Competition Quarterly - October 2024

We are pleased to bring you the third edition of Competition Quarterly, a concise summary of antitrust enforcers’ latest enforcement priorities and policy initiatives.

In the United States section, we check in on merger control policy, including the release of the much-anticipated update to the merger-filing rules; tackle the latest in labor antitrust, including court decisions enjoining enforcement of the FTC non-compete rule; cover the latest on the antitrust agencies’ enforcement efforts against platforms (including Google Search and Ad Tech trials, the Amazon monopolization suit, and a new monopolization lawsuit against Visa); and provide an update on algorithmic pricing and generative AI enforcement policy, among other topics.

In the Europe section, we discuss an EU Court judgment curtailing the European Commission’s jurisdictional powers to go after “killer acquisitions” that fall below the reporting threshold; report on new draft guidelines on exclusionary abuses of dominance; and provide an update on enforcement in digital markets, including the first judicial resolution of a dispute over the “gatekeeper” designation under the Digital Markets Act.

In the China section, we report on new rules on gun-jumping and other merger regime reforms; government guidance on civil antitrust litigation and pharma sector enforcement; and enforcers’ utilization of new regulatory tools like warning letters.

United States

Merger Enforcement

New Merger-Filing Rules: On October 10, the FTC issued its long-awaited Final Rule updating merger filing requirements under the Hart-Scott-Rodino (HSR) Act. The Final Rule will take effect 90 days after its publication in the Federal register, meaning it will likely become effective in mid-January 2025. Once the Final Rule goes into effect, the FTC will resume granting early termination of the HSR waiting period. Key changes in the Final Rule include:

• More Documents. Parties will have to submit transaction-specific documents prepared by or for the supervisor of each party’s deal team and ordinary-course business plans related to competition.
  
  
• Identification of Competitive Overlaps. Parties will have to describe their lines of business, which will reveal competitive overlaps between the merging firms (including for products that are in development) and supply relationships.
  
  
• Identification of Investors. The buyer will have to disclose its investors, including those with management rights.

The Final Rule also modifies or omits proposals that were contained in the FTC’s June 29, 2023, Notice of Proposed Rulemaking. Notably, merging parties will not be required to submit draft documents (unless they were shared with a member of the Board of Directors) or information about labor market competition. The Final Rule also scaled back requests related to prior acquisitions. Notwithstanding that the Final Rule has been scaled back from what was initially proposed, it is nonetheless likely to significantly increase the time, burden, and expense associated with all transactions reportable under the HSR Act.

For a more in-depth discussion of these important changes to the HSR filing rules, see our analysis here.

Ongoing Merger Cases: Both US antitrust agencies and state attorneys general remain extremely active in merger review and enforcement.

• Tapestry-Capri. The FTC’s challenge to the merger between Tapestry Inc. and Capri Holdings Ltd. (which controls Michael Kors and Versace) was tried before the US District Court for the Southern District of New York in September. The FTC alleges that Tapestry’s acquisition of Capri would eliminate competition between the rival brands’ luxury handbags and would harm consumers and workers. The court is expected to issue its ruling later this year.
  
  
• Kroger-Albertsons. As we initially described in the May 2024 edition of Competition Quarterly, Kroger’s proposed acquisition of Albertsons faces court challenges across multiple fronts. In rapid succession, the FTC (which was joined by nine states) completed its preliminary injunction hearing in mid-September, and trials led by individual state attorneys general in Washington and Colorado immediately followed. Among other things, the FTC and individual states rejected the merging parties’ proposed divestitures of several hundred stores aimed at addressing any alleged harm from the deal, which the FTC described as a “hodgepodge of unconnected stores, banners, brands, and other assets that Kroger’s antitrust lawyers have cobbled together.” While courts are under no obligation to adhere to the merging parties’ timelines, we expect decisions to be handed down later this year.
  
  
• Legends-ASM: On August 5, DOJ announced that it filed a civil complaint and proposed settlement with Legends Hospitality for unlawful pre-merger coordination, otherwise referred to as “gun-jumping,” in violation of the Hart-Scott-Rodino Antitrust Improvements Act of 1976. Although DOJ ultimately allowed Legends’ acquisition of rival venue-management company ASM to close, Legends agreed to pay $3.5 million and be subject to seven years of DOJ oversight to resolve the allegations.
  
