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What is the general attitude of business and the authorities to competition compliance?
China introduced the Antimonopoly Law (AML) in 2008, which has been in effect for less than a decade, and competition compliance is, therefore, still a novelty in China. After years of developing the AML, companies are beginning to understand the importance of competition compliance. In the past, more foreign companies than Chinese companies paid attention to competition compliance. More and more Chinese companies are now placing an emphasis on competition compliance, either to have it done within the company as a whole or as a separate compliance programme.
Government compliance programmes
Is there a government-approved standard for compliance programmes in your jurisdiction?
There is no such government-approved standard for compliance programmes in China yet. The Compliance Management Systems Guidelines (Compliance Guidelines) was drafted and published by China National Institute of Standardisation in February 2017 to solicit public comments. The Compliance Guidelines were officially published on 29 December 2017 and would come into effect on 1 August 2018. The Compliance Guidelines are applicable to all sectors of compliance programmes and, therefore, are applicable to competition compliance as well. These guidelines are not binding, but provide guidance on compliance management systems and recommended practices.
Applicability of compliance programmes
Is the compliance guidance generally applicable or do best practice and obligations depend on a company’s size and the sector of the economy it operates in?
The Compliance Guidelines are applicable to all types of organisations, while the extent of the application of these guidelines depends on the size, structure, nature and complexity of the organisation. In practice, companies may follow the guidelines discretionarily.
If the company has a competition compliance programme in place, does it have any effect on sanctions?
Based on our experience, while there is no explicit expression provided in the laws or regulations that a competition compliance programme is a factor for lighter or mitigated penalties in China, in practice, a competition compliance programme is usually a factor taken into consideration by the AML enforcement agencies. However, having a competition compliance programme will not exempt the company from punishment. A competition compliance programme may contribute to mitigating penalties in two ways: first, the AML enforcement agencies will regard the company itself to be in compliance with the AML while only some employees of the company fail to follow the law; second, as part of rectification measures, a competition compliance programme is commonly listed as a requirement. For example, in the public notice of the Medtronic case, the National Reform and Development Commission (NDRC) listed Medtronic’s rectification measures, which include reinforcing training employees to recognise antitrust and improving the company’s competition compliance programme. In the Medtronic case, we understand that the competition compliance programme was considered to be ‘taking the initiative to eliminate or lessen the harmful consequences brought about by the unlawful act’ listed in article 27(1) of the Law of the People’s Republic of China on Administrative Penalties (the Administrative Penalties Law), which is a factor for lighter or mitigated penalties, and thereby might have contributed to mitigating sanctions imposed on Medtronic.
In addition, the Draft Guidelines on the Application of the Leniency Programme to Cases Involving Horizontal Monopoly Agreements (Draft Leniency Guidelines), issued by the National Development and Reform Commission (NDRC) on 2 February 2016 to solicit public comments, require that, in addition to voluntarily reporting the facts of a monopoly agreement and providing important evidence, the applicants should also cooperate with the AML enforcement agencies’ investigation in a prompt, continuous, comprehensive and faithful manner. To have a competition compliance programme in place would be considered continuous and comprehensive cooperation.
Implementing a competition compliance programme
Commitment to competition compliance
How does the company demonstrate its commitment to competition compliance?
A company’s commitment to competition compliance should be demonstrated at all levels of the company organisation. In practice, a company may demonstrate its commitment to competition compliance in many ways, depending on the situation, including but not limited to the following:
- providing competition compliance guidance and competition compliance training with mandatory attendance requirement;
- examining officers and employees’ competition compliance knowledge, and considering the resulting grade as one of the factors when deciding key performance indicators, promotions or bonuses;
- requiring competition compliance from top to bottom to make sure that employees put a high value on competition compliance; and
- establishing the position of compliance officers or notification system, and requiring officers and employees to consult or notify compliance officers or outside counsel before they conduct any activity with potential risks.
While under investigation, a company should demonstrate its commitment to competition compliance by cooperating with enforcement agencies, and rectify existing problems by setting up or improving a competition programme.
What are the key features of a compliance programme regarding risk identification?
As the first step in a compliance programme, risk identification means to identify the key competition law risks faced by the company. Article 4.6 of the Compliance Guidelines provides that compliance risks should be identified by relating its compliance obligations to its activities, products, services and relevant aspects of its operations in order to identify situations where non-compliance can occur. The causes for and consequences of non-compliance should be identified as well. It is generally advisable that business operators develop a methodology for mapping internal and external antitrust compliance risks as part of the company’s general risk management and controls systems, consistently evaluate the effectiveness of control activities developed and deployed, and run regular checks (deep dives) to test the company’s assumptions about residual risk.
What are the key features of a compliance programme regarding risk assessment?
As the second step of compliance programme, risk assessment means to work out how serious the identified risks are. Article 4.6 of the Compliance Guidelines provides that the company should analyse compliance risks by considering the causes and sources of non-compliance and the severity of their consequences, as well as the likelihood that noncompliance and associated consequences can occur. Consequences can include, for example, personal and environmental harm, economic loss, reputational harm and administrative liability. Risk evaluation involves comparing the level of compliance risk found during the analysis process with the level of compliance risk the organisation is able and willing to accept. Based on this comparison, priorities can be set as a basis for determining the need for implementing controls and the extent of these controls. For example, if the company has identified a risk of cartel activity, staff such as senior managers, employees in the sales and marketing departments and employees dealing with competitors may be identified as being at high risk, while staff such as employees in back-office and HR may be identified as being at low risk. The compliance risks should be reassessed periodically if certain conditions exist.
What are the key features of a compliance programme regarding risk mitigation?
