This briefing examines the key legislative and enforcement developments under the AML over the past five years and identifies likely future enforcement trends.
On 1st August 2013 China’s Anti-Monopoly Law (AML) celebrated its fifth anniversary. The past five years have witnessed the development of an increasingly complete regulatory framework under the AML and an intensification of its enforcement by the PRC’s anti-monopoly enforcement agencies. While many of the legislative and enforcement efforts of the PRC authorities have attracted praise, as would be expected of a young antitrust regime, certain aspects of the regime remain to be improved.
This briefing examines the key legislative and enforcement developments under the AML over the past five years and identifies likely future enforcement trends.
MOFCOM has been active in enforcing the merger control regime under the AML. Over the past five years, MOFCOM has reviewed a total of 643 cases. As reflected by the statistics in Figure 1, below, MOFCOM’s case load grew significantly between the introduction of the AML and 2011, but appears to have since stabilized.
In terms of the type of transactions that MOFCOM is reviewing, according to MOFCOM, the majority (65 per cent) of notified cases primarily involve horizontal overlaps (as opposed to 35 per cent of transactions which primarily involve vertical or other relations). A significant proportion (36 per cent) of the transactions reviewed by MOFCOM are joint ventures). For a long time following the law entering into effect, the notifiablity of joint ventures had been ambiguous, as joint ventures are not explicitly listed as a type of notifiable transaction under the AML. In 2012, MOFCOM made it clear in its new notification form that joint ventures can be notifiable. Unlike in other jurisdictions such as the EU, all forms of joint ventures in or outside China (even not fully-functional, e.g. production joint ventures which supply products to their joint venture parents without any market facing functions) may be subject to the filing requirement in China. This explains the relatively high percentage of joint ventures cases that have been notified to MOFCOM so far.
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While the number of cases it has reviewed has increased year-on-year, MOFCOM has also become increasingly confident and sophisticated in its competition assessment of mergers. This is evidenced by a comparison of the detailed drafting of recent conditional clearances with that of earlier announcements.
While still a relatively young agency, MOFCOM has not hesitated to impose remedies on global transactions where other jurisdictions have not, or to act in divergence from its peers in more mature jurisdictions when imposing remedies (see, for example, the recent MOFCOM conditional clearance decisions in Glencore/Xstrata and Marubeni/ Gavilon). Notably, 2012 saw the highest number of interventions in transactions with six remedies imposed. Finally, it is notable that MOFCOM has disclosed that it has fined or warned the parties to 8 transactions that did not notify, although it has not chosen to publish its penalty decisions.
On the legislative front, over the past five years, MOFCOM has issued a significant number of regulations addressing both substantive and procedural aspects of the merger control regime. In terms of substantive issues, the issues of notifiability and market definition have been addressed, but measures relating to the definition of the key terms of ‘control’ and ‘undertaking’ are yet to be finalised. On the procedural side, MOFCOM has issued a number of regulations that address the review process in detail. It has also recently updated the notification form, clarifying some issues surrounding the notification of joint ventures. The agency is further currently drafting rules to distinguish “simple” cases, with a view to allowing ‘simple’ cases to be cleared within Phase I of the merger review process. These ’simple case’ rules, along with regulations addressing the imposition of merger remedies, are expected to be finalised in the coming year.
Issues relating to the China merger control process that carry implications for filing parties
Firstly, it is perceived that MOFCOM is under-staffed and that this has affected its ability to accommodate its ever increasing merger review case load. In our experience, MOFCOM’s review currently takes a minimum of 4-5 months to complete from the time of submission. As the AML imposes a suspensory obligation, which prevents companies from closing a transaction prior to receiving clearance from MOFCOM, this long review duration has a significant impact on the timing and planning of global transactions. It is hoped that the planned “simple” case rules will enable MOFCOM to clear straightforward transactions more quickly.
Second, in terms of transparency, while MOFCOM has operated in a transparent manner in its legislative activities, has become increasingly transparent in publishing details of its case load and has recently included more detailed reasoning in its conditional clearance decisions, on the other hand, however, compared with other more mature competition agencies, there are fewer interactions (e.g. state-of-play meetings) between filing parties and the case team in China during the review process. Therefore, the parties often find it difficult to stay well-informed of the status of the review and the potential concerns MOFCOM might have. In addition, MOFCOM is obliged to publish its reasoned decisions only if it intervenes in a transaction. To date, there have been only 20 published decisions, providing insufficient guidance to companies on how MOFCOM reviews a specific transaction. It would be helpful were MOFCOM to publish a number of unconditional approval decisions, or at least to disclose the approach adopted in its review (e.g. in defining the relevant markets).
