China: Overview

Introduction

The year 2019 was the first full calendar year for the State Administration for Market Regulation (SAMR) as China’s uniform antitrust enforcement agency, following the institutional reform of the state’s administrative departments in March 2018. Generally speaking, legislation has become more consistent and the publication of decisions has become more timely.

In 2019, the SAMR seemed to devote much of its efforts to legislation drafting and merger review work. On the other hand, the SAMR’s provincial-level subsidiaries – the provincial administrations for market regulation (AMR) – took on most of the investigatory work against conduct violations (monopoly agreements and abuse of dominance) concluded in 2019.

In May 2019, against the backdrop of trade tensions with the US, China quoted its Anti-Monopoly Law (AML) as one of the legal grounds for the building of a ‘unreliable entities list’, which purportedly would include foreign enterprises, organisations or individuals who foreclose or refuse to supply to Chinese enterprises for ‘non-commercial purposes. Thus far, such a list has not been published. But China remains a jurisdiction in which its AML enforcement activities, particularly those involving foreign entities, are much observed.

Legislation

The year 2019 witnessed the publication for public comments of a number of draft legislations, including:

  • Draft Revisions to the Anti-Monopoly Law (AML Draft Revisions);
  • Draft Anti-Monopoly Compliance Guide for Undertakings;
  • Draft Interim Measures of the Administration for Market Regulation for Handling Complaints and Whistle-blows;
  • Draft Revisions to the Interim Measures of the Administration for Market Regulation for Rewarding Whistle-blowers of Key Violations; and
  • Draft Interim Provisions on the Review of Concentration of Undertakings.

AML Draft Revisions

Published for public comments on 2 January 2020, the AML Draft Revisions proposed a number of important changes to the current AML, which has been in force since 1 August 2008. In short, the AML Draft Revisions sought to significantly raise the cap of fines for specific violations such as gun-jumping, non-compliance with a conditional clearance decision and obstruction of investi­gations, among others. It also sought to introduce the legal foundation for criminal sanctions on antitrust conduct violations. If adopted, these proposed changes would strengthen the deterrence power of the AML. There is currently no clear timetable for the finalisation of the AML Draft Revisions and promulgation of the revised AML.

Three interim provisions

In 2019, the SAMR continued its efforts to unify substantive and procedural rules previously published by its predecessors (ie, the NDRC, SAIC and MOFCOM). On 26 June 2019, it published the following three government department-level regulations to supplement the AML, which have since entered into force on 1 September 2019:

  • Interim Provisions on the Prohibition of Monopoly Agreements;
  • Interim Provisions on the Prohibition of Abuse of Market Dominance; and
  • Interim Provisions on the Suppression of Abuse of Administrative Power to Exclude and Restrict Competition.

The first two pieces of legislation in particular have provided further details on the identifi­cation of conduct violations and justifications, and the application of leniency and commitment systems. However, the initially proposed safe harbour for monopoly agreements disappeared from the final draft.

Anti-monopoly Compliance Guidelines for Undertakings

The Anti-monopoly Compliance Guidelines for Undertakings (draft for comments published in November 2019) is a new addition to the family of antitrust guidelines China has already published or is seeking to publish. Its publication resonates with compliance guidelines for undertakings published by the Zhejiang AMR and Shanghai AMR respectively in July and December 2019.

AML Guidelines

So far, 11 state-level guidelines and draft guidelines have been published. It is unclear when the guidelines on leniency, exemptions, motor vehicle and intellectual property rights will be published, despite earlier statements of the SAMR that they would be published within 2019. These guidelines are:

  • market definition (in force);
  • price-related conducts by industry associations (in force);
  • pricing conducts of undertakings in relation to drugs in short supply and active pharma­ceutical ingredients (in force);
  • fair competition review third-party assessment (in force);
  • leniency (draft);
  • commitments (draft);
  • exemptions (draft);
  • identification of illicit gains and setting fines (draft);
  • motor vehicle industry (draft);
  • abuse of intellectual property rights (draft); and
  • Anti-monopoly Compliance Guide for Undertakings (draft).

