Exploration

LexGTDT Dominance 2021 - China

2021-02-18


  GENERAL FRAMEWORK


Legal framework


1.What is the legal framework in your jurisdiction covering the behaviour of dominant firms?


The Anti-Monopoly Law of China (AML) (promulgated on 30 August 2007 and effective as of 1 August 2008) is the main legislation governing the behaviour of dominant firms.


On 26 June 2019, the State Administration for Market Regulation (SAMR), the anti-monopoly enforcement agency in China, issued the Interim Provisions on the Prohibiting Acts of Abuse of a Dominant Market Position (the Interim Provisions on Abuse of Dominance). The Interim Provisions on Abuse of Dominance not only clarify the substantive rules of abuse of dominance set forth in article 17 of the AML, but also provide detailed rules regarding the administrative enforcement.


In addition, SAMR's newly issued Anti-Monopoly Guidelines in the Automobile Industry, Guidelines to the Price Behavior of Undertakings Dealing in Drugs in Short Supply and Active Pharmaceutical Ingredients, Guidelines for Commitment of Undertakings in Anti-Monopoly Cases, Guidelines for Anti-monopoly in the Field of Intellectual Property Rights, and the Provisions on the Prohibition of the Abuse of Intellectual Property Rights to Eliminate or Restrict Competition revised in 2020 also cover the issue of abuse of dominance.


Definition of dominance


2. How is dominance defined in the legislation and case law? What elements are taken into account when assessing dominance?


Definition of dominance under the AML

According to article 17 of the AML, 'for the purposes of this Law, "dominant market position" refers to a market position where an undertaking can control the prices or volume of commodities or other trading conditions in a relevant market, or can obstruct or affect other undertakings' capability to enter into a relevant market'. This definition is fundamental in determining a dominant market position. If an undertaking does not have the capability to control the prices or volume of commodities or the capability to obstruct or affect the market entry, it will be hard to prove dominance.


Factors shall be considered in determining dominance

Article 18 of the AML lists the elements shall be taken into account when assessing dominance, and articles 6 to 10 of the Interim Provisions detail the analytical approach to assessing these elements.


Market share

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 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 has a market share of less than 10 per cent, the undertaking shall not be assumed to have a dominant market position.


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


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


In Shuqing Xu v Tencent, an abuse-of-dominance litigation, the Supreme Court held that competition in internet environment has highly dynamic characteristics, and the role of market share cannot be overestimated.


Control of upstream and/or downstream market

If an undertaking has the capability to control a sales market or a raw material procurement market, there are two possible influences: (1) the undertaking may determine prices, volumes, contract term or other transaction conditions base on the control; and (2) the undertaking may excise input foreclosure by denying, degrading, or raising the price of access to an important input for which there are no close substitutes, or customer foreclosure by shrinking the customer base of upstream rivals.


Since abuse of dominance is normally a vertical issue, the analysis of control of upstream or downstream market is always intertwined with abusive conduct.


Financial and technical strength

An undertaking's asset size, profitability, financing capability, R&D capability, technical equipment, capability of technology innovation and application, intellectual property rights owned are the basic facts to demonstrate financial and technical strength. The key analysis is how such financial and technical strength could be used to maintain or strengthen the dominant market position of an undertaking.


The degree of reliance of other undertakings

Normally, undertakings may have many suppliers or buyers to choose from. However, if due to reliance on one specific undertaking, they have no other choice but to choose the said undertaking, such reliance may lead to a dominant market position.


According to the Guidelines on Anti-Monopoly in the Automobile Industry, original equipment manufacturers (OEMs) without the dominant position in the sales market of new automobiles may be identified to have the dominant position in the automobile aftermarket of their respective brand. The economic rationale behind this analysis is the lock-in effect, and this approach could be expend to prove dominance by the degree of reliance of other undertakings.


Market entry

To evaluate the market entry, factors such as the difficulty of market access and obtaining of necessary resources, the status of control over procurement and sales channels, the scale of capital investment, technical barriers, brand dependence, user's switchover cost and consumption habits may be considered.


Internet dominance

It is very hard to prove dominance of an internet company because of dynamic competition in the relevant market. However, network effects, lock-in effects and mastery and processing of relevant data are still very important to evaluate market power of an internet company.


According to article 11 of the Interim Provisions on Abuse of Dominance, the competitive characteristics of the relevant industry, business models, number of users, technological features, capabilities of market innovation, the undertaking's market forces in associated markets could also be considered in finding the dominance of an internet company.


According to the Anti-monopoly Guide for the Platform Economy Sector (Draft for Comment), in specific cases, it may not be necessary to define the relevant markets and undertakings of the platform economy sector can be directly determined to have abused dominant market position, if the following conditions are met:

  1. conducts can only be implemented by taking advantage of a dominant market position.        

  2. the conducts have lasted for a long time and produced clear damage effects.        

  3. direct factual evidence is sufficient.        

  4. the conditions for accurately defining relevant markets are insufficient or it is very difficult to accurately define relevant markets.        


IP dominance

In Huawei v InterDigital, the Guangdong Higher People's Court determined that the Standard Essential Patent (SEP) by itself is a market, therefore, InterDigital held a dominant market position in that market. According to article 12 of the Interim Provisions on Abuse of Dominance, an undertaking that has non-SEP could also be determined to hold dominant market position if the substitutability of IP is low and the degree of reliance of downstream undertaking on the IP is high.


Purpose of legislation


3.Is the purpose of the legislation and the underlying dominance standard strictly economic, or does it protect other interests?


The AML is a balance of competition policy and industrial policy. Article 1 of the AML provides the purpose of the legislation, inter alia, is to protect the public interest and to promote the healthy development of the socialist market economy. Article 7 of the AML specifically focuses on industries of a dominant status granted by the state, but also explicitly prevents the undertakings abusing their dominance.


Sector-specific dominance rules


4 .Are there sector-specific dominance rules, distinct from the generally applicable dominance provisions?


In general, the AML does not contain any provisions on abusive conduct that apply to specific sectors. Based on the current laws and regulations, the anti-monopoly enforcement does not vary between industries or businesses.


API

The Guide to the Pricing Behaviour of Undertakings Dealing in Drugs in Short Supply and Active Pharmaceutical Ingredients (API Guideline), issued in November 2017, regulates the abusive conduct related to active pharmaceutical ingredient (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.


According to the Anti-monopoly Guide for the Active Pharmaceutical Ingredients Field (Draft for Comment), as APIs play a special role in the production of drugs, an API generally constitutes a separate relevant product market, which means if a small number of undertakings produce/distribute an API, they may hold a dominant market position individually or jointly.


the Anti-monopoly Guide for the Active Pharmaceutical Ingredients Field (Draft for Comment) put forward a series of strict rules of conduct for API undertakings, including:

  1. Avoid entering into joint production agreements, joint purchase agreements, joint sales agreements, and joint bidding agreements with other API manufacturers that have a competitive relationship.        

  2. Avoid communicating sensitive information such as API sales prices, production scales, production and marketing plans through third parties (such as API distributors, downstream drug manufacturers).        

  3. Avoid implementing geographic restrictions or customer restrictions.        


For API undertakings with dominance:

  1. It is prohibited to increase the selling price of APIs beyond the normal range when the market environment is stable and the cost (purchase price) is not significantly affected.        

  2. It is prohibited to refuse to deal with counterparties after underwriting APIs.        

  3. It is prohibited to compel drug manufacturers to distribute all drugs through them or their designated undertakings, or force drug manufacturers to share drug revenue.        


Since APIs and drugs are related to the people's life safety and immediate interests, and most API undertakings implement monopolistic behaviors knowingly and frequently, the anti-monopoly law enforcement agencies will imposes a severer and heavier punishment by taking into consideration such factors as the nature, extent and duration of the illegal act.