As the third step of the compliance programme, risk mitigation means to set up appropriate policies, procedures and training with the aim that the risks have identified do not occur, and to ensure that company will detect and deal with the risks when they occur. In the Compliance Guidelines, article 8.1 provides that the company should control operational planned changes and review the consequences of unintended operational changes, and take action to mitigate any adverse effects if necessary. Article 10.1.2 provides that, when a company is required by law to report non-compliance, it should inform authorities in accordance with the applicable regulations or as otherwise agreed. When the company is not required by law to report noncompliance, they may consider voluntary self-disclosure of non-compliance to authorities to mitigate the consequences. In this respect, the leniency programme under the AML is a good example for such voluntary self-disclosure.
To mitigate the identified risks, a company may enforce a culture of compliance through its policies and procedures to integrate competition law compliance into the day-to-day activities of the business. A company may also provide competition law training, which may vary for different staff, for example, higher risk employees will be required to have more in-depth training than medium risk employees. The training might be supported by other activity such as testing the employees’ knowledge and understanding of competition law and the company’s policies.
Compliance programme review
What are the key features of a compliance programme regarding review?
As the fourth step of A compliance programme, review means to review the above three steps as well as company’s commitment to competition compliance on a regular basis. Article 10.1.2 of the Compliance Guidelines provides that the company should maintain accurate and up-to-date records of its compliance activities to assist in the monitoring and review process and demonstrate conformity with the compliance management system. Article 9.3 of the Compliance Guidelines provides that top management should review the company’s compliance management system, at planned intervals, to ensure its continuing suitability, adequacy and effectiveness. The depth and frequency of such reviews depends on the nature of the company and its policies. Company should retain documented information as evidence of the results of management reviews and a copy should be provided to the governing body.
Since the key competition law compliance risks faced by a company might change over time, a company should regularly review all stages of its process to ensure that there is a clear and unambiguous commitment to compliance from the top down, and the risks identified or the assessment of them have not changed and that the risk mitigation activities remain appropriate and effective.
Dealings with competitors
Arrangements to avoid
What types of arrangements should the company avoid entering into with its competitors?
In China, the main law governing cartel activities is the AML. Under the AML, competing business operators should avoid reaching the following monopoly agreements, which are prohibited by article 13:
- fixing or altering the prices of commodities;
- restricting the production quantity or sales quantity of commodities;
- dividing sales markets or procurement markets of raw materials;
- restricting the procurement of new technologies and new equipment, or restricting the development of new technologies and new products;
- jointly boycotting transactions; or
- any other monopoly agreement as defined by the AML enforcement authority of the state council.
‘Monopoly agreements’ in article 13 can take multiple forms, including agreements, decisions or other concerted conducts that eliminate or restrict competition.
What precautions can be taken to manage competition law risk when the company enters into an arrangement with a competitor?
In practice, it is common that competing companies cooperate in the collective purchase and sale of goods, etc. However, such cooperation may have an anticompetitive effect on the market, due to the potential risks of exchanging sensitive information. In this regard, when the company enters into an arrangement with a competitor, they may take the following precautions to prevent dissemination of sensitive information:
- training and taking awareness-raising measures for the personnel;
- monitoring measures (eg, identification of the processes involving contacts with competitors, internal or external audits, reports to be submitted to the competition authority); and
- inducing or sanctioning measures (elements for compliance with competition rules within the sales objectives for employees, employment contracts that include the possibility of dismissal in case of personal participation in a competition infringement).
What form must behaviour take to constitute a cartel?
Pursuant to the AML, a cartel may be conducted in both formal agreements and other informal agreements like decisions and concerted actions. The agreements may also be concluded in written or verbal form.
Information exchange alone does not constitute a cartel under the AML. However, if companies have any followed agreements or concerted actions, those behaviours together may be construed as constituting a cartel or reaching monopoly agreements.
Under what circumstances can cartels be exempted from sanctions?
The AML provides general exemptions in article 15 and a specific exemption for the agricultural industry in article 56. Pursuant to article 15 of the AML, cartels can be exempted from sanctions if a business operator is able to prove any of the following:
(i) the objective is for technological improvement or research and development of new products;
(ii) the objective is to raise product quality, lower costs, improve efficiency, standardise product specifications or standards, or implement specialisation;
(iii) the objective is to increase the efficiency of small and medium-sized enterprises and to strengthen their competitiveness;
(iv) the objective is to fulfil public interest objectives such as energy conservation, environmental protection and disaster relief;
(v) the objective is to alleviate a serious drop in sales quantity or obvious overproduction in times of recession;
(vi) the objective is to protect legitimate interests in foreign trade and economic cooperation; or
(vii) any other circumstances stipulated by the laws and the state council.
In addition, a company that intends to invoke exemptions under items (i) to (v) above must also prove that the agreement it has entered into would not severely restrict competition in the relevant market, and that the agreement would bring about benefits for consumers.
For the agricultural industry, article 56 of the AML provides that the AML will not apply to cooperative or collaborative acts between agricultural producers and rural economic organisations in business activities such as the manufacturing, processing, sales, transportation and storage of agricultural products. There are no other industry-specific exemptions available thus far.
In the judicial area, there is a litigation case in which article 15 was applied. In Shenzhen Huierxun v Shenzhen Pest Control Association (No. 155 of the Third Civil Division of the High Court in Guangdong (2012), the Shenzhen Intermediate People’s Court and Guangdong High People’s Court both decided that the price agreement signed by the Shenzhen Pest Control Association with its members fell under the scope of article 15(1)(iv), thereby the agreement was exempted from article 13 and 14 of the AML. The courts considered that pest control service, unlike regular services, would involve life, health and safety of the public and environmental protection, as well as local health and epidemic prevention. In short, it was a service-related to social public interest. However, according to publicly available information, this is the only case where article 15 was applied. With regard to administrative enforcement, antitrust authorities rarely apply article 15 to cartel cases. To date, no administrative cartel cases have yet been exempted based on the above-mentioned exemptions. Generally speaking, a violation of article 13 could hardly be exempted pursuant to article 15 in practice.
