On December 26, 2019, the Shanghai Administration for Market Regulation (“Shanghai AMR”) released the “Shanghai Anti-monopoly Compliance Guide for Undertakings” (“Compliance Guide”) and thus introduced us another guiding reference for corporate anti-monopoly compliance.
Corporate compliance is not a new topic. Throughout the law enforcement practices in various jurisdictions, it is evident that a comprehensive setup of corporate compliance system not only helps undertakings respond correctly and proactively when being investigated, but also functions as a basis for self-certification and reduction of high penalties. China’s Anti-Monopoly Law (“AML”) has been implemented for more than ten years. In view of the particularity and complexity of anti-monopoly compliance, enterprises still have many confusions about how to prevent and control anti-monopoly risks. The Compliance Guide for the first time uses real cases with charts and images to illustrate anti-monopoly risks, enabling undertakings to easily comprehend conducts regulated by the AML. In addition, it provides clues for enterprises to discover anti-monopoly risks and proposed corresponding compliance recommendations. This article will briefly review the highlights and key points in the Compliance Guide for reference.
1. Reaffirming the Role of and Deterrence by the AML as the “Economic Constitution”
With the gradual improvement of market economy in China, protecting and maintaining market competition mechanism has become an integrated part of market economy regulation in China. The Compliance Guide reiterates that “the competition law system is a fundamental legal construct in a market economy nation; as such, the AML and related regulations must be complied with.” It also emphasizes the role of the AML as the “Economic Constitution.”
Meanwhile, the Compliance Guide again clarifies that the maximum fine for AML violation is 10% of the total sales revenue for the preceding year, consistent with the affirmation by Zhenguo Wu, the director-general of SAMR’s Antimonopoly Bureau, on the issue of AML penalty basis in May 2019. Calculating AML fines based on total sales revenue rather than sales revenue of relevant products exerts great deterrence of corporate anti-monopoly compliance.
2. Clarifying the Compliance Guide’s Effectiveness and Scope of Application
The Compliance Guide points out that, being a non-regulatory document, it only provides information for the purpose of general guidance and does not constitute any legal or other professional advice nor any legal statement in any jurisdictions. Meanwhile, the Compliance Guide emphasizes that it is subject to timeliness and limitations, and that enterprises should thus keep track with the latest developments of laws, regulations and regulatory documents, seek professional advice from professionals, and make decisions according to their own situation.
3. Providing Practical Management Advices Based on the Characteristics of Anti-Monopoly Compliance
There are particular features of AML violations: first, they frequently occur in frontline business departments or within the discretion of some individual operational employees; second, they frequently occur in the operation and business strategies of enterprises, such as product pricing, product sales strategies, promotion policies, selection of upstream and downstream customer, and others. Therefore, management of anti-monopoly compliance should be integrated into the routine business decisions, considered a preliminary practice preceding the formation of business strategies, and regularly evaluated.
Chapter 4 of the Compliance Guide provides several practical managerial advices for business operators’ reference based on their own situation, including reporting mechanism, corporate culture cultivation, review and auditing, competition law compliance consultation, compliance commitments, risk disposal and training mechanism. While there is no universal set of anti-monopoly compliance strategies suitable for all business operators, the Compliance Guide takes into full account the unique anti-monopoly compliance demands of advanced prevention, continuous frontline management, and cultural cultivation, and then gives several top-down suggestions such as commitment mechanism, continuous and regular training mechanism, competition law compliance consultation, and others.
4. Horizontal Monopoly Agreement
The Compliance Guide emphasizes that horizontal monopoly agreement is “a conduct that is strictly forbidden and severely punished worldwide, and is also the most important AML risk faced by business operators.” The horizontal monopoly agreement remains a risk that operators shall focus on preventing and controlling in the future. It is worth mentioning that the Compliance Guide lists “bid rigging” explicitly and separately for the first time, in parallel with other typical horizontal monopoly agreements, including “price-fixing or price modification”.
Concerted practices among competitors through information exchange have attracted much attention recently. The Compliance Guide lists “sensitive information” that may contribute to concerted practices. Although in practice the risk level of such information depends on specific situations, scope of such conduct is broad enough to gain much attention of business operators. When meeting with competitors is unavoidable, such as participating in industry association events, discussing industrial standards, and others, if other competitors discuss or mention sensitive information subject to potential AML violations, the Compliance Guide explicitly provides that business operators shall immediately express their refusal to participate in and timely avoid their attendance, and shall keep relevant evidences and records of their refusal and avoidance of attendance, as such evidences may be helpful to prove that they did not engage in the suspected conduct of monopoly in the future.
The Compliance Guide provides that “all business operators shall independently conduct sales and procurement and make independent decisions of relevant market behaviors”. This is also the first time that an AML enforcement agency explicitly suggests that business operators shall make “independent” business decisions.
