New Leapfrog Appeal System of the SPC

According to a decision issued by the National People’s Congress on 26 October 2018 and a follow-up regulation by the SPC, from 2019, appeals in antitrust civil litigation and against administrative penalties in antitrust administrative litigation, if tried by the intellectual property courts and intermediate people’s courts in the first instance, shall be directly submitted to the SPC (and heard by its intellectual property court established on 1 January 2019), skipping the provincial High People’s Courts. This sets up a “leapfrog appeal” mechanism.

The objectives of this reform are to promote consistency in rulings, strengthen the protection of IP rights and optimise the business environment. Although the main objectives are targeted at IP rights, they are equally applicable to antitrust litigation. Currently, rulings by different courts have been inconsistent. For instance, some local courts have adopted the rule of reason in cartel cases. There have been accusations of local protectionism, where rulings have been made against business operators registered in other provinces or countries. The leapfrog appeal will help make improvements in this regard.

It should be noted that the leapfrog appeal mechanism does not apply to all antitrust litigation. For antitrust civil litigation, it may not apply to cases simply involving antitrust defences. For antirust administrative litigation, the mechanism will only apply to cases challenging SAMR’s administrative decisions or penalties whose first-instance trials are at Beijing’s First Intermediate People’s Court. As for cases challenging the administrative decisions or penalties of the provincial administrations for market regulation, as well as cases against administrative monopoly and failure to perform duties, they are currently not within the scope of the leapfrog appeal mechanism.

In 2019, the intellectual property court of the SPC heard nine second-instance antitrust cases under the leapfrog appeal mechanism. Other than that, the SPC’s other divisions (eg, the IP Tribunal) heard another nine antitrust cases (which are either second-instance cases filed before the establishment of the leapfrog appeal mechanism or retrial cases that had gone through the first-instance and second-instance trials). These 18 antitrust cases set a new record for the SPC, and some of them also set precedents for the SPC regarding certain important antitrust issues. For example, Huili v Shell (2019) heard by the SPC under the leapfrog appeal mechanism tested the arbitrability issue before the SPC for the first time.

SPC’s Position on the Arbitrability of Antitrust Civil Litigation

Jurisdictional issues are frequently raised by the defendants in antitrust civil litigation due to uncertainties in law or simply due to their strategies. One major jurisdictional uncertainty in law is the arbitrability of antitrust disputes. On one hand, China’s Arbitration Law does not exclude the arbitrability of antitrust disputes. On the other hand, the SPC’s rules require the courts to accept antitrust disputes, but are silent on the circumstances involving arbitration clauses. As a result, different courts had made contrary rulings.

Shenzhen Intermediate People’s Court ignored the arbitration clause in Yulong v Ericsson (2016) where Ericsson was accused of abusing dominance. Jiangsu High People’s Court did not allow arbitration in Songxu v Samsung (2016), which involved abuse of dominance and vertical monopoly agreement issues, and expressly said that antitrust disputes affect the public interest, beyond the interest of the contract parties. However, Beijing High People’s Court admitted arbitration in Changlin v Shell (2019) where Shell was accused of abusing dominance.

This conflict of views towards the arbitrability of antitrust disputes was partly resolved by the SPC’s second-instance ruling in Huili v Shell (2019) where Shell was accused of organising cartels. The SPC upheld the first-instance ruling by Hohhot Intermediate People’s Court, and reasoned that (1) the AML is a public law in nature, (2) the determination and handling of horizontal monopoly agreements are beyond the legal relationship between the contract parties, and (3) no existing arbitration laws clearly support the arbitrability of antitrust disputes. The SPC reiterated such position later in State Grid Shanghai v VISCAS (2019) which also involves cartels. Additionally, it is reported that the SPC held the same position in another Huili v Shell (2019) involving vertical monopoly agreements. Based on the SPC’s aforesaid reasoning (1) and (3), it appears that arbitration clauses might not preclude the courts’ jurisdiction over other types of antitrust cases such as abuse of dominance cases.

It should be noted that the SPC did not say that the antitrust disputes are not arbitrable, and thus it is still possible that the courts might enforce the arbitration award on antitrust disputes, provided that the contract parties have no dispute in the choice of arbitration and the award does not violate public interest.

Progress Made in Antitrust Civil Litigation

Civil antitrust litigation is still taking shape in China. The total number of case filings, as indicated above, is relatively small compared to other jurisdictions. Having no class action procedure nor treble damages, and with a high standard of proof established by the cases so far, potential plaintiffs lack reasonable motivation to bring proceedings against large companies directly.

However, there are also good reasons to believe in a promising future. Procedurally, the civil litigation system in China provides ample flexibility for antitrust lawsuits. Both follow-on and stand-alone claims are allowed. Both direct and indirect purchasers have standing to sue, as confirmed by Tian Junwei v Beijing Carrefour and Abbott (2014). There are also various means of redress available to antitrust plaintiffs in addition to monetary damages, including injunctive relief or declaratory judgment of an invalid contract. The Civil Procedural Law also provides for the possibility of public interest litigation brought by consumer associations or the procuratorate organs, though this has not been tested in practise yet.

