On October 23, 2021, the highly anticipated Anti-Monopoly Law of the People’s Republic of China (Draft Amendment) (hereinafter, the “Draft Amendment”) was officially released for public comment.
Since its implementation in 2008, the Anti-Monopoly Law has played an important role in protecting fair competition, improving the efficiency of economic operations, and safeguarding consumer and public interests. With rapid economic development and the emergence of diversified business activities, some debatable issues have arisen during the implementation of the Anti-Monopoly Law. One example is the divergence between an administrative and judicial approach regarding vertical price monopoly agreements, the lack of regulation over the behavior of organizations and the coordination of monopoly agreements.
As can be seen, the Draft Amendment responds to a number of the key issues that have arisen in the implementation of the Anti-Monopoly Law over the past 13 years, including the clarification of hub-and-spoke conspiracy conduct, the introduction of safe-harbor systems, the optimization of the merger control review system and the enhancement of anti-monopoly law enforcement. In this article we interpret some of the key points in the Draft Amendment in comparison to the current Anti-Monopoly Law , and have combed the logic behind the proposed amendments, with a view to providing better insight for business compliance.
The Draft Amendment proposes to include in Article 4 that one of the aims of the Anti-Monopoly Law is to “strengthen the fundamental position of competition policy”. In addition, Article 5 of the Draft Amendment stipulates that “the State shall establish and improve a fair competition review system. The executive branch and organizations authorized by laws and regulations with functions of managing public affairs shall conduct a fair competition review when formulating regulations concerning the economic activities of market subjects.”
Where an executive branch and organization authorized by the law or other regulatory bodies to manage public affairs unreasonably intervenes in the market (e.g. by entering into a cooperation agreements memoranda, etc. with the undertakings, preventing other undertakings from entering into the relevant market or treating other undertakings unequally; restricting or excluding competition), they may be subject to Anti-Monopoly Law regulations. In particular, the Draft Amendment gives anti-monopoly law enforcement agencies the power to investigate and propose rectification of such administrative monopolies, rather than simply recommending that higher authorities deal with them in accordance with the law. The Draft Amendment legally establishes the power of anti-monopoly law enforcement agencies and strengthens the basic position of competition policy.
In June 2016, the State Council promulgated the Opinions on Establishing a Fair Competition Review System in the Development of a Market System, declaring the formal establishment of a fair competition review system. The inclusion of the fair competition review system in the Draft Amendment is another important reflection of the fundamental position of competition policy in China.
Article 18 of the Draft Amendment adds that “an undertaking shall not organize other undertakings to enter into a monopoly agreement or provide substantial assistance to other undertakings in entering into a monopoly agreement”. Based on this, typical “hub-and-spoke conspiracy” activities would be covered in the scope of antitrust regulations. The regulation also echoes the provisions relating to hub-and-spoke agreements in the Guidelines of the Anti-monopoly Commission of the State Council for Anti-monopoly in the Field of Platform Economy issued on February 7, 2021.
Under the rules of the current Anti-Monopoly Law, except for trade associations, those who organize and assist undertakings to reach monopoly agreements but do not participate in such agreements themselves or do not have any competitive relationship or vertical relationship with the undertakings concerned in the monopoly agreements are not regulated by the Anti-Monopoly Law. That is, law enforcement agencies could not regulate them either under the regime of horizontal monopoly agreements (which are only applicable to competing undertakings) or the regime of vertical monopoly agreements (which are only applicable to undertakings with a upstream or downstream relationship). For example, if a supplier organizes a dealer to enter into a horizontal monopoly agreement, the supplier does not violate the current Anti-Monopoly Law unless the supplier enters into a vertical monopoly agreement with the dealer. Such hub-and-spoke agreements may have a restrictive effect on competition, and Article 18 in the Draft Amendment would help fill the legal liability gap under the current antitrust rules. It is also worth noting that the coverage of Article 18 is not limited to hub-and-spoke agreements, e.g. an undertaking who has neither a vertical nor a horizontal relationship with other undertakings, but organizes and provides material assistance to other undertakings in the implementation of monopoly agreements, would also be subject to scrutiny.
