by: Cheng Liu, Audrey Li, Yun Bi, Shenglan Liu, Lushen Hong and Jeff Liu
The year 2019 marks the first complete year of enforcement for the Anti-Monopoly Bureau of State Administration for Market Regulation (“SAMR”)’s since its establishment as well as the start of the second decade of the Anti-Monopoly Law (“AML”). In this year, remarkable progress was made in Chinese antitrust law in terms of legislation, investigation and enforcement, merger control and antitrust litigation. In summary:
- Through institutional reforms, SAMR unified the interpretation of the AML by issuing the Interim Provisions on the Prohibition of Monopoly Agreements, the Interim Provisions on Prohibition of the Abuse of Market dominance and the Interim Provisions on Prohibition of Abuse of Administrative Power. At the beginning of 2020, SAMR promulgated the Interim Provisions on the Review of Concentrations of Undertakings (Draft for Public Comments) to integrate various provisions of the existing rules for merger control review. Meanwhile, SAMR and some of its local counterparts (“local AMRs”) also published antitrust compliance guidelines to increase compliance awareness of companies and serve as guidance to improve their internal
- On the antitrust investigation and enforcement front, SAMR continued to concentrate on enforcement in the industries which impact people’s livelihoods, and began to focus on monopoly issues in the e-commerce sector; Traditional anti-competitive conducts (including cartels, resale price maintenance etc.) continue to remain enforcement priorities while SAMR also provided more in depth guidance in complex abuse of market dominance conduct cases, such as minimum purchase quantity and most-favored-nation treatment clauses etc.
- With regard to merger control, SAMR continued to review cases under simplified procedure in an efficient manner. In contrast, complex transactions faced closer scrutiny. In comparison to other jurisdictions, there were certain areas of concern which SAMR particularly focused on. For instance, SAMR adopted a more stringent approach to conglomerate Based on cases since 2019, it seems that the “Hold Separate” remedy could be an effective measure to solve particular concerns in the Chinese market or particular product related concerns. Also noteworthy, is that in 2019, a record high of 17 cases were punished for failures to notify.
- Antitrust litigation continues to be very active, in particular, a number of noteworthy litigation matters in the internet industry caught eyes of the public in 2019. In terms of procedure, 2019 is the first year in which the leapfrog appeal system became effective, i.e., the Intellectual Property Tribunal of the Supreme People’s Court (“Supreme Court”) started to hear appeal cases; the Supreme Court and the Beijing High Court also made respective rulings on whether arbitration can be used for monopoly disputes.
- After preparation in 2019, SAMR promulgated the Draft Revision to the Anti-Monopoly Law (Draft for Public Comments) (“Draft Revision”) at the beginning of 2020. The Draft Revision clarified many controversial issues in practice, such as adjusting the regulation system of monopoly agreements, leaving room for future interpretation of regulations about “restricting the minimum resale price”; putting forward specific considerations for the determination of market dominance in the internet sector; significantly increasing the penalties for antitrust infringements. It is expected that the revision to the AML will provide some clarity for companies, and the enforcement of the AML will become more stringent in the future.
On 10 April 2018, SAMR was officially established by consolidating the antitrust enforcement functions of the previous three antitrust agencies, i.e. State Administration for Industry and Commerce (“SAIC”), the Ministry of Commerce of People’s Republic of China (“MOFCOM”) and the National Development and Reform Commission (“NDRC”). This marked the formation of a single and independent Chinese authority responsible for antitrust enforcement. To unify enforcement standards and procedures, in the last year, SAMR has been proactively integrating regulations issued by the previous three agencies.
Improved accompanying regulations for antitrust enforcement
In June 2019, SAMR promulgated three antitrust regulations, the Interim Provisions on Prohibition of Monopoly Agreements (“Provisions on Monopoly Agreements”), the Interim Provisions on Prohibition of Abuse of Market Dominance (“Provisions on Prohibition of Abuse of Dominance”), and the Interim Provisions on Prohibition of Abuse of Administrative Power, which came into effect on 1 September 2019. These three regulations have integrated relevant rules on monopoly agreements, abuse of dominance and abuse of administrative power by the NDRC and the former SAIC. In particular, the Provisions on Monopoly Agreements and the Provisions on Prohibition of Abuse provide clearer guidance on the determination of monopoly agreements and abusive conducts and legal liability, and the investigation of the aforementioned conduct (including suspension/termination of investigation, reporting, leniency system, exemption mechanism, etc.). For the detailed interpretation of these two Provisions, please refer to our previous articles on the Interim Provisions on Prohibition of Monopoly Agreements and the Interim Provisions on Prohibition of Abuse of Market Dominance’s Highlight Interpretations at: Monopoly Agreements, Abuse of Market Dominance and Investigation and punishment procedures.
In terms of merger control, since the current rules have been scattered in several regulations released by MOFCOM, SAMR has been trying to further integrate and clarify the relevant rules. On 7 January 2020, SAMR promulgated the Interim Provisions on the Review of Concentrations of Undertakings (Consultation Draft) (“Provisions on Review”), which has consolidated widely -scattered provisions on notification and review of merger control filing. It is expected that the final Provisions on Review will play a leading role in regulating merger control enforcement.
Antitrust compliance guidelines
In the meantime, SAMR and local AMRs have released antitrust compliance guidelines, including Anti-Monopoly Compliance Guidelines for Business Operators (Consultation Draft) by SAMR, Shanghai Anti-Monopoly Compliance Guide for Undertakings by the Shanghai AMR, Guidelines of Zhejiang Province on Corporation Competition Compliance by Zhejiang AMR (collectively referred to as “antitrust compliance guidelines”).
