Knowledge

ICLG Vertical Agreement and Dominant Firms 2020

2020-07-02


1.General


1.1What authorities or agencies investigate and enforce the laws governing vertical agreements and dominant firm conduct?


The State Administration for Market Regulation ("SAMR"), a consolidated anti-monopoly enforcement agency, investigates and enforces the Anti-Monopoly Law of China ("AML"), which regulates vertical agreements and dominant firm conduct.


The Anti-Monopoly Bureau under SAMR carries out antitrust investigations into vertical agreements and dominant firm conduct. More specifically, the Division of Monopoly Agreement Investigation is in charge of vertical agreement investigations, and the Division of Abusive Conduct Investigation is in charge of investigations into abuse of dominant market position.


According to the Circular of SAMR on  the  Authority  for the AML Enforcement issued on December 28, 2018, "market regulatory departments of people's governments of all provinces, autonomous regions, and municipalities directly  under the Central Government (the 'Provincial Market Regulatory Departments' or 'PMRD') are hereby authorized, according to the work needs and in accordance with the relevant provisions of the Anti-Monopoly Law of the People's Republic of China, to be responsible for antitrust law enforcement work within their respective administrative areas". This means that both the statelevel SAMR and the provincial-level PMRD have the authority to investigate vertical agreements and dominant firm conduct.


1.2What investigative powers do the responsible competition authorities have?


SAMR and PMRD have the power to initiate an antitrust investigation based on their official powers, or through whistle-blowing, assignment by higher-level authorities, transfer from other authorities, reporting by lower-level authorities, or voluntary reports from undertakings.


When investigating monopolistic conduct, SAMR and PMRD may take the following measures:

  1. enter the business premises of undertakings which are under investigation or any other relevant place to inspect;        

  2. conduct interrogations of undertakings which are under investigation, interested parties, or other relevant entities or individuals, requiring them to disclose relevant information;        

  3. review and duplicate the relevant business documents, agreements, accounting books, business correspondence, electronic data, files, or documentation of undertakings which are under investigation, interested parties, and other relevant entities and individuals;        

  4. seize and detain the relevant evidence; and        

  5. check the bank accounts of undertakings which are under investigation.        


SAMR and PMRD have the power to suspend the antitrust investigation based on a commitment made by the undertaking under investigation, upon taking into account the nature, duration, consequences and social impact of the conduct, and whether the commitment could eliminate the anticompetitive effect.


SAMR and PMRD have the discretion to impose a fine of up to 10% of the preceding year's sales of the undertaking, and may confiscate illegal income.


1.3Describe the steps in the process from the opening of an investigation to its resolution.


1. Pre-investigation

At this stage, SAMR or PMRD will conduct an external investigation to understand the background and verify the evidence obtained to determine whether to formally initiate an antitrust investigation. PMRD may communicate with SAMR before initiating an investigation.


2. The initiation of the investigation

PMRD shall, within seven working days after the initiation of the antitrust investigation, report the case to SAMR for its records. No notice of investigation can be obtained by the entity under investigation.


3. Fact-finding and dawn raid

After the initiation of the investigation, SAMR or PMRD may carry out a dawn raid on the undertaking under investigation by conducting an on-site inspection to collect and detain evidence, conducting interrogations, and requesting the undertaking under investigation to provide documents.


Undertakings which are under investigation and interested parties have the right to voice their views. SAMR or PMRD shall verify the facts, reasons and evidence presented by undertakings under investigation and interested parties.


SAMR or PMRD will ask undertakings under investigation to submit or supplement documents and materials or provide explanations for certain conduct. The fact-finding process may last for several months, even years, and the scope of the investigation may be upstream, downstream or involve competitors of the undertaking under investigation. The undertaking under investigation has no right to access the investigation files.


4. Decision on the cancellation, suspension, resumption or termination of the investigation

The investigation can be closed if no violation can be found.  The investigation can be suspended if the undertaking which submits an application agrees to implement a certain specific commitment that will eliminate the anticompetitive effect within a time limit designated by SAMR or PMRD. If such commitments are well-implemented in the agreed period of time, SAMR or PMRD may terminate the investigation. The investigation could be resumed if the commitments are not implemented as promised.


5. Expert argumentation meeting

There is an Expert Committee under the Anti-Monopoly Commission of the State Council. Experts in the Expert Committee can be called on by SAMR to attend an expert argumentation meeting to give an expert opinion on the findings and preliminary decision of SAMR. PMRD may have its own experts to review and endorse its findings and decision.


6. Examination by the department of legal affairs

When the investigation is completed, the case handler shall draft an investigation report, and submit the report along with the case materials to the department of legal affairs for examination. The department of legal affairs will review the following:

  1. whether there is a jurisdiction;        

  2. whether the basic information of the parties concerned is clear;        

  3. whether the facts of the case are clear and the evidence is adequate;        

  4. whether the nature of the antitrust conduct is correctly determined;        

  5. whether the application of law is correct; and        

  6. whether the procedures are legitimate and the investigation is properly handled. 

The department of legal affairs may agree with the report, propose to correct, propose to make a supplementary investigation, or issue other opinions/suggestions.


7.Oral notice for the findings of the case

After the expert argumentation meeting, SAMR or PMRD will release its findings and preliminary decision to the undertaking under investigation orally. The oral notice will not include the fine base or the rate of fine. The undertaking under investigation can provide the authority with a statement or argument to challenge the facts and the application of law.


8.Prior notice for the administrative penalty

After communication between SAMR or PMRD and the undertaking under investigation, the authority will issue the Prior Notice for the Administrative Penalty. This is a notice in written form stating the facts, the violation found, the fine base and the rate of fine. It will state the right for the undertaking under investigation to make a statement, argument or apply for a hearing. The undertaking under investigation may challenge the legal finding, submit counterevidence, and calculate the fine base and the rate of fine to reduce the penalty.


9.Hearing

The undertaking under investigation has the right to request a hearing. Such request must be made within three working days from the date when the Prior Notice for the Administrative Penalty is received. There is no charge for the hearing. Hearings are organised by the legislative affairs offices of SAMR or PMRD. The case handler, the undertaking under investigation and the agent thereof will participate in the hearing. Third parties, witnesses, translators and experts may also be allowed to join the hearing. A hearing shall proceed as follows:

  1. the case handler provides the facts and evidence of the illegal acts committed by the undertaking under investigation, the advice on the imposition of an administrative penalty and the basis thereof;        

  2. the undertaking under investigation makes statements and presents its defence;        

  3. the third party makes statements (if applicable);        

  4. cross-examination and debate; and        

  5. the host consults the final opinions of the parties in the order of the third party, the case handler and the undertaking under investigation.        


The undertaking under investigation may present evidence on the spot to prove its claim, and the host shall consider the evidence. The undertaking may seek a non-confidential version of the investigation files on the spot or prior to the hearing in order to conduct a cross-examination.


After the end of a hearing, the host shall write a hearing report stating its handling opinions and suggestions and send the report to the case-handling agency together with the hearing records.


10. Final decision on the administrative penalty

After the undertaking under investigation provides the statement, argument and/or attends the hearing, SAMR or PMRD will issue the final decision on the administrative penalty. The wording of the decision could be negotiated if it contains a trade secret of the undertaking under investigation.


11. Publication

A decision on the administrative penalty, or a decision on the suspension or termination of the investigation, will be released to the public through the website of SAMR at http://www.samr. gov.cn/fldj/tzgg/xzcf/.


12. Administrative review or administrative lawsuit

If the undertaking under investigation does not accept a decision made by SAMR or PMRD, it may apply for an administrative review or file an administrative lawsuit.


1.4What remedies (e.g., fines, damages, injunctions, etc.) are available to enforcers?


1. Injunctions, fines, and confiscation of illegal earnings Where an undertaking violates the AML by entering into and implementing a vertical monopoly agreement or abusing its dominant market position, SAMR or PMRD can:

  1. order the undertaking to cease the monopolistic conduct;        

  2. impose a fine of between 1% and 10% of the preceding year's sales revenue; and        

  3. confiscate illegal earnings.        

If the vertical monopoly agreement had been entered into but not yet been implemented, a fine of no more than RMB 500,000 can be imposed.


2. Commitments to eliminate the anticompetitive effect SAMR or PMRD may adopt commitments made by the undertaking under investigation as remedies to eliminate the anticompetitive effect and suspend/terminate the investigation.


3. No criminal liability

There is no criminal penalty imposed against undertakings or individuals in an antitrust investigation.


1.5How are those remedies determined and/or calculated?


