Fair play for high-quality development - The New Antimonopoly Law of the People's Republic of China

Effective August 1, 2022, China has placed its system for regulating anti-competitive agreements and practices on a new legal foundation. This is because the long-awaited revision of the Antimonopoly Law of the People's Republic of China ("AML"), promulgated on June 24, 2022, came into effect on that date. As this is the first revision of the AML, which dates back to 2008, the revision is widely regarded as an important step in strengthening China's antitrust laws.

With the new AML, Chinese lawmakers have drawn conclusions from observations made in recent years, which have brought to light extremely alarming tendencies, especially (but not only) regarding activities of large Internet and platform companies. Their foreclosure tactics, such as "choosing one between two," the establishment of virtual "walled gardens," the use of algorithms and Big Data for price discrimination, and a number of violations of notification requirements under merger control are, in the eyes of the Chinese government, representative of an increasing threat to fair, orderly competition and the interests of consumers. With regard to the latter, the State Administration for Market Regulation ("SAMR"), which is responsible for enforcing the AML, has therefore recently stepped up its monitoring activities to focus on sectors of particular importance to consumer welfare. These include, in particular, the pharmaceutical industry, public utilities, the automotive industry, and the construction and real estate industries.

Immediately following promulgation of the revised AML, SAMR published six draft revised implementing regulations on June 27, 2022, covering the various core areas of antitrust law necessitated by the AML reform.

The reform of the AML initially expanded the overall scope of the law (formerly 57, now 70 articles). Among the 33 amendments in total, in addition to some linguistic and editorial adjustments, there are numerous substantive changes intended to give the AML additional clout, according to the intention of the Chinese legislator.

In the first section of the AML on "General Provisions", two new Articles 5 and 9 were introduced, among others.

Article 5 obliges all public authorities as well as organizations with public administrative powers to carry out a ‘fair competition review’ as part of the drafting of rules regulating the behavior of market players. This is intended to ensure that public authorities take into account possible negative effects of the respective regulations on fair competition at an early stage. This obligation is in addition to the previously existing prohibition on the misuse of official powers to eliminate or restrict competition.

Article 9 is emblematic of the threat to competition described above as a result of harmful practices by dominant Internet companies. The provision prohibits in general terms the use of, among other things, data, algorithms, technologies, capital advantages or terms and conditions on online platforms to commit violations under the AML. Although Article 9 primarily targets large technology groups, due to the broad wording, all companies may fall within its scope as soon as data, technologies, etc. are used in the context of horizontal/vertical agreements, the exercise of a dominant position or in concentrations of undertakings. For example, due to the increasing use of smart algorithms in companies’ operations, the risk cannot be ruled out that contractual terms and conditions are automatically generated within a supply chain, resulting in inadmissible price fixing.

The new AML also contains two relevant changes with respect to monopoly agreements.

In practice, it can happen that conditions are agreed between the trading partners within a supply or value chain which formally constitute unjustified price fixing, but which do not result in the elimination or restriction of competition in the relevant market. For these cases, a newly inserted paragraph 2 in Article 18 will enable the companies involved to provide relevant evidence. Participating companies thus bear the burden of proving that an agreed price maintenance does not result in a distortion of the market. Unfortunately, it is currently not certain how and on what basis companies will be able to provide this proof in the future. Neither the AML nor the draft Provisions on the Prohibition of Monopoly Agreements contain reliable criteria in this regard. In any case, according to paragraph 3, also newly inserted in Article 18, vertical agreements below a threshold set by SAMR are not prohibited. The draft just mentioned specifies a combined market share of no more than 15% for this purpose, whereby companies controlled by one party or over which one party has a determining influence must also be included in the calculation.

The second significant change concerns intermediaries in transactions. Under the new Article 19, it is prohibited to organize other undertakings to enter into monopoly agreements or to provide them with substantial assistance for this purpose. The draft Provisions on the Prohibition of Monopoly Agreements specify when assistance is to be regarded as "substantial". Accordingly, any substantial support for the conclusion or implementation of the monopoly agreement that has a causal relationship to the elimination or restriction of competition is substantial. This may include active, constructive participation in contract negotiations or the provision of important resources for contract implementation.

Article 22(2) now stipulates that companies with a dominant market position are prohibited from using data, algorithms, technology, etc. to abuse their dominant market position. In addition to the generally prohibited conduct (e.g., unreasonably high pricing, price dumping, or tie-in sales), special Anti-monopoly Guidelines for the Platform Economy regulate in detail what SAMR or its local departments will look for when enforcing the regulations from the AML in this highly complex and dynamic industry. In particular, these guidelines also include specific criteria for determining a dominant position within the platform economy.

The revision of the AML also brings some important changes in the area of merger control.