These antitrust compliance guidelines provide an in-depth introduction to and illustrative cases of monopoly agreements, abuse of market dominance and merger control regulated by the AML, the corresponding penalties and the enforcement and investigation procedures for AML violations. More importantly, these guidelines are focused on encouraging companies to establish robust compliance management system, including reporting, evaluation, commitment, risk management, training and awarding mechanisms, and to strengthen specialized training and rating systems for those jobs where the risk for antitrust infringement is highest (such as sales department and senior management responsible for decision-makings of a company). It is expected that these antitrust compliance guidelines can help strengthen companies’ compliance awareness and management in the market place, and improve their ability to identify, prevent and deal with AML violations as well.
According to our observations, whether the companies being questioned have a robust compliance system in place and whether they have had competition training programmes could be factors (among others) considered by enforcement agencies when they decide whether to terminate an ongoing investigation procedure or to mitigate punishment. Therefore, it is very important for companies to set up their own tailor-made compliance systems that suit their business needs. With such compliance systems in place, companies may be able to identify and avoid legal risks effectively, and these mechanisms would be important factors taken into account by SAMR when companies apply for suspension of investigation and reduction of punishment or provide a successful defence in an AML investigation.
Active Antitrust Enforcement
In 2019, SAMR and local AMRs actively enforced against anti-competitive conduct, investigating a total of 38 cases involving suspected monopolistic conduct. Among the 17 closed cases in 2019 published on the official website of SAMR, there were 6 cases concerning horizontal monopoly agreements, 4 concerning vertical monopoly agreements, 5 concerning abuse of dominance and 2 concerning monopolistic conduct organized by trade associations.
Active enforcement towards sectors impacting people’s livelihood and the digital economy
In 2019, SAMR continued to “concentrate on antitrust enforcement in the sectors which have a strong impact on people’s lives”, including public utilities, active pharmaceutical ingredients, automobiles, building materials, chemical, consumer goods and other industries that closely affect people’s daily life.
Potential antitrust issues in the e-commerce sector have also received widespread attention. As reported, SAMR plans to launch an antitrust investigation on “choosing one from two” conduct. SAMR also investigated online music media and record companies for possible monopolistic conducts including abuse of dominance and vertical monopoly agreements.
Heightened scrutiny to minimum purchase quantity and MFN clauses
In 2019, China antitrust enforcement authorities continued to crack down on cartels and resale price maintenance (“RPM”). In particular, the following cases are worth noting: (i) concerning cartels, in its decision in a buyer cartel case in 2019, the AMR of Inner Mongolia Autonomous Region penalized the Balin Left Banner Chamber of Commerce of Catering Industry and the 4 enterprises involved in the related procurement for joint boycotting conduct; and (ii) with respect to RPM, Chinese antitrust enforcement authorities continued to apply a “prohibition + exemption” approach. In June 2019, SAMR fined Chang’an Ford CNY 162.8 million for restricting downstream dealers’ minimum resale prices of finished vehicles in Chongqing, which marked the highest fines applied by SAMR in 2019.
With regard to abuse of dominance, the attitude of the Shanghai AMR towards minimum purchase quantity clauses and most-favored-nation (MFN) clauses in the Eastman case was also noteworthy. In this case, the Shanghai AMR found that Eastman’s entering into and implementation of two types of agreements ——agreements containing the minimum purchase quantity clause and “take-or-pay” clause, and agreements containing the MFN clause conditioned on minimum purchase quantity, had the effect of exclusive dealing and thus violated the AML.
Regarding the minimum purchase quantity clause, Shanghai AMR considered that the specific minimum purchase quantity locked up most of the customers’ demand, while the take-or-pay clause, as a guarantee for contract performance, increased the liability of the signing customers for breach of contract and strengthened the locking effect. Regarding the MFN clause, Shanghai AMR affirmed that under most circumstances, global MFN agreements by themselves usually do not have the effect of exclusive dealing. However, considering Eastman’s extra discounts provided to its customers under the MFN is based on the condition that the purchase quantity reaches a certain amount, Shanghai AMR found that the MFN clause further locked in the customer’s demand in China.
Although the AML does not explicitly prohibit these two types of clauses, under specific circumstances, the minimum purchase quantity clause or MFN clause by dominant enterprises in the relevant markets may receive heightened scrutiny. Thus companies which may have a dominant position should be more cautious in formulating relevant clauses, and make comprehensive assessment of the potential antitrust risks thereof.
Expanded use of commitment mechanism
For enterprises under investigation, the commitment mechanism is an important way to address the risks of AML violation and avoid the heavy fines thereafter. Article 45 of the AML allows the antitrust authorities to suspend an investigation if the enterprises under investigation commit themselves to adopt specific rectification measures to eliminate the adverse impact from their conducts. Where the enterprises under investigation fulfill their commitments, the authorities may further decide to terminate the investigation. The Interim Provisions on Prohibition of Monopoly Agreements clarifies the scope of application of the commitment mechanism. Except for three types of hardcore cartel conduct (i.e., price fixing, quantity restriction and market segmentation), the commitment mechanism may be used for other forms of monopoly agreements.
In 2019, there were four cases in which the commitment/suspension mechanism was applied, namely the investigation on Yancheng Xinao Gas Engineering for abuse of dominance, the investigation on Nantong Jinghua Pharmaceutical for abuse of dominance, the investigation on Shanghai Hydron Contact Lens and Shanghai Horien Contact Lens for RPM (the “Hydron Case”) and the investigation on Lenovo for RPM by (the “Lenovo Case”). The Hydron case and Lenovo case clarified that the commitment/suspension mechanism may also be applied to RPM cases. In addition to the usual commitment measures, such as cessation of conduct, self-examination and strengthening of compliance training, the commitment measures in these two RPM cases also included price reductions for downstream dealers or sharing of benefits with consumers through promotions.
