The Antitrust Attorney Blog
Author: Yang Yang
Ms. Yang is an Antitrust Partner at Fairsky Law Offices in Shangai. She is also a lecturer and researcher at China University of Political Science and Law. She authored a treatise on China Merger Control and is a member of the expert advisory team for Amendments to China Anti-Monopoly Law (with a total number of 8 members). Indeed, she leads the drafting of an expert report on suggested amendments to China Merger Control regime, Chapter 4 of Chinese Anti-Monopoly Law. She is also a frequent contributor to the Antitrust Report of LexisNexis and Competition Policy International (Asia Column and Asia Chronicle).
See also Yang’s previous article on this website: Antitrust Merger Control in China: Notifiable Transactions under the People’s Republic of China Anti-Monopoly Law
On October 23, 2021, the Chinese legislative authority released a draft amendment for public comments to China’s Anti-Monopoly Law (“AML”)1, with a public comment period open until November 21, 2021.2 The amendment is controversial because of the hefty fines on antitrust violations imposed in China by the State Administration for Market Regulation (“SAMR”). Internet platforms have been the most heavily fined by the SAMR, partially due to the use of a calculation method for monetary fines based on gross sales.3
Still No Clarification on the Definition of “Sales”, Which Serves as the Base for Monetary Fines
One of the most controversial legal matters for antitrust enforcement in China is the definition of “sales” as the basis for the calculation of monetary fines. The SAMR has the power to impose a fine between 1 to 10 percent of the “sales” generated by the firm in the preceding year. Even though both the current AML and the amendment are silent on the definition of “preceding year,” the SAMR has been considering for this purpose the year when the investigation is officially initiated.
Similarly, according to the published cases of the SAMR, the word “sales” refers to all sales from the firm as a whole, rather than just the firm’s sales from the relevant products and geographic markets.
With these two factors in mind, under the new draft, the calculation of “sales” would significantly impact firms doing business in China. Indeed, once the SAMR discovers the existence of a cartel or a Resale Price Maintenance (RPM) provision in one product market, it would consider all sales from the firm(s) involved as the basis for the calculation of the monetary fine.
But the main reason why this matter is controversial is the fact that––according to Chinese Administrative Law––administrative fines must be commensurate with the underlying violation in degree, importance and effects, among others. Considering the size of a firm as a whole, even 1 percent of the total sales would be heavier than any underlying violation.
For example, in the Alibaba Group decision, the parent company owns and operates shopping platforms, including Taobao.com and Tmall.com4. There, the abusive conduct refers to the alleged exclusive-dealing agreements since 2015, where Alibaba “forced” some major downstream merchants to enter the “Strategic Merchant Framework Agreement”, the “Joint Business Plan”, the “Memorandum of Strategic Cooperation” and other agreements. In those agreements Alibaba required that such major merchants would not access other competing online platforms. Despite the conduct only involving exclusive-dealing agreements with certain major merchants, the sales as the basis for calculating the monetary fines were the total sales of Alibaba Group in 2019, the year preceding the year when the government initiated the investigation.
Another example is the fine on Meituan, a platform well known for food-delivery.5 In this decision, the relevant market was the online food-delivery platform, implying that the violating abusive conduct all occurred in this market. But, the basis for the fine was still the total sales of the group, RMB 114,747,995,546 in 20206, which also included sales from travel and other businesses, like drug-delivery and flower delivery. Such non-food-delivery businesses in 2020 generated approximately 46% of the sales for this public company7.
Hub-and-Spoke Agreements Constitute a Third Kind of Illegal Agreement
Article 18 of the amendment provides that Operators shall not organize other operators to reach monopoly agreements or provide substantive assistance to other operators in reaching monopoly agreements. This clause essentially accepts “hub-and-spoke” agreements as a third kind of illegal agreement in addition to horizontal agreements between/among competitors and vertical agreements between/among merchants and distributors.
Careful Reading of the Amendment When Dealing With an RPM Clause
Article 17 of the amendment adds one clause to the current RPM regime of Chinese Antitrust Law. If a firm can show that there are no anticompetitive effects eliminating or restricting competition, it would not be fined as an illegal RPM agreement.
