On April 16, 2013, China’s Ministry of Commerce (MOFCOM) approved Glencore’s tie-up with Xstrata with conditions. MOFCOM was the last global regulator to approve the transaction. The approval process took many months and the parties were required to re-file the case with MOFCOM in early 2013 when the initial deadline for approval was approaching with no apparent agreement on remedies. To obtain MOFCOM’s approval, Glencore agreed to divest Xstrata’s Las Bambas copper mining project in Peru and to maintain copper, zinc and lead concentrate supplies to Chinese customers for eight years from 2013. A certain proportion of the sales of copper concentrate during this period is required to be under the annual contract system, which used to define global commodities markets, rather than be based on daily spot prices which have been used more recently. Sales of zinc and lead concentrate are to be on “fair and reasonable terms.” These conditions have been imposed despite the fact that the transaction does not result in obviously high market shares or the reduction of significant competitors in the market to three or fewer, factors that would normally trigger antitrust concerns. The parties together accounted for roughly 18 percent of China’s imports of copper ore in 2011 and competitors in the market include BHP Billiton, Freeport-McMoRan Copper Gold, Anglo American, Rio Tinto and Grupo Mexico’s Southern Copper unit. The full Chinese text of the approval is available here.
On April 23, 2013, China’s Ministry of Commerce (MOFCOM) approved Japanese trading house Marubeni’s $5 billion acquisition of U.S. grain merchant Gavilon, subject to significant conditions in the Chinese soya bean market. The approval took many months to obtain and the parties were required to re-file their application for approval in early 2013 as the deadline for approval approached and no agreement on remedies had been reached. MOFCOM’s approval is subject to the condition that the two parties continue selling soya to China as separate companies with two different teams and firewalls between them blocking the exchange of market information. MOFCOM did not impose conditions in corn, wheat or any other food commodity. China is the world’s largest soya bean importer and accounts for more than 60 percent of global trade. In 2011, Marubeni was the largest soya supplier to China. Nevertheless, the parties’ combined share of the market for the supply of soya beans to China is no more than 20 percent, well below the threshold that would generally trigger antitrust concerns with other regulators. The combined entity will continue to face competition from other sophisticated international competitors including Archer Daniels Midland, Cargill, Louis Dreyfus and Bunge. The full Chinese text of the approval is available here.
On April 3, 2013, China’s Ministry of Commerce (MOFCOM) published the Provisions on the Criteria Applicable to Simple Cases of Concentrations of Business Operators (Draft for Comments). The draft contains only seven articles that are mainly focused on setting out the criteria for concentrations suitable for treatment under the simplified review procedure. According to the draft, the simplified procedure will be suitable for cases with no or negligible competition concerns. These include cases where the combined market share of the parties after the concentration is lower than 15 percent (for horizontal mergers) or where each party has a market share of less than 25 percent in its own market (for a vertical merger). The draft also provides that cases in which the parties to a concentration establish a joint venture outside of China shall be reviewed under the simplified procedure provided that the joint venture does not engage in economic activity in China. In addition, acquiring sole control or enhancing control over an undertaking over which one or more parties already has joint control shall be deemed as a simple case. However, the new draft does not address any procedural issues with respect to the fast track review, such as the requirements for submission documents, short-form decision and review timeline, etc. These will need to be clarified separately. The full Chinese text of the draft is available here.
On March 27, 2013, China’s Ministry of Commerce (MOFCOM) released the Provisions on Appending Restrictive Conditions on Concentrations of Business Operators (Draft for Comments). The draft is intended to replace the Interim Provisions of the Ministry of Commerce on Implementing Asset or Business Disposals Related to Concentration of Business Operators, which were issued in 2010.
