by: Susan Ning Kate Peng Chai Zhifeng Zhang Ruohan
Since the enforcement of the Anti-Monopoly Law of the People’s Republic of China (“AML”) in 2008, there are many related administrative law enforcement and judicial cases occurred. From 2016 to 2018, according to public information statistics, China’s AML enforcement agencies investigated and handled 334 monopoly cases, including 287 cases of horizontal monopoly agreements, 12 cases of vertical monopoly agreements, and 35 cases of abuse of dominant market positions. There were 1,207 cases of concentrators. In 2019 alone, China’s AML enforcement agencies investigated and dealt with 38 cases of various monopoly acts, and concluded 432 cases of concentration. On the basis of a large number of decisional experiences, the State Administration of Market Supervision (“SAMR”) made a big stride in the new year of 2020 and publicly released the Anti-Monopoly Law Revised Draft for Public Comments (“Draft for Comments”).
As an “economic constitution”, the AML is not only committed to maintaining market competition order, but also deeply touches the business model and business logic of enterprises. For enterprises, paying attention to the latest progress of the AML will help protect their rights and interests in the fierce market competition. In particular, the Draft for Comments significantly increased the legal liability of offenders, not only significantly increased the maximum fine for offenders, but also set up a stage for the future introduction of criminal liabilities for monopolistic behaviors, showing China’s enforcement of antitrust laws are highly valued. At the same time, the Draft for Comments also integrated 11 years of law enforcement and judicial experiences, and introduced many new systems, such as investigating the legal responsibilities of operators who help organize or help other operators reach monopoly agreements, and assess whether the Internet giants have market dominance from a list of suggested factors, etc. Considering that the Draft for Comments put forward higher requirements for companies’ compliance, this article aims to tailor to such needs, by focusing on the daily operations of enterprises, mergers and acquisitions, establishment of joint venture, cooperation with investigations, and dealing with administrative monopoly. It selects the main points of the Draft for Comments and tries to show the important impact of these changes on business operations and decision-making process.
Essentials in the Draft for Comments
Matters required for attention in daily operations
1. Is it allowed to organize other parties to reach a monopoly agreement?
Article 17 of the Draft for Comments has added a conspiracy clause that is, “prohibiting operators from organizing and helping other operators to reach monopoly agreements.” Common scenarios include suppliers organizing meetings with distributors to help distributors reach an agreement. At present, law enforcement agencies have begun investigating such behaviors in many cases. Recently, the Shanghai Operators’ Anti-monopoly Compliance Guidelines issued by the Shanghai Market Supervision Administration also clearly mentioned the hub and spoke conspiracy and requested that the operator pays close attention to such behaviors. We believe that with the further clarification and refinement of legislation, the enforcement activities of AML enforcement agencies against conspiracies will become more active in the future.
Before the proposed inclusion of such conspiracy behaviors in Draft for Comments, there were actually some cases, for example: an automobile manufacturer organized downstream dealers to reach and implement a monopoly agreement on vehicle sales and maintenance prices, which had the effect of controlling dealers’ resale prices; at the same time, downstream dealers reached and implemented a horizontal monopoly agreement to fix or change the price by signing price limits, guarantees, and uniformly issuing pricing notifications. In this case, the car manufacturer was fined 6% of the previous year’s sales, and the downstream dealers were fined 1% -2% of the previous year’s sales. The essence of the case is actually a situation where multiple competitors conspired with the upstream operator to restrict competition, which is also an act prohibited by Article 17 of the Draft for Comments.
Hub and spoke conspiracy has some significant characteristics, for example, it is composed of two dimensions, the hub and the spoke, and the operators located on the hub and the spoke usually do not have a direct competitive relationship. The hub is usually an upstream or downstream operator or a third-party platform, intermediary, etc. The spokes are usually more than two operators with a competitive relationship. On the surface, the hub and spoke conspiracy is that the hub operator and each spoke operator reaches a vertical monopoly agreement, but the actual effect is that the spokes operators exchange sensitive information through the hub operator, and eventually under the organization and coordination of the operator at the hub, a horizontal collusion is formed between the spokes operators. It can be seen that there is a certain overlap between the hub and spoke conspiracy and the horizontal and vertical agreements, but they are different, so the hub and spoke conspiracy is separately regulated through new provisions.
