On September 22, 2008, the EU-China Trade Project, a project launched in 2004 by the European Commission and the PRC Ministry of Commerce (MOFCOM) to bring EU-China trade relations closer, organized the EU-China Workshop on Anti-Price Monopoly1 in China together with the China Price Association (CPA). The workshop was intended to support the Department of Pricing under the PRC National Development and Reform Commission (NDRC) in its efforts to draft and enforce price monopoly related laws and regulations. European antitrust experts, officials from NDRC, and scholars from Chinese academic institutions and universities attended the workshop to discuss issues associated with price monopoly. Even though it is some time after the workshop, it is a useful resource in understanding the Rules on Anti-Price Related Monopoly under drafting by NDRC. In this edition of the China Update, we will brief you on the highlights of the workshop and its implications for antitrust law enforcement in China.
Brief Background of China’s Anti-Monopoly Law
Under China’s Anti-Monopoly Law (AML), which entered into force on August 1, 2008, the antimonopoly enforcement authorities designated by the State Council (AMEA) govern monopolistic conduct. According to the Provisions on Major Responsibilities, Internal Organizations and Personnel for MOFCOM, NDRC, and the State Administration of Industry and Commerce (SAIC) issued by the State Council, the AMEA’s structure involves a three-way split of authority among MOFCOM, NDRC, and SAIC, with NDRC overseeing price-monopoly related issues.
- Introduction to the Workshop
Prior to the workshop, the CPA submitted to each European expert in the workshop a list of questions regarding European anti-price monopoly legislation and practice. The list consisted of 17 questions, which were divided into four categories: (1 ) the illegal per se rule and rule of reason under European competition law; (2) the definition and determination of price monopoly conduct under European law; (3) the different types of entities the EU has generally found to be participating in price monopoly conduct; and (4) solicitation of comments on the anti-price monopoly provisions under the AML. In addition, the CPA requested comments on, and expectations for the AML, from these European experts.
The European experts focused the discussion on Article 81 of the Treaty Establishing the European Community (Article 81 EC). They addressed the CPA’s questions on the illegal per se rule and rule of reason. According to one expert, EC competition law does not explicitly stipulate the illegal per se rule, but Article 81 EC outlines several examples that are considered to eliminate or restrict competition, which coincide with the illegal per se rule under American antitrust law. These examples include (1) the fixing of prices or trade conditions; (2) the restriction of production, markets and development; (3) market allocation; (4) the application of dissimilar trading conditions to equivalent transactions; and (5) certain tying contracts. These examples are widely regarded as stringent restrictions in practice and are normally unlikely to be exempt by Article 81(3) EC. In this sense, EU anti-monopoly law and American antitrust law share a similar characteristic.
The experts also introduced the leniency and settlement mechanism adopted in EC anti-monopoly law. They believe that the leniency policy has proven to be one of the most effective tools of detection and investigation used to combat cartels. The leniency policy has a strong deterrent effect on the formation of cartels and dismantles the operation of existing cartels, because it seeds distrust and suspicion among cartel members. The experts also discussed the criteria for determining price-fixing agreements and tacit collusions. They believe that Article 81 EC prohibits all anticompetitive agreements among companies, anticompetitive decisions by trade unions, and concerted anticompetitive practices. Enforcement authorities must attach importance to substance rather than form in this regard. Although companies may show a higher level of consensus in an agreement than in a concerted practice, they are all anticompetitive in nature and should not be differentiated in the application of antimonopoly rules.
Additionally, the European experts also referenced other legislation,2 influential EU cases,3 and the fast track procedure of the EU competition regime.
- Comments on the Anti-Price Monopoly Provisions under the AML
Generally, all the European experts present at the workshop believed that the AML marks a milestone in Chinese antitrust history. They also believed that China has been making great progress in developing the AML by taking advantage of the antitrust experience from the U.S. and EU. In the section of comments and suggestions regarding the anti-price monopoly provisions under the AML, the European experts concentrated their comments on Articles 13,4 14,5 and 156 of the AML. They expressed similar opinions with respect to cartels and relevant exemptions under these articles.
- Hardcore Cartels
According to almost all the European experts, Article 13 and 14 of the AML list concrete prohibitions on horizontal and vertical agreements similar to those adopted in U.S. and EU antitrust laws. Articles 13(1) to 13(3) particularly resemble European legislation in that they forbid hardcore cartels. However, the Europeans had some concerns regarding the exception provision for these prohibitions which are set out in Article 15 of the AML.
The wording of Article 15 suggests that the exemption provision may be applicable to all monopolistic agreements set out in Article 13, including the hardcore cartels prohibited in Article 13(1) to 13(3). The EU experts said that there are no means for exempting hardcore cartels under EU competition law, because such cartels aim to restrict competition and harm the economy as a whole, consequently they have no beneficial effect. Although Article 81 EC does not explicitly provide that hardcore cartels can never be exempt, in practice, hardcore cartels such as price fixing cartels would never satisfy the conditions for an exception set forth in Article 81(3) EC. Thus, it has been a general rule of EU antimonopoly implementation for decades that the exemption set forth in Article 81(3) is not applicable to hardcore cartels. As a result, the experts strongly recommended that China specifically exclude hardcore cartels from the exemption under Article 15 of the AML.
