U.S. Ramps Up Criticism of China’s Enforcement of Its Antitrust Laws Against Foreign Companies

I.  Introduction

For some time, many in the antitrust community have expressed concerns about how China is enforcing its antitrust laws against foreign companies. The past several months have seen a steady stream of criticism from the United States that in certain areas—notably, dominant firm conduct, intellectual property rights and mergers—China is selectively enforcing its antitrust laws outside of international norms in order to protect domestic industries. The criticism includes pointed complaints, comments and recommendations from the U.S. enforcement agencies, U.S. business groups and antitrust practitioners. This article provides a brief overview of some of the comments and recommendations being offered to the Chinese government.

II. Discussion

The FTC and DOJ

On Sept. 10, 2014, U.S. Federal Trade Commission (FTC) Chairwoman Edith Ramirez gave a speech entitled “Standard-Essential Patents and Licensing: An Antitrust Enforcement Perspective.”[1] Among other topics, Ramirez explained that in the area of SEP licensing, the FTC and the European Union (EU) recently have taken similar approaches with respect to FRAND (Fair, Reasonable and Non-Discriminatory)-encumbered SEPs. In short, they have brought enforcement actions based on a patent holder’s alleged breach of a voluntary license agreement by seeking injunctions against willing licensees; the agencies have not, however, pursued enforcement actions based on particular royalty terms and they have not precluded the availability of injunctive relief where a licensee is unwilling or unable to abide by the terms of a license for FRAND-encumbered patents. But China, Ramirez explained, appears to be taking a different course and seems to be willing to impose liability based solely on what it perceives to be unfair royalty terms a patent owner demands for a license to its FRAND-encumbered SEPs, as well as on royalty demands for licenses for patents that might not be subject to a voluntary FRAND commitment. Ramirez expressed “serious concern” that China’s approach suggests “an enforcement policy focused on reducing royalty payments for local implementers as a matter of industrial policy, rather than protecting competition and long-run consumer welfare.”[2]

Two days later, Bill Baer, assistant attorney general for the Antitrust Division of the U.S. Department of Justice (DOJ), gave a speech entitled, “International Antitrust Enforcement: Progress Made; Work To Be Done.”[3] Among other things, he said that he shared Ramirez’s concern regarding antitrust regimes (i.e., China) that appear to be advancing industrial policy goals by “imposing liability solely based on the royalty terms that a patent owner demands for a license,” and the apparent forced adoption of a specific royalty rate that is not necessary to remedy the actual harm to competition.[4]

These comments were precursors to FTC Commissioner Maureen K. Ohlhausen’s Sept. 16, 2014 speech entitled, “Antitrust Enforcement in China—What Next?”[5] Ohlhausen focused on two areas where China may be moving away from, rather than towards, international norms in antitrust enforcement. She repeated the FTC Chairwoman Ramirez’s point that China appears to be operating outside international norms with respect to antitrust and intellectual property rights, including licensing practices and SEPs. Ohlhausen focused on the efforts of China’s State Administration for Industry and Commerce (SAIC) to issue guidelines with respect to the intersection of antitrust law and intellectual property rights, noting that the most recent draft Guidelines (the eighth draft), which were issued this past summer, contain several sections that deviate from international norms regarding the treatment of intellectual property. For example, China appears to want to apply the essential facilities doctrine to patents in the standard-setting context. Of greater concern, China appears willing to apply the essential facilities doctrine to all potentially relevant patents, including patents that were not voluntarily contributed to a standard-setting body. Ramirez had noted this same issue.

