China’s Anti-monopoly Law
The story so far – and what’s next?
On 1 August 2015, China’s Anti-monopoly Law (AML) celebrated its seventh anniversary. Over the past seven years, China has quickly established itself as one of the most active antitrust regimes in the world, impacting international business activities with its vigorous merger control regime, antitrust investigations resulting in multi-million dollar fines and antitrust litigation on complex IT- and IPR-related issues. Today, the Chinese antitrust regime has continued to gain momentum with an intensified legislative programme and increased enforcement. The antitrust agencies that enforce the AML are also becoming increasingly sophisticated and confident, but certain aspects of this young regime still
call for further development.
Reflecting this, China’s State Council announced plans in September 2015 to review the AML in its legislative programme for 2015 and has tasked China’s three antitrust agencies to identify and explore possible areas for amendment.
This briefing examines the key legislative and enforcement developments under the AML over the past seven years, and identifies likely future enforcement trends.
I. Merger control
Partner, Co-head of China Antitrust T +86 10 6505 3448
T +852 2846 3396
Counsel, Co-head of China Antitrust T +86 10 6535 4525
Timothy Lamb Senior Associate T +852 2913 2662
T +86 10 6535 4549
China’s Ministry of Commerce (MOFCOM) is the enforcement agency responsible for merger control review. Over the past seven years, MOFCOM has become one of the most active regulators in the world with MOFCOM reviewing both domestic Chinese and cross-border transactions. By the end of the first half of 2015, MOFCOM has reviewed 1,143 transactions.
As is illustrated in Table 1, MOFCOM’s caseload grew significantly in the first 3 years of the introduction of the AML and has been experiencing another surge since 2014. According to a MOFCOM statement in July 2015, it received a total of 161 notifications in the first half of 2015 – a 55% year-on-year growth. This may reflect the twin effects of the introduction of the simple case procedure in April 2014, which is designed as a fast track review process for transactions that genuinely raise no competition concerns; and MOFCOM’s intensified effort in investigating companies that fail to notify qualifying transactions.
Freshfields Bruckhaus Deringer China’s Anti-monopoly Law 1
Table 1 – MOFCOM’s merger control cases 2008 – Q2 2015
17 17 17 16
77 77 77
0 1 0
1 1 0 0
6 4 4
0 0 1 0 0
2013 2014 2015
Notifications Accepted Cases Concluded Cases
Unconditional Clearances / Withdrawals
Source: MOFCOM data published between 2008 and 2015
Today, MOFCOM reviews roughly just as many horizontal mergers as vertical or conglomerate mergers.1 Transactions in the manufacturing sector continue to account for the majority of cases reviewed by MOFCOM.2 Transactions involving foreign companies account for 85% of MOFCOM’s caseload, whilst purely domestic transactions continue to represent a small proportion of notified transactions. The vast majority of notified transactions (87% as at the first half of 2015) involve share acquisitions and joint ventures.
Although joint ventures are not expressly listed as notifiable transactions under the AML, MOFCOM has made clear through guidance (most recently in 2014) and its decisions that all forms of joint ventures, whether established in China or overseas, are notifiable in China provided the relevant turnover thresholds are met. Unlike the EU, there is no distinction between a full function and non-full function joint venture in China; both types of joint venture are subject to review by MOFCOM.
According to 2013 data, the majority (65%) of notified transactions primarily involved horizontal overlaps, as opposed to 35% of transactions that primarily involved vertical or other relationships. A MOFCOM press release in early 2015 indicated that among the 246 cases reviewed by MOFCOM in 2014, 121 cases primarily concerned horizontal overlaps (as opposed to 125 cases primarily concerning vertical and other relationships).
According to MOFCOM, transactions involving the manufacturing sector accounted for 64% and 57% of the cases closed in 2014 and the first half of 2015 respectively.
Increased sophistication and divergence from other main jurisdictions
MOFCOM has shown increasing levels of confidence and sophistication in its decisions, and a willingness to chart its own course over the past seven years. MOFCOM has not hesitated to intervene in global transactions and impose remedies, including some that diverge from the positions taken by its more mature peers in the EU and US, particularly if Chinese interests are at stake.3 Its unique “hold-separate” remedies, which require merging parties to remain independent post-transaction until such time that MOFCOM authorizes full integration, are rarely seen in other parts of the world.4
MOFCOM’s decisions also demonstrate increased use of economic arguments, models and/or tools to assess competition effects. In complex deals, MOFCOM has relied on external economic consultants to advise on economic evidence presented by merging parties (e.g. in the IT, life sciences and commodities sectors).
