China’s antitrust regulators have continued to increase their enforcement of the Anti-Monopoly Law (“AML”) in 2016. Given the high level of scrutiny in this area and the current legal environment in China, compliance with the AML should be a priority for businesses operating in China.
2016 saw the publication of a number of draft guidelines, outlining the regulators’ proposed approach to many important areas in antitrust enforcement, including leniency, the calculation of fines, and application of the AML to the automotive industry. Currently, discussions are also under way for highly anticipated draft guidelines on the application of the AML to intellectual property rights. Many of these proposed guidelines should enter into force in 2017.
On the enforcement side, although fines were largely symbolic in the early days of the AML, it is no longer surprising to see fines totalling tens of millions of dollars. In addition, regulators initially limited their enforcement activities to anticompetitive conduct that was relatively straightforward to prove, such as price fixing. Regulators are now tackling much more complex cases, including those involving abuses of dominance.
On the merger side, the Chinese Ministry of Commerce (“MOFCOM”) is no longer limiting itself to dealing with incoming merger notifications. Instead, despite a heavy caseload and a lack of resources, it now actively pursues cases where the parties failed to notify their transaction to the regulator.
This client alert highlights the most significant developments from 2016 and what to expect for 2017. Given the myriad of developments across numerous areas of antitrust law and practice in China in 2016, 2017 promises to be another significant year for the continued development of antitrust enforcement in China.
- Legislative/Regulatory Developments
China’s three antitrust regulators–MOFCOM, the State Administration for Industry and Commerce (“SAIC”), and the National Development and Reform Commission (“NDRC”) in addition to the State Council’s Anti-Monopoly Commission (“AMC”), are currently working on a number of draft rules, guidelines and legislative changes. It is likely that some of these will enter into effect in 2017, although it is not possible to predict exactly when. This section details the changes that would apply across the board. The next section, which reviews enforcement by agency, will detail the agency-specific rules that are currently anticipated.
Changes to the AML. China’s antitrust regulators have been tasked with proposing changes to the AML. Very few details regarding these proposed changes have emerged to date, except for a desire to increase fines for failures to notify concentrations.
Changes to the Anti-Unfair Competition Law (“AUCL”). The AUCL was enacted in 1993 to encourage and protect fair competition, prevent unfair competition practices and protect the rights of business operators and consumers. In February 2016, the Legislative Affairs Office of the State Council released for public comments proposed revisions to the AUCL, which would bring about significant changes[i]. Later in the year, the State Council passed a revised draft of the AUCL[ii]. This new draft must be reviewed and approved by the National People’s Congress before entering into force.
Some changes to the law aim to align the AUCL with the AML. However, according to the latest public draft of the law, the changes also seek to introduce a new prohibition on abuses of “relatively superior position,” which is a position short of “dominance.” This new prohibition would prevent undertakings from taking advantage of their relatively superior position by, among other things, imposing unreasonable terms.
Thus far, no guidance has been issued regarding the application of this new provision–in particular regarding any market share thresholds that will apply for the establishment of a “relatively superior position”. Absent such guidance, this new provision of the AUCL could significantly affect business activities in China by regulating unilateral conduct by non-dominant firms.
Draft Intellectual Property Guidelines. The application of the AML to intellectual property rights has been a contentious issue ever since the law first came into force. To date, only the SAIC has published guidelines on this topic. However, the AMC is currently reviewing draft guidelines from the three antitrust regulators (and the State Intellectual Property Office) concerning the application of the AML to intellectual property rights. The current objective appears to be to release a unified draft that incorporates the guidelines from these various regulators. It would (hopefully) first be released for public comments before entering into force.