In addition to noting divergence with respect to intellectual property rights, Ohlhausen discussed the apparent trend in China to focus on non-competition factors in analyzing mergers and acquisitions, and what she described as “a growing chorus claiming that the Chinese are using the AML to promote industrial policy.”[6] She explained that the Anti-Monopoly Law (AML) expressly provides for consideration of non-competition factors, that the legislative history of the AML lends support to the notion that the law may be used to protect and promote domestic industry, and that recent data suggest that China is using the AML to do so. She emphasized that she hoped that “future merger analyses from MOFCOM will be more robustly tethered to existing legal and economic norms and contain abundant supporting evidence, including econometric work.”[7]

The Obama Administration

The White House is also ramping up criticism of China’s enforcement of its antitrust laws. The Wall Street Journal reported on Sept. 14, 2014, that Jack Lew, that U.S. Secretary of the Treasury, sent a letter to China’s Vice-Premier Wang Yang, his counterpart, regarding recent high-profile investigations of foreign companies, including U.S. companies. Although the letter is not public, it reportedly said that China’s focus on foreign companies could devalue foreign intellectual property, and warned that China’s conduct could affect relations between the two countries.[8]

Business Groups and Associations

The U.S. enforcement agencies and the Administration are not alone in expressing concern with China’s enforcement of the AML—the business community is also concerned. In fact, of course, complaints from the business community are at least one reason the enforcement agencies and the Administration have been speaking out recently.

The U.S. Chamber of Commerce released a report on Sept. 8, 2014, entitled, “Competing Interests in China’s Competition Law Enforcement: China’s Anti-Monopoly Law Application and the Role of Industrial Policy.”[9] The report is a thorough review of China’s prioritization of industrial policy over competition law; merger review, which seems designed to support domestic industries; the use of competition law to constrain the exercise of intellectual property rights; and systemic flaws in the judicial system, including lack of independence and transparency. “AML remedies often appear designed to advance industrial policy and boost national champions,” the report states. “[The antitrust enforcement authorities] rely insufficiently on sound economic analysis, intellectual property rights have been curtailed in the name of competition law, and AML enforcement suffers from procedural and due process shortcomings. These patterns in AML enforcement give rise to growing concern about the quality and fairness of enforcement, and they raise legitimate questions about China’s commitment to the global antitrust commons.”[10] The report offers several recommendations to the Chinese government, including: 1) officially endorsing principles of competition law, protection of intellectual property rights and due process to bring the AML in line with international norms; 2) insulating AML enforcement activity from political pressures; and 3) continuing to accelerate judicial reforms.

The Chamber continued these themes in testimony it gave on Oct. 1, 2014, before the Office of the United States Trade Representative in connection with its “Hearing on China’s Implementation of and Compliance with Its Commitments to the World Trade Organization.”[11] The Chamber argued that “[r]ecent developments suggest that Chinese authorities are using a variety of policy tools—including competition law, technology standards and IP policies—to limit prices of foreign companies’ goods and IP, while protecting and promoting domestic Chinese companies and clearing the way for national champions to emerge, consolidate market power and flourish, often at the expense of their foreign competitors, in certain key sectors.”[12]

Other business groups and associations have expressed similar concerns. The US-China Business Council released a report in September 2014 called “Competition Policy and Enforcement in China.”[13] It underscores the widely held view among non-Chinese companies that Chinese authorities enforce the AML in a biased manner against them. It raises questions such as whether the AML is being used to protect domestic industry and to force foreign companies to lower prices. The report provides many specific recommendations in areas such as ensuring fair treatment and nondiscrimination, providing due process and regulatory transparency, shortening the time for merger review, committing to eschew non-competition factors in competition enforcement, improving the determination and application of remedies and fines, and clarifying that the rule of reason applies to alleged monopoly agreements.

The American Bar Association

Finally, the Antitrust, Intellectual Property and International Law sections of the American Bar Association recently submitted comments on the SAIC’s June 23, 2014 Draft for Comments of the Rules on Prohibiting Abuse of Intellectual Property Rights to Eliminate or Restrict Competition.[14] The ABA sections offered a host of proposed revisions to address areas where the proposed rules deviate from international norms, some of which were mentioned in the speeches noted above by FTC and DOJ officials. Key recommendations included the following:

