What is the general attitude of business and the authorities to competition compliance?
China introduced the Antimonopoly Law (AML) in 2008, so it has been in effect for a little more than a decade, and competition compliance is, therefore, still in its infancy in China. After a decade of the implementation of 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. Nowadays, more and more Chinese companies are placing a greater emphasis on competition compliance by either adding antitrust compliance into their overall business compliance programme or creating a separate antitrust compliance programme.
China’s State Administration for Market Regulation (SAMR), the country’s consolidated AML enforcement authority, began functioning in 2018. Prior to the institutional restructuring, three competition authorities, the Ministry of Commerce (MOFCOM), the National Development and Reform Commission (NDRC) and the State Administration for Industry and Commerce (SAIC), were in charge of China’s AML enforcement. MOFCOM was responsible for reviewing mergers, NDRC was responsible for regulating price-related monopolistic practices (such as price-fixing) and SAIC was responsible for regulating non-price-related monopolistic practices (such as market allocation). In addition, NDRC and SAIC were also in charge of investigating and punishing monopolistic activities. After the institutional reorganisation, SAMR’s enforcement authority now covers that of MOFCOM, NDRC and SAIC.
Government compliance programmes
Is there a government-approved standard for compliance programmes in your jurisdiction?
There is no government-approved standard for compliance programmes in China yet. The Compliance Management Systems Guidelines (Compliance Guidelines) were drafted and published by the China National Institute of Standardisation in February 2017 to solicit public comments. The Compliance Guidelines were officially published on 29 December 2017 and came 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 legally 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 company size and the sector of the economy in which it operates?
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 experiences, while there is no explicit expression provided in the laws or regulations that the existence of a competition compliance programme is a mitigating factor for penalties in China, in practice, the AML enforcement agencies will take into account the existence of a competition compliance programme regarding sanctions. However, having a competition compliance programme will not necessarily exempt the company from punishment.
A competition compliance programme may contribute to a mitigation of 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 Medtronic case, NDRC held that pursuant to article 27(1) of the Law of the People’s Republic of China on Administrative Penalties (the Administrative Penalties Law), ‘taking the initiative to eliminate or lessen the harmful consequences brought about by the unlawful act’ is a mitigating factor in sanctions. NDRC further held that Medtronic’s rectification measures, which included training employees to recognise antitrust risks and improving the company’s competition compliance programme, qualified as mitigating factors and thereby imposed reduced sanctions 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 NDRC on 2 February 2016 to solicit public comments, require that, apart from voluntarily submitting the facts of monopoly agreements and providing important evidence, the applicants should also cooperate during the course of the AML enforcement agencies’ investigation in a prompt, continuous, comprehensive and faithful manner. To have a competition compliance programme in place is considered as ‘continuous and comprehensive’ cooperation.
Implementing a competition compliance programme
Commitment to competition compliance
How does a 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 requirements;
- 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 systems, and requiring officers and employees to consult or notify compliance officers or outside counsels before they conduct any activities 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 identifying 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 a company’s 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 risks.
What are the key features of a compliance programme regarding risk-assessment?
As the second step of a compliance programme, risk assessment means working 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 non-compliance 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 the 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 a compliance programme, risk mitigation means setting up appropriate policies, procedures and training to reduce the adverse effects of the identified risks, and to ensure that the company will detect and deal with the risks when they occur. Article 8.1 of the Compliance Guidelines 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 of the Compliance Guidelines 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 non-compliance, 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 activities 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 reevaluating the above three steps as well as the 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. Companies 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 top to bottom. In addition, the company should assess identified risks and ensure that the risk mitigation activities remain appropriate and effective.
Dealing with competitors
Arrangements to avoid
What types of arrangements should the company avoid entering into with its competitors?
In China, the main statute governing cartel activities is the AML. Pursuant to article 13 of the AML, competing business operators should avoid reaching the following monopoly agreements:
- 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 with third parties; or
- any other monopoly agreements as defined by the AML enforcement authority of the State Council.