  
• Nippon-U.S. Steel. The proposed $14.9 billion sale of Pittsburgh-based U.S. Steel Corp. to its Japanese rival Nippon Steel Corp. has garnered significant attention from the government, particularly due to concerns spanning national security, labor, and supply chain issues. In mid-September, the Committee on Foreign Investment in the United States (CFIUS) reportedly granted Nippon Steel permission to refile its plans to acquire U.S. Steel. The extension will delay the final decision until after the upcoming November presidential election in the US.

Labor Markets and Competition for Workers

FTC Non-Compete Rule: In a widely anticipated decision foreshadowed in the last edition of Competition Quarterly, a district court in the Northern District of Texas struck down the FTC’s proposed rule banning post-employment non-compete covenants in Ryan LLC v. Federal Trade Commission. The FTC’s rule would have banned most non-compete agreements, with limited exceptions for certain executives. The FTC filed a notice of appeal on October 20. The rule remains enjoined pending appeal.

The Ryan opinion was issued days after a decision in Properties of the Villages, Inc. v. FTC, in which a district court in the Middle District of Florida entered a limited injunction prohibiting the FTC from enforcing the non-compete rule against the plaintiffs in that case. Both courts determined that the FTC likely lacked authority to issue the rule, but for different reasons. Whereas the Texas court determined that the FTC lacked authority under the FTC Act, the Florida court invoked the major questions doctrine, and noted that “common sense, informed by constitutional structure, tells us that Congress normally intends to make major policy decisions itself, not leave those decisions to agencies.”

Notably, the Texas Ryan and Florida Properties of the Villages, Inc. judgments contrast with another decision issued by a district court in the Eastern District of Pennsylvania in July 2024. In that ruling, ATS Tree Services, LLC v. Federal Trade Commission, the district court denied a motion for preliminary injunction seeking to stay the effective date of the FTC’s final rule, and shortly thereafter ATS Tree Services voluntarily dismissed its challenge.

DOJ Intervenes in Private Litigation Over Labor Markets: The Justice Department also weighed in on private litigation over alleged monopolization of labor markets. DOJ filed a statement of interest supporting plaintiffs alleging that the University of Pittsburgh Medical Center dominates the market for hospital workers in Pennsylvania following a series of acquisitions of local hospitals and the imposition of restrictive employment practices. Echoing the FTC’s position in the Anesthesia Partners case challenging an alleged roll-up of anesthesia practices in Texas, DOJ argued that UPMC’s series of acquisitions should be assessed as a whole, rather than assessing each one individually. The agencies also asserted that a series of acquisitions should be assessed as a whole in the Merger Guidelines issued in late 2023. It has been reported in the press that DOJ has an open labor-market investigation of UPMC.

DOJ, FTC, and NLRB Memorandum of Understanding: On August 28, the FTC, the DOJ Antitrust Division, the Department of Labor (DOL), and the National Labor Relations Board (NLRB) signed a new Memorandum of Understanding (MOU). The agreement aims “to enhance the ability of the FTC and DOJ to investigate the impact of mergers and acquisitions on labor markets.” Under the MOU, the DOL and NLRB will provide the antitrust agencies with assistance in merger review by, among other things, training FTC and DOJ personnel on labor issues. The FTC withdrew from the MOU without explanation on September 27.

Technology and Platforms

Monopolization Cases Against Platforms

Google Search: The District Court for the District of Columbia ruled on August 5 that Google illegally maintained monopoly power in general search services and general search text ad markets in a lawsuit brought by DOJ and a group of states. The court found that Google’s agreements with browser developers, mobile device manufacturers, and wireless carriers to make Google the default search engine foreclosed rival search engines from a substantial share of the general search market, depriving the rivals of scale they needed to develop strong offerings and permitting Google to charge high prices for search text ads. Importantly, the court acknowledged that “Google may have gained its initial dominance in the general search services market competitively—through superior foresight or quality” and that Google’s “conduct has been relatively constant, both before and after its acquisition of dominant market status,” but noted that “it is Google’s status as a monopolist that makes its distribution contracts exclusionary, even if the same conduct did not have that effect when Google first began employing it.”

The lesson for companies is that they need to reassess antitrust risk as their market share rises: conduct that carries no antitrust risk when undertaken by a small firm may draw antitrust scrutiny as the firm grows larger.