In June 2014, MOFCOM surprised many in the container liner shipping community by blocking the proposed P3 network shipping alliance (P3), after both the EU and US had given the green light. The decision was MOFCOM’s second prohibition decision and marked its first ever decision to block a foreign-to-foreign merger outright, which resulted in the termination of P3.
Increased enforcement risks in the merger control arena
In 2014, MOFCOM adopted decisions that highlight MOFCOM’s efforts to encourage compliance with the merger control rules and conditions set in its decisions. MOFCOM published a decision to fine Tsinghua Unigroup for its failure to notify its acquisition of RDA Microelectronics.5 This follows an initiative announced in March 2014 to publicise MOFCOM decisions related to failure to notify cases. It is understood that as at September
2015 MOFCOM has investigated more than 50 failure-to-file cases and has imposed penalties in a number of instances. The maximum fine that MOFCOM can impose for failure to file is RMB500,000. A senior official has acknowledged in a public forum that the low figure is unlikely to have a deterrent effect. It is understood that MOFCOM will push to increase
the level of penalties during the AML’s review.
MOFCOM also fined Western Digital Corp. for its failure to comply with hold-separate remedies imposed in relation to its 2012 conditional clearance decision in Western Digital/ Hitachi HDD.
Over the past seven years, MOFCOM has adopted several regulations that address substantive and procedural aspects of the merger control regime.
In 2014, MOFCOM made efforts to clarify certain key concepts under the AML such as “control” and “undertakings concerned”.6 Such guidance is welcomed and is to be encouraged.
See, for example, Microsoft/Nokia (2014), Thermo Fischer/Life Technologies (2014), MediaTek/Mstar (2013), Marubeni/Gavilon (2013), Glencore/Xstrata (2013), Google/Motorola Mobility (2012), Western
Digital/Hitachi (2012), Seagate/Samsung (2011), Uralkali/Silvinit (2011).
See, MediaTek/Mstar (2013), Marubeni/Gavilon (2013), Western Digital/Hitachi (2012), and Seagate/ Samsung (2011).
MOFCOM did not impose the maximum fine of RMB500,000 on the basis that, inter alia, the
transaction did not raise competition concerns.
See, Guidance for Notification of Concentrations of Undertakings.
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On procedure, MOFCOM has adopted a number of regulations to streamline the review process. In April 2014, MOFCOM introduced its much anticipated “simple case” rules, which provides a less burdensome and shortened review process for transactions that do not raise significant competition concerns.7 According to data published by MOFCOM at the end of the second quarter of 2015, the majority of unconditional clearances (77%) involved simple cases. With a simple case averaging 31 days for approval, after case acceptance, each case is cleared typically in Phase I or shortly after the beginning of Phase II. During a recent closed-door seminar between MOFCOM and selected law firms from China’s antitrust community, MOFCOM indicated that it will strive towards clearing all simple cases within Phase I in future. This is a material improvement compared with the pre-existing situation and is a welcome development for merger reviews in China. That said, it is important to use the procedure only for cases that clearly qualify for simple case treatment. In June 2015, MOFCOM reportedly cleared a simple case after 162 days, after a third party challenged the basis on which the notifying parties had claimed the case qualified for simple case review.
In December 2014, MOFCOM updated its guidance on remedies, including on the kinds of structural, behavioural and so-called hybrid remedies that can be imposed, the deadline for submitting remedies, the conduct of remedy negotiations, the implementation and monitoring of remedies, varying and lifting remedies, and the liabilities to which undertakings and trustees are subject.8
Some practical observations on the merger control process in China
Over the past seven years, businesses have learnt that it can take a long time for merger clearance in China. This is largely due to MOFCOM’s limited resources, the opaque
pre-acceptance phase that has existed to date, and protracted consultations with
stakeholders. MOFCOM is understood to not consult stakeholders as extensively in simple cases.9
Whilst it takes significantly less time for transactions notified under the simple case to be cleared, obtaining clearance under the normal case procedure continues to raise timing challenges. Our past experience indicates that transactions notified under the normal review procedure with no significant competition issues often run into Phase II and can take 4–7 months to be cleared from notification. In difficult cases involving remedy negotiations, longer review periods can be expected. The total review period can exceed the statutory maximum of 180 days, where parties have pulled and refiled their notification in order to restart the review clock.10
In a welcome development, MOFCOM indicated in September 2015 plans to overhaul the pre-acceptance phase of its review process by reducing this to less than one month before the Phase I statutory review period is initiated, whether a transaction is notified under the
simple case route or not. This would amount to a material reduction in time for this part of the review process which until now has taken 6–8 weeks before parties have been able to start the formal review timetable.