From a compliance perspective, in addition to avoiding proactively organizing a cartel, suppliers should also be alert to suspicious requests from dealers. This kind of situation is not uncommon. In the past, law enforcement agencies usually did not separately punish the supplier for organizing cartel among its dealers (but the supplier may be penalized separately based on other illegal acts such as resale price maintenance). Once the draft takes effect in the future, it will be difficult to avoid the legal liability even if the supplier is responding to the request from dealers.
2. Can monopolistic conduct lead to criminal liability?
China’s current AML only stipulates that operators can be held criminally liable if they refuse to cooperate with the investigation to constitute a crime, but in the Draft for Comments, a new provision stipulating criminal responsibility for monopolistic acts has been added. If the monopolistic conduct constitutes a crime, criminal liability shall be investigated according to law. Although the actual criminalization of a monopolistic behavior still needs to go through the legislative process by finalizing the amendments to the Criminal Law, such signal of introducing criminal liability for monopoly behaviors in the Draft for Comments shall generate a wake-up call for enterprises, even corporate executives, and employees.
The United States is one of the typical countries having criminalization of monopolistic behaviors. If a company conducts a monopoly, relevant executives or employees may be sentenced to imprisonment for up to several years. This provision makes the United States antitrust law extremely deterrent. China’s Draft for Comments also shows such trend, and it is recommended that enterprises pay close attention to such development.
3. Does the unimplemented monopoly agreement also face high penalties?
The current AML imposes a fine of up to 500,000 yuan for those who have reached but did not implement a monopoly agreement. The Draft for Comments has significantly increased the maximum fine for this type of conducts, and a maximum fine of 50 million yuan will be imposed on the operator, soared to 100 times.
For operators, if they fail to raise their vigilance when sending representatives to participate in industry association meetings and fail to express opposition to the association’s decision that constitutes a monopoly agreement, they may be deemed to participate in reaching a monopoly agreement and face high fines. In addition, if the operator communicates or negotiates with competitors about sensitive information such as future product prices and output, which constitutes a monopoly agreement, even if the business adjustments are not made in accordance with the content of the negotiation, they may face legal risks of high fines.
It is worth noting that, although the Draft for Comments expressed a signal that the upper limit of fines for monopoly agreements has not been implemented, it has not stipulated the lower limit. Therefore, the penalties of this clause may focus on the operators who have not had time to implement the monopoly agreements. For the operators who do not intend to implement the monopoly agreement or other acts with minor consequences and limited impact, but have not implemented the monopoly agreement, the penalties may still be relatively mild. Nevertheless, considering the possibility of a significant increase for the costs of risky behaviors, it is recommended that companies pay attention to the trainings of employees in participating in professional activities such as associations meetings, and handle the relationship with competitors carefully.
4. Is it illegal without impeding competition?
According to the current AML, a monopoly agreement refers to an agreement, decision, or other concerted action that excludes or restricts competition. Among them, the exclusion and restriction of competition are the key constituent elements of the monopoly agreement. This content was originally provided only as the second paragraph of Article 13 concerning horizontal monopoly agreements, resulting in different voices in the legal community as to whether this requirement is equally applicable to Article 14 concerning vertical monopoly agreements. At present, the Draft for Comments refers to this content as a separate provision at the beginning of Chapter Two. It is clear from such arrangement that the relevant requirements are also applicable to horizontal and vertical monopoly agreements.
The amendment here is also consistent with the thinking of the Supreme Court in a retrial case of an antitrust administrative lawsuit. In this case, the Supreme Court held that the definition of a monopoly agreement “of course also applies to the provisions of Article 14 of the existing AML on vertical monopoly agreements.” At the same time, we also noticed that at the end of the case, the Supreme People’s Court suggested: “The AML enforcement agencies should, in light of the current law enforcement practices, summarize the accumulated experiences in law enforcement and timely issue guidelines on the enforcement of vertical price monopolies to further define the law enforcement standards and give operators clear expectations.”