‘Monopoly agreements’ under article 13 of the AML can take various 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. However, such cooperation may have an anticompetitive effect on the market, owing to the potential risks of the exchange of competition-sensitive information among competitors. In this regard, when a company enters into an agreement with a competitor, it may take the following precautions to prevent the exchange of competition-sensitive information:
- taking awareness-raising measures for the relevant personnel;
- monitoring measures (for example, 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 (for example, incorporation of the compliance with competition rules into the performance indicators of employment contracts that include the possibility of dismissal in cases of personal participation in a scheme in violation of the AML).
What form must behaviour take to constitute a cartel?
Pursuant to the AML, a cartel may be inferred through both formal agreements and other informal agreements such as concerted actions. The formal agreements may be in written or verbal forms.
Information exchange does not constitute a cartel in and of itself under the AML. However, if companies act in a concerted way because of the information exchange, the existence of the concerted action together with the information exchange 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 of the AML and a specific exemption for the agricultural industry in article 56 of the AML. 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:
- the objective is for technological improvement or research and development of new products;
- the objective is to raise product quality, lower costs, improve efficiency or standardise product specifications or standards;
- the objective is to increase the efficiency of small and medium-sized enterprises and to strengthen their competitiveness;
- the objective is to fulfil public interest objectives such as energy conservation, environmental protection and disaster relief;
- the objective is to alleviate a serious drop in sales quantity or obvious overproduction in times of recession;
- the objective is to protect legitimate interests in foreign trade and economic cooperation; or
- 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 markets, 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 development of case law, there is a civil 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 articles 13 and 14 of the AML. The courts considered that a 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 interests. According to publicly available information, this is the only case where article 15 has been applied. With regard to the administrative enforcement against cartels, antitrust authorities rarely apply article 15 to cartels under administrative investigation. Thus, up to date, there are no precedents where cartels under administrative enforcement have been exempted based on the above-mentioned exemptions. Practically speaking, a violation of article 13 could hardly be exempted pursuant to article 15.
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 antitrust enforcement authority generally does not provide exemption-consulting services and may provide such services only 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;
- 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.
In addition to the above, an agreement to be consulted must also meet certain conditions listed in article 18 of the Draft Exemption Guidelines, such as that the agreement is not a subject of a dispute in a pending case. Therefore, the exemption-consulting mechanism may be of little use for ordinary consultation.
The consulting opinions given by the antitrust enforcement agencies are not legally binding and are only indicative of the enforcement agencies’ concerns and preferences based on materials available.
Can the company exchange information with its competitors?
Under the AML, the pure exchange of competition-sensitive information without an agreement would not be considered as a violation of the AML. However, it is clearly indicated in both the NDRC Rules and the 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 competition-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 noted from the practices of NDRC and SAIC that the exchange of competition-sensitive information is a key element to determine whether concerted actions are the result of an agreement between competitors or independent decision-making by competitors. Therefore, even though the exchange of competition-sensitive information is not per se a violation, business operators should bear in mind the above risks and set up a compliance programme before engaging in the exchange of competition-sensitive information.
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 that participate in a cartel. The legal basis is article 46 of the AML, which provides general rules for a leniency programme, indicating that where a business operator has voluntarily submitted relevant facts and evidence about entering into a monopoly agreement to the enforcement authority, the enforcement authority may, at its discretion, reduce or waive sanctions for such a business 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, further clarify that a leniency programme under the AML is applicable only to horizontal monopoly agreements (ie, cartels).
There are two requirements for a leniency application. First, an applicant needs to voluntarily make a report on the monopoly agreement to the enforcement authority; second, the applicant needs to provide important evidence that is crucial for the enforcement authorities to launch an investigation, including information concerning the identities of business operators involved in the monopoly agreement, the scope of products involved, the content of the monopoly agreement and the way in which an agreement was reached, or how 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 enforcement authorities to launch investigation procedures if the enforcement authorities have not yet obtained clues or evidence for the cases; or
- facilitate the ultimate identification of monopoly agreements if the enforcement authorities have already initiated investigation procedures.