There is no prior notification mechanism in China. The Draft Guidelines on General Conditions and Procedures on the Exemption of Monopoly Agreements (Draft Exemption Guidelines’, issued by NDRC on 12 May 2016 to solicit public comments, establish an exemption-consulting mechanism. However, this mechanism will have limited application considering the prerequisites. According to article 17 of the Draft Exemption Guidelines, an anti-monopoly law enforcement authority generally does not provide exemption-consulting services. The anti-monopoly law enforcement department under the state council may provide exemption-consulting services if law enforcement resources permit and an agreement to be reached by business operators or trade associations is in either of the following circumstances: the agreement may affect the market competition in many countries or regions including China, and the relevant business operators or trade associations intend to apply for exemptions with authorities in other countries or regions; or a national trade association, on behalf of the entire industry, consults opinions for certain important or widely adopted agreements.
On top of the above, an agreement to be consulted must also meet certain conditions listed in article 18 of the Draft Exemption Guidelines, such as with certainty, not an issue in a pending case. Therefore, the exemption-consulting mechanism may be of little use for ordinary consultation.
The consulting opinions given by the anti-monopoly law enforcement department are not binding, but only indicate the law enforcement department’s competition concerns and law enforcement preference based on materials available in respect of the agreement under the application for exemption.
Can the company exchange information with its competitors?
Under China’s AML, the pure exchange of sensitive information without entering into a monopoly agreement would not be considered as a violation. However, it is clearly indicated in both the NDRC Rules and the State Administration for Industry and Commerce (SAIC) Provisions that when determining whether there exists any concerted practice prohibited by article 13 of the AML, the enforcement authorities will look into factors including communications of intention between the competitors and acts in concert by the competitors. Concerted practice can be acts in concert without the explicit conclusion of written or oral agreements, and can be presumed upon a consistent pattern of actions in the absence of reasonable explanations and with communication of intentions or exchange of information. The exchange of certain competitively sensitive information, such as pricing strategies, output or sales volume information or specific customer information between competitors may be considered a way to facilitate concerted practice.
Furthermore, it can be seen from practice of NDRC and SAIC that communication together with concerted actions is likely to be punished, while exchange of sensitive information is a key element to determine concerted actions. For example, in the Estazolam case published by NDRC on 27 July 2016, Changzhou Siyao Pharmaceutical Co, Ltd (Changzhou Siyao) attended the meetings with competitors to negotiate raising estazolam tablet prices, in which Changzhou Siyao did not express objections. After the meetings, Changzhou Siyao raised its estazolam tablet price in accordance with the price rises negotiated in the meetings. Thereby, NDRC decided that Changzhou Siyao had communicated with competitors and its price rises were concerted actions with competitors.
Therefore, even though exchange of sensitive information is not a per se violation, business operators should bear the above risk in mind and avoid engaging in behaviour such as exchanging sensitive information regulated by the AML.
Cartel leniency programmes
Is a leniency programme available to companies or individuals who participate in a cartel in your jurisdiction?
Yes, under the AML, there is a leniency programme available to companies or individuals who participate in a cartel. The legal basis is article 46 of the AML, which provides general rules for a leniency programme, indicating that where an operator has voluntarily reported the relevant facts on entering into a monopoly agreement to the regulatory authority and provides important evidence, the regulatory authority may, at its discretion, reduce or waive the sanction for such an operator. The Draft Guidelines on the Application of the Leniency Programme to Cases Involving Horizontal Monopoly Agreements (Draft Leniency Guidelines), issued by NDRC on 2 February 2016 to solicit public comments, are formulated to be applicable to horizontal monopoly agreements (that is, cartels) only. Before the Draft Leniency Guidelines, the leniency programme under the AML was interpreted as applicable to vertical monopoly agreements as well. After the Draft Leniency Guidelines come into effect, the leniency programme will no longer be applicable to vertical monopoly agreements.
There are two constitutive requirements for leniency application. One is that the applicant needs to voluntarily make a report on the monopoly agreement to the regulatory authority, and the other is that the applicant needs to provide important evidence that is crucial for the authorities to launch an investigation or to affirm monopolistic agreement behaviour, including the information concerning the business operators involved in the monopoly agreement, the scope of products involved, the content of the monopoly agreement and the way such an agreement was reached, and how such an agreement was implemented. According to the Draft Leniency Guidelines, important evidence refers to ‘important evidentiary material that business operators possess’ that is sufficient to enable the law enforcement authorities to launch investigation procedures if the law enforcement authorities have not yet obtained clues or evidence for the cases, and evidence with significant added value for the ultimate identification of monopoly agreement practice if the law enforcement authorities have already initiated investigation procedures.
In the Draft Leniency Guidelines, article 16 provides for the confidentiality obligations of the law enforcement authorities that the materials such as reports submitted by business operators to apply for the leniency programme in accordance with the Guidelines and documents generated shall be kept in special archives by the law enforcement authorities and shall not be disclosed to the public without the consent of business operators, and no other institutions, organisations or individuals may get access to them. Meanwhile, the aforesaid materials shall not be used as evidence for relevant civil proceedings, unless otherwise regulated by the laws. However, the Draft Leniency Guidelines do not mention whether the name of the applicant should be kept confidential. In practice, law enforcement authorities usually keep the name of the applicant confidential during the investigation process, but would disclose the fact that the applicant applied for leniency in their decision to explain the lenient treatment granted to the applicant.
Can the company apply for leniency for itself and its individual officers and employees?
Individual officers and employees are not punishable under the AML.
