominance, especially in a highly dynamic market.

Intellectual property and AML

Legislation

The Anti-Monopoly Provisions on Intellectual Property Rights issued by the SAIC in 2015 remain the only regulation in force regarding the overlap of competition law and IP up to this date. On 23 March 2017, the revised Anti-Monopoly Guidelines on Intellectual Property (Draft for Comments) was published for public comment. Following the institutional reform, the SAMR has announced that it will be published in 2019. On the judicial front, Interpretation II of the Supreme People's Court on Several Issues concerning the Application of Law in the Trial of Patent Infringement Disputes has devoted one provision about injunction application in the context of standard essential patents (SEP).

A number of courts in China have also published their IP guidelines concerning SEP. For instance, on 20 April 2017, the Beijing High People's Court issued the Guidelines for Patent Infringement Determination (2017). Articles 149-153 are SEP-related provisions. Among the five, articles 152–153 specifically set forth how injunction applications are assessed in 'no fault' and 'at fault' scenarios during SEP licensing negotiation. On 26 April 2018, the Guangdong High People's Court issued the Working Guidelines of Guangdong High People's Court on the Trial of Standard Essential Patent Dispute Cases (for trial implementation). Articles 25-31 dealt with the trial of SEP-incumbent monopoly disputes.

Huawei v Samsung

On 11 January 2018, the IP tribunal at the Shenzhen Intermediate People's Court published two decisions in Huawei v Samsung. The two actions were filed in 2016 by Huawei, asserting two SEPs against several affiliates of Samsung Electronics in China. On the issue of whether Huawei was entitled to an injunction against Samsung, the court found that Huawei had complied with its FRAND obligations, particularly the royalty rates offered by Huawei were compliant with the FRAND principle while Samsung's were not. Thereby injunctions are granted to Huawei ­prohibiting Samsung from commercialising its devices by using Huawei's SEPs.

CAVCA v karaoke chain

On 8 August 2018, the China Audio-Video Copyright Association (CAVCA) prevailed in an abuse of dominance challenge against it in court brought by a karaoke chain. The karaoke chain accused CAVCA of tying and refusal to deal by setting unreasonable royalty rates and practising blanket licensing. The Kunming Intermediate People's Court of Yunnan province held that the royalty rates charged by CAVCA was reasonable and compliant with the relevant regulation. On the blanket licensing practice, the court found it could lower transaction cost and had efficiency enhancing effects.

Abuse of administrative power

The AML, in its Chapter V, prohibits organisations with public administration functions ­empowered by administrative authorities, law and regulations to engage in conducts that exclude or restrict competition. Where an administrative organisation violates the AML, its higher level authority may order it to rectify its behaviour. Administrative sanctions may be imposed on the persons directly responsible for the violation. The enforcement agencies may also make suggestions to the relevant authority at a higher level to handle the violation pursuant to law.

At the end of 2017, as part of the fair competition review system, China launched a campaign to clean existing regulations and policy measures relating to market entry, industrial development, introducing investment, tendering and bidding, government procurement, business operations, qualification and standards that are anticompetitive. According to the SAMR, 54 cases of abuse of administrative power were handled and concluded in 2018. These cases involves various ­sectors, including gas supply, real estate, accounting services, transport, bidding services, banking services, pharma, telecoms and so on.

Outlook for 2019

In the backdrop of a uniform enforcement agency and the consolidation of power to hear antitrust appeals within the SPC, 2019 will be a year with many developments to behold.

E-Commerce and AML

The E-Commerce Law, entered into force as of 1 January 2019, regulates the conduct of e-­commerce firms and contains several provisions that can overlap with the AML and the Anti-Unfair Competition Law in terms of the conduct, standards and enforcement authority. Although China has not yet used the AML to intervene in e-commerce-related firm conducts, the AML could be the most powerful tool to preserve competition in the digital era. The co-existence of three different laws with overlapping functions, rules and enforcement authorities begs more clarity and certainty, especially given that the speed of growth in China's e-commerce has been overwhelming in recent years.

Dawn raids and pending investigations

At the beginning of June 2018, the SAMR peformed dawn raids on the Beijing, Shanghai and Shenzhou offices of three chipmakers, Micron, Samsung Electronics and SK Hynix, for alleged monopoly conduct. It is worth noting that, according to media reports, the Shenzhen office of DRAMeXchange, a storage business unit under the Taiwanese consulting firm TrendForce, was also raided several weeks later, and the firm is believed to possess comprehensive data of the semi-conductor industry. Otherwise, Baidu is being investigated for alleged anticompetitive conduct, according to a recent statement of the SAMR.

Commitment decisions in conduct violations

In 2018, China issued five commitment decisions. Three of the decisions concern the alleged abuse of dominance by the Inner Mongolia branch of the Agriculture Bank of China, the Inner Mongolia branch of China Mobile and the Nanjing Lishui branch of the State Grid Jiangsu company. The fourth case concerned two operators of the Shanghai group purchasing organisation for public medical institutions. The fifth case concerned a civil explosives company in Hubei Province. The largest concern of commitment decisions is perhaps its lack of transparency, and it remains to be seen how the SAMR will apply commitment decisions in the future.

Continued regulatory focus on the pharma sector

The pharma sector has become the focus of AML enforcement activities in the past few years. Apart from the cases mentioned above, the pharma sector has been subject to the rectification of administrative monopolies many times. Against the backdrop of the healthcare reform, it is perhaps unsurprising to note that the pharma sector will continue to be under the spotlight of regulatory activities, including the Anti-Monopoly Law.

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