The consolidation of antitrust agencies and the reform and innovation of laws and regulations signal China’s determination to capture and eliminate antitrust practices, writes Luo Weiteng
At the forefront of China’s steady legal reformation is the desire – and the necessity, if it is to convince the world that the country’s trade conditions are improving and attractive – to create fair and equitable trade winds for all comers. With this in mind as the State Council presses ahead with its reforms, China has consolidated the functions of the previous three antitrust agencies – the Anti-Monopoly Bureau of the Ministry of Commerce (MOFCOM), the Price Supervision/Inspection and Anti-Monopoly Bureau of the National Development and Reform Commission (NDRC), and the Anti-Monopoly and Anti-Unfair Competition Bureau of the State Administration of Industry and Commerce (SAIC) – into a newly established agency, the State Administration for Market Regulation (SAMR). The new supervisory administration sends a strong message that antitrust regulation and enforcement will be strengthened. A regulatory storm is on the horizon.
So far, the bureaucratic overhaul at the SAMR level has come to an end. The antitrust agencies and personnel at provincial level are put in place in a progressive manner. The Anti-Monopoly Bureau overseen by SAMR is organized into 10 divisions, within which seven are enforcement divisions. Among them, three divisions are responsible for merger review, while the other four handle monopoly agreements, abuse of dominance, administrative monopoly, and supervision and enforcement.
The Anti-Monopoly Bureau also includes three general divisions, namely the general office, where the competition policy and anti-monopoly committee co-ordination responsibilities are divided.
“Previously, the antitrust regulators exercised subdivided functions and power based on price and non-price monopoly behaviours,” says He Zhiqin, a senior legal manager at the legal compliance department of the Shanghai-based JuneYao Group. “Now, the enforcement divisions perform separate functions according to the types of antitrust activities. The appointed heads of the Monopoly Agreements Division and the Abuse of Dominance Division come from different institutions. Although the enforcement procedures remain unchanged as before, companies under investigation will be more likely to have their voice heard.”
As the separation of the three antitrust authorities becomes a thing of the past, “the enforcement team of the Anti-Monopoly Bureau of MOFCOM stands as the backbone force for the Anti-Monopoly Bureau under the SAMR,” says He. “After the consolidation, the enforcement activities are conducted in a more proactive manner.”
Penalty-imposing cases reported by the SAMR involve anti-competitive agreements, abuse of dominant position and failure to notify, covering almost all of the illegal activities regulated by the Anti-Monopoly Law (AML). Moreover, He says there is a remarkable increase in investigations initiated in accordance with function and power.
For instance, the monopoly agreement case of Tianjin container yard operators was a result of an investigation launched by the Tianjin Municipal Development and Reform Commission after the regulator discovered problems in a special investigation on ports. The monopoly agreement case of Shandong Ginza Furniture was due to the investigation opened by administrative body and enforcement authority after media coverage raised concerns.
“In fact, the majority of jurisdictions worldwide have established a united antitrust enforcement authority,” says Pan Yongjian, a Shanghai-based partner at Llinks Law Offices. “Setting up a united, independent, authoritative and efficient antitrust enforcement agency by taking a leaf from the well-established antitrust regimes is a big trend.”
The latest moves
Riding high on the move to bring antitrust enforcement under one roof, China has made noticeable strides in antitrust legislation and enforcement.
In terms of legislation, amendments to the AML are on the agenda. Gu Zhengping, a partner at AnJie Law Firm in Beijing, says: “With the combination of years-long enforcement experience and research findings on competition policy, it is urgent to address some key, thorny issues emerging in enforcement practices such as the vertical restraints, the intensity of punishment on business operators failing to notify a notifiable merger or transaction, identification of the new abuse behaviours, and the demand for law from the internet economy.”
At the beginning of 2019, the SAMR consulted on three important departmental rules on abuse of domination, monopoly agreements and administrative monopoly, inviting comments from interested stakeholders. The formal editions will be released in the near future, based on public comment and expert opinions.
