- OVERVIEW
In 2022, the SAMR published 24 penalty decisions on alleged monopoly agreements and abuses of market dominance and concluded 741 merger review cases. As for conditionally approved cases, there were five cases in 2022, which included the first case with restrictive conditions imposed on a concentration between domestic enterprises. In addition, the SAMR investigated 32 non-filing cases in 2022.
2022 was a landmark year in the history of China’s anti-monopoly law development. The Anti-Monopoly Law (AML) was amended for the first time after 14 year’s implementation and the newly amended AML came into effect on 1 August 2022. Under the uncertainty of a complex and volatile international situation and recurring domestic epidemics, China’s antitrust enforcement did not stand still, but advanced and deepened further in terms of the number of cases concluded and the variety of the industries involved.
As for the legislative framework, the Standing Committee of the National People’s Congress of the People’s Republic of China published the amended Anti-Monopoly Law (new AML) on 24 June 2022. It is the first revision to China’s AML and it significantly increases fines for antitrust law violations. The new AML expressly strengthens anti-monopoly enforcement and indicates the legislative trends that will have a profound impact on China’s antitrust enforcement landscape. Shortly after the release of the new AML, the State Administration for Market Regulation (SAMR) published revised drafts of a set of six supporting regulations. These regulations are currently under review and are expected to be in place in the first half of 2023.
As for antitrust behaviour investigations, the SAMR maintained its rigorous approach in industries affecting people’s livelihoods and focused on public utilities, pharmaceuticals, building materials, etc. At the enforcement level, in addition to the SAMR’s active enforcement presence, local administrations for market regulation (AMRs) are also actively involved in the majority of cases.
As for merger control review, the SAMR maintained its professional and prudent style in 2022. The SAMR completed 741 merger cases in 2022, a slight increase compared with 727 cases in 2021. As for conditionally approved cases, there were five cases in 2022 (compared with four in 2021), which included the first case with restrictive conditions imposed on a concentration between domestic enterprises. In addition, the SAMR investigated 32 non-filing cases in 2022. In practice, the SAMR has further improved the overall efficiency of merger control review by entrusting five provincial AMRs to review merger filings.
- Prioritisation and resource allocation of enforcement authorities
In November 2021, the National Anti-Monopoly Bureau was established in the same building as the SAMR. The new bureau has taken over the role of the SAMR’s Anti-Monopoly Bureau and consists of three divisions:
- the Competition Policy Co-ordination Division, which aims to promote the implementation of competition policies and coordination of antitrust-related work;
- the Anti-Monopoly Enforcement Division I, which is in charge of matters relating to supervising and investigating monopoly agreements, abuses of market dominance and abuses of intellectual property rights to eliminate and restrict competition; and
- the Anti-Monopoly Enforcement Division II, responsible for merger control filings.
According to China’s government hierarchy, the administrative level of the National Anti-Monopoly Bureau is higher than that of the Anti-Monopoly Bureau under the SAMR. The director-general of the National Anti-Monopoly Bureau is also a vice-minister of the SAMR. The establishment of the National Anti-Monopoly Bureau signifies that China is determined to strengthen antitrust enforcement. Furthermore, we understand that the new bureau has started expanding its human resources to facilitate more rigorous antitrust enforcement.
On 15 July 2022, the SAMR started a pilot programme authorising five provincial AMRs (namely, the local administrations in Beijing, Shanghai, Guangdong, Chongqing and Shaanxi) to review some selected simple merger cases during the trial period from 1 August 2022 to 31 July 2025. After companies have submitted their filings, the SAMR will, at its discretion, refer some of the simple cases to the five local AMRs for a preliminary review, and the SAMR will make a decision based on the opinion of the provincial AMRs.