1. How to calculate the fine


Step 1: To determine the fine base

As a general rule, the fine will be imposed on the basis of the preceding year's sales revenue. In order to determine the fine base, SAMR or PMRD shall determine which entity's sales revenue should be used as the fine base, which year is the "preceding year", and what could be deducted from the sales revenue.


The sales revenue of the undertaking under investigation is the foundation of the fine base. If an investigation targets one subsidiary of an undertaking, in general, the fine will not extend to the sales revenue of the parent company and other affiliates. However, in certain cases, the scope of the investigation could be extended from one subsidiary to several subsidiaries, and the fine base will be enlarged accordingly. In practice, the "preceding year" shall be the year prior to the initiation of the antitrust investigation by SAMR or PMRD.


Generally, the figures from the audited accounts of the undertaking under investigation in the preceding year are the starting point to calculate the fine base. The following factors could be considered to make an adjustment. First, only the sales revenue from China will be taken into consideration. For example, in the Qualcomm antitrust investigation, Qualcomm's sales revenue in 2013 was USD 24.87 billion, and USD 12.3 billion was the sales revenue from China. The final fine against Qualcomm imposed by the authority in 2014 was USD 12.3 billion x 8% = USD   984 million = RMB 6.088 billion. Second, the sales revenues generated internally among affiliates of an undertaking could be deducted from the total sales revenue. Third, the sales revenue shall cover all products and the whole geographic market of China. It cannot be narrowed by the relevant product market and geographic market affected by the monopolistic conduct.   In the view of SAMR, this approach could increase deterrence and unify the standard of antitrust enforcement in China.


Step 2: To determine the ratio of the fine

To determine the ratio of the fine, SAMR or PMRD shall consider the factors of the nature, extent and duration of the monopolistic conduct, and the elimination of the consequences of such conduct.


The initial proportion of the fine against vertical agreements will be 1%, and the initial proportion of the fine against abusive conduct will be 2% or 3% according to the Draft Guidelines on the Determination of Illegal Earnings and Fines in Relation to Undertakings' Monopolistic Conduct ("Draft Guidelines on Illegal Earnings and Fines").


1) Adjustments due to aggravating circumstances


Aggravating circumstancesAdjustment
Playing a leading role or coercing other undertakings to implement the monopolistic conduct or preventing other undertakings from discontinuing the monopolistic conduct.            +1%            
Committing multiple instances of monopolistic conduct in the same case or having violated the AML in the past.            +1%            
As to the duration, one year shall be taken as the base; the proportion of fines will increase by 1% for each additional year; by 0.5% for the addition of a period of less than six months; and by 1% for the addition of a period of more than six months but less than one year.            +0.5% up to a total of 10%            

Continuing the monopolistic conduct after being ordered to stop by an anti-monopoly enforcement agency.                

+0.5%            
Other aggravating circumstances.            +0.5%            


2) Adjustments due to mitigating circumstances


Mitigating circumstancesAdjustment
Being coerced by other undertakings to implement the monopolistic conduct.            -1%            
Being forced or coerced by administrative authorities to implement the monopolistic conduct.            -1%            
Cooperating with the anti-monopoly enforcement agency and making meritorious performance.            -1%            
Taking the initiative to eliminate the harm and consequences of illegal activities.            -1%            
Taking the initiative to mitigate the harm and consequences of illegal activities.            -0.5%            
Voluntarily providing relevant evidence of other undertakings' violation of the AML.            -0.5%            
Other aggravating circumstances.            -0.5%            


SAMR or PMRD has full discretion to adjust the initial ratio of fines by considering the above aggravating or mitigating circumstances.


2.How to calculate the illegal earnings

According to the Draft Guidelines on Illegal Earnings and Fines, illegal earnings from monopolistic conduct refer to the extra income or reduced expenditure resulting from monopolistic conduct. In general, the illegal earnings arising from the economic activities of undertakings within China will be confiscated.  Where the economic activities are not conducted in China, SAMR or PMRD may confiscate the illegal earnings arising from their economic activities involving the Chinese market. The illegal earnings are calculated as follows:

  1. The extra income:Illegal earnings = actual income – the supposed income without the monopolistic conduct (cost x (1+ historical profit margins) x the sales volume of the undertaking before the monopolistic conduct took place).         

  2. The reduced expenditure:Illegal earnings = the supposed expenditure without the monopolistic conduct – the actual expenditure.        

 

Where the extra income or reduced expenditure arising from an undertaking's monopolistic conduct has been returned or paid to the trading counterpart (in an antitrust lawsuit) before SAMR or PMRD makes any decision on administrative penalties, the part which has not been returned or paid shall be deemed as illegal earnings.    

    

Where the undertaking and third parties cannot provide complete data for objective reasons, and if SAMR or PMRD is also unable to obtain complete data and documents in other ways, making it difficult or impossible to determine the supposed income or supposed expenditure, SAMR or PMRD may not confiscate the illegal earnings.        

       

Whether or not to confiscate illegal earnings will be taken into consideration when determining the fines.


1.6Describe the process of negotiating commitments or other forms of voluntary resolution.


The investigation against a vertical monopoly agreement or abusive conduct may be suspended through a commitment negotiation. It is up to the undertaking under investigation to decide whether to offer a commitment during the investigation. The advantage for the undertaking is that the investigation could be ended without a penalty and without a finding of AML violation. SAMR or PMRD could also benefit from the commitment because it could save enforcement resources and could eliminate the anticompetitive effect in a quicker and more efficient manner. The process is as follows:

  1. timely filing of the application to suspend the investigation, together with the initial commitment to establish the foundation of the negotiation between the undertaking and SAMR or PMRD;        

  2. the undertaking may negotiate with SAMR or PMRD regarding the content of the commitments; and        

  3. if SAMR or PMRD holds that (1) the facts are clear, and (2) the committed measures are sufficient to eliminate the effects caused by the suspicious monopolistic conduct, SAMR or PMRD may decide to suspend the investigation. Not all antitrust investigations can be ended with a commitment. It should be evaluated and negotiated on a case-by-case basis. After SAMR or PMRD investigates and verifies the suspected monopoly agreement or abusive conduct, if the conduct violates the AML, SAMR or PMRD can no longer accept an application for the suspension of the investigation proposed by the undertaking. In the case of hard core cartels or serious abusive conduct, it is unlikely that SAMR or PMRD will accept a commitment.        


1.7At a high level, how often are cases settled by voluntary resolution compared with adversarial litigation?


At a high level, the rate of settlement of antitrust investigations against cartels is 12.1% (four suspended/terminated cases from 2017–2019, out of a total of 33 investigations against cartels from 2017–2019). The rate of settlement of antitrust investigations against abusive conduct is 23.8% (five suspended/terminated cases from 2017–2019, out of a total of 21 investigations against abusive conduct from 2017–2019).


1.Cartels

YearSuspended/terminated by commitmentsPenalty
201707
2018210
2019212


2.Abuse of dominance

YearSuspended/terminated by commitmentsPenalty
201714
201827
201925


1.8Does the enforcer have to defend its claims in front of a legal tribunal or in other judicial proceedings? If so, what is the legal standard that applies to justify an enforcement action?


SAMR or PMRD has full discretion to make the decision to impose fines and confiscate illegal earnings, without the need to obtain approval by a legal tribunal or enter into other judicial proceedings. However, such decision could be appealed by the undertaking under investigation in an administrative review proceeding or an administrative lawsuit.

 

In terms of the standard of review, the competent administrative agency conducting the administrative review will look at the facts and the application of the law, but will not conduct a de novo review. In the process of the administrative review, SAMR or PMRD may not, of its own accord, collect evidence from the applicant or from other organisations or individuals concerned. According to Article 28 of the  Administrative  Reconsideration  Law, the administrative decisions can be nullified, changed or confirmed to be illegal, if: (1) the main facts are unclear and the material evidence is inadequate; (2) the application of the law is incorrect; (3) the statutory procedures have been violated; (4)  the power of authority has been exceeded or abused; or (5) the administrative decision is obviously inappropriate.


In an administrative lawsuit, the People's Court will look at the facts and the application of the law. According to Article 70 of the Administrative Procedure Law, the People's Court may make a ruling to nullify or partially nullify the administrative decision, or rule that the defendant make a new administrative decision, in the following cases: (1) inadequacy of material evidence; (2) erroneous application of the law or regulations; (3) violation of legal procedure; (4) exceeding authority; (5) abuse of powers; and (6) obvious unfairness.


1.9What is the appeals process?