This includes, first of all, the possible inclusion of mergers below the statutory thresholds in merger control. Under the current 2018 State Council Regulations on the Declaration Threshold for Concentrations of Undertakings, if the following thresholds are reached, planned mergers must be notified prior to the implementation of the merger:

Under the new legal framework, SAMR may require planned mergers below the above-mentioned thresholds to be notified if there are concrete indications that the merger will actually or potentially eliminate or restrict competition. Accordingly, companies involved in such mergers only have to make a notification if they are actively requested to do so by SAMR. If they fail to comply with the request, SAMR may initiate investigations and take appropriate measures (see 6 below). The State Council's Regulations on the Declaration Threshold for Corporate Concentrations are also currently being revised and the thresholds raised overall.

In the context of merger control, SAMR is now also given the power to suspend the proceedings in the event that

The statutory deadlines in the review procedure continue to run as soon as the reasons for the suspension have been remedied. This new mechanism enables SAMR, especially in complicated cases, to merely suspend the proceedings instead of prohibiting the merger to avoid the expiry of the time limit with a presumed approval and thereby forcing the parties to re-notify and restart all time limits.

In order to move closer to the goal set by the State Council and the CP Central Committee of creating a unified national market, it is essential that companies face comparable competitive conditions throughout the country. In addition to limiting the market power of private players, it is of at least equal importance that competitive opportunities are not shifted in one direction or the other by excessive state influence. Under the old legal regime, this was already written in the AML in the form of a separate chapter on the abuse of administrative powers to eliminate or restrict competition. The provisions listed there are supplemented by several additional provisions with the latest reform, which are intended to enable equal market access (Article 40) and to grant SAMR new investigative powers in cases of suspected abuse of power by different government authorities (Articles 54 and 55). Consistently with this, the Provisions on Combating Abuse of Administrative Powers to Eliminate or Restrict Competition are also currently being revised, further specifying prohibited acts of public authorities, strengthening competition supervision by SAMR, and expressing the need to further educate public authorities at all levels on the importance and key aspects of pro-competitive behavior.

Finally, the deterrent effect of the AML is enhanced by a significant increase in the severity of possible sanctions.

The unlawful conclusion or implementation of an agreement restricting competition can now be punished with a fine of up to RMB 5 million (approx. EUR 719,000) or up to RMB 3 million (approx. RMB 431,000). The latter applies if the agreement has not yet been implemented. This represents a huge step from the previously applicable cap of RMB 500,000 (approx. EUR 71,900). The same fines apply to intermediaries who have organized the conclusion/implementation of the agreement or have provided substantial assistance for this.

It should be particularly emphasized that in the future, legal representatives as well as persons directly responsible within the company can also be fined up to RMB 1 million (approx. EUR 144,000) if they bear personal responsibility for the conclusion of the agreement.

The unlawful completion of a business concentration may result in even more severe sanctions, namely up to 10% of the previous year's turnover. If the merger can be shown not to have an anti-competitive or restrictive effect, fines of up to RMB 5 million can also be imposed.

Another new feature is the possibility of increasing the specific fine determined to two to five times the amount in particularly serious cases. This punitive damages award applies equally to agreements restricting competition, abuse of a dominant market position, and violations of the merger control regulations..

In addition to the already existing possibility of civil actions for damages by affected parties, the Chinese People’s Procuratorate can now also bring corresponding actions if the relevant action of the company has resulted in damage to public interests.

Finally, the sanctions portfolio is supplemented by the options of initiating criminal investigations in the event of a criminal offense, as well as entering and publicizing the violation through the national social credit platform.

The reform of the AML undoubtedly brings some obvious improvements. This concerns first of all the special consideration of the abuse of data, technology, etc. in order to gain an anti-competitive advantage. The excesses of corresponding business strategies in the recent past have led to Chinese Internet corporations being able to further cement their unchallenged market power, and smaller market players in particular have been degraded to the status of pawns as a result. There is a fine line between opportunities and risks of cutting-edge digital technologies, and it is important to adequately consider their potential impact on fair and orderly competition. On the other hand, the consequence of this is that companies will have to take an even deeper look at how the technology they use works so as not to run the risk of the technology unknowingly or unintentionally influencing competition.

It is also to be welcomed that the Chinese state intends to take even stronger action against competition-distorting behavior by some authorities or organizations with state functions. This also includes the newly imposed obligation to carry out a fair competition review before issuing corresponding regulations and measures. However, this commitment can only lead to real improvements if the state succeeds in creating uniform standards for authority work across all areas, in providing comprehensive and continuous training for authority employees and in applying the abuse control through SAMR consistently and without exception. In practice, there are still too many areas in which foreign-invested companies in particular continue to be treated unequally without justification (especially in the field of public grants, subsidies or public procurement).

In the future, companies in sectors of strategic importance in particular can expect to be required by SAMR or its subdivisions to notify planned mergers, even if they do not meet the respective thresholds. As SAMR can now also suspend the review process indefinitely, this must be taken into account accordingly when planning the timing of the transaction.

Finally, vertical agreements give companies greater scope to set resale prices even if they do not fall under the relevant exemptions (e.g. technological improvements, improvement of product quality or enhancement of the competitiveness of SMEs). In these cases, however, it must be demonstrated that this does not adversely affect competition, for which there is currently still a lack of reliable criteria. In such scenarios, it should be easier to prove that the combined market share of the companies involved is below the currently applicable threshold.