China’s competition regulator publishes new compliance guidelines

In August 2020, China’s primary competition enforcement regulator, the State Administration for Market Regulation (SAMR), announced the publication of its “2019 Compilation of Antitrust Regulations and Guidance”.  The publication formally adopts four key guidelines (the Guidelines) relating to the enforcement of China’s main competition statute, the Anti-Monopoly Law (AML). 

The Guidelines include:

1. Guidelines to the Application of the Leniency Regime in Horizontal Monopoly Agreement Cases ( the Leniency Guidelines);
2. Guidelines to Commitments from Undertakings in Monopoly Cases (the Commitments Guidelines);
3. Antitrust Guidelines for the Automobile Sector (the Auto Sector Guidelines); and
4. Antitrust Guidelines for the Intellectual Property Field (the IP Guidelines).

The Guidelines have been long-awaited, and provide welcome certainty clarity for Japanese companies doing business in China, particularly for companies in the auto sector and seeking to enforce IP rights in China.

The guidelines are stated to be retrospectively effective as from 4 January 2019, and therefore have immediate effect.

The Leniency Guidelines

SAMR, as with many competition law regimes, operates a cartel ‘leniency’ regime, allowing parties to anti-competitive conduct to report the infringing conduct in return for a reduction in penalties.  The Leniency Guidelines formalise the framework around which leniency applications can be made to SAMR and other competition enforcement agencies, as well as the conditions on which leniency may be granted.

In particular, the Leniency Guidelines clarify that:

• Leniency is only available in the context of ‘horizontal’ monopoly agreements between competing undertakings (i.e. cartel agreements), and not vertical infringements such as resale price maintenance.
• Leniency can typically be granted to up to three parties in relation to any monopoly agreement, although this can be increased in certain circumstances.
• The first successful leniency applicant can in most cases be granted immunity from all penalties if the leniency application is submitted before the enforcement agency has established a case, or otherwise receive a reduction of the applicable fines by at least 80%.  Subsequent successful leniency applicants may be granted reductions of between 20-50%.
• Conditions on applicants seeking a leniency ‘marker’ prior to a formal leniency application appear to be stricter than those imposed in jurisdictions such as the EU or Hong Kong.

The framework set out under the Leniency Guidelines appears to be broadly similar to that in other jurisdictions (such as the EU or Australia), which will be reassuring to companies making multi-jurisdictional leniency applications in global cartel cases.  However, one important factor to note is the lack of any explicit formal or informal protections on confidentiality under the Leniency Guidelines. This could mean that materials contained in a leniency application may be subsequently used against the leniency applicant, for example in follow-on damages claims. 

More information on the Leniency Guidelines is available here.

The Commitments Guidelines

As in other jurisdictions including the EU and now also Japan, the AML makes provision for undertaking being investigated for anti-competitive conduct to offer ‘commitments’ aimed at removing or reducing the anti-competitive effects of such conduct in return for a termination of the investigation.  The procedure for offering such commitments is now formalised under the new Commitments Guidelines.

Whereas the position is not clear under the AML, the Commitments Guidelines explicitly rules out the possibility of undertakings offering commitments in relation to ‘hard-core’ cartel conduct, such as price-fixing agreements.

The Commitments Guidelines also make clear that, in deciding whether to accept commitments offered by an undertaking under investigation, enforcement agencies can consider the “subjective attitudes and intentions” of the undertaking, in addition to the nature of the commitments and their likely effectiveness.  This suggests that demonstrating contrition for any potentially infringing conduct will be an important element of commitment procedures, as in other competition investigations in China.

The Auto Sector Guidelines

The Auto Sector Guidelines targets antitrust issues that commonly arise in the automobile sector, including the auto parts aftermarket. As many Japanese auto parts manufacturers will be aware, the automobile sector is one that often comes under particular scrutiny in China and elsewhere.

The Auto Sector Guidelines provide that there is a rebuttable presumption that vertical geographical and customer restraints will be compliant with competition law if they are entered into between parties that have a market share that falls within a ‘safe harbour’ or 30% of less in the relevant upstream or downstream market.  The safe harbour does not, however, apply to ‘core prohibitions’, including restrictions on ‘passive’ sales by distributors, restrictions on cross-supplies between distributors and restriction on the sale of spare parts to end users.

The Auto Sector Guidelines can be seen as a guide to SAMR’s likely approach to key issues other sectors also, such as in relation to different forms of contractual restrictions that may be imposed between suppliers and distributors.

The IP Guidelines

The AML states that the valid and lawful exercise of IP rights (a form of monopolisation) is exempted from the AML, whereas the abuse of IP rights through conduct that excludes or restricts competition is not.  The IP Guidelines provide clarity on the tension between these two positions, setting out various principles applicable to IP-related arrangements, such as licensing.

In particular, the IP Guidelines clarify that agreements relating to IP rights will not be considered anti-competitive where one of the following conditions are met:

• Where the combined market share of the relevant undertakings in any market where there is a horizontal overlap does not exceed 20%;
• Where the market share of each relevant undertaking in any market affected by the IP agreement does not exceed 30%; and
• In any market where it is difficult to ascertain the market share of the relevant undertakings, or where market share is insufficient to reflect the market power of the relevant undertakings, where the market has at least 4 substitute technologies that can be obtained at a reasonable price from independent undertakings.

The IP Guidelines also deal with the enforcement of standard essential patents (SEPs), providing that the holder of standard essential patent rights can be deemed to have excluded or restricted competition by seeking injunctive relief or an order of a court in order to coerce a licensee to accept unreasonably high licensing fees or other unreasonable contractual conditions.  This is highly topical in Japan as well as in Europe.

Lastly, the IP Guidelines make clear that certain arrangements relating to IP rights (such as transfer of IP rights, or exclusive licences) that give rise to a change of control, or otherwise allows an undertaking to exercise decisive influence over another, could be notifiable for merger control purposes.

HSF Kewei, Herbert Smith Freehills’ local law firm joint venture in China, contains a team of competition and regulatory experts, who are licensed to practise local law and deal directly with the Chinese competition authorities. If you would like to know more about the contents of this e-bulletin, please get in touch with one of the contacts listed below.