Undertakings subject to a penalty decision from SAMR or PMRD have two options to appeal the decision:  administrative review; and/or administrative litigation. After the formal penalty decision is made, the undertaking has 15 days to pay the fines. The application for an administrative review or the filing of an administrative lawsuit with the court will not halt the payment of the fines. However, in an administrative lawsuit, if the plaintiff or an interested party applies for a suspension of execution, and the People's Court deems that the execution of the payment of the fines will cause irremediable losses and that the suspension of the execution will not harm national or public interests, the People's Court could order the suspension.


1. Administrative review

An administrative review is an administrative proceeding which applies to penalties imposed by administrative agencies. For a penalty decision made by SAMR, the application for an administrative review shall be submitted to SAMR. Decisions made by PMRD can be challenged either at the provincial government or at SAMR, subject to the discretion of the applicant. The review is, in principle, limited to an on-paper review, with the possibility of a hearing or consultation upon request by the applicant or at the discretion of the reviewing agency.


2. Administrative litigation

An undertaking can challenge SAMR or PMRD's penalty decision via an administrative lawsuit in the court. The undertaking must file the administrative lawsuit within six months of receipt of the formal penalty decision. Administrative lawsuits are usually accepted at the time of filing if formalities are complete; if not, the court will provide a time limit for the plaintiff to supplement the formalities. The court must make its first instance decision within six months of acceptance of the case. This period can be extended upon approval.


1.10Are private rights of action available and, if so, how do they differ from government enforcement actions?


Yes. Parties and non-parties to a vertical agreement can bring damages claims if they have suffered losses due to an anticompetitive clause contained in a vertical agreement. Anyone who suffered from the abusive conduct can file an antitrust suit against the undertaking which holds the dominant market position to claim damages.

The differences between private and public enforcement are as follows:


1. Compensation and deterrence

The plaintiff may obtain compensation in a private litigation, but cannot obtain compensation from public enforcement. In an antitrust investigation, all illegal earnings will be confiscated by the government and the undertaking who suffered from the vertical agreement restrictions or abusive conduct cannot obtain compensation from the confiscated illegal earnings.


If we consider this from a deterrence perspective, public enforcement may have higher deterrence power, because SAMR or PMRD can confiscate the illegal earnings, which could be higher than the damages claimed by the plaintiff. In addition, the fine imposed by the authority could be 10% of all sales revenues of the target, which may be much higher than the damages ruled by the People's Court in a private litigation.


2. Per se rule v. rule of reason

In practice, SAMR and PMRD treat resale price maintenance ("RPM") as a per se violation, but allow the undertaking to justify its conduct under Article 15 of the AML. In a private litigation, however, the RPM is reviewed by the People's Court under the rule of reason. According to the Provisions of Supreme People's Court on Several Issues Relating to Laws Applicable for Trial of Civil Dispute Cases Arising from Monopolies ("AML Judicial Interpretation"), for hardcore horizontal monopoly agreements, the defendant shall bear the burden of proof to show that the said agreement does not exclude or restrict competition. However, for a vertical monopoly agreement, the burden of proof to show that the said agreement excludes or restricts competition is on the shoulder of plaintiff. In other words, a vertical monopoly agreement may not be anticompetitive unless the plaintiff can prove it.


3. No discovery process v.  powerful investigation tools 

In a private litigation against a vertical monopoly agreement or abusive conduct, it is very difficult for the plaintiff to find evidence to prove illegal conduct and make meaningful competition analysis because there is no discovery process and all the damaging evidence is in the hands of the defendants. However, in a public enforcement case, SAMR or PMRD has the authority to request documents from the undertaking under investigation and can carry out a dawn raid on the target to obtain a large volume of materials including laptops and servers. It is comparatively easier for SAMR or PMRD to uncover the illegal conduct and complete the competition analysis.


4. Control over the proceeding

The plaintiff of a private litigation may withdraw the complaint, which means that it has a certain control over the proceeding. However, after SAMR or PMRD has initiated an antitrust investigation based on the report of a whistleblower, the whistleblower cannot stop public enforcement by withdrawing the report.


1.11Describe any immunities, exemptions, or safe harbours that apply.


1. Safe harbour

There are no safe harbours available under the AML and relevant antitrust regulations of China.


2. Exemptions for a vertical agreement

An agreement containing a vertical restraint can be exempted from the prohibition under the AML, if the undertaking can prove the following:

  1. the vertical agreement is in the public interest or efficiency can be achieved from the agreement, such as by advancing technology and R&D, improving product quality, lowering cost, increasing efficiency, unifying specifications and standards, realising energy conservation, environmental protection, and rescue and relief efforts, saving jobs in an economic recession, etc.;        

  2. such public interest or efficiency is derived from the vertical agreement, and there is a causation between them;        

  3. the vertical agreement does not significantly restrict competition in the relevant market; and        

  4. consumers could benefit from the vertical arrangement, for example, because it introduces more products to the market, improves the quality of the products, or lowers the price, etc.        


3. Exemptions for abusive conduct

The AML does not treat any abusive conduct as a per se violation. Any abusive conduct could be exempted by providing justifiable cause.


1.12Does enforcement vary between industries or businesses?


1. API

The Guide to the Pricing Behavior of Undertakings Dealing in Drugs in Short Supply and Active Pharmaceutical Ingredients ("API Guideline") issued in November 2017 regulates the abusive conduct relating to active pharmaceutical ingredients ("API"). In addition to the factors to be considered in determining the dominance regulated in Article 18 of the AML, Article 7 of the API Guideline provides: "in regard to categories of drugs in short supply and active pharmaceutical ingredients, market shares are a key element to measure the market power of the undertaking. In evaluating market shares, the actual capacity, potential capacity, intellectual property rights and other influencing factors of the undertaking may be considered. Besides, the law enforcement authority will examine and weigh the situation that any evidence proves the undertaking conducts any substantial control over relevant enterprises to obtain the dominant market position."


2. Public Utility

Article 22 of the Interim Provisions on Prohibiting Acts of Abuse of a Dominant Market Position provides: "undertakings in public utility domains such as water supply, power supply, gas supply, heat supply, telecommunications, cable TV, postal services and transportation shall operate according to the law, and shall not abuse their dominant market position to harm consumers' interests".


According to Xiao Yaqing, chief of SAMR, China will strengthen antitrust law enforcement in API, public utility, and other sectors in 2020.


3. Automobile

According to the Administrative Measures for Automobile Sales issued by the Ministry of Commerce ("MOFCOM") in 2017, the original equipment manufacturer ("OEM") may not:

  1. restrict the sales target for manufacturers/importers of spare parts;        

  2. limit the resale of spare parts by dealers or after-sales service providers;        

  3. force the dealers to accept unreasonable sales and stock targets;        

  4. restrict the dealers from providing the parts or after-sales service to the OEM's other vehicles;        

  5. force the dealers to bear the promotional cost which is conducted in the name of the OEM;        

  6. force the dealers to purchase facilities or systems from the OEM's designated suppliers or designated brands;

  7. tie the automobiles, accessories and other products which are not ordered; or        

  8. restrict the dealers to sell the vehicles to other dealers.   The Administrative Measures for Automobile Sales is not a regulation under the AML, because (1) the maximum fine is only RMB 30,000 (for an AML violation, the minimum fine will be 1% of the turnover of preceding year), and (2) the enforcement agency is MOFCOM rather than SAMR or PMRD. However, these are effective competition rules that should be followed by all OEMs in the automobile industry.   


In addition, there is a draft guideline regarding the automobile sector, which provides sector-specific dominance rules. However, the legislative process is pending.


1.13How do enforcers and courts take into consideration an industry's regulatory context when assessing competition concerns?


SAMR, PMRD and the People's Court will consider the regulatory context of: (1) industries of vital economic or national security importance in which the state-owed sector of the economy holds the position of control; or (2) industries which implement monopolisation legally. Article 7 of the AML provides that "the state protects the lawful business activities of the undertakings from industries of vital economic or national security importance in which the state-owned sector of the economy holds the position of control or industries which implement monopolization legally…".


According to Article 22 of the Interim Provisions on Prohibiting Acts of Abuse of a Dominant Market Position, "undertakings in public utility domains such as water supply, power supply, gas supply, heat supply, telecommunications, cable TV, postal services and transportation shall operate according to the law, and shall not abuse their dominant market position to harm consumers' interests".


1.14Describe how your jurisdiction's political environment may or may not affect antitrust enforcement.