The draft classifies different categories of restrictive conditions including: 1) structural conditions such as the disposal of tangible businesses, intellectual property rights or related rights and interests of operators participating the concentration; 2) behavioral conditions such as requiring the business operators participating in the concentration to make available their infrastructure including their networks or platforms, to license core technologies (including patent, proprietary technology, or other intellectual property), or to terminate exclusive agreements; and 3) comprehensive conditions which are a combination of structural and behavioral conditions. To enable a business operator to propose restrictive conditions, the draft provides that MOFCOM shall inform the business operator of the adverse effects that the concentration might have on competition and provide reasons therefore and shall request the applicant to submit proposed conditions. After the applicant submits the proposed conditions, MOFCOM shall evaluate the effectiveness, feasibility and timeliness of the proposal, and inform the business operator of its decision. The draft allows divestitures to be conducted by the divestiture obligor or by the trustee. It also sets out requirements for the buyer of the business to be divested and procedures for the sale. In the event that the divestiture meets the thresholds for a merger filing in China, it shall be filed with MOFCOM for approval and the business shall not be divested before MOFCOM’s review is complete.
The draft also sets out rules for the supervision of restrictive conditions by the supervision trustee, the amendment and termination of restrictive conditions and the legal liabilities for parties, including officials of MOFCOM, that violate the provisions of the draft. The full Chinese text of the draft is available here.
On March 28, 2013, the Guangdong Higher People’s Court ruled against Qihoo 360 (Qihoo) in its long running dispute with Tencent over market dominance. This is the first antitrust case to be heard by a higher people’s court in China and the first significant decision since the Provisions on Several Issues Concerning the Application of the Law in Trials of Civil Dispute Cases Arising from Monopolistic Acts came into effect on May 4, 2012. (See Orrick Antitrust and Competition Newsletter coverage here.)
Qihoo, a leading Chinese antivirus software developer, filed a lawsuit against Tencent, China’s biggest Internet company, in October 2011 accusing Tencent of abusive practices and alleging that Tencent had abused its dominant market position by introducing bundled sales to prevent users from installing Qihoo’s antivirus software. Qihoo sought damages of RMB 150 million ($24 million).
Qihoo claimed that QQ, the online chat program developed by Tencent, has a market share of over 76 percent in China. However, the court disagreed with Qihoo’s market definition and also refused to consider some of Qihoo’s evidence about the defendant’s market power. The court found against Qihoo and ordered it to pay RMB 790,000 ($125,912) in legal fees. The chief judge in the case, Zhang Xuejun, stated: “Those who gain a dominant market position through technological innovation, better operation and management and price advantages are not the targets of the country’s anti-monopoly law.” The judgment indicates that market share is only one of many factors the court will consider when assessing market dominance. Qihoo is considering an appeal to the Supreme People’s Court.
On March 14, 2013, the jury in In re Vitamin C Antitrust Litigation, 06-MD-1738 (E.D.N.Y.) returned a $54.1 million verdict ($162.3 million post-trebling) for the direct purchaser class plaintiffs after a trial that lasted nearly three weeks. The plaintiffs, in what is the first antitrust case ever filed against Chinese companies in a U.S. court, alleged that the four major Chinese producers of vitamin C conspired to fix prices and production levels of vitamin C exported from China to the United States. The defendants, with support from the Ministry of Commerce of the People’s Republic of China, mounted a defense based on the foreign sovereign compulsion doctrine and argued that although the Chinese vitamin C producers coordinated on pricing and production, the Chinese government required them to do so.
Of the four manufacturer-defendants, one was not sued for monetary damages because its sales contracts contained arbitration clauses that required any claims for such damages to be resolved by arbitration. Another manufacturer settled the case before trial for $9 million. A third manufacturer settled the case during the trial for $22.5 million. The jury found the overcharges amounted to $54.3 million dollars. After trebling and a reduction for amounts paid in settlement, the defendant against which the court entered judgment will be liable for $131.7 million plus attorney’s fees.
On Feb. 4, 2013, the Intermediate People’s Court in China’s southern city of Shenzhen issued a landmark decision, ruling that U.S. company InterDigital violated China’s Anti-Monopoly Law (AML) by charging excessive royalties and tying the licensing of essential patents to the licensing of non-essential patents. This is one of the first rulings by a China court in a plaintiff’s favor in an antitrust case, and it is the first antitrust lawsuit in the intellectual property area in China that adopted FRAND principles. The ruling also appears to be the first time that any judicial authority has ruled on the appropriate royalty rate in the context of a requirement to license on FRAND terms.
