Background

China's processed oil trading sector has undergone various reforms and adjustments, shifting from a highly centralised system to a market-based regulatory regime.

Following the introduction of a policy of reform and liberalisation in the 1980s, the Chinese processed oil market witnessed a period of market-oriented transformation from the central planned system. During that period numerous wholesalers and retailers entered into the market. However, in the late 1990s, due to price declines and a depression in the international oil market and in order to help state-owned enterprises, through a series of administrative orders the restructuring of the oil industry switched direction to a system that protects the national oil companies (NOCs). As a result, the right to sell processed oil (both wholesale and retail) was held by the NOCs (ie, CNPC in north China and Sinopec in South China), leading to an administrative monopoly by these companies and restricted market access for other entities. In December 2006 this restriction began to break up as the Ministry of Commerce (MOFCOM) promulgated the Measures for Administration of the Market of Processed Oil in order to honour China's commitment to the World Trade Organisation. According to MOFCOM statistics, in 2013 277 enterprises were licensed to engage in the wholesale of processed oil, mostly non-NOCs. Again, China's processed oil trading sector is moving towards market-oriented reform.

Nevertheless, the reality is that CNPC and Sinopec have maintained their monopoly status in their respective territories in the processed oil trading sector, due to their significant market power and the high market access threshold prescribed in the measures, which have effectively excluded newcomers from the market. In 2013 CNPC sold 39.3% of processed oil in the Chinese retail market and Sinopec sold 36.34%.(1) It seems that the liberalisation of the processed oil market still has a long way to go. However, Yunnan YingDing Biological Technology Co Ltd? v Sinopec marks the first monopoly case in China's oil and gas sector.

Facts

In January 2014 Yunnan YingDing Biological Technology Co Ltd – a private enterprise active in the production of biodiesel, – filed suit at the Kunming Municipality Intermediate People's Court against Sinopec and Yunnan Branch Company of Sinopec on the grounds of the defendants' abuse of a dominant market position. YingDing sought for its biodiesel to be incorporated into the defendants' sale system and compensation of Rmb3 million in damages for being unable to sell its products.

YingDing was a biodiesel producer in Yunnan Province whose products are mainly made from "swill-cooked dirty oil" and "swill oil". Biodiesel is a kind of biological liquid fuel listed in the Reviewable Energy Law,(2) according to which oil sales enterprises should include the biological liquid fuel conforming to the national standard into their fuel-selling systems.(3) YingDing did not hold a sales qualification and therefore had to cooperate with a licensed sales enterprise in order to sell its products. Since the Yunnan Branch Company controlled more than 80% of the sales terminal points in Kunming (the capital of Yunnan Province), YingDing hoped to cooperate with Sinopec. However, Sinpoec rejected that proposal, stating that YingDing's biodiesel did not meet the applicable national standard and was not qualified for sale. After years of this, YingDing believed that Sinopec and the Yunnan Branch Company's refusal to deal without sound reason constituted abuse of a dominant market position in violation of the Anti-monopoly Law(4) and sued the two companies at the Kunming Intermediate People's Court in January 2014.

YingDing claimed that Sinopec, as an oil wholesale enterprise licensed by law, held a dominant market position in the processed oil wholesale market (including biodiesel) in Yunnan Province and its refusal to purchase YingDing's biodiesel had made it almost impossible for it to enter into the market, leading to significant losses for YingDing and blocking the development of the renewable energy industry in Yuannan Province. On the other hand, Sinopec claimed that YingDing had never proposed complete transaction terms or an application to Sinopec and had failed to prove that its biodiesel met the national standard; thus, Sinopec was justified in refusing this transaction.

The Kunming Intermediate People's Court accepted YingDing's view on the definition of the relevant market and dominant market position of Sinopec, and held that the conduct of the defendants constituted abuse of a dominant market position, but rejected Yingding's claim for damages.

On December 8 2014 the intermediate court rendered its judgment, ordering Yunnan Branch Company to accept YingDing's biodiesel which conformed to national standards, but rejecting all of the other claims.

Appeal

Both parties appealed to the Yunnan Province Superior People's Court in January 2015. In its appeal petition YingDing sought to involve Sinopec as the co-party to accept its biodiesel and continued to seek damages. Yunnan Branch Company applied for revocation of the first-instance judgment and rejection of YingDing's claims. The superior court heard the case on April 22 2015 and stated that it would start a conciliation process and render its judgment should no settlement be reached between the parties.

