China - Overview
The Anti-Monopoly Law of China (AML) was promulgated on 30 August 2007 and came into force as of 1 August 2008. The declared objectives of the AML are the prevention and repression of monopoly conducts, the protection of fair competition on the market, the improvement of economic efficiency, the safeguarding of consumer interest and public interest, and the promotion of the healthy development of the socialist market economy.
The AML applies across the People’s Republic of China, except for Hong Kong, Macau and Taiwan. The AML can be applied extra-territorially where the conduct taking place outside of China has exclusionary or restrictive effects on competition in the market within China. Except for association or coordination by agricultural producers or rural economic organisations in the production, processing, sales, transportation and storage of agricultural products, there is no industry sector that is expressly excluded from the application of the AML.
The AML was largely fashioned after the competition law of the European Union, with some variations. For instance, the AML does not have state aid as a component, but instead it regulates abuse of administrative power which is of particular concern and relevance to China. Abuse of administrative power (and the fair competition review system under that realm) are discussed separately in this article.
The AML has three pillars:
- monopoly agreements;
- abuse of dominance; and
- concentration of undertakings.
The AML and the various implementing rules and guidelines issued by the three AML enforcement agencies form the legal framework of competition law in China.
Since the AML and the implementing rules are often too general, 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:
- market definition;
- price-related conducts by industry associations;
- leniency (draft);
- commitments (draft);
- general conditions and procedures of exemptions (draft);
- identification of illicit gains and setting fines (draft);
- motor vehicle industry (draft);
- abuse of intellectual property rights (draft); and
- pricing conducts of undertakings in relation to drugs in short supply and active pharmaceutical ingredients (draft).
AML enforcement agencies
The Anti-Monopoly Committee under the State Council of China is the organisation responsible for formulating competition policies and coordinating administrative enforcement activities. The power of AML enforcement is shared by three organisations, namely the National Development and Reform Commission (NDRC), the State Administration for Industry and Commerce (SAIC), and the Ministry of Commerce (MOFCOM).
The following chart sets out the division of responsibilities among the three enforcement agencies.
Anti-Monolopy Enforcement Agency (AMEA)
Price-related monopoly agreements and abuse of dominance violations
Non-price related monopoly agreements and abuse of dominance violations
Concentration of undertakings (merger reviews)
Delegation of power
Pursuant to article 10 of the AML, the AML enforcement agencies may empower their subsidiaries at provincial level (including the provinces, autonomous regions and cities under the direct leadership of the central government such as Shanghai) to enforce the AML.
The NDRC stipulated in its Provisions on the Anti-Price Monopoly Administrative Enforcement Procedures that the NDRC and its provincial-level subsidiaries may further empower price regulators at a lower level to investigate AML violations, provided the investigations are within the scope of power of the empowering authority and carried out in the name of the empowering authority.
The SAIC, to the contrary, forbids provincial-level subsidiaries to further empower their local subsidiaries to investigate and handle AML violations.
The review of merger notifications currently lies entirely with MOFCOM. However, pursuant to the ‘Interim Measures for Investigating and Handling Concentration of Undertakings Not Notified in Accordance with Law’, MOFCOM may empower its provincial-level subsidiaries to assist in investigations of concentration of undertakings within that region which were subject to mandatory review, however, were implemented without notifying MOFCOM.
The AML vests extensive investigatory power in the three enforcement agencies and such power can be categorised into the following:
- power to enter the business premises or other relevant premises of the undertaking being investigated;
- power to enquire undertakings being investigated, stakeholders or other relevant organisations or individuals;
- power to view and copy relevant documents and materials such as agreements, accounting books, business correspondences, electronic data;
- power to seize and impound relevant evidence; and
- power to enquire into the bank accounts of the undertaking being investigated.
Cartels remains an area where stable enforcement activities have been observed in China. In 2017, the NDRC and its subsidiaries issued infringement decisions to the following cartel activities.
The PVC cartel
In October 2017, the NDRC sanctioned 18polyvinyl chloride (PVC) firms which, reached andimplemented price-fixing agreements via WeChat andjointly pushed up the selling price of PVC. Each of the firms were fined between one per cent and two per cent of their annual sales on the relevant market in the previous year. The total fine imposed was 457 million yuan.
