Recently, State Administration for Market Regulation (“SAMR”) and Shanghai Administration for Market Regulation (“Shanghai AMR”) issued respectively within a short span two high-profile administrative penalty decisions against operators in the platform economy for the abuse of market dominance. SAMR has also issued an “Administrative Instruction” for the first time in its case (the “SAMR case”). The two cases unambiguously signal a trend of a significant increase in the antitrust enforcement actions in the future.
Administrative Instruction provides a textbook-like guidance to various operators in the platform economy in terms of the antitrust compliance. In this article, we will break down the main points raised in the Administrative Instruction with the reference to Guidelines for Anti-monopoly in the Field of Platform Economy (“Antitrust Guidelines for Platform Economy”) so that enterprises can avoid potential pitfalls in their business practices.
1. The definition of relevant markets in the platform economy needs to consider the characteristics of the platform economy.
In the SAMR case, SAMR defined the relevant market as “the online retail platform service market within China”. SAMR explicitly considered the two-sidedness of the online retail platform as two-sided markets tend to have cross-side network effects, i.e., the value users on one side place on the platform depends on the scale of the users on the side, thus creating an interdependence in the demand from both sides. In light of the economic features of the two-sidedness, SAMR conducted demand and supply substitutability analysis for both sides (end users and operators within the platform). SAMR’s approach of relevant market definition in the case is in line with the approach prescribed in the Antitrust Guidelines for Platform Economy.
Due to the diversity and dynamics of services within the platform economy, the definition of relevant markets in the platform economy is relatively complex. Apart from the general principles prescribed in China’s Anti-Monopoly Law (“AML”) and Guide of the Anti-Monopoly Committee of the State Council for the Definition of the Relevant Market, the authorities need to consider the characteristics of the platform economy and take into account various platform eco-systems, functions of the platform or application scenarios with the aid of economic analysis in order to delineate market boundaries more precisely.
For example, in its decision against a trade company for engaging in the so-called “choosing one from two” action (AKA, exclusive dealing requirement), Shanghai AMR defined “the online catering delivery platform service market in Shanghai that provides English services” as a relevant market. In reaching the conclusion, Shanghai AMR took into account the two-sidedness of the online catering delivery platform and used the hypothetical monopolist test. This case is the first case where language was used as the differentiating factor in relevant market segmentation.
Both cases illustrate that a enterprise in the platform economy should adopt a more nuanced analytical framework in self-assessment of its market position in line with the authorities’ more economic-oriented approach and should also consider how its market position may change depending on different means of market segmentation.
2. A wide range of conducts in the platform economy may fall under the purview of the antitrust enforcement.
SAMR stated in the Administrative Instruction that “enterprises shall not use technical means, platform rules and data, algorithms, etc., to implement monopoly agreements or abuse the dominant market position to exclude or restrict market competition”. Compared with the traditional markets, monopolizing actions in the platform economy are more diversified and concealed.
Conducts in the platform economy that may constitute abuse of dominant market position include but are not limited to: unreasonably high service charge from the operators within the platform; price subsidy or group buying that may constitute below-cost sales; refusal to deal or restriction of trade by means of lowering search rights, flow restrictions and other technical obstacles, etc.; tie-in behavior implemented by default checks and pop-up windows; compelling the collection of unnecessary user information as a form of attaching unreasonable transaction conditions; implementing differential transaction prices or other trading conditions based on big data and algorithms.
Although the above-mentioned abuse of market dominance conducts take various forms and may take on more complicated manifestations with the development of the platform economy, these conducts regardless their manifestations still fall under the purview of the AML.
3. Enterprises in the platform economy need to pay attention to other monopoly behavior
Enterprises in the platform economy also need to be alert to other forms of monopoly conducts such as hub-and-spoke agreements and most favored nation clause (“MFN”).
The antitrust risks of hub-and-spoke agreements have been emphasized in many recently published guidelines on antitrust enforcement. Antitrust Guidelines for Platform Economy explicitly states that “competing operators within a platform may reach a hub-and-spoke agreements with the effect of a horizontal monopoly agreement by means of a vertical relationship with the platform operator or through the organization and coordination by the platform operator.” Hub-and-spoke collusion in the platform economy may be more covert and complex due to the use of data algorithms. We have reasons to believe that the hub-and-spoke agreement will become a focus of antitrust enforcement in the future. Platform operators need to be more cautious in managing operators within the platform, exchanging competitively sensitive information with operators within the platform or requiring operators within the platform to use common algorithm software, etc.
In addition, Antitrust Guidelines for Platform Economy also clearly reveals the regulatory intent and attitude towards MFN clauses by stating “the behavior of platform operators requiring operators within the platform to provide them with most favored transaction conditions may constitute monopoly agreements or abuse of market dominance.” Although MFNs appear in the vertical monopoly agreement section in the Antitrust Guidelines for Platform Economy, MFNs in practice may also lead to a horizontal monopoly agreement. Although there has been no enforcement cases of MFNs directed at platform enterprises so far, MFNs imposed by platform operators may become a future enforcement focus. We suggest that platform operators use MFNs cautiously in future business practices.