1. The political environment in China is in favour of antitrust enforcement

In October 2015, the Central Committee of the Communist Party of China and the State Council issued the Several Opinions on Promoting the Price Mechanism Reform.  It was the first time that it clearly put forward the foundational position of competition policy. The Opinions call for strengthening antitrust enforcement, and aim to establish a scientific, orderly, and transparent antitrust enforcement mechanism by 2020. The decision of the Fourth Plenary Session of the 19th Central Committee of the Communist Party of China on October 31, 2019 highlighted "strengthening the foundational position of competition policy and implementing the fair competition review system".


A series of expositions and deployments by the CPC Central Committee and the State Council on competition policy highlight the importance and urgency of China's acceleration of competition policy implementation and the strengthening of its foundational position. This has created favourable conditions for China to construct and improve relevant laws and strengthen antitrust enforcement.

 

2. Competition neutrality

Article 4 of the Interim Provisions on Prohibiting Acts of Abuse of a Dominant Market Position provides: "when investigating and dealing with acts of abuse of a dominant market position, anti-monopoly law enforcement agencies shall treat all undertakings equally".  Similarly, Article 4 of the Interim Provisions on the Prohibition of Monopoly Agreements provides: "an anti-monopoly law enforcement agency shall treat all undertakings equally when investigating and punishing monopoly agreements".


In the 2019 Government Work Report, the State Council emphasises that fair competition is the core of the market economy, and all types of ownership undertakings should be treated equally in accordance with the principle of competition neutrality.


3. The role of industrial policy

In general, SAMR and PMRD shall only consider competition issues when making their decisions.  However, because the exemption rules under Article 15 of the AML are designed to keep the balance between competition policy and industrial policy, SAMR or PMRD shall consider industrial policy. More specifically, when an undertaking applies for an exemption under Article 15 of the AML, it should demonstrate that the public interest and efficiency obtained (the achievement of industrial policy) exceed the anticompetitive harm caused by the conduct.


1.15What are the current enforcement trends and priorities in your jurisdiction?


According to Xiao Yaqing, chief of SAMR, China will strengthen antitrust law enforcement in API and public utility in 2020. In addition, SAMR will also:

  1. enhance regulation against unfair competition conduct by government departments, public institutions, and natural monopolies;        

  2. initiate special campaigns against infringements of personal data protection and closely monitor digital transactions; and        

  3. treat all undertakings equally during investigations into abuse of dominance.        


1.16Describe any notable recent case law developments in respect of, e.g., vertical agreements, dominant firms and/or vertical merger analysis.


1. Calcium Gluconate API – a high profile case of abuse of dominance

Shandong Kanghui Medicine ("Kanghui"), Weifang Puyunhui Pharmaceutical ("Puyunhui") and Weifang Taiyangshen Pharmaceutical ("Taiyangshen") (collectively "the Companies") are pharmaceutical distributors in China. They purchased and distributed calcium gluconate API for injection from August 2015 to December 2017. SAMR found that the Companies held a dominant position in China's sales market for calcium gluconate API for injection and had abused their dominance by selling products at unfairly high prices and imposing unreasonable trading conditions on clients. SAMR issued a penalty decision against the Companies in April 2020. The total fines plus the confiscation of illegal earnings amounted to RMB 325.5 million – the largest penalty for API and the overall pharmaceutical industry in China to date.

  1. Collective dominance          
    The relationship between Kanghui, Puyunhui and Taiyangshen is unique: (1) they are registered as independent legal entities; (2) there is no shareholding relationship among them; (3) there is a vertical relationship among them as Kanghui sells calcium gluconate API to Puyunhui and Taiyangshen; (4) there is a horizontal relationship among them as they all sold calcium gluconate API to the market in different time periods; (5) managers in one company may have offices in another company; and (6) they co-sign the joint delivery orders for calcium gluconate API.


    SAMR did not declare in the penalty decision that the Companies held collective dominance. However, it implied collective dominance by issuing one decision rather than three decisions against the Companies (in other cases, SAMR will issue separate decisions for each of the undertakings under investigation). The reasoning behind this implied a determination of collective dominance as follows:

    1. The structure of the market. China's sales market for calcium gluconate API for injection is an oligopoly market. There are three calcium gluconate API manufacturers in China, "Jiangxi Xinganjiang", "Zhejiang Ruibang" and "Chengdu Beite", which were not fined in this investigation. The Companies entered an oral exclusive purchase agreement with Jiangxi Xinganjiang; signed an agreement with Chengdu Beite under which Chengdu Beite will only manufacture calcium gluconate API for its internal use; and bulk-purchased the majority of calcium gluconate API for injection from Zhejiang Ruibang. The result is that the downstream clients can only obtain calcium gluconate API for injection from the Companies or a small volume of calcium gluconate API from Zhejiang Ruibang. Therefore, the market is an oligopoly market and the market share of the Companies is very high. 

    2. Transparency of the market. Since there are only a few distributors of calcium gluconate API in China, the market is transparent. 

    3. The degree of homogenisation of the product. In this case, there is only one product constituting the product market, which is calcium gluconate API for injection. Therefore, the calcium gluconate API for injection sold by the Companies are identical. 

    4. The consistency of undertakings' conduct. In this case, the Companies cooperated closely with each other and jointly carried out the monopolistic conduct. There is a coordination mechanism among the Companies and Kanghui may have a certain control over the other two companies through management, trade and financial arrangements. 


  2. The role of calcium gluconate API manufacturers in this case

    The Companies are newcomers in China's sales market for calcium gluconate API for injection. They have no production experience, and no technology in the field of calcium gluconate API. The only specialty of the Companies is their capability of pharmaceutical distribution. Kanghui ranks number 73 in the pharmaceutical distribution market in China in 2017 according to a report issued by MOFCOM. 

    On the contrary, Jiangxi Xinganjiang, Zhejiang Ruibang, and Chengdu Beite control the production of calcium gluconate API for injection. The output of these manufacturers and the inventory of the Companies constituted the full scope of China's sales market for calcium gluconate API for injection from 2015 to 2017. Jiangxi Xinganjiang, Zhejiang Ruibang, and Chengdu Beite were clearly beneficiaries of the "unfairly high price", but there has been no penalty against these manufacturers.  The price for calcium gluconate API for injection was higher in 2018 and 2019, after the Companies stopped their operation of calcium gluconate API for injection. The higher market price in 2018 and 2019 triggered the antitrust investigation. However, as the key manufacturers of calcium gluconate API for injection in China, they have not been penalised by SAMR for their conduct in 2018 and 2019 either.


  3. The ratio of fine

    Kanghui was penalised for RMB 143.8 million, which amounted to 10% of its sales revenue for 2018. Illegal earnings amounted to RMB 108.9 million. The two other companies – Puyunhui and Taiyangshen – were penalised for 9% and 7% respectively of their sales revenue in 2018, and RMB 6.05 million of illegal earnings were confiscated from them.

    First, according to the penalty decision, SAMR did not mention that calcium gluconate API are only one of hundreds pharmaceuticals distributed by the Companies and did not proportionately reduce the ratio of the fine to a lower level, as the fine base is constituted by the total sales revenue of all pharmaceuticals. Second, although SAMR implied a determination of collective dominance, the ratio of the fine was not the same among the Companies. It is clear that SAMR did not treat the Companies as a single entity.


  4. The public hearing

    Before issuing the penalty decision, SAMR sent a notice to the Companies on December 19, 2019, outlining the details of its planned decision as well as the Companies' legitimate rights to make a statement, argument or to apply for a hearing. The Companies brought forward statements and arguments, while Kanghui also applied for a hearing. This was the first public hearing held by SAMR. 

    In the notice of public hearing, SAMR did not provide any contact information for interested third parties to apply for attendance at the hearing. The hearing was conducted on January 8, 2020 without the participation of any third parties. The case handler and the Companies attended the hearing before the official from the Legal Department of SAMR. It is important to note that not all evidence collected from the three calcium gluconate API manufacturers was provided to the Companies for cross-examination because of "confidentiality". Likewise, not all the evidence collected from dozens of calcium gluconate injection manufacturers was provided in the hearing for cross-examination because of "confidentiality". It is understandable that the evidence collected from competitors and downstream undertakings could pile up from ground to ceiling. If all documents must be provided for cross-examination, the case handler may redact the documents for a long period of time to prepare for the hearing, but ensuring a due process is also an important issue. 


  5. Fines against obstructing antitrust probes

    Together with the abuse of dominance penalty, SAMR also released 16 administrative penalties against Kanghui and Puyunhui, as well as sanctions against 14 individuals for obstructing antitrust probes. Kanghui and Puyunhui were both handed the penalty of RMB 1 million for the obstruction of the antitrust probe. The two companies' persons in charge were penalised by fines of RMB 100,000.