Public utilities

Article 22 of the Interim Provisions on Abuse of Dominance 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 utilities and other sectors in 2020.


Automobile

The Anti-Monopoly Guidelines in the Automobile Industry reshaped the competition rules of vertical monopoly agreements:


  1. Recommended prices, guide prices and maximum prices may be identified as resale price fixing or minimum resale price maintenance:        

    1. the pressure or incentive the supplier imposed upon dealers; and            

    2. such prices are implemented by most or all dealers            

  2. the following geographic restrictions and customer restriction may constitute vertical monopoly agreements:        

    1. Restrictions on passive sales by dealers;            

    2. Restrictions on cross-supply between dealers; and            

    3. Restrictions on the sale of spare parts needed for auto repair and maintenance services by dealers and repair and maintenance ("RM") service providers to end users.            

  3. Tying – an auto supplier compels dealers or RM service providers to buy tied products such as automobiles, aftermarket spare parts, accessories, consumables, maintenance tools, test equipment, etc. that they do not order.        

  4. Unreasonable sales target – an auto supplier compels dealers or RM service providers to accept any unreasonable sales target or inventory stocking category or quantity for automobiles or aftermarket spare parts.        

  5. Unreasonable costs of promotional or marketing activities – an auto supplier compels dealers to bear the costs of advertisements, auto shows or other promotional or marketing activities that are carried out in the name of the supplier, or imposes restrictions on the use of any specific ways or specific media for an advertising campaign carried out by dealers at their own expense.        

  6. Compels to use specific product/service supplier or supply channel – an auto supplier compels dealers or RM service providers to only use paid services provided by any specific design or construction organization, or compels dealers or RM service providers to only use any specific brand, supplier or supply channel for any needed construction materials, general equipment, information management system, office facilities, etc.        

  7. Exclusive distribution to squeeze channels        

    1. the auto supplier restricts the dealers from dealing in the goods of another supplier; or

    2. the auto supplier restricts the dealers from selling in their business premises the goods of another enterprise or brand; and            

    3. new or original competitors in the market to be unable to find good alternative circulation channels

  8. An auto supplier refuses to supply goods to or terminates early the distribution agreement with dealers or RM providers due to their engagement in activities that promote competition:        

    1. not implementing a minimum resale price set by the auto supplier;            

    2. purchasing OEM replacement parts and equivalent spare parts used for aftermarket repair, maintenance and other services from a channel other than the auto supplier; or            

    3. other activities that promote competition            

  9. Indirect vertical restrictions imposed through warranty clauses on aftermarket repair and maintenance services and circulation of spare parts:        

    1. Where an auto supplier sets a condition for its performance of warranty obligations that requires end users to engage all repair and maintenance services not covered by warranty through its authorized repair and maintenance network;            

    2. Where an auto supplier sets a condition for its performance of warranty obligations that requires, for spare parts not covered by warranty, auto dealers or auto RM service providers to use OEM replacement parts; and            

    3. Where an auto supplier imposes, without legitimate justification, restrictions on the provision of aftermarket repair and maintenance services by its repair and maintenance network to parallel import cars.            


Exemptions from the dominance rules


5.To whom do the dominance rules apply? Are any entities exempt?


The dominance rule only applies to the undertaking that holds dominant market position. If an undertaking cannot be proved to hold dominance, it should not be fined under the dominance rules. More specifically, article 6 of the AML provides 'the undertakings that have dominant market positions shall not abuse their dominant positions to eliminate or restrict competition'.


No undertaking, which holds dominance, could be exempted from the dominance rules. In practice, there are antitrust investigations against state-owned enterprises (SOEs). Article 7 of the AML deals with the designated state monopolies, but it does not grant SOEs with any exemption of dominance rules.


In addition, according to article 2 of the AML, the AML governs abusive conduct undertaken both inside and outside the territory of China that eliminates or restricts competition in China, which means the undertaking outside China may also be caught under the dominance rules under the AML.


Transition from non-dominant to dominant


6.Does the legislation only provide for the behaviour of firms that are already dominant?


Held dominance in the past


In practice, many undertakings' market positions are changing in certain period of time. If an undertaking held dominance before but its market power dropped dramatically later, it still could be proved to held dominance in the past, and its previous abusive conduct could be fined under the AML. In Hytera v Motorola, the Beijing IP Court issued the judgment at the end of 2019, which held that Motorola Solutions (China) had a dominant position in the bidding market of the Chengdu Metro subway lines 2(2010), 3(2014), and 4(2013), but did not find dominance in the bidding market of the Chengdu Metro subway lines 5, 6, 7, 8, 9, 10, 17, 18 (from 2015-2018). Despite the final judgment ruled in favour of Motorola, this case shows that the dominance in the past could also pose a threat to the non-dominant firms.


Attempting to become dominant

If an undertaking does not hold dominance, as a general rule, it will not be subject to the fine under the dominance rules. However, if a non-dominant company attempting is to become dominant, SAMR has two options: (1) wait until the undertaking holds dominance and then initiate the investigation against abusive conduct; or (2) fine the conduct under that Price Law if applicable. For example, according to article 13 of API Guideline, if an undertaking hoards a lot of drugs in short supply and APIs with tension of abnormal price fluctuation, causing an excessively rapid price increase or extremely high price, such conduct of hoarding the drugs in short supply and APIs could be fined under the Price Law.


Another example, in 2010, a garlic distributor was fined 100,000 yuan under the Price Law for holding more than 3,000 tons of garlic off the market for a year and for speculating on garlic forward contract prices on an electronic trading market. All these conducts could lead to dominance if not investigated by the authority.


Collective dominance


7.Is collective dominance covered by the legislation? How is it defined in the legislation and case law?


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.


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 collective dominance has been used by the anti-monopoly enforcement agency. The National Development and Reform Commission (NDRC) determined that Zhejiang Second Pharma had a dominant position in the domestic market for isoniazid APIs. The combined share of Zhejiang Second Pharma and Tianjin Handewei Pharmaceutical in the market exceed 66.67 per cent with Zhejiang Second Pharma's share alone consistently being more than 10 per cent over the past few years. Additionally, in a market with substantial barriers to entry, Zhejiang Second Pharma has strong controlling power and other business undertakings are reliant on it. The NDRC concluded that Zhejiang Second Pharma and peer Tianjin Handewei Pharmaceutical, jointly held a dominant market position in the relevant market of Chinese domestic medical-use isoniazid APIs.


Dominant purchasers


8.Does the legislation apply to dominant purchasers? Are there any differences compared with the application of the law to dominant suppliers?


Both dominant purchasers and dominant suppliers are subject to the dominance rules under the AML. Article 17 of the AML expressly prohibits dominant undertakings from purchasing goods at unfairly low prices. However, the application of dominance rules to the dominant purchasers are more complicated than the dominant suppliers.


Article 1 of the AML provides, 'this Law is enacted for the purposes of preventing and restraining monopolistic practices, protecting fair market competition, improving economic efficiency, safeguarding the interests of consumers and the public, and promoting the healthy development of the socialist market economy'. Safeguarding the interests of consumers and the public is a key factor to be considered by the legislator and enforcement agency. Because the price is directly related to the consumer interest, the AML expressly prohibits price fixing by competitors, resale price maintenance (RPM) in vertical agreements and unfairly high price by dominant firms. The aim of legislation is to lower the price and let consumer enjoy the benefit.


When we look at the dominant purchasers, we have to look at two markets, procurement market and distribution market. First, the undertaking should be determined to hold dominant market position in the procurement market. Second, the consumers' interest in the downstream market should be evaluated.


  • If a dominant purchaser passes all the cost saving obtained in the procurement market to the consumer by lower the sales price of its products, it is unlikely to be fined by the authority because there is no harm to the interests of consumers.        

  • If a dominant purchaser sells its products in the downstream market at a price higher than market level, the 'unfairly low prices' in the procurement market could be scrutinised, and it is likely to find the undertaking gained monopoly profit.        