Cartels

Cartels remains an area with stable enforcement activities in China. In 2019, there were eight published infringement decisions on cartel conducts. All of the undertakings concerned were Chinese companies, and these cases all concern the ‘sectors that are closely related to the people’s livelihood’, such as public utility, construction materials, restaurants and motor vehicle. See Table 1 for a list of cartel cases concluded in China in 2019.

Table 1: Cartel cases concluded in 2019

UndertakingsConductType of decisionEnforcement AgencyFineConfiscation of illicit gains
3 motor vehicle safety technology testing institutions in XianningPrice fixingInfringement decisionHubei AMR5% of each firm’s sales value in 2017Yes
8 concrete manufacturers in QuzhouMarket sharing and output restrictionInfringement decisionZhejiang AMR1% of each firm’s sales value in 2017No
5 catering firms in ChifengCollective boycott (prohibiting members from purchasing goods from outsiders)Infringement decisionInner Mongolia AMR1% of each firm’s sales value in the previous yearNo
9 bricks factories in ChongqingPrice fixing and output restrictionInfringement decisionChongqing AMR5% of each firm’s sales value in 2017Yes
10 concrete manufacturers in YananPrice fixingInfringement decisionSha’anxi AMR1% of each firm’s sales value in 2017No
5 concrete manufacturers in YongjiPrice fixing (not implemented)Infringement decisionShanxi AMRRMB 50,000 each firmNo
Automobile Industry Association in HezeProhibiting its members from participating in car exhibitions other than the ones it organisedInfringement decisionShandong AMRRMB 300,000No
7 gas supply firms in ZhangjiajieMarketing sharing and price fixingInfringement decisionHunan AMR1%-2% of each firm’s sales value in the previous yearNo

RPM

Compared to 2018, where there was only one infringement decision concerning resale price maintenance (RPM), four such cases were concluded in 2019. Changan Ford and Toyota Motor were respectively fined for restricting resale prices in the distribution of Ford and Lexus brand cars. Lenovo received a commitment decision from the SAMR that suspended the investigation into its behaviour to control the minimum resale price of certain accessories and services charged by its authorised dealers. Haichang Contact Lens also received a commitment decision from Shanghai AMR, terminating the investigation into Haichang’s restriction of minimum resale price of contact lens sold by online pharmacies. See Table 2 for a list of RPM cases concluded in China in 2019.

Table 2: RPM cases concluded in 2019

UndertakingsType of decisionEnforcement agencyPercentage of fineValue of fine
Changan FordInfringement decisionSAMR4% of its sales value in the Chongqing area in the previous year162.8 million renminbi
Toyota Motor (Lexus)Infringement decisionJiangsu AMR2% of its sales value in the previous year87.6 million renminbi

Abuse of dominance

As in 2018, 2019 has been relatively quiet in terms of concluded investigations toward abuse of dominance, although a few high-profile investigations are still ongoing.

Eastman

In April 2019, the Shanghai AMR issued an infringement decision against chemical giant Eastman, fining it 5 per cent of its sales value in 2016, the equivalent of 24.38 million renminbi. Eastman was found to have abused its dominant position in the relevant market of Texonol ester alcohol in China by way of exclusive dealing during 2013–2015. Shanghai AMR identified three problematic conducts:

  • Eastman had executed and implemented agreements that contain a minimum order quantity that takes up over 60 per cent of certain customer’s annual demands;
  • Eastman had executed and implemented agreements that contain take-or-pay clauses on customers whether or not they actually purchased goods; and
  • Eastman had offered most-favoured-nation terms to customers who would purchase the majority of their demand from Eastman.

Tianjin Water Supply Group

This is yet another case where a state-owned enterprise was punished for AML violations. In July 2019, the Tianjin AMR fined Tianjin Water Supply Group, the only urban water supply firm in the south of Tianjin, 3 per cent of its sales value, the equivalent of 7.4 million renminbi. The firm apparently deprived several real estate development companies from freely choosing smart electricity control cabinets and remote control substations.