The Google Search case is widely regarded as the most significant monopolization case since the Microsoft litigation, and the saga is far from over: DOJ filed a proposed remedy framework on October 8 indicating it is considering remedies that “could include contract requirements and prohibitions; non-discrimination product requirements; data and interoperability requirements; and structural requirements [i.e., a break-up].” The court will hold an evidentiary hearing to decide the remedy starting on April 22. Google may appeal both the monopolization ruling and the eventual remedy.

Google Ad Tech Stack: In September, DOJ tried another major monopolization case against Google. DOJ argued before Judge Leonie Brinkema in the Eastern District of Virginia that Google employed a series of acquisitions, self-preferencing techniques, and policies that encouraged publishers and advertisers to adopt Google’s tools to monopolize the ad tech stack—a collection of interconnected technologies that connect online advertisers and website publishers. DOJ emphasized Google’s acquisitions of other companies in this space, including DoubleClick in 2008 and AdMeld in 2011. Both transactions were approved by federal regulators at the time, showing that DOJ and the FTC (at least under the current administration) are willing to revisit past decisions when they claim to uncover new evidence of anticompetitive effects. Closing arguments are scheduled for November 25.

Amazon: The FTC and a group of states also notched a victory in their Big Tech enforcement efforts, with the Western District of Washington denying Amazon’s motion to dismiss their claims that Amazon illegally maintains a monopoly in the online superstore and online marketplace services markets. The court dismissed some of the state-law claims but allowed the federal claims to go forward. The core allegations are that Amazon penalizes sellers that offer lower prices off Amazon and “coerces sellers into using its fulfilment services to obtain Prime eligibility and successfully sell on Amazon.” The first theory of harm, that a platform may harm competition by insisting that sellers not offer lower prices through other channels, is very similar to the theory in US Airways v. Sabre, the first two-sided market case tried to a jury where O’Melveny scored a victory for its client US Airways.

Notably, the court also allowed the FTC Act Section 5 claim to proceed. The FTC challenged Amazon’s alleged use of an algorithm to raise prices in instances where rivals were likely to follow Amazon’s price hike, and then keeping prices high after competitors matched the price increase. The court agreed with the FTC that even in the absence of an agreement with competitors, parallel pricing coupled with anticompetitive intent is sufficient to state a claim of unfair competition under Section 5. This is a significant development, as it may encourage the FTC to further test the boundaries of its Section 5 authority for unfair competition claims that do not meet the requirements of traditional antitrust Sherman Act violations (i.e., that are not agreements in restraint of trade or exclusionary acts that create or maintain monopoly power).

Visa: On September 24, DOJ sued Visa, alleging that the company monopolized debit network services. DOJ claims that Visa used a combination of volume discounts and penalties to make it uneconomic for merchants to route transactions through rival networks and create de facto exclusivity and entered agreements to pay potential emerging competitors to create partnerships instead of competing. Both Google cases, the Amazon case, and the Visa case involve allegations that the defendant made it difficult to use rival services and thereby deprived rivals of scale—this theory of harm is popular in platform markets, where plaintiffs frequently argue that scale is particularly important due to network effects.

Algorithmic Pricing: Algorithmic pricing continues to be a top enforcement priority. On August 23, DOJ and eight state attorneys general filed a civil antitrust lawsuit alleging that revenue-management-software maker RealPage distorts competition between landlords by collecting nonpublic competitively sensitive information from landlords, feeding the information into an algorithm, and using it to make pricing recommendations. In addition to alleging an illegal agreement between RealPage and landlords to share competitively sensitive information and align pricing, the Complaint claims that RealPage’s collection and use of landlords’ nonpublic information “creates a self-reinforcing feedback loop of data and scale advantages” that allow RealPage to maintain a monopoly over commercial revenue management software for multifamily housing rentals.

Beyond the antitrust agencies, politicians at all levels are increasingly paying attention to algorithmic pricing too. On the national stage, Kamala Harris vowed on August 16 to “fight for a law that cracks down on [algorithmic collusion in rent-setting].” On a local level, San Francisco enacted an ordinance on September 13 banning the sale and use of revenue management software that relies on nonpublic competitor data to make recommendations on rents or occupancy levels.

The agencies also continue to investigate “surveillance” or “personalized” pricing—individualized pricing strategies enabled by application of algorithms to consumer data. On July 23, the FTC issued orders to eight companies that offer surveillance pricing products seeking information on the “types of products and services being offered,” “data sources used for each product or service,” and the impact of surveillance pricing on prices paid by consumers.