More consistent approach for setting the base for calculating fines
For the purpose of setting the base to be used to calculate fines, as AML does not explicitly define “the annual sales achieved in the previous year”, NDRC and SAIC had different practices before the establishment of SAMR to calculate the fines, i.e., based on the annual sales for relevant products involved in the specific cases or on the annual sales for all products. Based on the penalty decisions in 2019, it can be seen that SAMR and its local branches have moved towards a more consistent approach – imposing fines based on the annual sales for all products. In May 2019, in an interview with the China Market Regulation News (an official media under the supervision of SAMR), Mr. Wu Zhenguo, DG of the Anti-monopoly Bureau, also said that “the base of fines should be the annual sales for all products in the previous year rather than the annual sales of the products involved in the case. SAMR has asked for clarification from the Legislative Affairs Commission of the NPC Standing Committee, and has received a clear reply to this question.”
Regarding the geographical scope for setting the base for fines, enforcement cases in 2019 has also provided useful guidance. In July 2019, Chang’an Ford was fined RMB 162.8 million for its RPM practice in violation of the AML, and the fines was calculated based on its annual sales in Chongqing in the previous year. Similarly, Toyota Motor was fined CNY 87.613 million by Jiangsu AMR for restricting its dealers’ online quotation and the resale price of certain models of finished vehicles, and the base of fines in this case was its annual sales in the Jiangsu market in the previous year. As can been seen from these two cases, the base of fines may be limited to the annual sales in the area where the infringement was committed, rather than nationwide.
Efficient and Effective Merger Control Regime
In 2019, SAMR closed merger control reviews relating to 432 concentrations, and imposed conditional clearance in 5 cases. Concurrently, SAMR continued to demonstrate its tough stance on failures to notify, imposing fines in a record high of 17 cases in total.
Continued efficient review of filings made under the simplified procedure
For filings made under the simplified procedure, it only took 16.4 days on an average for SAMR to review after formal acceptance of a merger filing case. Having shorter and consistent review periods in practice will help to reduce timing concerns for companies involved in M&A / joint venture transactions and make timeline planning for a transaction much more predictable.
Against the background of trade tensions between China and the United States in 2019, there is no indication that SAMR has intentionally delayed any review just because a party to a transaction is a US company. Some cases with widespread attention, such as the proposed acquisition of 80% of Embraer S.A.’s commercial aviation business by Boeing Company was unconditionally approved by SAMR during phase II of the normal procedure.
Close scrutiny for transactions possibly creating competitive effects in the market
In 2019, SAMR imposed conditional clearances in 5 merger cases, namely the proposed equity acquisition of Orbotech Ltd. by KLA-Tencor Corporation (“Orbotech/KLA-Tencor”), the proposed equity acquisition of units of TTS Group by Cargotec (“TTS/Cargotec”), the proposed equity acquisition of Finisar Corporation by II-VI Incorporated (“Fenissa/II-VI”), the proposed establishment of a joint venture between Zhejiang Garden Bio-chemical High-Tech and Royal DSM (“ZGBH/Royal Disman”), and the proposed equity acquisition of Aleris Corporation by Novelis Inc. (“Nobelis/Aleris”).
As usual, SAMR conducted independent assessment on the impact of the transactions on the Chinese market. We note that Orbotech/KLA-Tencor, TTS/Cargotec and Fenissa/II-VI have each received unconditional approvals in other jurisdictions that require notifications and ZGBH/Royal Disman did not make a merger filing in any other jurisdictions. However, given that SAMR considered that the above transactions are likely to eliminate or restrict competition on the Chinese market, it still imposed conditional clearances for the above transactions. For Nobelis/Aleris, in view of the potential additional impact on the Chinese market (the concentrated entity will most likely manufacture cold rolled sheets in China and supply them to other producers of inner and outer panels of aluminium automotive body sheets), SAMR imposed specific conditions in this respect.
In the aforementioned cases, in order to solve the problems peculiar to China, SAMR required additional behavioural conditions, including keeping businesses separate, no tie-in, continuous supply/supply under FRAND conditions, and price commitment.
- “Hold separate” remedies
In 2019, SAMR imposed “hold separate” remedies in the following three cases:
|Case||Impact on the Chinese market||Specific Hold Separate Remedies||Period of Holding Separate|
|TTS/Cargotec||The parties to this transaction are the top two or top three competitors in the markets for hatch covers, roll-on equipment for merchant ships, and cargo lifters in China, and the combined entity will have more than 50% market share in each of these markets.||The parties shall keep their businesses in hatch covers, roll-on equipment for merchant ships, and cargo lifters in China separate.||The conditions will automatically terminate in two years.|
|Fenissa/II-VI||The combined market share of the combined entity in the wavelength selective switch (“WSS“) business in the global and in Chinese market will each be 45-50%.||The parties shall keep their WSS businesses separate from each other.||After three years, the combined entity shall apply to SAMR which will determine whether to lift the conditions according to the market competition situation.|
|ZGBH/Royal Disman||ZGBH and Royal Disman proposed to establish a joint venture in China to produce DHC (the core raw material for making vitamin D3 for animal and human use). ZGBH and Royal Disman will purchase DHC from the joint venture for the production of vitamin D3 for animal and human use. ZGBH and Royal Disman are the top two competitors for animal-use vitamin D3 both globally and in China, with a combined market share of more than 50%.||The joint venture shall operate independently from its parent companies ZGBH and Royal Disman.||The conditions will automatically terminate in five years.|
MOFCOM/SAMR’s application of “holding separate” remedies has strong behavioural remedy characteristics, which differs from other jurisdictions to a certain extent. In the United States, for example, “holding separate” is primarily used for pre-divestiture obligations, that is, to keep the divested businesses separate, separable, and saleable until a suitable buyer is identified. However, the “hold separate” remedies imposed by the MOFCOM/SAMR focus more on specific behavioural measures to keep business independent without involving divestiture of assets, with a certain time period and conditions for release.
