China: Abuse of Dominance

An overview: the enforcement after the integration

The enforcement of China’s Anti-Monopoly Law (AML) against abuse of dominance experienced another calm year, during which the main targets of the law were domestic companies. From 1 January 2019 to 31 December 2019, a total of 12 monopoly agreement cases and seven abuse cases were published, ¹ more than 2018, which had 11 monopoly agreement cases and four abuse cases. In other words, it is fair to say that the enforcement situation of 2019 is, to a large extent, consistent with that of 2018.

On the other hand, legislations in the field of antitrust law are very active. The State Administration for Market Regulation (SAMR) formally issued the Interim Provisions on Prohibiting Abuse of Dominant Market Positions ² on 1 September 2019, which is regarded as an important legislative development in the field of regulating abusive behaviour in China. In addition, the revisions on the AML are also available for public comments now.

Legislative development

Interim Provisions on Prohibiting Abuse of Dominant Market Position (Interim Provisions)

The Interim Provisions was issued by the SAMR on 1 September 2019, and is widely regarded as one of the fundamental provisions for regulating anticompetitive behaviours. Despite the fact that the main structure of the Interim Provisions is similar to its predecessors (ie, the State Administration for Industry and Commerce (SAIC)’s Provisions on the Prohibition of Abuse of Dominant Market Position and SAIC’s Procedural Provisions on Investigating Monopoly Agreements and Abuse of Dominance), there are several highlights.

First, the internet and the digital economy received attention from the SAMR. According to article 11 of the Interim Provisions, when assessing market dominance in internet new economy, the following specific factors shall be considered, among others:

• the competition characteristics of the internet industry;
• business models;
• the number of users;
• network effects;
• lock-in effects;
• technological features;
• capabilities of market innovation;
• the ability of handling and processing relevant data; and
• the undertaking’s market forces in associated markets.

Although the above provisions reflect the concerns of the SAMR regarding issues related to the internet and the digital economy, foreign and domestic internet giants (such as Facebook, Google, Tencent and Alibaba) are not current targets of the AML. These considerations can also be expected to apply not only to the assessment of abuse of market dominance, but also the assessment of monopoly agreements.

Second, the Interim Provisions provide a basis for assessing joint dominance. According to article 19 of the AML, where an undertaking is under any of the following circumstances, it could be assumed to have a dominant market position:

• the relevant market share of the undertaking accounts for half or more in the relevant market;
• the joint relevant market share of two undertakings accounts for two-thirds or more; or
• the joint relevant market share of three undertakings accounts for three-quarters or more.

Although the AML recognises joint dominance, the framework set by the AML seems too mechanical. In practice, the SAMR applied the concept of joint dominance in the isoniazid monopoly case of 2017 ³ and the chlor-trimeton monopoly case of 2018. ⁴ The SAMR respectively identified the companies concerned in the cases with certain legal links as holding ‘joint dominant market position’ because the combined market share exceeded two-thirds. However, the decision did not clarify the factors considered by the SAMR when assessing joint dominance. Now, the Interim Provisions clearly provide the method for assessing joint dominance: in addition to market share, factors such as market structure, market transparency, homogeneity of the relevant product and the consistency of behaviours should also be taken into consideration.

Third, according to Interim Provisions, when analysing predatory pricing, the average variable cost can be used as the benchmark for below-cost sales. In practice, China has not yet punished below-cost sales abusive behaviours. However, companies have no idea how to define below-cost sales behaviour because there are multiple ways of calculating cost. Article 15 of the Interim Provisions now explicitly states, for the first time, that the determination of sales below cost under the AML should focus on whether the price is lower than the average variable cost.

Draft Revised AML for Public Comments

For abuse of dominance, the Draft Revised AML for Public Comments (Draft Revised AML) revises the abuse of dominance part under the current AML. Please refer to Table 1 below:

Table 1: Comparison between the Draft Revised AML and the AML (2018)

According to the above table, there are several key differences between the AML and the Draft Revised AML in relation to abuse of dominance.

First, article 20 of the Draft Revised AML adjusts the tests for differential treatment by deleting the same conditions test. The same conditions test has always been a prerequisite for differential treatment in China’s anti-monopoly rules; the Interim Provisions on Prohibiting Abuse of Dominant Market Positions, promulgated by the SAMR, clarifies in article 19 that ‘same conditions’ means that ‘there are no differences that substantively affect transactions between the trans­action counterparties in terms of transaction security, transaction cost, scale and capability, credit status, transaction process involved, duration of transaction, and other aspects.’ That said, we expect that in practice, even without the same conditions test, undertakings holding dominant market positions could also rely on legitimate reasons to justify their transaction terms.