  • If a dominant purchaser is an end-user, the conduct of purchasing goods at unfairly low prices should be evaluated on a case-by-case basis. Article 12 of the AML provides, 'for the purposes of this Law, 'undertakings' refer to the natural persons, legal persons or other organisations that produce or sell commodities or provide services'. If this end-user purchaser does not sell commodities or provide services to the downstream market, it is not clear whether it constitutes an undertaking under the AML, and if it is not an undertaking under the AML, how could it be fined under the dominance rules.        


Market definition and share-based dominance thresholds


9.How are relevant product and geographic markets defined? Are there market-share thresholds at which a company will be presumed to be dominant or not dominant?


Article 12 of the AML provides, 'for the purposes of this Law, 'relevant market' refers to commodity coverage and territorial scope in which undertakings compete to provide a particular commodity or service during a specific period of time'. The Guidelines on the Relevant Market Definition provides more detailed rules on market definition.


Market definition

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'.


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


Relevant geographic market

According to the Guidelines on the Relevant Market Definition, the term 'relevant geographic market' refers to the geographic region where demanders obtains 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.


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. An undertaking's market share could be different in the past 10 years, five years or one year. In 360 v Tencent, the court also considered the future competition, even the alleged conduct was carried out in the past.


Different approach to market definition

Despite the Guidelines on the Relevant Market Definition equally applies to restrictive agreements, abuse of dominance and merger control, the approach of enforcement agencies or courts on market definition slightly differ from their approach to merger control cases.


The target product and territory

To define the relevant market, the starting point is to identify the target product and territory. In an antitrust investigation or litigation, the conduct under the investigation or litigation could be used to identify the target product and territory while, in merger control, the overlap products of undertakings participating in the concentration will be more decisive. Since the abusive conduct usually target at a specific point, the relevant market in an antitrust investigation or litigation could be very narrow, such as a group of standard essential patents.


Timeliness

In an antitrust investigation or litigation, all the past market share data will be considered because the abusive conduct could last for years, and the analysis will focus on the damage caused by the conduct in the past. In merger control, only market share of the parties in the past one or two years will be considered. The analysis is forward looking, focusing on whether the concentration gives rise to or reinforce the capability and motive of relevant undertaking to solely or jointly eliminate or restrict competition.


Share-based dominance thresholds

China's Anti-monopoly Law and related regulations and guidelines have put forward a series of market share standards. Although these standards cannot be used to directly determine the presence or absence of market dominance, these standards have a high reference value for determining market dominance:


Presumed dominance standard

  • 75 per cent (dominant position) – when the total market share of the three undertakings in the relevant market reaches 75 per cent and a series of prerequisites are met, the three undertakings can be presumed to have a dominant market position jointly.        

  • 66.7 per cent (dominant position) – when the total market share of two undertakings in the relevant market reaches two-thirds (66.7 per cent) and a series of prerequisites are met, the two undertakings can be presumed to have a dominant market position jointly.        

  • 50 per cent (dominant position) – an undertaking whose market share in the relevant market reaches 50 per cent can be presumed to have a dominant market position.        


Vertical Safe Harbor Standard

  • 30 per cent (vertical) – undertakings with a market share of 30 per cent or less in the relevant market may be presumed to have no significant market power (Antitrust Guidelines for the Automobile Industry).        

  • (vertical – the agreement involving IPRs) the market shares of the undertaking and trading counterparties do not exceed 30 per cent in any relevant market subject to the effect of the agreement involving IPRs, an agreement involving IPRs concluded by an undertaking shall usually not be recognised as a vertical monopoly agreement under the catch all provision of the Anti-monopoly Law. (Intellectual Property Anti-monopoly Guidelines 'Safe Harbor' provision; Regulations on Prohibition of Intellectual Property Abuse 'Safe Harbor' provision).        

  • 25 per cent (vertical M&A) – In the upstream and downstream markets, the market share of the undertakings participating in the concentration is less than 25 per cent, a concentration of undertakings can be notified as a simplified case. (Interim Provisions on the Review of Concentrations of Undertakings).        

  • (conglomerate M&A) Concentrated undertakings who are not in the same relevant market and do not have upstream and downstream relationships, and their market share in each market related to the transaction are less than 25 per cent, a concentration of undertakings can be notified as a simplified case. (Interim Provisions on the Review of Concentrations of Undertakings).        


Horizontal Safe Harbor Standard

  • 20 per cent (horizontal – the agreement involving IPRs) – The total market share of competitive undertakings in the relevant market does not exceed 20 per cent, an agreement involving IPRs concluded by an undertaking shall usually not be recognised as a horizontal monopoly agreement under the catch all provision of the Anti-monopoly Law. (Intellectual Property Antitrust Guidelines 'Safe Harbor' prohibits intellectual property abuse and 'Safe Harbor').        

  • 15 per cent (horizontal M&A) – In the same relevant market, if the total market shares of the undertakings participating in the concentration is less than 15 per cent, a concentration of undertakings can be notified as a simplified case. (Interim Provisions on the Review of Concentrations of Undertakings).        


Presumed no-dominance standard

  • Less than 10 per cent (no dominant position) – if an undertaking has a market share of less than 10 per cent, it should not be presumed to have a dominant market position.        


  ABUSE OF DOMINANCE


Definition of abuse of dominance


10.How is abuse of dominance defined and identified? What conduct is subject to a per se prohibition?


Article 6 of the Anti-Monopoly Law of China (AML) provides 'the undertakings that have dominant market positions shall not abuse their dominant positions to eliminate or restrict competition'. It is clear that the AML requires enforcement agencies or courts to consider both abusive conduct (form-based approach) and the anticompetitive effect of such conduct (effects-based approach) in determining the abuse of dominance.


No abusive conduct by the dominant firm is per se illegal, because the undertaking under the investigation or respondents could rebuttal (1) by proving justified reasons, or prove the price is fair; or (2) by demon-strating the conduct is not anticompetitive. Article 17 of the AML provides 'an undertaking that holds a dominant market position is prohibited from engaging in the following practices of abuse of that position:

  • selling commodities at unfairly high prices or buying commodities at unfairly low prices;        

  • selling commodities at a price lower than cost without justified reasons;        

  • refusing to trade with relevant trading counterparts without justified reasons;        

  • restricting trading counterparts to the trading only with the said undertaking or its designated undertaking without justified reasons;        

  • conducing tie-in sales without justified reasons, or attaching other unreasonable conditions to the trading counterparts, without justified reasons;        

  • discriminating against trading counterparts of the same qualifications with regard to transaction price, etc, without justified reasons; and        

  • other practices determined by the anti-monopoly law enforcement authorities as abuse of dominant market position'.        


Exploitative and exclusionary practices


11.Does the concept of abuse cover both exploitative and exclusionary practices?


The abusive conducts prohibited by the AML cover both exploitative and exclusionary practices.


Exploitative practices

Exploitative practices is an undertaking using its dominant market position to reap trading benefits that it would not have reaped if there had been normal and sufficient and effective competition. The AML prohibits exploitative practices such as unfair pricing, tie-in sales and attaching unreasonable trading conditions because they are perceived as directly harming consumers' interests.


Exclusionary practices

Exclusionary practices is an undertaking using its dominant market position to prevent equally efficient competitors from competing. The AML prohibits exclusionary practices such as predatory pricing, refusal to deal, exclusive dealing and discrimination because they tend to weaken the competitive structure of the market and indirectly harm consumers' interests.


Link between dominance and abuse


12.What link must be shown between dominance and abuse? May conduct by a dominant company also be abusive if it occurs on an adjacent market to the dominated market?