Revision of the Anti-Monopoly Law
The new AML came into force on 1 August 2022. In essence, it closely follows the old AML framework while making notable amendments to meet the changing demands of enforcement practice. For instance, the new AML adds relevant provisions on hub-and-spoke agreements, clarifies the identification of dominant undertakings in the internet sector, and introduces potential criminal liability of monopolistic behaviour. Also, the new AML significantly enhances the legal penalties for AML violators. The new AML also establishes a safe harbour rule for vertical monopoly agreements. In addition, the new AML introduces an enforcement mechanism that would allow People’s Procuratorates to initiate public interest litigation for antitrust matters. Where a concentration of undertakings fails to make a regulatory filing by the law and has or might exclude or restrict competition, Article 58 of the new AML prescribes penalties of up to 10 per cent of a non-filer’s annual turnover for the previous year – currently, the maximum penalty is merely 500,000 yuan. According to Article 63, if the violation is particularly serious with a particularly negative impact or causes particularly serious consequences, a fine of two to five times the penalty prescribed in Article 58 and other articles of the new AML may be imposed. For example, if an enterprise is fined 10 per cent of its annual sales for monopolistic practices, a multiplier of five times would result in an astronomical total penalty of 50 per cent of the turnover. The new AML would pave the way for further improvements in law-making and enforcement.
Revision of six supporting regulations of the new AML
On 27 June 2022, the SAMR published six supporting regulations of the new AML for consultation.
Among them, the amendments to the Provisions on Prohibiting Abuse of Dominant Market Positions (Draft for Consultation) focus on the regulation of the platform economy and clarify again that operators must not use data, algorithms, technology, platform rules, etc. to abuse a dominant market position. Provisions on Prohibiting Abuse of Intellectual Property Rights to Eliminate or Restrict Competition (Draft for Consultation) introduces the concept of ‘innovation market’, further defines the relevant technology and innovation market, and refines the manifestations of abuse in the field of intellectual property. Provisions on Prohibiting Abuse of Administrative Power to Eliminate or Restrict Competition (Draft for Consultation) improves China’s fair competition review system and refines the specific forms of manifestations of abuse of administrative power by administrative organs to exclude and restrict competition. Provisions on the Examination of Concentration of Undertakings (Draft for Consultation) mainly elaborates the common scenarios of transfer of control in practice and clarifies the circumstances triggering the ‘stop-the-clock’ provision.
We consider that in the revision of these supporting regulations, particular attention needs to be paid to the application of the safe harbour rule and the change to the standard of merger filings, as detailed below.
In the Provisions on Prohibiting Monopolistic Agreements (Draft for Consultation), the SAMR further clarifies the specific criteria and procedures for the application of the safe harbour rule. According to the draft for consultation, the specific market share criterion for the use of the safe harbour rule is currently proposed to be a combined market share of the operator and the counterparty of the transaction of less than 15 per cent. In terms of the procedures for applying the safe harbour rule, the draft provides that the operator needs to submit a written application to the SAMR and provide application materials such as the market share of the operator and the counterparty in the relevant market and the basis for calculation and that the agreement will not exclude or restrict competition in the relevant market. If the operator does meet the requirements, the SAMR may decide not to open an investigation or terminate the investigation.
According to the Provisions of the State Council on Thresholds for Prior Notification of Concentrations of Undertakings (Revised draft for Consultation), the turnover criteria for future merger filings will be significantly increased. The combined global turnover will be increased from the current 10 billion yuan to 12 billion yuan, while the combined turnover in China and the turnover in China of a single party (i.e., each of at least two parties) of the participating operators will be increased from the current 2 billion yuan and 400 million yuan to 4 billion yuan and 800 million yuan respectively. The increase in the turnover standard will, on the one hand, reduce the institutional costs of transactions for small companies and, on the other hand, help enforcement agencies better focus their limited enforcement resources on large enterprises. In addition to the significant increase in the turnover standard, the draft also adds a new special standard, requiring that a concentration be notified if it involves the acquisition of an undertaking with an (estimated) market value of more than 800 million yuan and generating over one-third of its turnover from China by an undertaking with a turnover of more than 100 billion yuan in China.
- Enforcement agenda
In October 2022, the report of the 20th National Congress of the Communist Party of China stated that, in the future, anti-monopoly and anti-unfair competition would be strengthened. On 14 January 2023, the SAMR issued a news release stating that the quality and efficiency of anti-monopoly enforcement and merger review would be further improved in 2023.
It is expected that, in 2023, despite continuing to promote regular regulation in the platform economy and strengthening enforcement in the fields related to people’s livelihood, the SAMR will also prioritise the review of merger filings in the fields of finance, media, technology and other key areas involving start-ups, new economy and labour-intensive industries. In addition, the SAMR will continue to deepen its regulation in the area of intellectual property rights. Reverse payment agreements and exclusive copyright agreements, which already appeared in judicial practice, are expected to receive wider attention.
