Summary

In a noteworthy recent case, bioenergy manufacturer Yunnan Yingding Bio-energy Co, Ltd claimed that Sinopec (a major state-owned oil company) and the Yunnan branch of Sinopec's trading company abused their dominant market position by refusing – for no justifiable reason – to incorporate the biodiesel produced by Yingding from waste cooking oil into Sinopec's distribution system. Yingding thus filed suit with the Kunming Intermediate People's Court.

The Kunming court ruled against Sinopec, holding that the Yunnan branch of Sinopec's trading company was obliged to purchase and distribute the biofuel made by Yingding and had abused its dominance in the refined oil market.

On appeal, the Yunnan High People's Court reversed the first-instance ruling and remanded the case on account of unclear facts and procedural errors. The outcome of the case is pending.

First-instance decision

The suit was filed before the Kunming court in January 2014. Yingding claimed that Sinopec and Sinopec Yunnan Branch had failed to fulfil their obligations stipulated in the Renewable Energy Law and had abused their dominance in the market of refined oil by refusing to deal with Yingding for no justifiable reason.

Sinopec and Sinopec Yunnan Branch claimed that they rejected Yingding's biofuel for the following reasons:

  • Yingding had failed to prove that the biofuel complied with the relevant national standards and was safe to use.
  • Yingding had failed to provide complete trading terms.
  • The laws and regulations regarding biofuel were incomplete; the authorised refined oil sales companies were obliged to purchase biofuel from the biofuel manufacturers if it met certain quality standards, but there were no legal provisions addressing how to reach end consumers from the sales companies.

On December 8 2014 the Kunming court ruled that Sinopec Yunnan Branch bore a legal obligation to purchase and distribute the biofuel made by Yingding and had abused its dominance in the refined oil market by refusing to purchase Yingding's biofuel for no justifiable reason. The court ordered Sinopec Yunnan Branch to incorporate the biofuel produced by Yingding into its distribution network within 30 days. Both Yingding and Sinopec appealed to the Yunnan High People's Court.

Appellate decision

The appeal hearing was held on April 22 2015. Sinopec submitted 23 new pieces of evidence and introduced two expert witnesses in a bid to overturn several key elements of the first-instance decision.

Sinopec argued that the relevant market in this case was for adipic acid monomethyl ester (AAME), the main ingredient of a biofuel additive known as BD100. Yingding's main product was BD100, which can be blended with fossil diesel to become biofuel. In the AAME market, Sinopec was a potential buyer instead of a market dominator. In support of this argument, it presented an expert witness – Gong Jiong, a professor of economics at Beijing's University of International Business and Economics – who testified that AAME should be defined as the relevant product market on the basis of an economic analysis.

However, Yingding insisted that the first-instance decision was correct in naming the sales market of refined oil as the relevant market and submitted new evidence – an article on Sinopec's website that claimed it had a 67% market share in Yunnan – to prove the claim that Sinopec had market dominance.

Another main dispute was whether Yingding's biofuel product met national standards, which would make it mandatory for Sinopec to purchase the biofuel under the Renewable Energy Law. The law stipulates that biofuel producers must sell their products first to an authorised refined oil sales company and the sales companies are obliged to buy the fuel if it meets certain quality standards. In order to test the quality, Sinopec introduced the second expert witness – Lin Jianmin, a leading author of China's national biofuel standards. Lin pointed out that there were quality hazards with regard to the country's biofuel technology, which gave Sinopec a justifiable reason not to deal with Yingding. Moreover, Sinopec submitted some precedent examples in which consumers had complained about the quality of biofuel and also claimed that China did not have a sound regulatory framework to support biofuel production, neither in testing nor in sales.

To refute this point, Yingding referred to a 2011 test in cooperation with Sinopec, whereby selected buses in Kunming used biofuel blended by Sinopec using BD100 produced by Yingding.

On August 13 2015 the Yunnan High People's Court reversed the first-instance decision and remanded the case on account of unclear facts and procedural errors; the case is pending. The court provided no details regarding its reasoning.

Key issues

Competition between Yingding and Sinopec

According to the Anti-monopoly Law, behaviour can be deemed abuse of market dominance only when the dominator specifically intends to eliminate or restrict competition. In this case, Yingding's product was biofuel, while Sinopec did not engage in the biofuel business. From this perspective, Yingding and Sinopec were not competitors. Thus, it was unnecessary and unreasonable for Sinopec to eliminate or restrict competition from Yingding.

Relevant market

The definition of the relevant market is a prerequisite to determining whether competition exists and whether the Anti-monopoly Law applies. In accordance with the Judicial Interpretation on Antitrust Civil Litigation, the plaintiff bears the responsibility to prove the defendant's dominance in the relevant market. Also, the methods of defining the relevant market are stipulated in the Guidelines on Relevant Market Definition. However, both Yingding and the Kunming court defined the relevant market as the sales market of refined oil without sufficient antitrust analysis; none of the methods in the guidelines were used in reaching this conclusion. Therefore, the definition of the relevant market remains debatable and should be sufficiently analysed in the upcoming retrial.

Justifiable reason for refusal to deal

Under the Anti-monopoly Law, abuse of market dominance includes the behaviour of refusing to deal for no justifiable reason; but such justifiable reasons were not investigated by the first-instance court. During the appellate trial, the expert witness introduced by Sinopec claimed that there were quality hazards in the country's biofuel technology and that this was a justifiable reason to refuse to deal with Yingding. Although the first-instance court and the appellate court did not specifically address the justifiable reasons, they should be discussed and investigated further during the retrial.

Anti-monopoly Law or Renewable Energy Law

Yingding's claims were based on both the Anti-monopoly Law and the Renewable Energy Law; the first-instance court also referred to both of these laws in its decision. At first glance the court's references to these laws may seem comprehensive, but in fact the court's reasoning is unclear and illogical. It reviewed certain points of contention regarding the Anti-monopoly Law, but all of its corresponding orders were not based on the Anti-monopoly Law. In particular, the court ordered the Sinopec Yunnan Branch to incorporate Yingding's biofuel into its distribution network based on the Renewable Energy Law and dismissed the other claims. This was an illogical move on the court's part and it is hoped that the laws will be applied more clearly during the retrial.

Comment

Many issues raised in this case were not clearly analysed by the courts, such as the definition of relevant market and the justifiable reasons for Sinopec's refusal to deal with Yingding. Since the case has been remanded, these issues are expected to be resolved at retrial. If the court rules against Sinopec, more antitrust suits against state-owned companies may follow. The courts may thus become an increasingly important battleground for antitrust issues in the near future.

For further information on this topic please contact Hao Zhan or Ying Song at AnJie Law Firm by telephone (+86 10 8567 5988) or email (zhanhao@anjielaw.com or songying@anjielaw.com). The AnJie Law Firm website can be accessed at www.anjielaw.com.?

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