Gu says that there is no shortage of groundbreaking provisions in the consultation drafts, such as the “safe harbour” principle applicable to eligible anti-competitive practices. Also, the identification of internet economy business operators as having market dominance should take characteristics of industry competition, operation models, network effect, technical feature, market innovation, and relevant data on hand into consideration.Gaopeng & Partners
As many as four guidelines, including the Anti-Monopoly Guidelines on the Abuse of Intellectual Property Rights, will be rolled successively, providing clearer instructions to enforcement agencies.
In terms of enforcement, antitrust enforcement at local level is gradually intensifying. In future, local-level antitrust enforcement activities will surge, and their significant role should not be underestimated, says Deng Zhisong, a Beijing-based senior partner at Dentons.
On 3 January this year, the SAMR published the Notice on the Authorization of Anti-Monopoly Law Enforcement on its official website, empowering local counterparts of the SAMR at provincial level to handle cases involving monopoly agreements, abuse of dominance, and abuse of administrative power to restrict competition within their own administrative areas. Provincial-level antitrust agencies do not need now to obtain authorization separately for enforcement activities, but are entitled to handle cases in their own names based on general authorization.
“Compared with the SAMR, local AMRs are staffed with more adequate levels of personnel with more flexible response,” says Deng. “In the future, there will surely be a great deal of antitrust enforcement activities, more than we have seen in the past decade. Local AMRs will play an important role in antitrust enforcement. Such a trend has already come to the fore in today’s enforcement practices.”
Chinese regulators carrying out intensive enforcement has become an irresistible trend. This is reflected in the rising number of cases about concentrations of undertakings between business operators, the upswing of activities of the investigation and punishment on administrative monopoly, the gradual increase in number of typical cases, and a remarkable surge in investigations initiated in accordance with function and power, all meaning antitrust violators will face tougher sanctions.
“Sector-wise, pharmaceuticals, natural gas, utilities and other sectors that may affect people’s livelihoods remain areas of focus, as shown by the SAMR’s enforcement practices last year,” says Jiang Liyong, a senior partner at Gaopeng & Partners in Beijing. “In the new year, enforcement activities will continue to concentrate on sectors related to people’s well-being, such as public utilities, raw materials, construction materials and daily consumer goods.
“According to the 10 typical antitrust enforcement cases last year, including the glacial acetic acid active pharmaceutical ingredients (APIs) cartel case, the vertical monopoly agreement case of natural gas in the Harbin-Dalian-Qiqihar region, and the unfair pricing case of chlorpheniramine maleate APIs – a compound used in some anti-allergy drugs, it is obvious that antitrust regulators have paid sustained attention to the raw materials sector in recent years, with the chemical industry, in particular, facing increasingly strict scrutiny.”
Huang Wei, a Beijing-based partner at Tian Yuan Law Firm, takes a similar view. “It can be predicted that antitrust enforcement in 2019 will be focused on reinforcing the fundamental position of competition policy and protecting interests of consumers,” Huang says. “Therefore, administrative monopoly [including fair competition review] and anti-competitive behaviours in sectors related to people’s livelihoods [such as public utilities, APIs, construction materials and daily consumer goods] will continue to be the focus of antitrust enforcement.”
In the past 10 years, China has made good progress in antitrust legislation, and administration of justice and enforcement. However, some unsolved problems remain causes of concern.
Pan, from Llinks Law Offices, says that China’s competition regime in general is well developed, but there are quite a few provisions still on the shelves and not yet being referred to by antitrust enforcement agencies. Such provisions involve restraints on innovation in monopoly agreements, non-price vertical agreements (including territorial and customer restraints), and predatory pricing as an abuse of dominance.
“In practice, these antitrust behaviours prevail in sectors like automobile, appliances and pharmaceuticals,” he says. “Up to now, however, we haven’t seen any illegal activity of this kind get punished in any public notice of a penalty decision. In the future, these provisions should be activated at a proper time.”