The power supply cartel
Around August 2017, the NDRC’s subsidiary Shanxi Provincial Development and Reform Commission, fined 23 thermal power suppliers that participated in a cartel 72.88 million yuan, which was one per cent of their relevant sales value in the previous year, on merits of cooperation and rectification of illicit conducts. Shanxi Province Electric Power Industry Association was given a fine of 500,000 yuan, which is the highest level of fine that can be imposed upon an industry association pursuant to the AML, for its leading role in organising the cartel.
The paper making cartel
In July 2017, the NDRC fined 17 paper manufacturers a total of 7.78 million yuan for participating in a cartel that fixed prices of rolled white board. The industry association that organised the cartel was revoked its business licenceas a punishment for repeated cartel involvement (see further below in ‘Sanctions’).
The property management evaluation service cartel
In May 2017, NDRC’s Beijing subsidiary fined the Beijing Property Management Assessment and Supervision Association and its 48 member companies for fixing fees for property management fee evaluation services. The fines imposed in this case totalled over 2.1 million yuan with the industry association fined 350,000 yuan.
The Hechi Insurance cartel
In April 2017, SAIC’s Guangxi subsidiary sanctioned the Hechi Insurance Industry Association and nine insurance companies for dividing the Hechi motorcycle insurance market. The industry association was fined 100,000 yuan and the nine companies were each fined five per cent of their annual sales value in the previous year.
The fireworks cartel
In February 2017, SAIC’s Henan subsidiary sanctioned five fireworks dealers for horizontal market division, which resulted in the increase of 15–20 per cent in the retail price of fireworks. The dealers were fined between 1 and 2 per cent of their sales value in the previous year and their illicit gains were also confiscated.
Industry association and cartel
As demonstrated above, the role of industry associations in cartels is not to be underestimated. Up to this date, around one-fifth of all published infringement decisions involved illicit conducts of industry associations. Against this background, the NDRC issued Guidelines on Price-Related Conducts of Industry Associations in July 2017, seeking to give specific compliance guidance to industry associations’ price-related conducts.
The legal ground for China’s leniency system is set out in article 46 of the AML, which is elaborated in the Guidelines on the Application of Leniency System to Horizontal Monopoly Agreements (Draft Leniency Guidelines) published by NDRC in February 2016. According to the Draft Leniency Guidelines, the leniency system applies only to horizontal monopoly agreements.
A ‘marker’ mechanism was proposed in the Draft Leniency Guidelines whereby undertakings are encouraged to come forward with initial information about their participation in horizontal monopoly agreements in exchange for a ‘place in line’ for leniency. In order for leniency to be granted, the undertaking applying for leniency should have fully performed the following obligations:
- ceased the suspected violation in a timely fashion;
- cooperated with the investigation rapidly, continuously, fully and sincerely;
- properly preserved, submitted and not tampered with evidence and information;
- without consent of the enforcement agencies, did not disclose the details of the leniency application; and
- there were no other conducts affecting the smooth performance of law enforcement.
The Draft Leniency Guidelines contemplate that generally leniency can only be granted to a maximum of three undertakings in one single case, but exceptions can be made where circumstances are complicated, a large number of undertakings are involved and different material evidence were submitted. The first undertaking granted leniency will receive either a full exemption or no less than 80 per cent reduction in fines; the second between 30–50 per cent reduction in fines; the third and any undertakings thereafter no higher than 30 per cent reduction in fines.
The Draft Leniency Guidelines also specified that no organisation or individual may have access to the leniency report and documents submitted by undertakings in leniency applications.
Article 14 of the AML prohibits agreements between undertakings and their transacting parties in the upstream or downstream markets where the agreements:
- fix resale price to third parties;
- restrict the minimum resale price to third parties; and
- are monopolistic as determined by the AMEA.