The simple case thresholds are based on market shares and transaction type.
The remedies regulations require parties to submit a final remedy proposal 20 days before the end of the “further review” i.e. the Extended Phase II review period. This assumes that MOFCOM has made known its concerns, although merging parties may also submit remedies proposals before MOFCOM raises competition concerns.
In simple cases, MOFCOM publishes a public notice for 10 days during which third parties may comment on the transaction, particularly whether the transaction qualifies for simple treatment.
For example, Glencore/Xstrata (2013) and Marubeni/Gavilon (2013) took 378 days and 307 days, respectively from notification to clearance. MStar/MediaTek (2013) took 416 days and remains MOFCOM’s longest review. In 2015, Applied Materials withdrew and refiled its notification twice to MOFCOM. This would have been the longest review had the transaction not been abandoned.
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Further, starting from 15 September 2015, MOFCOM’s former Consultation Division is converted into a case review team, which will work together with the other divisions to take a case from submission through to clearance. Abolishing the Consultation Division is the most significant internal organizational change to procedures of the Anti-Monopoly Bureau11 within MOFCOM since the AML took effect. It is expected that this reform will release manpower to focus on the substantive review, so as to speed up merger reviews in China and reduce the overall time taken to clear a transaction under the simple or normal case routes. While these reforms remain to be tested, it appears likely they will be an overall positive development for companies which currently have to respect China’s merger review process for their M&A transactions.
Obtaining clear guidance on complex issues remains difficult
Although Guidance issued in 2014 sought to clarify certain key concepts such as “control” and “undertakings concerned”, these issues remain unclear – as is turnover calculation – under the AML. In practice, over the past seven years, it has proved difficult to obtain clear guidance on such issues from the Consultation Division, prompting many companies to err on the side of caution and notify transactions when potentially there have been reasonably strong arguments not to. Following the abolition of the Consultation Division, MOFCOM will in principle respond only to inquiries on preparation of a notification going-forward – and not questions of jurisdiction, which will be left to the merging parties and their legal advisers to determine.
Improvements in transparency could go further
MOFCOM has improved transparency with its publication of some general information on unconditionally cleared transactions and increasingly detailed conditional clearance decisions (with developed analyses of market definition and competition effects).12 However, as compared with some more mature jurisdictions, there remains relatively speaking little interaction between notifying parties and the case team, particularly after case acceptance. It is therefore crucial to establish and maintain effective communication channels with MOFCOM in order to track progress and to identify potential concerns at an early stage
in the process.
It is notable that MOFCOM has imposed some remedies or blocked deals in circumstances where parties would not normally expect this outcome based on competition considerations alone. The AML, however, allows non-competition factors to be considered. Such industrial policy concerns are understood to more often arise during MOFCOM’s consultation process with other ministries, trade associations or other third party market players, which may influence the predictability of the substantive outcome of the reviews, as conditions or prohibitions may be imposed in circumstances where we would not expect them under a traditional competition analysis.
The Anti-Monopoly Bureau within MOFCOM is responsible for processing and reviewing merger control notifications.
MOFCOM is obliged only to publish prohibition and conditional clearance decisions. MOFCOM has published 24 conditional clearance decisions and 2 prohibition decisions to date.
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II. Non-merger antitrust enforcement
In China, non-merger antitrust enforcement (i.e. anti-competitive agreements and abuse of dominance, together antitrust investigations) is carried out by two agencies: the National Development and Reform Commission (NDRC), which is responsible for price-related antitrust investigations; and the State Administration for Industry and Commerce (SAIC), which is in charge of non-price related antitrust investigations.
In the initial years following the entry into force of the AML, the NDRC and the SAIC focused on capacity building, raising awareness of the AML, and pursuing a few domestic cartels and trade associations with modest fines imposed only in some cases. The number of antitrust investigations surged around 2013, as the NDRC and SAIC intensified enforcement against
a number of China’s household names (such as Moutai and Wuliangye) as well as foreign companies in consumer-facing industries.13 The agencies are also beginning to scrutinize the role of local governments and abuses of administrative power that restrict or
According to data released by officials of the agencies, since the AML came into force to September 2015, the NDRC and its local branches have conducted a total of 55 antitrust investigations; the SAIC and its local branches have conducted 54 antitrust investigations.