There has long been a debate over the high cost of supervision over the “hold separate” remedies. In fact, MOFCOM has only imposed such conditions in 5 cases previously, and had not imposed any “hold separate” remedies for 4 years before the acquisition of SPIL by ASE. However, based on SAMR’s practice in 2019, “hold separate” remedies may still be regarded as a relatively more effective measure to solve the concerns in Chinese market, or the competition concerns for a particular product.
- Remedies for conglomerate mergers
For conglomerate mergers, if the products of the parties to the concentration are complementary products, or belong to the same category (scope), SAMR may consider that the combined sale of multiple products is more attractive to consumers, and companies may have more incentives to carry out tie-in of products after the mergers. In 2019, SAMR imposed behavioural remedies on the Orbotech/KLA-Tencor case which involved a conglomerate merger, requiring that no product tie-in shall be made after the transaction. Considering SAMR’s decision in Essilor/Luxottica in 2018, taken together, it is clear that SAMR continued to take a relatively cautious attitude towards conglomerate mergers.
Active enforcement towards failure to notify and gun-jumping
SAMR continued to demonstrate its tough stance on failures to notify and the early implementation of transactions (“gun-jumping”). In 2019, SAMR has imposed fines in a record high of 17 cases in total. At the beginning of 2020, SAMR imposed fines on another case. In terms of enforcement for failure to notify, the following enforcement situations are particularly noteworthy:
- The acquisitions of minority shares may also require merger filings: For instance, in the gun-jumping case of the acquisition of Shanghai Siyanli Industrial Co., Ltd. by an international investment fund, although the fund only acquired 23.53% shares of the target company, SAMR considered this acquisition led to a change of control over the target company, thus notification was required.
- The gratuitous transfers of state-owned enterprises also require merger filings: In the transfer of Dalian Port Group and Yingkou Port Administration Group into Liaoning Port Group, although the transaction was carried out under the background of gratuitous transfer of state-owned assets, this was not a valid reason for exemption from notification.
- No gun-jumping after notification: In the acquisition of a 24% stake of Xingyuan Environment Technology by New Hope Investment Group, the parties to the transaction completed their business registration one day prior to the end of the public announcement period for the merger filing. This constituted gun-jumping, resulting in an administrative penalty of CNY 400,000 imposed on the acquirer New Hope Investment Group.
The amendment to the AML is likely to substantially increase the amount of penalties of failure to notify. Under Draft Revision, the penalty is raised to no more than 10% of the business operator’s turnover of the previous year, which is a significant increase comparing to the current cap of RMB 500,000.
Antitrust Litigation Still in Booming
According to publicly available information, in 2019, Chinese courts adjudicated 41 civil cases where “antitrust dispute” was the cause of action and where the decisions have been publicly announced, including 2 decisions made by the Supreme Court, 21 cases adjudicated by the courts in Beijing, 4 cases adjudicated by the courts in Zhejiang Province, and 14 cases adjudicated in other regions. Among the publicly announced and adjudicated civil cases, 24 cases were related to abuse of market dominance and 12 cases were related to monopoly agreements.
In addition, according to publicly available information, there were 8 cases involving administrative monopoly issues which were adjudicated and where the decisions have been publicly announced. Most of these cases took place before courts in Guangdong, Hunan, Beijing, Guangxi and Heilongjiang. There were 21 cases involving anti-monopoly administrative enforcement which were adjudicated and where the decisions have been publicly announced. Most of these cases were trialed before the courts in Beijing (including 2 retrial cases adjudicated by the Supreme Court).
High occurrence of antitrust litigations in public sectors and the internet industry, and wide attention to IPR-related cases
With respect to the concerned industries, among all the adjudicated cases in 2019, except for 14 cases in relation to domain name registration issues, other adjudicated cases mainly focused on abuse of market dominance in the public sectors and monopolistic industries, e.g. water supply, railway.
In addition to the aforesaid adjudicated cases, it is worth noting that there were a number of civil monopoly cases in 2019 targeting the emerging business models and competition in the Internet industry. The relevant cases mainly focus on whether the emerging business models constitute abuse of market dominance. Specifically, the key issues and concerned conducts involved therein are as follows:
|Case||Progress||Concerned Practices||Business Models|
|Luckin Coffee v. Starbucks re the Abuse of Market Dominance||
In May 2018, Luckin Coffee filed a lawsuit;
On October 29, 2019, the case was concluded because Luckin Coffee withdrew its lawsuit.
|Restriction on trade counterparties||Exclusivity clause in lease agreement for stores in the office buildings|
|The Abuse Of Market Dominance Litigations against Tmall.Com||
Galanz also initiated another lawsuit on October 28, 2019, which has been accepted and will be heard by the Guangzhou Intellectual Property Court.
|Restriction on trade counterparties||“Choosing one over another” arrangement|
|Zhang Zhengxin v. WeChat re the Abuse of Market Dominance|| On April 23, 2019, Beijing Intellectual Property Court accepted the case, which is still in trial.||Refusal-to-deal||WeChat forbids forwarding links of Taobao and Douyin|
|Huang Wende v. Didi re the Abuse of Market Dominance||
In May 2018, Huang Wende filed a lawsuit with Zhengzhou Intermediate People’s Court;
In March 2019, Zhengzhou Intermediate People’s Court rejected Huang Wende’s claim; thereafter, Huang Wende filed an appeal with the Supreme Court, where the case is still in trial.
