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Antitrust Regulation on Digital Companies: A Case Study of China

Authored by Shishir Mani Tripathi, Student at HNLU Raipur

Introduction

Antitrust laws are a set of rules formulated to regulate unfair trade practices in the marketplace and seek to protect the consumers from predatory corporate tactics. These regulations deal with a wide range of subject matters; from modulating mergers, and acquisitions to preventing collusion of exploitative firms; everything is regulated by Antitrust laws. The ultimate aim that these laws pursue is to promote healthy competition in the marketplace to ensure that the consumer enjoys appropriate benefits.[1]

In 2019, 12 of the top 100 Digital Companies originated from and were headquartered in, mainland China, along with 2 of the such situated in Taiwan.[2] In 2019, Manufacturing constituted 27.17% of China’s GDP.[3] Several prominent companies like Apple, Tesla, Microsoft, Google, Qualcomm, etc. have established large manufacturing units in China, implying that China’s crucial role in the technology and digital innovation industry. In February 2021, China issued new anti-monopoly laws aimed at introducing stricter regulations dealing with the country’s digital companies.[4] This made it essential to study the impact that Chinese rules and regulations have on such prominent digital corporations. 

It is important to get acquainted with Antitrust regulations and find out how it impact corporations and consumers within their jurisdiction. We will dissect the Anti-Monopoly Law (A.M.L) of China and will trace the impact that it had on various digital companies over the past decade. The last section will focus solely on China’s new Anti-Monopoly Regulations released in February 2021. The events following the newly issued regulations are discussed in further detail, specifically concerning the fate of technology giants based in mainland China and beyond.

Anti-Monopoly Law  of China, 2008

After over a decade of deliberations, China’s National People Congress (N.P.C) adopted the Anti-Monopoly Laws, which were made effective from August 2008.[5] The A.M.L had the same motive as that of the antitrust regulations of the USA and their enactment led to the codification of several Chinese rules and regulations, such as for competition and fair conduct.[6]

The A.M.L can roughly be categorised under four sections that seek to:

  • Restricts few agreements unless they come under the ambit of specified exceptions;
  • Efficient regulation of mergers and acquisitions through review schemes;
  • Prohibitions of actions identified as abuse of dominant market position also lay down a methodology for establishing secure competition when such dominance occurs in the market;
  • Outlaw the misuse of government administrative authorities to stifle competition.[7]

Besides the above-stated goals, the A.M.L also strives to facilitate domestic companies over the global ones; they fabricated a bunch of new enforcement and administrative authorities to ensure a smooth transition and effective output,[8] where the Anti-Monopoly Committee, Anti-Monopoly Enforcement Agency, and the National Development and Reform Commission being a few of them. It is evident that the A.M.L covers a wide range of subject matters and is quite vast, therefore China has been bold in its use of A.M.L against the digital companies and the Information Technology sector since the beginning. In 2014, Windows OS manufacturer was investigated by China’s SAIC concerning the use of the OS in the country. In 2015, a huge fine of US$ 975 million was imposed upon Qualcomm due to its violation of the A.M.L.[9]

For the sake of the scope of this blog, we’ll be focusing upon the practical impact that these laws have on various digital corporations and will discuss the landmark case of Huawei v. IDC,[10] to see how these laws function.

Case analysis of Huawei v. IDC

On December 6, 2011, Huawei, a worldwide supplier of telecommunication equipment, filed two lawsuits against IDC Inc., holder of a large number of wireless communication patents in the USA and China. The cases dealt with the application of FRAND i.e., fair, reasonable, and non-discriminatory principle, being unique in the fact that for the first time a Standard Essential Patent (SEP) holder was held accountable for violating the principle and was made to compensate under the Anti-Monopoly Law.

In the first lawsuit, the plaintiff contended that the defendant was misusing its dominant market position and was demanding disproportionately high royalties in exchange for its patents, which the plaintiff wanted to obtain. The plaintiff also claimed that the defendant is demanding higher royalties from them as compared to other companies like Apple and Samsung. This constituted a violation of the rules defined under Chapter III of the Anti-Monopoly Law. The plaintiff demanded compensation of RMB 20 million and that the defendants be made to stop the abuse of their superior market position.

The court while deciding accepted that, “the defendant did hold a dominant market position and could easily influence other companies’ business in the domain, and also observed that the defendant did discriminate against the plaintiff by demanding comparatively higher royalties.” The defendant further compelled the plaintiff to provide licensing of its patents for free. The court held the defendant accountable for violating the FRAND principle and for misusing their position in the market and asked the defendant to pay the damage of RMB 20 million to the plaintiff. The court further ordered the defendant to “immediately stop the monopolistic conducts of overpricing and tying sales.”