Draft Guidelines on the Calculation of Fines. The AMC released draft guidelines for the calculation of fines and determining illegal gains[iii]. Under the AML, the enforcement agencies have the right to impose fines between 1% and 10% of turnover (although the AML does not define the term “turnover”). For price-fixing activities, the draft guidelines propose to set the base level for fines at three percent of the sales value of the alleged products in the relevant geographic market. For international cartels, the draft guidelines propose to–typically–limit the revenues that will be considered to China and increase the base amount by one percent of turnover. The base fine amount will then be increased by 1% for each year of the cartel’s duration. In addition, the enforcement agencies also have the ability to adjust the overall fine amount depending on aggravating circumstances, such as whether the undertaking is a ringleader or repeat offender, or mitigating circumstances, such as whether the undertaking cooperated. Although recent cases have shed some light on the enforcement agencies’ policies regarding and approaches to determining fines, the guidelines will be welcomed by practitioners as they will increase the predictability of the agencies’ enforcement actions.
Draft Guidelines Addressing the Automotive Sector. The automotive industry, in particular the distribution of passenger cars, has been a significant target of NDRC enforcement actions, with multiple enforcement decisions against car manufacturers. As a result, the publication of enforcement guidelines in this area was much awaited by the industry. In March 2016, the AMC published draft guidelines regarding the application of the AML to the automotive industry[iv]. The guidelines comprehensively address antitrust-related questions in the automotive industry and include provisions that more strictly regulate territorial restrictions, distinguish between active and passive sales (like in the European Union), and restrict the ability of car manufacturers to control the resale of spare parts. Notably, the guidelines also provide useful guidance on subcontracting arrangements for the manufacture of spare parts.
- Merger Control
Another Record Year. MOFCOM had a record year again in 2016. According to figures released by a MOFCOM spokesman, in 2016, MOFCOM received 378 merger notifications, opened reviews of 360 cases, and concluded 395 cases. In 2016, 324 cases, or 82% of all cases, were concluded during the 30-day preliminary review phase–an increase of 8% from 2015[v]. In addition, cases that were processed under the “simplified procedure” (a faster and less burdensome version of the “normal” procedure) accounted for 76% of all filings. Approximately 98.6% of all “simplified procedure” cases that were filed were concluded during the preliminary review stage.
Published Decisions. Only those MOFCOM decisions prohibiting a transaction, or imposing or removing remedies are published. MOFCOM did not prohibit any transaction in 2016 and imposed remedies in only two cases. In the AB Inbev/SABMiller merger, although MOFCOM ultimately approved the merger, it ordered the divestiture of SABMiller’s 49% stake in CR Snow, the largest Chinese brewer[vi]. Interestingly, in that case, MOFCOM distinguished between separate product markets for popular, mid-range, and high-end beer by using price as a distinguishing factor (namely RMB 5 per 500 ml). MOFCOM also recognized that the relevant market was local and accordingly defined markets at the provincial level. In the Abbott/St Jude Medical merger, MOFCOM ordered the divestiture of St Jude’s vessel closure devices businesses[vii], a remedy that was also ordered by other regulators, including the U.S. Federal Trade Commission[viii] and the European Commission[ix]. In that matter, MOFCOM accepted a divestiture of the relevant business units to a specific purchaser, Terumo Corporation. This case represented the third time that MOFCOM accepted a fix-it-first divestiture and only the first time that the buyer was a foreign entity.
On June 8, 2016, MOFCOM published its decision to remove the conditions it had previously imposed on Walmart’s acquisition of an interest in Yihaodian, an e-commerce business, through the acquisition of 33.6% of shares in Newheight Holdings[x]. In August 2012, MOFCOM had imposed a number of conditions on Walmart in connection with this acquisition. MOFCOM mandated: i) that Newheight could only use its online platform for its own sales of goods and not for the sale of third-party goods; ii) that Newheight could not use its online platform to provide network services for other businesses without obtaining a value-added telecommunications services (“VATS”) permit; and iii) that Walmart may not engage in VATS via a variable interest entity (“VIE”) structure. MOFCOM decided to lift these conditions on May 30, 2016, for several reasons. First, MOFCOM found that Walmart had fully complied with the remedies and conditions previously imposed in the 2012 decision. Second, MOFCOM observed that barriers to entry to China’s VATS market had decreased, particularly since 2014, and determined that lifting the conditions would attract new entrants into the VATS market. In making this determination, MOFCOM referenced a decision issued by the Chinese Ministry of Industry and Information Technology on June 19, 2015, to open up e-commerce to foreign investment, so that foreign ownership of an e-commerce business could reach 100%. Third, MOFCOM found that China’s online retail market had continued to expand and that the relevant market structure had changed substantially, such that Yihaodian’s market share had not grown substantially when compared to its main rivals.