|Sale of products at unfairly high prices||Rush hour markup arrangement of Didi|
In addition, widespread attention has also been given to antitrust litigation involving intellectual property rights issues in 2019. With respect to the charging of excessive royalties in violation of the FRAND principle, Huawei sued IDC again at the Shenzhen Intermediate People’s Court in January 2019, and Xiaomi also sued Sisvel, an old Italian patent operator at the Beijing Intellectual Property Court in December 2019. Other than the royalty related issues, another case worth noting is Hytera’s lawsuit against Motorola lodged with the Beijing Intellectual Property Court for Motorola’s refusal to open API sources for interconnection. Recently, the Beijing court has issued its first-instance ruling, holding that Motorola’s conduct does not constitute the abuse of dominance of imposing restriction on the trade counterparties and refusal-to-deal. In 2020, it is likely that antitrust litigation involving abuse of intellectual property rights will remain one of the focusing areas for antitrust disputes.
Low rate of successful litigations and still high bar for plaintiff’s burden of proof
In terms of the outcome in antitrust litigation, except Wu Zongqu and Wu Zongli v. Yongfu County Water Supply Company for abuse of market dominance, in other public announced judgments, the courts did not support the plaintiffs’ claims for failing to prove that the alleged behavior of defendants constituted abuse of market dominance or monopoly agreements. As reflected in the case law, due to the technical nature and complexity of antitrust disputes, plaintiffs usually need to meet a relatively high bar to successfully prove that defendants reached a monopoly agreement or abused their market dominance in either civil or administrative antitrust litigation.
The first year of the Leapfrog Appeal Rules
On December 28, 2018, the Supreme Court issued the Regulation of the Supreme People’s Court on Several Issues Concerning Intellectual Property Tribunal (Fa Shi  No.22), which came into force as of January 1, 2019. Under the this Regulation, the Supreme Court will establish a new intellectual property tribunal, which will, jumping over the High People’s Courts, directly accept antitrust cases for appeals of judgements or rulings rendered by the Intellectual Property Courts and the Intermediate People’s Courts of first instance. Basic-level People’s Courts previously approved by the Supreme Court will no longer hear antitrust disputes of first instance (“Leapfrog Appeal Rules“).
On September 24, 2019, the Intellectual Property Tribunal of the Supreme Court heard the “Huang Wende v. Didi Chuxing Technology Co., Ltd. against abuse of market dominance“. This is the first publicly trialed antitrust case to which Leapfrog Appeal Rules were applied since they were introduced. Later, the Leapfrog Appeal Rules were also applied to an appellate case in which Huili Materials Co., Ltd. (“Huili”) sued Shell (China) Co., Ltd. (“Shell”) for horizontal monopoly agreements, and the Intellectual Property Tribunal of the Supreme Court directly heard the appellate jurisdiction disputes, bypassing the Higher People’s Court of Inner Mongolia Autonomous Region. In other judgement or rulings rendered by the Intermediate People’s Courts of first instance in 2019, it was also provided that the parties may file appeals to the Intellectual Property Tribunal of the Supreme Court directly.
Antitrust disputes are usually highly technical and specialized in nature, and disputing administrative decisions may usually face some local influences. Under the Leapfrog Appeal Rules, the Supreme Court has final appellate jurisdiction in antitrust disputes. Under the Two-tier Appellate System adopted in China, such rules will play an important role in controlling and improving the quality of rulings and unifying the ruling criteria for antitrust disputes.
Divergence in the arbitrability of antitrust disputes
In general, monopoly agreements and abuse of dominance are usually reflected in the commercial contracts concluded between undertakings. It has long been a controversial issue whether antitrust disputes related to commercial contracts could be arbitrated. In 2019, Beijing High People’s Court and the Supreme Court successively rendered different rulings on the jurisdiction issues in two antitrust cases related to Shell.
- Ruling of Beijing High People’s Court
On June 28, 2019, in the second-instance ruling on the jurisdiction issues in the antitrust case filed by Shanxi Changlin Industry Co., Ltd. (“Changlin“) against Shell, the Beijing High People’s Court held that given that the arbitration clause in the Distribution Agreement in dispute generally provided that matters concerning the agreement could be arbitrated, and the alleged abuse of market dominance (e.g. imposing unreasonable trading conditions, etc.) is closely related to the Distribution Agreement, the arbitration clause can be applied in this case and the arbitration agency shall have jurisdiction over the concerned antitrust dispute.
- Ruling of the Supreme Court
On August 21, 2019, in its ruling on the jurisdiction issue in the litigation filed by Huili against Shell concerning horizontal monopoly agreement issues, the Supreme Court confirmed that, considering the obviously public law nature of the AML and that the determination on whether it constitutes a monopoly agreement goes beyond the rights and obligations between the private counterparties of the contract, the antitrust disputes involved in this case do not fall within the scope of arbitritable matters as provided under China’s Arbitration Law. In addition, given that the current laws do not explicitly allow antitrust disputes to be settled via arbitration, the arbitration clauses as agreed by the parties in the Distribution Agreement is not a valid cause for excluding the court’s jurisdiction over disputes concerning horizontal monopoly agreements.