In practice, the above-mentioned controversy is reflected on the surface that there seems to have reached an agreement prohibited by the AML, but whether it can be proved that it does not exclude or restrict competition and can thus claim that it does not constitute a monopoly agreement. For a long time, law enforcement agencies have adhered to the principle of “prohibition and exemption”, that is, where an agreement prohibited by the AML is reached in form, unless a series of conditions can be met to apply the exemption clause, it is deemed illegal, which is similar to “in itself illegal (per se illegal)” principle. In several major cases, the judiciary has separately analyzed whether the agreement involved in the case excludes or restricts competition, and makes a judgment based on this, which is closer to the “rule of reason” principle. Although the position of the definition of a monopoly agreement has been adjusted in the current Draft for Comments, the above disputes have not been completely resolved. As suggested by the Supreme Court in the retrial case, we also expect law enforcement agencies to “produce timely guidelines on the enforcement of vertical price monopolies, further clarify law enforcement standards, and give operators clear expectations.”
Even with the above-mentioned ambiguity in the interpretation of the provisions, we still recommend that companies do not reach agreements that are prohibited in any form by the AML, even if the companies themselves assess that there is no negative impact on competition.
5. Can a monopoly be exempted?
Article 18 of the Draft for Comments supplements the exemption standards for monopoly agreements, adding a “necessity” analysis element, that is, on the basis of proving that the exemption situation is met, the company needs to further prove that the act in question is an exemption. As the situation so requires, there are no alternatives with less damage to competition. This further complicates the proving process for exemption. At present, there are few cases of successful application of exemption clauses. After adding the “necessity” analysis element, it will be more difficult for enterprises to apply exemption clauses.
Therefore, we again strongly recommend that companies do not reach agreements that are prohibited in any form by the AML. Even if you believe that there are significant and reasonable grounds, you should first consult an antitrust professional to avoid being too optimistic that exemptions can be applied.
Matters requiring attention in mergers and acquisitions and establishment of joint ventures
6. No controlling shares, do you still need to proceed with a merger filing?
In Article 23 of the Draft for Comments, for the first time, a clearer definition of control was given at the level of legislation, and a distinction of what business activities and major decisions could be viewed as legal rights or de facto rights is provided. Combined with the guidance of the concentration of business operators, the control under the antitrust law are not limited to the active control rights obtained after holding a company, but also include the right to veto the company’s operating activities or other major decisions as a participating shareholder, as well as the de facto control of the relatively majority equity within a high degree of decentralization of the enterprises’ equity. The amendment here also means that law enforcement agencies will have a clearer basis for determining the acquisition of control when they investigate and deal with “fail to file” cases in the future.
It is also worth noting that the Shanghai Municipal Antitrust Compliance Guidelines recently issued by the Shanghai Municipal Market Supervision and Administration Bureau also made it clear for the first time that it has the responsibility of “supervising the concentration of operators in this city and conducting investigations according to law”. These changes in legislation and documents may reflect that law enforcement agencies will step up efforts to investigate and deal with cases that have not been filed in accordance with the law.
Therefore, even in the transaction of acquiring a minority stake or jointly setting up a joint venture as a minority shareholder, the enterprise may still obtain control under the concept of the AML, and then need to assess whether it has reached the turnover standard and whether it should be notified. In the past, similar transactions have not been filed, which does not mean that such transactions do not need to be filed in the current increasingly strict law enforcement environment.
7. How have the penalties changed?
The penalties stipulated in Article 55 of the Draft for Comments are a major highlight of this amendment. Apart from “failure to file”, the implementation of the concentration without approval after the declaration, the violation of the remedy decision, and the violation of the decision to prohibit the concentration will be punished by law enforcement agencies a fine of up to 10% of the turnover in the preceding year. Compared with the current limit of 500,000 yuan in the AML, the amount of penalties in the future will be significantly increased, and the deterrent will be greatly enhanced.
