United States: China's Antitrust Agency Updates Its Enforcement Rules

China's State Administration for Market Regulation ("SAMR") recently released three new antitrust regulations that consolidate the antimonopoly regulations of its predecessor antimonopoly enforcement agencies, but also introduce important changes. This Jones Day White Paper reviews the key reforms, which take effect September 1, 2019, and their implications for companies doing business in China. Although the new regulations largely restate existing law, some new rules provide welcome clarity and transparency to underdeveloped legal principles. In some cases, the new rules foreshadow more enforcement and signal new areas for SAMR's focus. In other circumstances, the rules expand defenses available to companies faced with a SAMR investigation.

INTRODUCTION

China's State Administration for Market Regulation ("SAMR") recently released three new antitrust regulations¹ that consolidate the antimonopoly regulations of its predecessor antimonopoly enforcement agencies ("AMEAs"), but also introduce important changes.² This Jones Day White Paper reviews the key reforms, which take effect September 1, 2019, and their implications for companies doing business in China.³ Although the new regulations largely restate existing law, some new rules provide welcome clarity and transparency to underdeveloped legal principles. In some cases, the new rules foreshadow more enforcement and signal new areas for SAMR's focus. In other circumstances, the rules expand defenses available to companies faced with a SAMR investigation.

THE APPLICABLE SCOPE OF THE COMMITMENT AND SUSPENSION MECHANISM

Article 45 of the Antimonopoly Law ("AML") allows AMEAs to suspend an antitrust investigation if the parties under investigation agree to cease the allegedly unlawful conduct and take effective remedial measures. Prior AML regulations were silent as to the type of cases that qualified for commitment and suspension. With a few exceptions,⁴ most suspended AMEA probes have related to abuse of dominance allegations in which investigated parties committed to cease the allegedly unlawful conduct by agreeing, for example, not to sell at discriminatory prices or require exclusive contracts.

Although such settlements largely have not been controversial in abuse of dominance cases, there is disagreement about whether the same treatment should apply to the regulation of monopoly agreements, which are roughly comparable to the law of U.S. Sherman Act § 1 and Article 101 of the EU Treaty. Article 22 of the new Monopoly Agreements Regulation clarifies that the commitment and suspension mechanism applies to all types of AML violations, except for three "hardcore" cartel violations, price fixing, output restrictions, and market allocations. Examples of conduct that now falls within the commitment and suspension mechanism include resale price maintenance, restrictions on application of new technologies or new equipment, exclusive agreements, and most-favored nation clauses, among other conduct. Therefore, companies that find themselves under SAMR investigation for monopoly agreements, other than for hardcore violations, should weigh the benefits of a commitment to end the conduct.

ADJUSTMENTS TO LENIENCY POLICIES

Prior to the unification of China's AMEAs under one agency, as detailed in our June 2018 White Paper, the State Administration of Industry and Commerce ("SAIC") and National Development and Reform Commission ("NDRC") had distinct responsibilities. The NDRC dealt with price-related AML violations, whereas the SAIC dealt with non-price-related AML violations. Although the SAIC and NDRC AML implementing regulations featured largely similar leniency programs, there were a number of practical differences that led to confusion. Examples include who could receive leniency, the supply of evidence necessary to obtain leniency, and the amount of any fine reductions, among other issues.⁵

The Monopoly Agreements Regulation harmonizes these differences and adopts a unified leniency program framework. According to Article 34 of the Monopoly Agreements Regulation, the first applicant for leniency that provides important information may be exempted fully or receive a reduction of 80% or more of potential fines. The second leniency applicant may receive a 30% to 50% fine reduction, and a 20% to 30% reduction is available for the third applicant.

The most significant change is to the treatment of the first leniency applicant. Under the prior SAIC and NDRC regulations, AMEAs typically granted the first leniency applicant a complete exemption when an applicant met the conditions for leniency. The new Monopoly Agreements Regulation, however, adopts a more conservative approach, leaving room for SAMR to impose some fine, albeit largely reduced, against the first applicant. Although it is too early to say whether SAMR will deviate from prior practice, it has discretion whether to grant a total exemption or merely reduce fines. A company considering a leniency application should weigh the possibility that it may not receive a complete exemption, even if it is the first to report a violation.

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Footnote

1 The Interim Regulation on Prohibition of Monopoly Agreements ("Monopoly Agreements Regulation"), the Interim Regulation on Prohibition of Abuse of Dominance ("Abuse of Dominance Regulation"), and the Interim Regulation on Preventing Conducts Abusing Administrative Power to Eliminate or Restrict Competition ("Administrative Monopoly Regulation"). SAMR has already released merger filing related rules and guidelines.

2 The new regulations replace five regulations of the State Administration for Industry and Commerce ("SAIC") and though not explicitly provided, it is expected that two regulations promulgated by the National Development and Reform Commission ("NDRC") also will no longer be effective.

3 The new regulations are available in Chinese at http://www.samr.gov.cn/fldj/.

4 One such exception was the recent Hydron & Horien (2019) case, in which SAMR's Shanghai branch terminated a resale price maintenance ("RPM") investigation against two contact lenses manufacturers. The decision in Chinese is available at http://www.samr.gov.cn/fldj/tzgg/xzcf/201905/t20190521_293971.html.

5 For more discussion about the slightly different leniency programs under NDRC and SAIC regulation respectively, see Jones Day White Paper "Combination of China's Three Antitrust Enforcement Agencies May Bring More Aggressive Enforcement Over Long Run", available at https://www.jonesday.com/files/ Publication/e1aa9878-9ac0-43a2-a021-a12b535091ae/Preview/ PublicationAttachment/cfcbaa9a-4c2c-4a98-ba63-a8b1e6842fb8/ Combination_of_Chinas_Three_Antitrust_r2.pdf.

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