Heralding a New Era of Antitrust Enforcement in China: New Provisions on Monopolistic Agreements and Abuse of Dominance

Despite the long-time call for more predictability for companies, the Monopolistic Agreements Provisions did not go one step further to adopt the proposed "safe harbor" for non-hardcore restrictions which appeared in internal drafts. It is understood that such a cautious approach is mostly due to a concern expressed by local authorities and the academy that the AML does not explicitly specify the scope for safe harbor.

The absence of safe harbor means that non-hardcore agreements cannot be presumed lawful even if a company holds a small market share in the relevant market. While it's not entirely clear, in practice, the threshold of 15% (for horizontal agreements) and 25% (for vertical agreements) proposed under the previous draft guidelines for the automotive sector and draft guidelines on intellectual property (IP) rights should still reflect SAMR's enforcement approach and thus serve as helpful references. Therefore, companies may still derive comfort by citing small market shares to defend their non-hardcore agreements.

Exemptions of monopolistic agreements The Monopolistic Agreements Provisions enumerate the factors to be considered in evaluating whether an alleged monopolistic agreement can be exempted under Article 15 of the AML. By way of background, Article 15 of the AML provides that an agreement can be exempted if the undertaking can prove that such agreement: (1) can promote competition and enhance efficiencies; (2) do not severely impede competition in the relevant market and; (3) consumers can share resulting efficiencies.

The Monopolistic Agreements Provisions provide that, when evaluating eligibility for exemption under Article 15, antitrust agencies should assess, among others: (1) how, and to what extent, the agreement can achieve the relevant efficiencies; (2) the causal link between the agreement and such efficiencies; and (3) whether the agreement is indispensable in achieving such efficiencies. With regard to whether consumers can share resulting efficiencies, SAMR should consider whether consumers will benefit in terms of price, quality, variety, etc. Despite the increased level of guidance introduced by the Monopolistic Agreements Provisions, it remains to be seen when an exemption will be granted to an undertaking and how the company under investigation will manage to prove eligibility.

Lenient treatment The Monopolistic Agreements Provisions provides that an applicant will only be eligible for lenient treatment if it voluntarily provides SAMR with "important evidence" (such as identity of participants to the agreement, products concerned, contents of the agreement, how the agreement was concluded and implemented, etc. Further, the first three applicants are entitled to a ≥80%, 30-50% and 20-30% fine reduction, respectively.

It remains unclear whether lenient treatment is only applicable to hardcore cartels as in the EU, or more broadly covers both horizontal and vertical monopolistic agreements (e.g. RPM). The Monopolistic Agreements Provisions only refer to "monopolistic agreements", a literal reading of which is that vertical agreements are not excluded. Notably, offering lenient treatment to vertical agreements differs from the approach the draft leniency guidelines published by the National Development and Reform Commission (NDRC, one of SAMR's predecessors) a few years back, which proposed that lenient treatment only applies to horizontal monopolistic agreements.

The greater clarity will certainly help companies better assess their market position, in particular whether they are holding a dominant market position

Highlights of the Abuse Provisions

Factors for finding of dominance The Abuse Provisions shed more light on the factors to be considered in finding: (1) a dominant market position in general; (2) dominance in new economies such as the internet sector and in the IP area; and (3) collective dominance.

The greater clarity will certainly help companies better assess their market position, in particular whether they are holding a dominant market position. More specifically, additional considerations in assessing dominance in new economies show that SAMR is well aware of, and seeks to have regard to, the features of these frontier areas which are currently booming in China.

• Dominance in general: The Abuse Provisions elaborate on the specific elements to be assessed for each factor provided under Article 18 of the AML. For example, when considering competition conditions in the relevant market, SAMR may assess the development stage of the relevant market(s), the number and market shares of competitors, level of differentiation of relevant products, innovation, procurement and sales models, potential competitors, etc.
• Dominance in new economies and IP area: In addition to the above factors which are generally considered, SAMR will also look at elements which are unique or particularly relevant to new economies such as the number of users, network effect, lock-in effect, capability of possessing and processing data, and the company' market power in the related market (in the context of two-sided markets). In relation to the IP area, SAMR will additionally consider, among others, substitutability of the relevant IP, reliance on the product using the relevant IP in downstream market, bargaining power of the trading party, etc.
• Collective dominance: In response to a general concern in the wake of SAMR's previous enforcement actions that collective dominance was merely a result of high combined market share of a few leading companies in the market, the Abuse Provisions make it clear that SAMR should consider additional factors before concluding collective dominance exists, namely, market structure, transparency of the relevant market, whether the relevant products are homogeneous, whether the relevant companies showed consistent conduct patterns, etc.

The Abuse Provisions not only elaborate on the various forms that abusive acts can take, but also outline possible justifications for each specific abusive conduct

Forms of abusive acts The Abuse Provisions not only elaborate on the various forms that abusive acts can take, but also outline possible justifications for each specific abusive conduct.

