China - Abuse of Dominance

Overview

China’s Anti-Monopoly Law (AML) was still active in 2017 in its enforcement against abuse of dominance. Although the cases published are not as significant as those in 2015 or 2016, the two authorities were still active and busy in enforcing the AML against abuse of dominance.

Abuse of dominant position is one of the three main pillars of antitrust conduct that are regulated by the AML.1 The AML and its enforcement indicate a basic analytical framework. First, defining the relevant market based on State Council’s Guidelines of Defining Relevant Market.2 Second, whether the undertaking concerned has market dominance. Article 18 of the AML stipulates the factors that shall be considered when assessing the existence of market dominance. Further, according to article 19, an undertaking will be assumed to have a dominant position if its market share accounts for over 50 per cent in the relevant market. Third, whether the undertaking concerned has abusive behaviours. Fourth, whether the undertaking concerned has justifications. Fifth, whether the abusive behaviour has any anticompetitive effect.

In addition to the AML, the National Development and Reform Commission (NDRC) and the State Administration for Industry and Commerce (SAIC) also have their own provisions in relation to abuse of dominance. Provisions on Anti-Price Monopoly, which deal with price-related abusive behaviour, was issued by the NDRC and entered into force on 1 February 2011. Provisions of the Industry and Commerce Administration Organs on Prohibition of Abuse of Dominance, which deals with non-price related abusive behaviour, was issued by the SAIC and entered into force on 1 February 2011 as well.

Over the past year, the NDRC and the SAIC have reaffirmed their hard stance in targeting both domestic and global abusive behaviour. Based on these cases, the two authorities accumulated more and more experience, and want to summarise the experience in the guidelines currently being drafted, which may provide more legal certainty to the procedure and substance of regulating abusive behaviours in China. On the other hand, such cases may illustrate the authorities’ current focus and future trends by themselves, which may provide valuable guidance for practitioners. These upcoming guidelines and the enforcement records for abusive cases in 2017 will continue to shape the enforcement regime against abusive behaviour in China.

This article can be divided into two segments: legislation and enforcement. In relation to legislation, there are two significant draft guidelines that may come into effect soon, ie, the Draft Guidelines on the Abuse of Intellectual Property in the Antitrust Field (IP Guidelines) and the NDRC Draft Antitrust Guidelines for the Automobile Industry (Auto Guidelines). In terms of enforcement, this article particularly focuses on administrative enforcement, ie, the enforcement by the NDRC and SAIC (and their respective branches). It summarises several features of the enforcement in 2017, based on which we make some predictions about the trends of the authorities’ future enforcement towards abusive behaviour in China.

Legislative development: major upcoming draft guidelines

The Anti-Monopoly Commission’s Draft Guidelines on Abuse of Intellectual Property in the Antitrust Field

On 23 March 2017, the Anti-Monopoly Commission (AMC) released the IP Guidelines for public comments. It was formulated by the AMC based on the draft proposals respectively prepared by the NDRC, the SAIC, MOFCOM and the State Intellectual Property Office (SIPO).

Structure of the IP Guidelines

In terms of structure, the IP Guidelines includes five chapters in total. Chapter 1 sets up the general principles of dealing with intellectual property rights (IPRs) matters in the antitrust field; chapter 2 is related to monopolistic agreements regarding IPRs; chapter 3 deals with abuse of market dominance in relation to IPRs; chapter 4 relates to concentrations regarding IPRs; and chapter 5 includes other issues regarding IPRs, such as patent pool, injunctive relief and copyright collective management organisation. Through these five chapters, the IP Guidelines establishes a comprehensive analytical framework for the authorities to deal with the matters in connection with IPRs.

Monopolistic agreement in relation to IPRs

It is notable that chapter 2 of the IP Guidelines sets out several specific conducts from which competition concerns could arise and creates a ‘safe harbour’ for restrictive agreements involving IPRs. This chapter identifies five specific conducts in the exercise of IPRs that could cause competition concerns, namely joint research and development, cross-license, exclusive grant-back, non-challenge clause and standard setting. In addition to these conducts, the IP Guidelines further specifies another four conducts that can arouse competition concerns:

• restricting the areas in which IPRs are used;
• restricting distribution channels, scope or purchasers of the goods in which IPRs are incorporated;
• restricting the quantities of the goods in which IPRs are incorporated; and
• restricting the use of competing technologies or the supply of competing goods.

