Anticompetitive unilateral conduct

Abuse of dominance

In what circumstances is conduct considered to be anticompetitive if carried out by a firm with monopoly or market power?

An undertaking with market dominance is explicitly prohibited from selling products at unfairly high prices or purchasing products at unfairly low prices. Unless there are justifiable reasons, it is also prohibited from implementing other specified conducts including predatory pricing, exclusive dealing, refusing to trade, tying, imposing unreasonable trading conditions and discriminatory treatments. The undertaking is entitled to put forward justifications for no abusive conducts and the enforcement agency will assess the anticompetitive effects of the involved conducts and the justifications put forward by the undertaking.

Some non-specified conducts that would result in the same effect of the specified types of conducts may also be considered anticompetitive. For example, restricting the trading counterparty to trade exclusively without justifications would constitute abusive conduct, while other restrictive conducts that have had the same effect of exclusive dealing (even only for a substantial purchasing volume but not all) would also be deemed as ‘exclusive dealing’ conducts. For example, in the recent Eastman (China) Investment case, the enforcement agency determined that several clauses in the purchasing agreement, including the minimum order quantity requirement, take or pay and most favoured nation clauses, collectively resulted in the effect of exclusive dealing with regard to the customers’ substantial purchasing demand and therefore these conducts constituted abusive exclusive dealing.

In practice, the enforcement agency is also authorised to determine non-specified anticompetitive abusive conducts by applying the catch-call clause. For example, loyalty rebate was identified as a form of abuse of dominance in the Tetra Pak case.

De minimis thresholds

Is there any de minimis threshold for a conduct to be found abusive?

No.

Market definition

Do antitrust authorities approach market definition in the context of unilateral conduct in the same way as in mergers? If not, what are the main differences and what justifies them?

Generally, the antitrust authorities would follow the market definition guideline as promulgated by the Antimonopoly Commission of State Council, and are supposed to approach the market definition in the context of unilateral conduct in the same way as in mergers.

The precise market definitions may be case-specific and not exactly the same in investigating unilateral conducts and reviewing mergers. The main difference may be due to the different focuses in the competitive assessment and can be justified accordingly. In the former scenario, the affected products by the unilateral conducts are more obviously seen by existing facts and evidence and the boundary of the relevant market may have a clearer picture. Meanwhile, in the latter scenario of merger control review, the market definition would be more based on predictive and hypothetical factors for the purpose of assessing the likelihood of anticompetitive effects, which may depend on different features of the mergers being reviewed and therefore can be broader or narrower than the markets affected by the unilateral conducts.

Establishing dominance

When is a party likely to be considered dominant or jointly dominant? Can a patent owner be dominant simply on account of the patent that it owns?

If an undertaking has more than 50 per cent share in the relevant market, it may be presumed to have a dominant market position, while it is rebuttable. The undertaking’s ability to control product pricing, quantity and other transaction conditions (eg, commodity quality, payment terms, delivery method, after-sale services, trading options and technical constraint) will be considered in determining the market dominance, together with the ability to hinder or affect the entry of other under­takings into the relevant market (eg, excluding other undertakings from or delaying them in entering the relevant market, or making it impossible for them to compete effectively with the existing undertakings).

There is also a doctrine of joint dominance under the AML. Being rebuttable too, if the joint relevant market share of two undertakings accounts for two-thirds or above, or if the joint relevant market share of three undertakings accounts for three-quarters or above, these undertakings may be presumed to have joint dominant market position (except that an undertaking alone has a market share of less than one-tenth).

There have been two public enforcement cases where the joint dominance doctrine was applied; both cases are in the pharmaceutical sector (involving APIs). In Erkang Pharma and Jiushi Pharma in 2019, the enforcement agency found these two undertakings jointly dominant on the ground, among others, that they hold an aggregate market share of more than 90 per cent in the chlorphenamine APIs market in China, with one of them alone over 10 per cent of the market share (another factor is that they had a structural link during the period when the infringement was alleged).

A patent owner is not necessarily deemed dominant simply on account of the patent that it owns. Additional factors including possibility and cost for switching to other alternative patents, level of manufacturers’ reliance of downstream products on the involved patents and the countervailing power of the trade counterparty need to be taken into account in determining whether the patent owner has a dominant position.