In September 2014, the NDRC and SAIC published statistics on enforcement trends amid concerns that they were unfairly targeting foreign companies. The data suggest that less than 10% of the companies involved in the NDRC’s antitrust investigations were foreign companies (see Table 2 below).
Table 2 – Foreign vs. Domestic Companies in NDRC and
SAIC Antitrust Investigations
Companies in NDRC
(August 2008 – September 2014)
Companies in SAIC Antitrust Investigations
(August 2008 – September 2014)
Source: Press release of the NDRC, the SAIC and MOFCOM on 11 September 2014
That said, antitrust investigations involving foreign companies more often than not attract significant fines and media attention both within and outside China compared with purely domestic antitrust investigations. A number of record fines imposed since 2013 were on foreign companies. Apart from showing that China’s antitrust agencies are increasingly bold in pursuing foreign companies, this also reflects the significant turnover generated in China by the targets of the fines (see Table 3 on page 10).
In response to the rising number of cases, both the NDRC and SAIC have increased the number of
divisions in their respective antitrust divisions.
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In the initial years, antitrust investigations tended to focus on staple products such as food products and cement. More recently, various consumer-facing industries have been investigated, including LCD panels, liquor, infant formula, optical/contact lenses, gold, cars, car parts, shipping, telecoms, IT (including the licensing of Stand-Essential Patents (SEPs)), insurance, tourism, concrete, tobacco and healthcare. A number of these investigations involve foreign companies.
In March 2015, the NDRC indicated that it will focus on abuse of intellectual property rights (IPRs), the auto aftermarket, pharmaceuticals and agricultural machinery. For its part, the SAIC’s adoption of regulations on the interface between IP and antitrust suggests a focus on IPRs and sectors that are IP-intensive. Other sensitive sectors identified by the agencies as focus areas include airlines and petroleum.
Cartels (mainly price-fixing) and resale price maintenance (RPM) remain the main areas of focus, although there is a noticeable uptick in abuse of dominance cases.
As in other jurisdictions, cartels are an enforcement priority in China that has remained the case since the first published decision in 2009. In August 2014, the NDRC imposed its highest total fines yet in a (price-fixing) cartel. It fined Japanese auto parts and bearings companies for exchanging and coordinating prices in China, with fines on three companies totalling 8% of their respective China-based turnover in the preceding year. It is noteworthy that in the Japanese auto parts and bearings investigations, the whistle-blowers obtained full immunity from fines. It is understood that the whistle-blowers reported the respective cartels after the NDRC launched its investigations, which may indicate that the NDRC is more flexible in its leniency programmes compared with its counterparts in the EU and US. This investigation followed cartel investigations in, amongst others, the EU, US, Japan and Canada.
Since 2013, the NDRC has launched a series of high-profile investigations mainly targeted at RPM.14 The NDRC has taken a strict approach to RPM. Although some officials maintain that the NDRC has not adopted an “illegal per se” approach, in practice published decisions include very little discussion of effects. This contrasts with the Chinese courts’ endorsement of a “rule of reason” approach towards RPM. The level of fines in RPM cases has steadily increased since 2013, with the largest fines imposed on auto manufacturers in 2014 and in early 2015.
A number of the companies investigated also undertook by way of remedy to freeze or reduce prices. Such price commitments are rare in more mature jurisdictions such as the EU and US. The authorities have so far not focused on other types of vertical restraints such as exclusive dealing, non-competes and rebates, although some SAIC officials have stated that such restraints should be on the enforcement radar going-forward.
Abuse of dominance
There has been only a handful of abuse of dominance investigations in the past seven years. There was, however, a noticeable uptick in announced investigations in 2013-2015, including Tetra Pak (2013) and Microsoft (2014) led by the SAIC, and Inter Digital Corp. (IDC) (2014), Dolby Labs (2014) and Qualcomm (2015) led by the NDRC. Although the details of the investigations are not public, it is understood that the NDRC and the SAIC conducted dawn raids and relied on e-searches in some cases, and conducted detailed technical and economic analyses.