The Draft Amendment introduces a safe harbor system. Article 19 of the Draft Amendment provides that, “the provisions of articles 16, 17 and 18 of this law shall not apply if the undertaking is able to prove that its market share in the relevant market is below the thresholds set by the anti-monopoly law enforcement agency , unless evidence shows otherwise that the agreement reached by the undertaking excludes or restricts competition.
The safe harbor system is expected to help undertakings anticipate business compliance and, to a certain extent, avoid wasting law enforcement resources. The safe harbor system has already been embodied in some of the current Chinese anti-monopoly rules. For example, Article 5 in the Guide of the Anti-Monopoly Committee of the State Council for Countering Monopolization in the Field of Intellectual Property Rights provides that if an agreement has the effect of excluding or restricting competition, then the conduct of an undertaking in the exercise of intellectual property rights would not be deemed as a monopoly agreement prohibited by the Anti-Monopoly Law if the conduct involves any of the following circumstances: (1) The aggregate market share of competing undertakings in the relevant market affected by the undertaking's conduct does not exceed 20%, or, at a minimum, or four other substitutable technologies subject to independent control may be obtained at a reasonable cost in the relevant market; (2) Neither the undertaking nor the transaction counterparty has a market share exceeding 30% in the relevant market, or, at a minimum, two other substitutable technologies subject to independent control can be obtained at a reasonable cost in the relevant market. In another instance, the Anti-Monopoly Guideline for the Automobile Industry provides that an undertaking with less than 30% market share in the relevant market may be presumed not to have significant market power. Where the geographical and customer restrictions for reasons of economic efficiency and justification set by an automobile undertaking that does not have a significant effect generally comply with the provisions of Article 15 of the Anti-Monopoly Law, Article 15 of the Anti-Monopoly Law may be presumed to apply.
However, special attention should be paid to the fact that the safe harbor regime introduced in the present Draft Amendment is actually a bigger step than the current safe harbor rules. For example, in the case of horizontal monopoly agreements, does the establishment of the safe harbor system mean that core cartels such as resale price maintenance and quantity restrictions, which are currently strictly prohibited, might be allowed in the future? In the case of vertical monopoly agreements, does the establishment of the safe harbor system mean that it is possible to change the existing differences between the administration and the judiciary in the determination of vertical price monopoly agreements and to move towards the analytical thinking of the “reasonable principle”? We expect that the anti-monopoly enforcement agency will provide further detailed rules and guidelines on how to implement the safe harbor system.
(1) Strengthens the “investigative power” against illegal concentration
Paragraph 2 of Article 26 of the Draft Amendment provides that, for the concentration of undertakings which do not meet the notification criteria but has or may have the effect of excluding or restricting competition, the anti-monopoly law enforcement agency of the State Council shall investigate in accordance with the law. Although this has been stipulated previously in the Provisions of the State Council on the Standard for Notification of Concentration of Undertakings and the Interim Provisions on the Examination of Concentration of Undertakings, the power to investigate has been raised from the level of administrative regulations and departmental regulations to the level of legal provisions, which shows that the anti-monopoly law enforcement agency may take a stricter enforcement position to those concentrations which do not meet the notification standards, but may have the effect of excluding or restricting competition. We understand that such conferral of an active investigative power on the enforcement agency by law also reflects current economic developments, especially in some circumstances such as the development of the digital economy. For example, “killer acquisitions” occurring in the Internet sphere (in which one party is usually a start-up), can harm market competition and industry development, and thus affect industry innovation and consumer welfare.
