Introduction
General rules of UEL
UEL embraces Anti-monopoly Law

Potential conduct targeted by UEL and Anti-monopoly Law
Comment


Introduction

On 31 May 2019 the Ministry of Commerce of China (MOFCOM) announced the establishment of an Unreliable Entity List (UEL) targeting foreign entities and individuals that:

  • fail to comply with the principles of the market economy;
  • deviate from the contractual spirit;
  • cut off supplies to Chinese companies for non-commercial purposes;
  • threaten China's national security; or
  • seriously damage the legitimate rights and interests of Chinese companies.

On 1 June 2019 Wang Hejun, the director general of MOFCOM's treaty and law department, further explained the UEL and stated that more specific restrictions and measures will be promulgated in due course.

According to MOFCOM's spokesperson, the UEL will base its legal grounds on the Anti-monopoly Law, the Foreign Trade Law, the National Security Law and other relevant regulations. The Anti-monopoly Law's influence on the UEL was re-emphasised by the director general during the joint press interview on 1 June 2019, during which the concept of abuse of market dominance in the Anti-monopoly Law was heavily relied on. As some believed that the UEL regime aims to respond to the executive order signed by US President Trump on 16 May 2019 to prohibit US companies from continuing to supply to or cooperate with Huawei and its affiliates, it is anticipated that the UEL's future impact will be significant, and the importance of the Anti-monopoly Law will continue to rise. This article analyses the currently known framework and possible implementation of the UEL with a focus on the Anti-monopoly Law.

General rules of UEL

The Chinese government has announced that the UEL's specific procedures and rules will be explained shortly, and the first batch of foreign entities under the list will be issued soon. While the details of the list remain a mystery for now, MOFCOM's spokesperson indicated that there are four criteria that will be used to determine whether a foreign entity will be added to the list, including:

  • whether the entity implements blockades, cuts off supply or conducts other discriminatory measures against Chinese entities;
  • whether the entity's action:
    • fails to comply with the principles of the market;
    • deviates from the contractual spirit;
    • constitutes a boycott; or
    • cuts off supplies to Chinese companies for non-commercial purposes;
  • whether the entity's action causes material harm to Chinese enterprises or related industries; and
  • whether the entity's action threatens China's national security.

The legal grounds that China could use to take any necessary legal and administrative measures against UEL entities include the Foreign Trade Law, the Anti-monopoly Law and the National Security Law. Corresponding with the statements of Chinese high-rank officials, the jurisprudence of abuse of market dominance under the Anti-monopoly Law is widely anticipated to be one of the bases on which China will build and enforce the UEL.

UEL embraces Anti-monopoly Law

During the joint press interview, the director general specifically pointed out that Article 17 of the Anti-monopoly Law prohibits entities that possess a dominant market position from abusing their market dominance, and emphasised that it would be a violation of the Anti-monopoly Law in any country if such entities restricted or cut off trade with other companies due to non-commercial reasons. Although MOFCOM did not specify which types of behaviour fall under the abuse of market dominance, it could be reasonably assumed that refusal to deal and imposing unreasonable trading conditions may be the UEL's main focus, although other types of behaviour will not be ignored based on the Chinese authority's enforcement record.

Article 17 of the Anti-monopoly Law provides a non-exhaustive list of six types of behaviour that are typically regarded as abuse of market dominance, including:

  • selling commodities at an unfairly high price or purchasing commodities at an unfairly low price;
  • selling commodities at below-cost price without any justifiable causes;
  • refusing to deal with a trading party without any justifiable causes;
  • restricting a trading party so that it must conduct deals exclusively with the entity in question or with the designated business operators without any justifiable causes;
  • implementing tie-in sales or imposing other unreasonable trading conditions at the time of trading without any justifiable causes; and
  • applying discriminatory treatment on trading prices or other trading conditions to trading parties with equal standing without any justifiable causes.

Therefore, based on the current information released by the government, the premise for whether a foreign entity will be added to the UEL is similar to the Anti-monopoly Law's approach to the abuse of market dominance. Thus, it is useful to consider what might be targeted by the UEL based on the Anti-monopoly Law.

Potential conduct targeted by UEL and Anti-monopoly Law

According to the Anti-monopoly Law and the relevant supplementary regulations, there are four things to consider when deciding whether an entity's undertaking abuses its dominant position in the relevant market – these are whether:

  • the undertaking possesses a dominant position in the relevant market;
  • the undertaking commits any abusive conduct;
  • there is any justifiable reason for such conduct; and
  • the abusive conduct has the effect of eliminating and restricting competition in the relevant market.

Dominant market position
Article 19(1) of the Anti-monopoly Law provides that the market share could be an index for assessing market dominance.

Where the market share of an undertaking is less than the prescribed amount, other comprehensive factors should be considered when determining the dominant position – for example:

  • the competitive landscape in the relevant market;
  • the undertaking's ability to control sales or raw material procurement in the market;
  • the financial and technical conditions of the undertaking;
  • the dependence of other market players on trade with the undertaking;
  • market entry barriers; and
  • other related factors.