Enterprises are reminded that the penalty clause does not set a lower limit for the amount of penalty. Therefore, if the relevant case does not have the effect of excluding, restricting competition, or severely affecting market competition, it does not rule out that law enforcement agencies will still take more “mild” punishment measures. However, if the circumstances are serious, or if the implementation concentration is not declared for many times according to law, it is likely to be punished with a huge fine.
8. Will the reporting standards be adjusted?
Article 24 of the Draft for Comments added: “the AML enforcement agency of the State Council can formulate and modify reporting standards based on the level of economic development and industry scale, and make them publicly available in a timely manner.” In the current AML, the declaration standards are determined by the State Council’s Regulations on Concentration Declaration Standards for Operators. If this right is decentralized from the State Council to the AML enforcement agencies, the standard adjustment will be made in the legislative process more flexible.
Secondly, the notifying standards will be formulated and modified according to the level of economic development and industry scale, which means that it is possible to increase standards in addition to turnover, such as transaction amount, asset amount, etc., or to separately stipulate standards for key industries in the future. The flexibility of the standard makes it more in line with the requirements of economic development and closer to the needs of market competition management.
Relevant persons in charge of the company, especially the legal department, should continue to pay attention to this. The experience of yesterday may no longer be in line with tomorrow’s environment.
9. Do I have to notify if I do not meet the criteria?
According to Article 24 of the Draft for Comments, law enforcement agencies have the right to conduct investigations in accordance with the law for those who have not reached the standard for merger review, but have or may have the effect of excluding or restricting competition. Previously, the Regulations on Concentrated Operators’ Declaration Standards promulgated by the State Council was issued for the concentration of operators who do not meet the reporting standards but still may notify. Now the Draft for Comments takes this requirement to the legal level.
The setting of this clause currently targets operators in the Internet sector. Most Internet operators have very limited operating income during the start-up stage and may not meet reporting standards, but due to the special nature of the new business model, this does not prevent them from expanding significantly in the short term and gaining strong market power. In this case, if mergers, acquisitions, or joint ventures are set up, additional consideration needs to be given to whether proactive filings with law enforcement agencies are required to avoid the risk of future investigations.
In response to this, the Draft for Comments stipulates corresponding penalties in Article 34. If the concentration of business operators who do not meet the filing standards has the effect of excluding or restricting competition after investigation, it will not be punished by a fine of less than 10% of sales in previous year, but the transaction may still be prohibited, or imposed by additional restrictions. If the operator has implemented concentration, it may also be ordered to stop the implementation of the concentration, to dispose of shares or assets within a time limit, to transfer business within a time limit, and to take other necessary relief measures to restore the state before the concentration.
Therefore, for enterprises that do not exceed the notifying standards but have strong market power in a certain field, they should also consult antitrust professionals to evaluate whether they need to declare actively before conducting concentration.
10. Is the review period longer?
Article 30 of the Draft for Comments adds three new situations in which the calculation of the time limit for the merger review is interrupted: 1) the period of review is suspended upon the application or consent of the applicant; 2) the operator submits additional documents and materials in accordance with the requirements of the law enforcement agency; 3) The law enforcement agency and the operator have negotiated suggestions on additional restrictive conditions.
In the above three situations, the second paragraph often occurs in practice, that is, according to the supplementary questions of law enforcement agencies, documents and information are supplemented. In order to prevent the overall review time from being prolonged, it is recommended that companies pay more attention to the quality, completeness and professionalism of the initial submission documents, avoid the practice of first submitting a random application materials to reduce the number of subsequent supplements. This is to ensure an efficient and high-quality clearance.
Cooperating with antitrust investigations
The current AML requires enterprises to cooperate with the review and investigation conducted by antitrust enforcement agencies. Previously, there was a case in which a company instructed employees to refuse to cooperate with antitrust law enforcement officers on-site investigation, unplug the U disk from which law enforcement officers extracted evidence, and unplug the network cable and power cord of the computer from which law enforcement officers were extracting data, and was punished; Some companies have been punished for failing to provide information as required by antitrust enforcement agencies during the investigation.