Zhengyuan Water Supply Co of Suqian

In October 2019, the Jiangsu AMR fined Zhengyuan Water Supply Co of Suqian city 4 per cent of its sales value in 2016, amounting to 878,000 renminbi, and confiscated illicit gains in the amount of 1.18 million renminbi. The firm is the only running water supplier in the Suyu area of Suanqian City. The Jiangsu AMR found the firm to have designated construction teams for the installation of running water, depriving applicants for running water of the freedom to choose their own installation teams.

Jinghua Pharma

In February 2019, the Jiangsu AMR issued a commitment decision suspending the investigation into the refusal to deal conduct of Jinghua Pharmaceuticals Group Co, Ltd. Jinghua Pharma purportedly refused to sell phenobarbital active pharmaceutical ingredients (API) directly to its downstream drug manufacturers and instead authorised several firms to distribute the API at a significantly raised price. Under China’s commitment system, if the commitments were satis­factorily complied with by Jinghua Pharma, it will receive another decision to terminate the investi­gation in due course.

Yancheng ENN

Yancheng ENN is a gas supply firm in Jiangsu Province. The Jiangsu AMR investigated the firm’s purported imposition of unreasonable terms in its contracts with customers since 2008. Jiangsu AMR accepted the commitments by Yancheng ENN and suspended the investigation in February 2019.

Merger review

In 2019, the SAMR unconditionally cleared 432 concentration of undertakings and conditionally cleared five. There was no prohibition decision in 2019.

Conditional clearances

The conditionally cleared cases are:

  • KLA-Tencor/Orbotech;
  • Cargotec/TTS;
  • II-IV/Finisar;
  • Garden Bio-tech/Royal DSM; and
  • Novelis/Aleris.

The SAMR continued its preference for behavioural remedies and imposed pure behavioural remedies in four of the five cases, including fair, reasonable and non-discriminatory (FRAND) supply terms, hold-separate obligations and prohibition of tying behaviours. The SAMR only imposed structural remedies in the Novelis/Aleris case, which concerned horizontal overlap in aluminium sheets for cars with a post-transaction market share of 70–80 per cent. The SAMR ordered divestiture of Aleris’s aluminum auto body sheet business in the European Economic Area and imposed an obligation on Novelis not to supply cold-rolled sheet to competitors in the aluminum auto body sheet market.

Application of simplified procedure

The Novelis/Aleris case also tested the scrutiny of whether a notification is eligible for the simplified procedure. Novelis/Aleris was first notified as a case subject to the simplified procedure. When the SAMR discovered, through objection by third parties during the case’s public notification process, that it should not have been a simplified case, it then exercised its discretion to cancel the case and requested that the parties re-file as a standard procedure case.

Semicon mergers

Two of the five conditionally cleared cases concerned the sensitive semiconductor sector. Notably, both transactions were unconditionally cleared in other jurisdictions. In KLA-Tencor/Orbotech, the SAMR considered that the proposed transaction would generate a vertically integrated firm, which would leverage its dominant position in the upstream process control equipment market to exercise foreclosure in the downstream deposition and itching equipment market. The SAMR thus applied conditions including the supply of upstream products on FRAND terms and the prohibition of tying or unfair trading conditions for a period of five years. KLA-Tencor/Orbotech received unconditional clearance in the US, Germany, Japan, South Korea, Taiwan and Israel.

In II-IV/Finisar, the SAMR decided that the change of control from three to two competitors would result in a combined market share of 45-50 per cent in the global and Chinese markets of wavelength selective switches (WSS). The SAMR therefore again imposed behavioural remedies ordering II-IV and Finisar to maintain separate statuses of their WSS business for a period of three years. II-IV/Finisar received unconditional clearance in the US, Germany, Mexico and Romania.

Intensified sanctioning of gun-jumping

The year 2019 saw the SAMR intervene in 19 concentrations of undertakings that failed to comply with its notification obligation. This is an all-time high when compared to the 14 gun-jumping infringement decisions in 2018 and six in 2017. Notably, one of these cases concerned a transaction that was notified to the SAMR but implemented by the parties (by completing business registration) before a clearance decision was issued.