Can the company reserve a place in line before a formal leniency application is ready?
In the past, China has not had a marker system, which means that a company cannot reserve its place in line before submitting a formal application. The Draft Leniency Guidelines for the first time introduce the marker system into Chinese leniency programmes. According to the Draft Leniency Guidelines, if the business operator cannot provide all materials and information at the time it files for leniency, the operator can first submit a preliminary report to mark its ranking with the AML enforcement authority. In the preliminary report, the business operator must explicitly admit its involvement in the monopoly agreement and give a brief description of the conclusion and implementation of the monopoly agreement, including information as to the relevant participants, the products or services involved and time of conclusion and implementation. The AML enforcement authority will then issue a written opinion, requesting the business operator to supplement relevant materials within a limited period of time (no more than 30 days or 60 days under special circumstances). If the business operator can supplement the requested materials within the time limit, the AML enforcement authority will regard the time when the business operator submits the preliminary report as the time when the business operator files the leniency application.
If the company blows the whistle on other cartels, can it get any benefit?
Neither the AML nor the rules issued by NDRC and SAIC provides any ‘immunity plus’ or ‘amnesty plus’ mechanism. However, the company’s blowing the whistle on other cartels is a factor taken into consideration by the AML enforcement authority when deciding mitigation of punishment. According to article 26(6) of the Draft Guidelines on Determining Illegal Income of Undertakings’ Monopolistic Behaviours and Fines (the Draft Fines Guidelines), providing the first evidence of any other business operator who has violated the AML in other cases is a circumstance for lighter or mitigated penalties, which will cause the fine to be reduced by 0.5 per cent.
Dealing with commercial partners (suppliers and customers)
What types of vertical arrangements between the company and its suppliers or customers are subject to competition enforcement?
Pursuant to article 14 of the AML, the company is prohibited from reaching any of the following monopoly agreements with its suppliers or customers:
- fixing the price of commodities for resale to a third party;
- restricting the minimum price of commodities for resale to a third party; or
- other monopoly agreements as determined by the AML Enforcement Authority under the state council.
Accordingly, among vertical arrangements, only cases involving resale price maintenance (RPM) are currently regulated under article 14(1) and 14(2). Other types of vertical arrangements, such as exclusive dealing, channel management have not been regulated separately yet, but only regulated together with RPM as methods of companies to implement RPM.
However, the latest trend is to enhance regulation on other types of vertical arrangements. For instance, the Draft Guidelines on Prohibiting the Abuse of Intellectual Property Rights (the Draft IP Guidelines), issued by NDRC on 23 March 2017 to solicit public comments, regulate restrictive clauses that restrict the application fields of IP rights, sales channels, scope of sales, transaction objects or quantity of the products provided by applying IP rights, etc.
There are proposed sector-specific rules on agency agreements. The Draft Guidelines on Anti-Monopoly of Auto Industry (the Draft Auto Guidelines), issued by NDRC on 23 March 2016 to solicit public comments, provide that if a distributor simply acts as an intermediary agent to facilitate transactions, referring to the condition that the selling price is directly agreed on between automobile suppliers and a specific third party or end user (for example, between an automobile supplier and an employee, key account or advertising sponsor of such distributors) and such distributor is just responsible for delivering automobiles, receiving payments and invoicing during the sales, then restricting the resale price in sales constitutes an individual exemption of vertical price limitations based on article 15 of the AML. Since the Draft Auto Guidelines have not become effective yet, there is no case on agency agreements to date.
Would the regulatory authority consider the above vertical arrangements per se illegal? If not, how do they analyse and decide on these arrangements?
As explained in question 19, in practice, for vertical arrangements, only price-related monopoly activities have been regulated by NDRC. According to the literal interpretation of the relevant provisions, the monopoly agreements as listed in under article 14(1) and 14(2) are strictly forbidden, unless the parties can prove that the relevant agreements fall within the exemptions stipulated under article 15 of the AML (see question 19 and 21). However, it is very difficult to be exempted by NDRC under article 15. As a matter of fact, up to now, NDRC has never applied article 15 to exempt any infringements fell under article 14. Therefore, to some extent, we understand NDRC takes an ‘illegal per se’ and ‘by object’ approach.
However, in practice courts may take a rule of reason approach in adjudicating vertical agreement cases. For example, in the Ruibang v Johnson & Johnson case (No. 63 of the Third Civil Division (IP) of the High Court in Shanghai (2012)), the Shanghai High People’s Court evaluated both the anticompetitive effects and pro-competitive effects of the vertical agreement in question, and determined that the agreement had an adverse impact on the market. The Court did not apply article 15 of the AML in its reasoning.
Given that there is no judicial review of NDRC’s punishment decisions yet, it is not clear whether the law enforcement authority and judicial authority indeed take inconsistent approaches when deciding vertical arrangement cases under article 14(1) and 14(2) and, if yes, how they would resolve this.
Besides, article 14(3) has never been adopted by the law enforcement authority and judicial authority so far. Until any case is decided, it is uncertain which approach will prevail, though the enforcement authorities are likely to draw on the experience of the practice in the EU and US.
Under what circumstances can vertical arrangements be exempted from sanctions?
Vertical arrangements can be exempted from sanctions under article 15 of the AML, which is applicable to both cartel and vertical arrangements. See question 13.
It is worth noting that NDRC has never applied article 15 to exempt any infringements fell under article 14 in its decisions, and in judicial cases the court adopted a ‘rule of reason’ approach instead of analysing under article 15. Therefore, in practice, business operators can rarely obtain any exemption for violations under article 14 by invoking justifications prescribed in article 15.
How to behave as a market dominant player
Determining dominant market position
Which factors does your jurisdiction apply to determine if the company holds a dominant market position?