Enforcement Against Non-Notified Transactions. MOFCOM imposed fines for failure to notify in six transactions[xi]. In May 2016, MOFCOM published three cases in which fines were imposed on five companies for failure to notify. In the first case, Dade Holdings Company Limited was fined RMB 150,000 (approximately USD 21,746) for failing to notify MOFCOM of an acquisition that had triggered the thresholds for notification[xii]. The second and third cases involved the establishment of joint ventures between foreign companies and domestic companies. In the second case, Bombardier Transportation Sweden and New United Group was fined RMB 400,000 (approximately USD 57,990) and RMB 300,000 (approximately USD 43,511), respectively, for failing to notify MOFCOM of the establishment of a joint venture[xiii]. In the third case, Hitachi and Beijing CNR Investment Company Limited were each fined RMB 150,000 (approximately USD 21,746)for the same reason.
MOFCOM is reportedly investigating other transactions that have been closed but not notified.
- Non-Merger Enforcement
3.1 NDRC Draft Guidelines
Draft Cartel Leniency Guidelines. In February 2016, the NDRC released its draft Guidelines for Applying A Leniency Program to Horizontal Monopoly Agreements (“Draft Leniency Guidelines”) for public comment[xiv]. This was a significant step, especially given the relatively vague nature of the previous guidelines. To qualify for leniency under the Draft Leniency Guidelines, applicants must fulfil the following obligations: (1) cease allegedly illegal acts unless required otherwise; (2) provide prompt, continuing, extensive, and sincere cooperation with the investigation; (3) properly reserve and provide evidentiary documents and information; (4) not disclose the leniency application without the enforcement authority’s consent; and (5) not undertake activities that may adversely affect anti-monopoly enforcement. In a monopoly agreement case, a maximum of three undertakings would normally be granted leniency and would receive a reduced punishment. However, organizers of a horizontal monopoly agreement would normally not be granted full immunity. The Draft Leniency Guidelines also address how to determine the rankings of leniency applicants. For instance, they provide for circumstances where enforcement authorities may cancel applicants’ places in queues, but they do not give the applicants whose position are in jeopardy any opportunity to contest this determination before being removed from the Leniency program. In addition, the Draft Leniency Guidelines specify enforcement authorities’ obligations regarding confidentiality and prohibit materials submitted for leniency applications from being used as evidence in related civil litigation, unless otherwise provided for by the laws. It is unclear when these guidelines will be finalized.
Draft Commitment Guidelines. In February 2016, the NDRC released for public comments draft guidelines regarding the commitments scheme under the AML, which provides a framework for settling and terminating anti-monopoly investigations. The current draft guidelines exclude the application of commitments to cartel conduct, which appears inconsistent with NDRC’s current practice in cartel investigations. It is also unclear under the draft guidelines to what extent NDRC would require undertakings under investigation to “admit” to any violation of the AML, which seems to be NDRC’s current practice. Notably, the draft guidelines provide that a decision to suspend or terminate an investigation following the submission of commitment shall not identify whether the behaviour constitutes a violation of the AML. They also provide that the existence of such a decision to suspend or terminate an investigation shall not constitute evidence in follow-on damage cases that a violation of the AML has been committed.
It is unclear at this stage whether the NDRC will publish another draft of its guidelines and/or when the final text will be adopted.
3.2 Enforcement Decisions
Cartels. In the last days of 2015, the NDRC joined a growing list of regulators that have imposed fines on roll-on roll-off shipping lines for conspiring to fix prices[xv]. After an investigation lasting over a year, the NDRC announced that it had imposed fines of RMB 407 million (approximately $63 million) on seven companies that had participated in the cartel. One of the seven companies was fined only 4% of its China-related sales due to its cooperation with the NDRC’s investigation. In addition, an eighth company was not fined at all, notwithstanding that it had participated in the cartel, because it was the first to cooperate with the NDRC.