The link between dominance and abuse must be shown. If an undertaking holds dominance in market A and the abusive conduct occurs in an adjacent market B, in which the undertaking does not hold dominance, the abusive conduct cannot be established without causal link. There are two approaches to establish the causation:

  • to demonstrate there is tying or bundling practices or attaching unreasonable conditions in the transaction, in order to leverage its dominant market position on market A toward market B; and        

  • to demonstrate the undertaking passed its dominance from market A to market B. If it is established that the undertaking also holds dominance in market B then the causation can be established.        


The first approach depends on the fact, and the second approach is hard to prove. In practice, the best way is to correctly define the relevant market by identifying the target product and territory based on the conduct, and demonstrate dominance in the relevant market.


Defences


13.What defences may be raised to allegations of abuse of dominance? When exclusionary intent is shown, are defences an option?


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

  • the market definition is incorrect;        

  • the market share data is inaccurate;        

  • there is no dominant market position of the undertaking, because        

  • the market share is under 50 per cent;        

  • the undertaking has no ability to control the retail market or procurement market for raw materials;        

  • there is no substantial difference between the undertaking and other competitors on financial status and technical capabilities;        

  • the trading partners are not dependent on the undertaking; and        

  • there is no barrier for other undertakings to enter into the relevant market;        

  • there is no abusive conduct under article 17 of the AML;        

  • there is no anticompetitive effect derived from the abusive conduct;        

  • there are justifications to justify the conduct;        

  • the plaintiff has no standing to file the lawsuit;        

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

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


  SPECIFIC FORMS OF ABUSE


Types of conduct


14.Rebate schemes


Rebate schemes could be determined as a form of exclusive dealing which is prohibited by the Anti-Monopoly Law of China (AML) if the undertaking holds dominant market position.


Retroactive rebates

Retroactive rebate means that when a customer's purchases in a certain period reach a certain volume threshold, the customer will get a certain unit price discount. This discount applies retroactively to all cumulative purchases of the customer in this period, not just for the incremental part more than the threshold. This type of rebate is not only 'retrospective' but also 'cumulative', that is, when a higher threshold is reached, the discount is higher. The loyalty-inducing effect of retroactive rebate is that when the customer's purchase volume reaches or exceeds the threshold, the purchase volume will increase while the total payment price will decrease. In other words, the total payment price before the customer's total purchase amount reaches the threshold is higher than the total payment price for the higher purchase amount after the threshold is exceeded. Therefore, the retroactive rebates can attract customers to purchase as many goods as possible in order to reach the threshold and enjoy higher discounts, forming an induced effect.


In Tetra Pak antitrust investigation (2016), the SAIC found that the retroactive rebates of Tetra Pak constitute exclusive dealing under the AML and imposed a fine of 667.72 million yuan on Tetra Pak (7 per cent of Tetra Pak's sales revenue from the relevant products).


Incremental rebates

In general, incremental rebates have pro-competitive effects and do not violate the AML. However, providing rebate on the condition that a specific customer purchases a target proportion or target volume within a certain period of time may restrict such customer from dealing with other competing suppliers, such tailored rebate may constitute exclusive dealing if the supplier holds dominance.


Dominant undertakings often set different purchase ratios or target purchase volume according to different backgrounds of customers, and use this as a condition for providing rebates. This type of rebates often result in a circumstance that the purchase volume of customer A is greater than B, but the discount enjoyed is less than B. The direct consequence of such tailored incremental rebate is to lock the customer's purchase proportion or volume, thus having a loyalty-inducing effect.


In Eastman antitrust investigation (2019), Eastman Chemical Company signed an agreement with a customer, and if the customer's purchase volume through Eastman reached more than a certain percentage of its total global demand, it could enjoy the most favoured nation (MFN) treatment worldwide. In addition, the parties signed a loyalty discount agreement on the basis of the above agreement, locking in at least 75 per cent of the customer's demand in China. Shanghai Administration for Market Regulation believes that, under common circumstances, agreements that include global MFN treatment are inadequate to have an effect of restricting transactions in specific geographical markets. However, Eastman had further entered into supplementary agreements with customers, which granted extra sales discount on top of the MFN treatment on the condition that a certain volume of products was purchased. Under such conditions, a customer of Eastman could enjoy a discount and other favourable terms that could not be provided by other domestic competitors. Shanghai Administration for Market Regulation believes such combined practice has anticompetitive effect and imposes a fine of 24.38 million yuan (5 per cent of the 2016 sales revenue) according to articles 47 and 49 of the AML.


In sum, retroactive rebates are more likely to cause foreclosure effects on the market entrants, however, it is possible that a tailored incremental rebate schemes are found to be anticompetitive owing to the special circumstances.


15.Tying and bundling


Article 17 of the AML expressly prohibits a dominant undertaking from implementing tie-in sales without justified reasons.


Tying

bThe term 'tying' refers to a practice whereby the seller of a product or service (tying product) requires some or all purchasers of it to also purchase a separate product (tied product). In such practice, the tied product is available independently of the tying product. The tying product, on the other hand, is not available independently, in other words, the tied product has to be purchased along with it.


Bundling

The term 'bundling' refers to the two products are sold by the seller as a package at one price. If the goods are available only as a package, the practice is pure bundling; if the component goods are available both separately and as a package, the practice is mixed bundling. In general, the pure bundling is more restrictive, because the customer is compelled to buy the entire package as a whole and does not give customers the option to buy items separately. However, if an undertaking that practices mixed bundling set the component prices just marginally less than the bundle price, eg, product A at 95 yuan/unit, product B at 95 yuan/unit, and the bundle price of product A+B is 100 yuan/package, there is no reason for consumers to make separate component purchases. In such a case, the anticompetitive effect of pure bundling and mixed bundling will be the same.


Analysis

To demonstrate tying or bundling under the AML, four factors should be considered: dominance, motive, presence of distinct products, and coercion.


Dominance

The undertaking under the investigation or litigation shall have sufficient market power in the market of dominant product. As to tying practice, the dominance in the tying product is needed; while for bundling practice, the dominance in each or all component product markets will be sufficient.


Motive

The primary motive behind tying and bundling is to promote sale of tied products or a slow selling unknown product by making use of the market power of tying product or a fast selling well known product. As a result, both the arrangements restrict the consumer choice in terms of the type and the number of products to be purchased, and lead to consumer harm and foreclosure similar produce from the market.


Presence of distinct products

The presence of two 'distinct products' capable of being tied or bundled is a precondition for the existence of the tying or bundling arrangements. According to article 18 of the Interim Provisions on Prohibiting Acts of Abuse of a Dominant Market Position issued by the State Administration for Market Regulation (SAMR), the anti-monopoly enforcement agency in China, in 2019 (Interim Provisions on Abuse of Dominance), this distinctiveness can be evaluated on the basis of transaction practices, consumption habits or product functions.


Coercion

The key issue is that the tying product or the fast-selling well-known component product is not available independently. The customer is coerced to take or purchase a tied products or a slow selling unknown product if she wishes to buy the tying product or the fast-selling well-known component product, thus resulting in consumer harm.


In several antitrust investigations against tobacco companies, the local anti-monopoly enforcement agencies found the tobacco companies tied the sale of popular brands cigarette with unpopular ones.


In the Qualcomm antitrust investigation, the anti-monopoly enforcement agency found 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 dominant market position bundled sales of separate services or products, constituting a tie-in sale prohibited by the AML.


16.Exclusive dealing


Article 17 of the AML expressly prohibits a dominant undertaking from restricting trading counterparts to the trading only with the said undertaking or its designated undertaking without justified reasons.


Exclusive agreement

Exclusive agreements between manufacturers and suppliers, or between manufacturers and dealers, are generally lawful. However, when the undertaking holds dominance, it may use exclusive agreements to keep rivals out of the market or prevent new products from reaching consumers.


Exclusive supply agreement

The exclusive supply agreement is used by dominant purchaser to prevent a supplier from selling inputs to competing undertaking, so that the competing undertaking may not be able to gain the inputs it needs to compete with the dominant undertaking in the downstream market.