Generative AI: Antitrust enforcers continue to focus on the generative AI sector, with DOJ reportedly launching an investigation into Nvidia, the company supplying most of the chips used to train and run leading generative AI models. One emerging area of focus in the agencies’ analysis of AI is interoperability: the extent to which one company’s products and services interoperate with other suppliers’ offerings. A joint July 23 statement from DOJ, the FTC, the European Commission, and the UK Competition & Markets Authority touted interoperability as one of the key principles for enabling competition and innovation in AI, warning that “any claims that interoperability requires sacrifices to privacy and security will be closely scrutinized.” Assistant Attorney General Kanter reinforced the importance of interoperability in a July 26 media appearance, noting that he “heard overwhelmingly from [AI] innovators that they want an open interoperable environment.”

Health Care and Pharma

FTC PBM Complaint: Since our last issue, where we covered the FTC’s Interim Staff Report on pharmacy benefits managers (PBMs), the agency’s intense scrutiny of health care and pharma has continued unabated. On September 20, the FTC filed an administrative complaint alleging that three of the largest PBMs and their respective group purchasing organizations have “created a broken system that inflated insulin drug prices, boosting PBM profits at the expense of vulnerable patients.” According to the FTC, the three PBMs (who, per the FTC, collectively account for 80% of all prescriptions in the US) negotiate rebates with drug manufacturers that artificially raise insulin prices, including a “staggering increase of over 1200%” on one drug. The FTC characterized this business practice as a “chase-the-rebate” strategy where PBMs, over time, continued to demand higher rebates and fees in exchange for preferential treatment of certain products on the drug formulary lists. The FTC claims that while the PBMs benefit from high rebates and high fees, the added cost is shifted to patients in need of life-saving drugs.

And that appears to be just the beginning of enforcement actions in the health care space. The FTC Bureau of Competition Deputy Director Rahul Rao stated that insulin manufacturers “should be on notice that their participation in the type of conduct challenged [in the FTC’s administrative complaint] can raise serious concern…and that the Bureau of Competition reserves the right to recommend naming drug manufacturers as defendants in any future enforcement actions over similar conduct.”

Express Scripts’ Lawsuit Against FTC: The PBMs are not sitting idly while the FTC pushes ahead with its enforcement agenda. On September 17, Express Scripts filed a lawsuit in the Eastern District of Missouri alleging that the FTC’s Interim Staff Report on the PBM industry was “unfair, biased, erroneous, and defamatory” for its disregard of the “millions of documents and terabytes of data produced” to the FTC. Express Scripts alleged in its lawsuit that the evidence “would have led the Commission to report” that “PBMs lower prescription drug costs for health plan sponsors.” Express Scripts’ lawsuit also quotes the dissenting statement from FTC Commissioner Melissa Holyoak, who stated that the “Report’s failure to offer empirical evidence to support claims about the market power of PBMs is particularly troubling.”

Epic Lawsuit: Also, we are keeping an eye on health care startup Particle Health’s lawsuit against Epic Systems, which was filed on September 23 in the Southern District of New York. Particle Health alleges that Epic “is using its monopoly power over electronic health records (EHRs) to bar Particle from the fledgling payer platform market.” When asked recently if the FTC would get involved in the lawsuit, FTC Chair Lina Khan did not rule it out, noting that “it’s actually something [she] had heard concerns about, especially among entrepreneurs and startups that were trying to enter the healthcare space.”

Ongoing Challenges to the FTC’s Rulemaking Authority

Express Scripts’ lawsuit challenging the FTC’s 6(b) Study on PBMs is just one of several challenges to the FTC’s rulemaking and enforcement authority. For example, we previously covered the FTC’s case against US Anesthesia Partners and Welsh Carson for their alleged anticompetitive roll-up of anesthesia practices in Texas. US Anesthesia Partners asked a US appeals court to reconsider the district judge’s denial of their motion to dismiss because the FTC’s “practice of initiating standalone federal court actions without concurrent administrative proceedings exceeds the statutory authority granted by Congress.” The Fifth Circuit Court of Appeals ultimately declined to consider their appeal, finding that the court did not have jurisdiction to hear the matter before a final judgment was rendered in the monopolization lawsuit.