Resale price maintenance
A bifurcated treatment of resale price maintenance (RPM) has been observed in practice – the administrative enforcement agency NDRC has treated it as equivalent to the ‘by object’ offence in the EU; whereas the courts seemed to have applied the ‘rule of reason’ analysis to it in a number of RPM cases that went before them. This divergence, as appeared in the early days of competition law application, might have been the mere misinterpretation of legislative texts – a recent development may help to support this point. Reportedly in a challenge brought against an infringement decision issued by the Hainan Provincial Price Bureau concerning an RPM violation, the Hainan Province High People’s Court ruled in the second instance that AML enforcement agencies were not required to prove that the RPM in question had the effect of excluding and restricting competition, and thereby supported the Price Bureau’s infringement decision. This case brought the Hainan Province High People’s Court in line with the NDRC and its subsidiaries in terms of the distribution of burden of proof in RPM cases.
On the administrative enforcement front in 2017, Liaoning Provincial Price Bureau fined China Unicom’s Dandong branch 671,559 yuan for fixing the price of cable broadband products sold by Dandong Cable TV to households and for a tying practice.
Non-price related vertical restraints
The catch-all provision in the above article 14 of the AML acted as the legal authority for non-price related vertical restraints. Since this provision is too general and non-price related vertical restraints were never found to be independent violations of the AML in China, the legal position of non-price related vertical restraints is still quite unclear. Notwithstanding the foregoing, the Anti-Monopoly Guidelines of the Motor Vehicle Industry (Draft)published in March 2016 and the Anti-Monopoly Guidelines of the State Council’s Anti-Monopoly Commission on the Abuse of Intellectual Property Rights (Draft) published in March 2017 may serve to clarify the picture to some extent and offer some useful guidance to companies seeking compliance with the AML.
Article 15 of the AML provides articles 13 and 14 of the AML shall not apply where an undertaking can prove that the agreement or concerted practice in question fulfils one of the following circumstances:
- improves technologies, or engaging in research and development of new products;
- improves product quality, reducing cost and enhancing efficiency, unifying specifications and standards of products, or implementing specialised division of production;
- increases the efficiency and competitiveness of small and medium-sized undertakings;
- serves public interests in energy conservation, environmental protection and disaster relief;
- mitigates sharp decreases in sales volumes or obvious overproduction caused by economic depression;
- safeguards legitimate interests in foreign trade and in economic cooperation with foreign counterparts; and
- other circumstances as prescribed by law or the State Council.
If an undertaking were to claim exemption by applying the the first five points of the above, it also has to establish that the agreement or concerted practice in question meets two additional requirements:
- the agreement in question will not substantially restrict competition in the relevant market; and
- that the agreement in question will enable consumers to share the benefits generated therefrom.
The provisions of article 15 of the AML are general in nature and put tremendous burden of proof on the undertaking claiming its benefits. So far, no published case has seen impugned undertakings successfully obtaining individual exemptions relying upon article 15 of the AML. However, the draft guidelines for the motor vehicle industry and abuse of intellectual property may shed some light on block exemption rules.
Abuse of dominance
The analytic framework for abuse of dominance contains two major components: ‘dominance’ and ‘abuse’. In other words, the enforcement agency or the party challenging a conduct must prove:
- the undertaking in question is dominant on the relevant market; and
- the undertaking in question abused its dominant position on the relevant market.
There is a rebuttable presumption under which an undertaking can be presumed to be dominant on the relevant market where:
(i) one undertaking has a market share of 50 per cent or more on the relevant market;
(ii) the combined market share of two undertakings on the relevant market is two thirds or more; or
(iii) the combined market share of three undertakings on the relevant market is three quarters or more.
To presume ‘collective dominance’ as specified in the above (ii) and (iii), the market share of any undertakings in question must not be lower than one-tenth of the market share on the relevant market. The above presumptions can be rebutted if the undertaking can present evidence showing that it does not occupy a dominant position on the relevant market.
In additional to considering the market share of an undertaking, in practice the enforcement agencies often consider the following factors in the finding of dominance:
- the competitive conditions on the relevant market;
- the undertaking’s ability to control the sales market or the purchase market for raw and semi-finished materials;
- the undertaking’s financial and technical conditions;
- the extent to which other undertakings depend on the dominant firm in transactions; and
- entry barriers.
