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General framework

Legal framework

What is the legal framework in your jurisdiction covering the behaviour of dominant firms?

After consolidating China’s three antitrust enforcement authorities into the State Administration for Market Regulation (SAMR) at the end of 2018, now the SAMR is in charge of merger review, antitrust investigation and any other matters in relation to antitrust. The previous legislation, which was issued separately by State Administration for Industry and Commerce (SAIC) and the National Development of Reform and Commission (NDRC) before, is expected to be consolidated in the near future. At the time of writing, the previous legal framework for regulating the behaviour of dominant firms, including two pieces of primary legislation and eight secondary legislation, is still in force.

Primary legislation

Primary legislation is as follows:

  • the Anti-Monopoly Law (AML); and
  • the Price Law.

Secondary legislation

Secondary legislation is as follows:

  • The SAIC’s dominance provisions:
    • the Provisions for the Industry and Commerce Administrations on the Prohibition of Abuse of Dominant Market Position (which entered into force on 1 February 2011) explain what would be considered to be ‘a dominant market position’, the types of non-price-related abusive conduct and the SAIC’s authority over these activities;
    • the Provisions for the Industry and Commerce Administrations on the Prohibition of Abuse of Administrative Authority to Eliminate or Restrict Competitive Acts (which entered into force on 1 February 2011) set out specific provisions with respect to the abusive behaviour conducted by government authorities;
  • the SAIC’s procedural provisions:
    • the Provisions for the Industry and Commerce Administrations on the Procedures for Investigating and Handling Cases of Monopoly Agreements and Abuse of Market Dominance (which entered into force on 1 July 2009) set out the procedures that the SAIC will follow when investigating and handling restrictive agreements and abusive behaviours by dominant undertakings;
    • the Provisions for the Industry and Commerce Administration on the procedures for prohibition of Abuse of Administrative Authority to Eliminate or Restrict Competitive Acts (which entered into force on 1 July 2009) set out the procedures that SAIC shall follow when Investigating and handling cases;
  • The SAIC’s intellectual property rights provisions:
    • Provisions on Prohibition of Abuse of Intellectual Property Rights to Exclude and Restrict Competition (which entered into force on 1 August 2015) set out specific rules in terms of abusing intellectual property rights.
  • the NDRC’s Anti-Price Monopoly provisions:
    • the Provisions on the Anti-Price Monopolies (which entered into force on 1 February 2011) set out the prohibited types of price-related abusive conducts by dominant undertakings, as well as the NDRC’s authority over these activities; and
  • The NDRC’s procedural provisions
    • the Provisions on the Procedures for Administrative Anti-Price Monopoly Law Enforcement (which entered into force on 1 February 2011) set out the procedures that the NDRC will follow when investigating and handling abusive behaviours by undertakings; and
    • the Procedural Provisions on the Price-related Administrative Penalties adopted by NDRC (which entered into force on 1 July 2013) and the Provisions on the Trial and Examination of Cases in relation to Price-related Administrative Penalties (which entered into force on 1 January 2014) set out the procedures for the NDRC to review and impose penalties for price-related violations of the AML and the Price Law.

In addition, the Supreme People’s Court issued a set of judicial interpretations to provide guidance on how to proceed with civil actions under the AML (ie, the Provisions of the Supreme People’s Court on the Application of Laws in the Trial of Civil Disputes arising from Monopolistic Practices (which entered into force on 3 May 2012)).

Definition of dominance

How is dominance defined in the legislation and case law? What elements are taken into account when assessing dominance?

The term dominance is defined as an economic strength possessed by one or several undertakings that enable it or them to control the price or quantity of products or other trading conditions in the relevant market, or to block or affect the access of other undertakings to the relevant market (article 17 of the AML).

Dominance is assessed by reference to various factors. Market share is the first parameter. Under article 19 of the AML, a market share above 50 per cent is presumed dominant. In the case of several undertakings, the combined market share of two undertakings as a whole above two-thirds, or the combined market share of three undertakings as a whole above three-quarters, is presumed dominant. However, any undertaking with a market share of less than 10 per cent is not presumed to be dominant.

In addition to market share presumption, article 18 of the AML further stipulates that dominance could be assessed by reference to the following factors:

  • the ability of the undertaking to control the retail market or procurement market for raw materials;
  • the financial status and technical conditions or capabilities of the undertaking;
  • the extent of dependence on the undertaking by other undertakings in transactions; and
  • barriers to entry.

At the secondary legislation level, both the SAIC Dominance Provisions and the NDRC Anti-Price Monopoly Provisions elaborate on the two key concepts in the definition of ‘dominance’, which are ‘other transaction terms’ and ‘enabling such undertakings to block or affect other undertakings’. The SAIC Dominance Provisions also provide further guidance on how each of the determinative factors is to be assessed in determining the existence of dominance.

