In 2018 the Anti-monopoly Law celebrated its 10th anniversary. Since the law was implemented in 2008, China's legal framework has become more sophisticated and antitrust enforcement has become more prudent. China is now one of the world's major antitrust jurisdictions, alongside the United States and the European Union.
In 2018 the antitrust enforcement functions of the three former antitrust agencies (ie, the Ministry of Commerce, the National Development and Reform Commission (NDRC) and the State Administration for Industry and Commerce (SAIC)) were consolidated into the newly established State Administration for Market Regulation (SAMR) (for further details please see "Merger control review 2018").
Moreover, the SAMR and local antitrust agencies strengthened their antitrust law enforcement. As stated at a 27 December 2018 conference, the SAMR initiated 32 investigations into alleged monopoly agreements and abuses of market dominance in 2018, closing 15 in the same year.(1) As regards penalty decisions, the SAMR published seven and local antitrust agencies published 14. The SAMR focused on industries relating to livelihood and implemented penalties in a number of these cases (eg, in cases involving the transportation, pharmaceutical, natural gas, electricity and furniture industries). One notable penalty in this regard was the Rmb84 million fine that the SAMR imposed on two branches of PetroChina Company Limited (PetroChina) for resale price maintenance. Further, the identification of competitors in the Shenzhen tally companies case demonstrates the SAMR's strict approach towards and zero tolerance for monopolistic behaviours.
New measures regarding administrative penalty procedures
On 26 December 2018 the SAMR promulgated the Interim Provisions on Administrative Penalty Procedures of the SAMR(2) and the Interim Measures for Administrative Penalty Hearings of the SAMR,(3) both of which took effect on 1 April 2019.
Before the SAMR's establishment, the SAIC, the General Administration of Quality Supervision, Inspection and Quarantine of China, the China Food and Drug Administration and the Price Supervision and Inspection and Anti-monopoly Bureau under the NDRC had designated administrative enforcement functions and corresponding administrative penalty procedural regulations. Following the SAMR's establishment, the functions of the former enforcement agencies were consolidated. As such, the SAMR promulgated the above measures to unify the various administrative penalty procedures. Both measures apply to the antitrust investigation and penalty procedures and clarify:
- the principles of case jurisdiction;
- the investigation rules;
- the way in which evidence will be collected, retrieved, produced and preserved; and
- how hearing procedures will be conducted.
The measures also regulate the time limits for handling cases.
Following the measures' implementation, the investigation, hearing and penalty procedures are expected to be more transparent. Further, undertakings under investigation will be provided with detailed guidance on the relevant procedure.
In addition, due to the development of the Internet in China, the SAMR has adopted technical methods to modernise law enforcement. As such, the measures regulate digital data collection and extraction and electronic delivery in order to meet the practical needs of the digital era.
Investigation and penalty spotlights
Although it is still fairly new, the SAMR has diligently investigated and penalised monopolistic behaviour. In 2018 the SAMR and its local enforcement agencies published a dozen cases which attracted media attention. The main cases are summarised below.
Trade associations in spotlight
Trade associations remain a target for the antitrust agencies. In 2018 six cases involved trade associations, including:
- a freight merchants' association;
- a pharmaceutical purchasing alliance;
- an elevator association;
- two driver instructor associations; and
- a gas association.
Trade associations should act as role models for members and encourage them to comply with anti-monopoly laws and regulations and promote awareness of fair competition. However, in recent years, they have frequently arranged for their members to implement monopoly agreements or undertake other illegal acts in the name of industry self-discipline. On the other hand, enterprises with a large market share may also take advantage of trade associations and force or direct other members to reach horizontal monopoly agreements.
Equal treatment of state-owned and private companies
On 26 January 2018 the NDRC penalised PetroChina Daqing Oilfield Natural Gas and PetroChina Natural Gas Sales Daqing for imposing minimum resale prices on their downstream distributors of gas to consumers. According to the penalty decision, the two PetroChina branches received a total fine of Rmb84.06 million, which accounted for 6% of their respective revenues for the previous year.
This was a typical monopolistic case involving resale price maintenance. However, the 6% fine was much higher than the fines imposed in previous vertical monopolistic cases. In addition, the entities that were penalised were branches of PetroChina, a centrally administered stated-owned enterprise, and the industry involved was a natural monopoly industry. As such, the case implies that the SAMR will likely be more aggressive in its antitrust enforcement than the previous enforcement agencies. Companies that violate the Anti-monopoly Law should therefore expect to be scrutinised by the SAMR regardless of whether:
- they are a foreign or state-owned company; and
- the related industry is a special industry.