In addition, Article 37 of the Draft Amendment emphasizes the need to strengthen reviews on the concentration of undertakings in fields such as those that impact on people’s livelihood, finance, science and technology and media. Highlighting attention on particular industries at the legislative level is exceptional and whether or not the article will appear in the final draft, it does foreshadow that the anti-monopoly law enforcement agency will pay more attention to the competitive impact of the concentration of undertakings in the aforementioned areas in the future and initiate investigations on the concentration of undertakings that do not meet the notification standards when necessary.
(2) Introduces a "stop-the-clock" system for filing and increases the flexibility of the review period for concentration of undertakings
The Draft Amendment introduces a “stop-the-clock” system into the merger control area, increasing the flexibility of the review period. Article 32 of the Draft Amendment clearly lists the circumstances that do not count toward the review time limit, such as a failure to submit documents and information in accordance with the provisions, new circumstances and facts that have a significant impact, or the need for further assessment of the restrictive conditions. The stop-the-clock system increases procedural flexibility in the processing of individual cases and avoids unnecessary procedural operations under the existing provisions of the review time limit (e.g., withdrawal and then re-filing).
Nonetheless, we consider that the conditions for the application of the stop-the-clock system and the manner of its application should be more strictly limited, otherwise it may weaken the positive effects of the review period limits and lead to further extension and unpredictability of the review time. In the EU, a stop-the-clock is often triggered by exceptional circumstances such as the filing party's inability to provide the information or materials requested by the Commission on time, or a failure to notify the Commission in a timely manner of material changes to the transaction or filing materials. The appropriateness of the application of the stop-the-clock system to consultations on restrictive conditions and, if so, the need to limit the specific manner of the application (e.g., the maximum length of the stop-the-clock) will need to be further discussed and refined in the subsequent amendment process.
(3) Clarifies the legal consequences of different types of illegal concentration of undertakings
Article 58 of the Draft Amendment provides for two legal consequences for the illegal implementation of the concentration of undertakings: for the illegal implementation of the concentration which has or may have the effect of excluding or restricting competition, the anti-monopoly enforcement agency of the State Council shall order the cessation of the implementation of the concentration, the disposal of shares or assets within a certain period of time, the transfer of business within a certain period of time, and the taking of other necessary measures to restore the situation to the one before the concentration, and impose a fine of up to 10% of the previous year's sales. For illegal concentrations that do not have the effect of excluding or restricting competition, it is clearly stipulated that “a fine of not more than five million yuan shall be imposed”.
It can be said that the Draft Amendment uses the fact that whether or not a concentration has the effect of excluding or restricting competition as the dividing point for the different legal liabilities that are faced by companies for the illegal implementation of concentration, and if it is finally established, the risk of punishment for the illegal implementation of concentration that does not have the effect of excluding or restricting competition has a relatively greater certainty.
The Draft Amendment reflects the intention to strengthen the regulation of the rapidly developing Internet sector in several places. Specifically, Article 10 of the Draft Amendment requires that “undertakings shall not abuse data and algorithms, technology, capital advantages and platform rules to exclude or restrict competition,” and Article 22 also specifies that undertakings with a dominant market position using data and algorithms, technology and platform rules to create barriers to other undertakings and impose unreasonable restrictions can constitute an abuse of the dominant market position.
The Internet industry is very different from other traditional industries in terms of its business characteristics and development mode, and how to adjust the original competition analysis framework to regulate the monopolistic behaviors of Internet enterprises has been a focus in anti-monopoly academia and practice. As mentioned earlier, the Anti-Monopoly Commission of the State Council has issued the Anti-Monopoly Guidelines on the Platform Economy, which details monopolistic acts such as algorithmic collusion, big data ripening and other monopolistic acts committed by using data and algorithms, etc. The Draft Amendment further emphasizes the importance of technical factors such as data and algorithms in determining monopolistic acts from the legislative level, and clarifies that this conduct may constitute abuse of a dominant market position.