The second suit dealt with finding the correct royalty price to be paid by the plaintiff to obtain patents for the defendant’s SEPs. In this case, the court paid attention to the FRAND principles and also considered the discriminatory behavior of the defendant against the plaintiff since the beginning of negotiations in 2008. The court concluded that “as per Article 4 of the General Principles of the Civil Law and Article 5 to 6 of the Contract Law, the royalty rates should not be more than 0.019%.

Observations from the case and Applicability of the Anti-Monopoly Laws

The technology and digital corporate arena are an intertwined domain, with companies dependent on each other and working together to produce a single high-functionality product. Continuously budding inventions and the use of modern technology made negotiating patents a common practice in the domain.

From Huawei’s judgments with an analysis of the A.M.L, we can identify the scenarios in which its provisions apply:

  • The A.M.L defines the dominant market position as, “the market position that gives a business operator the power to control product pricing, quantity, and other transaction conditions, or to hinder or affect the entry of other business operators into the relevant market.” In the case of digital companies, since each patent is unique, the patent owner is at a dominant position in all the scenarios.[11]
  • If a S.E.P holder unethically uses his market position to dominate the negotiations and violates the FRAND principle, it could amount to monopolistic behaviour, leading to the application of the A.M.L.
  • According to Article 50 of the A.M.L, upon such a violation, the holder would bear civil liabilities and would be required to pay adequate compensation along with immediate eradication of such behaviour.

Implications Of S.A.M.R’s New Anti-Monopoly Regulations

In the past few years, China has gradually increased the regulations on its tech giants, along with an increase in fines and investigations. Its behavior has been largely intolerant against the ‘monopolistic’ practices prominent in the nation’s I.T sector. In 2018, Tencent, a Chinese multinational technology conglomerate holding company, was fined approximately US$ 76,500 for its acquisition of New Classic Media. A fine of US$ 31,430 was incurred by Microsoft due to its failure of informing the antitrust regulators about the company’s Xbox venture.[12]

The new regulations released by China’s State Administration for Market Regulation (S.A.M.R) provides more momentum to the regulatory authorities’ actions. The new rules help the authorities in tightening regulatory hold over the nation’s digital giants.[13] The rules prohibit exploitative activity such as influencing data and algorithms and applying different rates and terms on different clients. Another significant change observed is the removal of a fine cap of US$ 77,000. Now the Companies can be fined up to 10% of their last-year sales. The new guidelines prohibit agreements that aim to impose limits on a supplier or merchant. Such agreements are common in the digital world where companies use “data and algorithms” to restrict competition.

The effect of the new A.M.L is prominently visible in the events that took place in the past few months in the country’s technology corporation domain. On April 10, 2021, the S.A.M.R fined a mammoth sum of US$ 2.75 Billion on Alibaba, one of the largest e-commerce companies in the world, on account of abuse of its dominant market position.[14] The crackdown continued with a fine of US$ 235,302 being imposed on Alibaba-backed Nice Tuan, on May 27.[15] A sum of US$ 77,243 each was fined upon a total of 10 internet companies, including Tencent and Didi Chuxing, on April 30.[16] Another big e-commerce company, JD.com, was fined US$ 46,633 by the S.A.M.R on May 24, the reason being the promotion of false product information and repeated acts of establishing a monopoly.

Furthermore, the competition watchdog is planning to expand these operations by including more staff members in its anti-trust workforce. The internet companies are now further required to inform of any upcoming merger deals the upcoming authorities.[17] The primary focus of the new law is on the digital companies situated and operating in mainland China, with the most effect on the nation’s domestic internet corporations. Though, the possibility of a global crackdown on Chinese companies operating outside of China remains. In such a scenario, the Indian digital economy may also take a substantial hit given the large presence of Chinese mobile and digital companies in India.[18]  

Suggestions & Conclusion

The rise of China’s digital titans has resulted in a slew of social shifts. The Chinese regulatory authorities are taking appropriate actions to ensure that nation’s anti-monopoly laws don’t lag behind technological advancements. With a continuous exponential increase in the competition in the nation’s digital arena, companies are rolling out more such provisions and are resorting to tactics that can ensure their continued monopoly in the domain.[19] 

In an attempt to efficiently weed out such unethical practices and to maintain healthy competition in the marketplace, the governing bodies are ramping up investigative actions. Although such measures are needed, the authorities need to ensure the availability of a fair trial to alleged defaulters. The companies should be given a justified period to adapt to the new laws and make amends to their old and faulty methods. S.A.M.R also needs to address the lack of necessary resources and manpower needed to enforce the new rules. Any ambiguity present in the new rules needs to be eliminated as soon as possible for a better outcome.

Finally, the regulatory authorities have rolled out a comprehensive set of anti-monopoly laws which, if supported by an efficient enforceability mechanism and a just & fair grievance address system, is capable of inculcating healthy competition in the market and can potentially keep a check on the fiddly big-tech domain.  