From the perspective of substantive antitrust law, the SPC’s increasing role in antitrust lawsuits via the new leapfrog appeal system will, it is believed, stimulate more cases. The SPC’s landmark decisions in Qihu 360 v Tencent (2014) and Wu Xiaoqin v Shanxi Broadcast & TV (2016) have revealed some of its stances on antitrust issues. Though very limited in number, these cases have shown that complex antitrust analysis is not alien to the SPC and that a pro-plaintiff decision is also likely as in Wu Xiaoqin v Shanxi Broadcast & TV. This pro-plaintiff decision has inspired lower courts to follow suit where suitable, and 2019 has witnessed the progress made by lower courts.

Within the 50 most representative cases of 2019 published by the SPC, there is only one antitrust case: Wu Zongqu v Yongfu Water Supply (2019). Nanning Intermediate People’s Court ruled in favour of the claimant – a consumer who was required by the water supply utility to purchase both water supply service and water meter/pipeline installation service. The court held that the defendant had abused its dominant market position in the water supply market by tying two distinct services.

Another more significant victory for the claimant occurred in March 2020. In Yangtze River Pharmaceutical v Hefei Industrial Pharmaceutical (2020), at first instance, Nanjing Intermediate People’s Court ordered the defendant to pay approximately 70 million yuan in damages to the claimant for excessive pricing. This set a record of damages in antitrust civil litigation in China. This case is now subject to second instance before the SPC through the leapfrog appeal system.

“The newly integrated SAMR has the potential to become more aggressive and have firmer stances when it conflicts with the judiciary, and its influence might ripple into the antitrust litigation field.”

Interaction between courts and antitrust authorities in antitrust administrative litigation

Judicial review cases are still rare in China, and there have been only less than 10 such cases since the AML came into effect in 2008. The only case where the claimant secured a temporary win is Yutai. After being fined for resale price maintenance (RPM) by a local antitrust authority, Yutai brought an antitrust administrative litigation against the authority and won the first-instance trial where the court ruled that the authority had failed to prove anticompetitive effect. However, at second-instance, and at SPC’s retrial in December 2018, the authority won and the SPC recognised that antitrust authorities do not need to prove anticompetitive effect in their public enforcement in the current political and economic context of China. After Yutai, the courts and antitrust authorities may keep using different approaches on RPM unless the AML is amended: the antitrust authorities treat RPM as per se illegal (or rule of ‘prohibition + exemption’ in their words), while the court system adopts a rule of reason approach in trying civil antitrust disputes in relation to RPM.

To date, the claimants lost in all antitrust judicial review cases (although Yutai scored a temporary win at first instance). This is partly due to the relatively straightforward nature of these cases and the superior position of the antitrust authorities in exercising discretion in enforcing the AML. Some business operators did not even bring a judicial review case. However, the increasing number of such cases indicates that judicial review may become normal practise in antitrust. First, the AML is still new in China and has not become familiar to many small and medium-sized businesses, and they may challenge what they see as unreasonable penalties even in explicit cartel cases. Second, some immature areas in the AML such as non-price vertical monopoly agreements and the abuse of collective dominance may lead to judicial review claims, seeking declaratory relief or clarification of the rules. Third, the newly introduced leapfrog appeal mechanism may encourage the claimants and their lawyers to try their luck before the SPC. Although, on the other hand, the newly integrated SAMR has the potential to become more aggressive and have firmer stances when it conflicts with the judiciary, and its influence might ripple into the antitrust litigation field.

Administrative litigation against administrative monopolies

A unique feature of China’s AML is administrative monopoly. In recent years, the Chinese government has issued a number of policies to curb the traditional and widespread phenomenon of administrative monopoly in China, and public enforcement in this area is also quite active. This inspires more private enforcement against administrative monopoly.

In Haisi Valuation v Fuding Ocean & Fisheries Bureau (2019), both Xiamen Maritime Court (at first instance) and Fujian High People’s Court (at second instance) ruled in favour of the claimant. In this case, the industry regulator Fuding Ocean & Fisheries Bureau issued a notice and required that when the fishermen in Fuding city need to renovate or reconstruct their fishing vessels, they should purchase valuation services only from the vessel valuation companies kept in the file of Fujian State-owned Assets Supervision and Administration Commission. The claimant then brought an administrative litigation against the industry regulator for infringing its rights to fair competition in the market for fishing vessel evaluation.

Not every private enforcement has received satisfactory results. The Shanwei Bus case in 2018 is a good example of the weakness of private enforcement, namely, in certain circumstances, it cannot undo what has been done. Shanwei is a city in Guangdong province. Its government chartered a new bus company to operate solely in the local market and it revoked the licence of the incumbent bus operator. The incumbent operator sued the government for selecting the new operator before the normal bidding process, which violated the procedural rules and excluded competition. The court in the second instance recognised the procedural violation by the government and confirmed the existence of an administrative monopoly. However, the court refused to revoke the licence, as the new operator had been operating since 2015 and the public interest would be adversely affected if its licence was revoked. China’s Administrative Procedure Law provided for such an exception.

Nevertheless, administrative litigation against administrative monopolies still maintains good momentum and has received strong support from the courts, in the context of a strong commitment from the most senior leaders of the Chinese government to let the market play the decisive role in resource allocation.