Article 17 of the AML prohibits dominant undertakings from engaging in the following conducts:
- selling at unfairly high prices or purchasing at unfairly low prices;
- selling at prices lower than cost without justifiable reasons;
- refusing to deal without justifiable reasons;
- restricting the trading parties to deal only with it or its designated firms without justifiable reasons;
- tying or imposing other unreasonable trading conditions without justifiable reasons;
- discriminating trading counterparts who have the same conditions without justifiable reasons; and
- other abuse of dominance as determined by the AMEA.
Excessive pricing in pharmaceuticals
In July 2017, the NDRC fined two pharmaceutical firms, Second Pharma Co, Ltd of Zhejiang Province and Tianjin Handewei Pharmaceuticals Co, Ltd a total of 443,900 yuan for selling Isoniazid active pharmaceutical ingredients (API) at excessively high prices and for refusal to deal. This case concerned two of the only three undertakings on a narrowly defined market ‘pharmaceutical-level Isoniazid API’. For the first time, the NDRC applied the ‘collective dominance’ doctrine to find Handewei, a company having ‘over 10 per cent market share’ to be collectively dominant with Second Pharma, where the combined market share of the two companies exceeded two thirds on the relevant market. The two companies raised the price of Isoniazid API to a range between 3.52 and 19 times of the price at other time periods and of other batches, which were considered excessively high by the NDRC.
The decision came against the backdrop of the reform of drug price which was commenced in June 2015 and aimed at implementing a market-driven price setting mechanism for drugs, and the backdrop of publication of the Guidelines on the Pricing Conducts of Undertakings Relating to Drugs in Short Supply and Active Pharmaceutical Ingredients in August 2017. In this context, the supply of certain drugs and API has been a focus of the NDRC in the recent years. The dynamics as demonstrated in case suggest that antitrust violations in the pharmaceutical sector, especially concerning drugs in short supply and API, will continue to be a priority of regulatory supervision.
The port probes
In November 2017,the NDRC published findings of the probes into abuse of dominance practices by ports around China. The probes followed complaints received during another probe into the shipping companies earlier in 2017. According to the NDRC, over 100 firms including the ports,their subsidiaries and firms on their upstream and downstream markets were interviewed during the probes. Three major issues were identified to be not compliant with the AML:
- the imposition of restrictions on shipping companies to use services provided by subsidiaries of the ports;
- charging unfairly high prices in non-contestable local international trade container services;
- the imposition of unreasonable trading conditions on trading parties such as loyalty terms.
The probes were followed by a meeting held jointly by theNDRC andthe China Ports Association, calling for 39 ports to reflect on the issues discovered in theprobe and to examine and rectify their practices.
The following sanctions can be imposed upon undertakings that violated AML:
- cessation of violation;
- confiscation of illicit gains; and
For industry associations, in addition to fines, undertakings may also be revoked of their business license if the circumstances of violation are severe. In July 2017, the NDRC revoked the business licence of the Fuyang Paper Making Association for organising a price-fixing cartel once again. This case marks the first time in China’s AML enforcement history that an association of undertakings was deprived of its legal existence due to AML violations. This case also presented a good opportunity to examine the conditions under which ‘recidivism’ are identified under the the AML and how sanctions are applied to recidivists.
Additionally, pursuant to the Provisions of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Civil Disputes Arising from Monopoly Conducts, and the relevant provisions of the Contract Law of the People’s Republic of China, where the contents of the agreement in question were in violation of mandatory provisions set out in law, such contents shall be null and void.
While it goes without saying that violations in every case need to stop following findings of infringement, confiscation of illicit gains is not a sanction that was applied in every case. Fines remain the most used sanction for AML violations.
Depending on whether the fines were addressed to undertakings or association of undertakings, the fines that can be imposed are different.
For undertakings, the following fines may be imposed:
- between 1–10 per cent of the sales value of the undertaking in the preceding year where the monopoly agreement was reached and implemented, and where the undertaking abused its dominant position; or
- up to 500,000 yuan where the monopoly agreement was reached but not implemented.