References

[1]Guide to Antitrust Laws, Federal Trade Commissions, (2017), https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws.

[2] The List, Top 100 Digital Companies, Forbes, (2019), https://www.forbes.com/top-digital-companies/list/#tab:rank.

[3] China Manufacturing Output 2004-2021, Macrotrends, ttps://www.macrotrends.net/countries/CHN/china/manufacturing-output.

[4] Reuters Staff, China issues new anti-monopoly rules targeting its tech giants, Reuters, (Feb 17, 2016), https://www.reuters.com/article/us-china-internet-anti-monopoly-idUSKBN2A70DT.

[5] Insights, New Chinese Anti-Monopoly Law, Jones Day, (Oct 2007), https://www.jonesday.com/en/insights/2007/10/new-chinese-anti-monopoly-law.

[6] David Fleming, & Michelle Gon, Antitrust and Competition in China, Global Compliance News, (2008), https://globalcompliancenews.com/antitrust-and-competition/antitrust-and-competition-in-china/#:~:text=The%20Anti%2DMonopoly%20Law%20aims,competition%20in%20the%20Chinese%20market.

[7] Lianrui Jia, China ups anti-monopoly reforms to curb digital platform power, EastAsiaForum, (Feb 11, 2021), https://www.eastasiaforum.org/2021/02/11/china-ups-anti-monopoly-reforms-to-curb-digital-platform-power/.

[8] Fels A., Wang X., & Su, J., Special Report, China Competition Bulletin, (June 2011), http://www.anzsog.edu.au/research/publications/the-china-competition-bulletin.

[9] Lianrui Jia, China ups anti-monopoly reforms to curb digital platform power, EastAsiaForum, (Feb 11, 2021), https://www.eastasiaforum.org/2021/02/11/china-ups-anti-monopoly-reforms-to-curb-digital-platform-power/.

[10] Shen Zhong Fa Zhi Min Chu Zi, No. 857, Case 857, (2011); and Shen Zhong Fa Zhi Min Chu Zi No. 858, Case 858, (2011).

[11] Gary Zhang & Guangliang Zhang, Antitrust Liabilities For SEP Holders-A Review Of Huawei v. IDC, Mondaq, (Nov 26, 2015), https://www.mondaq.com/china/antitrust-eu-competition-/447110/antitrust-liabilities-for-sep-holders–a-review-of-huawei-v-idc.

[12] Lianrui Jia, China ups anti-monopoly reforms to curb digital platform power, EastAsiaForum, (Feb 11, 2021), https://www.eastasiaforum.org/2021/02/11/china-ups-anti-monopoly-reforms-to-curb-digital-platform-power/.

[13] Reuters Staff, China issues new anti-monopoly rules targeting its tech giants, Reuters, (Feb 17, 2016), https://www.reuters.com/article/us-china-internet-anti-monopoly-idUSKBN2A70DT.

[14] Thomas Peters, Exclusive China’s antitrust regulator bulking up as crackdown on behemoths widens, Reuters, (April 11, 2021), https://www.reuters.com/world/china/exclusive-chinas-antitrust-regulator-bulking-up-crackdown-behemoths-widens-2021-04-11/.

[15] Reuters Staff, China hands Alibaba-backed Nice Tuan new 1.5 mln yuan fine, Reuters, (May 27, 2021), https://www.reuters.com/business/china-hands-alibaba-backed-nice-tuan-new-15-mln-yuan-fine-2021-05-27/.

[16] Celia Chen, & Iris Deng, Tencent, Didi Chuxing, other internet firms slapped with a fine by antitrust authorities for failing to disclose deals, South China Morning Post, (April 30, 2021), https://www.scmp.com/tech/big-tech/article/3131818/tencent-didi-chuxing-other-internet-firms-slapped-fine-antitrust.

[17] Thomas Peters, Exclusive China’s antitrust regulator bulking up as crackdown on behemoths widens, Reuters, (April 11, 2021), https://www.reuters.com/world/china/exclusive-chinas-antitrust-regulator-bulking-up-crackdown-behemoths-widens-2021-04-11/.

[18] Shelley Singh, China’s mobile and digital dominance runs deep into the Indian economy, The Economic Times, (Feb 16, 2020), https://economictimes.indiatimes.com/tech/hardware/chinas-mobile-and-digital-dominance-run-deep-into-indian-economy/articleshow/74154017.cms?from=mdr.

[19] Lianrui Jia, China ups anti-monopoly reforms to curb digital platform power, EastAsiaForum, (Feb 11, 2021), https://www.eastasiaforum.org/2021/02/11/china-ups-anti-monopoly-reforms-to-curb-digital-platform-power/.

Edited By: Kirti Tapadiya

*Disclaimer: The content of this article is intended to provide a piece of general information. The views are expressed by the Author solely and BFTLR may or may not subscribe to the views of the Author.

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