China takes Amazon legal row in hand as small businesses, jobs become priority

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29 August 2023

As China's economy sputters, protecting private businesses and thereby jobs has become a priority. The judiciary is willing to play its part, even if it means testing a rare antitrust frontier to put Amazon under the microscope.

Guangzhou Mengbian Information Technology, an e-commerce company based in the southern Chinese city, recently sued Amazon for abusing a dominant position in the European market. The Guangzhou Intellectual Property Court has accepted the case, citing the extraterritorial reach of the country's Antimonopoly Law as well as the possibility that Amazon's conduct could have harmed Mengbian's interests and competitiveness locally.

The development comes as China's ruling Communist Party and the State Council, the country's cabinet, have vowed stronger legal protection for private enterprises. The pledge last month forms part of a 31-point guideline to shore up the private sector, after unemployment among Chinese youth jumped to a record 21.3 percent in June.

The statistics bureau later suspended publication of youth unemployment data, fueling speculation the Chinese economy has slowed further. With the need to sustain private businesses — which employ more than 80 percent of the workforce in urban areas  — taking center stage, China has reasons to scrutinize Amazon.

Since May 2021, the US tech giant reportedly has closed thousands of merchant accounts and frozen their funds in a clampdown on fake reviews. Media reports cited industry estimates as saying that more than 50,000 Chinese sellers were banned and might have suffered combined losses of more than 100 billion yuan ($13.7 billion).

It has been a common practice for Chinese online merchants to offer customers cash rewards or freebies in exchange for positive comment.

While better-off merchants sought remedies through arbitration or litigation in the US, many small operators have remained stuck in the situation. For Mengbian, it has resorted to the Chinese court apparently for what's known as the "home-court advantage."

In its court submission, Mengbian accused Amazon of shutting down its online store, blocking its account and refusing to trade "without valid reasons." It asked that Amazon return its account balance and compensate the company for its losses.

According to publicly available information, Mengbian is a "small and micro" enterprise incorporated in July 2017, with a registered capital of 30,000 yuan. Headed by its executive director Yuan Wei, the company mainly engages in cross-border wholesale and retail trade, including office supplies, as well as the development of new-materials technologies.

Extraterritorial reach

Mengbian's case against Amazon Services Europe is unusual in two ways. 

First, the plaintiff relies entirely on the European market in making its allegations. That contrasts with the typical reference to a Chinese relevant market in local litigation.

Even in a landmark ruling by the Guangdong High People's Court in 2013, the court examined the relevant geographical markets of both China and the US, before concluding that US wireless tech company InterDigital was abusive in its licensing of 3G standard essential patents, or SEPs, to Chinese smartphone maker Huawei.

Second, the Mengbian lawsuit highlights China's rare attempt to assert antitrust authority over foreign online platforms. Back in the epic Big Tech crackdown in 2021, enforcers targeted local giants such as Alibaba and Meituan.

Both speak volumes about China's readiness to flex its muscle and claim authority over matters beyond its borders. 

The Supreme People's Court, the country's highest court, illustrated this ambition in August 2021, when it dismissed the jurisdictional appeal lodged by Japanese electronics giant Sharp in its legal battle with Chinese smartphone maker OPPO.

In that ruling, judges affirmed that Chinese courts have jurisdiction over determining global SEP licensing terms, and that jurisdiction won't be affected even if the parties have a consensus that a foreign court should rule on the conditions.

Entailing risks

Litigation can be a lengthy process that may first go through jurisdictional challenges.

Meanwhile, the State Administration for Market Regulation, or SAMR, has the authority to enforce the Antimonopoly Law. If Mengbian succeeds in its court challenge, Amazon might face consequences beyond the courtroom.

In the last couple of years, China has been fostering the "coordination and unification of standards" adopted by the courts and by regulatory enforcers. In practice, how a case is viewed by one will have an impact on the way it is handled by the other.

For instance, the antitrust regulator dropped a complaint lodged by Chinese pharmaceutical giant Yangtze River Pharmaceutical soon after the country's top court ruled that its drug-ingredient supplier didn't abuse a dominant position (see here). By the same token, a court finding of an antirust violation may cement a complaint before SAMR.

Mengbian's legal counsel refused to comment on whether the company has taken the matter to SAMR. Amazon didn't respond to a request for comment.

SAMR is empowered to impose a fine of up to 10 percent of a wrongdoer's revenue for an antitrust offence. In many cases, China limits the base of the fine to a company's domestic turnover, although it has the discretion to apply the global number. Also, the agency's enforcement is often influenced by various factors, including the geopolitical tensions between Beijing and Washington.

Amazon recorded $514 billion in net sales last year. It has a relatively small presence in China compared to local rivals such as Alibaba and JD.com.

Active battlefields

From the Huawei and OPPO precedents to the Mengbian lawsuit, Chinese courtrooms have proven to be increasingly accessible to local businesses that have disputes with foreign peers.

In the first half, Chinese courts concluded a total of 13,645 foreign-related civil and commercial cases in the first instance, up about 35 percent from a year ago, according to official statistics.

In 2021, Chinese courts handled 27,300 such cases, nearly double the 14,800 in 2013, according to an October 2022 report by the top court.

These lawsuits involved new types of disputes pertaining to cross-border e-commerce, cross-border insolvency, cross-border mergers and acquisitions, as well as investment in financial derivatives. 

As these emerging categories expand, Chinese courts see an "urgent need to clarify trade rules, set boundaries for market conduct, and strike a balance between all stakeholders' interests," the report said.

Analysis by Yonnex Li and Xiaoqiong Gao.

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