  • Article 2, which recognizes that the AML applies only to conduct that abuses intellectual property rights and results in the elimination or restriction of competition, should be incorporated throughout the rules.
  • Article 7, which appears to endorse application of the essential facilities doctrine to intellectual property rights including but not limited to SEPs, should be omitted.
  • Article 8, which concerns exclusive dealing, should be clarified to state that the SAIC must establish that the conduct resulted in the elimination or unreasonable restriction of competition and is without justification.
  • Article 11, which prohibits undertakings with dominant market positions from treating counterparts of same conditions in a discriminatory manner, should be revised to prohibit such conduct only if it eliminates or restricts competition and is without justification.
  • Article 12, which concerns patent pools, should be clarified to make clear that the rule of reason applies to all aspects of patent pools, because the current draft appears to classify certain patent pool conduct as per se unlawful and puts the burden on patent pool members to prove that the patent pool agreements are in compliance with the AML. The comments refer the Chinese authorities to the DOJ’s patent pool Business Review Letters as a resource.[15]
  • Article 13, which concerns SEPs, was criticized for possibly requiring a non-member of a standard-setting organization to disclose SEPs, and also for prohibiting a patent holder from failing to offer FRAND terms regardless of whether the patent holder had participated in the SSO and made such a commitment, or whether the SSO required a FRAND commitment. The comments suggested abandoning the current draft of Article 13 and returning to the 2013 draft of the Rules, which was more consistent with international norms.

III. Conclusion

There is broad-based and consistent criticism regarding China’s enforcement of its antitrust laws against foreign firms. Critics generally recognize, however, that the AML is only a few years old, and China does not have decades of experience and tradition to inform its implementation and enforcement of the Law. In that light, recent criticism can be seen as well-intentioned and valuable commentary to assist Chinese authorities in taking corrective steps to align its antitrust enforcement policies, standards and practices with international norms. It may be premature to assess China’s reaction, but on Sept. 11, 2014, representatives from China’s three antitrust enforcement agencies—NDRC, MOFCOM and SAIC—held a press conference to defend their enforcement efforts, arguing that they have not been targeting foreign firms.[16] China’s antitrust enforcement work “is strictly conducted according to regulations,” said Xu Kunlin, director general of the NDRC’s Price Supervision and Inspection and Anti-Monopoly Bureau. “It is fair and transparent. It is not targeting any market player, and of course, it is not targeting any foreign invested or foreign enterprises.”[17] Thus, it remains to be seen whether recent criticism, commentary and advice will help moderate China’s antitrust enforcement policies and practices against foreign firms.

[1] http://www.ftc.gov/system/files/documents/public_statements/582451/140915georgetownlaw.pdf

[2] Id. at 9.

[3] http://www.justice.gov/atr/public/speeches/308592.pdf

[4] Id. at 7-8.

[5] http://www.ftc.gov/system/files/documents/public_statements/582501/140915gcrlive.pdf

[6] Id. at 3.

[7] Id. at 7-8.

[8] http://online.wsj.com/articles/u-s-treasury-warns-china-over-antimonopoly-efforts-1410687635

[9] https://www.uschamber.com/sites/default/files/aml_final_090814_final_locked.pdf

[10] Id. at ii.

[11] http://s3.amazonaws.com/cdn.orrick.com/files/chamberremarks10.1.14.pdf.

[12] Id. at 8.

[13] http://uschina.org/sites/default/files/AML%202014%20Report%20FINAL_0.pdf

[14] http://www.americanbar.org/content/dam/aba/administrative/antitrust_law/at_comments_
201410eu.authcheckdam.pdf

[15] See Letter from William J . Baer, Assistant Att’y General, Antitrust Div., U.S. Dep’t of Justice to Garrard R. Beeney, Sullivan & Cromwell LLP, at n.40 (Mar. 26, 2013), available at http://www.justice.gov/atr/public/busreview/295151.htm

[16] http://news.yahoo.com/chinas-antitrust-regulators-defend-probes-qualcomm-inquiry-nearly-112912025–sector.html; http://www.reuters.com/article/2014/09/11/china-antitrust-idUSL3N0RC2MY20140911

[17] Id. at 1.