Most of the NDRC’s enforcement decisions in 2016 related to domestic cartels. For example, in January 2016, the NDRC imposed a total of approximately RMB 4 million (approximately $607,000) in fines on Chongqing Qingyang Pharmaceuticals and four related companies for entering into anticompetitive agreements that involved price fixing, market division, and bid rigging in connection with Allopurinol medication. The fines imposed in this matter ranged from 5% to 8% of company revenues for the previous year[xvi].
Resale Price Maintenance. NDRC continued its aggressive enforcement against resale price maintenance during the year. In December 2016, it imposed a fine of RMB 118 million (approximately $17 million) on Medtronic for imposing resale price maintenance on its distributors[xvii]. The fine amounted to 4% of Medtronic’s China turnover. The Shanghai Municipal Development & Reform Commission also imposed a RMB 201 million fine (approximately $29 million) on General Motors for imposing minimum resale price maintenance on its dealers[xviii]. The fine amounted to 4% of GM’s turnover in China.
In theory, all anticompetitive agreements can benefit from an exemption under the AML if the agreement yields consumer benefits. Nevertheless, to date, all relevant administrative decisions and court cases have ruled that resale price maintenance is anticompetitive.
In 2016, SAIC closed more than 10 cases, involving both anticompetitive agreements and abuses of dominance cases.
The most significant enforcement action related to the Tetra Pak case. In November 2016, SAIC wrapped up a four-year investigation into potential antitrust violations involving Tetra Pak. In an unusually long and detailed decision, SAIC imposed a fine of RMB 667 million (approximately $97 million) on the food packaging and processing company for abusing market dominance[xix]. SAIC determined that Tetra Pak had a dominant position in the Chinese markets for paper-based aseptic packaging equipment, technology services for such equipment, and paper-based aseptic packaging materials. In addition, SAIC concluded that Tetra Pak abused its dominant position, among other things, by engaging in the following conduct:
- Forcing customers of its packaging equipment to use Tetra Pak packaging materials,
- Forcing customers of its maintenance service to use Tetra Pak packaging materials,
- Preventing a Tetra Pak supplier from selling to Tetra Pak competitors, and
- Implementing loyalty rebates.
The decision demonstrates that SAIC carefully considered the effect of the alleged anticompetitive practices before concluding that they constituted an abuse of dominance. Still, notwithstanding the level of detail contained in the decision, it remains unclear to what extent SAIC considered the arguments advanced by Tetra Pak in this matter.
3.4 Civil Litigation
Private antitrust litigation experienced a slow start in China but is picking up speed. In 2012, the Supreme People’s Court first established a basic framework for civil antitrust litigation by publishing its Rules on Civil Litigation under the AML[xx]. The Supreme People’s Court has published data on the number of AML cases filed between 2008 and 2014, but no data for more recent years are available[xxi].
2016 saw an appeals court in Beijing issue a final ruling in what is one of China’s first follow-on damage antitrust claims. A consumer sued Abbott Laboratories following the NDRC’s administrative penalty decision that the company had engaged in resale price maintenance in relation to infant formula purchased from Carrefour. Upholding the decision by the Beijing Intellectual Property Court, the Beijing High People’s Court ruled that the consumer had not demonstrated the existence of a resale price maintenance agreement specifically between Abbott and Carrefour. The court acknowledged that the consumer had submitted the NDRC administrative penalty decision as preliminary evidence that Abbott and certain of its distributors had entered into a vertical monopoly agreement to fix the resale price of infant formula. Nevertheless, the court noted that the NDRC decision did not specify which retailers had engaged in resale price maintenance with Abbott and, in particular, did not mention an agreement with Carrefour[xxii].
As a surprising development, 2016 has seen a few antitrust lawsuits related to standard essential patents (“SEPs”). For instance, Qualcomm sought a ruling from the Beijing Intellectual Property Court that its licensing terms for a particular Chinese licensee complied with both the AML and its obligation to offer standard essential patents under fair, reasonable, and non-discriminatory terms[xxiii]. This case was filed against the backdrop of an increasing number of patent lawsuits involving SEPs.