Crackdown on API industry
At the end of 2018 the SAMR successively published two cases relating to active pharmaceutical ingredients (APIs). One case concerned price collusion, while the other concerned abuse of market dominance.
In the glacial acetic acid APIs cartel case,(4) three enterprises reached a horizontal monopoly agreement to collectively increase the price of APIs. The price of glacial acetic acid APIs increased from Rmb9.3 per kilo to almost Rmb33 per kilo.
In the chlorphenamine APIs abuse case,(5) the SAMR penalised Hunan Erkang Pharmaceutical Management Co, Ltd for abusing its market dominance. By virtue of holding the import right of chlorphenamine APIs, the enterprise had committed a number of wrongdoings, including:
- implementing unfair prices;
- tying and bundling; and
- refusing to deal.
China's antitrust enforcement authorities have always monitored monopolistic behaviour involving APIs and have concluded eight cases involving 20 enterprises. In addition to reaching and implementing monopoly agreements, API enterprises have been penalised for abusing their market dominance. Manufacturers and distributors of APIs are more likely to be identified as holding a dominant market position due to:
- the serious dependence of downstream enterprises on upstream API manufacturers due to the small number of the latter in the relevant market; and
- the strict certification system for the production of APIs.
However, the Anti-monopoly Law does not prohibit undertakings from holding a dominant position; rather, it prohibits them from abusing a dominant position to restrict competition. The legal risks associated with the following types of behaviour in the API industry are relatively high:
- refusal to deal;
- the imposition of unfair prices;
- tying and bundling; and
- the imposition of unreasonable trading conditions.
New identification of competitors: Shenzhen tally companies case
On 20 July 2018 the SAMR fined two Shenzhen tally companies a total of Rmb3.16 million for entering into a horizontal monopoly agreement. According to the decision, China United Tally Shenzhen and China Ocean Shipping Tally Shenzhen had reached and implemented an agreement to divide sales and service areas for the tallying market in the western area of the Port of Shenzhen. In addition, the two companies had raised tallying prices between May 2013 and August 2016.
The notable feature of this case was the identification of the companies as independent competitors, as they shared the same shareholder, which owned a 50% share in each company. The SAMR found that the companies' ownership structures did not negate their competitive relationship. Although the shareholder owned a 50% interest in both companies, it performed different roles for each. The shareholder was the controlling shareholder of only one of the tallying companies. The SAMR also found that the two companies had been independently operated and managed. In addition, the SAMR relied on the companies' articles of association and inquiry records of relevant staff to prove that there had been a competitive relationship between the two companies. However, such detailed information was not disclosed in the SAMR's decision.
During the investigation, the two companies argued that they were not competitors as they were affiliates within the same group. However, the SAMR dismissed this argument for a number of reasons, noting that according to the relevant provision on port management issued by the State Council and the Ministry of Transport:
- port tally companies should introduce a competition mechanism to the market; and
- two tally companies within one port cannot be controlled by the same investment entity.
The SAMR appears to adopt a strict view on the identification of competitors. Normally, if one shareholder owns 50% of the shares in two companies, they will be regarded as being jointly controlled by the same shareholder (ie, the same entity). Moreover, the fact that two companies actually compete with each other does not necessarily mean that they constitute competitors in the sense of the Anti-monopoly Law in the same way that different subsidiaries in the same group can compete with each other.
This was one of the first cases to be announced by the newly established SAMR and may therefore indicate its attitude towards certain industries and behaviours. In particular, the way in which the competitors were identified could raise new compliance challenges for companies operating in China.
Penalties for individuals: Guangzhou Toyota dealer officers fined for obstructing investigation
In the Guangzhou Toyota dealer obstructing investigation,(6) the Guangdong Development and Reform Commission (DRC) penalised Guangzhou Toyota's legal representative and general manager for unplugging the USB that the Guangdong DRC had used to collect evidence and refusing to return it on request. Further, the two individuals had:
- claimed that the enforcement officials were not empowered to conduct the investigation; and
- insulted them.
As such, the Guangdong DRC imposed an aggregated fine of Rmb20,000 on the individuals.