Previously, in 2016, Shenzhen Intermediate People’s Court and Jiangsu High People’s Court made similar rulings that antitrust disputes should not be excluded from the judicial jurisdiction of the court’s due to arbitration agreements. The two conflicting rulings made by the Beijing court and the Supreme Court in 2019 reflect the divergences in judicial practices. Such conflicting views also exist in the different attitudes in China, Europe, America and other Western countries towards this issue. Currently without any clear laws or regulations on the arbitrability of antitrust disputes, the Supreme Court’s ruling in 2019 to confirm the court’s jurisdiction over antitrust disputes in commercial contracts containing arbitration agreements or clauses, is instructive for resolving arbitrability issues for antitrust disputes under the PRC law. However, in the future, issues concerning the enforceability of domestic and oversea arbitral awards on antitrust disputes are still subject to further clarification.
Amendments to the AML
In September 2018, amending the AML was included in the agenda of the Legislation Plan of the Standing Committee of the Thirteenth National People’s Congress for the first time. In January 2019, SAMR included revising the AML in its 2019 legislative work plan, and the Anti-Monopoly Bureau took the lead in drafting the revisions. Following its preparation in 2019, SAMR promulgated the Draft Revision at the beginning of 2020.
The Draft Revision retains the existing seven chapters of the AML, adds eight new articles and revises 24 articles in the AML. Furthermore, the Draft Revision clarifies several controversial issues in the existing AML which occurred in practice while signaling continued intensified enforcement in the future. The main revisions are summarized below:
Recognizing the fundamental status of competition policy and enhancing the role of fair competition review
The Draft Revision for the first time recognizes the fundamental status of competition policy at a legislative level. It also specifies the requirement that administrative agencies shall conduct fair competition reviews in formulating relevant regulations. The fair competition review mechanism will set higher self-restraint and self-supervision requirements for governmental authorities in their policy making and exercise of government powers, and will also serve as stronger legal basis for companies to resort to if they suffer any unreasonable or discriminatory treatment by the agencies when participating in market competition.
Adjusting the regulatory system for monopoly agreements and adding a “Hub-and-Spoke Conspiracy” clause
In the Draft Revision, the definition of “monopoly agreements” which is now Article 13 of the AML regarding Horizontal Monopoly Agreements, has been moved to the beginning of Chapter II Monopoly Agreement as a separate article. Our understanding is that this revised structure further signals that anti-competitive effect should be precondition for finding either a horizontal or vertical monopoly agreement. However, it is unclear that for the conduct listed in Article 13 and 14 of the AML, especially RPM, whether the current Draft Revision endorses the “prohibition + exemption” approach as adopted by the agency in practice, or if it is still necessary to prove that the conduct should have the effect of eliminating or restricting competition in the first place, so as to constitute a monopoly agreement. Therefore, detailed regulations still need to be further clarified by legislation.
In addition, the Draft Revision introduces articles that undertakings are prohibited from organizing and assisting other undertakings to reach monopoly agreements, and imposes the same penalties for this type of behavior as for reaching monopoly agreements. Many practitioners consider that this new article is aimed at regulating “hub-and-spoke collusion”. Previously, the Shanghai Anti-Monopoly Compliance Guide for Undertakings released by the Shanghai AMR also mentions platform “hub-and-spoke conspiracy”. It is expected that the enforcement agency will continue to pay close attention to this new type of conspiracy.
Specific factors to consider in determining the existence of a dominant position in the internet sector
The Draft Revision provides that in determining the existence of a dominant position in the internet sector, network effects, economy of scale, lock-in effect, and capability of controlling and processing data and other factors should be considered. As mentioned above, monopoly issues in the e-commerce sector have attracted widespread attention. SAMR has launched antitrust investigations into platform enterprises for the alleged “choose one from two” (exclusive dealing) behaviors. Within the judicial system, many cases concerning monopoly issues were brought to courts in 2019 in response to the emerging business and competition modes in the internet sector. Therefore, these new factors may provide more guidance on assessing the dominant position of an enterprise in the internet sector.
It is reported that the Anti-Monopoly Committee Expert Advisory Panel is undertaking a systematic and comprehensive research on monopoly issues in the digital economy. It is expected that AML enforcement in the internet and other booming industries will be more frequent in the future.
More detailed interpretations and innovative mechanism in merger control regime
The Draft Revision clarifies the interpretation of “control”. Furthermore, the power to set merger filing thresholds is delegated by the State Council to the enforcement agency, therefore SAMR will have the flexibility to adjust the thresholds according to the economic development level and specific industry characteristics. The Draft Revision also introduces the “Stop the Clock” mechanism based on the merger control experience of other jurisdictions. This may help to increase efficiency since in practice notifying parties may be required to “pull and refile” due to the expiry of the statutory review period, or where the parties may intentionally delay the submission of supplementary materials thus causing significant time-pressure on the agency to complete reviews within very limited time-frames.
Notable increased penalties for AML violations
In addition to retaining the original penalty standards for monopoly agreements, the maximum fine for monopoly agreements that have been entered into but not implemented, is increased from RMB 500,000 to RMB 50 million.
The maximum fine for failure to notify, gun-jumping and breach of remedies in a conditional case is increased from RMB 500,000 to 1%-10% of the sales amount of the preceding year of the undertakings.
The maximum fine for industry associations that organize undertakings to enter into monopoly agreements is increased from RMB 500,000 to RMB 5 million.
In addition, the Draft Revision clarifies the criminal liability of AML infringements for the first time.
While it remains unclear when the Draft Revision will be formally adopted by the National People’s Congress, it signals that SAMR will continue to take a strict approach to enforcement going forward, and thus the cost of violating the AML is expected to increase significantly for businesses.
Looking forward to 2020
Looking forward to 2020, China’s AML will continue to play a significant role in the field of global competition law.