Some challenges to the FTC’s authority are coming from inside the agency. The FTC’s Republican Commissioners Melissa Holyoak and Andrew Ferguson recently made comments warning of the risks of eroding the agency’s credibility due to the FTC’s pursuit of aggressive antitrust and privacy legal theories that have not always fared well in court. The Republican Commissioners harkened to the Supreme Court’s decision to overturn the “Chevron doctrine,” which had instructed courts to defer to agency interpretation of the law where statutes are ambiguous, as a reason for caution.

Europe

Merger Enforcement

Use of Article 22 to Go After Non-Notifiable Transactions: On September 3, the EU’s highest court brought to an end a long-running dispute between Illumina and the EC. The EC had called in Illumina’s acquisition of cancer detection tests developer GRAIL on the basis of a novel interpretation of its jurisdictional powers under Article 22 of the EU Merger Regulation in 2021, and then prohibited the acquisition in September 2022. Article 22 provides a basis for EU Member States to refer transactions that are not notifiable even under national Member State law, and is a remnant of times past when several Member States did not have a merger control regime and valued the ability to refer transactions to Brussels for merger review by the EC. As over time all Member States apart from Luxembourg adopted their own merger control laws, this Article 22 mechanism became all but obsolete, but in early 2021 the EC repurposed the provision as a tool to call in “killer acquisitions” and encouraged Member States to refer transactions that were below the revenue-based filing threshold “where the turnover of at least one of the undertakings concerned does not reflect its actual or future competitive potential.”

In its (unappealable) September 3 judgment, the Court ruled that the EC had overstepped by interpreting Article 22 as “a ‘corrective mechanism’ for the effective control of all concentrations with significant effects on the structure of competition in the European Union.” EC’s interpretation was deemed inconsistent with key objectives of EU merger law, namely “to establish, first, a clear allocation of powers between the Commission and the national competition authorities, and second, an effective and predictable system of prior control.”

While the Court’s judgment is welcome news for those looking for legal certainty, its practical value remains doubtful when over recent years several Member States introduced their own special call-in powers to capture and refer under Article 22 transactions that had previously not been notifiable under traditional revenue-based threshold rules.

Abuses of Market Power

Draft EC Guidelines: In August, the EC launched a public consultation inviting interested parties to comment on its draft Guidelines on exclusionary abuses of dominance. The new Guidelines set out how the Commission will assess whether certain conduct by dominant companies amounts to an exclusionary abuse under Article 102. Once finalized, they will replace previous EC guidance from 2009 to reflect more recent Court precedents and to address the perceived growth in “market concentration in various industries and the digitisation of the Union economy, which makes strong network effects and ‘winner-takes-all’ dynamics increasingly widespread.” To this end, the Guidelines introduce a range of rebuttable presumptions that the EC can rely on to go after exclusive supply or purchasing agreements, loyalty rebates, predatory below-cost pricing, margin squeeze practices, as well as certain forms of tying. They effectively reverse the burden of proof, putting the onus on the dominant company to justify its conduct as “fair” and consistent with “competition on the merits” (i.e., “conduct within the scope of normal competition on the basis of the performance of economic operators and which, in principle, relates to a competitive situation in which consumers benefit from lower prices, better quality and a wider choice of new or improved goods and services”). The opacity of these concepts gives the EC significant discretion to take enforcement action and to do so without having to embark on cumbersome economic analyses.

Apple Payments Investigation: In July, the EC concluded its Article 102 investigation into Apple’s refusal to grant rivals access to a standard technology used for contactless payments with iPhones (Near-Field-Communication (NFC), or “tap and go”) after Apple committed to change course. Its far-reaching commitments apply to trading partners and users in the European Economic Area and include free access rights for third-party wallet providers and app developers to iPhone NFC hardware as well as related functionalities and authentication tools such as Touch ID and Face ID. The commitments are bolstered by an independent monitoring mechanism and a dispute settlement system with short deadlines and procedural guarantees.

Google Shopping Case: An Article 102 case with strong links to the Digital Markets Act (DMA) concluded in September, when the EU’s highest court upheld the EC’s 2017 decision fining Google EUR 2.4 billion for what EC characterized as abusing its market power in general internet search by giving an illegal advantage to its own comparison shopping service, thereby stifling competition in comparison shopping markets. By validating the Commission’s appraisal of Google’s practices as abusive and illegal, the Court provided important clarifications also for the future application of the DMA. Crucially, it held that while there is no general rule that self-preferencing is always abusive, the EC was found to have met its burden of proof by having established that in light of “the characteristics of the upstream market and the specific circumstances identified, the conduct at issue, with its two components, namely the highlighted presentation of its own results and the demotion of those of competing operators, was discriminatory and did not fall within the scope of competition on the merits.” What is more, the judgment clarifies that when the alleged abuse is not related to pricing practices, the EC is under no obligation to prove with extensive economic analysis of costs and prices that a dominant firm’s conduct unlawfully excludes rivals.