As regards of SAIC’s provisions for intellectual property rights, business operators with market dominance shall not abuse market dominance in the process of exercising intellectual property rights to eliminate or restrict competition. Market dominance shall be identified and presumed pursuant to the provisions of articles 18 and 19 of the AML. A business operator holding intellectual property rights may constitute one of the factors for ascertainment of its market dominance, but the presumption of the business operator’s market dominance in the relevant markets shall not be merely based on the intellectual property held by the business operator.

Purpose of legislation

Is the purpose of the legislation and the underlying dominance standard strictly economic, or does it protect other interests?

The AML mainly supports competition-related objectives, but also includes certain non-economic policy objectives. For example, in article 1 of the AML, it provides that the legislation is to protect the ‘public interest’ and to ‘promote the healthy development of the socialist market economy’. Article 7 of the AML specifically focuses on industries of a dominant status granted by the state, but also explicitly prevents the undertakings engaged in such industries from abusing their dominance. This article could be interpreted as an effort to strike a balance between competition policy and industrial policy.

Sector-specific dominance rules

Are there sector-specific dominance rules, distinct from the generally applicable dominance provisions?

In addition to the AML and the Price Law, which apply equally to all sectors of the economy, the following additional legislation regulates dominance in the telecommunication and automobile sectors:

  • the PRC Telecommunication Provisions prohibit telecommunication operators from restricting consumer choice;
  • the NDRC issued the Guidelines on Anti-Monopoly in the Automobile Industry (Draft for Comments) to regulate the behaviours of automobile suppliers who may have the dominant position in the automobile aftermarket of their respective brand and the abuse of administrative power to eliminate or restrict competition in the automobile industry; and
  • the NDRC issued the Guidelines on Price-Related Activities of Undertakings in relation to Drug Shortage and Active Pharmaceutical Ingredients to regulate price-related activities of undertakings during production, operations, and services provision of shortage drugs and active pharmaceutical ingredients. To be specific, the Guidelines demonstrate how to ascertain an undertaking has a dominance position in the relevant market and whether an undertaking conducts abusive activities.

These additional legislations are complementary to the general dominance rules in China, and they are largely in line with the general dominance rules but may have a more sector-specific focus.

Exemptions from the dominance rules

To whom do the dominance rules apply? Are any entities exempt?

The AML applies to undertakings, which are defined as ‘a natural person, legal person or other organisation that engages in the manufacture or operation of goods or the provision of services’.

Article 7 of the AML deals with undertakings engaged in industries of a dominant status granted by the state, however, it does not exempt such undertakings from the prohibitions under the AML and explicitly prohibiting them from damaging consumer interests.

Article 8 and Chapter 5 of the AML also apply to public authorities. This article requires that a government authority may not abuse their administrative power to eliminate or restrict competition.

Transition from non-dominant to dominant

Does the legislation only provide for the behaviour of firms that are already dominant?

The AML requires dominance to be demonstrated when dealing with abusive behaviours of dominant undertakings.

The Price Law regulates behaviours of non-dominant firms. More specifically, article 14 of the Price Law prohibits certain pricing below cost where the objective is to exclude competitors.

Collective dominance

Is collective dominance covered by the legislation? How is it defined in the legislation and case law?

Under the AML, the term of dominance is defined as a market position possessed by one or several undertakings that have the ability to control the price or quantity of products or other trading conditions in the relevant market, or to block or affect the access of other undertakings to the relevant market.

When assessing ‘collective dominance’, the upmost consideration factor is ‘market share’, explicitly defined in article 19 of the AML. Moreover, the Chinese authorities will also apply the consideration factors in article 18 of the AML for a comprehensive analysis. Zhejiang Price Bureau’s penalty decision on 17 papermaking companies issued on 11 July 2017 set an example of the Chinese authorities’ approach. For more specific information, see question 2.

Dominant purchasers

Does the legislation apply to dominant purchasers? Are there any differences compared with the application of the law to dominant suppliers?

Dominant purchasers are subject to the AML. Article 17 of the AML expressly prohibits dominant undertakings from purchasing goods at unfairly low prices. There is no difference between dominant purchasers and dominant suppliers in terms of the application of the law.

Market definition and share-based dominance thresholds

How are relevant product and geographic markets defined? Are there market-share at which a company will be presumed to be dominant or not dominant?

Under the AML, there is no difference as to the approach to define a relevant market for restrictive agreements, abuse of dominance and merger control purposes.

The Guidelines on the Relevant Market Definition, which entered into force on 24 May 2009, applicable to all respects of the AML, and enforceable by all Chinese antitrust agencies and courts with jurisdiction, provide guidance on the definition of the relevant market and the methodology used for defining the relevant market.

Article 19 of the AML sets out rules on how a company will be presumed to be dominant in China, where the ‘market share’ is the first parameter. However, this presumption is rebuttable if there is evidence to the contrary. Any undertaking with a market share of less than 10 per cent is not presumed to be dominant. For more specific information, see question 2.