- Broad Exemption
Article 15 of the AML provides companies with six specific exemptions from the prohibitions contained in Articles 13 and 14, as well as a catch-all clause leaving great discretion to the Chinese government to determine what other types of agreements can be exempt. The experts emphasized several issues concerning this article.
Generally, the experts welcomed Article 15(1) and 15(2), which deal with innovation, because they felt these two exemptions would enhance market efficiency. Specifically, the experts suggested Article 15(1) may result in developments and benefits by fostering efficient competition. They also felt that Article 15(2) is much more detailed than the European regulations, and that this detail will be very helpful to Chinese business operators unfamiliar with the AML.
However, the experts believed that other exemptions in Article 15 broaden the grounds for exemption beyond traditional competition law. Specifically, Article 15(3) appears to provide a defense to a group of small and medium-sized enterprises (SMEs) forming a cartel if such defense allows them to better compete against a larger corporation. The experts suggested that it is neither necessary nor desirable to apply a special regime to SMEs. While agreements between SMEs usually will not be prohibited because they are highly unlikely to eliminate or restrict competition, hardcore cartels never bring efficient benefits and contradict the fundamentals of a free market economy, regardless if composed of large companies or SMEs. Therefore, if SMEs do actually engage in hardcore cartels, they also must be prohibited. In Europe, such cartel practices would only be legal if the parties establish an agreement meeting all requirements for an exception, which, in the case of a genuine cartel, is unlikely.
The exemption set forth by Article 15(5) relating to difficulties during recessions to some extent resembles the crisis cartel exemption in EU competition law. But the EU exception is only applicable to industries in chronic decline, and such exception has never been applied in the case of cyclical problems due to recession. Moreover, EU competition law generally assumes that the market will solve the problem itself, so it is wiser to allow the least efficient companies to exit the market or be acquired by more efficient companies. Although not part of legislators’ initial intent when allowing recession exemptions, the experts mentioned that companies may take advantage of such exemptions by usually forming price-fixing cartels and excuse such practice as a way of dealing with recession.
The experts deemed the exemption granted to agreements under Article 15(6), protecting legitimate interests during international trade and foreign economic cooperation, as unnecessary. Export cartels are unlikely to cause anticompetitive effects on the Chinese market and thus would not be subject to prohibition. Meanwhile, exempting export cartels under Chinese law would not relieve them from being caught by foreign competition law outside of China. Export cartels will probably constitute import cartels in other jurisdictions and thus violate competition laws elsewhere. In addition, such exemption may be incompatible with China’s commitments to international trade.
According to the experts, the catch-all provision, Article 15(7), may make it difficult for companies that want to act in compliance with the AML to evaluate and predict what behavior may be illegal under the AML. The experts believed that prohibitive or repressive laws ought to be as clear as possible to avoid forcing a referral to other laws or regulations.
In sum, the experts believed that the application of a rule of reason with a potentially wide exemption has the potential to undermine the certainty and therefore the deterrent effect of a law prohibiting cartel conduct.
- Other Comments and Suggestions
According to one expert, it is extremely important to designate an effective and credible enforcement authority. To be effective and credible, the enforcement authority must at first be independent. This primarily means that other government agencies should not intervene in the decision making process of such authority. In addition, the enforcement authority must be impartial in implementing the AML, treating all undertakings similarly. The experts also believed that the enforcement authority must ensure the transparency of competition law and policy, the predictability of implementation, the fairness of procedure, the capability to protect confidential information, and the capability to decide quickly.
The AML introduces a leniency mechanism for the first time,7 and the experts provided several suggestions for China to adopt detailed rules for this mechanism. The experts suggested that the mechanism should be supported by guidelines specifying the concrete circumstances, and procedures and requirements, for undertakings to benefit from such mechanism.
One expert also suggested that to further clarify to the public what types of agreements can be exempt from general prohibition, the Chinese enforcement authority should consider introducing “block exemptions” similar to those under EU competition law. Such “block exemptions” would explicitly exempt certain categories of agreements from prohibition provided that certain conditions are satisfied. Examples of the “block exemptions” under the EU competition law include specialization/production agreements, R&D agreements, technology transfer agreements, and certain other vertical agreements (such as exclusive distribution agreements and exclusive purchase agreements where certain conditions are satisfied).
To conclude, this workshop reflects that the Chinese antitrust authority for price monopoly is willing to learn about the EU’s experience while preparing more detailed regulations to implement the AML. Currently, NDRC is drafting the Rules on Anti-Price Related Monopoly and the rules are expected to be officially adopted and issued soon. Since the AML contains quite a number of elements similar to US and EU antitrust law, specific regulations resembling US and EU antitrust law are expected to arise.