The term ‘dominance’ is defined in article 17 of the AML 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.
Dominance is assessed by reference to various factors. Article 18 of the AML stipulates that dominance could be assessed by reference to the following factors:
- the market share of the business operator and its competitive status in the relevant market;
- the ability of the business operator to control the sales market or the raw material supply market;
- the financial and technological conditions of the business operator;
- the extent of reliance on the business operator by other business operators in the transactions;
- the degree of difficulty for other business operators to enter the relevant market; and
- other factors relevant to the determination of the dominant market position of the business operator.
Market share is the primary 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.
Abuse of dominance
If the company holds a dominant market position, what forms of behaviour constitute abuse of market dominance? Describe any recent cases.
Article 17 of the AML provides that 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 enter 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.
Other forms of abusing the dominant market position as determined by the Anti-monopoly Law Enforcement Authority under the State Council.
A high-profile dominance case is the Tetra Pak (TP) case. On 16 November 2016, 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. SAIC concluded TP’s activities of abuse of market dominance in the following ways:
- 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(5) 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(4) 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(7) 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.
Another high-profile dominance case is the Qualcomm case. On 9 February 2015, NDRC decided that Qualcomm abused its dominant position in the licensing market for standard essential patents (SEPs) for CDMA, WCDMA and LTE wireless communications (the SEP licensing market) and the market for sales of baseband chips for CDMA, WCDMA, and LTE wireless communications (the baseband chip market). NDRC concluded TP’s activities of abuse of market dominance as following:
- Qualcomm used its dominant position in the SEP licensing market to charge excessive royalties when licensing patents, including charging royalties for its expired patents and requiring licensees to cross-license their relevant SEPs and non-SEPs to Qualcomm without compensation or offsetting royalties, thereby violating article 17(1) of the AML;
- Qualcomm used its dominant position in the SEP licensing market to sell SEPs tying non-SEPs without justifications, which violated article 17(5) of the AML; and
- Qualcomm used its dominant position in the baseband chip market to impose unreasonable conditions on sales of baseband chip and violated article 17(5) of the AML. NDRC imposed a fine of 6.088 billion yuan in total.
Under what circumstances can abusing market dominance be exempted from sanctions or excluded from enforcement?
There is no exemption provided in the AML.
Competition compliance in mergers and acquisitions
Competition authority approval
Does the company need to obtain approval from the competition authority for mergers and acquisitions? Is it mandatory or voluntary to obtain approval before completion?
For transactions that meet the following two criteria, notification is mandatory. Such transactions must be notified and cleared by the Ministry of Commerce (MOFCOM) before they can be completed. The transaction is deemed a concentration and the parties to a transaction must meet specified turnover thresholds.
The relevant turnover thresholds are either:
- during the previous fiscal year, the total global turnover of all operators participating in the concentration exceeded 10 billion yuan and at least two of these operators each had a turnover of more than 400 million yuan within China; or
- during the previous fiscal year, the total turnover within China of all the operators participating in the concentration exceeded 2 billion yuan, and at least two of these operators each had a turnover of more than 400 million yuan within China.
The Guidance on the Notification of Concentration of Business Operators (Notification Guidance), which was issued on 5 January 2009 by MOFCOM and revised on 6 June 2014, prescribes the detailed factors that need to be considered when determining whether one business operator will acquire control over another business operator or be able to exert decisive influence over another business operator through a transaction (change of control).
Under article 3 of the Notification Guidance, these factors include numerous legal and factual factors. Concentration agreements and the articles of association of the target are important bases for assessing control, but will not be considered as the only basis. In fact, for some cases, while we cannot conclude whether or not control will be acquired from the agreements and articles of association, the business operator will still be deemed as having acquired control as long as it obtained de facto control, due to, for example, the fragmented ownership of other shareholders and they could act in concert. Generally, factors such as the purpose of the transaction and future plans, the voting matters and voting mechanisms of the shareholders’ meeting and the board of directors will be taken into consideration in determining whether one business operator acquires control over the other business operator through a transaction.
The Chinese merger control regime adopts an ex ante mandatory review regarding the concentration of business operators that a transaction involving concentration of business operators is not allowed to implement without obtaining MOFCOM’s antitrust approval.
Notifications must be filed by all business operators involved in the merger. For all the other types of concentrations, notifications must be filed by the operator acquiring control of, or being able to exercise decisive influence, on other operators and other operators should cooperate with this operator (in respect of the filing).
Where there are two or more business operators with obligations to notify MOFCOM, either of them on agreement or all of them jointly may be responsible for the antitrust notification. Where business operators agree to appoint one of them to take the responsibility for the antitrust notification and if the agreed business operator does not make the notification, the other business operator or operators with obligation or obligations to notify will not be relieved from the legal liabilities for failure to make notification in accordance with the law. Where the obligor does not notify MOFCOM of the concentration, other business operators participating in the concentration can make the notification.
How long does it normally take to obtain approval?
According to the AML, there are two phases for MOFCOM’s antitrust review.
In Phase I, MOFCOM must conduct a preliminary review and make a decision within 30 days from the date of formal acceptance of the complete filing documents. They must inform the applicant of the decision in writing. By the end of the 30-day period, MOFCOM may make a clearance decision without conditions, initiate a further review that enters Phase II, or make a clearance decision with conditions, which is very rare. If MOFCOM takes no decision at all at the expiry of the 30-day period, the parties can execute the transaction.
In Phase II, if MOFCOM makes a decision to further review the filing, it will complete the review within 90 days from the date of issuing the decision and it must notify the parties involved in writing. MOFCOM may extend the 90-day time limit for Phase II by written notice, provided that the extension does not exceed 60 days and under certain circumstances.