5. Vertical Monopoly Agreements
In addition to prohibition of vertical resale-price maintenance, the Compliance Guide also enumerates vertical non-price monopoly agreements. This is the first time that an anti-monopoly law enforcement agency explicitly enumerate and evaluate the scenarios of vertical non-price monopoly agreements in a generic industry guidance document following the Anti-monopoly Guidelines on the Automobile Industry (Draft for Comments) (the “Automobile Guidelines“).
It is worth mentioning that, although certain anti-monopoly risks exists for vertical non-price-fixing monopoly agreements, such agreements are not themselves per se illegal. Currently, the factors for identifying monopoly agreements prescribed by Article 13 of the Interim Provisions on Prohibiting Monopoly Agreements are also applicable to identifying vertical non-price-fixing monopoly agreements. The Automobile Guidelines also enumerate common vertical non-price restrictions and, in particular, recognize geographic restrictions and client restrictions by restrictions of passive sales and cross-supply as severe restraints on competition. As of today, the Automobile Guidelines are yet to come into effect, and the anti-monopoly law enforcement agencies have not imposed any penalties solely aiming at vertical non-price-fixing restrictions. However, enterprises are advised to note that the Compliance Guide for the first time mentions exclusive sales and exclusive purchases in parallel with the “restrictions of passive sales” and “restrictions of cross-supply” evaluated in the Automobile Guidelines, indicating the potential anti-monopoly risks of the former two types of exclusive arrangements.
6. New Issues of Anti-Monopoly Agreements
In addition to the above-mentioned typical horizontal and vertical monopoly agreements, the Compliance Guide emphasizes that enterprises should pay close attention and attach great importance to the new issues of suspected monopoly agreements. Using the examples of “platform hub-and-spoke conspiracy” and monopoly agreements reached by “network platform operators”, the Compliance Guide also reminds business operators to pay attention to potential new types of monopoly agreements arising from the two conspiracy models.
The Compliance Guide for the first time recognizes the “platform hub-and-spoke conspiracy” as a form of horizontal monopoly agreements. Such conspiracy may cause some confusion as on its face it takes the form of a vertical agreement (competitors communicating with each other via an intermediary platform). To clearly identify what kind of monopoly agreements will be reached, it is advised to distinguish whether the parties they ultimately enter agreements with are their competitors or upstream and/or downstream enterprises.
7. Abuse of Dominant Market Position
In the Chapter of “Abuse of Dominant Market Positions by Business Operators”, the Compliance Guide first introduces the definition of a dominant market position and the factors to consider and identify whether a market dominant position exist. Second, as emphasized by the Shanghai AMR, “it is not per se illegal for a business operator to possess a dominant market position. Anti-Monopoly Law does not oppose business operators to obtain market dominance by lawful operation, nor does it oppose business operators with certain market power to achieve greater success in the commercial world by more advanced technology and higher efficiency.” Such explanation has helped many business operators to understand the idea that monopoly itself is not illegal, while the abuse of monopoly position shall be punished. At the same time, such explanation clearly indicates that the AML focuses more on protecting market competition and regulating the operational behavior of market players, rather than adjusting the existing market structure.
Third, similar to the above-mentioned horizontal and vertical monopoly agreements, the Compliance Guide explicitly lists typical behaviors and illustrative cases of abuse of market dominance. The cases are concise, accessible, understandable, focused, and highly operable, as well as covering the essential points of compliance practices.
Last but not the least, the Compliance Guide separately provides that “industries concerning the vitals of national economy and national security (including water supply, power supply, gas supply, telecommunications, cable television and other public utility enterprises) and industries that are exclusively franchised in accordance with applicable laws are likely presumed to possess a dominant market position in the relevant markets and present high anti-monopoly law risks.” Most of China’s power supply, gas supply, water supply and lawfully franchised enterprises are monopolistic in their nature. Given the current trend of strong regulatory supervision, they are particularly easy to give rise to anti-monopoly issues. In such context, it cannot rule out the possibility that public utility enterprises and lawfully franchised enterprises will still be fall into key law enforcement in the coming year.
8. Anti-monopoly Investigations
8.1 Law Enforcement Agencies and Their Responsibilities
Chapter 6 of the Compliance Guide introduces the respective responsibilities of the SAMR and the Shanghai AMR. It is worth noting that Shanghai AMR for the first time pinpoint that it could “supervise concentrations of undertakings in this city and carry out investigations according to the relevant law”. For the time being, it is SAMR that has the jurisdiction to review concentrations of undertakings and make review decisions. Such jurisdiction has not been delegated to the Administration for Market Regulation of any province or direct-controlled municipality. According to the Compliance Guide, the Shanghai AMR has the jurisdiction of supervising and investigating pursuant to the law, which undoubtedly expands the source of discovering failure to file for concentrations by undertakings according to laws.