Finally, while MOFCOM has consistently emphasized that its review focuses on competition factors above other aspects, the AML appears to mandate MOFCOM to take non-competition concerns and the public interest into account and it is unclear to what extent these factors may affect the outcome of the review process. From a review of MOFCOM’s conditional approval decisions, these factors have arguably been present in MOFCOM’s reasoning in a number of remedies decisions, in which atypical behavioural remedies have been imposed, seemingly to address non-competition concerns.
Non-merger antitrust enforcement
The NDRC and SAIC enforce respectively against price and non-price related breaches of the AML provisions governing anti-competitive conduct, including horizontal agreements, vertical agreements and abuse of dominance.
In the initial period following the introduction of the AML, the NDRC and SAIC engaged in a period of capacity building refraining from pursuing a significant number of investigations. Over the past 24 months, however, the agencies have been instigating investigations with increased frequency and levying increasingly large fines against non-compliant parties. The NDRC has now concluded more than 30 cases and the SAIC has concluded at least 12. The agencies are now adding additional resources and coordinating more closely with existing resources at the local level and it appears that the upsurge in enforcement activity is set to continue (by relying on increased and better trained local capacity).
One interesting aspect of the PRC’s system is the jurisdictional split between the two non-merger agencies, which is a legacy of their separate roles in enforcing the Price Law (NDRC) and the Law against Unfair Competition (SAIC). In cases involving both price-related and non-price-related violations of the AML, this split jurisdiction raises the question as to which agency would have jurisdiction. As of today, there does not appear to be close coordination between the two agencies and it remains to be seen how these two agencies will address their overlapping jurisdictions in complicated cases. In a recent case, the Hunan AIC fined a number of insurance companies and chambers of commerce for setting up insurance cartels in cities throughout the province. Several months after this, the local DRC announced the results of a separate investigation in another city, in the same province, against a number of the same companies, for the same conduct. This highlights the overlapping jurisdiction of the two agencies. A senior NDRC official recently suggested that, in future cases involving both price and non-price related breaches of the AML, the NDRC and the SAIC will investigate jointly.
It is also worth noting that the two agencies have steadily increased their international cooperation over the past five years, signing MOUs with peer regulators throughout the world, most recently with the EU Commission in 2012 and the US agencies in 2011.
In terms of priorities, the agencies have investigated cases in a broad range of consumer-facing sectors, such as construction, agriculture, consumer goods, insurance, pharmaceuticals, and automobiles. The SAIC has recently stated that it will continue to focus its enforcement efforts on consumer-facing industries in the near future.
Horizontal agreements have been a priority for both the NDRC and SAIC over the last five years. Most recently, two cases have signaled the continued importance that the Chinese antitrust authorities pay to enforcing against cartels. In October 2012, the NDRC investigated and fined a cartel involving 20 sea sand extraction companies in Guangdong. These companies had coordinated pricing leading to a doubling of the downstream price of sea sand as used in construction materials. This case is notable in that it appears to be the first publicly announced case in which a company has taken advantage of the leniency provisions of the AML, whereby the company was awarded 50 per cent leniency with its fine reduced to 5 per cent of turnover. The disclosure of the use of the leniency regime by a company in this case may increase the likelihood of whistle-blowing in future cases, increasing the enforcement risk for companies engaged in cartel behaviour.
Most recently, the NDRC announced, in January 2013, China’s first enforcement action against a cartel that operated internationally, involving six international manufacturers of LCD flat panel displays. The NDRC’s penalty, while significantly lower than that imposed by the EC, is still a high penalty for China, at RMB353 million (approx. USD56.7 million). Interestingly, this action was brought under the Price Law, due to the fact that the cartel operated prior to the promulgation of the AML. Indeed, the NDRC commented that, had the cartel been operating following the introduction of the AML, the fines would have been based on turnover and therefore significantly higher. This case suggests that the NDRC has become increasingly confident in joining other major antitrust agencies in investigating international cartels, underlining the China-specific risks for companies that have extensive business activities in China and that have been involved in international cartels in other jurisdictions.