At the end of the Phase II review, MOFCOM will make a decision either to approve the transaction, to approve it subject to restrictive conditions or to prohibit the transaction. Under the AML, if MOFCOM fails to make a decision at the expiry of the relevant time periods in Phase II, the transaction is presumed to be cleared and the parties can execute the transaction.
For simple cases, the Notification Guidance does not stipulate a specific time limit regarding MOFCOM’s review; however, the review period for simple cases is generally less than that for normal cases. The above two phases of review procedure also apply to simple cases. From our experience, MOFCOM aims to clear a simple case within Phase I. Most simple cases filed were cleared within Phase I, ever since the establishment of the simplified procedure, with a limited number of cases entering into Phase II. As it is different from normal cases, once a simple case is officially accepted, MOFCOM will post the case’s publicity form on its website for a 10-day period of public review. If any third party believes that the case is not qualified for the simplified procedure, that party can raise objections in that regard and submit relevant evidence. If MOFCOM discovers that the proposed transaction indeed does not qualify as a simple case, the authority must revoke the case from the simplified procedure and require the notifying parties to re-notify under the normal procedure.
If the company obtains approval, does it mean the authority has confirmed the terms in the documents will be considered compliant with competition law?
When a company obtains approval, it does not necessarily mean MOFCOM has confirmed the terms contained in the documents will be automatically considered compliant with the AML. This is because MOFCOM’s main focus is the market structure, and its legal basis is Chapter 4 of the AML. When MOFCOM reviews merger cases, its focus is whether the merger will adversely affect competition structure in the relevant market. MOFCOM also pays attention to restrictive provisions in the agreements between the merging parties, such as non-competition clause, but only from perspective of whether the merger will preclude or restrain competition in the relevant market.
As competition authorities, MOFCOM, NDRC and SAIC have different responsibilities. MOFCOM is responsible for reviewing mergers, NDRC is responsible for regulating price-related monopolistic practices (for example, price-fixing), and SAIC is responsible for regulating non-price-related monopolistic practices (for example, dividing the market). The work of NDRC and SAIC is the investigation and punishment of monopolistic activities, and its legal basis is Chapters 2 and 3 of the AML. Therefore, their respective competition concerns are different.
Theoretically, MOFCOM may refer merger cases to NDRC and SAIC when it considers it necessary, such as when MOFCOM identifies monopoly agreement during its merger review process. However, in practice it has not happened yet.
Failure to file
What are the consequences for failure to file, delay in filing and incomplete filing? Have there been any recent cases?
If the concentration is not notified to MOFCOM before its implementation, MOFCOM has the right to investigate and review the concentration, subject to the general two-year limitation period.
Article 48 of the AML provides that if operators fail to file, the AML Enforcement Authority, under the state council, shall order them to stop the concentration, to dispose shares or assets, transfer the business or adopt other necessary measures to restore the market situation before the concentration within a time limit, and may impose a fine of less than 500,000 yuan.
One helpful example would be MOFCOM’s Canon decision published on 16 December 2016. Before the transaction, all outstanding shares of Toshiba Medical Systems, the acquired party, had been classified into three groups: 20 shares with voting rights (Class-A shares); one share without voting rights (Class-B shares); and 100 stock options (with right to purchase ordinary shares). The transaction had two steps. The first step was that Canon acquired one Class-B share and 100 stock options and M Company, established by the three natural persons, acquired the 20 Class-A shares (implemented before approval). The second step was that Canon exercised stock options by converting them into Class-A shares, and Toshiba Medical Systems repurchased the Class-A and Class-B shares (intended to implement after approved). MOFCOM decided that although the transaction was implemented in two steps, the two steps were closely related to each other and essential for Canon to acquire all shares of Toshiba Medical Systems. Therefore, the parties should have filed for concentration of business operators before implementing the first step; otherwise it constituted a failure to file. Canon was fined 300,000 yuan.
Investigation and settlement
Under which circumstances would the company and its officers or employees need separate legal representation? Do the authorities require separate legal representation during certain types of investigations?
Since individual officers and employees are not punishable under the AML, there is no need for officers or employees to have separate legal representation.
For what types of infringement would the regulatory authority launch a dawn raid? Are there any specific procedural rules for dawn raids?
In practice, regulatory authorities may launch a dawn raid for all types of monopolistic activities, including cartel, vertical agreement and abuse of dominance. Authorities may search business premises or any other relevant premises of the business operator under investigation to carry out an inspection (article 39(1) of the AML). Relevant documents and materials include those both in forms of hardcopy and electronic data (article 39(3) of the AML).
Under article 37 of the Administrative Penalties Law as well as article 11 of the Provisions on Procedures of Investigating and Handling Cases of Monopoly Agreements and Abuse of Dominant Market Position by AIC (AIC Procedures Provisions) when administrative organs conduct investigations or inspections, there shall not be less than two law-enforcement officers, who shall show their identification papers to the party or other persons concerned. Article 37 also requires law enforcement agencies to make a written record to document the inquiry or inspection.
Pursuant to article 39 of the AML, in the investigation, NDRC or SAIC may adopt the following measures:
- enter the business premises or any other relevant premises of the business operator under investigation to carry out an inspection;
- interview the business operator under investigation, the interested parties or any other related organisations or individuals, and require them to provide a relevant explanation;
- inspect or make copies of relevant documents and materials such as certificates, agreements, accounts books, business correspondence and electronic data of the business operator under investigation, interested parties or any other related organisations or individuals;
- seize or impound the relevant evidence (further stipulated by articles 22 to 28 in the Administrative Compulsion Law); or
- enquire into the bank accounts of the business operator.
To adopt the foregoing measures, a written report must be submitted to the key person in charge of the AML enforcement authority for approval.
What are the company’s rights and obligations during a dawn raid?