Faced with the ever-increasing situation of companies and their employees refusing to cooperate with antitrust review or investigation, on the one hand, the Draft for Comments significantly increased the fines for enterprises: the current AML for refusing to cooperate with antitrust review or investigation The fines for the investigation are below 20,000 yuan for individuals (more than 20,000 yuan but less than 100,000 yuan for serious cases), and less than 200,000 yuan (for more than 200,000 yuan and less than 1 million yuan for serious cases); Increase the unit fine to a maximum of 1% of the previous year’s sales (if there is no sales in the previous year or the sales are difficult to calculate, the antitrust law enforcement agency can also impose a fine of less than 5 million yuan on the enterprise), personal fines raised to a maximum of 1 million yuan. On the other hand, the Draft for Comments also specifically pointed out that enterprises must not threaten the personal safety of law enforcement personnel during the investigation, and it is clear that public security agencies should assist the investigation according to law when necessary, further increasing the deterrent power of antitrust investigation and law enforcement.
In this regard, enterprises should establish a set of effective cooperation investigation plans in advance, train managers at all levels and all employees, and ensure that they actively, efficiently, and accurately cooperate with possible investigations by antitrust enforcement agencies. According to our experience, enterprises should establish guidelines for responding to antitrust investigations, clarify the role that internal employees should play in cooperating with antitrust investigations, and perform duties of cooperating with investigations through reasonable division of labor and functions to avoid touching the legal red line. Protect your own legitimate rights and interests.
Dealing with administrative monopoly, take up legal weapons
The Draft for Comments incorporates the fair competition review system into the AML system, which is a major benefit for enterprises to respond to administrative monopolies and participate in market competition on an equal basis. In order to ensure that enterprises of different natures and identities can enjoy fair treatment in terms of market access, industrial development, investment promotion, bidding and tendering, government procurement, business conduct standards and qualification standards, etc., in June 2016, the State Council’s Opinions on Establishing a Fair Competition Review System officially established our fair competition review system. In the three years since the fair competition review system was implemented, it has become a powerful tool for the administration of administrative monopolies. The Draft for Comments has raised the fair competition review system to the legal level, which will provide a strong legal basis for the fair competition review system.
Enterprises are not only the beneficiaries of this system, they can also become active participants. If the policy-making unit violates the fair competition review system and unreasonably interferes with the market, the enterprise can submit opinions to the superior authority of the policy-making authority or the AML enforcement agency in accordance with relevant regulations, to protect its legitimate rights and interests to the maximum extent within the framework of the system, and to promote healthy market development.
Core concerns of large companies
Large enterprises are more likely to have an impact on the market competition order and consumer rights because of their large operating scale and excellent market performance. Therefore, compared with ordinary enterprises, the AML has stricter regulations on the operating behavior of large enterprises.
Summarizing the past 11 years of law enforcement and judicial experiences, the Draft for Comments focuses on the determination of the dominance of the Internet giants in the market. At the same time, it has also changed the identification standards for differential treatment.
Internet giants attract attention
In the past 25 years, China’s Internet economy has been developing vigorously. The rise of Chinese Internet companies has rapidly shortened the informatization gap with developed countries, and China has thus become a world-renowned Internet powerhouse. The Internet economy plays a pivotal role in China’s economic development. At the same time, we also need to see that Internet giants, especially platform companies, have many characteristics that are different from traditional industries, presenting their unique corporate background, and bringing challenges to antitrust enforcement and litigations.
Based on the experience of law enforcement and judicial cases since the implementation of the AML for 11 years, the Draft for Comments for the first time has separately regulated Internet market operators, a market player. On the basis of the factors that should be considered to determine the market dominance of the operator, the Draft for Comments clearly determines whether the operator of the Internet field has a market dominance and also needs to consider “network effects, economies of scale, lock-in effects, mastery and handling data and other factors”. These factors provide a new dimension for assessing whether the Internet giants have a dominant market position. We understand that the separate regulation of Internet enterprises in the Draft for Comments shows respect for the characteristics of Internet companies on the one hand, and leaves room for the innovation of Internet companies, on the other hand. It shows that China’s AML enforcement agencies pay special focus on Internet giants.