[i] Anti-Unfair Competition Law of The People’s Republic of China (Revised Draft for Review) (中华人民共和国反不正当竞争法（修订草案送审稿）) (released February 25, 2016), available at http://zqyj.chinalaw.gov.cn/readmore?id=987&listType=1
[ii] Li Keqiang Presided over State Council Executive Meeting (November 23, 2016) (李克强主持召开国务院常务会议(2016年11月23日)), November 24, 2016, http://www.gov.cn/premier/2016-11/24/content_5137110.htm
[iii] Guidelines on Identification of Illegal Proceeds of Operators by Monopolistic Practices and Determination of Fines (Draft for Comments) For Public Comment (《关于认定经营者垄断行为违法所得和确定罚款的指南》（征求意见稿）公开征求意见) (released June, 17, 2016), available at http://www.ndrc.gov.cn/gzdt/201606/t20160617_807545.html
[iv] Antitrust Guidelines for the Auto Industry (Draft for Comments) For Public Comment (《关于汽车业的反垄断指南》（征求意见稿）公开征求意见) (released March 23, 2016), available at http://www.sdpc.gov.cn/gzdt/201603/t20160323_795743.html
[v] 秦正陽, 商務部：2016反壟斷審查取得顯著成效, (Qin Zhengyang, 2016 Antitrust Review Achieved Remarkable Results), China Review Network, (January 5, 2017), available at http://hk.crntt.com/doc/1045/3/2/3/104532391.html?coluid=45&kindid=0&docid=104532391&mdate=0106105655
[vi] MOFCOM 2016 No. 38 Announcement – Announcement of the Anti-Monopoly Review Decision to Approve, with Restrictive Conditions, the Concentration of Undertakings in respect of the Acquisition of Shares of SABMiller Plc. By AB InBev S.A/N.V. (released July 29, 2016), available at: http://file.mofcom.gov.cn/article/gkml/201607/20160701369044.shtml
[vii] MOFCOM 2016 No. 88 Announcement – Announcement of the Anti-Monopoly Review Decision to Approve, with Restrictive Conditions, the Concentration of Undertakings in respect of the Acquisition of Shares of St. Jude Medical by Abbott (released December 30, 2016), available at http://file.mofcom.gov.cn/article/gkml/201612/20161202440204.shtml
[viii] FTC Puts Conditions on Abbott Laboratories’ proposed $25 billion Acquisition of Rival Medical Device Maker St. Jude Medical Inc. (December 27, 2016), available at https://www.ftc.gov/news-events/press-releases/2016/12/ftc-puts-conditions-abbott-laboratories-proposed-25-billion
[ix] European Commission Press Release: Mergers: Commission approves acquisition of St Jude Medical by Abbott Laboratories, subject to conditions (November 23, 2016), available at http://europa.eu/rapid/press-release_IP-16-3941_en.htm
[x] Announcement of the Ministry of Commerce  No. 23 Announcement on Lifting of Business Concentration Restrictive Conditions of the Acquisition of 33.6% Stake in Niuhai Holdings by Wal-Mart (June 10, 2016), available at http://english.mofcom.gov.cn/article/policyrelease/buwei/201606/20160601348939.shtml
[xi] 秦正陽, 商務部：2016反壟斷審查取得顯著成效, (Qin Zhengyang, 2016 Antitrust Review Achieved Remarkable Results), China Review Network, (January 5, 2017), available at http://hk.crntt.com/doc/1045/3/2/3/104532391.html?coluid=45&kindid=0&docid=104532391&mdate=0106105655
[xii] Decision of the Ministry of Commerce on Administrative Penalties (Commercial Law  No. 173) (decision issued April 21, 2016; decision published May 3, 2016), available at http://file.mofcom.gov.cn/article/gkml/201605/20160501311079.shtml
[xiii] Decision of the Ministry of Commerce on Administrative Penalties (Commercial Law  No. 174) (decision issued April 21, 2016; decision published May 3, 2016), available at http://file.mofcom.gov.cn/article/gkml/201605/20160501311081.shtml
