competition law
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This article is written by Nikhil Shinde pursuing Certificate Course in Competition Law, Practice And Enforcement from LawSikho.

Table of Contents

Introduction

Competition law is the body of legislation intended to prevent market distortion caused by anti-competitive practices on the part of businesses. The Anti-Monopoly Law of the People’s Republic of China (“AML”) is the primary antitrust legislation of China. Apart from the AML, the competition law regime in China also comprises: 

  1. The Anti-Unfair Competition Law of the People’s Republic of China (“AUCL”),
  2. The Price Law of the People’s Republic of China (“Price Law”), and
  3. The Bid invitation and Bidding Law of the People’s Republic of China (“Bidding Law”).

The AML prohibits monopolistic agreements, abuse of dominance, and concentration of business, which can restrain or eliminate competition. The AUCL prohibits predatory pricing, tying-in, imposition of unreasonable conditions on the sale, and abuse of administrative powers by the governments and/or their subordinate departments. The Price Law prohibits unfair price acts such as collusion, price discrimination, price manipulation, predatory pricing and excessive pricing. The Bidding Law prohibits bid-rigging.

The AML does not apply to cooperative or collaborative acts between agricultural producers and rural economic organization business activities such as manufacture, processing, sale, transportation and storage etc. of agricultural products. The AML also permits monopoly agreements concluded for any of the following purposes:

  1. Improving technologies or engaging in research and development of new products;
  2. Improving product quality, reducing cost and enhancing efficiency, unifying specification and standards of products, or implementing specialized division of production;
  3. Increasing the efficiency and competitiveness of small and medium-sized undertakings;
  4. Serving public interest in energy conservation, environmental protection and disaster relief;
  5. Mitigating sharp decrease in sales volumes or obvious overproduction caused by economic depression;
  6. Safeguarding legitimate interests of foreign trade and in economic cooperation with foreign counterparts;
  7. Other purposes as prescribed by law or the state control.

Enforcement

The Ministry of Commerce (“MOFCOM”), through its Anti-Monopoly Bureau, is responsible for regulating mergers and acquisitions in China. In addition to the AML, the MOFCOM has issued several guidelines and regulations which also form a part of the merger control regime in China.

The National Development and Reform Commission (“NDRC”) and the State Administration of Industry and Commerce (“SAIC”) are the two other antitrust authorities responsible for competition law enforcement in China. NRDC is responsible for price-related enforcement, while SAIC is responsible for non-price related enforcement.

A decision of the MOFCOM can be challenged by way of administrative reconsideration and thereafter, an administrative action can be made before the court. Decisions of NDRC or SAIC can be challenged by way of administrative reconsideration and thereafter, before a court, or if the parties choose to, they can directly approach a court without seeking administrative reconsideration.

In case of conclusion and implementation of a monopolistic agreement or abuse of dominance, the concerned antitrust authority can issue a cease and desist direction, confiscate unlawful gains, and impose penalties. If the contravening party is a trade association, then in serious cases, the administrative department for the registration of public organizations may cancel the registration of the trade association in accordance with the law.

Contravention of the AML does not attract criminal liability in China.

As per the AML, if an undertaking engaged in monopolistic conduct causes loss to another person, it shall be liable to pay civil damages. Damages claims have to be brought as civil suits. Although the Anti-Monopolistic Authority(“AMA”) does not provide for class action, if more than one party with the same subject matter approaches the court, then the matters can be tried as ‘joint action’ with the approval of the court.

The AML provides for a leniency regime in the case of cartels. Article 46 of the AML states that if a business, on its own initiative, reports about a monopoly agreement and provides material agreement, then the concerned authority may at its discretion mitigate and even exempt the business from any punishment. NRDC and SAIC have come out with their own rules which govern the leniency regime in addition to the AML.

The AML does not have any provision for penalizing officials of a contravening party, so the question of applicability of the AML to individuals does not arise. In India, the CCI has also put in place regulations that govern the leniency procedure. In 2017, the leniency regulations were amended to extend leniency benefit to individuals; definitions of an ‘applicant’ now includes an individual who has been involved in a cartel. 