In recent years, some Internet giants have been engaged in disputes over whether their business models are suspected of abusing market dominance. Some Internet companies believe that the business development models of some Internet giants have disrupted the market competition order and set up monopoly barriers for other companies to participate in market competition on an equal basis. The resulting antitrust judicial proceedings are common. On November 5, 2019, Xu Lefu, deputy director of the Anti-monopoly Bureau, also stated at the Administrative Guidance Symposium on Regulating Network Operation Activities held in Hangzhou that he would pay close attention to the “two choices but only one” implemented by Internet operators with the view to promote sustainable and healthy development.
Against the backdrop of the AML enforcement and judicial development in the Internet field, we recommend that Internet giants carefully analyze the various elements of determining market dominance added in the Draft for Comments, and combine their own market forces with the existing business model on the one hand professional analysis of legitimacy, on the other hand, prudent judgment when determining emerging business models in the future.
The implementation of differential treatment needs to be cautious
The Draft for Comments retains six specific circumstances on abuses of market dominance in the current AML, but within the provision concerning “differential treatment”, deletes the term of “same conditions” in the sentence of “without justified reasons, different treatment is implemented towards counterparties with same conditions on transactional conditions, such as transaction price”. If this change is retained, after the new law goes into effect, the antitrust enforcement agency will no longer need to provide evidence of “same conditions” on the counterparty of the transaction in the antitrust enforcement process. The investigating party or the defendant in the antitrust lawsuit can still use “justified reasons” to rebut.
Considering the changes in the components of “differential treatment”, large companies need to be more careful when classifying transaction objects and giving differentiated transaction conditions. We recommend that large companies conduct professional analysis from the perspective of antitrust law before implementing differential treatment of transaction counterparties on transaction conditions such as transaction prices, and establish unified, objective, and reasonable rules before classifying transaction objects, and pay attention to keep relevant evidence.
Legal liability of industry associations
The Draft for Comments retains the rules in the current AML, which stipulate that “Industry associations should strengthen industry self-discipline, guide operators in this industry to compete in accordance with the law, and maintain market competition order.” “The association shall not organize the operators in this industry to engage in the monopolistic conduct prohibited in this chapter”, instead of “industry associations shall not organize the operators in the monopoly prohibited in this chapter”, and delete the restriction on the nature of the operator as “in the industry”. As far as legal liability is concerned, if the Draft for Comments stipulates that industry associations organize operators to reach a monopoly agreement, the AML enforcement agencies will order to stop illegal acts and can impose a fine of less than 5 million yuan, which is higher than the current maximum of 500,000 yuan. The fine was increased tenfold.
Combined with existing AML enforcement cases, the conduct of monopoly agreements by industry associations is the focus of law enforcement. Law enforcement priority areas include construction materials and engineering, insurance, gold and silver jewelry, power, tourism, services, manufacturing. In the foregoing areas, AML enforcement agencies have imposed fines on industrial associations and ordered corrections in cases of monopoly agreements organized by industry associations. However, those who have serious circumstances have also made punishments for deregistration.
In the Draft for Comments, the penalties for industry associations have been greatly increased. It is recommended that industry associations attach great importance to their own compliance construction, formulate antitrust compliance guidelines for association activities, and prioritize antitrust compliance activities for member self-examination, forming a compliance process and establishing a record system to actively avoid antitrust compliance risks.
Conclusion
As an “economic constitution”, the AML protects the free competition of enterprises and is closely related to the development of enterprises. The release of the Draft for Comments marks that China’s protection of free competition has entered a new stage. We also hope to have the opportunity to communicate with you and listen to valuable opinions from the market; we also hope to have the opportunity to discuss with you on specific cases and business models, with a view to improve the Draft for Comments and antitrust law development in general.