In addition, as the interface between antitrust enforcement and the judiciary continues to strengthen and the collaboration between the SAMR and other authorities (e.g., the Cyberspace Administration of China and the China Securities Regulatory Commission) is growing, we believe that the SAMR will be more likely to cooperate with other departments in future to launch cross-departmental enforcement investigations. This also places higher demands on corporate compliance.
- CARTELS
In 2022, the SAMR and local agencies concluded and published 11 cartel cases, compared with 13 cases in 2021. Four of the 11 cartel cases involved industry associations. The published penalty cases involved a variety of industries, such as building materials, driver training, automotive testing and credit assessment services. Penalties totalled 524.24 million yuan in 2022, which is a significant decrease compared with 1,636 million yuan in 2021.
- Significant cases
Shaanxi Cement Association case
On 9 July 2022, the Shaanxi AMR published a decision fining Shaanxi Cement Association and 13 concrete companies a total of 451.58 million yuan for entering into a horizontal monopoly agreement.
The Shaanxi AMR found that between July 2017 and March 2019, 13 concrete companies negotiated cement sale prices several times during industry meetings, gatherings and through WeChat group messaging and other activities organised by Shaanxi Cement Association or on its initiative. The companies involved agreed to increase prices at the same time with the same range. Subsequently, these companies notified their downstream customers of the price rise and implemented the price increases simultaneously. The price collusion of the 13 concrete companies under the coordination of the association violated Article 13 of the AML, which prohibits market players from reaching an agreement with rivals to fix or change the product price.
Since the evidence provided by one of these companies played a key role in identifying the formation and implementation status of the monopoly agreement, the Shaanxi AMR gave this company a reduced fine equal to 2 per cent of its annual turnover. In contrast, each of the other 12 companies was imposed a fine equal to 3 per cent of their respective previous year’s turnover for not being truthful and cooperative during the investigation. Shaanxi Cement Association was fined the maximum of 500,000 yuan under the old AML.
This is a typical cartel case involving an industry association. The total fine of approximately 451.58 million yuan is not only the highest anti-monopoly fine ever imposed in a case involving an industry association but also sets a record for anti-monopoly penalties in the cement industry. Industry associations are the organisers or promoters of many cartels and have long been a key enforcement target for antitrust investigation concerns. Compared with the previous level of penalties, the new AML has increased the maximum fines that can be imposed on industry associations to 3 million yuan. The intensity of enforcement against cartels that involve industry associations may continue in 2023. Undertakings must pay attention to the latest developments in antitrust enforcement and be cautious not to engage in monopolistic conduct organised or instructed by any industry association.
- Trends, developments and strategies
The key industries for antitrust enforcement on cartels in 2022 were still those closely related to people’s daily lives, especially those relating to building materials and foodstuffs. At the same time, the published cases also involve some niche industries that were uncommon in previous antitrust enforcement (e.g., stamp manufacturing industry, credit assessment service, etc.). In addition, according to the enforcement and judicial cases published in 2022, new types of cartels such as cooperation agreements, joint operations and reverse payments are included in the scope of supervision, and enterprises need to be alert to the anti-monopoly risks of these acts.
iii Outlook
As enforcement capabilities and experience continue to increase, the SAMR has gradually begun to investigate cartel conduct that was not typical in the past (e.g., joint operation, business collaboration). In future, companies should pay more attention to the potential antitrust risks of important and innovative business models and conduct careful antitrust compliance assessments before implementation. In addition, companies should exercise caution when participating in meetings or events organised by trade associations and review the agenda of the meeting topics and other arrangements from an antitrust compliance perspective before attending. In particular, companies should be careful not to exchange any competition-sensitive information with enterprises in the same industry, and not to participate in discussions on prices, market promotions and market divisions that are suspected of horizontal monopoly conducts.
III ANTITRUST: RESTRICTIVE AGREEMENTS AND DOMINANCE
In 2022, the SAMR and its local agencies concluded nine abuse of dominance cases. Of those cases, seven involved public utilities, one involved transport services and one involved an online platform company. The penalties totalled 137.3 million yuan. Furthermore, the antitrust agencies concluded and published four cases concerning vertical restraint. Among these, three involved the pharmaceutical industry and one involved the education industry.
The most significant dominance case concluded in 2022 was CNKI. This case was notable owing to its unique relevant market and additional rectification measures. It also clearly indicates that the SAMR still keeps a close eye on the platform economy.
