Preface

The Anti-Monopoly Bureau of the National Development and Reform Commission (the “NDRC”) has successively investigated and penalized several price monopoly cases during its law enforcement since the beginning of this year, including the cases concerning South Korea-based Samsung and other LCD manufacturers, Moutai & Wuliangye, six foreign milk powder enterprises including Biostime, and the Shanghai Gold & Jewelry Trade Association and relevant gold retailers. The NDRC has strengthened the intensity and frequency of law enforcement, and enhanced the supervision over monopoly and protection on free price competition. Since the NDRC expressed that the anti-monopoly investigation target will be focused on areas that are closely related to people's livelihood, the public aviation tariff issue has attracted more and more attention. China's public air transportation industry is still in the process of reform and marketization, and the tariff issue has also the transitional features appearing in the process of limited marketization of change from strict government-regulated tariff to government guidance-based tariff. The boundaries and scales between administrative directives and market mechanisms are relatively vague. Therefore, under the trend to strengthen anti-monopoly supervision, comprehending relevant laws, regulations and policies as well as the law enforcement of supervision authorities is critically important for business operators, i.e. aviation enterprises, to regulate their operations. Focusing on the price concerted acts and combining with the introduction to relevant cases, this article will provide research and analysis on relevant laws and regulations from the business operators' perspective.

In January 2013, the NDRC imposed penalties with the huge amount due to price-related violations, where six international large-scale LCD panel manufacturers (including Samsung) were punished with RMB 353 million. This is the first time that China punishes overseas enterprises for price monopoly acts.

In February 2013, a penalty of RMB 449 million was imposed by the NDRC to Moutai and Wuliangye, two leading enterprises in the liquor production industry, due to price monopoly reasons.

In August 2013, six milk powder enterprises including Biostime, Dumex, Mead Johnson, Wyeth, Abbotts and Friesland Campina (Frisocare) were punished by the NDRC for an amount of RMB 668.73 million for restricting the lowest resale price against their downstream resellers.

In August 2013, the Shanghai Gold & Jewelry Trade Association was alleged to manipulate prices of gold and platinum jewelry by organizing gold retailers including Lao Feng Xiang, Lao Miao, First Asia (Ya Yi), Cheng Huang Jewellery and Tian Bao Long Feng to price their gold and platinum jewelry within the given floating range, which prejudiced the legitimate rights and interests of other operators and consumers. The Shanghai Municipal Price Bureau imposed a fine of an amount of RMB 10,093,700 to the Shanghai Gold & Jewelry Trade Association as per the NDRC's requirements.

In August 2013, the NDRC was closely concerned about the price of imported and joint ventured automobiles. Luo Lei, vice secretary-general of the China Automobile Dealers Association, said that the NDRC is investigating whether the auto manufactures fixed the lowest retail price for Chinese retailers, and the Association is collecting all data relating to the price of imported automobiles for the NDRC. Although the NDRC expressed no comment on this news, it is common for it to launch an investigation into an industry suspected of monopoly or collect data from the industry associations as one of the anti-monopoly law enforcement authorities.

What is Price Monopoly?

Just for a moment, price monopoly became a hot topic widely discussed by the public, also one of the focal points discussed by the professionals and the media. In fact, it is not a new word. The NDRC enacted the Interim Provisions on Preventing Acts of Price Monopoly in accordance with the Price Law of the People’s Republic of China in 2003, clarifying that the acts of price monopoly shall mean business operators' acts of, by colluding with each other or by abusing the dominant position thereof in the market, manipulating the market-regulated price, which disrupts the normal production and business order, harms the legitimate rights and interests of other business operators and the consumers, or jeopardizes the social public interest. As the Anti-Monopoly Law came into effect on August 1, 2008, the provisions governing the acts of price monopoly were raised from departmental rules to laws. The Anti-Monopoly Law explicitly prohibits business operators with competing relations from entering into monopoly agreements to fix or change prices of commodities, prohibits business operators from entering into monopoly agreements with their trading counterparts to fix the price or restrict the lowest price of commodities for resale to a third party, prohibits business operators with dominant market position to engage in activities including selling commodities at unfairly high prices or purchasing commodities at unfairly low prices, selling commodities at below-cost prices without a valid reason, and implementing differential treatment for similar trading counterparts regarding the terms of transaction such as transaction price without a valid reason. In 2010, the NDRC, as the competent authority under the State Council and in charge of anti-price monopoly enforcement, enacted the Provisions on Anti-Price Monopoly and the Regulations on Procedures for Enforcement of Administrative Law on Anti-Price Monopoly in accordance with the Anti-Monopoly Law, which provided the legal basis for the NDRC’s law enforcement against price monopoly.

