Another “double eleven” – the most-celebrated Chinese shopping festival around 11th November – just ended this year, again with record-breaking sales number. However, the digital shopping platforms in China spent this “double eleven” with mixed feelings. Along with the shopping season came a regulatory document which targets digital platforms specifically. On 10 November 2020, the central antitrust enforcement body of China, the State Administration of Market Regulation (“SAMR”), released a draft of the Antitrust Guidelines on the Field of Platform Economy (“Draft Guideline”) to solicit public comments. On the very next day, the major listed tech giants’ stock value plunged.
China has never punished any of the tech giants pursuant to the antitrust rules, despite that the Anti-Monopoly Law of China (“AML”) has come into effect for more than twelve years. During these years, we have seen an active enforcement on digital market in foreign jurisdictions. For example, Google received three antitrust tickets in the EU for three consecutive years from 2017 to 2019, totaling more than 60 billion CNY. Earlier this year, the US Department of Justice also initiated a lawsuit against Google for its anticompetitive practices in the search and search advertising markets. In contrast, China’s antitrust enforcement authorities were criticized for not using antitrust weapons effectively, particularly against the backdrop of its prosperous development of digital economy.
Draft Guideline could be a milestone. It is a signal that the regulation of Internet industry will usher in a new era of antitrust enforcement in China. The Draft Guideline encompasses the hot topics such as “choose one from two” (a form of exclusive dealing), differential pricing, and hub-and-spoke cartel, as well as algorithm collusion, MFN, and essential facilities, which have been controversial in China. It also clarifies the notifiability of VIE related transactions, which has never been expressly voiced by antitrust regulators and was a grey area. This article will focus on some of the most important behaviors that are addressed in the Draft Guideline and analyze how it will affect e-commerce business scenarios.
I. Definition of “Gatekeeper”: What Are Digital Platforms?
The Draft Guideline defines “platform” in Article 3, which refers to Internet platforms that “use Internet and information technology to enable interdependent multilateral parties to interact under the rules and matching provided by specific carriers to jointly create value.” It additionally provides definitions of “operators of platforms” and “operators on the platforms.” They are both part of “operators in the field of platform economy” that are regulated by the Draft Guideline.
The concept of platforms is sometimes self-evident, for example in the case of Alibaba or Amazon. However, when it comes to smaller ecosystems, the concept could be vague. For example, in practice, some SaaS (Software as a service) providers deliver services mainly to businesses but may also have the capacity to certain extent of attracting and matching private users with such businesses. So far, the legal test is not entirely clear. In the EU, the proposed Digital Markets Act is also confronted with the daunting issue of defining gatekeeper. In China, although the E-Commerce Law has involved the definition of e-commerce platforms, related rules or cases are not fully developed in this aspect.
II. Algorithm and Cartel: Tacit Coordination is on SAMR’s Radar
Tacit coordination occurs when competitors’ prices or other strategies converge without an explicit agreement. In the context of digital platforms, the convergence of pricing and the monitoring of deviation could be accomplished through algorithms or other technical means which are more secret. Article 6 of the Draft Guideline stipulates that cartels include agreements reached by “communication of intentions through technical means” and “coordinated behaviors achieved through data or algorithms.” It means algorithms or other technical ways that facilitate tacit coordination will not be overlooked by SAMR.
Cartels through online platforms have been investigated in places out of China. For example, thirty travel agencies in Lithuania were considered to be implementing hub-and-spoke cartel for sharing the same online travel booking system, Eturas. Eturas applied a common cap on discounts that the travel agencies could offer through the platform, and the cap was communicated to the travel agencies by amending the platform terms and conditions. The European Court of Justice ruled that if a travel agency understood that there might be anti-competitive collusion in the platform management system and still used the system, it could be presumed that they participated in the cartel.