For association of undertakings, up to 500,000 yuan may be imposed. It should be noted that the newly published Guidelines on Price-Related Conducts of Industry Associations seemed to suggest that where an industry association sells newspapers and publications created by it to its members or other non-member individuals or organisations, or provides paid services such as consulting, training, credit evaluation or exhibitions, the industry association should be treated as undertakings. Nothing express was said about whether the fines applicable to undertakings shall be equally applicable to association of undertakings in these circumstances, it therefore remains to be seen how the enforcement agencies will treat this in practice.
Setting of fines
The methods of setting fines are set out in the Guidelines of the State Council Anti-Monopoly Commission on the Identification of Illicit Gains and Setting Fines in Monopoly Conducts by Undertakings (Draft) issued by the NDRC in June 2016. According to the guidelines, a three-step method is applied to calculate the final amount of fines:
- step one: determine the sales value of the undertaking in the preceding year;
- step two: determine the basic percentage of the fines, taking into consideration the nature and duration of the offence; and
- step three: determine the final percentage by adjusting the basic percentage, taking into consideration mitigating and aggravating factors as well as the degree of the offence.
Article 45 of the AML provides possibilities for undertakings to submit commitments in lieu of infringement decisions. However, unlike a straightforward commitment decision in the EU, the AML employs a two-phase approach.
- First phase: suspension of investigation. The enforcement agencies may decide to suspend the investigation where the commitments submitted by the undertaking being investigated can eliminate the consequence of their illicit conducts within a time period recognised by the enforcement agencies.
- Second phase: termination of investigation. The enforcement agencies may decide to terminate the investigation where the commitments were fulfilled by the undertakings.
The NDRC issued a Guidelines on Commitments of Undertakings in Anti-Monopoly Cases (Draft) in February 2016 proposing that the commitment system will not apply to horizontal monopoly agreements such as horizontal price fixing, output restriction and market division.
In 2014, the NDRC suspended investigations in the IDC abuse of dominance case. The SAIC by far issued most of the commitment decisions, which span from the telecom and public utility sectors to the sport ticket selling sector. In 2017 alone, the SAIC terminated investigations of five cases, all suspected of abuse of dominance.
Administrative review and administrative litigation
Where impugned undertakings are not happy with infringement decisions or commitment decisions issued by NDRC or SAIC, they may submit the decisions for administrative review or initiate administrative litigation proceedings.
In the context of concentration of undertakings, where undertakings are not happy with prohibitions decisions or conditional clearance decisions, they may apply for administrative review of such decisions first. If they are unhappy with the results of the administrative review, they may then initiate administrative litigation proceedings.
Concentration of undertakings
Where a merger falls in the specified types of transaction and meets the turnover thresholds, it is mandatory for the relevant parties to notify MOFCOM for anti-monopoly review before implementation of the contemplated transaction.
Types of transaction
The following types of transaction shall be subject to merger review if the turnover thresholds are also met:
- obtaining control over other undertakings by acquiring equity shares or assets;
- obtaining control over or exerting decisive influence on other undertakings by contracts, etc; and
- formation of joint venture jointly controlled by at least two undertakings.
The turnover thresholds are met where one of the following is satisfied:
- the combined global turnover of all the undertakings concerned in the preceding year exceeds 10 billion yuan and the turnover within China of each of at least two of the undertakings concerned in the preceding year exceeds 400 million yuan; or
- the combined turnover within China of all the undertakings concerned in the preceding year exceeds 2 billion yuan and the turnover within China of each of at least two of the undertakings concerned in the preceding year exceeds 400 million yuan.
Where the undertakings concerned are financial institutions in the banking, insurance, securities, futures and fund management sectors, 10 per cent of the various income items minus taxes and surtax will be used as the turnover in calculating the turnover thresholds.
MOFCOM’s investigatory power
MOFCOM has the power to investigate concentration of undertakings where, although the turnover thresholds are not met, ‘facts and evidence collected in accordance with prescribed procedures demonstrate that the concentration of undertakings has or is possible to have effects of excluding and restricting competition’.
Additionally, MOFCOM may authorise provincial level subsidiaries to assist in the investigations on concentration of undertakings that were not notified although the notification requirements are met.
Pursuant to article 25 of the AML, the initial review period (or Phase I) is 30 days, starting on the day the documents and materials required are submitted. MOFCOM can take the review to Phase II, which is a further 90 days if a detailed review is required, and Phase III, which can be up to a further 60 days where the undertakings concerned agree as such, the documents and materials submitted are not accurate or the relevant circumstances have changed substantially.