The Draft Amendment has made many efforts to enhance the deterrent effect of the Anti-Monopoly Law:
1. The upper limit of fines for the illegal implementation of concentration of undertakings has been significantly increased. For concentrations that do not have the effect of excluding or restricting competition, the Draft Amendment adjusts the upper limit of fines under the current Anti-Monopoly Law from 500,000 yuan to 5 million yuan, while for illegal concentration of undertakings that have or may have the effect of excluding or restricting competition, the Draft Amendment adjusts the upper limit of fines to 10% of the previous year's sales, which is consistent with the range of fines for "entering into and implementing monopoly agreements" and an "abuse of dominant position".
2. The fines for reaching a monopoly agreement without implementation and other acts have been significantly increased. For undertakings who reach but do not implement monopoly agreements, the Draft Amendment raises the current maximum fine of 500,000 yuan under the Anti-Monopoly Law to 3 million yuan; the maximum fine for trade associations has been raised from 500,000 yuan to 3 million yuan; in addition, for undertakings who reach and implement monopoly agreements but have no sales in the previous year, the Draft Amendment also adds a maximum fine of 5 million yuan.
3. The Draft Amendment establishes a system of doubling penalties. On the basis of the aforementioned substantial increase in the upper limit of fines, Article 63 of the Draft Amendment further provides for the penalty range, i.e., "if the violation of the provisions of this Law is particularly serious, has a particularly bad impact, or causes particularly serious consequences, the antimonopoly enforcement agency may impose a fine in accordance with Article 56 (monopoly agreement), Article 57 (abuse of market dominant position), Article 58 (Concentration of undertakings) and Article 62 (refusal to cooperate with anti-monopoly investigation) shall impose a fine of not less than two times and not more than five times the amount of the fine prescribed in the Draft Amendment
4. The Draft Amendment establishes a dual attribution system for the undertaking and the responsible personnel. The legal liability of the current Anti-Monopoly Law is mainly for the undertaking itself, except for the refusal to cooperate with an investigation by the anti-monopoly enforcement agency, the responsible personnel of the operator do not bear any legal liability. Article 56 of the Draft Amendment adds a penalty for the operator's responsible personnel for entering into a monopoly agreement, i.e., the legal representative, principal person in charge and directly responsible personnel of the undertaking who are personally responsible for entering into a monopoly agreement may be fined up to one million yuan.
5. Undertakings that have violated the Anti-Monopoly Law and received administrative penalties will be incorporated into the credit record. Article 64 of the Draft Amendment provides that undertakings subject to administrative penalties for violations of the provisions of this Law, in accordance with the relevant state regulations are recorded in the credit record, and will be given credit disciplinary action for serious violations of the law and dishonesty, and will be made public.
6. The fine for refusing to cooperate with an anti-monopoly investigation has been significantly increased. For refusing and obstructing an investigation, the Draft Amendment raises the upper limit of fines for individuals from 100,000 yuan to 1 million yuan, and revises the upper limit of fines for entities from 1 million yuan to 1% of the previous year's sales (a fine of less than 5 million yuan for no sales or sales that are difficult to calculate).
7. The Draft Amendment establishes a civil public interest litigation system. In addition to the civil liability under Article 50 of the current Anti-Monopoly Law, the Draft Amendment further provides that if an undertaking implements monopolistic acts that infringe the public interests of society, the people's procuratorate may institute civil public interest litigation in the people's courts in accordance with the law. Civil public interest litigation is initiated by the bodies and the relevant organizations provided by the law against acts that pollute the environment, infringe the legitimate rights and interests of many consumers and other acts that harm the public interest of society. However, under what circumstances the people's procuratorate can bring civil public interest litigation, and how to achieve convergence with the litigation law, is to be regulated by the subsequent introduction of rules.
The release of the Draft Amendment marks the strengthening of competition policy and entry into a new phase of protection for free competition in the market. We will continue to pay close attention to the amendment process of the Anti-Monopoly Law and keep our clients updated on relevant matters pertaining to anti-monopoly compliance.