- The improvement of relevant supporting regulations coupled with the growing experience of national and local antitrust enforcement authorities, antitrust enforcement activity is expected to increase. Traditional cases, such as cartels and resale prices maintenance, will continue to be the focus of antitrust enforcement. Antitrust enforcement authorities will become more sophisticated to deal with complex cases. Specifically, the antitrust enforcement concerning the digital economy, internet sector and other new business models will be of particular concern. Issues such as “Two-Choose-One”, “exclusive license” and how to establish market dominance for an internet company may need to be further clarified in the enforcement practice in the coming year.
- With regard to merger control, SAMR will continue to efficiently review cases under simplified procedure, and focus on solutions which address China specific competition issues in complex cases. Meanwhile, in light of the expected stricter enforcement of failure to notify and gun-jumping rules, companies should pay greater attention to compliance with merger notification obligations in China for their transactions.
- On the antitrust litigation front, in the coming year there are a number of cases in the internet sector that should be closely followed. It is expected that antitrust litigation will become a more common tool for companies to use in achieving commercial goals. After the establishment of new judicial procedures, such as the Leapfrog Appeal System, the courts will have more unified criteria for related proceedings, and the judicial interpretations of the AML will also provide more guidance and clarity.
For further information, please contact:
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Mr. Cheng Liu is a partner at Corporate Group of King & Wood Mallesons. His main areas of practice are competition law and M&A transactions. Mr. Liu has more than 15 years working experience in antitrust and competition law since 2005. He regularly advises clients on Chinese antitrust and competition matters and has represented numerous multinational companies and Chinese companies in their merger filings at Chinese authority, including a number of high profile transactions. He also provided advice on antitrust compliance for the clients’ business model, and delivered antitrust trainings. He also advised clients in dealing with antitrust investigations by the authorities. Mr. Liu has been recognized by many global famous legal media as one of the leading competition lawyers in China.
 In Lenovo’s termination case (Jing Shi Jia Jian Zhong Zhi  No.1), the rectification measures promised by Lenovo include “to organize legal training programmes and strengthen competition law training and guidance for all employees, especially for the marketing, sales, legal, regional, service departments…making legal training and awareness as necessary element for fulfilling each position. In Haichang Contact Lens’ termination case (Hu Jia Jian Zhong Zhi  No.1), the rectification measures promised by Haichang include “to organize legal training, and to strengthen public awareness of its employees regarding competition laws, to deliver dedicated trainings on the AML, the Anti-Unfair Competition Law and other laws to all employees (especially sales department) at least once every two months…and to make observation of laws as an important indicator in its performance evaluation system”. In Medtronic’s case (NDRC Administrative Penalty Decision  No.8), Medtronic’s rectification measures include “to strengthen employee’s antitrust compliance system and improve company’s antitrust compliance regulations”, and NDRC found these rectifications as one of the mitigating circumstances in the penalty decision.
 See http://www.xinhuanet.com/ent/2019-09/03/c_1124952998.htm. Based on the report, the investigation now has been suspended, see https://tech.sina.cn/2020-02-08/detail-iimxyqvz1274233.d.html?ivk_sa=1023197a
 Decision available at http://www.samr.gov.cn/fldj/tzgg/xzcf/201908/t20190820_306149.html.
 See Article 21 and 22 of Interim Provisions on Prohibition of Monopoly Agreements.
 Termination Decision available at http://www.samr.gov.cn/fldj/tzgg/xzcf/201905/P020190521511210721002.pdf.
 Suspension Decision available at http://www.samr.gov.cn/fldj/tzgg/xzcf/201911/P020191115621750846727.pdf .
 Full record of the interview available at http://www.cqn.com.cn/cj/content/2019-05/22/content_7136594.htm.
 Penalty decision available at http://www.samr.gov.cn/fldj/tzgg/xzcf/201912/t20191227_309552.html.
 SAMR cleared 85 mergers under its simplified review procedure in the first quarter of 2019, taking 15.1 days on an average to approve a deal (please see https://app.parr-global.com/intelligence/view/prime-2820811 ); SAMR cleared 72 mergers under its simplified review procedure in the first quarter of 2019, taking 18 days on an average to approve a deal (please see https://app.parr-global.com/intelligence/view/prime-2867469 ); SAMR cleared 96 mergers under its simplified review procedure in the first quarter of 2019, taking 18.5 days on an average to approve a deal (please see https://app.parr-global.com/intelligence/view/prime-2944945 ); According to public information, SAMR cleared 107 mergers under its simplified review procedure in the first quarter of 2019, taking 14.4 days on an average to approve a deal. We calculated that in 2019 SAMR took 16.4 days on average to approve a deal.
 This transaction is subject to merger control filings in European Union, China, the United States and Brazil; and till February 1 2020, the European Commission was still conducting a second-stage review of the transaction. Unconditional clearances in other jurisdictions have been obtained.
 Decision available at http://gkml.samr.gov.cn/nsjg/xwxcs/201902/t20190220_290940.html.
 Decision available at http://www.samr.gov.cn/fldj/tzgg/ftjpz/201907/t20190712_303428.html.
 Decision available at http://www.samr.gov.cn/fldj/tzgg/ftjpz/201909/t20190920_306948.html
 Decision available at http://www.samr.gov.cn/fldj/tzgg/ftjpz/201910/t20191018_307455.html
 Decision available at http://www.samr.gov.cn/fldj/tzgg/ftjpz/201912/t20191220_309365.html
 This transaction is subject to merger control filings in Germany, Israel, Japan, Korea, Taiwan and the US.
 This transaction is subject to merger control filings in Germany and Korea.
 This transaction is subject to merger control filings in Germany, Mexico, Romania and the US.