This restrictive practice may happens between manufacturers and wholesalers, manufacturers and retailers, and wholesalers and retailers.


Exclusive purchase agreement

Exclusive purchase agreement is used by a dominant supplier to require dealers cannot purchase the agreed product from any other suppliers than the said supplier or a third party designated by the supplier. Such arrangement may prevent competing manufacturers from getting its products into enough outlets, and the competing manufacturers may face significant additional costs and time to induce dealers to give up the exclusive purchase agreements with the dominant undertaking, or to establish different channels of getting its product before consumers. The harm to consumers in these cases is that the exclusive purchase agreements are preventing consumers from accessing more competing products, which could lead to lower prices, better products or services, or new choices. The anticompetitive effect of exclusive purchase agreement increases if the length of agreement term is long, the coverage of outlet is large and the alternative outlets is small.


'Choose one from two'

'Choose one from two' is to require downstream distributors to stop cooperating with competitors and can only conduct transactions with itself. Since this behavior is directly against competitors and it is usually diffi-cult to find any legitimate justifications, as long as the undertaking holds a dominant market position, it is very likely that "Choose one from two"to be determined to constitute an exclusive dealing.'Choose one from two'was originated in the high-profile 360 v Tencent case. Qihoo 360 and Tencent are two large integrated providers of internet products and services in China. Each builds its user base via a free core product: antivirus software (360) and the QQ instant messaging software (Tencent). Both companies profit from selling online advertising and offering 'value-added' services to users. However, conflicts between 360 and Tencent broke out in 2010 when 360 introduced its 360 Bodyguard software allowing users to control the number of ads that QQ could display. Tencent responded by making its QQ incompatible with all 360 software, with users being forced to choose between having QQ or 360's antivirus software on their computer (the 'choose one from two' event). The 'choose one from two' event was successful in undermining 360's core user base in antivirus software (360 lost around 10 per cent of its users within 48 hours). By restricting 360 in its core market, it could also restrict 360's ability to compete directly with Tencent in future markets. The final judgment is ruled in favor of Tencent because of dynamic competition in the digital economy.


The new development is JD.com v Alibaba alleging exclusive dealing by'choose one from two', and SAMR probing Alibaba over suspected 'choose one from two' conduct at the end of 2020.


Loyalty rebate

In general, incremental rebates have pro-competitive effects and do not violate the AML. However, providing rebate on the condition that a specific customer purchases a target proportion or target volume within a certain period of time may restrict such customer from dealing with other competing suppliers, such tailored rebate may constitute exclusive dealing if the supplier holds dominance.


Dominant undertakings often set different purchase ratios or target purchase volume according to different backgrounds of customers, and use this as a condition for providing rebates. This type of rebates often result in a circumstance that the purchase volume of customer A is greater than B, but the discount enjoyed is less than B. The direct consequence of such tailored incremental rebate is to lock the customer's purchase proportion or volume, thus having a loyalty-inducing effect.


In Eastman antitrust investigation (2019), Eastman Chemical Company signed an agreement with a customer, and if the customer's purchase volume through Eastman reached more than a certain percentage of its total global demand, it could enjoy the most favoured nation (MFN) treatment worldwide. In addition, the parties signed a loyalty discount agreement on the basis of the above agreement, locking in at least 75 per cent of the customer's demand in China. Shanghai Administration for Market Regulation believes that, under common circumstances, agreements that include global MFN treatment are inadequate to have an effect of restricting transactions in specific geographical markets. However, Eastman had further entered into supplementary agreements with customers, which granted extra sales discount on top of the MFN treatment on the condition that a certain volume of products was purchased. Under such conditions, a customer of Eastman could enjoy a discount and other favourable terms that could not be provided by other domestic competitors. Shanghai Administration for Market Regulation believes such combined practice has anticompetitive effect and imposes a fine of 24.38 million yuan (5 per cent of the 2016 sales revenue) according to articles 47 and 49 of the AML.


In sum, retroactive rebates are more likely to cause foreclosure effects on the market entrants, however, it is possible that a tailored incremental rebate schemes are found to be anticompetitive owing to the special circumstances.


Other forms of exclusive dealing

The AML not only prohibits dominant undertakings from restricting the trading counterpart to conduct transactions with them only, but also prohibits dominant undertakings from (1) restricting the trading coun-terpart to conducting transactions only with particular undertakings designated by them; and (2) restricting the trading counterpart by not allowing it to conduct transactions with particular undertakings (see article 17 of the Interim Provisions on Abuse of Dominance).


17.Predatory pricing


Article 17 of the AML expressly prohibits a dominant undertaking from selling products or services at a price lower than cost without justified reasons.


According to the Interim Provisions on Abuse of Dominance, in the determination of whether products or services are sold at a price below cost, key consideration shall be given to whether the price is lower than the average variable cost. Average variable cost refers to the cost per unit that varies with the volume of products produced, or services provided. Where the free-of-charge model in internet or other novel economic models is involved, comprehensive consideration shall be given to the free products or services and relevant charged products or services provided by undertakings.


Recoupment is not a necessary element has to be considered in determining selling below cost.


In practice, selling below cost will not be fined if (1) it is related to disposal of fresh goods, seasonal goods, goods with an imminent expiry date or overstocked goods; (2) it is to repay debt, change production lines or wind-up a business; or (3) it is to promote the new product within a reasonable period of time.


18.Price or margin squeezes


Price or margin squeezes occurs when a dominant supplier, which is also active in a downstream market, sets both its wholesale price to competitors in the downstream market and its retail price to consumers, and the whole sale price exceed or very close to the level of its own retail price, so the competitors in the downstream market cannot compete with the undertaking.


Refusal to deal

Price or margin squeezes could be determined as refusal to deal if its wholesale price to competitors in the downstream market exceeds the level of its own retail price, and an efficient competitor in the downstream market could not earn a normal profit after paying wholesale prices set by the undertaking.


Price discrimination

Price or margin squeezes could also be determined as discriminatory treatment, if its wholesale price to competitors in the downstream market is very close to the level of its own retail price, or the wholesale prices to competitors is much higher than the wholesale price to non-competitors.


In China Telecom and China Unicom antitrust investigation (2011), China Telecom and China Unicom are alleged to charge the competing broadband access network undertakings much higher prices than non-competitors for the purpose of squeezing out the other access network undertakings. The broadband backbone network is the principal data routes that connect different networks among cities, countries or even continents. Back in 2011, there were only two nationwide undertakings running backbone networks – namely China Telecom and China Unicom. China Telecom operates the backbone network service market in South China, while China Unicom operates the backbone network service market in North China. China Telecom was alleged to have charged competing access network undertaking an access fee that is three times or even a dozen times higher than other types of users such as internet content providers (ICPs). By forcing its rivals to pay much higher access fees, China Telecom may thus be in a better position to expand its own business in providing broadband access network services. The case was settled by offering commitments by China Telecom and China Unicom to improve the internet interconnection quality, adjust the pricing management of internet dedicated leased line access service and continue to invest and upgrade construction of broadband network in China.


19.Refusals to deal and denied access to essential facilities


In general, dominant undertakings may choose their dealers. However, refusals to supply may violate the AML, where the dominant undertakings acts arbitrarily, disproportionately or in the pursuit of anti-competitive purposes, for example, to enforce RPM. Article 17 of the AML expressly prohibits a dominant undertaking from refusing to trade with relevant trading counterparts without justified reasons.


Refusals to deal


Existing trading counterparts

According to article 16 of the Interim Provisions on Abuse of Dominance, the following actions against existing trading counterparts could be considered as refusals to deal:

  • substantively reducing the volume of existing transactions with the trading counterpart;

  • delaying or interrupting existing transactions with the trading counterpart;

  • refusing to make new transactions with the trading counterpart;

  • setting up restrictive conditions to make it difficult for the trading counterpart to make transactions with them.


