China’s National Development and Reform Council (NDRC) has released draft rules explaining how the various price-related ‘conduct rules’ in China’s Anti-Monopoly Law (AML) will be applied in practice. The draft Rules on Anti-Price Monopoly (“Draft Price Rules”) were published on 12 August 2009 for public comment, with a consultation phase in relation to the draft scheduled to end on 6 September 2009.

The NDRC is one of the two regulatory bodies responsible for enforcing the AML prohibitions on monopoly agreements and abuse of a dominant market position, and has primary responsibility regarding the aspects of these prohibitions that touch directly on pricing issues - such as price-fixing, resale price maintenance and price-related abuses by dominant firms. China’s State Administration of Industry & Commerce (SAIC) is responsible for enforcing most (if not all) other aspects of the two prohibitions.

This is the first time the NDRC has engaged in public consultation regarding enforcement of the AML. It previously released two limited exposure drafts of the Draft Price Rules to several law firms and antitrust experts for comment in December 2008 and June 2009, and the Draft Price Rules have undergone substantial revision over the past 9 months following significant criticism of the early versions.

The Draft Price Rules comprise 24 Articles, many of which repeat information already contained in the text of the AML. However, several Articles offer significant new guidance. An outline of some of the important new details provided in the draft, as well as a summary of key questions that remain unanswered, is provided below.  

  • PRICE CARTELS

The AML prohibits competitors from colluding to fix prices or limit sales volumes (unless a relevant exception applies), and the Draft Price Rules elaborate on these cartel prohibitions by providing examples of the different forms such conduct may take. For example, the draft confirms that the price-fixing prohibition extends to agreements between competitors on the use of a standard formula to calculate prices, or on the extent to which the competitors may implement discounts or price increases.

The Draft Price Rules also confirm that unlawful cartels may be deemed to arise not only from written or oral agreements, but also on the basis of tacit understandings and coordination. In particular, the draft suggests that competing business operators may be regarded as coordinating their pricing if there is ‘consistency’ in their pricing activities (such as if changes to the pricing offered by the competitors fluctuates at times and/or by levels that are the same or similar) and they have engaged in some prior communication.

Although the draft expressly recognises there may be a legitimate justification for consistent pricing behaviour amongst competitors, and that “market structure and market change” should be considered, a literal reading of the rules suggests a presumption of unlawfulness may arise where such parallel pricing behaviour is identified, and the competitors involved will bear the onus of rebutting the presumption of illegality in those cases.

It is also noteworthy that agreements between competitors to restrict production output or sales volumes is listed as one of the AML violations in respect of which the NDRC has enforcement responsibility. This seems at odds with prior indications from the Chinese authorities that the NDRC would only have authority over behaviour directly relating to price. If any behaviour that indirectly affects price and constitutes a violation of the AML can be handled by the NDRC, then its AML-related responsibilities may significantly overlap with those already entrusted to the SAIC.

  • RESALE PRICE MAINTENANCE

Article 14 of the AML deals with the practice commonly referred to as resale price maintenance, and prohibits a business operator from stipulating a specific or minimum resale price for goods provided to downstream parties such as distributors or retailers (unless a relevant exception applies).

Interestingly, Article 12 of the AML defines the term “products” as including both products and services, and thus it appears prohibited resale price maintenance activities under the AML can include fixing the resale price - or a minimum resale price - in relation to services. In this context, there remains some uncertainty regarding the circumstances in which a “service” may be deemed as re-supplied for the purpose of applying the prohibition.

The Draft Price Rules do not address this issue, as the relevant Article dealing with resale price maintenance effectively just restates the relevant AML prohibition, and refers generically to the concept of ‘resale’ without any reference to either products or services.

  • PREDATORY PRICING

Article 13 of the Draft Price Rules deals with below-cost or ‘predatory’ pricing by dominant firms, which will be considered an unlawful abuse of a dominant market position unless it occurs with justification.

Unfortunately, the draft does not provide any guidance on appropriate measures of cost. The draft is also silent as to whether it is necessary to prove that the party engaging in the below-cost pricing has a reasonable prospect of recoupment before such pricing may be deemed unlawful, which is generally required to prove unlawful ‘predatory’ pricing in jurisdictions such as the United States of America.

Usefully, the draft does provide a list of situations in which below-cost pricing will be considered to be justified, such as where fresh, live, past-expiry or overstocked products are being sold, short-term promotions are being run to facilitate entry by a new market player, or the below-cost pricing was instituted to match competitor prices. Notably, a justification of “mistaken business decision” that was mentioned in previous drafts of the relevant rules has now been omitted.

  • PRICING THAT IS UNFAIRLY HIGH OR UNFAIRLY LOW

Article 17 of the AML prohibits a business operator with a dominant market position from abusing that position by engaging in pricing that is ‘unfairly high’ or ‘unfairly low’, in circumstances where the transaction counterpart is not able to acquire the same product or service from other business operators at a reasonable price.

Although a similar prohibition exists in Europe, there has long been concerns about how the prohibition may be applied in China. In particular, the NDRC’s traditional role as a price regulator in China and relative lack of experience in applying competition law prohibitions have fuelled concerns that the prohibition may be applied in an unduly interventionist manner.

Earlier versions of the Draft Price Rules fuelled these concerns, as they stipulated that pricing would be deemed to be unfairly high if it was 20% higher than the maximum price of “like commodities” sold by other undertakings, or - where there was no clear equivalent for comparison - where the profit margin was above 20%. A similar formula was used regarding “unfairly low” prices.

