China's Anti-monopoly Law – the First Decade in Review

On substantive aspects, MOFCOM has shown growing sophistication and has developed its unique approaches. In particular, MOFCOM generally requires notifying parties to propose definitive relevant markets and detailed market data in all plausible markets/segments both worldwide and in China to inform a thorough review of a transaction's impact on China. The agency is also building up databases by industry, which allows it to check the market data provided by the notifying parties.

MOFCOM also did not hesitate to chart its own course in imposing remedies it considers appropriate. In its decisional practice, MOFCOM has demonstrated a long-standing preference for behavioral remedies – 25 out of the total 35 remedy cases by the end of 2017 (more than 70%) involved constraints on the merged entity's future competitive behaviors. In addition, MOFCOM has imposed in five cases the unique “hold separate” arrangements, which required the merging entities to maintain the independence of different portions of their businesses even after closing. Such requirements are rarely seen in other major antitrust jurisdictions. Furthermore, some cases (e.g. Glencore/Xstrata, Nokia/Alcatel Lucent) are featured by broader industrial and regulatory considerations (e.g. ensuring that domestic companies operating at the downstream level have access to input or intellectual property rights on reasonable terms), as MOFCOM's mandate includes examining a transaction's “impact on national economic development”.

In an effort to urge companies to take their filing obligations seriously, MOFCOM has been vigorously pursuing failures to notify and “gun-jumping” (implementing the transaction before MOFCOM has granted approval). To date, a diverse range of companies (including multinationals, Chinese SOEs and domestic firms) have been penalised, which suggests that no company is immune, regardless of its identity. MOFCOM has also become increasingly confident in pioneering investigations across multiple jurisdictions. An example is the Canon/Toshiba case where MOFCOM concluded that a series of transactions between the parties were all integral parts of the same overall concentration and the first step had amounted to gun-jumping. It's noteworthy that MOFCOM's penalty on Canon was the first among the relevant jurisdictions and preceded the European Commission's investigation.

MONOPOLY AGREEMENTS AND ABUSE OF MARKET DOMINANCE

In the initial years after the AML's entry into force, the National Development and Reform Commission (which is responsible for price related investigations, the NDRC) and the State Administration for Industry and Commerce (which oversees non-price related matters, the SAIC) had focused on drafting implementing rules, building capacity and raising awareness, and enforcement activities were limited to a few domestic cartels with modest fines. Starting from 2013, the authorities ramped up enforcement and vigorously pursued companies in a wide array of consumer-facing and industrial materials/services sectors including those for LCD panels, liquors, infant formulas, insurance, concrete, automobiles, shipping, pharmaceuticals, medical devices, chemicals etc. Sanctions have been imposed on diverse companies, covering multinational, state-owned and domestic private companies.

While cartels (in particular price fixing) and resale price maintenance (RPM) have remained enforcement priorities, there has also been a surge in abuse of dominance cases, including high-profile cases such as Qualcomm (2015), InterDigital (2015), Tetra Pak (2017) and Microsoft (ongoing). The NDRC examined thorny issues around standard essential patents (SEPs) in both Qualcomm and InterDigital and the Qualcomm decision set a record of the largest fine imposed on a single company (Rmb 6.088 billion). The SAIC's Tetra Pak decision, which followed four years of investigation, for the first time held that loyalties rebates constituted a type of abuse of dominance under the catchcall provision of Article 17(7).

To date, the NDRC has launched more than 150 antitrust investigations, levying fines totalling approximately Rmb10 billion (approximately US$1.5 billion), and the SAIC has investigated a total of 86 cases. With increased experience and confidence, the authorities' antitrust jurisprudence and investigative skills have also developed through active enforcement. For example, against the background that it is becoming commonplace that business communications take place on WeChat, investigations have increasingly targeted the group chat record of WeChat (a popular messaging application) as evidence of unlawful collusion between competitors or enforcement of RPM with distributors.

Companies engaging in anticompetitive conducts are subject to an increased risk of detection, as many investigations arose from complaints or leniency applications. In addition, the NDRC has also conducted broader sector inquiries aimed at evaluating whether the sectors are functioning properly targeting selected companies. For example, in 2014 and 2016 the NDRC issued questionnaires to a large number of pharmaceutical and medical device companies, requesting detailed information such as corporate details, sales model and policies, pricing, patents and internal documents. In terms of procedure, the authorities' investigative skills are becoming increasingly sophisticated, with dawn raids and electronic data seizures frequently used in investigations.

Apart from active enforcement, the authorities have shown steady progress in procedural fairness and transparency. Both the NDRC and the SAIC started to publish decisions systematically from 2013, which coincide with the uptick in enforcement activity. The published decisions contain increasingly detailed information about the alleged conduct, evidence, and reasoning, which shed lights on the authorities' approach.

PRIVATE ENFORCEMENT

In the past decade, there has also been an emerging wave of civil litigation, which suggests that private enforcement is becoming an important piece of the AML enforcement. As with public enforcement, civil action in the first few years since 2008 was scarce, but there has been an uptick since 2012 largely as a result of the set of judicial interpretations by the Supreme People's Court (the SPC) to provide important procedural clarifications. To date, most civil actions in China are standalone claims, which stands in contrast with the EU and the US where follow-on claims are commonplace. However, plaintiffs face high evidentiary burdens, in particular in establishing market dominance by the defendant in abuse of dominance lawsuits unless the defendant is a public utility company.