The NDRC launched its investigation against Qualcomm following complaints from Chinese stakeholders concerning the company’s licensing practices related to SEPs. In Qualcomm
(as in IDC), the NDRC examined some of the thorny issues around SEPs, including market definition, licensing terms and royalty rates under fair, reasonable and non-discriminatory (FRAND) principles. It is understood that the SAIC considered tying issues in Tetra Pak
and, amongst others, interoperability issues in Microsoft, mirroring investigations in other jurisdictions.
See, for example, the Moutai and Wuliangye cases (2013), Infant Formula (2013), Optical/contact lenses (2014), FAW-Volkswagen (2014), Chrysler (2014), and Mercedes-Benz (2015).
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The level of fines imposed and settlements brokered in some of these cases combined with the authorities’ willingness to pursue contentious cases that are at the frontier of antitrust analysis on the interplay between IP and antitrust would seem to confirm China’s place at
the table of serious antitrust enforcement agencies. This also serves to warn companies of the appetite and ability of the Chinese antitrust agencies to mount increasingly sophisticated investigations. With the antitrust agencies’ increased focus on abuse of IPRs, vigorous enforcement of abuse of dominance is expected to continue.
Since 2009, the SAIC and the NDRC has each published guidance on enforcement practices against anti-competitive agreements and abuse of dominance.
In April 2015, the SAIC adopted rules on the abuse of IPRs (the SAIC IPR Rules), which came into effect on 1 August. Before the rules entered into force, the SAIC adopted an Interpretation to explain how it will apply the AML to IPRs agreements and IPRs-related practices. The rules apply only to non-price related conduct and are relevant only to enforcement by the SAIC. They are the first comprehensive set of rules to regulate IP agreements and other IP practices under the AML. The SAIC IPR Rules provide, inter alia, market share-based “safe harbours” for IP agreements for the first time where such agreements are presumed lawful. This is broadly aligned with the approach in the EU in relation to technology transfer agreements. However, the SAIC IPR Rules adopt a potentially broader approach to refusals to license IP than in the EU or US, by introducing the doctrine of “essential facilities” in relation to IPRs.
As far as the NDRC is concerned, it is understood that the NDRC is taking the lead in drafting guidelines on the interface between IP and antitrust. The NDRC is also leading the drafting
of other regulations on dawn raids, calculation of fines, leniency, the suspension of investigations and exemptions, and more generally on antitrust issues in the automobile industry.
Some practical observations on non-merger enforcement in China
From a procedural perspective, the Chinese antitrust agencies enjoy greater enforcement powers (such as powers of search and seizure) and discretion in practice than many of their peers in other major jurisdictions. Whilst there are laws and procedures that are designed to protect a company’s rights of defence and due process during an investigation, a number of companies under investigation have found that these laws and procedures differ in material respects to what they are used to in other jurisdictions. Investigations are typically conducted at phenomenal speed, and responses to questions are often due in considerably shorter periods – which some companies find make for a challenging and unpredictable process. There have also been cases where some companies have felt compelled to admit wrongdoing. Although procedures exist to challenge enforcement decisions via administrative review (which involves an antitrust agency reviewing its own decision) or the courts, either route remains largely untested – which critics feel gives the antitrust agencies broad and relatively unencumbered decision-making power. It remains to be seen if such concerns will dissipate as China’s enforcement practices develop with time.
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Increasing levels of transparency
The vast majority of historic decisions in antitrust investigations in China, especially those of the NDRC, are not publicly available. However, the SAIC began publishing decisions systematically from 2013, which coincides with the uptick in enforcement activity, and
the NDRC from late 2014.
The few published decisions provide some insight on penalties under the AML. The AML enables the NDRC and SAIC to confiscate illegal gains generated from unlawful conduct and to impose fines. To date, neither the NDRC or SAIC appears to have confiscated illegal gains in published decisions under the AML.15 The decisions reveal that fines are currently calculated based on the turnover generated in China by the company under investigation instead of its global turnover, or the turnover of the corporate group to which it belongs.
Similar to the evolution of merger control decisions, the length and level of detail in decisions has increased gradually. That said, in the few published decisions, the agencies’ claims are still typically high-level and stop short of providing detailed legal reasoning or economic analysis. The limited information in decisions does not provide much guidance on how the authorities interpret and apply the AML. Therefore, the decisions are often of limited practical value to companies looking to them for guidance on compliance of their commercial practices under the AML.