A simplified procedure was adopted in February 2014 and is applicable to the following circumstances:
- where the combined market share of all the undertakings participating in the concentration on the same relevant market is less than 15 per cent;
- where the market share of each of the undertakings participating in the concentration on the upstream and downstream markets is less than 25 per cent;
- where the undertakings participating in the concentration operate neither on the same relevant market nor on the upstream and downstream markets, the market share of each of the undertakings participating in the concentration is less than 25 per cent on each of the markets relevant to the transaction;
- where undertakings participating in the concentration establishes a joint venture outside of China, and the joint venture does not engage in economic activities within China;
- where undertakings participating in the concentration acquire equity shares or assets of an overseas entity, and the overseas entity does not engage in economic activities within China; or
- the concentration will result in control being obtained by one or more existing undertakings in a joint venture jointly controlled by two or more undertakings.
For cases subject to simplified procedures, a notice containing the brief of the transaction is published for public consultation for 10 days. This practice has made cases subject to simplified procedures having a better level of exposure than those cleared through standard procedures.
Undertakings can propose remedies to address competition concerns raised by MOFCOM. Three types of remedies can be imposed: structural remedies, behavioural remedies or a hybrid of structural and behavioural remedies. So far, MOFCOM has displayed a propensity to use behavioural remedies over structural remedies.
In the event of using divestiture as a remedy, supervising trustees and divestiture trustees may be appointed pursuant to request and approval from MOFCOM.
According to MOFCOM’s relevant regulations, the final remedy proposals need to be submitted to MOFCOM no less than 20 days before the end of the Phase II review. Where there is possibility that the remedies proposed as a first choice have the risk of not being able to be implemented, MOFCOM has the discretion to require the undertakings concerned to submit an alternative proposal that is stricter in nature than the proposal of first choice and may involve divestiture of the relevant core assets.
Updates in 2017
In 2017, MOFCOM unconditionally cleared 325 filings and conditionally cleared seven filings. The number of prohibited filing was zero. Among the transactions conditionally cleared, MOFCOM imposed divestiture requirements on three: Dow/DuPont, Agrium/Saskatchewan Potash and Becton-Dickinson/C.R. Bard.
In September 2017, MOFCOM published the Draft Revisions to the Measures of Review of Concentration of Undertakings (Draft Revisions), seeking to improve the notification and review of concentration of undertakings by consolidating the Measures of Notification of Concentration of Undertakings and Measures of Review of Concentration of Undertakings, both in force since 2009. Among many things, the Draft Revisions attempts to shed light on the identifying of ‘control’ or decisive influence. It also attempts to set out the standards of identifying ‘undertakings concerned’ under various circumstances.
MOFCOM in 2017 also sanctioned nine concentration of undertakings that failed to be notified even though the notification thresholds were met.
Pursuant to article 50 of the AML and the Provisions of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Civil Dispute Cases Arising from Monopoly Conduct, parties incurring losses from anticompetitive conducts or having disputes over monopoly agreements may bring civil actions against undertakings that engaged in anticompetitive conducts. Such civil actions may be brought to court by the claimant either directly or following infringement findings by AML enforcement agencies (follow-on actions).
Although the number of AML private actions in 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 more potential damage claims.
The local intermediate courts generally have jurisdiction over the first instances of monopoly disputes of a civil nature. The Supreme People’s Court may also designate an intermediate court to hear first instance monopoly cases. Subject to the approval of the Supreme People’s Court, courts at grass-root level (often district-level courts) can also hear first instance monopoly cases.
Arbitrability of AML matters
China’s legislation neither confirmed nor barred monopoly civil disputes from being resolved through arbitration. However, in 2016, the Jiangsu Province High People’s Court decided, in a contractual dispute between Samsung China and one of its distributors and upheld the court of first instance’s decision, that monopoly civil disputes are not arbitrable due to their ‘obvious public law nature’ and involvement in ‘public interest’. In setting out its reasons for denial of the arbitrality of monopoly disputes, the court noted China’s lack of judicial experience in anti-monopoly matters and expressed its view that the impact of the dispute in question was ‘beyond the contractual terms’ in the sense that it involved interests of third parties and consumers.