 This transaction is subject to merger control filings in the European Commission (“EC”) and the US. EC imposed conditional clearance on this transaction, requiring it to divest Aleris’s business of inner and outer panels of automotive body in Europe Economic zone. Unconditional clearance was obtained in the US.
 U.S, Department of Justice, Antitrust Division, ANTITRUST DIVISION POLICY GUIDE TO MERGER REMEDIES, June, 2011.
 To be specific, the acquisition of the Hard Disk Drive – HDD business of Samsung Electronics Co., Ltd. by Seagate Technology LLC, the equity acquisition of HGST, Inc. by Western Digital Corporation, the acquisition of 100% equity interest in Gavilon LLC by Marubeni Corporation, merger of MStar Semiconductor Inc. by MediaTek Inc., and the equity acquisition of SPIL by ASE.
 See PaRR analysis: Asia Desk: Finisar’s SAMR clearance puts spotlight on hold separate remedies.
 Essilor/Luxottica obtained unconditional clearances from European Commission and the United States Federal Trade Commission. This transaction was obtained conditional clearance in Turkey.
 The State Administration for Market Regulation Administrative Penalties Decision Guo Shi Jian Chu (2019) No. 51.
 The State Administration for Market Regulation Administrative Penalties Decision Guo Shi Jian Chu (2019) No. 48.
 The State Administration for Market Regulation Administrative Penalties Decision Guo Shi Jian Chu (2019) No. 50.
 Source: China Judgments Online and Wolters Kluwer, with case type as “civil case”, cause of action as “antitrust dispute”, and year of judgment as “2019”.
 Source: China Judgments Online, case type: “administrative case”; cause of action: “cause of action of administrative case”; year of adjudication: “2019”; full text search: “Anti-Monopoly Law”. Cases of first instance and appeal for the same cause of action have been consolidated
 See No. (2019) Zui Gao Min Xia Zhong 130
 See https://youyou-tech.com/2019/12/12/%E5%B0%8F%E7%B1%B3%E5%8F%91%E8%B5%B7%E5%8F%8D%E5%87%BB%EF%BC%8C%E9%A6%96%E6%AC%A1PK%E5%9B%BD%E9%99%85%E4%B8%93%E5%88%A9%E2%80%9C%E7%A2%B0%E7%93%B7%E5%B7%A8%E5%A4%B4/
 Article 2 of Regulation of the Supreme People’s Court on Several Issues Concerning Intellectual Property Tribunal provides: “The Intellectual Property Tribunal may hear the following cases:
- Appellate cases concerning objection to the first-instance civil case judgments or rulings rendered by high people’s courts, Intellectual Property Courts or Intermediate People’s courts involving invention patents, utility model patents, new plant varieties, integrated circuit layout design, know-how, computer software or antitrust issues;
- Appellate cases concerning objection to the first-instance judgments or rulings on administrative cases rendered by High People’s Courts, the Intellectual Property Courts and the Intermediate People’s Courts involving administrative penalties on invention patents, utility model patents, design patents, new plant varieties, integrated circuit layout designs, know-how, computer software and antitrust issues;
Article 14 provides: “The basic people’s courts that have been approved to accept first-instance civil and administrative cases involving patents, know-how, computer software and monopoly before the effectiveness hereof shall no longer accept the aforesaid cases.”
 See No.(2019) Jing Min Xia Zhong 44
 See No.(2019) Zui Gao Fa Zhi Min Xia Zhong 47
 See No. (2015) Shen Zhong Fa Zhi Min Chu ZI 1089 and No.(2015) Su Zhi Min Xia Zhong Zi 00072
 Since Mitsubishi Motors Corp. v. Soler Chrysler – Plymouth, Inc., the U. S. Federal Courts recognized that U. S. courts should enforce the arbitration clauses that solve antitrust disputes in international transactions, and affirmed the arbitrability of domestic antitrust disputes. The European Commission and the European Court of Justice also indirectly affirmed the arbitrability of antitrust disputes in their past cases.
 See Legislation Plan of the Standing Committee of the Thirteenth National People’s Congress, available at http://www.gov.cn/xinwen/2018-09/08/content_5320252.htm.
 See Notice of SAMR on the 2019 Legislative Work Plan of the SAMR Guo Shi Jian Fa  No.18, available at http://www.gov.cn/xinwen/2019-02/05/content_5364002.htm
 Article 17 of the Draft Revision stipulates that undertakings are prohibited from organizing and assisting other undertakings to reach monopoly agreements. Article 53 stipulates that organizing and assisting undertakings in entering into monopoly agreements applies same penalties as entering into monopoly agreements, i.e. a fine ranging from 1% to 10% of the sales amount of the preceding year. If the undertaking has no sales or has not performed the monopoly agreements in the preceding year, a fine of not more than RMB 50 million may be imposed.
 “Hub-and-Spoke Conspiracy” refers to a form of horizontal monopoly agreements, which on its face takes the form of a vertical agreement where competitors communicating with each other via an intermediary platform (either upstream or downstream operators, or a third-party platform or intermediary).
 Article 21 of the Draft Revision, paragraph 2.
 See Looking Back 2019: Antitrust and Fair Competition, https://www.imsilkroad.com/news/p/398809.html?from=singlemessage&isappinstalled=0
 Article 23 of the Draft Revision, paragraph 2, the term “control” referred in the preceding paragraph shall mean the rights or actual conditions in which the undertakings have or may have a decisive influence on the business activities or other major decisions of another undertakings directly or indirectly, individually or jointly.
 Article 24 of the Draft Revision.
 Article 30 of the Draft Revision.
 Article 53 of the Draft Revision.
 Article 55 of the Draft Revision.
 Article 53 of the Draft Revision.
 Article 57 of the Draft Revision.