In addition, article 21 of the Draft Revised AML further embeds the situation in the internet sector to encounter challenges stemming from the digital era. Following the landmark case Qihoo v Tencent and recent litigation cases such as the ‘either-or’ choice between Alibaba and JD, the Draft Revised AML enshrines regulation of the digital era within law and helps the anti­monopoly law enforcement authority tackle similar situations.

Although the factors to be considered are generally worded therein, it can be taken as a cornerstone step for China antimonopoly law enforcement authorities to face similar issues.

The Draft Revised AML may catch the eye of the semiconductor industry. When it comes to abuse of dominance, undertakings in this industry should be circumspect to apply any potential discriminatory or unequal conditions, such as in supply or licence contracts with counterparts. The existing provision applies article 20(6) where the customers or licensees are of equal standing, whereas the Draft Revised AML deletes this requirement and thus any discriminatory conditions cannot be caught by antimonopoly law enforcement authorities.

Enforcement record against abusive behaviour in 2019: from a comparative perspective

As illustrated by Table 2, below, between 1 January 2019 to 31 December 2019, a total of 12 monopoly agreement cases and seven abuse cases were published, ⁵ which is more than 2018, which saw 11 monopoly agreement cases and four abuse cases). The following table summarises seven abuse cases published in 2019:

Table 2: Seven abusive cases in 2019

Industries concerned

The abuse cases in 2019 concerned public goods supply (water and gas), API (Active Pharmaceutical Ingredient) and chemicals, among others. Compared with the industries concerned in 2018 (banking, post services, telecommunication and electricity supply), in general, the focus of enforcement has remained broadly the same. These industries share several similarities:

• they are closely related to the national economy and general public;
• they can be categorised as natural monopolistic industries; and
• they are highly regulated by the government.

The enforcement authority seems to be interested in the pharma­ceutical industry; two of the seven cases concern this industry (Jinhua Pharmaceutical and Erkang and Jiushi).

Domestic undertakings: focus of enforcement

Another feature, which was the same in 2018, is that enforcement seems to be active towards domestic undertakings. The targets of almost all the published cases in 2019 are domestic undertakings, except the Eastman case.

Nevertheless, the investigation of three dynamic random-access memory (DRAM) makers’ abuse of dominance, which started in May 2018, is still ongoing. Samsung, SK Hynix and Micron are all multinational companies. According to Mr Wu Zhenguo, the director-general of the SAMR’s Antitrust Bureau, significant progress has been made in this investigation. ⁶ It is believed that the DRAM case will be another influential abusive case concerning global market players after Tetra Pak (2016) ⁷ and Qualcomm (2015). ⁸

Thus the enforcement authority seems to attach its focus on domestic undertakings, especially those concerning the general public. Further, the authority is determined to punish any anticompetitive behaviour, regardless of whether the companies are domestic or foreign.

Types of abusive behaviour

Compared with the types of abusive behaviour in 2018 that were quite simple (three of the four cases concerned imposing unreasonable trading conditions and one concerned discriminatory treatment), abusive behaviour in 2019 concerned different types: three cases concerned restricting trading parties; two concerned imposing unreasonable trading conditions; one concerned unfair high price; and one concerned refusal to trade.

The reason the types of abusive behaviour in 2018 were simple may, to a large extent, be due to the fact that the undertakings engaged in imposing unreasonable trading conditions were all state-owned enterprises (SOEs) and concerned natural monopolistic industries. Generally, those undertakings had dominant market positions and strong bargaining power. They were able to impose unreasonable trading conditions through, for example, unreasonable standard contracts, whereas the customers most likely have to accept such unreasonable contracts due to having limited alternatives. On the other hand, almost all domestic undertakings concerned in 2019 were private enterprises. Compared with SOEs, private enterprises are indeed active in different markets and their management is more flexible. From this perspective, it is understandable why they may engage in different types of abusive behaviours once they have obtained dominant market position in relevant markets.

Decentralisation of the enforcement authority

Table 2 demonstrates that almost all of the abusive cases in 2019 were investigated the local branches of the SAMR under its authorisation according to article 10 of the AML, with one exception being ErKang and Jiushi. Decentralisation of enforcement is consistent with 2017 and 2018 practices.

It is believed that such an approach could increase the effectiveness and efficiency of AML enforcement in China. First, the local branch may be in a better position to investigate the case, because the local branch is usually more familiar with the situation and possible local features than central government. Second, it allows the SAMR to focus its limited resources on more significant antitrust cases, which may improve the AML’s overall enforcement.

In addition, the decentralisation of enforcement may also, to some extent, explain why most of the investigated undertakings are domestic. Due to, among others, the possible affects resulted from an investigation on the markets and the capacity limitation, it seems that multinationals are more likely to be investigated by SAMR, while domestic undertakings can be investigated by local branches of SAMR under its authorisation.