During a dawn raid, the company under investigation has an obligation to cooperate. First, the company should assist the AML Enforcement Authority in performing its functions and shall not refuse or obstruct the investigation conducted by the AML Enforcement Authority, as required by the article 42 of the AML. Second, according to article 52 of the AML, any party that refuses to provide the relevant materials or information to the AML enforcement authority, provides false materials and information, conceals, destroys or removes evidence, or commits any other act to refuse or obstruct investigation, may be ordered by the AML enforcement authority to make reparations; a fine of up to 20,000 yuan may be imposed on individuals, and a fine of up to 200,000 yuan may be imposed on organisations. Where the case is serious, fines of between 20,000 and 100,000 yuan may be imposed on individuals, and fines of between 200,000 and 1 million yuan may be imposed on organisations. Where the case constitutes a criminal offence, criminal liability shall be pursued in accordance with the law.
There are limited regulations regarding the company’s rights during a dawn raid, such as, according to article 43 of the AML, a company under investigation has the right to make statements on the investigation. As a whole, there are no explicit stipulations and company’s rights are basically summarised according to practice.
It is not the company’s right to have an attorney present during the dawn raid, and in certain past circumstances the authorities did not allow an attorney to attend the dawn raid, either by providing legal assistance or by helping with interviews. However, in recent cases, the authorities have allowed the company’s attorneys to attend the dawn raid on more occasions. In addition, it is worth noting that the concept of attorney-client privilege does not exist under Chinese law.
Although the principle of proportionality is not stated in law, as a basic theory of administrative law, it requires the enforcement authority to limit their investigation to the necessary scope, which provides a basis for the company to argue during the dawn raid that the investigation measures and scope should be in accordance with the purpose of investigation and be relevant. However, in practice, the purpose of investigation is usually described in a broad way to provide enforcement agencies with a wide range of rights to conduct investigation. Therefore, it is hard to make the argument of relevancy. Nevertheless, the authorities usually will exclude employee’s personal belongings from the investigation to protect personal privacy.
Is there any mechanism to settle, or to make commitments to regulators, during an investigation?
Currently, there is no settlement procedure provided in the legislation. However, companies can seek to apply for a suspension procedure by making commitments.
During the investigation, the business operator under investigation can undertake to remove the anticompetitive effects of the suspected monopolistic practice within an approved period. The AML enforcement agencies can decide whether to accept the commitments and suspend the investigation. During the suspension of the investigation, the agencies will supervise the performance of the undertaking and will have the right to resume the investigation if any of the following occur:
- the operator fails to perform its commitments;
- there are significant changes to the facts on which the suspension decision was made; and
- the suspension decision was made on the basis of incomplete or inaccurate information submitted by the business operator.
Where the agencies consider that the business operator has fulfilled its commitments, the regulator may decide to terminate the investigation.
The Draft Guidelines on Commitments Made by Business Operators in Antitrust Cases (the Draft Commitment Guidelines), one of the six antitrust guidelines drafted by NDRC (see question 13), was released by NDRC seeking for public comments on 2 February 2016. It provides that the commitment procedure will only be applicable to monopolistic conduct other than horizontal monopoly agreements on price fixing, on restricting production or sales quantity, or on allocation of sales market or raw material procurement market. The commitments can be made at any stage starting from the commencement of the investigation until the issuance of the advance notice of administrative penalty decision. However, if after investigation the AML enforcement authority holds that suspected monopolistic conduct constitutes an AML violation, the authority will not accept any commitment made by the operator concerned.
When making commitments and applying for suspension of the investigation, the business operator must submit a written application with the following information:
- the suspected monopolistic conduct under the investigation and its possible impact;
- the specific measures in the commitment to be taken to eliminate the consequences of the conduct;
- the timeline and approach to fulfil the commitment; and
- other contents that need be covered by the commitment.
Furthermore, the Draft Commitment Guidelines also confirm that the AML enforcement authorities’ decisions on suspension or termination of the investigation must not be interpreted as an affirmation on whether the business operator’s conduct constitutes an anti-monopoly violation and must not be taken as relevant evidence to affirm the violation before the people’s court.
What weight will the authorities place on companies implementing or amending a compliance programme in settlement negotiations?
There is no settlement procedure in China. Authorities usually take implementing or amending a compliance programme as a part of commitment. For example, according to the Draft Leniency Guidelines, implementing or amending a competition compliance programme may be considered as cooperation (see question 4).
Are corporate monitorships used in your jurisdiction?
There is no settlement procedure in China. Article 13 of the Draft Commitment Guidelines provides that law enforcement agencies shall supervise the implementation of commitments by operators, and if necessary, may entrust independent third-party professional agencies to carry out the supervision.
Statements of facts
Are agreed statements of facts in a settlement with the authorities automatically admissible as evidence in actions for private damages, including class actions or representative claims?
There is no settlement procedure in China. As for the materials submitted in accordance with the leniency programme, the Draft Leniency Guidelines provide more clear guidance on whether it will be adopted in a court proceeding. According to the Draft Leniency Guidelines, all reports submitted and documents generated under the Draft Leniency Guidelines must be kept in special archives by the AML enforcement agencies and must not be disclosed to any third party without the consent of the business operator concerned; meanwhile, the documents must not be used as evidence in relevant civil proceedings, unless otherwise stipulated by the laws.
Invoking legal privilege
Can the company or an individual invoke legal privilege or privilege against self-incrimination in an investigation?
The concept of attorney-client privilege does not exist in the Chinese laws, so confidential communications between a lawyer and a client are not privileged. The Chinese laws require lawyers to protect the confidentiality of their clients’ private information and, if they are aware of any of their clients’ trade secrets, they must also protect them (see article 38 of the Lawyer’s Law). However, according to article 70 of the Civil Procedure Law, a court can order a lawyer to testify about a client’s private information or trade secrets in a judicial proceeding.