III. MFN: Multiple Levels of Risks Revealed
In the digital economy, most favored nation (“MFN”) clauses (also called “parity clauses”) are often adopted by platforms to prevent their suppliers from offering lower prices or better terms on other sales channels (e.g. competing platforms or the suppliers’ own websites). Article 7 of the Draft Guideline provides that MFN may constitute a vertical monopoly agreement by taking into consideration the business motives, the implementers’ market power, and the clause’s impact on market competition, innovation and consumers.
Other than the named risk of vertical monopoly agreement, cases in foreign jurisdictions show that MFN could also lead to hub-and-spoke cartels and abuse of market dominant position by imposing unfair trading terms, if the implementer’s dominance could be established. For example, the UK watchdog, the Competition and Markets Authority, launched an investigation in the hotel online booking sector focusing on MFN restrictions that prevent hotels from offering cheaper room rates on competing OTA (online travel agency) sites. It is considered a vertical restraint case. In the US, the 2nd Circuit held that Apple’s MFN clauses of e-books amounted to price fixing among book publishing companies. On the other hand, the European Commission considered that Amazon’s MFNs may violate EU antitrust rules that prohibit abuses of a dominant market position. Whether SAMR will limit the enforcement of MFN within vertical agreement remains to be seen.
IV. Market Definition: Not That Much a Barrier in Abuse Cases
The existence of dominant position in the relevant market is the precondition to abusive conducts, and usually there should be a consensus on the definition of relevant market before finding dominant position. Therefore, to pursue abusive conducts of digital platforms, such as “choose one from two”, refusal to deal or differential pricing, etc., the enforcer has to overcome the barrier of market definition, which is complicated by their special attributes such as network effects, bilateral and even multilateral markets, and users’ multi-homing attributes. However, Article 4 of the Draft Guideline explicitly provides that “if there is sufficient evidence to prove that a behavior that can only be carried out by relying on market dominance lasts for a long time and its anticompetitive effect is obvious”, the definition of market dominant position can be skipped.
Despite that market definition has always been an inherent part for Chinese watchdog in abuse of dominance cases, there has been different view in the judicial branch. In a private dispute as early as in 2014 – Qihoo v. Tencent , the Supreme People’s Court hinted that it is not necessary to clearly define the relevant market in every case of abuse of market dominance, and an entity’s market power can be evaluated by direct evidence proving exclusion or elimination of competition. Now this rule is articulated by the Draft Guideline and market definition or establishing dominance may no longer a prominent barrier of abuse cases in the digital economy.
V. Essential Facilities Doctrine: A Burden of Open Access on Platforms
The essential facilities doctrine requires monopolists with essential facilities to open the facility and allow competitors to use it reasonably. In China, the doctrine is embodied in the abuse by refusal to deal, that is, an entity with essential facilities could be regarded as having a dominant market position and are not allowed to refuse the access of the facility by others without justification. But so far, it is still a very controversial concept in the digital economy, because it might overburden some tech companies by forcing them to share data or resources with their competitors. Nonetheless, the Draft Guideline provides such possibility in Article 14.
The potential application of essential facilities doctrine is analyzed from two aspects: when a platform may constitute an essential facility, and when data may constitute an essential facility. For platforms, it is necessary to consider other platforms’ substitutability, potential competing platforms, the feasibility of creating a new one, others’ dependency, and the possible impact of open-up on this platform. For data being essential platforms, the factors include the data’s indispensability, alternative channels to access such data, technical feasibility, and the possible impact of opening-up on the data owner.
VI. “Choose-one-from-two”: How It Is Implemented Matters a Lot
“Choose-one-from-two” of digital platforms is similar to exclusive dealing in the traditional sense – a seller is asked by one platform to shut stores on competing platforms, otherwise the former platform would banish the seller from its platform or restrict its activities on it, e.g., shoppers would no longer be directed to the seller’s store on this platform (or its store or products are suspended outright). The practice has become so common in China that SAMR had warned against top digital platforms before almost each shopping season. In the Draft Guideline, “choose-one-from-two” is explicitly listed as a form of abuse of dominant position by exclusive dealing in Article 15.
