A flurry of coordinated rule making activities at the end of 2010 signals China’s entering into a new phase in market competition regulation. Two of the enforcement agencies, the National Development and Reform Commission (NDRC) and the State Administration of Industry and Commerce (SAIC), in the last week of 2010 released a total of five implementing regulations for China’s Anti-Monopoly Law (AML). While this marked the completion of the agency rule making process, training for local enforcement staff and probably more enforcement actions are likely to follow in the years ahead. The AML and the new implementing regulations authorize hefty monetary penalties for certain violations, and judicial restraints on competitors’ standing to bring civil actions has yet to be established. It is thus imperative for companies with market power to review their internal control program to ensure compliance with these new regulations. This article discusses only the SAIC regulations on monopolistic agreements, abuse of dominant market position and the leniency program, but not the regulations on administrative monopoly. Detailed discussion of the NDRC’s regulations on pricing behavior can be found in another article of this newsletter.
China passed its first comprehensive competition law, the AML, in August 2007. Three administrative agencies were delegated with the authority to enforce the AML. The Ministry of Commerce (MOFCOM) is responsible for merger review2. The NDRC, China’s price regulator, is responsible for policing restrictive pricing behavior. Monopolistic conduct, not involving pricing, falls under the jurisdiction of the SAIC.
Drafting of the implementing regulations started immediately after the AML was enacted. During the process, draft regulations were released by the NDRC and SAIC, respectively, to seek public comments. Both agencies also consulted with foreign antitrust enforcement agencies and business communities. As a result, the final regulations resemble in many aspects the rules found in jurisdictions with a mature competition regulatory regime.
A total of five implementing regulations were issued at the end of 2010; all went into force on February 11, 2011. The SAIC promulgated three regulations to address the three areas under its jurisdiction: the Regulations on Prohibiting Monopolistic Agreements (Regulations on Monopolistic Agreements), the Regulations on Prohibiting Abuse of Market Dominance (Regulations on Abuse of Market Dominance), and the Regulations on Abuse of Administrative Power to Eliminate or Restrain Competition (Regulation on Administrative Monopoly). The NDRC released two regulations, the Regulations on Monopolistic Pricing Behavior and the Regulations on Price Monopoly Enforcement Procedure, to address, respectively, the substantive and procedural aspects of its enforcement action.
Prohibition of Monopolistic Agreements
The AML generally invalidates monopolistic agreements that unreasonably restrain competition in the market, including agreements both between competitors (Horizontal Monopolistic Agreements, Article 13) and between up-stream and down-stream market participants (Vertical Monopolistic Agreements, Article 14). In addition, the AML prohibits trade associations from facilitating formation of monopolistic arrangements among their members. (Article 16).
For horizontal agreements, the AML specifically invalidates five types of agreements: (i) price fixing; (ii) restraining production or sales, (iii) allocating sales or raw material purchasing markets; (iv) restricting acquisition of new technologies or equipment, or development of new technologies and products; and (v) group boycotting. This list is not intended to be exhaustive. The AML explicitly delegates the enforcement agencies the authority to identify additional horizontal monopolistic agreements (Article 14.6). The SAIC regulations do not seek to expand this list3. On vertical monopolistic agreements, the AML explicitly invalidated only two types of agreements: resale price fixing and minimum resale price maintenance. These two types of vertical monopolistic agreements all fall under the NDRC’s jurisdiction. The SAIC does not address vertical agreements in its regulations, instead only reiterating that it has the authority to invalidate any monopolistic agreements not expressly identified in the regulations that unreasonably restrain competition in the market.
Lastly, under the AML and the SAIC’s implementing regulations, a monopolistic agreement is invalid only when its restraint on market competition is unreasonable. No category of monopolistic agreements has been identified as without redeeming virtue. Thus, the rule of reason will be applied in all enforcement actions and court cases.
Proof of the Existence of an Agreement
The AML is explicit that the term monopolistic agreement refers to agreements, decisions and other concerted conduct. The SAIC further clarified, rather importantly, that such an agreement or a decision could be oral. The term other concerted actions refers to situations where the participants actually engaged in concerted actions, without explicit oral or written agreements or decisions. In deciding whether there existed a concerted action, the enforcement authorities are directed to consider the following: whether there was a paralleled market conduct, whether the participants could establish a reasonable explanation for the paralleled conduct and whether the participants engaged in exchange of information or other communications. In addition, the enforcement agents are also to consider the structure and the competition conditions in the market, as well as changes in the market and the industry.
Monopolistic Arrangements through Trade Associations
The SAIC Regulations on Monopolistic Agreements also prohibit trade associations from facilitating the reaching of arrangements among the members to restrict competition. Specifically, trade associations may not promulgate and issue articles of association, internal rules, resolutions, notices and standards that contain contents eliminating or restraining competition; and may not assemble, organize or promote the participants in the industry to reach agreements, resolutions, meeting minutes and memos with contents that eliminate or restrain market competition.
The SAIC Leniency Program
To discover and prove the existence of a cartel has been a challenge in many jurisdictions. Drawing upon experience from its foreign counterparts, the SAIC also establishes a leniency program in the Regulations on Monopolistic Agreements to encourage whistle blowing. While the NDRC’s regulations also contain a leniency program, there are significant differences between the two programs. Most importantly, complete exemption from administrative sanction for the first qualified whistleblower is mandatory under the SAIC leniency program; in comparison, such exemption is at the discretion of the NDRC. Also, the two agencies appear to require different levels of cooperation for a whistleblower to qualify for exemption. Though both agencies require a whistleblower to report the cartel and to provide key evidence to the enforcement agency, only the SAIC requires a whistleblower to cooperate fully and proactively in the investigation.
Prohibition of Abuse of Market Dominance
Participants with market dominance are subject to close scrutiny under the AML for exclusionary or exploratory abusive conduct. The focus of the scrutiny is on identifying market dominance and abusive conduct. Market dominance status refers to a participant’s position to control product price and quantity in the market, or other transaction conditions; or the position to impede or influence [the decisions of] other undertakings to enter the market (Article 17). Though a participant’s market share is normally the most important factor in finding market dominance status, the AML specifically listed some other factors the enforcement agencies need to consider4. The SAIC clarified these factors in its regulations. For example, in addition to market share, the SAIC will consider factors such as product differentiation level, entry by potential market participants and financial and technological position of the participant. Finally, under both the AML and the SAIC regulations, market dominance is presumed when a participant’s market share is big enough5.
The SAIC also undertakes in its regulations to clarify four of the seven types of abusive conduct identified by the AML: unilateral refusal to deal (Article 4), exclusive dealing (Article 5), tying and leveraging (Article 6), and discriminative dealing (Article 7). It is worth noting that the provision against discriminative dealing reaches far beyond price discrimination. Indeed, discrimination with respect to essentially any aspects of a commercial deal without good cause could potentially constitute abuse of market dominance, such as differentiated treatment with regard to quality, type, and quality of a product; quantity and other discount terms; payment terms and payment method; contents and duration of product warranty; contents and duration of after-sale service; supply of parts and components; and after-sale technical support and other after-sale services.
Under the AML, otherwise abusive conduct is not invalid if good cause can be shown. In this regard, the SAIC Regulations on Abuse of Market Dominance directs the enforcement agencies to consider if the conduct is deemed a common business conduct under the circumstances or is for the participant’s normal business benefits, and to consider the impact on economic efficiency, public interest, and overall economic development.