Digital Markets

EU “Gatekeeper” Judgment: July saw the first substantive judgment on the issue of who qualifies as a “gatekeeper” under the DMA regime. The EU’s lower General Court affirmed the EC’s September 2023 decision to designate the owner of a major social media platform as a “gatekeeper.” Under the DMA, the “gatekeeper” designation subjects a company to a range of conduct restrictions and obligations, including on self-preferencing, combining and using user data, and interoperability with third parties’ products and services. The court ruled that conducting a full market investigation is not necessary if the company sought to be designated as a “gatekeeper” does not rebut DMA’s presumptions relating to the company’s significant impact on the internal market, its role as an important gateway, and its entrenched and durable market position. The decision is significant because it affords EC wide discretion to designate gatekeepers without extensive market testing.

Generative AI

The September issue of the EC’s Competition Policy Brief focuses on “competition in generative AI and virtual worlds” EC raised competition concerns regarding “key inputs to these technologies, such as data, AI accelerator chips, computing infrastructure, cloud capacity and technical expertise, [as well as their] deployment and distribution.” The Policy Brief identifies several potential barriers to entry and expansion in generative AI: data, AI accelerator chips, computing infrastructure, cloud capacity, and technical expertise. With regard to virtual worlds (i.e., “persistent, immersive environments, based on technologies including 3D and extended reality (XR), which make it possible to blend physical and digital worlds in real-time, for a variety of purposes such as designing, making simulations, collaborating, learning, socialising, carrying out transactions or providing entertainment”), the Commission expressed concern over potential bottlenecks resulting from network effects, and customer lock-in stemming from limited interoperability or cost of portability. The EC is concerned that these barriers may lead to “exclusionary practices or other forms of foreclosure by dominant players, such as exclusivity agreements, imposition of unfair trading conditions, self-preferencing, tying and bundling, refusal to supply, margin squeeze or predatory pricing, [or] reducing choice and innovation for consumers.” It vows to “use all tools at its disposal to address potential concerns in the generative AI and virtual worlds sectors, including antitrust, merger control and the DMA, to ensure that these sectors remain competitive, contestable and fair.”

The Policy Brief follows on from and expands on the July Joint Statement on Competition in Generative AI Foundation Models and AI Products by the EC, the UK’s Competition and Markets Authority (CMA) as well as the US DOJ and FTC, which had already communicated the agencies’ shared commitment to keep AI-related markets open and competitive. The Joint Statement identified fair dealing (i.e., the need to prevent dominant firms from engaging in exclusionary conduct to deepen moats and discourage investments and innovation by third parties), interoperability between products and services, and choice (i.e., the need to prevent companies from using lock-in mechanisms to prevent switching) as guiding principles for future enforcement action.

China

Merger Control

Rules on Penalties for Gun-Jumping and Other Merger-Related Contraventions of the Chinese Anti-Monopoly Law (AML): On August 16, China’s State Administration for Market Regulation (SAMR) released for public comment its Draft Rules on Administrative Penalties for the Illegal Implementation of a Concentration (Draft Rules). The Draft Rules aim to make SAMR’s decision-making for fines relating to gun-jumping and other merger control violations of the competition rules more transparent.

O’Melveny reviewed the Draft Rules in detail in its Client Alert of September 11. Key points are summarized below.

• Illegal Implementation of a Concentration. The Draft Rules define the illegal implementation of a concentration to include gun-jumping, failure to file a non-reportable transaction called-in by SAMR, failure to comply with a restrictive condition imposed by SAMR in a conditional clearance, and closing a transaction that SAMR has blocked.
  
  
• Higher Fines. The Draft Rules propose a substantially higher range of potential fines for the illegal implementation of a concentration using a two-step methodology. First, the regulator will select an initial fine level based on certain factors; second, the initial amount may be adjusted upward or downward—depending on aggravating or mitigating factors—to arrive at the final amount. The final amount of the fine for the illegal implementation a concentration with no anticompetitive harm will be between RMB 400,000 (approx. US$56,000) and RMB 5 million (approx. US$700,000). The final amount of the fine for illegally implementing a concentration with anticompetitive effects will be between RMB 5 million (approx. US$700,000) and 10% of the offending undertaking’s annual turnover.