- Significant cases
Kairui case
On 27 July 2022, the Beijing AMR issued a penalty decision fining Beijing Kairui Alliance Education Technology (Kairui) 942,386.47 yuan for engaging in resale price maintenance (RPM).
Kairui is the licensee of the language learning brand Sesame Street English and has the exclusive right to use and sublicense the brand in China. It charged the franchisee licence royalties and management fees, authorised the franchisee to resell its training courses and provided the franchisee with management consulting, teaching materials, personnel training, and other support services.
The Beijing AMR found that Kairui fixed the sale prices of training courses by prohibiting franchisees from adjusting prices through the cooperation agreement, formulating and issuing several rules and regulations to ensure price control. The company claimed that its price control clauses fell under the exemption circumstances defined in the seventh item of Article 15 of the old AML (i.e., other circumstances as prescribed by law and the State Council). However, the Beijing AMR rejected this argument and concluded that Kairui failed to prove that the RPM clause was necessary to maintain its unified franchising business model. Furthermore, Kairui failed to prove the agreement would not substantially restrict competition in the relevant market and would enable consumers to share in the resulting benefits. Therefore, Kairui did not meet the requirements for exemption.
Franchising was usually considered different from the traditional contractual relationship of sale and purchase, and therefore the franchisor’s price control over the franchisee might not be regarded as RPM. However, in this case, the enforcement agency has taken an aggressive approach in penalising the franchisor for setting the English training course price offered by the franchisees. In particular, the authorised sale of training courses by the franchisees is not a typical resale of the product since the substantial part of the training courses was directly provided by the franchisees rather than the franchisor. Nevertheless, operators would need to revisit the potential antitrust risks arising from the existence of similar franchising arrangements.
Straumann case
On 30 December 2022, the Beijing AMR published a decision fining Straumann (Beijing) Medical Device Trading Co., Ltd. (Straumann) approximately 34.39 million yuan for engaging in RPM. The fine is equal to 3 per cent of Straumann’s annual turnover in 2020.
Straumann is a leading player in the field of dental implants, prosthetics and oral tissue regeneration. The Beijing AMR found that Straumann participated in negotiations between distributors and large dental support organisation (DSO) customers and determined the resale prices of the distributors. Then Straumann requested its authorised distributors to comply with the determined resale prices. Moreover, Straumann was found to set the minimum resale price for products sold to customers other than large DSO customers, and ordinary private dental institutions in different sales areas, requiring distributors not to sell at prices lower than its guiding prices.
In 2022, RPM continued to be an antitrust enforcement focus for the SAMR. With the implementation of the new AML, RPM will remain presumed to be illegal in principle, but operators can claim an exemption under the safe harbour rule and defend from the perspective of not having the effect of excluding or restricting competition.
Keqiao Water case
In June 2022, the Zhejiang AMR published a penalty decision fining Shaoxing Keqiao Water Supply (Keqiao Water) approximately 9.91 million yuan and confiscated 12.55 million yuan in illegal gains for abuse of market dominance, amounting to 3 per cent of the company’s annual turnover in 2020.
Since Keqiao Water is the only water supplier in a specific district of Shaoxing city to provide the relevant services, the Zhejiang AMR considered that it has a dominant market position in the market for urban public tap water services in the region. According to the penalty decision, Keqiao Water had abused its dominant position by requiring real estate developers to entrust it solely with the construction of offsite water supply projects and prevent them from choosing other brands and suppliers for secondary water supply facilities, equipment and components. Furthermore, the real estate developers were also overcharged for construction costs other than those stipulated.
Abuses in public utilities continue to be the enforcement focus of the SAMR, with cases in this industry accounting for almost 80 per cent of all abuse of dominance cases in 2022. Given the characteristics of the market structure of the public utilities (i.e., there are only one or two operators in the local market), the relevant operators are likely to be found to have a dominant position in the local market, thus triggering the risk of abuse. The relevant public utility companies should remain highly alert to the restrictive conduct for which there were already precedents of penalties imposed by enforcement agencies.
CNKI case
On 26 December 2022, the SAMR issued a penalty decision on China National Knowledge Infrastructure (CNKI) for abuse of dominance. CNKI is one of the major academic platforms in China.
On the one hand, it provides academic database editing and dissemination services for authors of academic theses. On the other hand, it provides services such as literature data retrieval and literature download for institutions and individuals. The company was fined 87.6 million yuan, amounting to 5 per cent of the company’s annual turnover in 2021.
