On 24 June 2022, China's Congress passed the amendment to China's Anti-Monopoly Law ("AML"), which will come into force on 1 August 2022. Businesses will have one month to adapt to this new set of, extensively revised, competition rules in China. The new AML particularly matters your distribution systems and M&As. This alert will reflect these key new rules and some other important changes.
I. Vertical Agreements: Rebuttable RPM and the Safe Harbor
The new AML has radically changed the regulation landscape of vertical monopoly agreements. One of the most significant revisions is that it partly confirms the approach taken by Chinese courts that the illegality of resale price maintenance ("RPM") is rebuttable. In addition, the new AML shrinks the scope of illegal vertical agreements by establishing safe harbor regime.
- RPM becomes rebuttable but will still be risky in China
Article 18(1) of the new AML still prohibits RPM, but Article 18(2) provides that RPM will not be prohibited if undertakings can prove that the RPM agreements do not have anti-competitive effect. This is arguably the most fundamental amendment of the AML as it seemingly overturns the long-perceived notion of Chinese public enforcement that RPM is per se illegal.
Previously, there was a long-existing controversy over the approach to deal with RPM in China: while Chinese courts traditionally held that evidence of anti-competitive effect is essential to an RPM claim, public enforcement authorities have been sending out penalty decisions without addressing the agreement's anti-competitive effects. The debate intensified sharply with the Yutai case (2018)1. With the new amendment, some therefore argues that the new AML basically gives permission to RPM and RPM is not per se illegal in China now.
Encouraging as this may be, a rebuttable illegal presumption is nowhere near a free pass. In addition, considering the grave difficulty of demonstrating anti-competitive effect in an RPM case (in history, most plaintiffs failed to prove the existence of anti-competitive effect in RPM litigations due to the courts' rule of reason approach and the plaintiffs' burden of proof), when the burden of proof shifts to the undertakings engaging in RPM, the illegal presumption may de facto not be rebuttable. This is more obvious in public enforcement cases.
Nonetheless, it does provide possibilities for undertakings to escape from hefty penalties, and as a matter of fact, lately the Chinese public enforcement authorities have been more cautious with RPM cases and targeting mainly giant or leading companies in their industries. It is also possible that the authorities may require complainants to submit evidence on anti-competitive effect when they report RPM. Another practical consequence may be that as RPM is presumed to be illegal and anti-competitive, companies aim to annul RPM agreements for illegality may stand a better chance of winning in civil courts since the new AML says that the defendants bear the burden of proof. We will see more economic analysis is required in this regard.
- Safe harbors for vertical monopoly agreements
Article 18(3) of the new AML provides that vertical monopoly agreements will not be prohibited if the undertakings pass the market share test and met certain conditions to be set by the State Administration for Market Regulation ("SAMR").
The wording of the clause seems to cover all types of vertical agreements including even RPM, yet the details of the rules are not clear now and will be formulated later by SAMR in implementation guidelines. With reference to previous antitrust guidelines, it is possible that the market share threshold may be set around 30%. As such, the safe harbors will provide more clarities and assurance for small companies doing business in China.
- Hub-and-spoke cartel
Article 19 of the new AML expressly prohibits organizing and assisting in the execution of monopoly agreements, covering hence hub-and-spoke cartel, and provides same legal liabilities for both the hub and the spokes. In contrast, in some previous cases, the hub was not penalized due to lack of clear rules in the old AML.
The new rule against hub-and-spoke cartel should be studied carefully by businesses who runs exclusive or selective distribution system in China. They need to be wary of not communicating competitively sensitive information of one distributor to another, particularly when passive sales are made by one distributor to the territory or customer of another distributor.
II. Merger Control: New Procedures and Heavier Fines for Gun-Jumping
The new AML has made certain substantial changes to the merger control system in China. It not only incorporates the provisions previously scattered in other regulations into the AML, but also adjusts a number of provisions based on practical issues.
- "Stop the Clock" introduced for the first time
Article 32 of the AML introduces the "stop the clock" mechanism into China's merger control regime for the first time. It provides for three circumstances that may stop the clock on time limit, i.e., (i) when the notifying parties fail to submit materials as required, (ii) when it is necessary to verify new situations or facts, and (iii) when further assessment of the remedy proposals is needed and the notifying parties request stopping the clock. In particular, the further evaluation of the remedy proposals is of great practical significance. This will avoid the compromise solution adopted now that the notifying parties have to withdraw the notification and resubmit once or twice in order to proceed with the transaction due to the insufficient time limit.
As compared to other jurisdictions, the number of antitrust officials in China is quite limited. The introduction of this mechanism will reduce the time limit pressure on the enforcement authority, in particular for cases that may be prohibited or cleared conditionally. As regards the detailed rules on this mechanism, we expect the supporting regulations to be released in the near future, which will provide undertakings with more predictability on this new procedure.