Revised Filing Form for Simple Cases: On September 14, SAMR published a streamlined simple case filing form, reducing the information burden on parties, particularly relating to market share data, information for the competitive analysis of the transaction (a competitive analysis will no longer be required in certain simple cases), and document authentication procedures required in the case of a foreign notifying party. The new filing form came into effect on October 12.

Simple cases include transactions where the parties’ market shares are below certain thresholds (e.g., below a combined 15% share for horizontal transactions), transactions involving an offshore target with no economic activities in China, or transactions involving the exit of one or more joint controlling shareholders from an existing JV. Per SAMR’s current internal procedures, a simple case will typically be cleared within 20 days of case opening, absent special circumstances. Since the introduction of the simple case regime in 2014, 85% of notified transactions have been reviewed on this track. The new filing form now further reduces the burden of making a filing in China for most transactions. At the same time, SAMR’s new higher notification thresholds remove a considerable number of transactions from the scope of a review under the AML. (See O’Melveny’s Client Alert of January 31 for a detailed discussion of the new filing thresholds.)

Civil Litigation

Judicial Interpretation on Civil Antitrust Cases: On June 24, China’s Supreme People’s Court published its Interpretation of Certain Issues Relating to the Application of the Law in the Trial of Monopoly-Related Civil Disputes (Civil Antitrust Cases Interpretation).

O’Melveny reviewed the Civil Antitrust Cases Interpretation in detail in its Client Alert of September 6. Key points are summarized below.

• Antitrust Claims Not Subject to Arbitration. The Civil Antitrust Cases Interpretation confirms that Chinese courts have jurisdiction over private antitrust disputes notwithstanding the inclusion of an arbitration clause in the parties’ contract. Civil antitrust disputes are not amenable to settlement by arbitration.
  
  
• Interplay Between Administrative and Judicial Enforcement. For “follow-on actions,” the Civil Antitrust Cases Interpretation provides that where a breach of the AML has been established in a decision of an administrative agency (and the agency’s decision has been confirmed on appeal if applicable), a plaintiff can rely on the regulator’s findings of fact, unless there is evidence that contradicts those findings. The Civil Antitrust Cases Interpretation is silent on whether the plaintiff can rely on the agency’s legal findings. This suggests that the court will have the last word on legality.
  
  
• Market Definition. The Civil Antitrust Cases Interpretation provides for some exceptions to the general rule that the plaintiff bears the burden of defining the relevant market within which the effects of the defendant’s alleged anticompetitive conduct occur. For example, the plaintiff may not need to define the relevant market where the defendant’s conduct amounts to hardcore cartel conduct or resale price maintenance (RPM).

Pharma Sector

Pharma Guidelines: On August 9, SAMR released for public consultation its draft Anti-Monopoly Guidelines for the Pharmaceutical Sector (Draft Pharma Guidelines). O’Melveny discusses the Draft Pharma Guidelines in detail in its Client Alert of October 11.

The Draft Pharma Guidelines comprise 55 articles organized into 7 chapters which closely align with the provisions in the AML. Key aspects of and takeaways from the Draft Pharma Guidelines are outlined below.

• Reverse Payment Agreements. The Draft Pharma Guidelines explain that reverse payment agreements may be monopolistic. Such agreements involve settlements resolving patent infringement disputes between patent holders and generic drug manufacturers, where patent holders compensate generic drug manufacturers for refraining from challenging the validity of a patent or delaying the launch of generic drugs. Article 13 of the Draft Pharma Guidelines set out factors that SAMR may consider when assessing whether a reverse payment agreement is anti-competitive: 1) whether the settlement payment significantly exceeds, without justification, the cost of resolving the patent dispute; 2) the likelihood of the patent being invalidated should the generic manufacturer proceed with its challenge; and 3) whether the settlement effectively extends the patent holder’s monopoly or delays generic entry. (For additional discussion of reverse payment agreements, see O’Melveny’s Client Alert of May 22 on the US Supreme Court decision in Fed. Trade Comm’n v. Actavis).
  