New purchasers

Refusal to start supply products to new purchasers could be determined as refusal to deal if the input is indispensable for the economic activity on the downstream market. It is important to know that existing an essential facility is not a precondition to determine refusal to deal.


Such product may not necessary to reach the threshold of essential facility.


Competitors

In Hytera v Motorola, Hytera alleged competitor Motorola abusing its dominance in the Chengdu subway TERA system market by refusing to provide access to the API port for interconnection. Since the municipal government of Chengdu prefers TERA systems of different subway lines to be interconnected, and Motorola won all bids from line 1 to line 18 with 100 per cent market share, the access to the API port for interconnec-tion of Motorola TERA system is indispensable for other TERA system providers to compete in the market. Since the existing evidence did not prove that the approach of API port-based interconnection was directly used by various TERA system providers. Therefore, although Motorola refuses to provide access to the API port, it did not eliminate or restrict competition. The Beijing IP Court ruled that the alleged conduct did not constitute a refusal to deal. This case shows that dominant undertaking may be caught under the AML for its refusal to deal with competitors.


Essential facilities

According to article 16 of the Interim Provisions on Abuse of Dominance, the dominant undertaking is prohibited from refusing to trade with trading counterparts without justified reasons by refusing to let the trading counterpart use its essential facilities in production and business operations under reasonable conditions. To determine the essential facility the following factors shall be considered: (1) the feasibility of investing in the separate construction or making separate development and construction of the said facilities with reasonable investment; (2) the degree of dependence of the trading counterpart on the said facilities to effectively carry out production and operational activities; and (3) the possibility of the said undertaking providing the said facilities and the impact on its production and operational activities.


20.Predatory product design or a failure to disclose new technology


Predatory product design means a dominant undertaking use redesign to entrench its dominant market position to raise competitor's costs or to exclude competitors out of downstream market, while producing little or no corresponding benefits to consumer welfare. Predatory product design is more damaging in the network markets, such as for software and hardware. The lock-in effect, network effect and low marginal cost could amplify the anticompetitive effect. In addition, the dominant position could be strengthened by IP rights.


Tying

In Sichuan Dexian v Sony (2008), battery producer Sichuan Dexian alleged Sony engaged in unfair competition by using codes in batteries installed in its digital cameras to prevent the use of non-coded batteries. The codes in Sony batteries and digital cameras may have the foreclosure effect to the non-coded batteries, because non-coded batteries cannot function in Sony digital cameras. However, the court after evaluating all the new features of the codes in Sony batteries and digital cameras, found that they are innovative and of benefit to consumer. The claims are dismissed. Since the lawsuit was initiated in 2004 before the AML became into effective, Sichuan Dexian alleged the Sony violated the Unfair Competition Law. The similar predatory product design practice can be challenged as tying under the AML.


21.Price discrimination


Price discrimination is an abusive conduct regulated under article 17 of the AML.


It is very difficult for SAMR and the People's Court to identify price discrimination, unless it constitutes price or margin squeezes. 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 undertakings. Second, it is very hard for enforcement agencies 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.


In Huawei v InterDigital (2013), the Guangdong Higher People's Court ruled that InterDigital tried to charge Huawei a much higher rate than it charged Apple or Samsung and ordered damages of 20 million yuan and set a royalty rate of 0.019 per cent.


22.Exploitative prices or terms of supply


Unfair high pricing

Article 17 of the AML expressly prohibits dominant undertakings from selling products or providing services at unfairly high prices.


In order to determine whether a price level is unfairly high, the first step is to find competitive market level price as a benchmark, and the second step is to compare the two price levels to determine whether the prices is unfairly high.


According to article 14 of the Interim Provisions on Abuse of Dominance, there are three benchmarks can be considered: (2) the price of the same or comparable products sold or services provided by other undertakings under the same or similar market conditions; (3) the price of the products sold or services provided by the same undertaking in other regions with the same or similar market conditions; and (3) the cost of the products sold or services provided.


There is no objective standard to determine whether the price is unfairly high. According to Interim Provisions, the unfairly high price can be found if (2) the selling price is apparently higher than the benchmark price; (2) the selling price is raised beyond the normal range when cost is basically stable; or (3) the selling price is raised apparently faster than the cost growth rate.


In chlorpheniramine maleate APIs antitrust investigation (2018), Henan Jiushi was the largest producer of chlorpheniramine maleate APIs in the China market, and Hunan Er-Kang had obtained the import right of the API. The two companies were the major suppliers of chlorpheniramine maleate APIs to downstream drug makers in China. In 2018, Hunan Er-Kang sold chlorpheniramine maleate APIs at a price of 2,940 yuan per kg to downstream operators, three to four times of the average procurement price, while the production costs did not change significantly. As a result, the price of chlorpheniramine maleate drug products in the market skyrocketed. SAMR determined that both companies hiked the price of chlorpheniramine maleate APIs and caused a supply shortage, severely impaired fair competition in the market, infringed on the interests of downstream undertakings, and caused adverse effects on society. SAMR determined that the two companies abuse their dominance to sell chlorpheniramine maleate APIs to downstream undertakings at unfair high prices violated article 17 of the AML and imposed cumulative fines of 10.04 million yuan on Hunan Er-Kang and Henan Jiushi.


Attaching unreasonable conditions

Article 17 of the AML expressly prohibits dominant undertakings from attaching unreasonable conditions to the trading counterparts, without justified reasons. Attaching unreasonable conditions are heavily regu-lated in China. According to article 18 of the Interim Provisions on Abuse of Dominance, the following restrictions are prohibited:

  • attaching unreasonable restrictions on the term of a contract, the method of payment, the mode of transport and delivery of products, or the mode of service provided, etc;

  • attaching unreasonable restrictions on regions of sales, targets of sales, after-sales services of products, etc;

  • adding unreasonable charges to the price at the time of conducting transactions; and

  • attaching terms of transaction that are not related to the subject matter of transaction.


In Qualcomm investigation (2014), the National Development and Reform Commission (NDRC) found Qualcomm imposed unfair cross-licensing conditions, by forcing customers to grant Qualcomm free licences for their own patents while refusing to lower the royalties it imposed in consideration of the value of the patents licensed to it. In addition, NDRC found that Qualcomm imposed unreasonable conditions on the sale of baseband chips because Chinese customers were forced to accept a non-challenge clause prohibiting them from challenging the validity of Qualcomm's patents. NDRC determined, inter alia, that Qualcomm abused its dominance by attaching unreasonable trading conditions, and fined Qualcomm 6.08 billion yuan (8 per cent of Qualcomm's 2013 revenues generated in China).


23.Abuse of administrative or government process


In general, a dominant undertaking can invoke administrative or government process, even with anticompetitive intent and effects, without violation of the AML. However, if the administrative authorities and the organisations authorised by laws and regulations to manage public affairs abuse their administrative power to implement exclusive dealing in favour of specific undertaking or block the market entry of competing undertakings, the administrative authorities could be determined as abuse of administrative power and violate the AML. If there is sufficient evidence to prove the private undertaking affiliates with the administrative authority and play an active role in exclusive dealing or foreclosure of competitors, it may also be fined under the AML.


Exclusive dealing

Any administrative measures involving the economic activities of market players could change the competition situation of the market. For several decades, China maintained a centrally planned economy, where the state directed and controlled a large share of the country's economic output by setting production goals, controlling prices, and allocating resources throughout most of the economy. Through long-term reform, the state gradually eliminated the price controls on a wide range of products. However, the administrative authorities still have great power to affect the market situation. Certain private undertakings may through the administrative authorities obtain dominance and excise exclusive dealing through administrative measures.