The above decision is controversial and poses uncertainty to agreements stipulating arbitration as the method of dispute resolution. The degree to which the impact of this decision has on other contractual disputes will have to be observed.
Notable case in 2017
Yingding v Sinopec
Yingding v Sinopec was the ‘first anti-monopoly case in the petrochemical sector’. The claimant, Yingding Co, is a producer of biodiesel. It initiated civil actions against Sinopec’s Yunnan Petroleum Branch and demanded the inclusion of its biodiesel products in the fuel sales system of the latter and a damage cost of 3 million yuan. The court of first instance partially supported claimant’s claims and ruled that Sinopec Yunnan shall include the claimant’s products into its sales system while rejecting the rest of the claims. Both sides appealed the judgment. In appeal, Yunnan High People’s Court remitted the case back to the court of first instance for retrial on both factual and procedural grounds. In retrial, the claimant added Sinopec as another defendant and issues pertaining to facts, procedure and law were fully debated, eventually the court of first instance fully supported the defendants and rejected all the claims of the claimant. The claimant appealed again but the court of second instance finally rejected all its claims in September 2017.
This case was essentially a refusal to deal case under the abuse of dominance realm, and touches upon several important issues, for instance the interplay between contract law and the AML, whether refusal to purchase can be a form of refusal to deal and thus be subject to the AML, and whether refusal to purchase on grounds of inferior quality indeed constituted ‘refusal’ for purpose of the AML.
Abuse of intellectual property rights
Article 55 of the AML provides that the AML is not applicable to the exercising of intellectual property rights by undertakings in accordance with laws and administrative regulations on intellectual property rights (IPR); however, the AML shall be applicable to conducts of undertakings that exclude or restrict competition by abusing intellectual property rights. Article 55 of the AML serves as the legal basis for anti-monopoly law’s intervention in the abuse of IPR in China.
The first legal document endeavouring to clarify the relationship between AML enforcement and the exercise of IPR is the Provisions on the Prohibition of Excluding and Restricting Competition by Abusing Intellectual Property Rights (IP Provisions), which were issued by SAIC and went into effect on 1 August 2015. However, since SAIC is only empowered to regulate non-price AML violations, the IP Provisions have inherent limitations due to their inapplicability to price-related AML violations and were also constrained in their degree of illustration.
On 23 March 2017, MOFCOM published for public comments the revised Anti-Monopoly Guidelines on the Abuse of Intellectual Property Rights (Draft IP Guidelines). The Draft IP Guidelines combine the experiences and opinions of the three AML enforcement agencies and the State Intellectual Property Offices. In particular, they specify the circumstances under which scrutiny under AML may be triggered and provide, factors that can be considered when assessing competitive effectives thereof, for instance, joint research and development, cross-licensing, exclusive grant-back, non-challenge clause, standard setting and patent pooling. The Draft IP Guidelines also set out a safe harbour for agreements involving IPR. If an agreement falls under the safe harbour, it will usually not be considered falling under the agreements prohibited. The Draft IP Guidelines also brought into awareness the abuse of IPR in the course of activities of copyright-collecting societies. Finally, five proposed factors in the Draft IP Guidelines are noteworthy, based on which injunctive reliefs are to be determined as to whether or not they constitute abuses.
Since the implementation of the AML in 2008, the interplay between the AML and the exercise of IPRs has been scrutinised on several occasions by the AML public enforcement agencies and courts.
The NDRC in 2015 fined Qualcomm approximately US$975 million for having abused its dominant position by charging an unfairly high price when licensing wireless standard essential patents as well as tying and imposing unreasonable trading conditions without justifiable reasons.
Huawei v IDC
In Huawei v IDC, the appellate court, the Guangdong Province High People’s Court, in 2013 upheld the judgment of the court of first instance and found IDC to have abused its dominant position by excessive pricing practice.
In 2014, MOFCOM approved Microsoft’s takeover of Nokia’s devices and services business on conditions that Microsoft and Nokia would respectively license their certain SEPs on fair, reasonable and non-discriminatory (FRAND) terms and that Microsoft would license, on a non-exclusive basis, its certain non-SEPs to smartphone makers within China.