Article 14(3) of the AML stipulates three kinds of vertical agreements:

• fixing resale price;
• maintaining the lowest resale price; and
• other vertical agreements.

The IP Guidelines requires many other types of vertical agreements to be reviewed, including exclusive grant-backs, non-challenge clauses and restrictions on the IP licenses concerning, eg, use, sales channels, sales areas, sales targets, the number of products, and the use of competing technologies or providing competitive products. These agreements are regulated under article 17 (abuse of market dominance) of the AML. This implies that such agreements can be reviewed and regarded as monopolistic even if the IPR holders concerned do not have market dominance.

Safe harbour

Article 12 of the IP Guidelines concerns a ‘safe harbour’, which is delineated by meeting any one of the following conditions:

• the combined shares on the relevant market of undertakings in a competing relationship are no more than 20 per cent;
• the market share of all of the undertakings in a non-competing relationship on any of the relevant markets affected by the agreement involving IPRs is no more than 30 per cent; and
• the market share information of the undertaking on the relevant market is difficult to be obtained, or where the market share does not truthfully reflect the market position of the undertaking, apart from the technologies controlled by the parties to the agreement, there are, however, four or more substitutable technologies on the relevant market that are independently controlled by other undertakings and obtainable at reasonable costs.

It is also notable that the safe harbour only applies to ‘other monopolistic agreements’.

Abuse of dominance in relation to IPRs

Regarding the IPR-related dominance, the IP Guidelines lists five types of abusive behaviour:

• charging an excessively high licensing fee;
• refusal to license;
• IPR-related tying;
• imposition of IPR-related unreasonable trading conditions; and
• IPR-related discriminative treatment.

It is notable that the IP Guideline gives no definite answer to determine whether this abusive behaviour is right or wrong. Instead, it only lists several factors that may be considered when assessing the anticompetitive effect of such behaviour.

The NDRC’s Draft Antitrust Guidelines for the Automobile Industry

On 23 March 2016, the Auto Guidelines, which were drafted by the NDRC, were published by the NDRC for public comments.

Overall structure and content

Overall, the Auto Guidelines specify those commercial arrangements that may constitute monopolistic behaviour in the vehicle and after-sales market from the perspectives of horizontal/vertical monopolistic agreement and abuse of dominance. The Auto Guidelines make an overall assessment on both the possible efficiencies and anticompetitive effects that can be generated from commercial arrangements.

In terms of content, the draft Auto Guidelines concern various rights and obligations of auto suppliers, part suppliers and auto dealers, covering a variety of aspects of production, wholesale, retail and after-sale. Based on the AML, the draft Auto Guidelines introduce a series of new concepts, such as significant market power, single-brand after-sales market, cumulative effects, passive sales, middlemen and real foundry agreements. Some of the concepts have been widely used in some mature jurisdictions as far as antitrust enforcement is concerned, while they are introduced for the first time in China’s antitrust legislation.

Vertical agreement and safe harbour

For some vertical agreements which, in practice, have been proven to be able to promote efficiency without seriously restricting competition, the draft Auto Guidelines propose that a block exemption can be applied (the antitrust law enforcement agency does not rule out the possibility of identifying such agreements as a monopolistic agreement on a case-by-case basis). The Auto Guidelines introduce a market share threshold of 25–30 per cent as a sort of safe harbour. The following four types of restrictions, when satisfying the above thresholds, are considered under the Auto Guidelines as being eligible for an exemption under article 15 of the AML, when proven to yield efficiencies and when justified:

• territorial restrictions that do not restrict passive sales or cross-supply;
• restriction of active sales into non-allocated regions;
• restriction of direct sales to end-customers by wholesalers; and
• restriction of auto parts sales by dealers to customers who use such auto parts to manufacture the same products as the auto suppliers.

For other vertical agreements for which the presumed exemption cannot be used, the draft Auto Guidelines point out that the application of exemption should be determined according to article 15 of the AML.

