China Enforces Antitrust Guidelines on its Online Economy

On February 7, 2021, China’s State Administration for Market Regulation (“SAMR”) promulgated the Antitrust Guidelines for the Platform Economy (“Guidelines”) with immediate effect.

The final version of the Guidelines does not substantially differ from the initial draft unveiled by the SAMR at the end of November 2020. A breakdown of the Guidelines can be found here.

The short time needed to finalize the Guidelines reveals the urgency felt by China to regulate its fast-growing digital economy to prevent and stop monopolistic behaviors and promote the sustainable and healthy development of online commerce.

Curtailing monopolistic behavior on online platforms

Chinese authorities, by means of the Guidelines, intend primarily to prevent monopolistic behaviors.

Horizontal, vertical, hub and spoke agreements, and concentration of undertakings have been forbidden, and in doing so, the Guidelines provide ad hoc definitions of market dominance and abuse of such position in the online market; this has its own peculiarities.

The main purpose of the Guidelines is to create a fair and competitive market on online platforms and to safeguard consumer interests.

This goal is pursued by establishing rules that define what must be considered as an anti-competitive behavior and by identifying the practices that must not be adopted by platforms operators, such as squeezing other operators out of the market, sharing sensitive consumers’ data, adopting the “choose one between two” practice (also called “choose one over the other” whereby a seller cannot operate on different platforms and must choose one single platform), or using big data to manipulate the market to their own advantage (for example, drafting the profile of a user, based on their online behavior, with the aim of setting different prices).

As explained by the Office of the Anti-Monopoly Commission of the State Council during a press interview released on February 7, 2021, monopolistic behaviors on the platform economy have their own characteristics, for instance:

• The behavior is more concealed, and the use of tools, such as data and algorithms, among others, may help operators to quickly exchange sensitive information making it more difficult to discover and determine monopoly agreements.

• On the platform economy, it is easier to reach hub and spoke agreements, made possible by using algorithms or other technical tools, to assume the role of market organizer and coordinate the activities of other operators on the platform, as well as determine or interfere in the price setting mechanism.

• Platforms operators may impose better or equal trading conditions, in terms of price and quantities, to operators compared to those of other platforms, thus restricting the competition among the different platforms.

The Guidelines clarify that a monopoly agreement is identified when different operators behave in a coordinated way due to the use of data, algorithms, and other tools that allow them to synchronize their activity.

Recent antitrust cases involving internet giants

We spotlight a few important and recent cases where Chinese internet giants been accused, or even punished, for anti-competitive or monopolistic conduct.

Given their outsized presence and influence in the online market, Chinese authorities have begun to pay acute attention to their respective commercial and business activities to ensure fair competition in the platform economy. Such antitrust regulation will come under the Guidelines going forward.

“Choose one over the other” case

In December 2020, the SAMR officially announced that it had initiated an investigation into Alibaba Group Holding Ltd for suspected anti-competitive conduct. The investigation was based on allegations that the company forces merchants on its website to sign exclusive cooperation agreements, preventing them from selling products on rival platforms. SAMR reported to have conducted and completed an on-site investigation on the same day. This is the SAMR’s first major publicly announced investigation on a case of abuse of dominance in the internet sector. For sake of clarity, it shall be noted that under the Anti-Monopoly Law, SAMR can confiscate the offender unlawful gains and, in addition, it may impose a fine up to 10 percent of its revenues.

Concentration of undertakings case

On December 14, 2020 SAMR punished Alibaba Investment Co., Ltd, Tencent-backed China Literature Group, and Shenzhen Fengchao Network Technology Co., Ltd in accordance with Articles 48 and 49 of the Anti-Monopoly Law, by imposing a fine equal to RMB 500,000 (US$76,500) each for having failed to make the mandatory declaration prescribed under the law to implement the concentration of undertakings. In this case, the Chinese competent authorities also ascertained that the concentration of business operators involved an agreement control structure (variable interest entity structure). An investigation by the SAMR revealed that the failure of the three companies to fulfill their legal obligation to declare equity purchases of other companies – as required by the Anti-Monopoly Law – constituted an illegal concentration of operators.

Unfair competition case

On December 30, 2020, SAMR penalized the online discount retailer Guangzhou Vipshop E-commerce Co., Ltd. – together with Beijing Jingdong Century Information Technology Co., Ltd. (JD.com), Hangzhou Haochao E-commerce Co., Ltd. (Tmall) – with a fine of 500,000 RMB (US$76,500) for conducting manipulative pricing. After that, SAMR announced in mid-January that it was investigating the said company for unfair competition behavior. On February 8, 2021, right after the promulgation of the Guidelines, SAMR fined Vipshop (China) Co., Ltd. for anti-competitive behavior, accusing the company of developing and using an information-gathering system that helped it influence consumer choices on the buying platform and block sales of certain brands. This led to disruption of normal market competition orders and constituted a breach of the Anti-Unfair Competition Law. The administrative fine imposed was RMB 3 million (US$464,000), the maximum amount stipulated by the law.

Landmark case of abuse of market dominance

On February 7, 2021, the Beijing Intellectual Property Court accepted a case filed by China’s largest video-sharing platform Douyin (the Chinese iteration of TikToK owned by ByteDance) against the internet giant Tencent over alleged monopolistic behavior. More specifically, Douyin alleged that Tencent had blocked its users from sharing content from Douyin on its social networking platforms, WeChat and QQ, thus constituting “a monopolistic behavior achieved by abusing market domination to exclude and limit competition”. On this basis, Douyin appealed to the said court asking to order Tencent to stop its monopoly practice, remove the negative impact caused by the act, and claiming RMB 90 million (US$13.9 million) as compensation for losses and expenses. In response, Tencent argued that ByteDance’s move is “maliciously framing it” and the company will countersue ByteDance for illegal infringement. These two Chinese internet giants have fought several legal battles over monopolistic practices over the years, but this is the first case that has been filed since China promulgated the Guidelines. Market watchers will be observing if the court’s judgment will be impacted and how – given the tightening antitrust regulation of the platform economy.