On 29 April 2019 China's competition watchdog, the State Administration for Market Regulation (SAMR), published on its website a penalty decision issued by its Shanghai branch, the Shanghai Market Regulation Bureau (SMRB). This decision was addressed to Eastman (China) Investment Management Co, Ltd, a Chinese subsidiary of US Chemical firm Eastman Chemical Company, which had restricted transactions by abusing its dominant market position. The $3.6 million fine imposed on Eastman (China) was equal to 5% of its 2016 sales revenue.

Eastman Chemical Company is familiar with Chinese antitrust enforcement, as this is the second fine that it has received in the past two years. In December 2017 Eastman (China) was fined by the Shanghai Price Bureau, the Shanghai branch of the former National Development and Reform Committee, for a separate antitrust violation of resale price maintenance. However, the fine in that case was only $350,000 (approximately).

Since this is the first antitrust enforcement decision that the SMRB has issued since its establishment, it has drawn significant attention from commentators who have attempted to identify the bureau's enforcement approach. On examination, this case reflects the attitudes of China's antitrust enforcement authority on a few substantive and procedural issues. As such, entities operating on the Chinese market should pay the decision close attention.

Is whole group or just Chinese subsidiary liable?

A frequent question is whether an entire international group or only its Chinese subsidiary will be subject to a penalty decision adopted by the SAMR.

Although no detailed rules exist in this regard, a general standard is provided in Eastman, in which only Eastman (China) was subject to the penalty decision (and not its US parent company). The decision sets out that Eastman (China)'s parent company (Eastman Chemical Company) reviewed its sales policies in a formal capacity and did not directly engage in its sales activities in mainland China. Another manufacturing entity of Eastman Chemical Company which was active in mainland China was also not listed as a penalty addressee on the ground that it had no decisional power regarding the sales policies of the products that it manufactured.

Nonetheless, there are precedents in which the headquarters of foreign companies were directly fined or fined together with their Chinese subsidiaries. For example, in Qualcomm, Qualcomm Inc was listed as a penalty addressee because it had developed the violating patent licensing policies for the whole group. Further, in Tetra Pak, the SAMR found that the parent company of the Tetra Pak group and its Chinese subsidiaries had collectively developed and implemented violating sales practices and thus addressed the penalty decision to each of them.

Economic analysis set to play larger role in enforcement?

In China, economic analysis tools have traditionally been more frequently employed by agencies which undertake merger reviews rather than the regulation of monopoly agreements and abuses of market dominance. However, in Eastman, the SMRB resorted to economic analysis tools in both its:

  • definition of the relevant market; and
  • assessment of a dominant market position.

This may indicate that economic analysis will play a larger role in antitrust enforcement going forward.

Specifically, the SMRB employed:

  • the critical loss analysis methodology to define the relevant market; and
  • the Lerner index to verify Eastman Chemical Company's market power and the restrictive effects of its behaviour in the relevant market.

Heightened antitrust risks: disguised forms of exclusive purchase

The Former National Development and Reform Commission and State Administration for Industry and Commerce investigated many cases that directly required exclusive dealing from a seller or other designated undertakings (usually affiliates of the offending company), but not other indirect forms of exclusive purchase requirement. However, Eastman is the first case in which the Chinese antitrust agencies have extended their focus to include other masked variants of exclusive purchase requirement, such as minimum purchase agreements together with reinforcing clauses (eg, take-or-pay or most-favoured-nation clauses) or favourable rebates. It therefore implies that companies operating in China face heightened antitrust risks, as the enforcement agencies will not only strictly penalise behaviours listed in the law, but also pay attention to the nature of behaviour, in line with the practice of other main competition jurisdictions.

The draft Provisions Prohibiting Abuse of Market Dominance Conduct, which were issued by the SAMR for public comment in 2019, stipulate that 'transaction-restrictive behaviours' include "disguised forms via setting specific trading conditions or by other indirect means".

Minimum purchase requirement and long-term agreements

Parties are often curious as to what level of minimum purchase requirement may be viewed as having the same effect as exclusive dealing. Previously, it was hard to answer this question from a practical perspective. However, according to the penalty decision in Eastman, the company had set the minimum purchase requirement above:

  • 80% of certain customers' annual demand in five contracts; and
  • 60% of the customer's annual demand in one contract.

The SMRB also considered the 20% market share that was foreclosed in aggregate by the offending contracts in assessing the anti-competitive effects. In addition, the SMRB deemed a two-to-three year contract a long-term agreement, which had the potential to render the anti-competitive effects significant. For compliance purposes, companies should take the 60% and two-to-three year benchmarks into consideration.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.