As regards the intellectual property rights, the Guidelines on the Relevant Market Definition are still applicable, and factors such as intellectual property and innovation shall be simultaneously taken in to account. In AML enforcement involving licensing intellectual property rights, the relevant product markets could be technology markets or product markets containing specific intellectual property rights. The relevant technology market shall mean the market where the competition among technologies involved in the exercise of intellectual property rights occurs and the technologies involved are mutually substitutable.

Abuse of dominance

Definition of abuse of dominance

How is abuse of dominance defined and identified? What conduct is subject to a per se prohibition?

Article 17 of the AML provides that a conduct may constitute an abuse if it consists of:

  • selling products at unfairly high prices or buying products at unfairly low prices;
  • selling products at prices below cost without justification;
  • refusing to enter into transactions with other parties without justification;
  • limiting other parties to entering into transactions exclusively with them or undertakings designated by them, without justification;
  • tying products without justification or imposing any other unreasonable terms in the course of transactions; and
  • applying dissimilar prices or other transaction terms to equivalent trading parties that are in the same position without justification.

The SAIC Dominance Provisions and the NDRC Anti-Price Monopoly Provisions provide more details on each type of specific abusive conduct prohibited by law.

The Price Law prohibits price collusion, predatory pricing, discriminatory pricing and obtaining exorbitant profits, regardless of the existence of dominance.

In the intellectual property section, business operators with market dominance shall not, without a proper reason:

  • refuse to license its intellectual property rights to other business operators under reasonable conditions if this intellectual property constitutes requisite facilities for manufacturing and business activities;
  • restrict the transaction counterparties from entering into transactions only with them; or restrict the transaction counterparties from entering into transactions only with their designated business operators;
  • implement bundling sales;
  • impose unreasonable terms in the course of the transaction, such as exclusive grant-back; questioning the validity of intellectual property rights; making use of competing commodities or techniques upon the expiry of the licensing period without infringing upon the intellectual property rights; exercising intellectual property rights for which the protection period has expired or was declared void; and
  • discriminate against transaction counterparties under the same conditions.

Exploitative and exclusionary practices

Does the concept of abuse cover both exploitative and exclusionary practices?

The AML, the SAIC Dominance Provisions and the NDRC Anti-Price Monopoly Provisions cover both exploitative and exclusionary practices.

Link between dominance and abuse

What link must be shown between dominance and abuse? May conduct by a dominant company also be abusive if it occurs on an adjacent market to the dominated market?

These issues have not yet been dealt with in the law or in the decisional practice of the enforcement authorities. However, in order to testify the abusive behaviour, the precondition of dominate position shall be satisfied at first.

Defences

What defences may be raised to allegations of abuse of dominance? When exclusionary intent is shown, are defences an option?

The AML provides that certain practices are prohibited where they are ‘without any justification’. While the AML itself is silent as to the interpretation of what may be considered to constitute adequate ‘justification’, some guidance is provided in relation to specific types of abuse in the AML-related regulations.

Article 12 of the NDRC Anti-Price Monopoly Regulations prohibits undertakings with dominance from selling goods below cost price without proper justifications, which includes the following:

  • selling at a reduced price fresh perishable goods, seasonal goods, goods with an imminent expiry date or overstocked goods;
  • selling goods at a reduced price to repay debt, to change production lines or to wind-up a business; and
  • promoting the new product marketing.

The Price Law prohibits the sales of goods at a below-cost price in order to exclude competitors or to dominate the market except for the legitimate reduction of prices for goods such as seasonal products, or overstocked goods.

Article 16 of the NDRC Anti-Price Monopoly Provisions and article 7 of the SAIC Dominance Provisions provide ‘proper justification’ for price discrimination. To clarify what could be considered as ‘proper justification’, article 8 of the SAIC Dominance Provisions provides that two elements should be comprehensively considered: whether the business operator’s conduct is based on its normal operating activities and for its normal benefits; and whether the conduct has an impact on economic efficiency, public interests and economic development.

Specific forms of abuse

Types of conduct Types of conduct

Rebate schemes

The AML prohibits dominant undertakings from selling goods below cost without justification, although there is no explicit provision on rebate schemes.

Article 14 of the NDRC Anti-Price Monopoly Regulation prohibits undertakings with dominance, through price discounts or other means, from requiring counterparties to enter into transactions exclusively with them or undertakings designated by them without proper justification.