In particular, judicial authorities in China take different approaches to handling price-related vertical agreements prohibited by the AML, so much so that it has become historically overlooked. He, from JuneYao Group, says that, as the existing civil judgments have shown, the High People’s Court of Guangdong province held that the alleged price-related vertical agreements should be built on the assessment that they exclude or restrict competition. According to administrative litigation judgments, however, the High People’s Court of Hainan province argued that there was no need to assess the anti-competitive effect of the agreements. For the moment, it remains inconclusive as to which practice should be taken as a standard.
Meanwhile, all sectors of society place high hopes on antitrust enforcement regulators doing something about data monopoly. “In recent years, deals of mergers and acquisitions have sprung up in the internet industry,” says Jiang, from Gaopeng & Partners. “There is no lack of skyhigh-priced deals worth tens of billions of yuan, almost none of which are declared transactions.
“At the end of 2018, the SAMR said it was investigating the merger of two ride-hailing businesses, Didi and Uber’s China branch. The deal, however, is still waiting on approval. The development of antitrust enforcement in the internet industry remains to be seen.”
The year-long investigation on the Didi-Uber merger points to the issue of declaration on concentrations of undertakings in China between companies with a variable interest entity (VIE) structure. Deng, from Dentons, says that a draft of the Foreign Investment Law for public comment, issued by MOFCOM at the beginning of 2015, defined the wholly foreign-owned enterprise with a VIE structure as a foreign investor, explicitly including VIE-structured companies into the regulatory scope of the review of concentrations of undertakings.
However, the Foreign Investment Law, passed in March this year, narrowed the definition of foreign investors and foreign investment, steering clear of VIE structure-related issues. But it hasn’t clearly identified VIE structures as being illegal. The regulatory scope of the review of concentrations of undertakings may be expanded in a progressive manner, and transactions between VIE-structured companies will eventually be reviewed.
The heat of antitrust battles in the internet industry can be traced back to the headline-making dispute between Qihoo 360 and Tencent as early as 2010, the so-called 3Q war, hailed as “the first antitrust case of China’s internet battlefield”. Last year, internet-related antitrust came under the spotlight again with the Supreme People’s Court upholding the dismissal of Xu Shuqing’s lawsuit alleging abuse of dominance against Tencent. And the year-long legal tussle between Jinri Toutiao and Tencent scratches the surface of the complexity of the internet-related antitrust issues in the new era.
As China charts its course of increasingly active participation in global competition, antitrust has become an unavoidable issue. “The antitrust legislation in China is a brainchild of the well-established systems and advanced experience learned from competition laws of the EU and Germany,” says Gu, from AnJie Law Firm. “It also takes a leaf from the antitrust regime in the US, and incorporates the actual situation in China.”
Sara Ashall, a counsel in the Brussels office of Shearman & Sterling, says that “all three jurisdictions have adopted a similar approach to competition regulation”. The three regimes have developed strong merger control regimes, an important regulatory framework controlling the creation or abuse of monopolistic positions, and well-developed cartel prohibition regimes with settlement procedures. In addition, the three competition regimes provide and encourage damages claims (although it remains the competence of each member state in the EU), a procedure which allows consumers to litigate against companies in court for damages suffered as a
result of anti-competitive practices.
Craig Waldman, who is based in San Francisco and co-chairs Jones Day’s global antitrust practice, says the authorities in all three jurisdictions are active in each of these areas, including anti-competitive agreements between companies, abuses of monopoly (or dominant) market position, and mergers that substantially lessen competition. These authorities share information and co-operate with each other, prompted by the proliferation of cross-border business and transactions.
However, due to different histories, cultures, economic situations and other factors, differences exist in the three jurisdictions in terms of antitrust legislation and enforcement styles.
“For example, in the US, criminal sanction is levied upon individuals who engage in antitrust conspiracies, while treble damages, allowing a court to triple the amount of the actual or compensatory damages that a defendant must pay to a plaintiff, are a type of civil damages awarded in civil court cases,” says Gu, from AnJie.
