Antitrust Regulation on Digital Companies: A Case Study of China

Introduction

Antitrust laws are a set of rules formulated in order 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 a collusion of exploitative firms; everything is regulated by the help of antitrust
laws. The ultimate aim that these laws pursue is to promote a healthy competition in the market
place so as to ensure that the consumer enjoys appropriate benefits.1

12 of the top 100 Digital Companies of 2019 originated from, and were headquartered in,
mainland China, along with 2 more situated in Taiwan.2 In 2019, Manufacturing constituted
27.17% of China’s GDP.3 A number of prominent companies like Apple, Tesla, Microsoft,
Google, Qualcomm, etc. have established large manufacturing units in China. This implies that
China plays a 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 makes it essential to study the impact that Chinese rules and
regulations have on such prominent digital corporations.

In this blog, we’ll get acquainted with antitrust regulations and will find out how they impact
corporations and consumers within their jurisdiction. We will dissect the Anti Monopoly Law
(AML) 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
details, specifically with reference to the fate of technology giants based in mainland China and
beyond.

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,
https://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.
Anti Monopoly Law (AML) of China, 2008

After over a decade of deliberation, China’s NPC (National People Congress) adopted the Anti
Monopoly Laws, which were made effective from August, 2008. 5 The AML had the same
motive as that of the antitrust regulations of the USA and their enactment led to the codification
of a number of Chinese rules and regulations relating to competition and fair conduct. 6 The AML
can roughly be categorized under four sections that seek to:

 Restrict a few sorts of agreements unless they come under the ambit of specified
exceptions;
 Efficiently regulate mergers and acquisitions through review schemes;
 Prohibit some actions identified as abuse of dominant market position, and lay down a
methodology for establishing when dominance occurs in the market;
 Outlaw the misuse of government administrative authorities in order to stifle competition.

7
Besides the above stated goals, the AML also strived to facilitate domestic companies over the
global ones. The AML also fabricated a bunch of new enforcement and administrative authorities
in order to ensure a smooth transition and effective output, 8 the Anti-Monopoly Committee
(AMC), Anti-Monopoly Enforcement Agency (AEA) and the National Development and Reform
Commission (NDRC) being a few of them.

As is evident, the AML covers a wide range of subject matters and is quite vast. 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 to see how
these laws actually function.

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
China has been bold in its use of AML against the digital companies and the IT sector since the
beginning. In 2014, Windows OS manufacturer was investigated by China’s SAIC in relation
with 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 AML.9

Huawei v. IDC10 cases

On 6 December 2011, Huawei, a worldwide supplier of telecommunication equipments, filed

two law suits against IDC Inc., holder of a large number of wireless communication patents in
USA and China. The cases dealt with the application of FRAND (fair, reasonable and non-
discriminatory) principle, being unique in the fact that for the first time ever, a SEP (Standard
Essential Patent) holder was held accountable for violating the principle and was made to
compensate under the Anti-Monopoly Law.

In the first law suit, the plaintiff contended that the defendant was misusing its dominant market
position and was demanding disproportionately high royalties11 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
violation of the rules defined under Chapter III of the Anti-Monopoly Law. The plaintiff
demanded a compensation of Rmb20 million and that the defendants be made to stop the abuse
of their superior market position.

In the judgment, the court accepted that the defendant did hold a dominant market-position and
could easily influence other companies’ business in the domain. The court 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 a damage of Rmb20 million to the
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
In a license agreement, the licensor allows the licensee to produce and distribute the licensors' products for a
defined period in exchange for a royalty.
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 in order to
obtain patents for 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 AML

The technology and digital corporate arena is an intertwined domain, with companies dependant
on each other and working together in order to produce a single high-functionality product.
Continuously budding inventions and use of modern technology makes negotiating patents a
common practice in the domain. From the judgments in the above cases and by an analysis of the
AML, we can identify the scenarios in which its provisions apply:

 The AML defines 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 cases.12
 If a SEP holder unethically uses his market-position to dominate the negotiations and
violates the FRAND principle, it could amount to monopolistic behavior, leading to the
application of the AML.
 According to article 50 of the AML, upon such a violation, the holder would bear civil
liabilities and would be required to pay adequate compensation along with immediate
eradication of such a behavior.

Implications of SAMR’s new Anti Monopoly Regulations

12
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.
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 IT 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.13

The new regulations released by China’s State Administration for Market Regulation (SAMR)
provides more momentum to the regulatory authorities’ actions. The new rules help the
authorities in tightening regulatory hold over the nation’s digital giants.14 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. Companies can now 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 AML is prominently visible in the events that took place in the past few
months in country’s technology corporation domain. On April 10 SAMR 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.15 The crackdown continued with a fine of
US$235,302 being imposed on Alibaba-backed Nice Tuan, on May 27.16

A sum of US$77,243 each was fined upon a total of 10 internet companies, including Tencent
and Didi Chuxing, on April 30. 17 Another big e-commerce company, JD.com, was fined
US$46,633 by the SAMR on May 24, reason being the promotion of false product information
and repeated acts of establishing monopoly.
13
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/.
14
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.
15
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/.
16
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/.
17
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.
The Beijing situated competition watchdog is further 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 to the upcoming authorities. 18 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.19

Suggestions and Conclusion

The rise of China's digital titans has resulted in a slew of social shifts. The Chinese regulatory
authorities are taking appropriate actions in order to ensure that nation’s anti-monopoly laws
don’t lag behind the technological advancements. With a continuous exponential increase in the

18
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/.
19
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.
competition in 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.20

In an attempt to efficiently weed-out such unethical practices and in order to maintain a healthy
competition in the market-place, the governing bodies are ramping up the 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 of time to adapt to the
new laws and make amends to their old and faulty methods. SAMR 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.

In the end, it could be concluded, that 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 addressal system, is capable of inculcating a healthy competition in the
market and can potentially keep a check on the fiddly big-tech domain.

20
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/.