[xiv] Guidelines for Applying Leniency Program to Horizontal Monopoly Agreements (Draft for Comments) For Public Comment (《横向垄断协议案件宽大制度适用指南》（征求意见稿）公开征求意见) (released February 2, 2016), available at http://jjs.ndrc.gov.cn/fjgld/201602/t20160203_774287.html
[xv] NDRC Administrative Punishment Exemption Decision  No. 1 (December 15, 2015), available at http://jjs.ndrc.gov.cn/fjgld/201512/t20151231_770027.html; NDRC Administrative Punishment Exemption Decision  No. 2 (December 15, 2015), available at http://jjs.ndrc.gov.cn/fjgld/201512/t20151231_770028.html;NDRC Administrative Punishment Exemption Decision  No. 3 (December 15, 2015), available at http://jjs.ndrc.gov.cn/fjgld/201512/t20151231_770029.html;NDRC Administrative Punishment Exemption Decision  No. 4 (December 15, 2015), available at http://jjs.ndrc.gov.cn/fjgld/201512/t20151231_770030.html;NDRC Administrative Punishment Exemption Decision  No. 5 (December 15, 2015), available at http://jjs.ndrc.gov.cn/fjgld/201512/t20151231_770031.html;NDRC Administrative Punishment Exemption Decision  No. 6 (December 15, 2015), available at http://jjs.ndrc.gov.cn/fjgld/201512/t20151231_770032.html;NDRC Administrative Punishment Exemption Decision  No. 7 (December 15, 2015), available at http://jjs.ndrc.gov.cn/fjgld/201512/t20151231_770033.html;NDRC Administrative Punishment Exemption Decision  No. 8 (December 15, 2015), available at http://jjs.ndrc.gov.cn/fjgld/201512/t20151231_770039.html
[xvi] NDRC Investigation of Monopoly Agreement in connection with Allopurinol Tablets, available at http://jjs.ndrc.gov.cn/fjgld/201601/t20160128_772982.html
[xvii] NDRC Investigation of Medtronic’s Monopolistic Pricing Conduct (December 7, 2016), available at http://www.sdpc.gov.cn/gzdt/201612/t20161207_829470.html
[xviii] Shanghai Municipal Price Bureau Administrative Punishment Decision (SAIC-GM Sales Co., Ltd.) (decision issued December 19, 2016; decision published December 23, 2016), available at http://www.shdrc.gov.cn/fzgggz/jggl/jghzcfjds/25286.htm
[xix] Competition Enforcement Notice 2016 No. 10 The Case of Tetra Pak Abusing Market Dominance (Decision issued November 9, 2016; decision published November 16, 2016), available at http://www.saic.gov.cn/zwgk/gggs/jzzf/201611/t20161116_172375.html
[xx] For more details, see http://www.gibsondunn.com/publications/Pages/Civil-Antitrust-Litigation-in-China.aspx.
[xxi] According to the latest statistics published in 2015, from 2008 to the end of 2014, the local courts have heard a total of 274 civil anti-monopoly cases of the first instance and concluded 250 cases, see http://www.saic.gov.cn/jgzf/fldyfbzljz/201507/t20150701_158420.html
[xxii] Junwei Tian v. Beijing Carrefour Shuangjing Store and Abbott Shanghai, Beijing Higher People’s Court Civil Judgment (2016) No. 214 (decision issued on August 22, 2016; decision published on November 4, 2016), available at http://wenshu.court.gov.cn/content/content?DocID=7ad234f9-cfdc-453a-ae0a-a8f22dc22004&KeyWord=（2016）京民终214号
[xxiii] Qualcomm Files Complaint against Meizu in China (June 24, 2016), available at https://www.qualcomm.com/news/releases/2016/06/23/qualcomm-files-complaint-against-meizu-china
This post comes to us from Gibson, Dunn & Crutcher LLP. It is based on the firm’s memorandum, “Antitrust in China–2016 Year in Review,” dated February 7, 2017, and available here.