One step further, the Draft Guideline provides specific rules in the same article as to under what circumstances “choose-one-from-two” may constitute exclusive dealing. “Choose-one-from-two” through punitive measures, such as downgraded ranking in searches, technical restrictions or confiscation of deposit, will generally harm competition and be determined as exclusive dealing. But “choose-one-from-two” through incentives, such as subsidies/discounts, preferential treatments or traffic supports, is acknowledged to have positive effects. It would be penalized only when its anti-competitive consequences are obvious.
VII. Data Abuse: Intersection between Competition and Data Protection
Abuse in the collection and use of users’ data is usually addressed based on data protection law, but increasingly it has been discussed in the context of competition law. Last year, the German Federal Cartel Office penalized Facebook due to its exploitative conducts in collecting, merging and using users’ data. The Draft Guideline also provides for such possibility in China. In Article 16, it provides that abuses through unfair trading terms could include forcibly collecting users’ information, or tying different products through “take it or leave it” terms and conditions, pop-up windows, or required operation steps. Therefore, dominant market players should be discreet in over-collecting user data or aggregating user data from different apps.
VIII. Abuse by Discrimination: When Differential Pricing Can Be Justified?
“Killing familiarity”, a direct translation of its Chinese term “杀熟” which means to unfairly obtain more profit from regular customers, is regulated in the Draft Guideline as an abuse of dominant position. In the digital economy, it usually results in different users being shown different price quotes for the same product (e.g. the same flight or the same taxi itinerary), with those insensitive to prices charged disadvantaged. Article 17 of the Draft Guideline prohibits dominant market players from applying different prices or trading terms to trading parties with the same conditions.
In the same article, it explains what are “trading parties with the same conditions.” The transaction security, transaction costs, credit status, level of chain, transaction duration of the trading parties, the aspects that can materially affect the transaction, are the so-called “conditions”, and the differences in these aspects can justify applying different prices or trading terms. However, trading parties cannot be discriminated based on their privacy information, transaction history, individual preferences, or consumption habits.
IX. VIE Transaction and Voluntary Filing: Anticipating Exploded Merger Filings in Digital Economy
The Draft Guideline also highlights merger control regime in the area of digital platforms. First, it specifies in Article 18 that the concentrations of undertakings involving VIE structure fall within the scope of merger control. VIE refers to a structure where an entity established in China that is fully or partially foreign owned has control through contracts over an operating company which holds the necessary license(s) to operate in an FDI (foreign direct investment) restricted or prohibited sector. It is common for Internet companies to have VIE structure to circumvent FDI restrictions or to achieve other means. However, the validity of VIE structures has been a gray area under Chinese law, and the uncertainty leads to the awkward situation that the Chinese authorities were reluctant to review the filing of transactions involving VIE structures. By stipulating that VIE transactions are subject to merger control review, the Draft Guideline will undoubtedly change the practices of tech companies in merger filing.
In addition, the Draft Guideline clarifies SAMR’s investigative power in “killer acquisitions” that are below filing thresholds. “Killer acquisitions” refer to acquisitions of start-ups or nascent firms by dominant market incumbents. Usually, such start-ups have not generated much revenue and not triggered filing obligations when acquired. But potential competition or even threat posed by them is stifled. Article 19 of the Draft Guideline provides that SAMR should investigate into such transactions if there is evidence of potentially anti-competitive effects. This may urge many tech companies to submit voluntary filings for their M&A activities that are not notifiable, in case adverse consequences take place post transaction.
X. Way Forward
The Draft Guideline are currently seeking public opinion and the consultation period will end on 30 November 2020. The Draft Guideline boldly confronts with the antitrust issues in the Chinese digital market, challenging the prevailing yet illegal practices in the industry. What the final version will turn out to be remains to be seen, yet what is for certain is that SAMR would no longer take the tolerant and cautious attitudes towards tech giants as it used to be, and a new era of vigorous enforcement in the digital market has dawned. Companies with digital platform business are advised to review its activities from the perspective of antitrust law to avoid being targeted by SAMR. We will keep monitoring the development of the Draft Guideline.
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