Abuse of administrative power and fair competition review
Abuse of administrative power
The AML in its Chapter V prohibits organisations with public affairs administration functions empowered by administrative authorities, law and regulations to engage in conducts that exclude or restrict competition. Such conducts may include:
- restricting the operation, purchase and use of commodities to those provided by undertakings designated by them;
- impeding the free movement of commodities among different regions;
- imposing discriminatory qualifications, standards or withholding information illegally to exclude or restrict undertakings from other regions to participate in bidding and tendering activities;
- employing unequal treatments to exclude or restrict undertakings from other regions to invest or establish branch or subsidiaries;
- forcing undertakings from engaging in conducts prohibited under the AML; and
- formulating provisions 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.
Fair competition review
The fair competition review system was introduced in June 2016 with the publication of the Opinions of the State Council on the Establishment of the Fair Competition Review System in the Building of the Market System (Opinions). The Opinions was supplemented by the Implementing Rules of the Fair Competition Review System (Implementing Rules), issued by five ministerial-level government institutions in October 2017.
The fair competition review system advocates self-review by administrative organisations in their formulation of regulations, regulatory documents and other policy measures having to do with market entry, industrial development, introducing investment, tendering and bidding, government procurement, business operations, and qualification and standards. Further, administrative regulations, policy measures formulated by the State Council and local regulations formulated by governmental departments may not be submitted for deliberation where self-reviews were not conducted.
Self-reviews should be carried out in accordance with 18 review standards classified into four categories designed to safeguard the ‘national single market’:
- market entry and exit;
- free movement of commodities and key elements;
- impact on cost of production and business operation; and
- impact of conduct on production and business operation.
In addition, a catch-all provision in the Opinions provides a safety net for regulating other policy measures that do not fall under these categories but nonetheless may exclude or restrict competition.
The opinions also call for review of existing regulations and policy measures in accordance with the principle of ‘the one who formulates, cleans’. The fair competition review system is expected to provide firms with legal grounds to challenge regulations and policy measures of administrative organisations that impede fair competition.
In 2017, especially after the publication of the Implementing Rules, China saw accelerated dynamics in the promotion and enforcement of the fair competition review system. For instance, special inspections by AML enforcement authorities were carried out in Jiangsu, Anhui, Shandong, Shaanxi, Liaoning, Heilongjiang provinces, and trainings were delivered by AML enforcement authorities in Shaanxi and Jilin Provinces. Particularly, the Ningxia Provincial AIC acted on complaints it received and issued a letter of suggestions to the Yinchuan Municipal Environment Protection Bureau requesting it to review a circular containing two anti-competitive provisions it had earlier issued to three firms that won a bid in a government procurement process. Reportedly, the latter finally deleted the anticompetitive provisions. Similar enforcement activities or ongoing investigations were seen in Hebei, Qinghai, Jiangsu and other provinces.
Outlook on 2018
China will continue to be a leading merger review regime and is expected to continue to sanction mergers implemented without complying with notification requirements. The NDRC and SAIC will continue the momentum of enforcement activities that became normalised in the past five years. China is also likely to see a number of soft laws being published in 2018. The introduction of the fair competition review system will improve awareness of a competition culture among administrative organisations and enhance the chances of successful challenges against anticompetitive policy measures brought by undertakings.
The tenth anniversary of the implementation of the AML will be in 2018. Though the past year may have been a relatively quiet year in terms of the lack of record-breaking fines, the dynamics gathered in 2017 on the fronts of policy, enforcement and the uptake of a competition culture in China are not to be underestimated and will set the stage for a more mature competition regime in the next 10 years.
1 The AML enforcement agencies sometimes work with the other relevant authorities and sectoral regulators in formulating the AML rules, for instance, with the State Intellectual Property Office and the China Banking Regulatory Commission.
2 Article 3 of the Provisions of the Administration for Industry and Commerce on the Procedures Governing the Investigation and Handling of Monopoly Agreement and Abuse of Dominance Cases.
3 RPM is considered a price-related offence.