There had been several instances of investigations being obstructed before this case, such as Sunyard's refusal to cooperate in an investigation case (for further details please see "Enterprise fined for refusing to cooperate with antitrust investigation")(7) and Longshunhe's obstruction of an antitrust investigation case.(8) However, this case was the first in which individuals, rather than enterprises, were penalised for failing to cooperate. In accordance with Article 42 of the Anti-monopoly Law, undertakings, interested parties and other entities and individuals under investigation must cooperate with the antitrust authorities and cannot refuse or obstruct the investigation. Further, according to Article 52 of the Anti-monopoly Law, individuals may be fined up to Rmb100,000 and enterprises may be fined up to Rmb1 million for failing to cooperate with an investigation. The Toyota dealer case shows that the antitrust authorities take investigations seriously. Following the establishment of the SAMR in 2018, anti-monopoly enforcement has intensified. Thus, enterprises should enhance their employees' awareness of antitrust law compliance. Further, when it comes to antitrust investigations, enterprises should ensure that their employees do not blindly plead guilty. On the other hand, employees should actively react to the investigation and cooperate therewith in accordance with the law.
Termination of investigation due to active rectification
In 2018 the SAMR and local enforcement agencies announced five cases in which an investigation had been suspended or terminated, accounting for 24% of the total announced cases. The termination of investigated cases reflects the importance of cooperation and active rectification by the relevant enterprises under investigation. If an enterprise actively cooperates with an enforcement agency, the latter may issue a decision on the suspension of the investigation based on:
- the nature and duration of the violation;
- the investigated enterprise's assistance in the investigation; and
- the rectification commitment submitted by the enterprise under investigation.
After rectification, an enforcement agency can terminate the investigation. After obtaining a termination decision, the enforcement agency will not penalise an enterprise for its alleged violations. Therefore, enterprises which undertake monopolistic conduct can apply for the suspension or termination of the investigation by:
- actively cooperating during the investigation;
- submitting rectification commitments; and
- implementing rectification measures.
In 2018 antitrust authority enforcement concentrated on fields related to livelihood. Of the 21 published cases, 18 concerned livelihood-related industries. Another focus was trade associations, with six cases being announced in this regard. In addition, the pharmaceutical industry came under the spotlight of the antitrust enforcement agencies, with the SAMR closing two cases relating to API enterprises in late 2018.
On 27 December 2018 the SAMR held a national market regulation conference. SAMR Director Zhang Mao summarised the enforcement activity carried out in 2018 and the priorities for 2019, emphasising that competition enforcement will be increased. He also stated that enforcement will continue to focus on livelihood-related industries, such as public welfare, pharmaceuticals, building materials and daily consumer goods. In addition, enforcement authorities will increase their investigations into monopoly agreements and abuses of dominant positions.(9) In terms of legislation, Zhang pointed out that the revision of the Anti-monopoly Law will be expedited. Additional guidelines are also expected to be promulgated in 2019 to promote anti-monopoly law enforcement and the establishment and development of a mature and complete anti-monopoly legal framework.
In this context, enterprises should:
- actively comply with the Anti-monopoly Law;
- pay close attention to legislation; and
- promote the awareness of compliance by employees.
In particular, companies active in the industries to which the SAMR is paying close attention (eg, public welfare, APIs, building materials and daily consumer goods), should check their anti-monopoly compliance. Finally, enterprises under investigation should actively cooperate with the relevant authority and submit a rectification plan and relevant evidence in order to have the investigation suspended or terminated.
Endnotes
(1) Zhang Mao's speech at the national market regulation conference, China Market Regulation News, 28 December 2018.
(2) Interim Provisions on Administrative Penalty Procedures of the SAMR.
(3) Interim Measures for Administrative Penalty Hearings of the SAMR.
(4) The original announcement on the penalty decision imposed in the glacial acetic acid APIs cartel case is available on the SAMR's website.
(5) The original announcement on the penalty decision imposed in the chlorphenamine APIs abuse case is available on the SAMR's website.
(6) The original announcement on the penalty decision imposed in the Guangzhou Toyota dealer case is available on the Guangdong DRC's website.
(7) The original announcement on the Sunyard refusal to assist case is available on the SAIC's website.
(8) The original announcement on the Longshunhe case is available on the Shandong Price Bureau's website.
(9) Zhang Mao's speech at the national market regulation conference, Ibid.
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