China is increasing oversight and enforcement of anti-monopoly legislation, in a trend that could have a significant impact on the country’s platform economy.
China’s State Administration for Market Regulation (SAMR) recently fined e-commerce giant Alibaba a record 18.2 billion yuan ($2.75 billion) for violating the antitrust law. It also issued administrative guidance requiring the tech giant to conduct a comprehensive rectification and submit self-inspection reports for three consecutive years.
The watchdog said that the hefty fine was imposed because Alibaba abused its dominant position in the online retail service market and implemented “exclusive dealing agreements” that restricted vendors on its platform from opening e-shops or participating in marketing campaigns on competitors’ platforms. By taking these steps, the group strengthened its market power and gained an unfair competitive advantage, SAMR noted.
“We accept the penalty with sincerity and will ensure our compliance with determination,” Alibaba said in a statement. “To serve its responsibility to society, Alibaba will operate in accordance with the law with utmost diligence, continue to strengthen its compliance systems and build on growth through innovation.”
The penalty was China's largest fine for an antitrust violation. In 2015, Qualcomm, a U.S. chipmaker, paid $975 million to Chinese authorities to end an antitrust investigation into its patent licensing practices.
Considered the first case after antitrust guidelines focused on China’s digital platform companies took effect, Alibaba’s experience may shed some light on how future antitrust investigation may transpire moving forward.
Janet Hui, partner of JunHe, tells ALB that the Alibaba case provides clues on how to define dominant position and anti-competitive practices.
The case demonstrated that China’s antitrust investigations will not only target foreign firms but also domestic players. Those who break the law will face administrative penalties, Hui says.
At the same time, the decision is of “high standard”, as it mentioned the technical issues and included a comprehensive economic analysis. It also laid out specific details of the misconduct and defenses, which made for great progress in transparency.
Lastly, “it acts as a precedent for business operators and clarifies some principles of law and how to comply with the law,” Hui notes.
The administrative guidance could serve as a reference for other companies. Other online platform companies can conduct self-inspections on their antitrust compliance based on the administrative guidance and the Antitrust Guidelines for the Platform Economy and implement measures based on the inspection results.
Fay Zhou, an antitrust and foreign investment partner at Linklaters, says that the administrative guidance proposes to “increase access to data, applications and payment systems on the platform and promote cross-platform connectivity and operations.” This provides offer guidance for the entire industry and have structural impact on the competitive landscape and business model of China’s platform economy.
The record fine on Alibaba sent a chilling message to other e-commerce giants and prompted them to conduct self-inspections to avoid being seen to be undertaking monopolistic practices such as exclusive dealing agreements, big data discrimination or blocking links to other platforms.
“Internet firms need to reshape their business models, define which market they belong to, and inspect their technologies. If they have been involved in monopolistic behaviour, their business model and profitability could be significantly affected.”
—Janet Hui, JunHe
Speaking of the significance of the Alibaba case to e-commerce platform operators, Hui says Internet firms need to reshape their business models, define which market they belong to, and inspect their technologies. If they have been involved in monopolistic behaviour, their business model and profitability could be significantly affected.
“However, it’s an opportunity for smaller internet platforms,” says Hui. Without practices such as exclusive dealing agreements, more vendors will be able to join smaller platforms and make them more competitive. Hence, she says, ensure compliance with antitrust legislation is urgently needed and will provide for a fairer competitive environment.
Linklaters’ Zhou adds that the SAMR, the Cyberspace Administration of China and the State Taxation Administration recently ordered 34 companies to conduct self-inspections within one month in accordance with China’s antitrust law and make public commitments to abide by the law. This suggests regulators intend to use the new rules and penalties to rectify the industry and solve anti-competitive issues that have long existed in China’s platform economy sector.
"With a new regulatory landscape and stronger regulation as the new normal, internet companies should adjust their mentality and strategy and treat antitrust compliance as the main focus of their operation management as well as risk prevention and control," says Zhou.
"Antitrust enforcement will become a norm and an important tool for regulating the industry and promoting market competition, as China’s platform economy has entered a new stage of development. Moving forward, regulators will pay close attention to monopolistic practices such as 'choosing one from two', ' big data discrimination’ and 'blocking links from other platforms', among others,” she continues.
She advises companies, when conducting the rectification, should comprehensively assess antitrust risks in their business and establish or optimize antitrust compliance programs.
In 2020, the SAMR rolled out the Anti-Monopoly Compliance Guidance for Business Operators to urge companies to establish antitrust compliance programs. With regulation tightening up, such programs are expected to play a more important role in business operations.