It is believed that the actual number of transactions to have escaped antitrust merger scrutiny might have been greater. There has been criticism that this phenomenon was, to some degree, attributable to the low fine (currently only up to 500,000 renminbi) applicable to gun-jumping violations. The AML Draft Revisions proposed to raise the cap of fine on gun-jumping violations to up to 10 per cent of the relevant undertaking’s sales value in the previous year. It should be observed whether this can be adopted as proposed.

Private actions

China allows both standalone and follow-on antitrust actions. Although the number of stand-alone actions are steadily growing in China, follow-on actions and actions against administrative decisions remain scarce. Notably, on 1 January 2019, China implemented an interim arrangement where all antitrust disputes that are appealed should be heard by the Supreme People’s Court of China (SPC), and Huang v Didi became the first such case. Table 3 details a few high-profile private action cases that were brought before the courts in China in 2019.

Table 3: Some of the private action cases observed in 2019

PartiesCourtsIssuesEvents
Huawei v IDCShenzhen Intermediate People’s CourtPurported violation of FRAND obligation by IDC in licensing 3G, 4G and 5G wireless communication standards2 Jan 2019 – commencement of litigation proceedings
JD v Ali (Pingduoduo and vip.com joined in as third parties)Beijing High People’s CourtAbuse of dominance (Ali’s ‘choose one from two’ restrictions on vendors on its Tmall platform)1 Jan 2019 – commencement of litigation proceedings
9 Oct 2019 – SPC ruled on Ali’s jurisdictional challenge finding the Beijing High People’s Court has jurisdiction
Nov 2019 – Pingduoduo and vip.com joined in as third parties
Galanz v TmallGuangzhou IP CourtAbuse of dominance (Tmall’s ‘choose one from two’ restrictions)28 Oct 2019 – Galanz filed for litigation
4 Nov 219 – filing accepted
Ruixin v StarbucksShenzhen Intermediate People’s CourtAbuse of dominance (Starbucks’ exclusive terms in tenancy agreements and ‘choose one from two’ terms in supply agreements)16 May 2018 – Ruixin filed for litigation
14 Nov 2019 – Ruixin withdrew the filing
Huang v DidiZhenzhou Intermediate People’s Court; SPCAbuse of dominance (excessive pricing)4 May 2018 – Huang filed for litigation
March 2019 – Zhenzhou Intermediate People’s Court rejected all of Huang’s claims; Huang appealed later to SPC
24 Sep 2019 – hearing by SPC
Hytera v MotorolaBeijing IP CourtAbuse of dominance (Motorola’s purported exclusive dealing and refusal to deal behaviours in the subway network wireless communication equipment market in Chengdu)Around Nov 2019 – hearing
Dec 2019 – Beijing IP Court found Motorola dominant on the market delineated by the requirements set out in the tender invitation documents, but did not abuse such dominance due to lack of intention and presence of substitutable technologies

Arbitrability of antitrust disputes

In its decision in Huili v Shell, handed down in August 2019, the SPC deliberated that, since the AML has obvious public law characteristics and the finding of monopoly is beyond just contractual relationships, AML disputes should be adjudicated by courts and not by arbitration. This clarifi­cation from the SPC contrasted with a decision of the Beijing High People’s Court handed down two months earlier where it found that antitrust disputes were arbitrable. Whether the SPC would consistently apply this principle in its future decisions remains to be seen.

Intellectual property and AML

Dawn raid on Ericsson

The SAMR raided Ericsson’s office in Beijing and conducted on-site forensics in April 2019. The dawn raid was believed to be related to complaints made by Chinese mobile phone manufacturers in relation to Ericsson’s alleged abuse of dominance in the 3G and 4G non-SEP markets by charging excessive royalty rates. The case is still under investigation.