  
• Resale Price Maintenance (RPM). Consistent with the AML, the Draft Pharma Guidelines provide that RPM is presumed to be anti-competitive unless the pharmaceutical undertaking can prove there are no anti-competitive effects. The Draft Pharma Guidelines also provide that certain restrictions common in the pharmaceutical sector do not amount to RPM. These include resale pricing restrictions imposed on an agent, resale pricing agreed in centralized drug procurement, and resale pricing agreed with an ancillary service provider.
  
  
• Product Hopping. The Draft Pharma Guidelines address the practice of “product hopping,” where a pharmaceutical patent holder with a dominant market position makes minor modifications to an existing drug to extend its patent life. This conduct may be abusive where it serves merely to prolong dominance. Factors relevant to assessing whether this is the case include: 1) whether the newly patented drug constitutes a substantial improvement; 2) effects on generic entry; 3) whether the original patent is nearing expiry and whether any generic drugs are about to launch, and 4) the range of choices available to patients and physicians.
  
  
• Unfairly High Prices. In recent years there have been several cases in the pharmaceutical sector in China involving “unfairly” high prices. According to SAMR’s 2023 Annual Report, 4 of the 11 abuse cases concluded in 2023 concern excessive pricing in the pharmaceutical sector. The Draft Pharma Guidelines provide a framework for evaluating whether a price is unfairly high. This includes a consideration of comparable competitor pricing (comparing whether the pharmaceutical undertaking’s pricing is significantly higher than that of its competitors), comparable cross-region pricing (comparing the pharmaceutical undertaking’s prices across regions), comparable historical pricing (comparing the pharmaceutical undertaking’s pricing during different periods), a normal margin approach (which examines whether a price increase results in a “normal” margin), and whether a price increase results from sales made through layers of distributors solely for the purpose of impacting the price.

Investigations

Flexible Regulatory Tools: SAMR announced on September 13 that it issued warning letters to five European automakers and patent-pool operator Avanci, reminding them of the antitrust risks associated with certain of their business practices and urging them to rectify the same. Common elsewhere, the warning letter is a new antitrust regulatory tool for SAMR introduced by the “three notices and one letter” mechanism unveiled in December 2023. This mechanism, which aims at a more flexible approach to enforcement, equipped SAMR with two new enforcement tools—the warning letter and the regulatory meeting notice—on top of its existing tools: the investigation notice and the administrative penalty notice. A firm may receive a warning letter where SAMR suspects that its conduct violates the AML. If the firm fails to rectify its conduct in a timely fashion, SAMR may issue a regulatory meeting notice, summoning the representatives of the firm to a meeting where they will be further urged to rectify the offending conduct. If the firm still fails to rectify its conduct or repeats the conduct, SAMR will move to open a formal investigation.

According to SAMR’s announcement of September 13, it has sent warning letters to automotive manufacturers concerning certain vertical arrangements with distributors. The warning letter sent to Avanci concerns its licensing of standard-essential patents, or SEPs, associated with automotive wireless-communication technologies.

The advent of these new regulatory tools comes at a time of increased trade tensions between China and its western trading partners and may signal a return to investigations of foreign corporations under the conduct rules in the AML following a long period where such cases had become uncommon.

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Stay tuned for continued global coverage of key developments in antitrust enforcement in our next edition of the Competition Quarterly, coming this Winter.

If you have any questions related to the topics in this Competition Quarterly, please reach out to your usual O’Melveny contact or a member of our Antitrust & Competition team.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Sergei Zaslavsky, an O’Melveny partner licensed to practice law in the District of Columbia and Maryland; Julia Schiller, an O’Melveny partner licensed to practice law in the District of Columbia, New Jersey, and New York; Pete Herrick, an O’Melveny partner licensed to practice law in New York and the District of Columbia; Adam Walker, an O’Melveny associate licensed to practice law in the District of Columbia; Sheya I. Jabouin, an O’Melveny associate licensed to practice law in New York; Ryan J. Fennell, an O’Melveny associate licensed to practice law in New York; Christian Peeters, an O'Melveny partner licensed to practice law in Brussels-Capital Region and Germany, Rechtsanwalt; Philip Monaghan, an O’Melveny partner licensed to practice law in Hong Kong, England and Wales, and Ireland; Lining Shan, an O’Melveny senior legal consultant in the firm’s Beijing office; and Vivian Wang, an O’Melveny associate licensed to practice law in New York and the District of Columbia, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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