The AML allows for settlement in case of monopolistic conduct if the undertaking being investigated commits to adopt specific measures to eliminate the consequence of the contravening act within a period as approved by the concerned antitrust authority.

Merger control

“Concentration of Undertakings” are to be notified to the MOFCOM in terms of AML. If specified thresholds are met. Although the AML is silent about the treatment of joint ventures, in 2012 MOFCOM, in the amended notification of form, clarified that joint ventures, including the greenfield of joint ventures, would also have to be notified.

The MOFCOM allows for pre-merger consultation.

There is no deadline for notifying a transaction, however, the regime is suspensory in nature. Transactions cannot be closed before the MOFCOM approves a transaction.

Under exceptional circumstances, the MOFCOM can waive the requirement of filing copies of executed definitive agreements. However, notifying parties need to provide legitimate reasons for their inability to furnish executed copies of definitive agreements.

In 2014, MOFCOM introduced a short-form filing which is available to parties only in specific cases namely,

  1. A transaction where the parties
  • Have a combined market share of less than 15% if they complete in the same market, and
  • Each has a market share of less than 25% if operate in vertically related or neighbouring markets;

2. Setting up of offshore joint venture with no activities in China; and

3. Change from joint venture to sole control if the parent sole controller and the joint venture do not operate in the same market.

In a transaction where a foreign investor seeks to acquire a stake in a Chinese enterprise and the transaction involves national security, in addition to the review process to set out in the AML, additional review for national security is required to be undertaken This process is referred to as the National Security Review (“NSR”). The AML does not provide for any mechanism or procedure to conduct NSR. In 2011, the State Council of the People’s Republic of China published a notice which formed the basis of the NSR process. Foreign investment in certain sectors is also subject to foreign investment review.

In terms of AMA, the MOFCOM can examine transactions on non-competition issues as well. This would occur in case of;

  1. Industries that belong to the State-owned economic sector and have bearing on the lifeline of the national security and 
  2. Industries that exercise a monopoly over the production and the sale of certain commodities according to law.

The MOFCOM can look into business operations, price of commodities and services provided by the business, in order to protect the consumers’ interest and facilitate technological advancements.

Decisions of non-conditional approvals are not published by the MOFCOM. Only in case of condition clearance or non-clearance within a stipulated review period. approval is deemed to have been received upon expiry of the review period.

Extraterritoriality

Article 2 of the AML expressly states that the provision of the AML would have extraterritorial application if monopolistic conduct outside China eliminates or restricts competition within the territory of China.

In 2013, the MOFCOM in a merger control matter directed parties to divest interests and assets located outside the territory of China.

International cooperation

MOFCOM, NDRC and SAIC have entered into cooperation agreements and undertakings jointly and severally, with antitrust agencies of other jurisdictions.

MOFCOM has MOUs/ terms of reference with antitrust agencies of the US, the EU, the United Kingdom and South Korea to establish formal cooperation mechanisms. It also engages in international cooperation through free trade agreements (“FTA”) with countries like Switzerland and Iceland.

NDRC has MOUs with JTFC and the Australian Competition and Consumer Council. SAIC has MOUs with the Russian Federal Antimonopoly Service and the Council for Economic Defense of the Federal Republic of Brazil. 

Landmark judgements

Qihoo 360 v. Tencent (2016)

Facts

  • Plaintiff: Qihoo 360 Technology Co. Ltd. (“Qihoo 360”), a leading Chinese antivirus software company.
  • Defendant: Tencent Holdings Limited (“Tencent”), a major Chinese Internet and social media company.

Issue

  1. Qihoo 360 had alleged that Tencent used its abusive dominant position in the Instant Messaging and Service market by bundling up its anti-virus software with his Instant Messaging Software QQ Messenger.

Judgement

  1. The Supreme People’s Court (“SPC”) upheld the decision of Guangdong High People’s Court by rejecting Qihoo 360 allegations. 
  2. The SPC found that Tencent had limited power to control the market by price, quality, quantity or restriction on trading terms. 
  3. Although the restrictions it imposed might have inconvenienced consumers, the SPC said that this was a dynamic and highly competitive market and held there was not enough evidence to prove that Tencent held a dominant market position or that it had abused its position in the Instant Messaging and Service market.