4. The enterprises in the platform economy may need to comport with the FRAND principle
“Fair, reasonable and non-discrimination (FRAND)” is the basic principle in the field of Standard Essential Patents (“SEP”). Its main purpose is to restrict the patentee’s abuse of patent rights (such as excessive licensing fees, tying, differential treatment, etc.), and to eliminate the hold-up problem or lock-in effect that normally occurs in the SEP licensing. FRAND principle has also been applied in antitrust enforcement. For example, in some merger cases with conditional approval, SAMR has attached remedy measures including the continuous supply of products in accordance with the FRAND principle.
In the SAMR case, SAMR clearly stated in the Administrative Instruction that the platform operator “should deal with the operators within the platform in accordance with the FRAND principle, and should not engage in conducts such as charging unfairly high service fees from the operators within the platform, imposing unreasonable restrictions or attaching unreasonable trading conditions to the operators within the platform, or treating the operators within the platform in a discriminatory manner”. It is worth noting that, based on the FRAND principle, Administrative Instruction states that platforms are still allowed to take punitive measures against operators within the platform, such as lowering search rights, flow restrictions, removing certain goods from the platform or suspending services. However, the punitive measures should be publicized in a timely manner.
As such, the FRAND principle in the context of the platform economy sets forth the responsibilities of platform enterprises and provides general guidelines for platform enterprises for the compliance with the antitrust regulations.
5. strengthened enforcement on failure to file a merger filing for a notifiable transaction (“failure to file”)
Previously, the reason why many transactions in the platform economy were not notified is the use of VIE structure. Since last year, SAMR has been accepting applications for concentration of business operators involving VIE structures. Antitrust Guidelines for Platform Economy states that “concentration of business operators involving agreement control (VIE control) falls within the scope of concentration of business operators and needs antitrust clearance before implementation.”
Recently, SAMR has significantly increased enforcement actions against failure to file violations and has announced a number of failure to file penalties involving VIE structures. Based on publicly available information, SAMR is still in the process of investigating several leading operators in China for failure to file violations. These cases under the investigation have as long a time span as eight years. From Antitrust Guidelines for Platform Economy, we can see that SAMR is particularly attentive to transactions involving startups or emerging platforms.
Currently, fines for merger-related violations including failure to file is up to RMB 500,000. However, the revised draft of the Anti-Monopoly Law (the draft for public comments) will increase penalties for merger-related violations such as “failure to file”, “implementing the concentration before antitrust clearance” or “breaching merger commitments” to “up to 10% of sales of the violator in the previous year”. If the draft is passed in its current form, the penalty for failure to file will be dramatically increased.
Based on the above, we suggest that enterprises should assess as soon as possible whether previous transactions require merger filling, and consider whether to voluntarily submit a remedial merger filing to reduce the risk of facing higher fines when the revised AML takes effects.
6. The enterprises in the platform economy face concurrent enforcements.
In addition to the AML, monopoly acts or unfair competition acts in the platform economy are also regulated by laws and regulations in other, but related areas.
Take “choosing one from two” as an example. Article 12 of the Anti-Unfair Competition Law stipulates that “operators shall not use technical means to obstruct or destroy the normal operation of network products or services legally provided by other operators by influencing users’ choices or other means: … (2) misleading, deceiving, forcing users to modify/revise/amend, closing or unloading network products or services legally provided by other operators …” Article 12 of the Anti-Unfair Competition Law can also be applied to regulate the “choosing one from two” requirement.
In addition, the “choosing one from two” is also covered in China’s Electronic Commerce Law. Article 35 of the Electronic Commerce Law stipulates that “operators of electronic commerce platforms shall not use service agreements, transaction rules and technologies to unreasonably restrict or attach unreasonable conditions to the transactions, transaction prices and transactions with other operators within the platform, or charge unreasonable fees to operators within the platform.”
Furthermore, Article 32 of the Measures for Supervision and Administration of Online Transactions builds on the Electronic Commerce Law and lists some prohibited cases where platforms interfere with other businesses’ independent operations. For example, it states that “restricting operators within the platforms from choosing to operate on multiple platforms by means of lowering search rights, removing goods from shelves, restricting operations, blocking shops, increasing service charges, or using improper means to restrict them from operating only on specific platforms” are all manifestations of the “choosing one from two” requirement. Based on publically available information, we have noticed that law enforcement agencies have already imposed relevant penalties from the perspectives of price law and anti-unfair competition law.
Therefore, platform enterprises should comprehensively consider the possible risks in different legal contexts according to the above applicable laws and regulations.
The recent actions by antitrust authorities including SAMR and Shanghai AMR present a clear policy signal of increased antitrust enforcement in the future. The release of the Antitrust Guidelines for Platform Economy means that the antitrust authorities are fully equipped to supervise China’s bulging platform economy. In response to a reporter’s question on the Antitrust Guidelines for Platform Economy, the head of the Office of the Anti-monopoly Committee of the State Council stated that “anti-monopoly law enforcement agencies will strengthen competition analysis according to the development status, laws and characteristics of the platform economy and the specific circumstances of the case, continuously strengthening and improving anti-monopoly supervision, and enhancing the pertinence and legal foundation of anti-monopoly law enforcement.” Correspondingly, on January 27, 2021, Shanghai AMR issued a notice stating that it would carry out a special enforcement campaign directed at unfair competition practices city-wide, one of which is the supervision of the platforms. Therefore, we have reasons to believe that with the increasing attention paid by law enforcement agencies to the platform economy, the antitrust supervision and investigation in the platform economy will become the norm in the future. Many platform enterprises and leading enterprises in various industries should take immediate actions to strength their antitrust compliance programs in order to reduce compliance risks.