Abuse of dominance in auto industry

Although abuse of dominance may not be the focus of the Auto Guideline, the articles have very specific industrial features. For example, automakers who have dominant position will not be allowed to prohibit distributors from selling products of other brands or sourcing parts from other channels, which is likely to be regarded as a kind of abusive behaviour according to the Auto Guidelines. In particular, with dominant market position in the aftermarket, automakers shall not restrict distributors and repairers from purchasing quality-equivalent parts or OEM parts through other channels (including parallel imported parts) without proper justifications.

The draft Auto Guidelines were the first antitrust guidelines with its focus on one particular industry in China. It is believed that they can be regarded as a milestone during the development of antitrust enforcement, especially in the auto industry.

It seems plausible that the sector-specific Auto Guidelines could have more far-reaching potential implications, chiefly because the issues addressed by the Auto Guidelines are also faced by many other industries with similar business models. However, it remains to be seen how the NDRC will view such arguments in a wider context. Importantly, the Auto Guidelines also bring, at least within the automotive industry, the authorities’ position regarding vertical arrangements closer to the approach adopted in other jurisdictions, most notably the EU.

Analysis of authorities’ enforcement against abusive behaviours in 2017

Up to 11 December 2017, the NDRC had published 20 decisions on its official website. Among these there were 18 cases concerning monopolistic agreements and two cases concerning abuse of dominant position. Regarding the enforcement of the SAIC, 12 decisions have been published. Among these there were four monopolistic agreement cases and eight cases concerning the abuse of dominant position.3 Therefore, published decisions account for 32.3 per cent of the total number of the cases published by the NDRC and the SAIC in 2017.

Therefore, there are 10 published abusive cases in total from both the NDRC and the SAIC. We analysed the abusive cases in 2017 and tried to summarise some of the features in relation to the NDRC and the SAIC’s enforcement.

Industries concerned

The NDRC’s two dominance decisions concerned the pharmaceutical industry. Among the SAIC’s eight dominance decisions, three cases concerned the pharmaceutical industry, one case concerned software, and three cases concerned public goods supply (water/gas/electricity supply).

We may find out the three industries causing the majority of the authorities’ concerns: pharmaceutical, public goods supply, and telecommunication. There are several similarities regarding these industries:

• they are closely related to national economy and people’s livelihood;
• they can be categorised as natural monopolistic industries; and
• they are highly regulated by the government.

Decentralisation of enforcement

Both the NDRC’s two dominance cases were investigated and published by the NDRC itself. In contrast, all the SAIC’s eight dominance cases were investigated by its local branches, including: the Administrations for Industry and Commerce (AICs) of Sichuan Province, Jiangsu Province, Shandong Province, Hubei Province and Ningxia Autonomous Region.

China can be divided into six areas and the above-mentioned local branches of the SAIC are located in four different areas across China; namely, the northwest area, southwest area, central-south area and east area.

Decentralisation of SAIC’s enforcement, which means the SAIC authorises its local branches to enforce the AML in local areas, is a significant feature in relation to its 2017 enforcement. The legal basis is article 10 of the AML.4

This decentralisation trend can be beneficial to the AML enforcement in China as a whole. For example, in the China Telecom Ningxia Branch Abuse of Dominance case,5 which was investigated by the Ningxia AIC, the Ningxia AIC may be in a better position to investigate the case, because it is more familiar with the China Telecom Ningxia Branch’s situation and possible local features than the SAIC. After all, the SAIC, which is located in Beijing, is more than 1,000 kilometres away from the Ningxia region. Therefore, the Ningxia AIC’s enforcement may be more efficient and effective than the SAIC. In addition, decentralisation may be beneficial in terms of popularisation of the concept of competition in the areas far from Beijing. Last but not the least, decentralisation may allow the SAIC to focus its scarce resources on more significant antitrust cases, which may improve the AML’s overall enforcement.

Types of abusive behaviour

According to the NDRC and the SAIC’s published decisions, different types of behaviour were involved. Please refer to the table below.

Based on the table above, we may summarise that two abusive behaviours, tying and designated dealing, are the most significant abusive behaviours chased by the authorities. On the other hand, these two behaviours are very common in commercial interactions between the undertakings and its trade counterparts. For the market dominators, especially whose market share is above 50 per cent in the relevant market,6 such undertakings should be very careful if they want to adopt the arrangement of tying or designated dealing. Refusal to trade and an charging excessively high price, which are often found in antitrust cases related to patents and royalties, are also noteworthy because the NDRC has paid great attention to such behaviours.