The first dominance case involving loyalty discounts was the Tetra Pak (TP) case in 2016. The SAIC identifies two types of loyalty discounts TP adopted in its carton business between 2009 and 2013: retroactive accumulative volume discount and customised volume target discount. The SAIC found both loyalty discounts have a loyalty-inducing effect. Specifically, in the first scenario, given that the discount applies to all units purchased during a defined reference period, when a customer’s purchase volume reaches the threshold, the price that the customer needs to pay drops significantly. Therefore, to obtain more products at a lower price when a customer’s purchase volume approaches the threshold, customers tend to continue purchasing until the threshold is met, which leads to a loyalty-inducing effect. In the second scenario, the undertaking with a dominant market position tends to condition its discount on the target percentage and target volume set forth specifically for individual customers, the direct consequence of which would be to lock-in the customer’s purchase percentage or volume. By taking into account specific market conditions, the SAIC found that TP’s loyalty discount had evident anticompetitive effects.

Tying and bundling

The AML prohibits a dominant undertaking from implementing tie-in arrangements that do not have any justifications.

Article 6 of the SAIC Dominance Regulations prohibits undertakings with dominance from tie-in sales without any justification, or imposing other unreasonable transaction terms during the course of a transaction, including:

  • compulsory bundling or grouping of different products that would not normally be bundled together according to normal transactional practices and consumption habits, regardless of the functions of different products;
  • imposing unreasonable restrictions on the terms of contracts, payment methods, transport and delivery methods for goods, or methods of providing services, etc;
  • imposing unreasonable restrictions on the sales region, sales targets and after-sales services of products, etc; and
  • imposing transactional conditions irrelevant to the subject matter of the transaction.

In June 2016, the Inner Mongolia AIC, which was authorised by the SAIC, announced that it had investigated and fined the Inner Mongolia Broadcast and Television network Group (Xilinguole) Company for tying a service fee, which should be a voluntary choice, to the basic fee. The Inner Mongolia AIC imposed a fine of 98,000 yuan on the company, which is respectively 1 per cent of its previous year’s sales in the relevant market.

The high-profile dominance case involving tying was the TP case in 2016. For more details of the case, see question 29.

In addition, pursuant to article 9 of SAIC’s intellectual property provision, undertakings with market dominance shall not, without a proper reason, implement the following bundling that satisfy all the following criteria in the course of implementation of intellectual property rights to eliminate or restrict competition:

  • forced bundling or combined sales of different commodities that, among others, violate trade practice and consumer habit, or ignore the functions of the commodities; and
  • implementation of bundling sales, which will extend the undertaking’s dominance in the market of the bundled product to the market of the bundled products so as to eliminate or restrict competition of other business operators in the markets of the bundled product or the bundled products.

Exclusive dealing

The AML prohibits an undertaking with dominance from requiring, without justification, undertakings to enter into exclusive dealing agreements with it or an undertaking designated by it.

Article 5 of the SAIC Dominance Regulations prohibits an undertaking with dominance from requiring a counterparty to enter into transactions exclusively with it, or any undertaking designated by it, without any justification. The relevant exclusive provisions in SAIC’s intellectual property is the same.

Article 14 of the NDRC Anti-Price Monopoly Regulations prohibits an undertaking with dominance, through price discounts or other means, from restricting counterparties to enter into transactions exclusively with them or undertakings designated by them without proper justification. ‘Proper justification’ is further explained to include the following exemptions:

  • to guarantee the quality or safety of a product;
  • to maintain the image of a brand or to enhance service level;
  • to significantly reduce costs, increase efficiencies and share the benefits generated thereof with consumers; and
  • other reasons that can provide justifications for the conduct.

In October 2016, the Urumqi AIC, authorised by the SAIC, announced that it investigated and fined the Urumqi Water Group Inc for exclusive dealings of which the company required its customers to trade only with designated undertakings. The Urumqi AIC imposed a fine of 1.49 million yuan on the company, which is respectively 1 per cent of its previous year’s sales in the relevant market.

The high-profile dominance case involving exclusive dealing was the TP case in 2016. For more details of the case, see question 29.

Predatory pricing

The AML prohibits undertakings with dominance from selling products at a price below cost without justification.

Article 12 of the NDRC Anti-Price Monopoly Regulations also prohibits undertakings with dominance from selling goods at a below-cost price without proper justifications, which includes the following:

  • selling fresh perishable goods, seasonal goods, goods with an imminent expiry date or overstocked goods at reduced prices;
  • selling goods at a reduced price to repay debt, to change production lines or to wind-up a business;
  • promoting the new product marketing; and
  • other reasons that can provide justification for their conduct.

The Price Law prohibits the sales of ‘goods at a below-cost price in order to exclude competitors or to dominate the market except for the legitimate reduction of prices for goods such as seasonal products, or overstocked goods’.

Price or margin squeezes

Article 11 of the NDRC Anti-Price Monopoly Provisions provides that business operators with dominant positions are prohibited from selling commodities at unfairly high prices or buying commodities at unfairly low prices, taking into account factors such as the price offered by other business operators for the same kind of commodity and the normal price range when costs are generally stable.

