CHINA (PRC FIRMS): An Introduction to Competition/Antitrust

An Introduction to Competition/Antitrust 

Overview 

In the latter half of 2020, antitrust enforcement in China attracted enormous attention, both within China and globally, when the State Administration for Market Regulation (“SAMR”) drastically enhanced antitrust enforcement. This was driven by the Chinese authorities’ determination to “enhance antitrust enforcement and prevent the disorderly expansion of capital.” The enforcement started in the internet sector, targeting the abusive conduct of a leading online retail platform. A fine of CNY18.2 billion (approximately USD2.8 billion) was finally imposed. The investigation and enforcement later expanded to other internet companies and companies in other sectors, and many of SAMR’s regional counterparts are also actively pursuing targets in their respective regions.

Apart from the investigation on monopolistic conduct, SAMR also strengthened enforcement against gun-jumping in mergers. Since December 2020, 54 gun-jumping cases have been fined by SAMR, involving essentially all of the Internet giants in China, and in some cases their co-investors.

Meanwhile, the PRC legislature also took action. Amendment to the current Antimonopoly Law (the “AML”, effective since 2008) has been a top priority of the National People’s Congress (“NPC”) Standing Committee (to be reviewed late October 2021), and some of the most important guidelines were promulgated in the past few months by the NPC’s Antimonopoly Commission, including the Antimonopoly Guidelines for the Platform Economy Sector (the “Platform Economy Guidelines”).

In the judicial area, there have been a number of high-profile litigation cases ongoing, including one between two leading internet companies regarding abusive conducts, and several cases involving international IP holders on standard essential patents (“SEPs”). The Supreme People’s Court also recently issued judicial interpretations in this area.

Therefore it is advisable for companies to closely monitor the fast-changing enforcement trends in the antitrust area in China, and enhance/adjust internal control and compliance to mitigate risks arising from the significant changes in law and enforcement.

Highlights of enforcement 

As noted above, SAMR has significantly enhanced its antitrust enforcement since the end 2020, and has pursued cases in all the three key pillars of the AML, namely (i) abuse of dominance, (ii) monopoly agreement, and (iii) merger control.

(1) Abuse of dominance 

In this area, SAMR mainly targets two types of conduct: (i) “choosing one from two” (exclusive dealing), and (ii) “charging higher prices to more frequent customers using big data” (discriminatory trading terms).

For “choosing one from two,” as noted above, SAMR fined a leading Chinese online retail platform operator CNY18.2 billion (4% of its previous annual turnover), which is believed to be the largest administrative fine ever imposed by a Chinese government agency, and third largest in the global antitrust enforcement history. The internet company was found to prohibit small retailers on its platform from operating on competing retail platforms.

In addition, the Shanghai SAMR fined an online food-delivery platform CNY1.2 million, 3% of its annual turnover of the previous year for the same conduct (preventing restaurants from joining competing platforms), alleging it abused dominance in the market for “online food-delivery platforms offering English service.” This shows that the relevant market defined by the authority can be very small.

Recently, SAMR has initiated an investigation into another large Chinese internet company providing local living services for the same conduct. The investigation is still ongoing.

There are also several fines imposed by the local SAMR, including on the sale of aviation kerosene in Yunnan, the supply of water in Shanxi and the supply of gas in Sichuan. Apart from formal investigations, SAMR has also been focusing on supervising internet companies to conduct self-inspection to improve compliance.

(2) Monopoly agreements 

For monopoly agreements, resale price maintenance has always been a focus. In September 2021, a civil electrical producer was fined CNY290 million (approximately USD45 million) for resale price maintenance. In April 2021, a pharmaceutical manufacturer was fined CNY764 million (approximately USD118 million) for the similar conduct.

There are also investigations and fines for horizontal agreement in the cement, liquefied gas and insurance sectors.

Notably, the Platform Economy Guidelines expressly provide that hub-and-spoke agreements also violate the AML. There may be more enforcement cases in this regard in the future.

(3) Merger Control 

Due to legal restrictions on foreign investments in certain sectors, internet companies typically adopted the so-called VIE structure, which posed challenges in merger review. SAMR has been pursuing gun-jumping mergers since the end of 2020, and has handed down 54 penalty decisions as of September 2021. The companies fined include almost all the leading internet companies in China, and in some cases their co-investors including PE funds, industrial companies and Chinese state-owned enterprises. Apart from monetary fines, a transaction in the online music streaming sector was penalised with behavioural measures, including prohibition from concluding exclusive agreements with upstream copyright holders. This is the first gun-jumping case imposed of behavioural measures in China.

The enforcement against gun-jumping in mergers is still ongoing. Spurred by this, SAMR has been receiving an increasing number of filings each year, with 520 in 2020 and 334 in the first half of 2021. There have been 4 conditional approval cases in 2020 and 2 in 2021 (as of September). One transaction was even prohibited in the online game-streaming sector, marking the third prohibitive decision of SAMR.

New rules and amendments to the AML 

As noted above, new rules, regulations and guidelines, as well as amendments to the AML are being proposed and reviewed by SAMR and by the NPC. Particularly, a number of new guidelines have been issued for the digital economy sector. Below are some key changes:

First, amendment to the AML is a top priority of the NPC this year. The AML amendments are expected to introduce more specific provisions for antitrust enforcement for the digital economy. The most important amendments include: (i) significant increase of the maximum fine for gun-jumping (from CNY500,000 to 10% of annual turnover); (ii) potential “safe harbour” for monopoly agreements; and (iii) “stop-the-clock” mechanism for merger review.

Second, the Platform Economy Guidelines were announced in February 2021, which provide more detailed provisions for antitrust enforcement in the digital economy sector, including monopoly agreements, abuse of dominance and merger review.

Third, the draft Regulations Prohibiting Online Unfair Competition was announced for public comments in August 2021, and it provides detailed guidance on how to apply the Anti-Unfair Competition Law of China to the Internet sector. Notably, the draft regulations extend the prohibition of several abusive conducts, including “choosing one from two” “charging higher prices to more frequent customers using big data”, to internet companies without a dominant market position.

Litigation 

As noted above, there have been a number of high-profile litigation cases currently in China, including one between two leading internet companies on abusive conduct (refusal to deal by blocking links), and several cases involving international IP holders on SEPs (on the calculation of licence fees). In addition, there are also some antitrust litigation cases against other major Chinese and international companies for abuse of dominance.

In light of the above, it is advisable for companies to closely monitor the fast-changing enforcement trends in the antitrust area in China, and enhance/adjust internal control and compliance to mitigate risks arising from the significant changes.