Towards A Stronger Competition Law New Developments In The Anti-Monopoly Law In The People’s Republic Of China

2022 AMA Amendment: What Has Changed in Competition Law?

China’s Anti-Monopoly Law has been subject to new developments in a move towards stronger competition law. However, the law is still relatively new and has some ambiguous provisions that make it difficult for businesses to understand their obligations and comply with them.

Introduction

As competition law plays a crucial role in merger reviews, prohibition of cartels/trusts, and prohibition of abuses of dominant positions, the People’s Republic of China (PRC) has been actively refining its competition law since the adoption of the Anti-Monopoly Act (AMA) by the National People’s Congress in 2007. With more than six regulations and eight guidelines issued to date, China has been taking steps to provide additional guidance on the interpretation, implementation, and enforcement of the AMA.

In June 2022, the Standing Committee of the National People’s Congress adopted a major amendment to the AMA, which took effect on August 1, 2022. This amendment was followed by the State Administration of Market Regulation (SAMR) publishing six draft regulations for public comment. These revisions focus on the criteria for filing a merger review, prohibition of monopoly agreements, abuse of dominant market positions, and intellectual property.

This article series briefly reviews the major changes made by the recent amendments to the AMA and the proposed regulations. It also reviews the recent developments in enforcing the AMA and their impacts. In addition, this article will provide insights into China’s initiative to build up a stronger competition law and encourage businesses operating within or relating to China to develop a robust compliance mechanism.

What Changes Have Been Introduced To The Ama By The 2022 Amendment?

Despite the progress that has been made by and in the enforcement of the AMA, for some time the AMA and its enforcement have been criticized in some aspects, including:

  • Lack of clarity in the provisions: the AMA is a relatively new law and some of its provisions are still open to interpretation, which can make it difficult for businesses to understand their obligations under the law and to ensure compliance.
  • Difficulty in applying to new business models: The rapid development of new business models, such as e-commerce and digital platforms, has posed new challenges for the enforcement of the AMA, as these models may not fit neatly within the existing provisions of the law.
  • Lack of consistency in enforcement: Despite the reforms to unify anti-monopoly enforcement in China, there is still some variation in the enforcement practices of different agencies and localities, which can lead to inconsistencies in the application of the AMA.
  • Weaknesses in the private enforcement system: While the AMA has strengthened the rights of private parties to seek remedies for anti-monopoly violations through the courts, there are still some weaknesses in the private enforcement system, including limited damages and heavy costs for starting the proceeding.
  • Limited efficiency and effectiveness in cross-border enforcement: The Chinese anti-monopoly authorities have increased their focus on international cases, but there is still limited cooperation with foreign regulators and limited interaction with foreign practices, which can limit the efficiency and effectiveness of cross-border anti-monopoly enforcement.

The AMA has now been amended to address some of the above problems, aiming at playing a more important role in ensuring fair competition in the market.

1. Confirmation of a Unified Enforcement Agency

Many commentators have been quick to point out those technical changes when it comes to the 2022 Amendment, while the first important change made by the 2022 Amendment is the confirmation of unified enforcement by one government agency (under the leadership of the Chinese Communist Party).

The AMA used to be enforced by several government agencies, including:

In 2018, by a government agency reshuffling plan, the State Administration for Market Regulation (“SAMR”) was set up to replace the SAIC and to perform more functions in “market regulation”. After this reform, SAMR has become the primary anti-monopoly enforcement agency in China, responsible for merger reviews and investigating and penalizing anti-monopoly violations in all areas, including market competition, intellectual property, and pricing. By November 2021, a reorganized State Anti-Monopoly Bureau (formerly part of MOFCOM) was formally announced under the leadership of SAMR. Nevertheless, it is only until this 2022 Amendment, that Article 10 of the old AMA was revised to confirm SAMR’s (and its future successor’s) role in unifying the enforcement of the AMA.

The unification of anti-monopoly enforcement in China is considered helpful in improving the consistency and coherence of anti-monopoly enforcement and increasing the deterrent effect of the AMA. It is also considered to make it easier for businesses to understand and comply with the AMA, as there is now a single agency responsible for enforcing the law. Although, it is arguable that SAMR, remaining as the company registration house, may not be the proper agency to enforce the competition law.

2. Increase in Costs for Non-Compliance

Before the 2022 Amendment, the AMA followed international practice and allowed the enforcement authorities to impose civil penalties at any amount from 1% to 10% of the turnover (globally) of the non-complying company for serious violations in cases involving monopoly agreements or abuse of dominant market positions. It did not impose a similar civil penalty for failure to comply with the merger review. It did not impose criminal penalties for any violation.

