Key points for tech companies checking anti-monopoly compliance

By Ye Han, Merits & Tree Law Offices
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Since the end of 2020, the State Administration for Market Regulation (SAMR) has been focusing on the internet sector as a key area in its anti-monopoly law enforcement work, carrying out a series of legislative, investigative, handling and punishment tasks revolving around the suspected illegal acts of relevant enterprises. In terms of legislation, the Anti-Monopoly Guidelines for the Platform Economy Sector only required four months from the draft for comment to official issuance, making their issuance the fastest among the three sets of major industry-specific anti-monopoly guidelines.

叶涵, Ye Han, Partner, Merits & Tree Law Offices
Ye Han
Partner
Merits & Tree Law Offices

In terms of law enforcement, the SAMR has, since the end of 2020, imposed penalties in about 40 cases involving internet/platform-related enterprises that failed to file in accordance with the law before implementing concentrations. Additionally, it has penalised a number of internet enterprises, including the Alibaba Group, in which fines and forfeiture totalled about RMB18.2 billion (USD2.8 billion). This is the highest amount of fine and forfeiture imposed by China’s anti-monopoly law enforcement authorities to date. Furthermore, to the best of the author’s knowledge, the SAMR is currently conducting anti-monopoly investigations of a number of internet enterprises.

In light of recent legislative and law enforcement developments, the author recommends that technology enterprises conduct internal anti-monopoly compliance self-checks addressing three main aspects – monopoly agreements, abusive practices, and illegal implementation of concentrations. At present, the main risks associated with, and the law enforcement trends in, the three areas are as follows.

Monopoly agreements

Cases of technology enterprises being penalised for monopoly agreements are quite rare, but this may be due to a quirk in law enforcement and does not indicate that the risks of reaching monopoly agreement by technology enterprises are low.

At the system level, the guidelines do not provide a safe harbour for vertical monopoly agreements. For technology enterprises, this means that if they impose restrictions on resale prices, they would not be exempt by virtue of the fact that they have a relatively low market share. Furthermore, the introduction of hub-and-spoke agreements has significantly increased the risks of reaching monopoly agreement by platform-type technology enterprises.

At the practical level, early-stage technology enterprises may mistakenly believe that the risks of violating anti-monopoly law are relatively remote, but a monopoly agreement is not preconditioned on the market share or size of an enterprise. Start-ups may also incur large penalties for committing such acts. Furthermore, an agreement can be written, oral, express, implied or may even be reached passively through technical means. In recent investigations, law enforcement authorities have also collected information from core personnel’s WeChat and Ding Talk, which may use to contact with its competitor or customer.

Abuse of dominant market position

Although abuse of dominant market position is predicated on an enterprise having such a dominant position, the scope of relevant market under the Anti-Monopoly Law is not necessarily identical to that in general knowledge.

With respect to abuse of dominant position, a technology enterprise should work with its in-house and outside counsel to tease out in which lines of business it may have a dominant position, so as to specifically raise the level of internal oversight in the departments concerned, while also formulating internal compliance standards and providing training to specific departments. Generally speaking, the risk of abuse of dominant position arises in an enterprise’s outward facing departments (those that have direct contact with consumers or upstream and downstream enterprises) and in the decision making departments.

While the recent focus in investigating and dealing with technology enterprises has undoubtedly been “one out of two”, it should be noted that the next one could be “big data swindling” and “subsidies”. Even though many acts appear to be industry practice in the eyes of a business department, they may be found to be illegal, so compliance departments should co-operate with outside counsel to promptly rectify any relevant acts to avoid anti-monopoly law risks.

Concentration filings

In the course of a financing, equity investment, asset acquisition or other such transaction, a technology enterprise should consult with anti-monopoly lawyers as early as possible to determine whether the relevant transaction reaches the threshold for a filing. In recent times, two clear signals have been given in business operator concentration filings by technology enterprises due to the issuance of the guidelines. First, they expressly specify that filings are required for business operator concentrations that involve a variable interest entity (VIE); and second, with respect to determinations of control, even if the percentage of equity acquired is low, a determination will be made by taking into account other factors.

With regard to the first point, the author keeps noticing through clients that law enforcement authorities have never explicitly indicated that filings are not required for concentrations involving a VIE. The second point signifies that anti-monopoly authorities are increasingly strict in their determinations of control, which differs significantly from control under the regulations of other authorities. The investment and acquisition team of a technology enterprise needs to work closely with the compliance/anti-monopoly team and outside counsel to avoid an erroneous determination as to whether a filing should be made for a certain transaction.

Among the cases of illegal implementation of concentrations involving equity acquisitions penalised by the SAMR in the first half of the year, there were 11 cases in which the concerned party acquired less than 20% of the equity, including one case in which the concerned party acquired only 6.67% of the equity.

In summary, the author recommends that technology enterprises work with professional anti-monopoly lawyers to actively tease out the above mentioned key law enforcement trends, conduct a self-check and, if there are potential risks, promptly correct the potential illegal acts or take remedial measures to reduce the risk of violations.


Ye Han is a partner at Merits & Tree Law Offices. You can contact him at +86 139 0121 5103 and han.ye@meritsandtree.com