The cases reported by third parties (such as competitors, upstream suppliers, downstream customers, and others) and the previous cases of failing to notify, discovered in the process of current review, account for the majority of the currently announced penalty decisions regarding failure to file. Hereafter, considering that the Shanghai AMR (and even extended to the Administration for Market Regulation of other provinces and direct-controlled municipalities) will take the initiative to carry out supervision and investigation, the possibility of discovering implementation of concentrations without filing will be greatly increased, and it will be more difficult for transaction parties to avoid their filing obligations.
8.2 Cooperation with Anti-monopoly Investigations
The Compliance Guide describes three steps to cooperate with anti-monopoly investigations, namely proactive reporting, active cooperation with investigations and proper responses to investigations.
It can be inferred from the concept of first step of proactive reporting that, when business operators find any illegal act in the process of self-inspection, internal rectification of illegal acts may not be sufficient for the purpose of AML enforcement. It is also necessary to proactively report to the law enforcement agencies, actively cooperate with the investigations, and then apply for leniency or, as the case may be, make commitment to stop/terminate the investigation procedure.
As for the second step of active cooperation with the investigations, business operators shall fully cooperate with the investigation of the law enforcement agencies, maintain effective communications with the law enforcement agencies, mitigate losses and try to minimize negative impacts or penalties.
The third step is to respond properly to investigations. The Compliance Guide introduces two methods, namely (1) application for leniency, and (2) application for suspending investigations by making commitment. Business operators could choose the proper response depending on the illegal facts and acts discovered through self-inspection or investigation by law enforcement agencies and their own situations.
8.2.1 Application for the Leniency Program
The application for the leniency program is usually applicable to cases where multiple business operators commit illegal acts at the same time. Antitrust enforcement agencies will decide whether to mitigate or exempt the penalties according to the time-sequence of the self-reporting and the importance of the evidence provided by business operators, and according to the relevant circumstances of the monopoly agreements being reached or implemented. In the same case, the first applicant may be exempted from all penalties or the penalties will be reduced by not less than 80%; for the second applicant, the penalties will be reduced by 30% to 50%; for the third applicant, the penalties will be reduced by 20% to 30%.
The requirements of being identified as “the first applicant exempted from penalties” are generally higher, requiring business operators to voluntarily submit to the antitrust enforcement agencies unacknowledged evidence that plays a key role in the initiation of the investigation or the identification of monopoly agreements. A business operator proactively reporting without providing substantial evidences will very unlikely to be regarded as “the first applicant exempted from penalties”. In addition to submitting important evidences, applicants also need to continue cooperating with law enforcement agencies until the end of the investigation.
Based on the above, it could be inferred that the application for leniency program is more suitable for horizontal monopoly agreements/cartels. The underlining logic behind such mechanism is that as cartels are usually hidden and difficult to be found, the members of cartels are encouraged to proactively expose illegal acts and break up the cartels from within.
In addition, the application for leniency program means that business operators admit themselves guilty of the illegal acts, and such business operators have to give up all or part of the their factual and legal defenses. They may also be required to conduct a thorough internal investigation and make compliance rectifications, as well as provide critical or a complete set documents related to their illegal acts, otherwise they may be difficult to meet the conditions of the exemption.
8.2.2 Making Commitment and Application for Suspending Investigations
Different from the application for leniency program, application for suspending investigations by making commitment is more suitable for vertical monopoly agreements or abuses. In addition, the Compliance Guide also clearly points out that the application for suspending investigations are not applicable to the majority of horizontal monopoly agreements.
Although the Compliance Guide mentions that the making commitment and the application for suspending investigations are applicable “during the process of investigation by antitrust enforcement agencies and before anti-monopoly enforcement agencies have sufficient evidence to identify the illegal acts”, for anti-monopoly violations, especially vertical price controls, discovered by business operators in the process of self-inspection, such business operators may consider reporting to the antitrust enforcement agencies on their own initiative and then making commitment and applying for suspending investigations.
Based on above, the application for suspending investigations could prevent law enforcement agencies from carrying out large-scale law enforcement and investigation against a company to some extent, and provide business operators with opportunities of seeking for exemption from penalties. However, by taking these actions, business operators are highly likely to be required to make substantial changes in business operation, subject to regular review and investigations by antitrust enforcement agencies and wide public supervision and public complaint mechanism. Moreover, there will be risks of resumption of investigations when certain circumstances arise.
The Compliance Guide is moderate in length and comprehensive in content. It focuses on the analysis of key issues, and connects the AML with illustrative cases in an in-depth but simple manner. In addition, it provides a more clarified and practical guidance of compliance for business operators to engage in their business operations.
Now being a proper time for compliance, the Compliance Guide could be a useful handbook for enterprises to seek for references of anti-monopoly compliance. Furthermore, the enterprises shall pay close attention to dynamics of AML legislation and enforcement activities and formulate their anti-monopoly compliance system in accordance with their own circumstances. When business development synergizes with compliance management, “compliance” would create value for enterprises.