    It is important to know that obstructing antitrust probes could be considered as an aggravating factor when determining the fine. However, if there is a separate administrative decision and a penalty has been made to address the obstructing of antitrust probes, this conduct cannot be considered as an aggravating factor in determining the fine; otherwise, it is double jeopardy. SAMR did not make that mistake, and the higher ratio of the fine against Kanghui is simply because it played a leading role to implement the abusive conduct.


2. Acquisition of Mellanox Technologies by Nvidia – vertical merger

SAMR conditionally approved the acquisition of Mellanox Technologies by Nvidia on April 16, 2020, because the deal may eliminate or restrict competition in the global and Chinese markets for GPU accelerators, special network interconnection devices, and high-speed ethernet adapters.


Nvidia and Mellanox have a vertical relationship in the markets for data centre servers and ordinary ethernet adapters, and also have an adjacent market relationship in GPU accelerators, special network interconnection devices and high-speed ethernet adapters.


The conditions are that the concerned parties:

  • Shall not engage in tie-in or bundled sales in any form or impose unreasonable trading terms, impede or restrict customers from purchasing or using the relevant products individually, or discriminate against clients who purchase the relevant products individually in terms of service quality, price, and software functions, among others, when selling Nvidia GPU accelerators and Mellanox high-speed network interconnection devices in the Chinese market.        

  • Shall continue to provide Nvidia GPU accelerators, Mellanox high-speed network interconnection devices, and the relevant software and accessories on fair, reasonable and non-discriminatory ("FRAND") terms in the Chinese market.        

  • Shall continue to ensure interoperability between Nvidia GPU accelerators and third-party network interconnection devices, and between Mellanox high-speed interconnection devices and third-party accelerators.        

  • Shall continue to keep their open source commitments regarding the point-to-point communication software and collective communication software of Mellanox's high-speed network interconnection devices.        

  • Shall take measures to protect the information of third-party accelerators and network interconnection device manufacturers.        


2.Vertical Agreements


2.1At a high level, what is the level of concern over, and scrutiny given to, vertical agreements?


The explicit wording of the AML and the practice of SAMR and PMRD shows that China takes a high level of concern over vertical agreements.


First, the wording of Article 14 of the AML is strong and straightforward, which directly prohibits RPM. In addition, the AML allows the authority to impose a fine of 1% to 10% of the sales revenue of the preceding year against RPM, which is no different from that imposed on cartels.


Second, SAMR and PMRD treat RPM as per se illegal, although vertical agreements raise fewer competition concerns. Third, there is a vast number of antitrust investigations against vertical agreements in China. In the automobile industry, for example, AUDI was fined RMB 248.6 million for RPM for car sales and after-sales services in 2014, Mercedes-Benz was fined RMB 375 million for RPM for car sales and parts price fixing in 2015, Dongfeng-Nissan was fined RMB 123.3 million for RPM for car sales in 2015, SAIC-GM was fined RMB 201 million for RPM for car sales, and Chang'an-Ford was fined RMB 162.8 million for RPM for car sales.


2.2What is the analysis to determine (a) whether there is an agreement, and (b) whether that agreement is vertical?


Article 13 of the AML defines a monopoly agreement as an "agreement, decision or other concerted practice which eliminates or restricts competition".  The agreement does not need to be in written form; oral agreement is sufficient. A concerted practice occurs when parties coordinate their conduct with each other without entering into an agreement.

 

In general, a vertical agreement involves undertakings at different levels in the chain of distribution and the content is to purchase or sell certain goods or services.


2.3What are the laws governing vertical agreements?


The laws governing vertical agreements are Articles 14 (prohibition of RPM), 15 (exemption rules) and 46 (penalty provision) of the AML and Article 12 (detailed provision of RPM prohibition) of the Interim Provisions on Prohibition of Monopoly Agreements.


2.4Are there any types of vertical agreements or restraints that are absolutely ("per se") protected? Are there any types of vertical agreements or restraints that are per se unlawful?


There are no laws or regulations to state that any type of vertical agreement or restraint is per se protected. However, in practice, the following vertical agreements are, in general, unlikely to be caught under the AML:

  1. to set up a maximum sales price;        

  2. to provide a suggested or recommended price, if there is no sanction, incentive or pressure to mandate such price;        

  3. to restrict the active sales of a distributor outside of the reserved territory or customer group exclusively designated for it;        

  4. to restrict the wholesale-level distributors from selling products directly to the end customers; and        

  5. to prohibit the distributor from selling components of the supplier to other manufacturers to produce similar products.


As indicated above, SAMR and PMRD treat RPM as a per se violation, but allow the undertaking under investigation to submit an application for an exemption under Article 15 of the AML. Please note that the People's Court does not consider RPM as a per se violation. This different approach can be identified not only from the AML Judicial Interpretation (please see question 1.10), but also from the private antitrust litigation. The rule of reason approach to RPM litigation was first introduced in Rainbow v. Johnson & Johnson heard by the Shanghai Higher People's Court in 2013. In 2018, the Guangdong Higher People's Court reconfirmed the rule of reason approach in Dongguan Guochang v. Dongguan Shengshi & Dongguan Heshi when judging RPM. The judge held that whether RPM violates the AML depends on the purpose and effect of eliminating and restricting competition.


2.5What is the analytical framework for assessing vertical agreements?


The general analytical framework underpinning the assessment of vertical agreements under the AML is as follows:


1. Antitrust investigation

If SAMR or PMRD finds that an agreement fixes resale prices or sets minimum resale prices, it is likely to conclude that entering such vertical agreement violates Article 14 of the AML. However, the undertakings can still argue that the prohibition in Article 14 should be exempted on the grounds that the agreement fulfils one of the circumstances listed in Article 15 of the AML and the agreement does not significantly restrict competition in the relevant market and allows consumers a share of the resulting benefit. The final step is to determine the penalty based on the nature, extent and duration of the vertical agreement.

 

2. Antitrust litigation

In Rainbow v. Johnson & Johnson, the High People's Court of Shanghai held that when analysing the nature of the RPM, there are four prongs that should be considered, and that constitute the basic method to analyse and evaluate the RPM. They are:

  • whether the relevant market competition is sufficient;        

  • whether the defendant has a very strong market position;        

  • the motive of the defendant to impose the RPM, and        

  • the competition effect of the RPM.        


To determine the damage, the Shanghai Higher People's Court held that when claiming compensation, the loss should not be calculated according to the available profit of performing the RPM agreement, but should be calculated by referring to the normal profit of the relevant market. Otherwise, it will fall into the logical conflict of pursuing monopoly profits through an antitrust lawsuit.


2.6What is the analytical framework for defining a market in vertical agreement cases?


Because a vertical agreement involves undertakings at different levels in the chain of distribution, it may involve at least two relevant markets. However, as a vertical agreement will only affect competition on one relevant market, the market definition may only focus on the market affected. The analytical framework for defining a relevant market in a vertical agreement case will be no different to any other antitrust case.


1. Relevant product market

According to the Guidelines on the Relevant Market Definition, the term "relevant product market" refers to a market that comprises a group or type of products that the demanders deem to be close substitutes for each other due to factors such as characteristics, intended use and price. In defining the relevant market, demand substitution may be analysed based on the characteristics, intended use, price and other factors, and supply substitution may, when necessary, also be analysed. If the scope of the market in which undertakings compete is unclear or difficult to define, the relevant market may be defined according to the analytical concept of "the hypothetical monopolist test".

The relevant technology market is a special product market, which is intangible. Similar technologies that are mutually substitutable could be defined as a relevant technology market.


2. Relevant geographic market

According to the Guidelines on the Relevant Market Definition, the term "relevant geographic market" refers to the geographic region where demanders obtain products that are relatively close substitutes for one another. The sequence of economic analysis is the same as the market definition of the relevant product market: demand substitution; supply substitution; and the hypothetical monopolist test.


3. Timeliness

According to the Guidelines on the Relevant Market Definition, timeliness shall also be taken into consideration in defining the relevant market in certain cases. Timeliness is the third dimension of market definition. In practice, it is important to determine what period of time should be considered in evaluating the dominance.


2.7How are vertical agreements analysed when one of the parties is vertically integrated into the same level as the other party (so-called "dual distribution")? Are these treated as vertical or horizontal agreements?


When dealing with the dual distribution, both vertical issues and horizontal issues may be considered.