Under article 50 of Criminal Procedure Law revised in 2012, it is prohibited to force anyone to incriminate themselves. However, under the Chinese laws, there are no criminal penalties provided for monopoly activities.
What confidentiality protection is afforded to the company or individual involved in competition investigations?
Article 41 of the AML provides that the AML enforcement authority and its personnel are obligated to keep confidential of any commercial secrets that come to their notice during the enforcement process. Under Provisions on Evidence in Administrative Punishment of Price, article 4 requires the authorities not to use the evidence obtained during investigation for the purposes other than administrative punishment of price, and not to reveal commercial secrets and personal privacy.
Refusal to cooperate
What are the penalties for refusing to cooperate with the authorities in an investigation?
According to article 52 of the AML, any party that refuses to provide the relevant materials or information to the AML enforcement authority, provides false materials and information, conceals, destroys or removes evidence, or commits any other act to refuse or obstruct investigation, may be ordered by the AML enforcement authority to make reparations; a fine of up to 20,000 yuan may be imposed on individuals, and a fine of up to 200,000 yuan may be imposed on organisations. Where the case is serious, fines of between 20,000 and 100,000 yuan may be imposed on individuals, and fines of between 200,000 and 1 million yuan may be imposed on organisations. Where the case constitutes a criminal offence, criminal liability shall be pursued in accordance with the law.
Is there a duty to notify the regulator of competition infringements?
There is no duty to notify the regulator of competition infringements.
What are the limitation periods for competition infringements?
For administrative penalties, if a violation is not discovered within two years as of the time when it is committed, no punishment can be imposed by antitrust enforcement agencies. If the violation is of a continual or continuous nature, the two-year period is calculated from the date when the violation ends. In practice, due to the lack of a clear standard, enforcement authorities make a looser interpretation when deciding the meaning of ‘discovered’ and ‘continual or continuous’, and usually decide on the limitation period issue on a case-by-case basis.
For civil liabilities, the statute of limitations is two years as of the time when the claimant is aware of or should have been aware of the infringement caused by the monopoly practices. According to the Supreme People’s Court’s judicial interpretation on the trial of antitrust civil cases, when a claimant reports the monopolistic act to an AML enforcement authority, the statute of limitation will be suspended from the date of report. If the AML enforcement authority decides not to file the case, or to rescind the case or terminate the investigation, the statute of limitation will be calculated anew from the date on which the claimant is aware of or should have been aware of the AML enforcement authority’s decision. If the AML enforcement authority, after the investigation, concludes on the existence of monopolistic acts, the statute of limitation will be calculated anew from the date on which the claimant is aware or should have been aware that the decision made by the AML enforcement authority on confirming the reported act as constituting a monopolistic act becomes legally effective.
Are there any other regulated anticompetitive practices not mentioned above? Provide details.
Chapter 5 of the AML regulates the abuse of administrative power to eliminate or restrict competition. The administrative organ or organisation empowered by a law or administrative regulation to administer public affairs may not abuse its administrative power to force or use a disguised form to force any entities or individuals to deal, purchase, or use the commodities provided by the business operators designated by such an administrative organ or organisation.
The AML came into effect in 2008. Before its enactment, several activities regulated in the AML were regulated by the Anti-Unfair Competition Law (AUCL), which was promulgated in 1993, and the Price Law, which was promulgated in 1997. After 2008, those activities are regulated by both the AML and the AUCL or the Price Law.
In particular, selling products at prices below cost without any justifiable causes (article 17(2) of the AML) is also regulated by article 11 of the AUCL, and implementing tie-in sales or imposing other unreasonable trading conditions at the time of trading without any justifiable causes (article 17(5) of the AML) is also regulated by article 12 of AUCL. Meanwhile, price collusion (article 13 of the AML), obtaining exorbitant profits (article 17(1) of the AML), predatory pricing (article 17(2) of the AML) and discriminatory pricing (article 17(6) of the AML) are also regulated by article 14 of the Price Law.
Currently, authorities at the central-level and provincial-level usually apply the AML as legal basis in antitrust cases in practice, while enforcement authorities at lower levels that cannot apply the AML use AUCL and the Price Law as legal basis. Another difference is that some monopoly activities prohibited by the AML require dominant position as prerequisite, while the AUCL and the Price Law do not have such a requirement.
Are there any proposals for competition law reform in your jurisdiction? If yes, what effects will it have on the company’s compliance?
Under the authorisation of the Anti-Monopoly Commission (AMC) under the State Council, NDRC has drafted six antitrust guidelines and published them to solicit public comments, namely the Draft Leniency Guidelines, the Draft Exemption Guidelines, the Draft Commitment Guidelines, the Draft Fines Guidelines, the Draft Auto Guidelines, and Draft Guidelines on Prohibiting the Abuse of Intellectual Property Rights.
In the Chinese Competition Policies and Laws Annual Meeting on 12 January 2017, MOFCOM, NDRC and SAIC said that they would promote the issuance of the final versions of the six guidelines and amendment of the AML. In 2015, NDRC mentioned that it was working on amendment of the Price Law.
On 26 February 2017, the Standing Committee of the National People’s Congress of China published draft amendments to the AUCL to solicit public comments.
Updates and trends
Updates and trends
Updates and trends
China is in the process of a State Council reshuffle, which includes the proposed establishment of a new comprehensive department, the State Administration of Market Supervision (SAMS). The SAMS will consolidate the country’s three antitrust agencies, namely, the NDRC, the SAIC, and the MOFCOM. Under the new plan, the SAMS will be the direct subordinate agency under the State Council. This new setting, which is reported to complete within the first half of this year, will have a decisive influence on China’s future anti-monopoly law enforcement landscape.