It is notable that, in the initial years following the introduction of the AML, the NDRC based its investigations on the Price Law and levied relatively light fines on the undertakings concerned. This was evident in the Rice Noodles (fines of between RMB30,000 and RMB100,000 or approx. USD4,500 to USD16,500 at today’s rates), Sterilised dining utensils (no fines), and Cold Storage (RMB80,000 or approx. USD13,000 at today’s rates) cases that took place in 2008-2009. However, recent decisions are strong indications that the NDRC and SAIC are both comfortable in launching actions under the AML and fines are increasingly reaching the level of ‘turnover’ sanctions under the AML, which are between 1-10% of the previous years’ turnover of the infringing undertaking.
In recent months, the NDRC has launched a series of high-profile enforcement actions against restraints in vertical agreements, particularly with regard to resale price maintenance (RPM). Following a reported investigation into RPM in the automotive industry in 2012, in February 2013, the NDRC levied penalties of RMB247 million (approx. USD39.5 million) and RMB202 million (approx. USD32.3 million) against two state-owned enterprises, Moutai and Wuliangye, respectively, for imposing vertical restraints in the course of commercial agreements, including RPM clauses.
These record fines were closely followed by an investigation into nine Chinese and international infant formula companies for RPM and vertical restraints. Following several weeks of investigation, the NDRC announced fines totaling RMB670mn (approx. US$110mn) on six of the manufacturers, with full immunity granted to three manufacturers. This was the first case, involving an international company, in which the NDRC has specifically calculated fines on a turnover basis. For a long time, there was uncertainty as to whether the fines under the AML are calculated on the basis of the turnover of the PRC entities of the undertakings concerned, or are instead calculated on the basis of the global turnover of the undertakings concerned. It is interesting to note that the turnover included as the basis for the fines in this case was the local turnover of the PRC entities of the brands in question. Another interesting point to note with regard to this investigation is that, as a result of the investigation, a number of the manufacturers in question have implemented significant price reductions for their products. It is unclear whether these price reductions are part of the remedies offered by the relevant manufacturers to the NDRC to settle their cases. It is worth noting that it would be rare for pricing commitments to be offered to, or requested by, a competition regulator in the EU and US. If the NDRC indeed endorsed these commitments, this would partly reflect its historic and continuing role as a pricing regulator.
Despite the NDRC’s recent active enforcement actions against RPM, the NDRC has not clarified in its decisions whether RPM is subject to a ‘rule of reason’ or is deemed ‘per se’ illegal. Given that these decisions are very brief and contain little analysis and reasoning, they inevitably invite people to question whether the NDRC is leaning towards adopting a ‘per se’ illegal approach with respect to RPM.
Abuse of dominance
Abuse of dominance has been subject to fewer administrative enforcement actions than have anti-competitive agreements, to date. However, in a landmark case, the NDRC opened a high-profile investigation into two state-owned telecommunications companies, for abusing their dominance in pricing discriminately wholesale access to their broadband networks. In this case, although the NDRC has not published its decision, it has been reported that the NDRC has accepted a three year behavioural remedy, with both companies so far complying with the NDRC’s terms.
In June 2013, the SAIC is reported to have launched an investigation into Tetra Pak for tying the sale of its packaging machines to packaging materials. It is notable that the SAIC has deployed considerable resources in this investigation, mobilizing investigators in over 20 provinces and municipalities. Another interesting aspect of this case is that the SAIC states that it has recovered electronic evidence that had previously been deleted. This demonstrates that the agencies are becoming increasingly technically sophisticated in carrying out evidence collection.
Since 2009 both the SAIC and the NDRC have issued guidance on fundamental aspects of their enforcement against monopoly agreements and abuse of dominance. As the agencies become more sophisticated, it is expected that more detailed guidelines on substantive issues such as vertical restraints and the calculation method for fines will be issued. In recent months, the SAIC has been preparing administrative rules on abuse of IPR which, among other measures, provide that dominant undertakings may not discriminately refuse to license or refuse to licence essential IP, may not engage in bundling or tying, and may not attach other unfair trading conditions.
In addition, the draft rules provide that horizontal agreements involving IPR, which the SAIC cannot prove restrict or eliminate competition, can take advantage of safe harbour where the combined market share of the undertakings involved is less than 20 per cent (or where there are at least four other undertakings with closely substitutable IPR). Vertical agreements are subject to a safe harbour of 30 per cent market share per undertaking (or where there are at least two other undertakings with closely substitutable IPR). Finally, the rules aim to curtail patent ambushes by members of standards setting organisations.
