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SAMR signals future enforcement focus on China’s platform economy with publication of new draft guidelines

China's State Administration for Market Regulation (SAMR) published draft Antitrust Guidelines for the Platform Economy for public comment on 10 November 2020. Although still in draft form, the impact of the Guidelines is potentially wide-reaching for some of China’s major tech companies.

Against the backdrop of increased scrutiny and tightened supervision over the online platform sector in China, the State Administration for Market Regulation (SAMR) published its draft Antitrust Guidelines for the Platform Economy (the Guidelines) for public comment on 10 November 2020. Although still in draft form, the impact of the Guidelines is potentially wide-reaching, and is already having reverberations on some of China’s major tech companies with a fall in share prices on announcement of the Guidelines.

The Chinese government has until relatively recently taken a “supervision with tolerance and prudence” approach to support the development of China’s digital platform economy. Despite complaints levelled at Chinese tech companies regarding potentially problematic practices, the sector has not been an antitrust enforcement priority for SAMR (or its predecessor authorities). The Guidelines may change this – the market has already had a taste of the potential impact of increased regulation in the sector following the high-profile intervention by multiple Chinese regulators and subsequent suspension of the Ant Financial IPO last month. The Guidelines signal that China’s online platform sector will increasingly be subject to antitrust scrutiny.

The Guidelines are comprehensive and relatively detailed. They follow the structure of the Anti-Monopoly Law of the People’s Republic of China (the AML), and cover relevant considerations for antitrust analysis in the online platform sector in respect of, inter alia, anti-competitive agreements, abuse of market dominance and merger control. Also, the scope of the Guidelines is extremely broad, capturing not only all internet platforms and platform operators but also any undertakings operating on a platform such as companies offering goods or services through online platforms. In short, the Guidelines provide a clear indication of SAMR’s focus on the online platform sector going forward and provide important insights into the types of issues that may give rise to concern to SAMR and how it will go about assessing competition in the online space.

Key highlights of the Guidelines are set out below.

Market definition: The Guidelines seek to make it easier for SAMR to establish a case against companies operating in the online platform sector, for example, by providing that the relevant market can be left open in certain cases including those involving anti-competitive agreements, (exceptionally) abuse of dominance cases and mergers. This approach would be a departure from the strict position taken to date in terms of the authority defining markets in prior conduct decisions and always requiring merging parties to define markets in merger notifications. The Guidelines leave SAMR with considerable discretion. Whilst it may not be necessary to define markets in all cases (e.g. hardcore cartels) and markets can be left open in some cases (e.g. mergers), market definition can be critical especially in the abuse of dominance arena where cases require a careful and detailed economic assessment of the impact on competition in a given market.

Use of data and algorithms: The Guidelines draw particular attention to the role of data and algorithms. The capability of gathering and processing data, and the costs for data access are cited as relevant factors when assessing market dominance. The Guidelines also recognise that data and algorithms can be used to facilitate collusion or other anti-competitive agreements (such as price fixing and resale price maintenance), and to engage in exclusive dealing, discriminatory pricing or refusal to deal. Significantly, the Guidelines note that a platform or the data gathered by a platform could constitute an essential facility, in which case it may prove difficult for the platform to defend a refusal to deal claim. Coercive collection of user information may also constitute abusive conduct when undertaken by a dominant company and is likened to imposing unreasonable trading terms, although anti-competitive effects should in theory still be established.

Hub-and-spoke conspiracies: The Guidelines include a dedicated provision on hub-and-spoke conspiracies. There is some debate as to whether and how the “hub” can be held liable for facilitating a horizontal agreement where it is not a competitor. The Guidelines lend support to the notion that the current framework of the AML allows for this, even though they are not clear on precisely how such a case would be established.

MFNs: The Guidelines acknowledge that an MFN clause is not automatically unlawful but can be problematic depending on, amongst others, the market position and intent of the relevant parties, and the clause’s impact on competition, consumer interests and innovation. In particular, the Guidelines indicate a threshold consideration is whether the parties – particularly the platform operator imposing the MFN clause – have sufficient market power, but not necessarily a dominant market position (which in China is presumed with a market share of 50%).

Exclusive dealing: Similarly, the Guidelines indicate that dominance is not necessarily a pre-requisite in the context of exclusive dealing arrangements. It will be enough that a platform operator has sufficient market power, and SAMR will also consider the competitive dynamics of the market and market entry barriers. That said, exclusive dealing is also dealt with separately as a form of abuse of market dominance absent a reasonable justification for the practice. One of the examples cited in the Guidelines is where a platform operator effectively forces its trading partner to trade on its platform exclusively (the “choose between two platforms” tactic). The Guidelines also call out certain practices that platform operators have used to enforce exclusive dealing such as lowering a trading partner’s ranking in search results, limiting network traffic, and creating other technological obstacles (e.g. threatening to de-list a trading partner or breaking links with its online store).

Merger control: In relation to so-called killer acquisitions, the Guidelines indicate a desire by SAMR to scrutinize such transactions by making use of its power to conduct its own investigation of transactions falling below the filing thresholds. This contrasts with some other jurisdictions, including Germany and Austria, which have adopted a transaction value filing threshold to capture such transactions. If remedies are required, SAMR has signaled that merging parties will need to consider appropriate structural remedies (e.g. divesture of data) and/or behavioural remedies (e.g. modifying algorithms) to secure deal approval. The Guidelines also confirm that transactions involving VIE structures are caught by the merger control regime provided the filing thresholds are met.

It remains unclear when the Guidelines will be enacted. Nevertheless, the publication of the draft Guidelines clearly indicates a shift in SAMR’s enforcement priorities towards the online platform sector, and we expect to see further enforcement in this area in the near future.

If you are interested in more details of the proposed Guidelines and how they may affect your business, we would be happy to discuss this further with you.