Under the Draft Leniency Guidelines, article 16 provides for the confidentiality obligations of the enforcement authorities that the materials submitted by business operators for the application of the leniency programme in accordance with the Guidelines shall be kept in special archives by the enforcement authorities and shall not be disclosed to the public without the consent of the submitting business operators, and no other institutions, organisations or individuals may have access to them. Meanwhile, the aforesaid materials shall not be used as evidence for relevant civil proceedings, unless otherwise regulated by the law. However, the Draft Leniency Guidelines do not specify whether the name of the applicant should be kept confidential. In practice, the enforcement authorities usually keep the name of the applicant confidential during the investigation process, but disclose the fact that the applicant applied for leniency in their decisions 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 did not have a marker system, which means that a company could not reserve its place in line before submitting a formal application. The Draft Leniency Guidelines for the first time introduced the marker system into Chinese leniency programmes. According to the Draft Leniency Guidelines, if a business operator cannot provide all the materials and information at the time it files for leniency, it can first submit a preliminary report to mark its ranking with the enforcement authority. In the preliminary report, a 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 the time of conclusion and implementation. The 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 enforcement authority will regard the time 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 provide any ‘immunity plus’ or ‘amnesty plus’ mechanisms. However, the company’s blowing the whistle on other cartels is a mitigating factor that the enforcement authority will consider when deciding 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 about 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, a company is prohibited from reaching any of the following monopoly agreements with its suppliers or customers:
- fixing the resale price of commodities to a third party;
- restricting the minimum resale price of commodities 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 articles 14(1) and 14(2). Other types of vertical arrangements, such as exclusive dealing, 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 of 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 limit the field applications 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 situation where 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 vertical agreements have been scrutinised by the enforcement authority. According to the literal interpretation of the relevant provisions, the vertical agreements (related to RPM) as listed under articles 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 questions 19 and 21). However, it is very difficult to qualify for an exemption under article 15. As a matter of fact, up to now, the enforcement authority has never applied article 15 to exempt any infringements falling under article 14. Therefore, to some extent, we understand the enforcement authority 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 ultimately 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 the enforcement authority’s punishment decisions yet, it is not clear whether the enforcement authority and courts indeed take inconsistent approaches when deciding vertical arrangement cases under articles 14(1) and 14(2) and how they would resolve the inconsistency if there is any. Besides, article 14(3) has never been adopted by the enforcement authority or courts so far. Until any case is decided, it is uncertain which approach will prevail, though the enforcement authorities are likely to draw on the experiences of the practice in the EU and the 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 the enforcement authority has never applied article 15 to exempt any infringements falling under article 14 in its decisions, and in judicial cases the court adopted a rule-of-reason approach. Therefore, in practice, firms 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 player
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 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 markets, or to block or affect the entry of other undertakings to the relevant markets.
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 materials 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 that TP abused its market dominance in the following ways:
- TP was using its dominant position in machinery and technical service markets to impose restrictions that affected customers’ usage of cartons, which damaged 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 prevented companies that were able to achieve production at scale of brown paper from supplying brown paper to any other third parties constituted a violation of article 17(4) of the AML; and
- TP’s two types of loyalty discount scheme had a loyalty-inducing effect and constituted ‘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 was 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 Qualcomm abused its market dominance in the following ways:
- 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 by tying licensing of non-SEPs with licensing of 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 chips and violated article 17(5) of the AML.
NDRC imposed on Qualcomm 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 SAMR 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 SAMR 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 various 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, owing to, for example, the fragmented ownership of other shareholders and the fact that 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 the concentration of business operators is not allowed to implement without obtaining SAMR (previously MOFCOM)’s antitrust approval. Notifications must be filed by all business operators involved in the merger. For all 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, 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 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 SAMR 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 SAMR’s antitrust review.
In Phase I, SAMR must conduct a preliminary review and make a decision within 30 days of the date of formal acceptance of the complete filing documents. The applicant must be informed of the decision in writing. By the end of the 30-day period, SAMR 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 SAMR takes no decision at all at the expiry of the 30-day period, the parties can execute the transaction.
In Phase II, if SAMR makes a decision to further review the filing, it will complete the review within 90 days of the date of issuing the decision and it must notify the parties involved in writing. SAMR 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, SAMR 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 SAMR 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 SAMR’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 experiences, SAMR aims to clear a simple case within Phase I. Most simple cases filed have been cleared within Phase I 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, SAMR 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 SAMR discovers that the proposed transaction does indeed not qualify as a simple case, the authority must revoke the case from the simplified procedure and require the notifying parties to renotify 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 SAMR has confirmed that the terms contained in the documents will be automatically considered compliant with the AML. This is because SAMR’s main focus is the market structure, and its legal basis is chapter 4 of the AML. When SAMR reviews merger cases, its focus is on whether the merger will adversely affect the market structure in the relevant market. SAMR also pays attention to restrictive provisions in agreements between the merging parties, such as non-competition clauses, but only from the perspective of whether the merger will preclude or restrain competition in the relevant market.