According to article 4 of the Interim Provisions on Prohibiting Acts of Abuse of Administrative Authority to Eliminate or Restrict Competition issued by SAMR in 2019 (Interim Provisions on Abuse of Administrative Authority), the administrative authorities are prohibited from restricting customers to purchase or use of products or services provided by specific undertakings by means of (1) refusing or postponing an admin-istrative approval, repetitive inspection, or denying access to platforms or networks; (2) limiting the location of bidders, the ownership form, and the organisational form in bid invitation and bidding activities; or (3) setting up a project library or a directory library of specific undertakings without the basis of laws and regulations.


Blocking market entry

According to article 5 and article 7 of the Interim Provisions on Abuse of Administrative Authority, the administrative authorities are prohibited from restricting the free circulation of the goods between regions, excluding or restricting foreign undertakings from making investments or establishing branches in the regions.


Standard setting and SEP

According to the Standardisation Law of 2018, standards shall include national standards, industry standards, local standards, group standards, enterprise standards. Only national standards may be mandatory standards, other standards are all recommended standards.


The mandatory national standards are approved and promulgated by the State Council, and products and services that do not comply with mandatory national standards shall not be manufactured, sold, imported or provided. Industry standards and local standards are formulated by the standardisation administrative authority of the State Council or the provincial government. Institutes, associations, chambers of commerce, federations, industrial technology alliances could coordinate with the relevant market entities to jointly formulate group standards. Enterprises may formulate enterprise standards jointly with other enterprises.


Patent owners may have incentive to push for the adoption of their own patented technology in the framework of the standard, and benefit from royalties. If the patent owners refuse to license or claim unreasonably high royalties against competitors, there could be foreclosure effect. To avoid such foreclosure, article 13 of the Provisions on the Prohibition of the Abuse of Intellectual Property Rights to Eliminate or Restrict Competition (2015) provides an undertaking that is of dominant market position may not, without justified reasons, implement the following acts of eliminating or restricting competition in the course of formulation and implementation of the standards:

  • when participating in the formulation of the standards, deliberately not disclosing information on its rights to the standards developing organisation, or explicitly waiving its rights, but claiming its patent rights to the implementers of a standard after the standard involves the patent; or

  • after the patent has become a standard essential patent (SEP), in violation of the fair, reasonable and non-discriminatory (FRAND) principles, implementing denial of licence, conducting tied sale of products, adding other unreasonable trading conditions in the transaction or implementing other acts of eliminating or restricting competition.


24.Mergers and acquisitions as exclusionary practices


Article 4 of the Interim Provisions on Evaluating the Impact of Concentration of Undertakings on Competition (2011) provides that, when addressing the possibility of negative impact on competition caused by a merger or an acquisition, the possibility of excluding other competitors is an initial factor to be considered by the authority.


25.Other abuses


Abuse of IP rights

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 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 includes:

  • refusal to license IP rights that amount to 'essential facilities';

  • imposing certain exclusivity restrictions;

  • imposing unjustified tying and bundling requirements;

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

  • engaging in discriminatory treatment; and

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


Strategic capacity construction or under investment in capacity

It is not a violation under the AML for a dominant undertaking to underinvest in capacity. Even though such conduct could cause higher price of the products and a shortage of supply in the market, (1) there could be legitimate reasons to justify such under investment; and (2) even if there is no specific reason to justify the conduct, the enforcement authority cannot force a private undertaking to make investment.


  ENFORCEMENT PROCEEDINGS


Enforcement authorities


26.Which authorities are responsible for enforcement of the dominance rules and what powers of investigation do they have?


Enforcement authorities

The State Administration for Market Regulation (SAMR), the anti-monopoly enforcement agency in China, investigates and enforces the dominance rules under the AML. Before April 2018, the National Development and Reform Commission (NDRC) was responsible for law enforcement against price-related abusive conduct, and the State Administration for Industry and Commerce (SAIC, the predecessor of SAMR) was responsible for investigations into non-price-related abusive conduct.


According to the Institutional Reform Plan of the State Council, released by the National People's Congress on 18 March 2018, 'the duties of the SAIC, the duty of the NDRC in price supervision and antitrust law enforcement, the duty of the Ministry of Commerce in antitrust law enforcement for concentration of undertakings and the duty of the Office of Anti-monopoly Committee of the State Council shall be consoli-dated to form SAMR as an organisation directly under the State Council'.


The Anti-monopoly Bureau under SAMR carries out antitrust investigations into abusive conduct. More specifically, the Division of Abusive Conduct Investigation is in charge of investigations into abuse of market dominance.


According to the Circular of SAMR on the Authority for the Anti-Monopoly Law of China (AML) Enforcement issued on 28 December 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 (PMRD)) are hereby authorised, 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 both the central-level SAMR and the provincial-level PMRD have the authority to investigate abusive conduct.


Powers of investigation

When investigating abusive conduct, the anti-monopoly enforcement authorities may take the following measures:

  • entering the business premises of undertakings which are under investigation or any other relevant place to inspect;

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

  • reviewing and duplicating 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;

  • seizing and detaining the relevant evidence; and

  • enquiring into the bank accounts of undertakings which are under investigation.


Sanctions and remedies


27.What sanctions and remedies may the authorities impose? May individuals be fined or sanctioned?


In the case where an undertaking violates the AML by abusing its dominant market position, SAMR shall order a halt to abusive conduct, confiscate illegal gains, and impose a fine of between 1 per cent and 10 per cent of the preceding year's sales revenue.


The Regulations on Non-bank Payment Institutions (draft for comments) issued in January 2021 is a key step to regulate big tech in the digital economy. It provides that the People's Bank of China may recommend SAMR to split non-bank payment institutions according to the type of payment business (article 57), which means the penalty against dominant firms in the digital economy could be extended to split and divestiture.


Individuals may not be fined for the abusive conduct. However, according to article 52 of the AML, where, during a lawful investigation by the enforcement authorities, actions are taken to obstruct the investigation, including the refusal to provide information or materials, the submission of fraudulent information or materials, or the concealment, destruction, or diverting of relevant evidence, the enforcement authorities shall order rectification, and may impose a fine of no more than 20,000 yuan on individuals; where the circumstance constitute a crime, criminal liability shall be investigated and the offenders may be prosecuted.


To date, the highest fine imposed for abuse of dominance is 6.08 billion yuan against Qualcomm.


Enforcement process


28.Can the competition enforcers impose sanctions directly or must they petition a court or other authority?


The enforcement authority can impose sanctions directly without any petition from court. Article 10 of the AML provides that the AML enforcement agency designated by the State Council shall be responsible for the AML enforcement, and such AML enforcement agency may empower corresponding agencies in the provincial government to be responsible for the AML enforcement.


Enforcement record


29.What is the recent enforcement record in your jurisdiction?


The frequency of the rules on abuse of dominance enforced

The following are the statistics of antitrust investigation initiated against abusive conduct in the past 10 years:

YearThe antitrust investigation against abusive conduct
2010

1

20111
20120
20132
20148
20156
201612
20175
2018
5
20195
20208


Most common abusive conduct investigated

The statistics of antitrust investigation (see table below) shows that the attaching unreasonable conditions is the most common abusive conduct to be challenged by the enforcement authority. The second most common is tying or bundling and the third is exclusive dealing. The statistics shows that there is no predatory pricing case investigated by the enforcement authority in the past 12 years.000

Abusive conduct
Number of cases (up to February 2020)
Attaching unreasonable conditions17
Tying or bundling13
Exclusive dealing8
Unfair high pricing6
Refusal to deal5
Price discrimination4
Others1
Predatory pricing0


The average length of abuse of dominance proceedings

The length of abuse of dominance proceedings are differences from one case to another. In general, the average length of investigation is about one year. For example, in Eastman antitrust investigation, the case was initiated in August 2017 and the punishment decision was issued in April 2019 (one year and nine months). The chlorpheniramine maleate API investigation was initiated in July 2018 and the decision was issued in December 2018 (six months).