Investigation against Tencent Music Entertainment Group

Tencent Music Entertainment Group has reportedly been under investigation by the SAMR since January 2019 for the alleged exclusive licensing agreements with several of the world’s largest record labels, such as Universal Music Group, Sony Music Entertainment and Warner Music Group, and then re-licensing music rights in China to its rival platforms at unreasonably high prices.

KTV v CAVCA

On 21 March 2019, nine karaoke establishments from Guangdong province sued the China Audio-Video Copyright Association (CAVCA) in the Beijing IP Court. The causes of action were CAVCA’s alleged abuse of dominance by imposing unfair trading terms. The rulings of the above series of cases are still pending.

Xiaomi v Sisvel

Around December 2019, electronic products manufacturer Xiaomi sued Italian patent licensing firm Sisvel in the Beijing IP Court asking the court to determine the royalty rates of the China SEPs within the wireless transmission technology package Sisvel licences.

Abuse of administrative power

On 2 September 2019, China launched a campaign against abuse of administrative power and called for enforcement focus on anticompetitive conduct exercised by government departments in sectors including pharma, construction, transport, tendering, government procurement and production of seals.

Outlook on 2020

Although there is no industry sector, perhaps with the exception of agriculture products, that is excluded from the scrutiny of the AML, it could be said that certain industry sectors may attract more enforcement focus. For instance, as was reiterated multiple times by officials of the SAMR, the industry sectors concerning the people’s livelihood has become and will continue to be the focus of AML enforcement. Sensitive sectors or sectors of strategic importance to China, such as semiconductors or the chemical industries, would also be expected to attract regulatory attention. It is also obvious that the SAMR is not unwilling to delve into new areas such as exclusionary conducts by internet platforms or restrictive agreements that have the effect of delaying new technologies from entry into the market.

Exclusionary conduct by internet platforms likely to attract continued regulatory attention

In March 2019, Tencent Music Entertainment Group was reportedly being investigated by the SAMR for charging excessive fees in the sub-licensing digital music distribution rights it owned exclusively to its competitors. So far, the enforcement focus seems to have been on Chinese internet companies. In March–May 2019, the online food delivery platform Ele.me was reportedly being investigated by the SAMR’s Heilongjiang and Zhejiang provincial subsidiaries for imposing terms on local restaurants forcing them to choose one from the two. In November 2019, the SAMR called meetings with 20 e-commerce firms and stated that it intends to conduct antitrust investigations into the problematic ‘choose one from the two’ tactics.

Dawn raids and pending investigations

In April 2019, the SAMR dawn raided Ericsson’s Beijing office for alleged abuse of dominance including excessive pricing and tying in the licensing of 3G and 4G SEPs. There have also been reports about the SAMR’s investigation into the exclusive arrangements by Tencent Music Entertainment Group, the agreement to delay the entry of new emission technologies in the car industry, and ‘choose one from the two’ tactics adopted by many, but especially some, internet giants. Northeast Pharma disclosed that it has been under antitrust investigation by the Liaoning AMR since 4 November 2019. China Mobile also disclosed on 29 April 2019 that four of its provincial-level subsidiaries are under antitrust investigation by the SAMR concerning the distribution of bespoke 4G+ mobile phones.

Interplay between antitrust merger review and national security review

China’s national security review (NSR) system was introduced as early as 2011, but it has largely remained a wallflower until August 2019, when the NDRC informed Yonghui Supermarket that its proposed acquisition of another retail group Zhongbai should be notified for national security review. This notice of the NDRC came only six days after Yonghui received an unconditional clearance from the SAMR in its concentration of undertaking review. It thus raised the question whether antitrust notifications would attract regulator attention to launch a parallel or following national security review. In the most recent development, Yonghui announced in December 2019 that it had decided to abort the acquisition one month after the NDRC brought the case to the special review process of the NSR.

In summary, the dynamics in antitrust legislation in 2019 seem to suggest that, while China hopes to raise the awareness of businesses and deter AML violations by raising the bar of legal consequence, it is also seeking to encourage the reporting and detection of AML violations. Parallel enforcement activities in other jurisdictions would also inform China’s enforcement activities. Any key developments under the AML deserve to be closely observed.

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