- Heavier fines for gun-jumping
Gun-jumping was only fined up to RMB 500,000 (approx. USD 80,000) under the old AML. Although SAMR has imposed such maximum fines in a number of cases, it appears the deterrence effect is very limited. Now the new AML has increased the fines for gun-jumping to "up to RMB 5,000,000 (approx. USD 800,000)" or "up to 10% of the turnover in the previous year for concentrations have or may have the anti-competitive effect".
Such fines reach the same level of fines for monopoly agreement and abuse of dominance. Therefore, the deterrent effect for gun-jumping is greatly improved and it is expected that increasingly more parties will submit remedial notifications, voluntarily apply for consultation, voluntarily file notifications and even self-report themselves for gun-jumping before the new AML come into force on 1 August 2022. In this regard, it is still uncertain whether the old fine rule or the new fine rule is applicable to concentrations consummated before the new AML is effective. According to China's general Administrative Penalty Law, if such concentrations are still operative, the new fine rule may be applicable since the concentrations are still in the status of gun-jumping.
- Power to review transactions below threshold granted
For merger control, in addition to mandatory notification for concentration of undertakings that meet the threshold, Article 26(2) of the new AML grants SAMR the power to require the undertakings to notify and then to review a transaction below the threshold but may have the effect of eliminating or restricting competition. For example, mergers between companies with no or little turnover due to their operation models, or some "killer acquisitions" that the target does not reach the threshold, now fall within the realm of merger control.
It is worth noting that while Article 26(2) stipulates that for such mergers, the authority "can require the undertakings to notify", Article 26(3) provides that the authority "shall investigate if the undertakings fail to notify" in accordance with Article 26(2). Compared with the provision in the first draft of the AML that "the authority shall investigate a transaction below the threshold that may have the effect of eliminating or restricting competition", we understand that the undertakings now can notify the transaction below the threshold with the authority without concern of being investigated directly when receiving the filing requirement. The authority can only launch an investigation if the undertakings refuse to notify as required by the authority.
- Classification and categorization of merger control cases
Article 37 of the new AML introduces a "mechanism of classification and categorization of merger control cases". This mechanism aims to improve the efficiency of the enforcement authority, save notification time for undertakings, and reduce institutional transaction costs on the one hand; and will help the authority focuses on cases that may cause competition concerns on the other hand.
In practice, since the beginning of this year, SAMR has begun to require the notifying parties to mark that whether a platform company is involved in the transaction. This indicates that the authority has begun to classify merger control cases by sensitive sectors. However, SAMR may still need some time to establish this mechanism and publicize the entire rules thereof.
III. Private enforcement: Public Interest Lawsuit
The antitrust enforcement in China has been featured by the imbalance between public enforcement and private enforcement. Although the number of private actions initiated is not necessarily smaller than that of public enforcement, few of them have turned into substantive rulings and even fewer end up with a successful challenge of monopolistic behaviors. A significant barrier for antitrust private actions in China is that, due to the absence of class action proceeding, plaintiffs have to devote huge resources to meet relatively high burden of proof and, due to the lack of punitive or exemplary damages, monetary awards are usually not sufficient to provide incentives.
The new AML intends to change the landscape by introducing public interest lawsuit for monopolistic behaviors. In Article 60, it adds a second clause which provides that if a business operator conducts monopolistic behaviors and infringes on public interests, procuratorial organs can file a civil public interest lawsuit with courts in accordance with the law. It suggests that public prosecutors, as state organs with administrative resources, are better positioned than individuals or small businesses to pursue the civil liabilities of antitrust offenders. Actually, the Fourth Plenary Session of the 19th CPC Central Committee in 2019 has proposed to "expand the scope of public interest lawsuits" and after that the promotion of public interest lawsuits by procuratorial organs has been raised in a number of government statements.
For companies, the introduction of public interest lawsuit means more risks and higher compliance standards for behaviors affecting public interests or, in other words, people's livelihoods. For example, big data "killing familiarity" (i.e., using big data to analyze price elasticity and loyalty of users to implement price discrimination) is a phenomenon in China's e-commerce sector criticized for long and may qualify as a target of antitrust public interest lawsuit. Public interest may become a new factor in assessing legal exposures for companies' compliance work.
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Footnote
1. For a detailed explanation of the Yutai case and other relevant RPM cases, please see Jet Deng, Ken Dai and Rangi He. "Yutai: A Landmark Case on Resale Price Maintenance in China -- The Divergence in Public and Private Enforcement is Now Institutionalized." CPI, https://www.competitionpolicyinternational.com/yutai-a-landmark-case-on-resale-price-maintenance-in-china-the-divergence-in-public-and-private-enforcement-is-now-institutionalized/#.
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