1. Vertical agreement

If the following conditions are met, the dual distribution is likely to be considered a vertical agreement:

  1. the agreement is non-reciprocal; and        

  2. the supplier is a manufacturer/service provider and distributor, while the purchaser is just a distributor.        

2. Horizontal cooperation

If the parties are competing at both the manufacture/service level and the distribution level and the agreement  is  reciprocal, the agreement is more likely to be considered a horizontal arrangement. Exchange of sensitive information between the parties is prohibited.


2.8What is the role of market share in reviewing a vertical agreement?


In practice, if the relevant market share of the undertakings participating in a vertical agreement does not exceed 25%, it may be assumed that the agreement will not eliminate or restrict competition. According to the Interim Provisions on the Applicable Standards for Cases of Concentration of Operators Subject to Simplified Procedure, if both upstream and downstream operators participating in concentration hold less than 25% of market share in the upstream and downstream market, the transaction is subject to the simplified procedure.


If the undertaking in a vertical agreement has a market share of 25% or more, it is likely that the vertical restraint will have a negative effect on competition. More importantly, the vertical restraint could be considered abusive conduct if the undertaking holds a market share of more than 50%.


2.9What is the role of economic analysis in assessing vertical agreements?


Economic analysis is inevitable in every antitrust case, including cases involving vertical agreements. According to Article 10 of the Provisions of the Supreme People's Court on Application of Laws in the Trial of Civil Disputes arising from Monopolistic Practices, the parties may apply to the People's Court for permission to engage professional organisations or personnel to conduct market research or make economic analysis reports with respect to the relevant professional issues.


In addition, according to Article 7 of the Guidelines on the Relevant Market Definition, SAMR shall encourage undertakings to define relevant markets according to the specific circumstances of each case by using objective, genuine data and adopting economic analysis methods.


In Rainbow v. Johnson & Johnson, both parties retained economists to provide expert reports regarding RPM to the People's Court.


2.10What is the role of efficiencies in analysing vertical agreements?


Promoting efficiency is one of the objectives set forth in Article 1 of the AML, which is also applicable to vertical agreements.


In addition, if a vertical agreement can result in a higher quality of product/service, lower price, easing of market entry, or promoting innovation, the undertaking may apply for an efficiency exemption under Article 15 of the AML.


2.11Are there any special rules for vertical agreements relating to intellectual property and, if so, how does the analysis of such rules differ?


SAIC (predecessor of SAMR) issued the Rules on Prohibition of Restriction or Elimination of Competition through Abuse of Intellectual Property Right in 2015, which address the issue of exclusive grantback of technology improvement, prohibition of challenging the validity of the IPR, etc. The Rules do not change the analysis framework of vertical agreements under the AML.


2.12Does the enforcer have to demonstrate anticompetitive effects?


When SAMR or PMRD decides whether a vertical agreement is illegal, it only needs to determine whether the agreement falls under the circumstances described in Article 14 of the AML. The anticompetitive effects may be evaluated only when the undertaking under investigation files an application for exemption under Article 15 of the AML.


2.13Will enforcers or legal tribunals weigh the harm against potential benefits or efficiencies?


The People's Court will weigh the harm against potential benefits or efficiencies in a litigation regarding a vertical agreement. SAMR and PMRD may not consider benefits or efficiencies unless there is an application for exemption under Article 15 of the AML.


2.14What other defences are available to allegations that a vertical agreement is anticompetitive?


A possible defence is to argue that there is no vertical agreement under the AML because the "vertical agreement" is an agent-principal arrangement in which an undertaking agrees to perform certain services on a supplier's behalf for a sales-based commission payment.


Since the People's Court will consider the anti-competitive effect of the vertical agreement, undertakings may prepare evidence regarding the market share of the parties, the competition situation on the relevant market, the ability of the undertaking to control the market, the financial and technical ability of undertaking, the degree of reliance of the trading counterpart, and market entry, to formulate possible defences.


2.15Have the enforcement authorities issued any formal guidelines regarding vertical agreements?


Article 12 of the Interim Provisions on Prohibition of Monopoly Agreements detailed RPM as follows:

  1. fixing the price level, price change range, profit level or discount, handling fee etc. for resale of products or services to a third party;        

  2. restricting the minimum price for resale of products or services to a third party, or restricting the minimum price for resale of products or services through restricting the price change range, profit level or discount, handling fee or other fees; or        

  3. fixing the price or restricting the minimum price for resale of products or services through other methods. 


2.16How is resale price maintenance treated under the law?


The AML mainly stipulates resale price maintenance in Articles 14, 15 and 46. Article 14 (1) and (2) respectively prohibit fixing the price of products or services for resale to a third party and restricting the minimum price of products or services for resale to a third party.


SAMR and PMRD treat RPM as per se illegal. The People's Court will evaluate the anticompetitive effect. In Rainbow v. Johnson & Johnson, the Higher People's Court of Shanghai held that when analysing the nature of the RPM, there are four prongs that should be considered, and that constitute the basic method for the Shanghai Higher People's Court to analyse and evaluate the RPM. They are:

  1. whether the relevant market competition is sufficient;        

  2. whether the defendant has a very strong market position;        

  3. the motive of the defendant to impose the RPM; and        

  4. the competition effect of the RPM.        


2.17How do enforcers and courts examine exclusive dealing claims?


Exclusive dealing could be considered abusive conduct under Article 17 of the AML. Exclusive dealing is not a target of vertical agreement investigations unless the undertaking holds a dominant market position in the relevant market.


In an antitrust investigation, SAMR or PMRD can presume that an undertaking holds dominance if its market share is above 50%. SAMR or PMRD could determine that exclusive dealing by a dominant firm violates Article 17 of the AML, unless there is an acceptable justification.


Justifications for exclusive dealing include:

  1. it is essential for meeting the product safety requirements;        

  2. it is essential for protecting intellectual property rights;        

  3. it is essential for protecting particular investments undertaken for transactions.        

In an antitrust lawsuit, because it is not sufficient for the plaintiff to presume dominance solely on the basis of high market share, and it is hard to prove the anticompetitive effect of exclusive dealing, it is very hard for the plaintiff to challenge exclusive dealing.


2.18How do enforcers and courts examine tying/ supplementary obligation claims?


Tying could be considered abusive conduct under Article 17 of the AML. Tying is not a target of vertical agreement investigations unless the undertaking holds a dominant market position in the relevant market.


In several antitrust investigations against tobacco companies, the local anti-monopoly enforcement agencies found that the tobacco companies bundled the sale of popular cigarette brands with unpopular ones by restricting the supply of popular brands. In the Qualcomm antitrust investigation, the anti-monopoly enforcement agency found that Qualcomm abused its dominant market position in the wireless standard essential patent ("SEP") licensing market by tying non-SEP licensing with SEP licensing without justification.


In the retrial of Wu Xiaoqin v. Shaanxi Radio and Television Network Media (Group) Co., Ltd., the Supreme People's Court ruled that the undertaking with a market-dominant position bundled sales of separate services or products, constituting a tie-in sale prohibited by the AML.


2.19How do enforcers and courts examine price discrimination claims?


Price discrimination is an abusive conduct regulated under Article 17 of the AML. Price discrimination is not a target of vertical agreement investigations unless the undertaking holds a dominant market position in the relevant market.


It is very difficult for SAMR and the People's Court to identify price discrimination. First, it is normal for a firm to provide different prices to different trading counterparts. The price difference within a reasonable range will be legal under the AML, even for dominant firms. Second, it is very hard for enforcers or judges to draw a line as to what price difference constitutes discrimination, because the markets vary from one to another, and as the markets are changing, the enforcers and courts cannot set up a benchmark that is forever correct.


2.20How do enforcers and courts examine loyalty discount claims?


Loyalty discounts are an abusive conduct regulated under Article 17 of the AML. Loyalty discounts are not a target of vertical agreement investigations unless the undertaking holds a dominant market position in the relevant market.


In the antitrust investigation against Tetra, the anti-monopoly enforcement agency concluded that from 2009 to 2013, Tetra abused its dominant market position in three relevant markets in China, and concluded that the company had no legitimate reason to carry out loyalty discounts. In the penalty decision, the anti-monopoly enforcement agency recognised that discounting is a common commercial behaviour, which can promote market competition and benefit consumers. In the meantime, the authority believes that loyalty discounts implemented by undertakings with a dominant market position should be regulated when they combine with specific market conditions and have obvious anticompetitive effect.


2.21How do enforcers and courts examine multi-product or "bundled" discount claims?


Multi-product or "bundled" discounts are an abusive conduct regulated under Article 17 of the AML. They are not a target of vertical agreement investigations unless the undertaking holds a dominant market position in the relevant market.