The AMA, as amended now, has enabled the enforcement authorities to impose civil penalties at any amount of up to 10% of the (global) turnover of the non-complying company for failure to comply with the merger review. Even failure to report a merger that does not produce excluding or restraining impacts on competition could incur a fine of up to RMB5,000,000. In very serious cases, the above-said maximum fines may be multiplied by 2 to 5. The amended AMA further imposes various fines on various violations, even if it is merely a procedural failure, and in some cases, fines on individuals responsible for the violations as well. Most importantly, the amended AMA has now introduced criminal penalties for any violation that may constitute a crime, without specifics (Article 67).

With such an increase in costs for non-compliance, businesses operating in or relating to China have to think not just twice, but many times before they go into a conscious violation. The importance of such new penalty clauses could never be overstated.

However, such clauses, especially the 2 to 5 multiplying clause, when combined with the 10% global turnover clause, may be criticized for being too draconian. For their deadly consequences (e.g., a fine of up to 50% of the global turnover of a company), such draconian clauses could beget unintended effects such as abuse of power and corruption. To prevent such unintended effects, very detailed follow-up regulations and stringent due process would need to be established immediately.

3. Introduction of Certain Critical Competition Law Concepts

Based on international practice, China’s own experience in enforcing the AMA since 2008, and some existing Chinese regulations and guidelines, the amended AMA has now formally introduced a few critical competition law concepts. Among them are “Hub and Spoke Cartel” and “Safe Harbour”.

A Hub and Spoke Cartel is a complex structure of cartel (“monopoly agreements” in the AMA) which could involve both horizontal and vertical agreements. Typically, it involves an indirect exchange of information between two or more competing business operators for supply or sale (the “spokes”), through one business operating at a different level of the production or distribution chain (the “hub”). In such a structure, the hub facilitates or coordinates the anti-competitive activities between the spokes, typically without any direct exchange of information between the spokes. The agreements reached or practices concerted in such a way are no less harmful than any horizontal or vertical agreements. In practice, Chinese trade or industrial associations and large upstream business operators may play the hub for such Hub and Spoke Cartels.

Hub and Spoke Cartels are now expressly prohibited by the AMA. Before the 2022 Amendment, trade or industrial associations had been prohibited from organizing their members for anti-competitive conduct. The amended AMA, while maintaining this prohibition, further prohibits any business operator from organizing other business operators to reach monopoly agreements or providing material support to other business operators in reaching monopoly agreements (Article 19).

As the costs for non-compliance with the AMA increase substantially for businesses, compliance with the AMA has increasingly become a substantial burden for businesses. As such, clear guidelines for compliance and further, “Safe Harbours” have been in demand. The AMA now has responded to this demand.

A “Safe Harbour” provision exempts certain types of conduct from being examined for potential anti-monopoly violations. These provisions are designed to balance the goal of promoting competition with the need to allow for reasonable and pro-competitive business practices.

Article 18 of the amended AMA now provides a “Safe Harbour” for business operators in terms of vertical agreements, if they can demonstrate that they do not meet the prescribed market share threshold and do meet other prescribed conditions. However, no “Safe Harbours” have been provided to horizontal agreements in the AMA.

Notwithstanding the foregoing, under the AMA, the following types of conduct are generally considered to be exempt from the prohibition against anti-monopoly practices:

It is important to note that the safe harbour provisions under the AMA are subject to certain limitations and restrictions and that businesses must comply with the provisions of the AMA to take advantage of the safe harbours. Businesses should also be aware that the safe harbour provisions may be subject to change over time, and that the enforcement authorities may interpret the provisions differently in different cases.

4. Amendments in Other Aspects

The 2022 Amendment has also made other important changes to the AMA. Among others, it sets up a “Fair Competition Review” procedure for any administrative authority or public entity to go through before they could adopt rules, regulations or provisions involving the “economic activities of market operators” (Article 5).

It specifically prohibits business operators from engaging in any anti-competitive conduct “by making use of data and algorithm, technology, capital advantage, platform rules etc.” (Article 9).

It allows the enforcement authority to stay in the review process without counting the time for the statutory review period for merger review in certain cases (Article 32).

It prohibits government agencies from abusing administrative power to exclude or restrain completion through signing cooperation agreements, memoranda of understanding or other ways (Article 40).

It also allows the public prosecutors (“people’s procuratorates” in Chinese law) to sue business operators if their anti-competitive activities harm the public interest (Article 60).

Towards A Stronger Competition Law New Developments In The Anti-Monopoly Law In The People’s Republic Of China

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