Abusive conduct
Refusal to deal
In general, an undertaking with market dominance is forbidden from:

  • delaying or cutting off existing transactions;
  • refusing to enter into new transactions with a trading party; or
  • setting restrictive conditions to make it difficult for the trading party to trade with the company, without justifiable reasons.

Assuming that a US company ceases to supply, cooperate with or refuse to negotiate new transactions with a Chinese company, it might be regarded as 'refusal to deal' under Article 17 of the Anti-monopoly Law by the Chinese antitrust authority.

Imposing unreasonable trading conditions
Another antitrust risk for a foreign company that cuts off trade would be 'imposing unreasonable trading conditions' under Article 17 of the Anti-monopoly Law if the entity requests its distributors not to supply products to or cease cooperation with a specific Chinese company. In China, a company with market dominance is not allowed to impose unreasonable trade conditions, including:

  • unreasonable restrictions on sales areas, sales customers and after-sales services; and
  • additional transaction conditions that are unrelated to the subject matter of the transaction and without justification.

Even if the distributor voluntarily commits to cut off the supply, in practice this could be interpreted as a result of a foreign entity's market dominance.

Justifiable reasons
According to the Anti-monopoly Law and relevant supplementary regulations, the 'justifiable reasons' that China's antitrust and competition authority will consider in the case of abuse of market dominance include whether the relevant acts:

  • must be taken for the purpose of regular business activities and benefits;
  • can benefit the trading parties or consumers;
  • have a positive influence on the business development, future investment and innovation of the undertaking;
  • have a positive influence on operational efficiency, social and public interests and economic development; and
  • might exclude or severely restrict existing or potential competition in the relevant market.

According to these provisions, a US company could, for example, defend itself by stating that it must abide by its national laws and regulations to cease the supply and also its regular business activities. However, the chance of success of this defence remains unclear in China for now. In fact, there are varying opinions on this international comity issue across different jurisdictions. For instance, on one hand, the comitas gentium principle of international law raised by Ulrik Huber requires mutual recognition of legislative, executive and judicial acts among different political entities. On the other hand, in Animal Science Products, Inc v Hebei Welcome Pharmaceutical Co, Ltd, the Eastern District of New York considered that the Chinese law relied on by the defendants did not compel their illegal conduct, while later Judge Hall upheld that the Chinese government deserved the same respect and treatment that the United States would expect to receive in comparable matters before a foreign court.

Notably, the antitrust authority has discretion in determining whether to accept the proposed justifiable reasons.

Weighing of competitive effects – rule of reason
The rule of reason is applied to assess abuse of market dominance in China (ie, weighing the anti-competitive effects against the economic efficiencies). The analysis of competitive effects relies on various factors according to China's laws and regulations, such as considering:

  • the competition landscape in the relevant market;
  • the number and differentiation of competitors;
  • the degree of concentration of the relevant market;
  • the undertaking's ability to control the market;
  • any entry barriers for other potential players;
  • whether economic efficiencies are created;
  • the dependence of other market players on the undertaking; and
  • the foreclosure effect triggered by the abusive conduct.

On 29 April 2019 the local branch of the State Administration for Market Regulation (SAMR) imposed an administrative penalty on Eastman for its abuse of market dominance. The SAMR decided to impose the penalty by analysing the damages that the abuse of dominance caused on the market, and emphasised that the anti-competitive effects overwhelmed the economic efficiency in the case.

In summary, based on the objective and legislative purpose of laws and regulations and based on the relevant precedents, it is necessary to analyse whether the abusive conduct eliminates and restricts competition in the relevant market, and to further evaluate the balance of anti-competitive effects and pro-competitive effects. Indeed, although this is a statutory obligation on the SAMR's shoulders, the reality may not be that straightforward. Aside from the competition concerns, other factors may also influence any potential investigation, such as:

  • national security, including:
    • economic security;
    • science and technology security;
    • information and resource security; and
    • public interests; and
  • the legitimate interests of Chinese enterprises and their protection against major risks for example:
    • cutting off supply or blockades;
    • fair and equitable international economic orders; and
    • the multilateral trading rules to protect the security and stability of the global industrial chain.

These considerations are broad, potentially leaving any justifiable reasons a drop in the ocean during the balance test.

Comment

Some might assume that China announced the UEL in response to the US Entity List. While specific provisions have not been established, related foreign companies should be concerned, especially when the end of the trade friction still seems far away. The enforcement and implementation of the UEL as well as its legal liabilities are expected to be somewhat comparable to the measures against Huawei and its affiliates by the US government. Nevertheless, it is anticipated that the UEL will rely heavily on the Anti-monopoly Law, especially in relation to foreign entities with a noticeable market presence in China. While no SAMR officials have made public statements on this, the competition authority seems to have little reason not to stand by MOFCOM's side, and the Anti-monopoly Law should be considered and promoted together with the UEL.

For further information on this topic please contact Yang Zhan at AnJie Law Firm by telephone (+86 10 8567 5988) or email ([email protected]). The AnJie Law Firm website can be accessed at www.anjielaw.com.‚Äč