This was the first and is a landmark judgement of SPC on AML Abuse of Dominance since coming into effect in 2008. In this case, SPC, establishing the approach to market definition and assessment of what constitutes an abuse of dominance under the AML. Market share was considered by the SPC to be only a rough and potentially misleading indicator when assessing the existence of a dominant market position. High market share does not, the SPC said, directly translate into the existence of a dominant market position.

Huawei v. InterDigital (2013)

Facts

  • Plaintiff: Huawei Technologies Co. Ltd. (“Huawei”), a leading Chinese telecommunications equipment manufacturer and service provider, 
  • Defendant: InterDigital, Inc. (“InterDigital”), a leading US developer of fundamental mobile-phone technology, 

Issue

  1. Huawei accused InterDigital of abusing its dominant market position in China and the United States in the market for the licensing of essential patents.
  1. Through differentiated pricing, tying and refusal to deal; and
  2. Refusal to license patents to Huawei on fair, reasonable and non-discriminatory (“FRAND”) terms. 

Judgement

  1. On 28 October 2013, the Guangdong Higher People’s Court upheld the Shenzhen Intermediate People’s Court’s decision by ruling that InterDigital had violated the AML by licensing standard-essential patents to Huawei on unfairly high royalty rates.
  2. InterDigital was ordered to cease the alleged excessive pricing, alleged improper bundling of patents and pay Huawei approximately RMB 20 million in damages.

This was the first case under the AML involving the patent transfer and the first time a court has determined a FRAND royalty rate in China. This case sets a potentially important precedent for other complaints relating to standard essential patents.

Rainbow v. Johnson and Johnson (2013)

Facts

  • Plaintiff: Ruibang Yonghe Technology Co., Ltd. (“Ruibang”), is an authorized distributor of Johnson & Johnson (Shanghai) Medical Equipment Co., Ltd.
  • Defendant: Johnson & Johnson (China) Medical Equipment Co., Ltd. (“J&J”), in the authorized territory under a distribution agreement.

Issue

  1. Ruibang file a suit against J&J for;
  1. J&J’s partially withdraw Ruibang’s distributorship, 
  2. taking off Ruibang’s distributor deposit; and
  3. Eventually refusing to supply because of Ruibang’s breach of the lowest re-sell price in the unauthorized territory.

Judgement

  1. On 1st August 2013, the Shanghai Higher People’s Court overruled the previous decision of the Shanghai Pudong New District Court.
  2. J&J had violated Article 14.2 of AML and was liable for damages.
  3. In the final judgement, the Shanghai Higher People’s Court has made some observations that:
  1. The Vertical Agreements under the AML is not illegal but challengeable and its effects test is necessary to know the vertical agreement breaches AML’s rule of reason is not.
  2. Effect test can be measured by following four elements:
  • sufficient competition;
  • market position;
  • motivation; and 
  • effects of competition restriction and competition promotion.

c. In private enforcement cases, the AML applied the maxim ‘semper necessitas probandi incumbit ei qui agit’, i.e., the necessity of proof always lies with the person who lays the charges.

This was the first and landmark judgement case on Vertical Agreements under AML. The court essentially considered that the reduction of intra-brand competition (e.g. competition between distributors of the same brand) would be sufficient to meet this effects-based test. On the other hand, given the fact that in that case there was no strong evidence suggesting that the Retail Price Maintenance (“RPM”) had affected competition in the overall markets (i.e., inter-brand competition between upstream suppliers), the judgement opened up debates not only concerning the competition analysis of RPM, but also the applicability of economics in legal disputes.

Conclusion

China is effectively working and has made significant achievements in its AML enforcement over the past twelve years. China is dynamically tackling anti-competitive agreements, abuse of market dominance and anti-competitive merger and acquisition. It’s also fighting with so-called administrative monopolies. There has been an increasing number of private actions suits brought to and considered by the People’s Court of China which supplement the public enforcement of the AML. In all these areas, economics theories and reasoning have been applied to AML enforcement in a way consistent with modern competition economics and international best practice.


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