Besides, such activities may be punished as price discrimination or refusals to deal in disguised form. In practice, enforcement authorities have not made any punishment decision based on price or margin squeezes up to the date of writing.

Refusals to deal and denied access to essential facilities

The AML prohibits undertakings with dominance from refusing to trade with other undertakings without justification. The SAIC Dominance Provisions and NDRC Anti-Price Monopoly Provisions provide detailed examples of refusal to deal.

Article 4 of the SAIC Dominance Provisions prohibits undertakings with dominance from refusing to deal with a counterparty without justifiable reasons.

Article 13 of the NDRC Anti-Price Monopoly Provisions prohibits undertakings with dominance from refusing to conduct transactions with their counterparties in disguised form by imposing excessively high selling prices or excessively low buying prices without proper justification. A ‘proper justification’ includes:

  • the counterparties have significantly bad credit records, or their operating conditions may lead to relatively significant risks to the safety of the transaction;
  • the counterparties are able to purchase the same or substitutable goods from other undertakings at a reasonable price, or to sell goods to other undertakings at a reasonable price; and
  • other reasons that can provide justification for their conduct.

As for the issue of denied access to essential facilities, article 4 of the SAIC Dominance Provisions prohibits undertakings with dominance from refusing to allow a counterparty to use, on reasonable terms, its essential facilities during such a party’s production and operations.

Article 7 of the SAIC Intellectual Property Rights Provisions provides that a business that has a dominant market position shall not, without any justification, refuse to license other businesses to use its intellectual property right under reasonable conditions to preclude or restrict competition if the intellectual property right is part of the necessity facilities for production and trading.

In the determination of the conduct as mentioned in the preceding paragraph, the following factors shall be considered at the same time: (i) the intellectual property right cannot be substituted reasonably in the relevant market, and the intellectual property right is necessary for other businesses to participate in competition in the relevant market; (ii) refusal of licensing of the intellectual property rights will have an adverse impact on the competition or innovation in the relevant markets and harm consumer interests or the public interest; and (iii) licensing of the intellectual property will not cause unreasonable harm to these business operators.

Besides the above, if the intellectual property right constitutes essential facility for production or operation activities, its refusal to license the intellectual property right to other business operators, without justified reasons and without following the principles of fairness, reasonableness and no discrimination, will eliminate or restrict competition in the relevant market.

It also provides that for business operators with dominance, after their patent becomes an essential patent for a standard, eliminating or restricting the competition by committing tied sales, discriminatory treatment or adding other unreasonable terms is prohibited.

Predatory product design or a failure to disclose new technology

There is no provision in the AML concerning predatory product design. Predatory product design is also known as predatory innovation, which is still a novel issue in China. As at the time of writing, there is no relevant enforcement record.

Based on the firm’s legal practice, predatory product design could be analysed with five elements in practice:

  • a market of novelty that is characterised by the emergence of a new product or technology;
  • whether there are primary and secondary markets;
  • whether there is need for interoperability between the above two markets;
  • whether there is dominance in the primary market; and
  • whether there are foreclosure effects in the secondary market.

As for the issue of failure to disclose new technology, it has not yet been dealt with in the law or in the practice of enforcement authorities.

Price discrimination

The AML prohibits businesses with a market-dominant position from applying dissimilar prices or other transactional terms to equivalent trading partners without justification. A market-dominant position is the prerequisite for the AML to apply.

Article 16 of the NDRC Anti-Price Monopoly Provisions prohibits undertakings with dominance from price-related discriminatory treatment, without a proper justification, against other parties to a transaction.

Article 7 of the SAIC Dominance Provisions prohibits non-price-related discrimination, including discriminatory treatment, without proper justification, of counterparties that are in a comparable situation in respect of transaction terms such as transaction quantity, the quality of goods, payment method, delivery method, aftersales service and so on.

Article 14(v) of the Price Law prohibits price discrimination towards undertakings of equal trading conditions for the same goods or services. Unlike the AML, article 14 of the Price Law applies regardless of the existence of dominance.

Exploitative prices or terms of supply

The AML prohibits undertakings with dominance from selling or buying products at unfairly high or low prices. Article 11 of the NDRC Anti-Price Monopoly Provisions stipulates the following decisive factors in determining the extent to which low or high pricing is unfair:

  • whether the sale or purchase price is obviously higher or lower than the price charged or paid by other undertakings to sell or buy the same goods;
  • where costs are stable, whether an increase or decrease in the sale or purchase price exceeded normal margins; and
  • whether the rate of increase or decrease of the purchase price of goods is obviously higher or lower than the rate of increase or decrease of the cost.

The Price Law prohibits excessive profits that are obtained in violation of laws and regulations.