This formulaic approach to the prohibition was roundly criticised, and was seen as indicative of the gap between the instincts of some of NDRC officials on these kinds of prohibitions and current best practices.

In this context, the new version of the Draft Price Rules will be welcomed by many in the business sector, as they provide for assessment of the fairness of pricing to be determined by reference to a range of factors rather than any set formula. For example, in relation to unfairly high pricing, the factors to be considered include whether :

  1. the sale price is obviously higher than the cost;
  2. the sale price was raised by an unusually high margin, by reference to any change in costs.

Unfortunately, however, while these may be relevant considerations in the context of trying to identify pricing that, to use the EU perspective, has no reasonable relation to the economic value of the product or service supplied, there is no guidance on how cost is measured. This may raise concerns for businesses whose products are the result of substantial research and development.

A further factor mentioned in the draft is consideration of whether the selling price is substantially higher than that for the same product sold by other business operators. Some commentators have suggested that this type of comparison is of limited value, and may actually encourage companies not to compete on price.

  • DISGUISED REFUSAL TO DEAL

Article 17(iii) of the AML prohibits a dominant business operator from refusing to trade with prospective trading partners without justification.

In most cases, suspected or alleged violations of this prohibition are likely to be dealt with by the SAIC, however the Draft Price Rules confirm that the NDRC will have enforcement responsibility when the relevant refusal is disguised in the form of an offer of an ‘overly high price’ (by dominant suppliers) or an ‘overly low price’ (by dominant buyers, such as monopsonists).

The draft also provides that an ‘overly high’ or ‘overly low’ price will be deemed to exist where the price offered would lead to no profit after the relevant transaction counterpart’s normal production and sale.

This aspect of the draft raises significant concerns, as it does not appear to take into account the level of efficiency of the relevant transaction counterpart, who may suffer a loss as a result of its sale activities due to its own poor business model or operations and not (for example) the price of inputs offered by a dominant supplier. However, it is possible that this consideration will be taken into account when a determination is made of whether the relevant ‘overly high’ or ‘overly low’ price was provided with justification.

  • PRICE DISCRIMINATION

Article 15 of the Draft Price Rules deals with the concept of price discrimination by a dominant undertaking. Specifically, it provides that a business operator who enjoys a dominant market position may not give different treatment in respect of transaction prices to transaction counterparts for which “the same conditions” apply.

Helpfully, the draft does set out a list of ‘justifications’ that, if established in relation to a particular case of potential price discrimination, will mean the prohibition is not breached. Those justifications include:

  • where the price difference cannot cause substantial adverse impact on the market competitiveness of the relevant transaction counterpart; and
  • where the relevant transaction counterpart can buy the same product or a substitute product at a reasonable price from other business operators.

The draft also explains when “the same conditions” will be deemed to apply to transaction counterparts. According to Article 15, this will apply when the transaction terms applicable to those counterparts are (other than in relation to price) the same or similar - with particular regard to matters like the relevant products at issue (and their type, quality and grade), the transaction method, quantities concerned, payment settlement and after-sales service.

What this mean is that parties dealing with price discrimination claims will need to focus on demonstrating that differences in these matters justified different prices offered to otherwise similar transaction counterparts.

Further Matters Addressed

The Draft Price Rules clearly state that the NDRC may identify other forms of behaviour not expressly mentioned in the draft or the text of the AML as constituting unlawful ‘price monopoly activities’. Similar wording is included in analogous draft rules that the SAIC has published in relation to the non-price related prohibitions it is charged with enforcing, and it is not yet clear whether the NDRC and SAIC will need to make a prior announcement of other unlawful forms of behaviour that may be targeted in their enforcement actions.

The Draft Price Rule also include Articles:

  • expanding on the AML prohibitions regarding anti-competitive price-related conduct by business associations (Articles 9, 10 & 24) and by government organisations and authorities (Articles 3, 21-23 & 25); and
  • confirming that the relevant prohibitions discussed in the draft apply to monopolistic pricing behaviour outside Mainland China that produces an exclusionary or restrictive impact on market competition in Mainland China.

It also remains unclear the extent to which the Draft Price Rules will apply to state-owned enterprises, and business operators whose pricing is already wholly or largely regulated by the NDRC

Business operators who violate the AML conduct rules face fines of up to 10% of business turnover, along with confiscation of illegal gains.

Conclusions and Next Steps

Release of the Draft Price Rules brings China another step closer to more active enforcement of the AML ‘conduct rules’ - which to date have remained largely dormant due to the SAIC and NDRC’s focus on ensuring appropriate guidance on the rules is available before violations are penalised.

It is reported that China’s State Council has issued an imminent deadline for finalisation of the Draft Price Rules and the SAIC’s separate ‘conduct rules’ guidance documents, and accordingly it may not be long before these enforcement authorities begin formally investigating some of the thousands of AML-related complaints they have reportedly received.

This means time is running out for business operators to ensure they have implemented appropriate compliance programs and conducted business reviews to minimise the risk of an AML violation. In particular, the Draft Price Rules show that business operators who meet the presumptive rules on market dominance will need to exercise considerable care when setting or discussing pricing with customers, suppliers and rivals.

As mentioned, the Draft Price Rules will be open to public consultation until 6 September.