This new clause is identical to the Chinese Supreme Court’s decision on Yutai v. Hainan Provincial Price Bureau. That Court essentially created an “inversion of burden of proof” for administrative enforcement on RPM agreements, i.e., once the SAMR discovers sufficient facts for an execution and/or actual implementation of an RPM agreement, the defendant has a defense based on the lack of anticompetitive effects (i.e. elimination or restriction of competition). And such defense is in addition to the defense of Article 15 exemptions8. But it is worth noting that the defense based on the lack of anticompetitive effects should not be considered as an exemption. The second instance court opinion stating that a monopoly agreement does not require the elimination or restriction of competition is erroneous and will be reversed.
In addition, the court provides that the definition of a “monopoly agreement” in Art. 13 (2) of AML, a monopoly agreement as used in this law refers to an agreement, decision or agreement that eliminates or restricts competition, should equally apply to vertical agreements in Article 14. Such definition remains unchanged in the amendment, as Article 15. Therefore, the Court is clear that the anticompetitive effects is a legal element of the violation of an illegal RPM rather than an exemption.
Thus, the clause does not add anything new to the current Chinese RPM regime. It is true that the Yutai decision from the Chinese Supreme Court abandons the “per se illegal RPM”. But, unfortunately, this decision does not make a big impact on enforcement. This is because in the end the SAMR has the power to accept the defense–– showing that there are no anticompetitive effects eliminating or restricting competition––or not. The SAMR has used anticompetitive intent to override this defense in the high-profile RPM enforcement case against Yangtze River pharmaceutical company9. Despite this new clause, more clarifications from the legislative authority are still necessary.
Article 19 of the amendment also provides that if a market share is lower than a threshold provided by the antitrust authority, a horizontal, vertical and hub-and-spoke agreement would be exempt unless the authority has proof of the elimination and restriction of competition.
Last, there is a question of whether the SAMR would be authorized to promulgate implementing rules or measures on the exemption threshold based on market shares, and if so, what would be considered as determinative factors for eliminating and restricting competition as the exception to the exemption based on market-share thresholds.
Special Abusive Conduct for Internet Platforms
Article 22 of the amendment essentially adds new specific abusive conduct to firms holding a dominant position by imposing unreasonable restrictions on other firms by using data, algorithms, technology, and platform rules.
This clause also calls for clarifications on questions re “reasonableness” of the restrictions on other firms, and how to apply the element of “elimination or restricting competition”.
Conclusion
Even though the amendment includes some very positive developments, such as for example, imposing personal liabilities for executing monopoly agreements and for serious interference in investigations (including dawn raiding), there are still too many questions unanswered. Therefore, we still call for more clarifications from SAMR on this new AML amendment.
1 Published for public comments at the official website of National People’s Congress at http://www.npc.gov.cn/flcaw/userIndex.html?lid=ff8081817ca258e9017ca5fa67290806
2 See http://www.npc.gov.cn/flcaw/
3 Chinese Antitrust Law, art. 46, in effect from August 1, 2008, available at http://www.gov.cn/flfg/2007-08/30/content_732591.htm.
4 Official decision in Chinese is available at http://www.samr.gov.cn/fldj/tzgg/xzcf/202104/t20210409_327698.html.
5 Official decision in Chinese is available at http://www.samr.gov.cn/fldj/tzgg/xzcf/202110/t20211008_335367.html.
6 Annual report of 2020, page 7, available, http://media-meituan.todayir.com/2021041908000317079722494_en.pdf
7 Annual report of 2020, page 8, available, http://media-meituan.todayir.com/2021041908000317079722494_en.pdf
8 Yutai v. Hainan Provincial Price Bureau (Chinese Supreme People’s Court Dec.18, 2018), Supreme Court Administrative Decision, [Zui Gao Ren Min Fa Yuan Xing Zheng Cai Ding Shu Di (2018) Zui Gao Fa Xing Shen No. 4675], available at http://zscq.court.gov.cn/sfjs/201304/t20130408_183102.html (hereinafter “Yutai v. Hainan Provincial Price Bureau (Sup. People’s Ct. 2018)”), Page 14.
9 Official decision in Chinese is available at http://www.samr.gov.cn/xw/zj/202104/t20210415_327851.html.