• Below-cost sales: to dispose of perishable or seasonal products; to pay off debts; to switch to new lines of business; to promote new products within a reasonable period of time; etc.
• Refusal to deal: force majeure; bad credit record of the counter-party; risk of damages as a result of dealing with the counter-party; etc.
• Exclusive dealing: necessity to ensure product safety, protect IP and protect the investment particularly made for the transaction.
• Tying and bundling: trading norm and customs; necessity to ensure product safety and utilize a certain technology, etc.
• Discriminatory treatment: trading norm and customs; promotion applicable to the first transaction with new customers within a reasonable period of time; etc.

In relation to abuse by way of predatory pricing/below-cost sales, the Abuse Provisions uses "average variable costs" as the benchmark to determine whether a price is "below costs", which is broadly in line with prevailing international practice. If it relates to new economies such as the internet sector where individual users do not have to pay for the services, SAMR will conduct a comprehensive analysis of both free products (e.g. for users) and paid-for products (e.g. for companies advertising) offered by the platform operator because it falls in the multi-sided market.

Regarding refusal to deal, while the Abuse Provisions introduce the "essential facility doctrine", they adopt a cautious approach in its application and require a holistic review of the feasibility of investing in or developing an alternative facility by the counter-party, reliance of the counter-party on the facility, the feasibility and impact of offering the facility by/on the undertaking, etc.

Common issues in both sets of Provisions

Both the Monopolistic Agreements Provisions and the Abuse Provisions seek to address the following common issues.

"Forced cartel" Both sets of Provisions provide that even if the monopolistic conduct were forced by government mandates, the relevant company can only enjoy reduction of fines but not a full exemption. This rule may put some companies in between a rock and a hard place. The company would end up either: (i) not complying with instructions, which may lead to other unfavorable consequences; or (ii) following instructions but contravening AML (although mitigated/reduced antitrust penalty may apply). Presumably, a company would only be free of liability if it refuses to follow instructions and does not engage in anticompetitive conduct at all. It is understood that this rule is intended to grow companies' compliance awareness and to prevent companies from taking advantage of government mandates to facilitate anticompetitive conduct, and in the meantime, encourage companies to engage in timely communications with antitrust enforcement authorities.

Settlements Settlements have been seen in a number of enforcement cases to date, including the investigation into Hai Chang Contact Lens Co. for RPM practices and the investigation into InterDigital Technology Corporation for abuse of dominance. Both sets of Provisions seek to codify established enforcement practice and provide for further guidance on circumstances in which a company under investigation may be able to settle with SAMR, resulting in a suspension of the investigation. In addition to outlining the procedural steps of requesting settlement, the Provisions also set out factors SAMR will take into account in deciding whether to accept the settlement proposed by the company, such as the nature of alleged conduct, duration, consequences, impact on society, proposed remedial measures and its effectiveness. Notably, the Monopolistic Agreements Provisions make it clear that settlement is not available if the allegations are price fixing, output restriction or market sharing, which are widely recognized as the most serious anticompetitive conduct.

Fine calculation Both sets of Provisions mirror the relevant clause of the AML regarding fine calculation and provide that infringing companies will be subjected to a fine in an amount of 1-10% of its "sales revenues in the preceding year", whose scope is not entirely clear in itself. In practice, SAMR and its predecessors have traditionally used "relevant turnover", namely the turnover generated from the products concerned in the infringing act, as the basis to determine antitrust fines. However, earlier this year, the D-G of the Anti-Monopoly Bureau has made it clear that SAMR would use "total turnover" instead and it is evident in a few cases conducted this year. The significantly greater deterrence as a result of the possibly sky-high penalties would have implications for companies' defence strategies in investigations and compliance endeavours during the course of business.

Delegation to provincial authorities Both sets of Provisions seek to delegate enforcement power to SAMR's provincial branches and delineate the jurisdictional allocation between SAMR's and the provincial branches. More specifically, SAMR investigates inter-province cases, complicated cases, cases with nation-wide influence and other cases at its discretion, while in general SAMR's provincial branches enforce the remaining cases.

Conclusion

Following the completion of the consolidation of antitrust enforcement power into SAMR in early- 2019, the two sets of Provisions represent a major step in SAMR's conduct enforcement. Substantively, they lay a unified analytical framework, codify settled positions and provide further guidance. From a jurisdictional and procedural perspective, they divide jurisdiction between SAMR and its provincial branches and streamline the investigatory and decision-making procedures.

With the AML understandably focusing on key principles/fundamentals, the two sets of Provisions are expected to facilitate SAMR's enforcement against monopolistic agreements and abuse of market dominance, increase efficiency and predictability of SAMR's investigations, and ultimately herald a new era of intensified antitrust enforcement actions.

Fay Zhou, Partner  Linklaters Beijing

Vivian Cao, Partner     Linklaters Zhao Sheng Joint Operation