Several landmark cases have helped the courts carve out a key role in the AML regime. In Huawei v. InterDigital (2013), the Guangdong High Court for the first time held that each SEP constitutes a separate relevant product market, resulting in that each SEP was found to have a dominant position in the relevant market. Qihoo v. Tencent (2014), which was the first case heard by the SPC, concerned exclusionary practices and bundling. The SPC's ruling provides guidance on market definition in the highly dynamic Internet sector, where the Supreme Court found that Tencent fell short of a dominant market position despite its 80% share in the instant messaging telecommunications market.

Notably, civil litigation in the past few years was featured by the divergence in the approach to RPM between the NDRC and the courts. The NDRC has been applying a “prohibition + exemption” approach, i.e. RPM are in principle prohibited (the enforcement agency does not take the burden to prove an alleged conduct is anticompetitive), unless the company under investigation is able to demonstrate that it is eligible for an exemption under Article 15 of the AML (which sets a very high bar and there has been no successful precedent to date). In contrast, in Rainbow v. Johnson & Johnson (2013) and Gree (2016), the courts required the plaintiff to not only prove the existence of RPM conduct, but also that such conduct had restricted competition. In a welcome development, the Hainan High Court in the recent Yutai case provided long-awaited clarity and shows convergence between the NDRC and the courts. Specifically, the Hainan High Court distinguished between public and private enforcement and held that while a private plaintiff needs to prove the anticompetitive effect of alleged RPM conduct and further the resulting losses, public enforcement authorities are not required to bear such evidentiary burdens. The Yutai ruling thus demonstrates reconciliation between the NDRC and the courts, and reaffirms the hard stance on RPM under the AML.

ABUSE OF ADMINISTRATIVE POWERS AND FAIR COMPETITION REVIEW

A disguising feature of the AML is that it also prohibits abuse of administration powers to restrict competition such as favoring local players. In recent years the NDRC and the SAIC have actively investigated restrictive local policies in various areas and suggested rectifications to breaking regional blockades. In an effort to build a long-term, systematic mechanism, China introduced the fair competition review system in June 2016, which requires administrative bodies at all levels to review whether existing and future laws and regulations would unduly restrict competition, by way of limiting market access, interfering companies' pricing decisions, favoring local players and so on. Implementing regulations were put in place in 2017 and the NDRC recently also created a dedicated division to advance the implementation of the new mechanism.

LEGISLATION

Since the AML's entry into force, the three enforcement authorities have had issues implementing regulations to provide more substantive and procedural guidance on the general and broad principles laid out in the AML.

Over the past years, MOFCOM has issued detailed guidance on jurisdiction, review process, simplified procedure, remedy discussion, investigations into missed filings etc. The authority is now in the process of consolidating and updating the rules, and plans to issue a comprehensive merger review regulation, which is expected to provide more clarity on a number of jurisdictional and substantive issues.

In the initial years of 2009 and 2010, the NDRC and the SAIC issued their respective implementing regulations to provide detailed rules on the determination of price and non-price related monopoly agreements and abuse of dominance, as well as the enforcement procedures. Starting from 2015, the NDRC took the lead from 2015 in drafting six sets of guidelines covering antitrust issues in the automobile sector and in relation to intellectual property (respectively), leniency, suspension of investigation, exemptions, and calculation of fines. These draft rules reportedly have been submitted to the Anti-monopoly Commission under the State Council, and the guidelines in relation to intellectual property was published by the Anti-monopoly Commission for public comment. Some of these rules are expected to be finalised in 2018, offering more clarity for enforcement in both substance and procedure.

More broadly, the Anti-monopoly Committee has also rolled out the initiative of revamping the 10-year old AML, seeking to codify proven experience and settled views cumulated in the past decade.

LOOKING AHEAD

In just 10 years, China has become one of the world's most influential antitrust jurisdictions by establishing an important merger control regime to be reckoned with, conducting extensive investigations leading to hefty fines on multinational corporations and hearing high-profile civil lawsuits. Boosted by active enforcement, a culture of competition is emerging in the country and antitrust awareness has also grown in governance agencies, businesses, consumers and the general public.

Looking forward, active enforcement is set to continue and grow in breadth and intensity, accompanied by the following noteworthy trends. On the merger control front, while quick clearance can be expected for clearly no-issue cases, obtaining clearances for transactions involving competition concerns or non-competition complications in China will remain challenging. Parties are advised to plan early and formulate strategies for engaging with MOFCOM, and where necessary, proposing remedies to alleviate concerns. MOFCOM will likely harden its stance on missed filings and gun-jumping and may even impose sanctions for failures to notify of an offshore transaction with no nexus with China. While cartels and RPM in consumerfacing industries will continue to be enforcement priorities, the authorities will also expand the scrutiny of abuse of market dominance in IP-heavy sectors. Under the fair competition review system, government agencies will be progressively expected to exercise self-restraint and ensure their rules and policies would not be anti-competitive. In the meantime, new legislations will codify valuable enforcement experience and incorporate helpful international perspectives, providing further guidance and clarity on both substantive and procedural issues to enforcement agencies, businesses, practitioners, and other stakeholders.

Fay Zhou, Partner

Xi Liao, Managing Associate

Linklaters