Increased detection of anti-competitive conduct and enforcement risk
Most of the antitrust investigations in China in recent years follow complaints16 and, increasingly, leniency applications. The AML has a leniency regime for companies that voluntarily report unlawful conduct and provide “key evidence” to the agencies during an investigation. In 2010, the NDRC and SAIC each adopted implementing rules which, amongst others, gives effect to China’s leniency regime. A number of companies have successfully filed leniency applications since the Sea Sand cartel case in 2012. Recent examples include the Japanese auto parts and bearings cartels where two companies obtained full immunity from fines; and the Zhejiang car insurance cartels where three insurance companies received full immunity or reduced fines. The noticeable uptick in the use of the leniency programme has increased the likelihood of whistle-blowing, increasing the enforcement risk for companies that engage in cartels.17
Unlike in most other jurisdictions where leniency programmes apply only to cartel cases, in China, companies may apply for leniency in cases involving vertical agreements if the authorities are investigating a number of the companies in the same industry in respect of the same anti-competitive conduct. In the Infant Formula case, for example, involving RPM, three companies were exempt from fines. In addition, some of the companies under investigation received lenient treatment for being cooperative.
The NDRC confiscated illegal gains in the LCD panels cartel, although this was under the Price Law. In September 2014, the Jiangsu AIC decided not to confiscate illegal gains in relation to an abuse of dominance finding against the Pizhou branch of Xuzhou Tobacco. The Jiangsu AIC determined that given that the sale of tobacco is organized under a state-monopoly and the government determines the price and quantities sold, the company’s conduct could not generate additional revenue.
See, Press release of the NDRC, the SAIC and MOFCOM on 11 September 2014.
According to a NDRC statement in February 2015, it saw an increased number of cases triggered by leniency applications in 2014.
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Increasing severity of fines
Until recently, the NDRC and SAIC typically tackled relatively small domestic companies and domestic cartels, and fines imposed (if any) had typically been relatively low. As shown in Table 3 below, the level of fines imposed on foreign and domestic companies for antitrust infringements under the AML has increased dramatically from less than RMB10 million in 2011 to RMB1.24 billion (approximately EUR150 million or USD200 million) in August 2014 in the Japanese auto parts and bearings cartels, and reached a new high of RMB6.088 billion (approximately EUR750 million or US$975 million) in the NDRC’s landmark abuse of dominance decision in the Qualcomm case in February 2015.18
Table 3 – Penalties in recent selected investigations (2013–2015)
Linear (US$ million)
17.8 40.5 5.16
penalty before 2013
Panels (Jan 2013)
Spirits (Feb 2013)
Formula (Aug 2013)
Parts/ Bearings (Aug 2014)
Insurance Volkswagon (Sept 2014) (Sept 2014) (Sept 2014)
Benz (May 2015)
Source: NDRC and SAIC published decisions 2013–2015
III. Civil litigation
Although somewhat overshadowed by powerful administrative enforcement activities, private enforcement of the AML has also intensified over the past seven years, showing it to be an important supplement to administrative enforcement. Statistics provided by a chief judge at the Supreme People’s Court (SPC) suggest that the Chinese courts accepted a total of approximately 60 cases between 2008 and 2011, while in 2013 the number of cases spiked to more than 70 in that year alone and to more than 80 in 2014. It is assumed that this increase is largely a result of the long-awaited Judicial Interpretation by the SPC on private claims under the AML, which was published in 2012. The Judicial Interpretation introduced certain important procedural clarifications in antitrust private actions including, amongst others, the reversal of the burden of proof from the plaintiff to the defendant in actions pertaining to anti-competitive agreements. As at September 2015, Chinese courts had accepted a total of more than 270 antitrust private actions since 2008, with about five of them at SPC level.
Unlike in the EU and the US where follow-on claims are common, in China most claims are stand-alone claims (i.e. where there is no prior public enforcement decision). In addition, according to the SPC, a greater number of cases concern abuse of dominance than anti- competitive agreements. The courts are also beginning to see follow on damage claims, cases related to abuse of administrative power and cases challenging an agency’s penalty decision.
Three landmark cases highlight developments on the litigation front: Qihoo vs. Tencent (2014),
Huawei vs. IDC (2011), and Ruibang vs. Johnson & Johnson (2013).
The fine imposed is one of the single largest fines ever imposed on a company for infringement of
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Qihoo vs. Tencent was the first antitrust case heard by the SPC. Qihoo, one of China’s major cyber security software providers, brought an action in 2011 against Tencent, the instant messaging service leader. The case concerned exclusionary practices and anti-competitive bundling. The SPC’s ruling provides guidance on market definition and assessing abuse of dominance in the Internet and IT sectors in an antitrust case concerning one of the most dynamic industry sectors.