Private enforcement of the AML has seen a similar rise in intensity over the past five years. Unofficial statistics provided by a judge of the Supreme People’s Court (SPC) suggest that a total of approximately 60 cases were accepted by the courts between 2008 and 2011 while, in 2012, the number of cases spiked to nearly 100 in that single year alone. It is assumed that this rise is largely a result of the long-awaited judicial interpretation by the SPC on private claims under the AML, which was released in May, 2012. This judicial interpretation clarified some outstanding issues of standing and, notably, introduced procedural changes in antitrust cases including, among other changes, the reversal of the burden of proof from the plaintiff to the defendant in actions pertaining to cartel agreements.
In terms of the types of cases being heard in China, while many early cases were brought by private lawyers, in their capacity as consumers, against companies as ‘test’ cases, and were heard under Chinese contract or tort laws, the number of such cases has decreased and antitrust cases involving real commercial disputes between companies are now more regularly being brought before the courts. Unlike in the EU and US (where follow-on claims are more common), in China most private claims are stand-alone claims without prior public enforcement decisions. In addition, according to the SPC, a greater number of cases concern abuse of dominance than anti-competitive agreements.
Of the hundreds of private actions so far, a number have attracted significant attention. In the high-profile case Qihoo 360 v Tencent (2012), Qihoo 360 accused Tencent of abusing its position of dominance in the market of online instant communications services. The Guangdong Higher People’s Court issued a detailed decision in favour of Tencent, which included extensive discussion on the complex issue of market definition in the internet sector and the alleged abusive conduct, ruling that Qihoo had failed to establish Tencent’s dominance. This case is now on appeal before the SPC.
Another notable case that has attracted significant public attention, as it sought to address fundamental questions regarding the treatment of vertical agreements (in particular, RPM) under the AML, is Ruibang v Johnson & Johnson (2012). In this case, the first instance court’s decision suggested that an effects based analysis is required to establish an infringement of article 14 of the AML, which governs vertical agreements, rather than vertical restraints in such agreements being ‘per se’ illegal. This ‘rule of reason’ approach was affirmed by the Shanghai Higher People’s Court on appeal, although the appellate court reversed the judgment of the lower court and ordered Johnson & Johnson to pay damages to Ruibang for engaging in RPM.
In another recent notable case, in early 2013, in two actions which are collectively referred to as Huawei v InterDigital, the Shenzhen Intermediate People’s Court found for Huawei against InterDigital for abuse of dominant position in the course of licensing its standards-essential patents (SEPs) to Huawei. The court also capped the royalties payable to InterDigital by Huawei for its SEPs, the F/RAND (fair, reasonable and non-discriminatory) rate. InterDigital has indicated that it will appeal these decisions.
With respect to merger control, the number of transactions under review by MOFCOM has risen to a relatively high figure. Furthermore, MOFCOM is regularly intervening in high-profile global transactions. This trend is expected to continue. The lack of certainty as well as transparency of the MOFCOM review process may cause practical challenges to companies contemplating international transactions. Filing parties are therefore advised to exercise caution and, where necessary, to seek advice when planning deal timetables, (particularly where the deal is in the form of a public bid) and in negotiating the conditions precedents in merger transaction documents. Given the relatively long review timeline, companies are also advised to prioritize the PRC merger filing, when they are engaging in a cross-border transaction which triggers multijurisdictional filings, so that Chinese merger clearance will not be the gatekeeper for the closing of the transaction. As MOFCOM is also increasingly confident in taking a different approach from that taken by other major competition authorities and as non-competition factors appear to play a role in the review process, companies should not assume that just because other agencies have unconditionally cleared their transaction or because, from a purely competition analysis perspective, there do not appear to be any substantive issues, that their cases will not prove to be problematic in China. In addition to typical competition analysis, companies need to seek local advice to identify the non-competition concerns early on 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.
In terms of non-merger enforcement, the NDRC and SAIC are gradually building up their enforcement reputation within and outside China. International cartels may now be deemed a focus (following the LCD case), and it appears that the NDRC’s campaign against vertical restraints is set to continue. The historic enforcement records of the two agencies and recent statements by the SAIC indicate that consumer-facing industries such as pharmaceuticals, consumer goods and food products (such as infant formula milk power) are at a higher risk of enforcement in China.
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 and the SAIC’s upcoming IP rules are expected to encourage private actions. Dominant firms with significant IP portfolios will need to be more careful in managing the potential increase in antitrust risk when leveraging their IP rights, in the future.