IP rights

To what extent can an application for the grant or enforcement of a patent or any other IP right (SPC, etc) expose the patent owner to liability for an antitrust violation?

Generally following the ‘rule of reason’ analysis, an IP owner having market dominance in relevant markets may be exposed to antitrust risks if the exercise of IPR would result in the effect of eliminating or restricting competition in the market. Typical conducts that may be problematic include excessive pricing of licence fee, tying and bundling, refusal to license, setting out unreasonable trading terms (eg, exclusive grant-back clause, restriction on competitive IP and no-challenge clause), applying differentiated trading conditions, implementing an injunction order, etc.

For example, in the Huawei v IDC case, the court held that IDC has a dominant market position in relation to the licensing of standard-essential patents for 3G wireless communication, and the royalty rate IDC has offered to Huawei was discriminatory, which thus constitutes an abuse of market dominance. There has been no such case in the pharmaceutical industry so far though.

When would life-cycle management strategies expose a patent owner to antitrust liability?

The implementation of life-cycle management strategies may be problematic if they would result in the effect of eliminating or restricting competition in the market. For example, if the regulatory approvals are obtained on the basis of misleading information or otherwise form part of a strategy to exclude generic entry (eg, reverse patent settlement agreements with potential generic entrants). The life-cycle management strategies for the purpose of obtaining an exclusive right to which a dominant firm is otherwise not entitled can amount to an abuse of market dominance (following the rule of reason analysis with other factors considered). There has been no such case in the pharmaceutical industry so far though.

Communications

Can communications or recommendations aimed at the public, HCPs or health authorities trigger antitrust liability?

Not likely.

Authorised generics

Can a patent owner market or license its drug as an authorised generic, or allow a third party to do so, before the expiry of the patent protection on the drug concerned, to gain a head start on the competition?

In China, such practice is allowed and may be even encouraged by the healthcare regulators as it would be deemed beneficial to the consumers and market competition. Therefore, at this stage such practice is unlikely to raise antitrust concerns under the AML.

Restrictions on off-label use

Can actions taken by a patent owner to limit off-label use trigger antitrust liability?

There has been no such case in the pharmaceutical industry so far and thus it is not clear whether these actions can be taken from the AML perspective. Generally, if the actions taken by the patent owner are defaulted, for example, the claim or ground of induced infringement is challengeable, they may be deemed (together with other factors) as having an effect of eliminating or restricting competition and thus raise antitrust concerns, for example, as an abusive conduct.

Pricing

When does pricing conduct raise antitrust risks? Can high prices be abusive?

Several types of pricing conducts would or may raise antitrust risks. An undertaking is prohibited from reaching agreements with competitors on fixing or changing prices, and agreements with its trading counterparty (eg, the distributors) fixing the resale price or setting out the minimum resale price.

An undertaking with market dominance is prohibited from selling products at unfairly high prices or purchasing products at unfairly low prices and, without any justifiable reasons, selling products at a price below cost (predatory pricing).

Unfairly high prices are deemed abusive. For example, in one case in 2011 involving two pharmaceutical distributors, the enforcement agency found two distributors to have raised the price from less than 200 yuan per kilo to a range of between 300-1,350 yuan per kilo after they monopolised the supply of promethazine hydrochloride (APIs of compound reserpine) in the Chinese market.

Neither the decisions of the enforcement agency nor those of the courts show any clear or specific quantitative test. The tests adopted in both public and private enforcement actions seemed to indicate that the enforcement agency and courts tend to adopt more qualitative test for the assessment of unfairly high prices. The generally applicable qualitative tests include whether the price is remarkably higher than the competitor’s price, whether the increase in sale price exceeds the normal range when costs are generally stable and whether the increase in sale price remarkably exceeds the cost increase.

Sector-specific issues

To what extent can the specific features of the pharmaceutical sector provide an objective justification for conduct that would otherwise infringe antitrust rules?

Generally, quality promotion and safety control can serve as justifications for certain abusive conducts such as exclusive deal, or factors in the assessment of whether consumers benefit. However, to be successful in mitigating the antitrust infringement, they alone would not be sufficient and shall be assessed together with other factors that are usually taken into account in the enforcement agency’s rule of reason analysis.