Investigation result

It is interesting to note that the trend of investigation results varied in 2017, 2018 and 2019.

In 2017, fines were imposed in six investigations with only one exception. This sharply contrasts with 2018. In 2018, in only one case was a fine imposed; the other three investigations were terminated without imposing any fines. By contrast, in 2019, the investigations were suspended in two of the seven cases. The investigation against Lianxing Civil Explosive Equipment was terminated. Fines were imposed in the remaining four cases.

Specifically, according to the published decisions, the percentage of fines imposed was between 3 per cent and 8 per cent of the annual sales revenue generated in the year preceeding the initiation year. There are two cases, Zhenyuan Water and ErKang and Jiushi, in which a fine was imposed and illegal gains were also confiscated.

Therefore, it is reasonable to conclude that the enforcement authority may indeed impose any measure it deems necessary and reasonable punish the undertakings. In particular, a fine can be issued in combination with confiscation.

Investigation time

According to publicly available information, Table 2 summarises the investigation time spent on the seven abuse cases as between six months (Erkang and Jiushi) and 83 months (Lianxing Civil Explosive Equipment). The average time is about 32 months.

Thus investigations can be extremely lengthy: Lianxing Civil Explosive Equipment took almost seven years for the enforcement authority to terminate the investigation without imposing any fine since the formal initiation in January 2013.

However, investigations can also proceed at high speed: the SAMR only took six months to complete the investigation and make its decision on Erkang and Jiushi’s abuse of dominance.

But in almost all cases, only the time of the formal initiation was published. In fact, the enforcement authority may start its preliminary investigation before the initiation, which will result in a longer investigation period.

Significant recent case

The Eastman case was one of the more important abuse cases in 2019, the decision of which was published on the SAMR website on 29 April 2019. ⁹ The case was investigated by the AMR of Shanghai under the authorisation of the former SAIC. A fine amounting to more than 24 million renminbi was imposed on Eastman (China) Investment Management Co, Ltd, equal to 5 per cent of its 2016 sales revenue.

It is worth noting that economic analysis was adopted in this case. The AMR of Shanghai adopted a critical loss analysis and the Lerner Index to draw a borderline for the relevant market and verify the market power of Eastman and restrictive effects in the relevant market.

While economic analysis tools are increasingly used in pre-merger notifications by the SAMR to, for example, assess and determine whether a notified transaction will bring about anti­competitive effects, it was rarely used in antitrust investigation cases. From this perspective, the Eastman case may, to some extent, reveal that economy analysis tools can be used more frequently in investigation cases in the future.

Disguised forms of exclusive agreements were also caught. The Eastman case concerned minimum purchase clauses, take-or-pay clauses as well as clauses of most-favoured-nations and favourable rebates. The agreements were regarded as exclusive by the authority because such agreements imposed quantitative obligations on customers which would have the same effects of exclusivity and foreclosure.

Therefore, the case implied that, in addition to those forms of abusive conducts regulated in the AML and relevant regulations, the competition authority also pays attention to the nature of the conduct to determine whether certain conducts constitute abuse.

Conclusion

In terms of AML enforcement against abuse of dominance, 2018 was a relatively quiet year. Nevertheless, there were several highlights.

From a legislative perspective, the SAMR’s Interim Provision has several highlights:

• close attention to the abusive behaviours in the internet industry;
• factors to be considered when analysing joint dominance; and
• the confirmation of average variable cost as the benchmark for below-cost sales (ie, ­predatory pricing).

In addition, the AML is also being modified to put further emphasis on the regulations in the internet industry.

From an enforcement perspective, compared to 2018, it can be observed that:

• enforcement against abusive behaviour in 2019 consistently focused on industries related to the national economy and general public;
• the enforcement authority seems to be interested in the pharma­ceutical industry;
• domestic companies are the authorities’ main targets, instead of foreign companies;
• types of abusive behaviour are more diverse than that in 2018, including imposing unreasonable trading conditions, restricting trading party, unfair high price and refusal to trade;
• the decentralisation of the enforcement authority is still an ongoing process; and
• decisions in two suspended investigations and one terminated investigation reveal that it is fully possible for undertakings to avoid being fined by providing commitments to rectify their behaviour.

We may expect a more active enforcement landscape against abusive behaviour in 2020, particularly considering the active legislation activities. The ongoing DRAM abuse case against US and South Korean semiconductor giants may serve to indicate the enforcement trends of 2020, and the landmark legislation of the Draft Provisions may further encourage enforcement against abusive behaviour by providing more legal certainty both for the authority and the practitioners.

Notes