Huawei vs. IDC involved a range of issues at the intersection between IP and antitrust. Huawei brought two actions against IDC for (1) abuse of dominance and (2) failure to apply FRAND terms for licensing its SEPs. The first instance court ruled in favour of Huawei and upheld a FRAND royalty rate for IDC’s Chinese SEPs. IDC appealed against the judgment before the SPC. This is the first Chinese antitrust private action in which a court has held that each SEP constitutes a separate relevant product market, with the result that IDC was held to have a market share of 100% in each of its SEP markets. This ruling is consistent with the NDRC’s decision in 2015 in the Qualcomm case, although this approach is not expressly reflected in the new SAIC IPR Rules.
Ruibang vs. Johnson & Johnson was the first private antitrust action involving a vertical agreement and the first private antitrust action in which a Chinese court has ruled in favour of the plaintiff. Most noticeably, the court devised a detailed “rule of reason” approach for assessing the anti-competitive effects of RPM, including the level of competition in the relevant market, the market power of the defendant, whether the defendant has the
intention of restricting price competition and whether the pro-competitive effects of the RPM outweigh its anti-competitive effects. This rule of reason approach is not entirely consistent with the NDRC’s approach to RPM. It remains to be seen how the courts and the NDRC will reconcile the divergence in evaluating RPM practices.
In just seven years, China has become one of the world’s most influential antitrust regimes. Not only has it established an important merger review system which is at the forefront of executives’ minds in global transactions, it has also conducted bold antitrust investigations leading to multi-million dollar fines, and it is developing its own body of antitrust jurisprudence through high-profile private antitrust actions.
With respect to merger control, MOFCOM is clearly prepared to intervene in high-profile global transactions. This trend is expected to continue. The relative lack of certainty as well as transparency of MOFCOM’s review process continue to cause practical challenges for international transactions, and as such parties are advised to plan their notification strategy carefully in advance, and in negotiating conditions precedents in merger transaction documents. While cases that qualify for simple treatment under the AML have benefited from a faster review process, it is still important to prioritize China merger control filings in cross-border transactions, so as to avoid Chinese merger clearance becoming the gatekeeper for closing global transactions. Companies should not assume that just because other agencies have cleared the transaction unconditionally, or because, from a purely competition law perspective, there do not appear to be any significant substantive issues, that their cases will not be viewed as problematic by MOFCOM. In addition to standard competition analysis, companies need to seek local advice to identify non-competition concerns early and have a game plan to address such concerns, to avoid the risk of non-competition issues creating surprises in the review process, and in the worst scenario, derailing the transaction.
For non-merger enforcement, the NDRC and the SAIC have built up an enforcement reputation within and outside China. Cartels involving multinational corporations are now an important part of the Chinese authorities’ work stream, but it remains to be seen whether the Chinese antitrust agencies will join coordinated international cartel investigations in the future. It is clear that the agencies’ scrutiny of vertical restraints and abuse of dominant market positions is set to continue and grow in intensity. The historic enforcement records of the two agencies indicate an apparent enforcement focus on consumer-facing industries. The shift in focus to abuse of IPRs since 2014 and recent high-profile investigations in IP-driven sectors foreshadow closer scrutiny of IP-related anti-competitive conduct.
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Given the nature of antitrust investigations in China, companies subject to or affected by NDRC or SAIC investigations are advised to engage external legal counsel familiar with Chinese antitrust investigations as early as possible, to reduce the risk of miscommunication when interacting with the enforcement authorities, and to protect the company’s interests to the extent possible. It is also important for multinational companies active in China to seek legal advice on compliance of their business practices with Chinese antitrust law, and, if necessary, conduct an internal antitrust audit to identify and manage compliance risks. Companies with consumer-facing businesses, which seem to be subject to higher antitrust risks in China should ensure that their staff receive proper training and enhance their internal awareness of antitrust compliance.
In addition to enhanced administrative enforcement, multinational companies cannot afford to overlook private actions under the AML. In particular, the SPC’s Judicial Interpretation of the AML is expected to continue to encourage private actions. Specifically, companies with significant market power and IP portfolios will need to be particularly careful in managing the potential increase in antitrust litigation risks in the future.
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