In August 2017, a decision taken by the NDRC concerned exploitative pricing. This case involved two Chinese active pharmaceutical ingredients companies that abused their dominant positions and sold products (ie, active pharmaceutical ingredients for isoniazid) at unfairly high prices. The NDRC imposed a fine of 443,916 yuan on the two companies, which is 2 per cent of their previous year’s sales in the relevant market. Similarly, in 2018, the SAMR fined two pharmaceutical ingredients companies 10.04 million yuan because of the sale of products at exorbitant prices (for more details, see question 29).

Abuse of administrative or government process

As an ex post approach, Chapter V of the AML regulates the abuse of administrative power by the government authorities to eliminate or restrict competition. The SAIC Dominance Provisions set out in more detail the types of prohibited activities by administrative bodies and the SAIC’s authority over these activities.

On 1 June 2016, the State Council promulgated the Opinions of the State Council on Establishing the Fair Competition Review System in the Development of Market System (Guo Fa [2016] No. 34), in which the main objective of setting up the system is to reconcile the laws and regulations at all levels of the Chinese government with the competition law principles.

In the fair competition review system, targets subject to review are rules, regulatory documents and other policy measures that involve the economic activities of market players, such as those on market entry, industrial development, attracting foreign investment, bidding and bids, government procurement, business code of conduct, qualification standards, etc, formulated by government authorities that have the functions of public affairs administration as authorised by laws and regulations. This system is regarded as an ex ante mechanism to comprehensively remove the legal basis for possible abusive behaviour by government authorities.

On 7 April 2017, NDRC published a decision that Shenzhen Municipal Health and Family Planning Commission (SMHFPC) had abused its administrative power with the purpose of excluding and restricting competition in violation of articles 8 and 32 of the AML. On 1 July 2016, SMHFPC issued the Circular on the Establishment of a Pilot Programme to Promote the Drug Procurement Reform in Public Hospitals in Shenzhen, which required that only one designated corporation, Quanyao Net, could provide group purchasing organisation (GPO) services to the Shenzhen public hospitals and drug manufacturers. SMHFPC is then committed to undertake three measures to rectify these violations, and to revise and improve the relevant policies during the launching period of the GPO pilot programme in order to comply with the AML and the Fair Competition Review System standards so that relevant policies will be revised to allow qualified GPOs to enter the relevant market and ensure that the GPO programme can be developed in an orderly manner.

In terms of prohibition of abusing of administrative authority, the SAMR issued a new draft provision (now under the process of public comment) which reintegrated the SAIC’s dominance and procedural provisions on abusing administrative authority, and it is expected to be formally issued in very near future.

Since 2008, the NDRC has investigated and punished more than 30 administrative monopoly cases and corrected local governments’ activities of designated transaction and local protectionism, and the SAIC has prevented 40 activities of abuse of administrative power.

In 2018, the SAMR investigated and listed 16 typical cases of abuse of administrative power to restrict competition.

Mergers and acquisitions as exclusionary practices

Article 4 of the Interim Provisions for the Assessment of the Effect of the Concentration of Business Operators on Competition issued by the Ministry of Commerce (MOFCOM) on 29 August 2011 provides that when assessing the possibility of negative impact on competition caused by a merger or an acquisition, the possibility of excluding other competitors is the initial factor to be considered by MOFCOM.

Other abuses

Abuse of IP rights

Article 55 of the AML tries to strike a balance between the protection of legitimate IP rights and the application of competition law. If an undertaking’s conduct eliminates or restricts competition by abusing its intellectual property rights, such undertaking will fall foul of the AML.

The SAIC Intellectual Property Rights Provisions include provisions on patent pools and identify various types of conduct, which, absent an objective justification, may amount to an abuse of a dominant position. However, the SAIC Intellectual Property Rights Provisions only regulate non-price-related anticompetitive conduct and bind only the SAIC.

Under the SAIC Intellectual Property Rights Provisions, companies with a ‘dominant position’ are prohibited from engaging in certain types of conduct in exercising their IPRs that are deemed to constitute an abuse of that market power. The non-exhaustive list of abusive conduct includes:

  • refusal to license IPRs that amount to ‘essential facilities’;
  • imposing certain exclusivity restrictions;
  • imposing unjustified tying and bundling requirements;
  • attaching unreasonable trading conditions to an IP agreement, including inserting no-challenge clauses;
  • engaging in discriminatory treatment; and
  • engaging in practices that are inconsistent with fair, reasonable and non-discriminatory principles in relation to the licensing of standard-essential patents.

Enforcement proceedings

Enforcement authorities

Which authorities are responsible for enforcement of the dominance rules and what powers of investigation do they have?

After consolidation of China’s three antitrust enforcement authorities, the SAMR is responsible for the AML enforcement of cases relating to abuse of dominance.