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 SAMR before its implementation, SAMR 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 business operators fail to file, the enforcement authority shall order them to stop the concentration, dispose of 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 up to 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 share); and 100 stock options (with the 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 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 approval). 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 the 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 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 cartels, vertical agreements 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 hard copy 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 be no fewer 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, NDRC or SAIC may adopt the following measures in the investigation:
- 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); and
- 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 enforcement authority in performing its functions and shall not refuse or obstruct the investigation conducted by the enforcement authority, as required by article 42 of the AML. Second, according to article 52 of the AML, any party that refuses to provide relevant materials or information to the enforcement authority, provides false materials or information, conceals, destroys or removes evidence or commits any other act to refuse or obstruct the investigation may be ordered by the 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. 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 the 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. In addition, it is worth noting that the concept of attorney-client privilege does not exist under Chinese laws.
Although the principle of proportionality is not stated in law, as a basic theory of administrative law, it requires the enforcement authority to limit its 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 the investigation and be relevant. However, in practice, the purpose of the investigation is usually described in a broad way to provide enforcement agencies with a wide range of rights to conduct the investigation. Therefore, it is hard to make the argument of relevancy. Nevertheless, the authorities will usually exclude employees’ 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 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 occurs:
- the operator fails to perform its commitments;
- there are significant changes to the facts based 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 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 the administrative penalty decision. However, if, after the 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 content that needs to 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 of 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 with the enforcement agency (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 the 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 guidance on whether they 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; the documents must not be used as evidence in relevant civil proceedings, unless otherwise stipulated by law.
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 China, so confidential communications between a lawyer and a client are not privileged. 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 the Criminal Procedure Law revised in 2012, it is prohibited to force anyone to incriminate themselves. However, under Chinese law, there are no criminal penalties for monopolistic activities.
What confidentiality protection is afforded to the company and/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 any commercial secrets that come to their notice during the enforcement process. Article 4 of Provisions on Evidence in Administrative Punishment of Price requires the authorities not to use evidence obtained during an investigation for purposes other than administrative punishment, and not to reveal commercial secrets or 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 or information, conceals, destroys or removes evidence or commits any other act to refuse or obstruct an 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 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 interpret discretionarily 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 the 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. An 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 now under the purview of the AML were regulated under the Anti-Unfair Competition Law (AUCL), which was promulgated in 1993 and revised in 2017 (the amendment became effect on 1 January 2018), and the Price Law, which was promulgated in 1997. After the enactment of the AML in 2008, those same activities were regulated under 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 1993 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 the 1993 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.
After the 1993 AUCL was revised in 2007, the amended AUCL no longer regulated selling products at prices below cost, tie-in sales or imposing other unreasonable trading conditions.
Currently, authorities at the central level and provincial level usually apply the AML as a legal basis in antitrust cases in practice, while enforcement authorities at lower levels that cannot apply the AML use the AUCL and Price Law as legal bases. Another difference is that some monopoly activities prohibited by the AML require a dominant position as a 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 AMC under the State Council, NDRC drafted six antitrust guidelines and published them to solicit public comments in 2016; 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.
The amended AUCL was approved by the National People’s Congress in November 2017 and came into effect on 1 January 2018.
According to the SAMR’s notice issued on 3 February 2019 on its website, SAMR plans to push forward with legislative work in 2019. It is reported that SAMR has revised the Provisions on Prohibition of Monopolistic Agreements, Provisions on Prohibition of Abuse of Dominant Market Position and Provisions on Prohibition of Abusing Administrative Power to Eliminate or Restrict Competition to strengthen antitrust law enforcement and the Fair Competition Review System. Specifically, SAMR will actively promote amendments to the AML.
Additionally, SAMR has also asked its Bureau of Price Supervision and Anti-Unfair Competition to revise the Interim Provisions on the Prohibition of Commercial Bribery and Several Provisions on the Prohibition of Infringement of Trade Secrets.