The most recent high-profile dominance case

The most recent high-profile dominance case is the chlorpheniramine maleate APIs antitrust investigation.


Contractual consequences


30.Where a clause in a contract involving a dominant company is inconsistent with the legislation, is the clause (or the entire contract) invalidated?


The AML provides that the enforcement authority may order the cessation of abusive conduct. Despite there being no express provision in the AML stating that the illegal abusive conduct leads to direct invalidity of a clause in a contract, in practice, the clause in the contract that has been held in violation of the dominance rules under the AML could not be enforced.


Under the PRC Civil Code, any act that violates the mandatory provisions of laws and administrative regulations shall be null and void. If the plaintiff can prove the clause in the contract violates the dominance rules under the AML, it can challenge the validity of such clause in a civil litigation.


Private enforcement


31.To what extent is private enforcement possible? Does the legislation provide a basis for a court or other authority to order a dominant firm to grant access, supply goods or services, conclude a contract or invalidate a provision or contract?


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


The AML does not provide a basis for a court to order a dominant firm to grant access to infrastructure or technology, supply goods or services, conclude a contract. However, there is no prohibition for the court to grant access to infrastructure or technology, supply goods or services or conclude a contract if the abusive conduct is a refusal to deal.


Damages


32.Do companies harmed by abusive practices have a claim for damages? Who adjudicates claims and how are damages calculated or assessed?


Yes. According to article 50 of the AML, undertakings shall be held liable for the damage to the losses of others stemming from their monopolistic practices. Pursuant to the AML and the Provisions of the Supreme People's Court (SPC) on Application of Laws in the Trial of Civil Disputes arising from Monopolistic Practices, a claimant may request:

  • compensation for the losses caused by the abusive conduct;

  • cessation of the infringement;

  • compensation for reasonable expenses incurred for investigation, attorney and other measures necessary to stop the abusive conduct; and

  • the relevant agreement, decision of industrial associations or other documents in violation of the AML to be declared invalid.

    Multiple damages are not available under the AML.


Appeals


33.To what court may authority decisions finding an abuse be appealed?


Undertakings subject to the penalty decision of the enforcement authority may have two options to appeal the decision: administrative review or administrative litigation. After the formal penalty decision is made, the undertaking has 15 days to pay the fines. The application for administrative review or filing of administrative lawsuit with the court will not halt the payment of 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 execution of the payment of fines will cause irremediable losses and suspension of the execution will not harm national or public interests, the people's court could order suspension.


Administrative review

Administrative review is an administrative proceeding applies to penalties imposed by administrative agencies. For the penalty decision made by SAMR, the application for administrative review shall be submitted to SAMR. Decisions made by local 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 on-paper review, with the possibility of a hearing or consultation upon request by the applicant or the discretion of the reviewing agency.


In terms of timing, the undertaking must apply for administrative review within 60 days of receipt of the formal decision. The agency has 60 days from acceptance to make a decision, which can be extended by up to 30 days upon approval. The applicant still has the opportunity to file an administrative litigation if it is unsatisfied with the administrative review decision.


In terms of the standard of review, the competent administrative agency conducts the administrative review and will look at the fact and the law application, but will not conduct a de novo review. In the process of administrative review, SAMR or local PMRD may not, on its own, collect evidence from the applicant or from other organisation or individual concerned. According to article 28 of the Administrative Reconsideration Law of 2017, the administrative decisions can be nullified, changed, or confirmed to be illegal, if (1) the main facts are unclear and material evidence is inadequate; (2) the law application is incorrect; (3) the statutory procedures are violated; (4) the power of authority is exceeded or abused; or (5) the administrative decision is obviously inappropriate.


Administrative litigation

An undertaking can challenge SAMR or local 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 the 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.


According to article 2 of the Provisions of the Supreme People's Court on Several Issues Related to the Intellectual Property Tribunal, the IP tribunal of the Supreme People's Court tries the following cases: 'appellate cases due to disobeying judgments and rulings of administrative cases of first instance on … administrative penalty for monopoly made by higher people's courts, intellectual property courts and inter-mediate people's courts'. Either party can appeal the first instance decision to the SPC within 10 or 15 days, depending on the nature of the court decision, after receipt of the first instance decision. The SPC must make the final decision within three months of receipt of the appellate petition, which is extendable.


In terms of the standard of review, similar to the administrative review, the people's court will look at the fact and the law application, but will not conduct a de novo review. According to article 70 of the Administrative Procedure Law 2017, the people's court may make a ruling to nullify or nullify partially the administrative act, or rule the defendant to make a new administrative act, if there is (1) inadequacy of material evidence; (2) erroneous application of the law or regulations; (3) violation of the legal procedure; (4) exceeding authority; (5) abuse of powers; and (6) obvious unfairness.


  UNILATERAL CONDUCT


Unilateral conduct by non-dominant firms


34.Are there any rules applying to the unilateral conduct of non-dominant firms?


Not applicable.


  UPDATE AND TRENDS


Forthcoming changes


35.Are changes expected to the legislation or other measures that will have an impact on this area in the near future? Are there shifts of emphasis in the enforcement practice?


The draft amendments to the Anti-Monopoly Law of China (AML)


Safe Harbor

If the undertaking that has reached a monopoly agreement has evidence that its market share in the relevant market is below a specific standard, the cartel and vertical monopoly agreement rules shall not apply, unless there is evidence that the agreement excludes or restricts competition. The specific standards for market share are formulated by the Anti-monopoly Law Enforcement Agency of the State Council.


Digital Economy Rules

  • The state supports the healthy development of the digital economy. Undertakings in the digital economy shall participate in market competition fairly, and shall not conduct activities that exclude or restrict competition.

  • Undertakings in the digital economy are not allowed to engage in monopoly agreement behaviors by using technical means, platform rules, data and algorithms, etc.

  • Undertakings in the digital economy must not abuse the dominant market position formed by the Internet platform or engage in behaviors that abuse the dominant market position.

  • To determine that undertakings in the digital economy have a dominant market position, factors such as the competitive characteristics of the digital economy, business models, technical characteristics, market innovation, and the ability of undertakings to master and process relevant data should be considered.


The Anti-monopoly Guide for the Platform Economy Sector

The following actions may be investigated by the anti-monopoly law enforcement agencies, and could be caught under the AML:

  • Improper collection of user data – Undertakings in the platform economy with a dominant market position impose unreasonable trading conditions to force the collection of user personal data.

  • Discrimination based on big data – based on the big data collected by the platform ecology, undertakings in the field of platform economy with a dominant market position will provide differential treatment to counterparties with the same trading conditions, such as providing different prices based on users' browsing and purchase records or personal data.

  • Self-preferential treatment based on big data – Undertakings in the field of platform economy with a dominant market position give preferential treatment to their own platform ecology by providing superior data to their affiliates in the same business system.

  • Refusal to share data as an 'essential facility' – If the data is deemed to be an essential facility, the undertaking of the platform economy that owns such data and has a dominant market position may be obliged to share the data with competitors.

  • 'Choose one from two' – require downstream distributors to stop cooperating with competitors and can only conduct transactions with itself.


Coronavirus


36.What emergency legislation, relief programmes and other initiatives specific to your practice area has your state implemented to address the pandemic? Have any existing government programmes, laws or regulations been amended to address these concerns? What best practices are advisable for clients?


The State Administration for Market Regulation (SAMR), the anti-monopoly enforcement agency in China, issued the Announcement on Supporting Anti-monopoly Law Enforcement for Pandemic Prevention and Control and the Resumption of Work and Production in 2020, and the following measures are ongoing:

  • Speeding up the review of cases of concentration of undertakings involving pandemic prevention and control;

  • Giving exemptions to undertakings for the cooperation agreements involving pandemic prevention and control;

  • Providing additional penalty reduction to the undertakings that (1) suffer great losses in the pandemic; or (2) make outstanding contributions in the fight against the pandemic.

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