Pursuant to article 39 of the AML, the SAMR has rights to adopt the following measures during the investigation:

  • entering the business premises or any other relevant premises of the undertaking under investigation to carry out inspection;
  • questioning the undertaking that is under investigation, the interested parties or any other related organisations or individuals and require them to provide the relevant explanation;
  • inspecting or making copies of the relevant documents and materials, such as certificates, agreements, accounts books, business correspondence and electronic data, of the undertaking under investigation, the interested parties or any other related organisations or individuals;
  • sealing up or confiscating the relevant evidence; and
  • enquiring into the bank accounts of the undertaking.

The SAMR is entrusted with the power to conduct ‘dawn-raid’ investigations of business premises or other premises of undertakings under investigation. During the dawn-raid investigation, the SAMR also has the power to interview individuals, inspect or copy relevant documents and material, seal or retain relevant evidence and investigate the bank accounts of the undertakings.

Sanctions and remedies

What sanctions and remedies may the authorities impose? May individuals be fined or sanctioned?

Under the AML, the sanctions include a fining penalty of between 1 and 10 per cent of the sales revenue for the previous year of the undertaking in breach of the law and to confiscate illegal gains.

The Price Law provides that the sanctions include rectifying the violations, confiscating any illegal gains and a fine penalty of up to five times the amount of the illegal gains. An objection notice will be given and a fine may be imposed if there are no illegal gains. In serious circumstances, the undertaking will be ordered to suspend operations while the infringing behaviour is rectified and the relevant authority may also revoke the business licence of the infringing undertaking.

As of the time of writing, the highest fine imposed for abuse of dominance is 6.08 billion yuan imposed by the NDRC in the Qualcomm case in 2015.

Enforcement process

Can the competition enforcers impose sanctions directly or must they petition a court or other authority?

Yes, the Chinese competition authorities can impose sanctions directly without any petition from court. Article 10 of the AML provides that the anti-monopoly law enforcement agency designated by the State Council shall be responsible for the anti-monopoly law enforcement work, and such anti-monopoly law enforcement agency may empower corresponding agencies in the governments of the provinces, autonomous regions and municipalities directly under the central government to be responsible for the anti-monopoly law enforcement work.

Enforcement record

What is the recent enforcement record in your jurisdiction?

In the decade ending October 2018, Chinese antitrust regulators investigated and concluded 165 cases involving monopoly agreements and 55 cases of abuse of dominance, imposing penalties totalling more than 11 billon yuan.

In 2018, Chinese antitrust authorities launched investigations into 32 abuse of dominance and monopoly agreement cases, and announced 16 typical enforcement cases concerning the abuse of administrative power to exclude or restrict competition. Further, according to a SAMR press release on 27 December 2018, the enforcement authorities will focus on cases concerning public utilities, active pharmaceutical ingredients (APIs), building materials and common consumer products in 2019.

Take an example in 2018, the SAMR imposed 10.04 million yuan in cumulative fines on Hunan Er-Kang Medical Operation and Henan Jiushi Pharmaceutical for abuse of dominance in the domestic market for chlorpheniramine maleate active pharmaceutical ingredients. The fines imposed on Er-Kang and Jiushi Pharmaceutical are equivalent to 8 per cent and 4 per cent of their annual sales in 2017. After investigation, the activities amounting to abuse of market dominance of foresaid undertakings include:

  • selling chlorpheniramine maleate APIs to downstream operators at exorbitant prices;
  • forcing downstream operators to buy other pharmaceutical recipients;
  • refusing to provide chlorpheniramine maleate APIs to downstream operators under the pretext of short supply or with unacceptable conditions; and
  • buying back drug products and reselling at a unified increased price, asking for a high level of deposits.

In 2016, the NDRC published a decision based on article 17(1)(i) of the AML (selling products at unfairly high prices or buying products at unfairly low prices). In 2016, the SAIC published six punishment decisions based on abuse of dominance, among which:

  • three punished violations of article 17(1)(v) of the AML (implementing tie-in sales or imposing other unreasonable trading conditions at the time of trading without any justifiable causes);
  • one decision punished violation of article 17(1)(iv) of the AML (restricting trading party so that it may conduct deals exclusively with themselves or with the designated undertakings without any justifiable cause);
  • one decision punished violation of article 17(1)(vi) of the AML (applying discriminatory treatments on trading prices or other trading conditions to their trading parties with equal standing without any justifiable causes);
  • and one punished violations of article 17(1)(iv), (v) and (vii) (other forms of abusing the dominant market position as determined by the Anti-monopoly Law Enforcement Agency under the State Council) of the AML.

There is no conclusion on the length of abuse of dominance proceedings from initial investigation to final decision. According to the publicly available notices of past decisions, the length ranges from six months to five years.