In defining the market, the SAMR respectively pointed out that the Chinese academic online database services market is not substitutable with both the market for electronic book database services and foreign language academic literature online database services from the perspectives of supply substitution and demand substitution.
In determining CNKI’s dominant position in the online academic platform market in China, the SAMR considered the following factors: (1) the market share of CNKI is over 50 per cent in the relevant product market; (2) the relevant market is highly concentrated and CNKI maintains a strong competitive advantage over time; (3) CNKI’s ability to control the market; (4) CNKI’s financial and technical advantages; (5) the dependence of users on CNKI; (6) the high entry barrier; and (7) the significant advantage CNKI has in the relevant market.
Throughout its investigation, the SAMR found that CNKI abused its dominant position in the market for Chinese academic literature online database services in China by charging an unfairly high price and requesting exclusive cooperation. Specifically, CNKI implemented exclusivity agreements to prohibit academic journal publishers and universities from providing academic literature data to other competing platforms. To ensure the implementation of agreements, CNKI took reward and punitive measures such as offering higher royalty rates and providing free academic misconduct detection for its collaborators that accept the exclusive dealing requirement. In addition, CNKI increased its sale prices by more than the normal margin despite the stability of its service costs and continuing to push up the prices of its database services in various ways, such as splitting databases, unreasonable pricing mechanisms and sales incentives.
The SAMR concluded that CNKI’s conduct seriously hindered the technological progress and innovative development of rival platforms and that CNKI’s conduct eliminated and restricted competition in the relevant market without any reasonable justification, which constituted an abuse of market dominance to restrict transactions, in breach of Paragraph 1(4) of Article 22 of the new AML.
This case is the first abuse of dominance case involving the online database market in China. Compared with several platform economy cases announced in 2021, the SAMR did not propose administrative guidance to be followed by CNKI in the decision. However, the company took the initiative to make rectification commitments and published a rectification plan in response to the penalty decision. The rectification plan formulated 15 rectification measures, such as thoroughly rectifying exclusive dealings, significantly reducing service prices, protecting the legitimate rights and interests of authors, continuously optimising relevant services and comprehensively strengthening compliance construction.
As can be seen from the above cases, in addition to the penalties imposed by the SAMR, it is commonly required to carry out subsequent rectification in cases of abuse of dominance where the violations are prominent and the scope of influence is large. The rectification requirements may be mandatory or can be initiated by the company involved.
ii Trends, developments and strategies
Unlike in 2021, when strict enforcement measures were taken against companies in the platform economy, the SAMR’s regulation of internet companies is moving towards a normal trend in 2022 and will maintain a constant focus in this field. Internet companies should conduct internal antitrust risk assessments. For example, whether the development and application of algorithms and platform rules are suspected of discrimination, whether the data collection and sharing and the use of technology for blocking and counter-blocking would lead to the abuse of market power, etc.
Abuses in public utilities have been a key enforcement priority of the SAMR in recent years. A total of 11 abuse of dominance cases involving public utilities were announced in 2021 and 2022, the highest number among all industries that were investigated by the SAMR. The relevant public utility companies are advised to review their business models and in particular those related to tying and exclusive dealings.
In addition, it is worth noting that, except for the CNKI case, the remaining behaviour cases including the monopoly agreements and abuse of dominance cases were all investigated and handled by provincial AMRs. This indicates that increasingly active antimonopoly enforcement actions are taken by provincial enforcement agencies while most cases are directed or supervised by the SAMR in the practice.
iii Outlook
According to the enforcement plan announced by the SAMR, the industries related to people’s daily lives (e.g., public utilities, pharmaceutical, online platforms, financial services) will continue to be the focus of enforcement in 2023.
Under the safe harbour rule in the new AML, and after the relevant supporting regulations come into force, the supervision of vertical monopoly agreements, and in particular the vertical price monopoly, would be relaxed to a certain extent. Companies will undoubtedly have more flexibility in their business arrangements, especially in the management of sales channels and distributors. However, companies that choose to use the safe harbour rule to design their business models need to understand the rule accurately and have a clear understanding of market definition and market share, which in fact places a higher demand on their antitrust compliance.
For further information, please contact:
Michael Gu, Partner, Anjie Broad
michaelgu@anjielaw.com
