In Western terms, the new antitrust “draft guidelines” proposed by China in November are not so much a series of suggestions as they are a road map of how each provision of the nation’s monopoly law should be enforced in the internet industry. The new guidelines could significantly reshape the way in which internet companies do business in and with the People’s Republic of China (PRC).
Following the framework set forth by the PRC Anti-Monopoly Law, the new antitrust guidelines start with a preamble that states the purposes of the rules and whom they are meant to protect. Similar to the PRC Anti-Monopoly Law, the goals of the new guidelines are to prevent monopolies, improve the efficiency of enforcement, lower the cost of compliance, foster fair competition, and protect consumers. It aims to protect the legitimate rights and interests of all the players in the internet industry.
Like most antitrust regulations in China, one of the key policy considerations behind the new guidelines is to ensure that the players in dominant positions don’t abuse their market power. The new guidelines will be particularly helpful in the area of the new internet industry, where the standards developed out of traditional industries are difficult to apply and enforce.
The rules come at a time when the government believes that a wide array of internet companies no longer need the preferential treatment they enjoyed when they were trying to gain a foothold. Now that they are successful domestically and some even internationally, in many cases they no longer need any special leniency. In fact, they are so strong now that they have the ability to impair the fair market competition and ultimately the rights and interests of consumers or general public through abusing their market power.
The new rules will make it easier to treat these large internet companies as the giants they are. For example, after the current PRC Anti-Monopoly Law was adopted in 2008, many internet companies were sued for abuse of dominance. The plaintiffs lost because it was difficult and expensive to prove these internet companies are dominant in the relevant market: it is difficult to define the relevant market and calculate the market share of a particular company when the services provided by the internet companies are free.
The new guidelines provide a breakthrough of sorts by instituting certain prohibitions. For example, dominant companies may not be able to impose exclusivity restrictions on their users or customers. A dominant platform company, for instance, couldn’t prohibit a merchant who uses its services from using another platform. Furthermore, companies wouldn’t be able to use the private data they gather on customers to discriminate against one type of consumer over another by charging different prices.
The variable interest entity (VIE) structures that have been used so extensively to facilitate offshore financing of Chinese technology, media, and telecommunications businesses will also be affected by the regulations, despite the current legal limbo about their status due to the silence on this issue under the new PRC Foreign Investment Law.
Under the new antitrust guidelines, however, VIEs will be included when the revenues are calculated. In that sense, the government is acknowledging the reality of VIE structure.
Currently, the government is seeking public comment on the guidelines. Since the principles behind them are general, there shouldn’t be too many changes before the guidelines are adopted. Enforcement, however, is going to be a challenge since it will require lots of analyses by an enforcement agency that is understaffed.
For companies concerned that the guidelines-based nature of the regulations leaves too much room for the discretion of enforcement agency, it’s encouraging to note that the government has spelled out some specifics in areas that could be problematic. Regarding pricing and discounts, for example, the guidelines say something to the effect that a discount or bonus for first-time users or customers is permitted.
What’s missing from the new antitrust guidelines and what could be the subject of other regulations to protect consumers are stronger data privacy standards. Data and information are the most important assets of internet companies. Regulations in that area would raise the standards for the internet companies to protect the personal data of users and potential users. While the safety and security of personal data and information is critical to internet companies, raising the standards of protection would be necessary to ensure fair competition and protect the interests of consumers.
About Mingzhao Zhu
Mingzhao Zhu is Senior Counsel at Shanghai PanDeng Law Firm since November 2011. Before moving to private practice, Mingzhao was the Legal Counsel at Cargill Investments (China) Ltd. in Shanghai. Prior to that, he was the Legal Counsel at Basf Polyurethane Company Limited. He advised the MNCs on the their investment activities in China, including reviewing and/or drafting of the Joint Venture contracts, Articles of Association, Technology License contracts, and M&A related contracts, as well as actively participating in their negotiations.
This industry article is adapted from the September 29, 2020, GLG Remote Roundtable “China’s Anti-Trust Regulation of Internet Companies.” If you would like access to this teleconference or would like to speak with Mingzhao Zhu, or any of our more than 900,000 industry experts, contact us.