Risks for Enterprises to Conduct Price Monopoly

During our internal compliance review and management for some multinational enterprises or leading enterprises in the industry, we noticed that the legal departments are very prudent about agreements, decisions or other concerted acts that will exclude and restrict price competitions, such as communication of intentions or business communications to exchange sensitive information, which is inevitable to conflict with the business departments’ pursuit of price and market interests. For instance, consider the aviation industry, as the market of domestic civil aviation transportation industry gradually opens up, the competitions of sizes, flights, prices and services among the three major domestic aviation enterprises (namely Air China, China Southern and China Eastern), foreign aviation enterprises and medium and small sized aviation companies are becoming more and more fierce, which created great challenges for the business model and management level of aviation enterprises. Therefore, it is the current development trend for aviation enterprises to carry out multi-faceted joint operations and collaborations on tariffs, capacity, sales and services. In most circumstances, to determine, maintain or change the tariff in a unified manner is the core of joint operation. The joint operation proposed by aviation enterprises is using the unified service standard, integrating the passenger services and coordinating products by means of collaboration on specific air routes or trans-regional cooperation, so as to increase efficiency, decrease costs and benefit from the consequent concerted effect. The multi-faceted joint operations and collaboration models, including price coordination, are necessary to achieve such efficiency and public interests.

However, from the perspective of the Anti-Monopoly Law, price coordination is suspected of being identified as monopoly agreement and has legal risks including arising investigations launched by anti-monopoly law enforcement authorities or being reported by others, as well as accompanied commercial and financial risks and uncertainty of air line joint operations caused by such investigations. For such concerns, we suggest that aviation enterprises, involving price monopoly collaboration models, file with the NDRC in an active manner in order to obtain exemptions from it.

What is Exemption?

The Anti-Monopoly Law has no explicit provisions regarding the “exemption” system for anti-monopoly agreements. Article 15 of the Anti-Monopoly Law provides that the provisions relating to anti-monopoly agreements shall not apply where a business operator proves that the agreement it has entered into falls under statutory circumstances, and that it will not severely restrict competition in the relevant market and will allow consumers to benefit from the interests arising therefrom. In addition, Article 21 of the Provisions on the Procedures for the Administrative Authorities for Industry and Commerce to Investigate Cases Concerning Monopoly Agreements and Abuses of Dominant Market Positions provides that where a business operator is able to prove that the agreement it has entered into is in compliance with the circumstance as stipulated in Article 15 of the Anti-Monopoly Law, the administrative authorities for industry and commerce may exempt him or her from penalties for relevant acts.

The Notice of the General Office of the National Development and Reform Commission and the General Affairs Department of the Civil Aviation Administration of China on the Establishment of Liaison Meeting Working Mechanism for Exemption Examination on Air Transportation Business Operators (Fa Gai Ban Jia Jian [2012] No. 520) provides that the NDRC shall be responsible for exemption application review for monopoly agreements reached by air transportation business operators, accepting the exemption application submitted by business operators and taxing relevant decisions.

Therefore, we believe that the parties to conduct price monopoly can file an exemption application to the NDRC in accordance with the above laws and documents.

Possibility of Exemption?

In accordance with Article 15 of the Anti-Monopoly Law, if a business operator is able to prove that the agreement it has entered into falls under any of the following circumstances, the provisions of Article 13 on prohibited monopoly agreements shall not apply:

  1. When the purpose is technological improvement or research and development of new products;
  2. When the purpose is to raise product quality, lower costs, improve efficiency, standardize product specifications and standards or implement division of labor based on specialization;
  3. When the purpose is to raise business efficiency of small and medium business operators and to strengthen the competitiveness of small and medium business operators;
  4. When the purpose is to fulfill public interest such as energy conservation, environmental protection and disaster relief, etc.;
  5. When the purpose is to alleviate serious drop in sale quantity or obvious over-production in times of recession;
  6. When the purpose is to protect the legitimate interests in foreign trade and economic cooperation; or
  7. Any other circumstances stipulated by the laws and the State Council.