The most high-profile dominance case is the TP case. On 16 November 2016, the SAIC found that, from 2009 to 2013, TP abused its dominant position in aseptic carton packaging machinery for liquid food products, technical services for aseptic carton packaging machinery for liquid food products, and cartons for liquid food product aseptic packaging and conducted tie-in sales, exclusive dealing and loyalty discounts without justifiable reasons in China. To determine TP’s market position in the three relevant markets, the SAIC mainly considered the following:

  • TP’s market share and competition status in the relevant markets, including its competitive advantages in the relevant markets reflected by the changes of its sales margin and its profitability;
  • TP’s ability to control the market, particularly prices and discounts as well as other trading conditions;
  • the extent to which other undertakings (especially the users) depend on TP; and
  • the difficulty that other undertakings encounter when entering the relevant markets.

The SAIC concluded that:

  • TP was using its dominant position in machinery and technical service markets to impose restrictions on and affect customer’s usage of cartons, which damaged the competition in the carton market and violated article 17(1)(v) of the AML;
  • TP’s restrictions on the use of non-proprietary technical information that excluded the only companies that are able to achieve production at scale of brown paper from supplying brown paper to a third party constituted a violation of article 17(1)(iv) of the AML; and
  • TP’s two types of loyalty discount scheme have a loyalty-inducing effect and constitute other forms of abuse of dominant market position as prohibited by article 17(1)(vii) of the AML. The investigation lasted for almost five years from January 2012 and the punishment imposed was a fine totalling 667.7 million yuan.

Contractual consequences

Where a clause in a contract involving a dominant company is inconsistent with the legislation, is the clause (or the entire contract) invalidated?

The AML provides that the enforcement authority may order the cessation of any illegal actions. It does not specifically provide for the consequences of an infringement in relation to the validity of contracts. However, under the Contract Law, any contractual provisions that are in breach of mandatory provisions of laws and regulations are void.

Private enforcement

To what extent is private enforcement possible? Does the legislation provide a basis for a court or other authority to order a dominant firm to grant access, supply goods or services, conclude a contract or invalidate a provision or contract?

From a legislative perspective, article 50 of the AML provides the possibility for private enforcement against abusive the behaviour of dominant firms in the Chinese courts.

However, the AML does not explicitly provide for a basis for a court to order a dominant firm to grant access, supply goods or services, conclude a contract or invalidate a provision or contract.

Damages

Do companies harmed by abusive practices have a claim for damages? Who adjudicates claims and how are damages calculated or assessed?

Yes, companies harmed by abusive practices have a right to claim for damages by submitting a case to a people’s court. The relevant court has the power to adjudicate these damages claims.

In 2017, the Yunnan High People’s Court ruled on the appeal of the Yunnan YingDing v Sinopec Corporation and Sinopec Yunnan Branch retrial case. This is the first antitrust case in the petroleum industry and is of great pioneering significance. Based on the AML and the Renewable Energies Law, Yunnan YingDing sued Sinopec in the Kunming Intermediate People’s Court for Sinopec’s refusal to integrate the biodiesel produced by Yunnan YingDing into its sales system, which was abuse of dominant market position. After the judgment of the first instance, which required Sinopec to accept Yunnan YingDing’s products, both parties appealed to the Yunnan High People’s Court. In the second instance, the Yunnan High People’s Court ruled to revoke the original judgment and to remand the case for retrial. Yunnnan YingDing lost the action in the first instance of retrial at the end of 2016 and lost the appeal of retrial in August 2017.

Appeals

To what court may authority decisions finding an abuse be appealed?

Article 53 of the AML provides that where any party concerned is dissatisfied with any decision made by the Anti-monopoly Law Enforcement Agency punishing activities of abuse of dominance, that party may apply for an administrative reconsideration or lodge an administrative lawsuit according to law.

Under article 28 of the Administrative Reconsideration Law and article 168 of the Civil Procedure Law respectively, administrative reconsideration organs (which is normally the authority vertically superior to the authority having issued the decision) and the people’s court of second instance should review both facts and laws.

Unilateral conduct

Unilateral conduct by non-dominant firms

Are there any rules applying to the unilateral conduct of non-dominant firms?

Not applicable.

Update and trends

Recent developments

Are changes expected to the legislation or other measures that will have an impact on this area in the near future? Are there shifts of emphasis in the enforcement practice – for example, that enforcement is expected to focus on a particular business sector in the time to come, or that, more generally, economic considerations are given greater weight than in the past?

Forthcoming changes

35 Are changes expected to the legislation or other measures that will have an impact on this area in the near future? Are there shifts of emphasis in the enforcement practice?

Since the three Chinese antitrust authorities have been consolidated into the SAMR in September 2018, all the antitrust-related secondary legislation and guidelines, including abuse of dominant position, are expected to be consolidated in the very near future. Actually, the SAMR has published a consolidated regulation in relation to abuse of dominant position recently, but it is still in the process of public consultation, and the clauses in the newly consolidated regulation has not been materially changed. However, it still remains to be seen as to whether there will be substantial changes in relation to the officially issued consolidated regulations.