Multi-product or "bundled" discounts may be determined illegal if the bundle is priced below cost, or a competitor providing a competitive product cannot match the discount without pricing below cost on that product. Bundled discounts are very popular in the Chinese online and offline markets. However, there is no antitrust investigation or litigation against bundled discounts in China.


2.22What other types of vertical restraints are prohibited by the applicable laws?


1. Prohibiting distributors from passive sales

To restrict passive sales under the territory allocation in a vertical arrangement could be determined by SAMR or PMRD to be a violation of the AML.


According to the Guidelines on Anti-Monopoly in the Automobile Industry (Draft for Comment), manufacturers could restrict the distributor to provide goods within a certain region and not to carry out sales in any other distribution region. However, manufacturers may not restrict passive sales by a distributor.


Passive sales mean that distributors do not actively market   the goods or services to consumers, but deliver the goods or services upon their request. The following are passive sales, which cannot be prohibited by manufacturers:

  1. Where a consumer from region A buys goods in region B, this is a passive sale for distributors designated within region B.        

  2. Where a consumer contacts the distributor after visiting the website of either such distributor or a third party and such contact contributes to a deal, such deal is regarded as a passive sale.        

  3. Where distributors publish relevant information for indefinite consumers on their own website or the website of a third party and consumers contact the distributors, the deals made therefrom shall be deemed as passive sales of the distributors.        


2. Prohibiting distributors from cross-supply among themselves

To restrict distributors from cross-supply among themselves under the territory allocation in a vertical arrangement could be determined by SAMR or PMRD as a violation of the AML.


2.23How are MFNs treated under the law?


Most-favoured-nation ("MFN") clauses in the context of vertical agreements are most-favoured-customer clauses, where the supplier grants the distributor a price that will not be less favourable than the prices granted to its other customers. MFN clauses may reduce the incentive to lower the resale price. In addition, since the undertakings are prevented from applying differing prices in different distribution channels, MFN clauses may facilitate RPM.


3.Dominant Firms


3.1At a high level, what is the level of concern over, and scrutiny given to, unilateral conduct (e.g., abuse of dominance)?


Abuse of dominance is the major claim in antitrust lawsuits in China. In 2018, 66 antitrust cases were adjudicated by courts at all levels. In China, inter alia, 36 are abuse of dominance cases, 25 are monopoly agreement cases, and five are antitrust administrative lawsuits, which account for 54%, 38% and 8% of cases, respectively.


The statistics of antitrust investigations (see the table below) show that attaching unreasonable conditions is ranked as the number one type of abusive conduct to be challenged by the enforcement authority. The second ranked type of abusive conduct is tying or bundling and the third is exclusive dealing. The statistics show that there have been no predatory pricing cases investigated by the enforcement authority in the past 12 years.


Types of abusive conductNumber of cases (until Feb. 2020)
Attaching unreasonable conditions            17
Tying or bundling            13
Exclusive dealing            8
Unfairly high price            6
Refusal to deal            5
Price discrimination            4
Predatory pricing            0
Others            1


3.2What are the laws governing dominant firms?


Articles 6, 17–19, and 47 of the AML regulate abusive conduct by dominant firms.


1. Definition of dominance

Article 17 of the AML provides: "dominant market position refers to a market position where an undertaking can control the prices or volume of commodities or other trades in a relevant market, or can obstruct or affect other undertakings' capability to enter into a relevant market".


2. Penalties

According to Article 47 of the AML, "where an undertaking violates the provisions of this Law by abusing their dominant market position, the anti-monopoly law enforcement authorities shall order a halt to the offending behavior, confiscate the illegal earnings, and impose a fine of between 1% and 10% of the preceding year's sales revenue".


The Interim Provisions on Prohibiting Acts of Abuse of a Dominant Market Position provides more detailed regulation to guide enforcement by SAMR or PMRD against abusive conduct.


3.3What is the analytical framework for defining a market in dominant firm cases?


The analytical framework for defining a relevant market in a dominant firm case will be no different to any other antitrust case. Please see question 2.6.


3.4What is the market share threshold for enforcers or a court to consider a firm as dominant or a monopolist?


Market share is the first factor to be considered when determining dominance.

According to Article 19 of the AML, it may be assumed that one or more undertakings have a dominant market position if:

  1. an undertaking has a one-half or a higher market share in a relevant market;        

  2. two undertakings have a two-thirds or higher market share in a relevant market; or        

  3. three undertakings have a three-quarters or higher market share in a relevant market.        


If one of the undertakings under the circumstances of Item 2 or 3 of the preceding paragraph has a market share of less than 10%, the undertaking shall not be assumed to have a dominant market position.


Where there is evidence showing that an undertaking which has been assumed to hold a dominant market position does not hold such a position, the undertaking shall not be determined to hold a dominant market position.


3.5In general, what are the consequences of being adjudged "dominant" or a "monopolist"? Is dominance or monopoly illegal per se (or subject to regulation), or are there specific types of conduct that are prohibited?


The AML does not prohibit market dominance, only the abuse of a dominant market position.


No abusive conduct by the dominant firm is per se illegal. Article 17 of the AML provides: "an undertaking who holds a dominant market position is prohibited from engaging in the following practices of abuse of the said position:

  1. Selling commodities at unfairly high prices or buying commodities at unfairly low prices;        

  2. Selling commodities at a price lower than cost without justifiable reasons;        

  3. Refusing to trade with relevant trading counterparts without justifiable reasons;        

  4. Restricting trading counterparts to the trading only with the said undertaking or its designated undertaking without justifiable reasons;        

  5. Conducing tie-in sales without justifiable reasons, or adding other unreasonable conditions to the trading; 

  6. Discriminating against trading counterparts of the same qualifications with regard to transaction price, etc., without justifiable reasons; and        

  7. Other practices determined by the anti-monopoly law enforcement authorities as abuse of dominant market position."        


3.6What is the role of economic analysis in assessing market dominance?


Economic analysis is crucial in assessing market dominance. In determining the dominant market position of an undertaking, the following factors should be taken into consideration:

  1. the market share of the undertaking and the competitive conditions in the relevant market;        

  2. the ability of the undertaking to control the retail market or procurement market for raw materials;        

  3. the financial status and technical conditions or capabilities of the undertaking;        

  4. the extent of dependence on the undertaking by other undertakings in transactions;        

  5. the level of difficulty for other undertakings to enter the relevant market; and        

  6. other factors relating to the determination of the dominant market position of the undertaking.        

None of the above factors is decisive.


3.7What is the role of market share in assessing market dominance?


Market share is a very important factor to be considered in assessing market dominance, but it is not decisive. Market dominance should be determined on a case-by-case basis.


In Qihoo 360 v. Tencent, even though QQ has had a market share of over 70% in the instant message market in China for more than seven years, the Supreme Court did not determine that Tencent holds a dominant market position in the relevant market because the market competition on the internet is dynamic.


In Shuqing Xu v. Tencent, an abuse-of-dominance litigation, the Intellectual Property Tribunal in the Supreme People's Court held that competition in the internet environment has highly dynamic characteristics, and the role of market share cannot be overestimated. The Court did not determine that Tencent holds a dominant market position in the relevant market, and stated that internet platform operators have the right to set reasonable platform management and disciplinary rules in order to achieve good platform management.


3.8What defences are available to allegations that a firm is abusing its dominance or market power?


The most frequently used defences in a private enforcement case against abusive conduct are:

  1. the market definition is incorrect;        

  2. the market share data is inaccurate;        

  3. there is no dominant market position of the undertaking, because (1) the market share is under 50%, (2) the undertaking has no ability to control the retail market or procurement market for raw materials, (3) there is no substantial difference between the undertaking and other competitors on financial status and technical capabilities, (4) the trading partners are not dependent on the undertaking, and (5) there is no barrier for other undertakings to enter into the relevant market;        

  4. there is no abusive conduct under Article 17 of the AML;        

  5. there is no anticompetitive effect derived from the abusive conduct;        

  6. there are justifiable reasons to justify the conduct;        

  7. the plaintiff has no standing to file the lawsuit;        

  8. there is no damage to the plaintiff by the alleged conduct; and        

  9. there is no causation between the conduct and the alleged damage.        


3.9What is the role of efficiencies in analysing dominant firm behaviour?


