On 24 June 2022, China adopted an amendment to its Anti-Monopoly Law (the “AML”). Coming into effect as of 1 August 2022, this is the first amendment to the AML (the “AML Amendment”) since it became in force in 2008. Instead of overhauling the current regulatory framework, the AML Amendment attempts to fine-tune a number of key areas that have drawn attention and discussion within antitrust community and public. On 27 June 2022, State Administration for Market Regulation (SAMR), China’s antitrust authority, released six sets of draft AML implementing rules to public comments, which are designed to streamline and harmonize the existing operational measures with respect to filing thresholds (e.g. significant increase of turnover thresholds), merger review rules (e.g. clarifying “stop-the-clock” mechanism, intensifying the failure-to-notify sanction obligations), joint conduct rules (e.g. introduction of “safe harbour” rules), unilateral conduct rules (e.g. clarifying situations applicable to platform players), IP abuse rules (e.g. clarifying abusive conducts where standard essential patents are concerned) and administrative monopoly. We anticipate that the AML Amendment and its forthcoming implementing rules will upgrade China’s antitrust regulatory regime and will have profound implications for firms doing business in China.
We set forth below some highlights of the AML Amendment.
(1) Significant hike in fines on enterprises and individuals for various violations (e.g., failure-to-notify, refusal-to-cooperate)
(2) Potential reputational damages to infringers
(3) Digital platform sector under stricter scrutiny
(4) “Hub-and-spoke” cartels captured
(5) Safe harbour rules added for vertical restraints
(6) Streamlined merger control regime (e.g., introduction of “stop-the-clock” mechanism)
(7) Harmonization between administrative enforcement and judicial practice (incl. introduction of antitrust public interest lawsuit)
Highlight 1: Significant hike in fines on enterprises and individuals for various violations (e.g., failure-to-notify, refusal-to-cooperate)
The AML Amendment significantly increases legal liabilities for enterprises and individuals in violation of the AML. Specifically:
- Increased upper limits of fines: The upper limits of fines for merger filing related non-compliance and refusal or obstruction of investigation are raised to a certain percentage of the entity-in-question’s turnover, similar to joint conducts and unilateral conducts.
- Establishment of punitive fines: For violations which are particularly serious or have caused significantly aggravated consequences, the AML Amendment allows for punitive fines of 2 to 5 times of the base fines. This implies that the utmost fine for serious violations could be as high as 50% of the entity-in-question’s turnover for the preceding year.
- Persons-in-charge could be held liable: Individuals who are personally liable could be imposed with a fine up to RMB 0.5 million (for refusal or obstruction of investigation) or RMB 1 million (for conclusion of a monopoly agreement).
Highlight 2: Potential reputational damages to infringers
The AML Amendment requires anti-monopoly violations may be documented on an enterprise’s credit record, which could affect not only such enterprise’s goodwill but also its business opportunities, especially for public procurements. For example, medical enterprises with an antitrust sanction record may be downgraded for its credit and will be restricted or prohibited from participating in centralised medicine procurement.
China has been working on establishing its social credit system for years and is increasingly leveraging such system to regulate market players. Considering this, the implications of antimonopoly violations should be taken seriously.
Highlight 3: Digital platform sector under stricter scrutiny
In line with the antitrust regulatory trends in other jurisdictions such as the US and the EU, the digital platform sector has also become a prioritized focus of China’s antitrust enforcement starting from 2020, marked by record high fine (RMB 18 billion) against Alibaba. While the existing AML does not expressly stipulate how to target digital platform players’ novel monopolistic conducts, SAMR has already considered the unique features of online platforms in its enforcement activities.
The AML Amendment now fills in the legislative gap by prohibiting abusive actions by taking advantage of data and algorithms, technology and platform rules, etc.
“Killer acquisition” is another topic that has drawn antitrust regulatory attention worldwide. The AML Amendment now provides clearer rule to tackle deals which may have competition concerns but fall below the traditional turnover threshold. Under the AML Amendment, SAMR has the power to require notification of such deals, and if the notification is not made, an investigation shall be initiated.
Highlight 4: “Hub-and-spoke” cartels captured
While “hub-and-spoke”cartels have been examined and penalised in other jurisdictions such as the US and the EU, the current AML has been unwieldy in tackling such a kind of collusion since it only considers trade associations to be able to be the “hub” in “hub-and-spoke” cartels. The AML Amendment stepped up by expressly subjecting any undertaking from organizing or assisting in the conclusion of a monopoly agreement to the same level of penalty as those which directly participates in a monopoly agreement.
Highlight 5: Safe harbour rules added for vertical restraints
It is believed that monopoly agreements between undertakings with a low market share would unlikely have an anti-competitive effect. Therefore, some jurisdictions, such as the EU, adopt a safe harbour rule to block exempt undertakings below a certain market share from being accused of conclusion of certain monopoly agreements. Previously in China, similar safe harbour rules only exist in the antitrust guidelines on the intellectual property sector and the automobile sector.
The AML Amendment for the first time establishes a safe harbour for vertical monopoly agreements in all sectors. According to the AML Amendment, vertical agreements can be exempted if it can be proved that the relevant undertakings’ market share in the relevant market is lower than the threshold and meets other conditions prescribed by the anti-monopoly enforcement authority. SAMR’s draft implementing rules for monopoly agreement proposed a threshold of 15% market share for such safe harbour.
It is worth noting that the AML Amendment limits the application of the safe harbour to only vertical agreements, although horizontal agreements were also considered to be covered by the safe harbour in the first exposure draft of AML Amendment. This demonstrates that legislators still consider horizontal cartels as “hardcore restrictions” which could hardly qualify for any block exemption.
In addition, the AML Amendment further clarifies that resale price maintenance (RPM) is prohibited only when it has anti-competitive effects, and parties to the RPM bear the burden to prove that their RPM is not anti-competitive. This reconciles the long-existing divergence between the enforcement authority’s “per se illegal” approach and the judiciary’s “rule of reason” approach towards RPM in China.
Highlight 6: Streamlined merger control regime (e.g. introduction of “stop-the-clock” mechanism)
Learning from the practices of other jurisdictions such as the EU, the AML Amendment also introduces the “stop-the-clock” mechanism to avoid the need for “pull-and-refile” in complicated cases. Triggers of the “stop-the-clock” include the notifying parties’ failure to provide information as requested, new fact or circumstances requiring further verification, and the notifying parties’ request for stop the clock to evaluate remedies. Although the new mechanism is expected to optimise review schedule for complicated cases, undesired extension of the review period is also envisaged for ordinary cases or even simple cases.
The AML Amendment also introduces a “classified” review system to focus on mergers in important sectors and to improve the efficiency of merger review. However, it is unclear how this “classified” review system will work in practice.
Highlight 7: Harmonization between administrative enforcement and judicial practice (incl. introduction of antitrust public interest lawsuit)
The AML Amendment calls for improvement of harmonization between administrative enforcement and judicial practice, and introduces a civil public interest lawsuit system which endows the procuratorates (like state attorneys in the US) with the power to initiate a civil public interest litigation against undertakings whose monopolistic conducts are believed to harm the public interest. This poses additional exposure for undertakings violating the AML including follow-on actions from individual stakeholders and the state.