Active enforcement towards domestic undertakings or State-Owned Enterprises

Another observation is that enforcement in 2017 is very active towards domestic undertakings or State-Owned Enterprises (SOEs). The targets of all the published cases are domestic undertakings and SOEs. In 2016, the SAIC published one abusive case related to multinational company: the Tetra Pak case.7 For the NDRC, it also published one case related to a multinational company: the Medtronic case.8 Both cases are influential.

Therefore, it seems fair to say that the authorities’ AML enforcement is not specifically targeted at multinational companies. Instead, their targets are, to a large extent, domestic undertakings and SOEs, which illustrates the determination of the authorities to punish any anticompetitive behaviours, regardless of who conducts the behaviour.

Settlement method

In relation to the settlement method, the enforcement record in 2017 is also very interesting. Firstly, fines were imposed on almost all of the undertakings in the decision, although the amounts varied from one to another. Generally, the range of the rate of fine was from two per cent to seven per cent of the undertakings’ sales in the past year.

In addition, according to the published cases, fines imposed by the authorities were based on the sales of the subject product/service from the Chinese market, which was generated in the year prior to the one when the decision was made.

It is also noteworthy that the SAIC terminated its investigations in two cases because the undertakings made commitments to rectify their behaviour and the SAIC agreed with the commitments and terminated the investigations. Therefore, submitting commitments and reaching agreement with the authorities may serve as an alternative and better approach to close the investigation than being fined.

Features and future trends

2017 was the tenth year since the AML was enacted. After a brief review of the enforcement of abusive behaviour in 2017, we summarised several features and future trends of the enforcement activities as below.

More guidelines to be made

The development of competition law enforcement is likely to be accompanied by the publication of more refined regulations or guidelines. This is echoed by the two draft guidelines mentioned above. In fact, more guidelines are still in the pipeline.9 Thus, more guidelines are predicted to be formulated in the future.

More focused on the industries related to consumers’ everyday life

In 2017, the cases investigated by the NDRC and the SAIC were mainly focused on pharmaceuticals, public goods supply, communications and software. Such industries concern consumers’ everyday life and can have a big impact on consumer welfare. By regulating the undertakings’ behaviours in these industries, consumer welfare can be protected.

More decentralised: local branches of the NDRC/SAIC are active

The local branches of the NDRC and the SAIC are actively engaging in the antitrust enforcement. Such decentralisation10 can be helpful to efficiently and effectively regulating undertakings’ monopolistic behaviours, popularising the concept of competition and focusing the SAIC’s scare resources on significant antitrust cases.

Enforcement towards domestic companies is more active

It seems that the authorities are more active in enforcement towards domestic companies. For example, there were in total 73 decisions published by the NDRC on its website by the end of 2017, while only 16 decisions concerned multinational undertakings. Still, multinational undertakings should also be aware of compliance with the AML.

Notes

1 The other two are ‘monopolistic agreement’ and ‘merger review’.Notes

2 Issued and came into force on 24 May 2009.

3 Although there are 12 decisions published by the SAIC, there were actually only 11 cases in total because two decisions were actually made based on one case. In that case, the decision of suspension of investigation was first published and later, a final decision of termination of investigation was published.

4 Article 10 stipulates: ‘(T)he antitrust enforcement authorities under the State Council may authorise the corresponding branches within the provincial, regional and municipal people’s governments to take charge of the AML enforcement in accordance with this Law.’

5 For official decision, please see, www.ngsh.gov.cn/2017/03/21/61219.html.

6 According to Article 19 of the AML, the undertaking who has more than 50% market share in the relevant market can be presumed to have market dominant position.

7 For official decision, please see, www.saic.gov.cn/fldyfbzdjz/jzzfgg/201703/t20170309_232289.html.

8 For official decision, please see, http://jjs.ndrc.gov.cn/fjgld/201612/t20161209_829716.html.

9 For example, the Guidelines on Identifying Illegal Income and Determining Penalties for Undertakings’ Monopolistic Behaviours (Draft) was published by the NDRC on 17 June 2016 for public comments. The Anti-Monopoly Guidelines for Exemption (Draft) was published by the NDRC on 12 May 2016 for public comments.

10 Except merger filing. MOFCOM is the only competition authority that is in charge of merger review.