“Both of them are statutes peculiar to the jurisdiction. Under the EU competition regime, there are European state aid rules governing the circumstances in which commercial businesses in member states may be granted financial assistance. China has its own fair competition review system. These are all characteristic systems integrated with the competitive landscape in each jurisdiction.”
Pan, from Llinks Law Offices, says that among the three jurisdictions, China has the shortest history of antitrust legislation and enforcement. The beginning of antitrust legislation in China was set at the promulgation of the Provisional Rules on the Development and Protection of Socialist Competition by the State Council, back in 1980, an historic course of less than 40 years.
By contrast, US competition law traces its roots to the promulgation of the famous Sherman Act in 1890, which laid the legal foundation for undertaking to prohibit monopolies. In 1914, the Clayton Act was passed by the US Congress, adding further substance.
The EU derives its competition authority primarily from the Treaty of Rome, which was signed by member states of the European Economic Community and took effect in 1957. After rounds of amendments and the changes of name, the Treaty of Rome was renamed the Treaty on the Functioning of the European Union, in 2009, by the Treaty of Lisbon.
Stephen Harris, a partner at Winston & Strawn in the firm’s Washington, New York and Shanghai offices, says the long history of US antitrust law, “which has been developed by courts and agencies since the Sherman Act was enacted in 1890, provides a deeper body of jurisprudence on most issues than is yet the case in the EU or China”.
However, Waldman, from Jones Day, says that although the US regime is the oldest, China chose to follow the EU model in its general approach and imposition of more strict standards. “Conventional wisdom is that the EU and China have traditionally enforced their competition laws more aggressively than has the US,” he says. “These differences sometimes are explained as being the result of the EU’s overarching goal to maintain a single market and China’s use of competition law to benefit its national economy.”
Harris says that the strong US reliance on the judicial model, which requires government antitrust agencies to go to court in contested antitrust enforcement matters, in contrast to the authority of the EU and China agencies to impose self-executing orders – though those are of course subject to review by a court on appeal – continues to be a major difference.
Daniel Swanson, a partner at Gibson Dunn & Crutcher, with offices in Los Angeles and Brussels, says that at least in the cartel enforcement sphere, the US places more emphasis on enforcement against individuals. In the EU and China, sanctions are mostly applied to companies, not individuals.
Huang, from Tian Yuan Law Firm, says that since China wrapped its three antitrust agencies into one authority, power over antitrust enforcement is now centralized to the SAMR and its local enforcement agencies. In the US, however, the Department of Justice and Federal Trade Commission (FTC) are empowered to bring enforcement actions against anti-competitive conduct and mergers.
The pair of federal government agencies have their own subdivided roles and oversee separate aspects of antitrust enforcement in the country; in the EU, the EU Commission for Competition is responsible for interstate antitrust matters, while EU member states have authority to enforce their own national competition policies.
Pan says that the “fundamental difference” between the three competition regimes lies in the fact that the US is a country with a common law system, where quite a lot of important antitrust regulations derive from judicial decisions of courts and similar tribunals. By comparison, the EU and China are countries with statutory law systems, where antitrust enforcement and administration of justice relies heavily on written laws adopted by a legislative body.
He, from JuneYao Group, says that in the EU and the US, the defendant often chooses to lodge an appeal after the enforcement agencies make their decisions on administrative penalty. Such a situation is relatively rare in China, partly because sanctions on antitrust activities are too light.
Ramping up enforcement
In terms of administrative penalties, China has taken a modest and restrained approach to antitrust legislation and enforcement. Since the AML came into effect, none of the administrative penalties, except for imposing fines, have been applied to actual cases. Even with the fines imposed, the amount has seldom reached the ceiling of RMB500,000 (US$72,000). In the US and the EU, however, there are plenty of cases where the divestiture of assets, equities and business, as well as heavy fines imposed, are required, says Pan from Llinks Law Offices.
