China’s Price Law To Target Conduct In Digital Sector.

Legal News & Analysis - Asia Pacific - China - Telecommunications, Media & Technology

10 August 2021
 

The State Administration for Market Regulation (SAMR), China’s primary competition enforcement regulator, recently published a consultation draft of its amendments to the existing Provisions on Administrative Sanctions Against Price-related Illegal Activities on 2 July 2021 (the Provisions). The Provisions provide further guidance and elaboration on China’s Price Law (the Price Law), which prohibits a range of “illegitimate price acts”.
 

One of the key proposed additions to the Provisions relates to illegitimate price acts in “new business models” targeting practices in the digital sector. The penalties for breach not only include confiscation of all illegal gains and fines between 0.1% to 0.5% of annual turnover, but also cessation of business orders and/or the revocation of business licences.
 

These severe penalties add to the burgeoning arsenal of enforcement tools that regulators can deploy in the digital sector, and represent the next link in a growing chain of enforcement activity. In this briefing, we consider the key changes to the Price Law under the new draft Provisions, as well as current trends in the sector.
 

 
 
Background to the Price Law

 

Personalised pricing in digital sector targeted

 

Price Law and Anti-Monopoly Law: harmonisation or conflict?

 

Digital sector remains high on the regulatory agenda

 

Background to the Price Law

 

The Price Law, which was first promulgated in 1997, governs a range of “illegitimate price acts”, such as price fraud and price gouging. The Provisions provide further guidance and clarity to the Price Law, and have been in force since 1999 (and amended three times previously: in 2006, 2008 and 2010).
 

The types of “illegitimate price acts” covered by the Price Law are varied in nature. For example, Article 14(4) of the Price Law prohibits price fraud, which is the use of false or deceptive means to represent prices and induce consumers or other businesses to make purchases. Under the existing Provisions, different types of breaches of the Price Law can carry different penalties. These include cessation of business orders or the revocation of business licences, as well as confiscation of illegal gains. In terms of financial penalties, the maximum under the existing regime is relatively low, capped at a maximum of RMB 5 million for very severe cases.

 

Personalised pricing in digital sector targeted

 

The amended Provisions introduce a new article that specifically targets pricing practices in the digital sector, specifically:
 

  • The use of data analytics and algorithms to apply differential pricing based on consumer preferences (personalised pricing); and
     

  • The sale of products below cost by non-dominant sellers on digital platforms, in order to foreclose competitors.
     

Of these two types of conduct, personalised pricing has received significant public and media attention as a growing issue in the digital sector. The conduct was also expressly called out as a potential abuse of dominance in breach of the Anti-Monopoly Law (AML) in the recent Antitrust Guidelines for the Platform Economy published by SAMR earlier this year.
 

Personalised pricing has also been targeted from a data privacy angle. A Zhejiang local court recently handed down a judgment in July 2021 finding Shanghai Ctrip Commerce Company Limited (Ctrip), a Chinese online travel agency, liable for collecting personal data on consumer preferences that was superfluous to its functions. The data was used to personalise the price of offerings on the app, setting a much higher price for the plaintiff when compared with the price otherwise charged by the hotel.
 

The overlapping regulations against personalised pricing demonstrate the focus on this type of conduct, but may also give rise to uncertainty in enforcement. For example, from an AML perspective, personalised pricing is a potential abuse of dominance, which means that it must first be proven that the supplier is dominant in a relevant market for the conduct to constitute a breach. However, this requirement falls away if the conduct is pursued under the Price Law or on data privacy grounds.

 

Price Law and Anti-Monopoly Law: harmonisation or conflict?

 

There are various other prohibitions within the Price Law that overlap with the AML, including price collusion, price discrimination, and tying or bundling.
 

This gives rise to an obvious question as to which legislation or regulatory process takes priority when these types conduct arise, particularly given the financial penalties are far lower under the existing Price Law than those that could be imposed under the AML. Additionally, and unlike the AML, the Price Law further allows for a wider range of penalties such as cessation of business or revocation of business licences.
 

The divergence (at least in relation to financial penalties) will be reduced under the proposed Amendments, which increases the penalties for certain infringements to a maximum of 10% of relevant turnover during the period of the infringement (although the penalty for personalised pricing is limited to a maximum of 0.5% turnover). This 10% threshold is in line with the penalties that can be imposed under the AML. Nevertheless, even with this harmonisation, the question of which legislation applies to a specific circumstance remains. 

 

Digital sector remains high on the regulatory agenda

 

The introduction of an explicit reference to digital sector practices in the proposed Amendments to the Provisions occurs against a backdrop of increased enforcement activity against digital/technology market players.
 

Since early this year, SAMR has been aggressive in probing past mergers and acquisitions in the sector that may have met the merger control notification thresholds, but that were not notified. SAMR published a record number of penalty decisions this year following scrutiny of internet companies, with the latest wave of 22 penalties targeting internet companies announced on 7 July 2021.
 

In response to the intensified efforts by Chinese authorities to regulate the digital sector, 33 Chinese internet companies jointly signed the Internet Platform Operators Anti-Monopoly Self-Discipline Convention (the Convention) on 13 July 2021. The Convention states that signatories will strive to protect consumer interests and to ensure a fair and healthy market environment for the sector. In particular, the Convention covered pricing practices that have become increasingly prevalent in recent years such as personalised pricing and “Choosing One Between Two” restrictions, which restricts sellers on one platform from selling on their competing platforms.
 

As the Chinese authorities flex their regulatory muscles in the digital sector, we expect that market players will continue to face increased scrutiny. In light of the rapidly changing regulatory environment, companies engaged in these markets should take necessary steps to ensure compliance of Chinese laws and regulations to avoid fines and reputational damage.
 


 

For further information, please contact:

  

Adelaide Luke, Herbert Smith Freehills

[email protected]