In general, the AML pursues multiple objectives, which include both micro-economic efficiency and macro-economic development. These objectives would also apply to the regulation of vertical agreements. Specifically, these objectives are:

  1. preventing and prohibiting monopolistic conduct;        

  2. protecting market competition;        

  3. promoting efficiency of economic operations;        

  4. safeguarding the interests of consumers and the general public; and        

  5. promoting the healthy development of the socialist market economy.    


Normally, the economic analysis will be aimed at specific economic issues, such as defining the relevant product market and geographic market, to prove dominance, to evaluate the anticompetitive effect, calculate damages, and to prove the causation. In some cases, economic models will be established and calculation is involved. Efficiencies will be touched on in the above economic analysis.


3.10Do the governing laws apply to "collective" dominance?


Article 19 of the AML does apply to collective dominance. If two undertakings have a two-thirds or higher market share in    a relevant market, or three undertakings  have  a  three-quarters or higher market share in a relevant market, they could be presumed to hold dominance in the relevant market.


Article 13 of the Interim Provisions on Prohibiting Acts of Abuse    of a Dominant Market Position provides that, in the determination of whether two or more undertakings hold a dominant market position, the market structure, the transparency of the relevant market, the degree of homogenisation of the relevant products or services, and the consistency of undertakings' conduct, shall also be considered.


Since the application of collective dominance in a case must meet many conditions, collective dominance is rarely used in China. The Isoniazid API investigation in 2017 is the first time when collective dominance has been used by the anti-monopoly enforcement agency. Please see also question 1.16 regarding the Calcium Gluconate API investigation.


3.11How do the laws in your jurisdiction apply to dominant purchasers?


Dominant purchasers are subject to the AML. Article 17 of the AML expressly prohibits undertakings with dominant market positions from purchasing goods at unfairly low prices.


According to the Administrative Measures on Fair Trade Between Retailers and Suppliers 2006, retailers may not abuse their advanced position to conduct the following unfair dealing:

  1. to refuse to accept the products after entering into a supply contract, unless the refusal may be attributed to the suppliers, or upon the consent of the suppliers, unless the retailers are willing to bear the incurred loss;

  2. to request that the suppliers bear the liabilities for the loss of the products unstipulated in advance;        

  3. the retailers have no justifiable reasons to remove the products of suppliers, unless retailers remove the products of suppliers in accordance with the laws and regulations or the administrative decisions made by administrative authorities under the law;        

  4. to impel suppliers to unconditionally return sales profits, or stipulate the return of sales profits based on a certain sales amount, or request the return of sales profits without the accomplishment of the agreed sales amount; or        

  5. to impel suppliers to purchase the designated products or accept the designated service.        


3.12What counts as abuse of dominance or exclusionary or anticompetitive conduct?


Article 17 of the AML provides: "an undertaking who holds a dominant market position is prohibited from engaging in the following practices of abuse of the said position:

  1. Selling commodities at unfairly high prices or buying commodities at unfairly low prices;        

  2. Selling commodities at a price lower than cost without justifiable reasons;        

  3. Refusing to trade with relevant trading counterparts without justifiable reasons;        

  4. Restricting trading counterparts to the trading only with the said undertaking or its designated undertaking without justifiable reasons;        

  5. Conducing tie-in sales without justifiable reasons, or adding other unreasonable conditions to the trading;

  6. Discriminating against trading counterparts of the same qualifications with regard to transaction price, etc., without justifiable reasons; and        

  7. Other practices determined by the anti-monopoly law enforcement authorities as abuse of dominant market position."        


3.13What is the role of intellectual property in analysing dominant firm behaviour?


Article 55 of the AML provides that "this Law is not applicable to the undertakings' conduct in exercise of intellectual property rights pursuant to provisions of laws or administrative regulations on intellectual property rights; but this Law is applicable to undertakings' conduct that eliminate or restrict market competition by abusing its intellectual property rights".


According to the Provisions on the Prohibition of the Abuse of Intellectual Property Rights to Eliminate or Restrict Competition, undertakings with a dominant market position are prohibited from engaging in certain types of conduct in exercising their IP rights that are deemed to constitute abusive conduct, which include:

  1. refusal to license IP rights that amount to "essential facilities";        

  2. imposing certain exclusivity restrictions;        

  3. imposing unjustified tying and bundling requirements;        

  4. attaching unreasonable trading conditions to an IP agreement, including inserting no-challenge clauses;

  5. engaging in discriminatory treatment; and        

  6. engaging in practices that are inconsistent with FRAND principles in relation to the licensing of standard essential patents.        


3.14Do enforcers and/or legal tribunals consider "direct effects" evidence of market power?


Direct effects analysis has been used in several antitrust litigation cases, through the submission of an expert report by economists. However, the judges are inclined to follow the traditional way to prove dominant market position. In practice, it is hard to let enforcers and judges consider direct effects evidence of market power.


3.15How is "platform dominance" assessed in your jurisdiction?


Platform dominance is very difficult to prove in China, because it involves a two-sided market, and the data are all in the hands of the defendant and cannot be obtained by the plaintiff. The concept of the platform market is introduced by the defendant in several civil antitrust litigations.  The aim of the defendant is to make it more difficult for the plaintiff to define the relevant market and to establish dominance. Without the tool of discovery under the common law, it will be difficult to evaluate platform dominance. It is possible for SAMR or PMRD to collect data in a public enforcement case, but to prove platform dominance will still be a major challenge.


3.16Are the competition agencies in your jurisdiction doing anything special to try to regulate big tech platforms?


According to Article 11 of the Interim Provisions on Prohibiting Acts of Abuse of a Dominant Market Position, SAMR or PMRD will consider the following factors in determining dominance for a big tech platform: competition characteristics of the industry; business model; number of users; network effects; lock-in effects; technical characteristics; market innovation; ability to obtain and process relevant data; and market power of undertakings in the relevant market.


In addition, according to the Several Provisions on Regulation of the Order of Internet Information Service Market, issued by the Ministry of Industry and Information Technology ("MIIT") in 2011, internet information service providers shall not commit the following:

1. Excluding competing products by:

  1. maliciously interfering with the services or operation provided by competitors on the user terminals;

  2. maliciously implementing incompatibility with the services or products of competitors; or

  3. cheating, misleading or coercing users into not using or modifying the parameters of services or products of competitors.

2. Refusal to deal by refusing, delaying or discontinuing to provide internet information services or products to users without justifiable reasons.


3. Exclusive dealing by:

  1. restricting users from using the internet information service or product designated by the undertaking without justifiable reasons;

  2. without tips and without the voluntary choice of consent by users, modifying the browser configuration or other setups of users; or

  3. failing to provide the convenient unloading methods or retaining executable code or other unnecessary documents on the user terminal after the unloading of software without the voluntary choice of consent by users.


4. Attaching unreasonable conditions without the consent of users, collecting information relevant to users that can recognise the identity of users independently or in combination with other information.


The Several Provisions on Regulation of the Order of Internet Information Service Market is not a regulation under the AML. However, the above-summarised rules can be used to identify abusive conduct of big tech platforms, if a platform can be determined to hold dominance.


3.17Under what circumstances are refusals to deal considered anticompetitive?


Article 17 (3) of the AML stipulates that an undertaking who holds a dominant market position is prohibited from "refusing to trade with relevant trading counterparts without justifiable reasons".


According to the API Guideline, undertakings of drugs and API with a dominant market position may not, without justified reason, refuse to deal with the relative party in disguise by setting an excessively high selling price or an excessively low purchase price. In analysing whether refusal to deal is justified, the API Guideline explicitly considers its impact on competition in the downstream market, namely that "the undertaking's existing capacity cannot meet the market supply, or the product needs to be produced for its own use, and its supply or self-use conduct has not seriously excluded competition in the downstream market".


4.Miscellaneous


4.1Please describe and comment on anything unique to your jurisdiction (or not covered above) with regard to vertical agreements and dominant firms.


After 12 years of implementation, the AML is subject to its first amendment. The draft amendment was issued at the end of 2019 and SAMR received 265 pieces of feedback from 75 entities in a public consultation in January 2020.


The feedback primarily concerned areas such as the legislative purpose, the implementation of competition policies, the fair competition review system, monopoly  agreements,  the  abuse of dominance, the filing system for concentration of undertakings, the abuse of administrative power to eliminate or restrict competition, investigations into suspected unlawful practices, and an increase in the legal liabilities for violations.


SAMR has deliberated upon the suggestions, and will incorporate the feedback it deems reasonable in the revised draft.  The amendment will become law after the legislation process of the National People's Congress.

Relevant Lawyer

  • Liang DING

    Partner

    Tel:+86 10 5268 2977

    E-mail:dingliang@dehenglaw.com

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