Zhou suggests companies take the initiative to develop a compliance program that can
coordinate and deal with investigators to make sure they cooperate and fulfil their legal obligations. Such programs also help avoid risks of procedural violations and more effectively put forward claims and defenses during investigations.
Meanwhile, Zhou also says that it is usually complicated to analyse antitrust issues in the Internet sector, and some of the competition laws are still controversial. Although different countries understand and implement regulations differently, the general consensus is to strengthen regulations, including in countries like the U.S. She suggests large platform operators should keep an eye on the latest developments and adjust their business strategy to match regulatory requirements.
When companies develop and optimize an antitrust compliance program, lawyers can be a great help.
Since regulators issued the antitrust guidelines on the country's platform economy, Hui says JunHe has received queries from many clients to conduct internal audits and seek legal advice on compliance.
Meanwhile, Zhou believes lawyers can help companies protect their procedural rights, understand the legal and factual issues in an investigation, and make claims and defenses during antitrust investigations.
“An antitrust investigation involves a lot of complicated factual and legal issues. Lawyers should take up a case as soon as possible to help companies minimize their losses and risks and provide effective support to strive for the best outcome for their clients.”
—Fay Zhou, Linklaters
“An antitrust investigation involves a lot of complicated factual and legal issues. Effective defense, just cause defense, as well as leniency, exemptions, and suspension of investigation are all allowed by the law. Lawyers should take up a case as soon as possible to help companies minimize their losses and risks and provide effective support to strive for the best outcome for their clients,” she adds.
Other antitrust investigations and enforcement actions are likely to come in the wake of the record-breaking Alibaba fine.
In late April, state antitrust regulators were reportedly planning to fine Tencent at least 10 billion yuan for not properly reporting past acquisitions and investments for antitrust reviews. The SMAR has also initiated an investigation into Meituan for implementing an "exclusive dealing agreement."
And it is not only tech giants that could take a hit. At the local level, the Shanghai Municipal Administration for Market Regulation ruled that English-language food delivery app Sherpa’s had abused its market dominance and slapped a 1.16 million yuan fine on the Shanghai-based company.
As regulators have revised China’s antitrust law and implemented measures to strengthen antitrust enforcement, Vivian Cao, partner at Zhao Sheng Law Firm, tells ALB that law enforcement agencies will be more proactive and expects more antitrust enforcement in many sectors.
Looking ahead, state regulators are expected to focus more on launching antitrust investigations in merger and acquisition (M&A) deals and optimizing antitrust litigation.
Cao says monopolistic practices in the platform economy sector are not limited to abusing market dominance, but also implementing merger control and monopoly agreements. She explains that the earliest antitrust enforcement measures taken against the platform economy players were imposing penalties for not properly reporting M&A deals in the Internet industry. Regulators are still investigating deals that have not been properly reported, and the SAMR is looking into the latest investment and M&A transactions in the Internet industry.
“For M&A deals that see anti-competitive issues, regulators might impose additional restrictive conditions or even ban the transaction.”
—Vivian Cao, Zhao Sheng Law Firm
“We expect the review of concentrations of business operators will play a key role in containing the disorderly expansion of the capital and preventing high market concentration or structural risks,” says Cao. “For M&A deals that see anti-competitive issues, regulators might impose additional restrictive conditions or even ban the transaction. The antitrust review of M&A deals in China may be able to address issues that are of general concern in other countries, such as data collection and misuse, platform bundling, and self-preferencing.”
As the antitrust law has been further refined, Cao points out that it will be more likely to take in more illegal concentrations of business operators. For investment and M&A deals in various industries, the review of concentrations of business operators will have a more prominent impact on the transaction schedule and even the feasibility of deals.
Meanwhile, JunHe’s Hui expects to see more antitrust litigation as consumers and stakeholders come to realise that the antitrust law protects their interests.
Cao from Zhao Sheng notes that in recent years, the Supreme People's Court has improved the procedures and systems of antitrust litigation through measures such as setting up intellectual property courts and adopting a leapfrog appeal system. “The Supreme People's Court might roll out new judicial interpretation of the antitrust law in order to provide institutional protection to reduce the burden and difficulty to present evidence for the plaintiff,” she says.
She emphasizes that antitrust and unfair competition litigations have become a major task for the Supreme Court’s work this year and beyond. Cases such as JD.com suing Tmall for implementing an exclusive dealing agreement and Douyin suing Tencent for abusing its market dominance that are already in judicial proceedings are expected to have a great impact on the industry.
“Deepening antitrust enforcement in the platform economy sector will encourage business operators whose interests have been harmed by monopolistic practices to protect their rights through civil litigation,” she says. “This will prompt the court to further clarify the interpretation and application of the antitrust law.”
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