In the appellate proceedings Sinopec contended that the first-instance judgment was incorrect regarding the relevant market and its dominant market position. Sinopec argued that since the main component of biodiesel is fatty acid methyl esters (FAME), which is an intermediary to processed oil rather than processed oil itself, the relevant market should be the FAME market rather than the processed oil market; hence, Sinopec and Yunnan Branch Company had no dominant market position in the relevant market as neither company was active in the FAME market. YingDing contended that the MOFCOM Measures for Administration of the Market of Processed Oil expressly defined 'processed oil' as "gas, coal oil, diesel oil and other alternative fuels that conform to national product standards with same purposes such as ethanol gas and biological diesel oil". Therefore, the relevant market should be the processed oil market. YingDing argued that as evidence showed that Sinopec's market share in the Yunnan Province processed oil market was as much as 67%, it could be inferred that Sinopec had a dominant market position.

Regarding the issue of Sinopec's refusal to deal, Sinopec claimed that YingDing and Sinopec had a vertical relationship rather than a horizontal competitive relationship, and that the refusal to deal set out in the Anti-monopoly Law usually refers to refusal to provide rather than to purchase goods or services. Therefore, the defendants' conduct did not constitute a refusal to deal under the law.

According to recent reports, the Yunnan Province Superior People's Court has revoked the first-instance judgment and remanded the case for retrial; however, these reports have yet to be confirmed.

Issues

Definition of relevant market and proof of dominant market position
One of the key issues in this case was whether Sinopec had a dominant market position. To prove this, the plaintiff first had to establish a properly defined relevant market. In litigation, both issues are troublesome and susceptible to challenges, and the plaintiff (usually the victim of monopolistic conduct) bears the burden of proof. Before 2014, the courts found against the plaintiffs in a large number of anti-monopoly litigations simply because the plaintiffs' arguments on the definitions of 'relevant market' and 'dominant market position' were not accepted by the courts. In the case at hand Sinopec also focused its arguments on these two issues and appealed on the grounds that YingDing has not proven them at first instance.

However, according to the judicial interpretation of the Supreme People's Court regarding alleged abuse of a dominant market position by a legally licensed monopoly business operator, the court may determine whether a dominant market position exists simply by examining the structure and competition status of the relevant market. Further, in Qihoo 360 v Tencent,(5) a high-profile anti-monopoly case in the internet sector, the Supreme Court noted that a clear definition of the relevant market is not necessary in every case concerning abuse of a dominant market position, and the court may evaluate the market position of the defendant as well as the possible impact of the alleged monopolistic conduct on the market by examining the direct evidence of elimination from or an impediment to competition. In the case at hand, considering the historical market power of Sinopec in Yuannan Province, it was valid to skip the definitions of the relevant market and dominant market position in the first-instance judgment if the Yunnan Superior Court found Sinopec to be "a legally licensed monopoly business operator" as stated above, because the court could determine directly whether Sinopec's conduct constituted abuse of a dominant market position.

Sound reason to refuse to deal
Another issue was whether Sinopec had sound reason to refuse the transaction. YingDing claimed that, according to Article 16 of the Renewable Energy Law, Sinopec had an obligation to include the biodiesel products in its sale system. However, Sinopec declared that it had sound reason to turn down the transaction as YingDing had not proven that its biodiesel met the national standard. The published case report gave no indication of how the first-instance court ruled on this issue.

Regarding the issue of whether the defendant was justified in refusing to deal, according to provisions promulgated by the State Administration for Industry and Commerce(6) the regulatory authority should consider whether the refusing party's decision was made based on its own normal business activities and normal interests, as well as the impact of the refusal on economic development, economic operative efficiency and the interests of the public and society. In this case, if the biodiesel in question did not meet the national standard, selling it would likely cause potential safety hazards, thus constituting a valid defence. Therefore, one relevant issue for the defence of Sinopec was whether the biodiesel in question met the national standard. In this regard, YingDing had submitted its test report to Sinopec and Sinopec had declared the report inauthentic, which was one ground of appeal before the second-instance court.

Comment

Regardless of the outcome at second instance, Yunnan YingDing Biological Technology Co Ltd? v Sinopec is the first anti-monopoly case in China's oil and gas sector lodged by a private enterprise against an NOC in a Chinese court and thus has major implications for the Chinese oil and gas sector. According to government plans for oil and gas reform, a major goal of the reform is to liberalise the processed oil retail market and foster a fully competitive trading sector. This goal is also consistent with the essence of the Anti-monopoly Law. Like the anti-monopoly investigations initiated against major corporations in the telecommunications, auto, insurance and other sectors, it is likely that NOCs such as CNPC and Sinopec may also have to deal with enforcement of the Anti-Monopoly Law in various situations. Due to ongoing reform and extended application of the Anti-monopoly Law in the oil and gas sector, an increasing number of similar cases are expected in China. One thing is certain: in the transition to a market-oriented system, similar cases will arise in the oil and gas sector.

For further information on this topic please contact Libin Zhang or Meng Zhao Lu at Broad & Bright by telephone (+86 10 8513 1818) or email (libin_zhang@broadbright.com or mengzhao_lu@broadbright.com). The Broad & Bright website can be accessed at www.broadbright.com.

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