In its ruling, the court ordered InterDigital to cease the alleged excessive pricing and alleged improper bundling of its essential and non-essential patents and to pay the plaintiff, Huawei Technologies, approximately $3.2 million in damages. The court ruled that InterDigital’s license offers to Huawei, reviewed under Chinese law, did not comply with FRAND requirements. According to InterDigital’s Feb. 26, 2013 Securities and Exchange Commission filing, the court ruled that under Chinese law, the royalties to be paid by Huawei for InterDigital’s 2G, 3G and 4G essential patents should not exceed 0.019 percent of the actual sales price of each Huawei product. InterDigital has said that the court did not explain how it arrived at the figure and it intends to appeal the court’s ruling. In May 2012, Huawei also filed an antitrust complaint against InterDigital in European court alleging that the company had abused its market dominance by refusing to license key wireless patents.
The Xi’an Intermediate Court in western China’s Shaanxi province recently ruled that Shaanxi Broadcast and TV Network Intermediary Group (“Shaanxi TV”) abused its dominance in the provincial cable TV transmission service market. The court found that Shaanxi TV is the only legitimate cable TV transmission service operator in the province and maintains 100 percent control of the market in the province. The court held that Shaanxi TV did not offer users the opportunity to choose the services they wished to receive, but instead imposed bundled trading of basic and paid services by charging the fees for basic services and paid services together. Because of its dominant position, users were forced to accept its services. The court ruled that Shaanxi’s tie-in charge was not valid and ordered that it should refund RMB 15 (approximately $2.40) to the plaintiff.
Although the penalty is very small, this case is significant. In an essay published in the People’s Court Daily, the presiding judge of the Intellectual Property Rights Tribunal at the Xi’an Intermediate Court made reference to the Supreme People’s Court Judicial Guidance on Civil Antitrust Lawsuits issued in May 2012 (“the Judicial Interpretation”). He stated that the main reason the court accepted the civil antitrust case was because the Judicial Interpretation stipulates that when business operators’ monopolistic behavior causes loss to others, or their contract or industry associations’ regulations violate the Anti-Monopoly Law (AML), the business operators shall bear civil liability and such disputes shall be within the jurisdiction of the courts. The judge also referred to Article 8 of the Judicial Interpretation, which states that in dominance cases, the defendant should present evidence to justify its conduct according to the AML. In this case, the defendant did not present any evidence to justify the tie-in sales and simply claimed that it had the right to charge the extra fees.
On Feb. 22, 2013, China’s antitrust regulators announced that they had imposed a total penalty of around RMB 449 million ($71.5 million) for resale price maintenance by two state-owned liquor companies, Wuliangye Yibin and Kweichow Moutai. This is the largest fine the Chinese authorities have levied in an antitrust case to date. In a statement issued by the Sichuan Provincial Development and Reform Commission, the regulator said that Wuliangye, a leading company in the high-end liquor industry that enjoys strong consumer loyalty, signed agreements with more than 3,200 independent, third-party distributors to restrict the minimum resale price. It used its strength to impose the minimum prices and also carried out regional monitoring and assessment and terminal control. In 2012, it punished 14 distributors who did not implement its resale price restriction policies. The Guizhou Price Bureau issued a statement saying that Kweichow Moutai had fixed minimum resale prices for third-party distributors of its liquor, and punished those distributors that did not comply. According to publicly available information, Wuliangye was fined RMB 202 million ($ 32.2 million) and Kweichow Moutai was fined RMB 247 million ($39.3 million).
China’s Ministry of Commerce (MOFCOM) recently asked some companies to re-file their transactions for approval in cases where the initial, three-stage review period has been almost exhausted but the parties have failed to reach agreement about remedies. Re-filing a transaction for approval has the effect of restarting the clock on the review periods, thereby giving the regulators and transaction parties more time to reach an agreement on remedies. Re-filing appears to be more likely to happen if substantial concerns only arise at a later stage of the review period, as an alternative to MOFCOM blocking the transaction or letting it go ahead without conditions. Reports suggest that four proposed takeovers have been re-filed so far this year. It remains to be seen whether this practice might become more common in the future and whether it might be more common in certain industries than others.