Because of the particularity of air transportation services, we suggest that the aviation enterprises firstly consider explaining the importance and necessity of price coordination for joint operation and collaboration, the irreplaceability of the collaboration model in enhancing the quality of regularly scheduled air transportation services in the relevant market and promote seamless services and mutual benefit of airports; part of the driving forces for price coordination comes from the consistency of the varieties and quality of air transportation services provided by the parties with collaborative relationship, and there is no unreasonable discrimination or unfair or deceptive practices during collaboration. Secondly, the aviation enterprises need to analyze whether price monopoly will restrict competitions in the relevant market. Each affected city pair (departure city and destination city) shall be valued separately, including the market share of parties involved in the price monopoly agreements and the effect to enforce the agreements, scale economy and market entry, etc.

Besides satisfying the circumstances provided in Article 15 of the Anti-Monopoly Law, for item 1 to 5, the business operator must also prove that the agreement it has entered into will not severely restrict competition in the relevant market and that it will allow consumers to benefit from the interests arising therefrom. However, the Anti-Monopoly Law and relevant laws and regulations provide no specific instruction or explanation on how to decide whether consumers can benefit from the interests. Drawing lessons from the provisions and practical experiences of the Anti-monopoly Law in developed countries such as the EU and the US, the anti-monopoly exemption procedure requirements of China’s anti-monopoly law enforcement authorities are similar to the ones of the US[1]. Therefore, we suggest business operators referring to the main standards of “public interests” stipulated in the U.S.C. to make analysis. These standards include:

  1. The availability of a variety of adequate, economic, efficient, and low-priced services without unreasonable discrimination or unfair or deceptive practices.
  2. Place maximum reliance on competitive market forces and on actual and potential competition to provide the needed air transportation system, and to encourage efficient and well-managed air carriers to earn adequate profits and attract capital, considering any material differences between interstate air transportation and foreign air transportation.
  3. Develop and maintain a sound regulatory system that is responsive to the needs of the public and in which decisions are reached promptly to make it easier to adapt the air transportation system to the present and future needs of the commerce of the United States, the United States Postal Service and the national defense.
  4. Prevent unfair, deceptive, predatory or anticompetitive practices in air transportation.
  5. Avoid unreasonable industry concentration, excessive market domination, monopoly powers, and other conditions that would tend to allow at least one air carrier or foreign air carrier to unreasonably increase prices, reduce services or exclude competition in air transportation.
  6. Encourage, develop and maintain an air transportation system relying on actual and potential competition to provide efficiency, innovation and low prices, and to decide on the variety and quality of, and determine prices for air transportation services.
  7. Encourage the entry into the air transportation markets of new and existing air carriers and continue strengthening small air carriers to ensure a more effective and competitive airline industry.
  8. Strengthen the competitive position of air carriers to at least ensure equality with foreign air carriers, including the attainment of the opportunity for air carriers to maintain and increase their profitability in foreign air transportation.
  9. Ensure that consumers in all regions of the United States, including those in small communities and rural and remote areas, have access to affordable, regularly scheduled air service.

We are of the opinion that, if conducting transactions does enable consumers to benefit from the profits generated by such transactions, even if “price monopoly” arrangement exists, such arrangement might obtain exemption from the anti-monopoly law enforcement authorities. The “exemption system” is the result of mutual coordination between the value target of the Anti-monopoly Law and other economic and social targets, and also an exception for public interests.

Other Remedies That Can Be Considered

Besides filing an application and obtaining the exemption, we are of the opinion that aviation enterprises themselves shall actively perform their internal function for anti-monopoly risk prevention, be more prudent in exchange of sensitive business information such as resale price, costs and profits, guide the business departments to enhance their identification of anti-monopoly risks, avoid to suffer unnecessary anti-monopoly accusation or investigation, and actively report to the competent authority of the industry and anti-monopoly law enforcement authorities on a regular basis about their commercial progress procured during their transaction or collaboration, and on what extent would they realize their expected public interests.