However, recent discussions among the SAMR’s leaders have sent a strong signal that penalties will be ratcheted up. The fine amount will no longer be based on the turnover of goods involved. Instead, it will be set at the total turnover of the company involved in the previous year. “Such a calculation method moves in line with what the EU and the US adopt today, which will dramatically push up the costs of companies getting involved in unlawful conduct. Predictably, the number of antitrust administrative litigation is likely to be on a sharp rise in future,” says He, from JuneYao.
As the tech giants have grown almost too big to control, the antitrust investigation into tech behemoths turns out to be a tough issue not unique to China. “Despite each jurisdiction having its own competitive landscape and market situation, and differences still existing in terms of the concept of law enforcement, the areas of focus and behaviours that draw attention, the EU has always spared no effort to investigate and penalize tech barons, while Chinese regulators take a more cautious, prudent attitude given a series of complex factors like the industry’s development,” says Gu.
Since 2017, the EU has levied fines on Google three times for abuse of dominance in breach of competition law; in May this year, the mobile chip supplier Qualcomm was found liable in an antitrust lawsuit brought by the US via the FTC, and tech companies like Amazon and Facebook are now in the cross-hairs of the antitrust agency. “More vigorous regulatory oversight of the gigantic tech firms has already become a mainstream trend,” says Huang.
Harris, from Winston & Strawn, says that many issues at the intersection of intellectual property law and antitrust law continue to be a major focus that produces new applications of antitrust law to IP in the EU and the US. These include issues related to the licensing of standard-essential patents, and issues related to whether (and if so, how) to apply antitrust law to address alleged market power perceived to be held by large internet platforms.
As the escalating Sino-US trade skirmish gives rise to mounting concern over international trade and commerce, Swanson, from Gibson Dunn & Crutcher, says that, “one consequential new development is the imposition of high tariffs and their significance for antitrust policy”.
US antitrust laws were initially adopted in the late 19th century, when high tariffs were conducive to domestic cartels and monopolies. It is unclear whether US and EU enforcers are well positioned to take on any new cartel wave, since it is generally agreed that amnesty policies – previously a highly effective tool for the detection of cartels – have lost much of their attractiveness to business for various reasons.
Ashall, from Shearman & Sterling, says that trade and trade policy in the US are very separate from antitrust enforcement, and the two hopefully will not be confused, either in the US or China. Further, in the US the authorities cannot unilaterally block a deal, and having independent judges involved should provide additional protections.
“As rhetoric and mentality all over the world today may usher in a new era of trade protectionism, it becomes increasingly more important than ever before to foster development with profound, deeper reform, consolidate the fundamental position of competition policy, and give full play to the decisive role of the market in resource allocation,” says Yang Chen, a senior partner at Jincheng Tongda & Neal in Beijing. “It is foreseeable that China’s antitrust enforcement activities targeting administrative monopoly will continue to be on the upswing.
“Meanwhile, as the economy shows signs of slowing down and companies brace for an increase in operation costs, effective antitrust enforcement is not only conducive to reducing losses caused by antitrust violations on other business operators, but lowering the higher operation costs caused by anti-competitive behaviours,” he says. “It also helps improve the business environment as a whole. Therefore, it can be predicted that the antitrust enforcement authority will ramp up its efforts to investigate and penalize business operators’ anti-competitive practices.”
Despite the rising trade tensions casting a shadow over global markets, Yang says economic globalization remains a big trend that cannot be reversed. Strengthening the collaborations and exchanges with overseas antitrust enforcement agencies, playing a part in the rule-making process of global competition rules, and expanding the international influence of China’s antitrust enforcement authority should be a major focus.
In the past decade, China has played a proactive role in negotiations and adjustment of international competition rules, promoting the link-up and integration of global competition rules in different jurisdictions.
So far, China has inked as many as 55 agreements on competition policy and antitrust enforcement co-operation with 28 countries and regions including the US, the EU and Australia. In 2019, the EU and China entered into a further Memorandum of Understanding on a dialogue in the area of the State Aid Control and the Fair Competition Review.