On August 30, 2007, China adopted its first anti-monopoly law (“AML”) in an effort to continue the modernization of its economy through fostering competition and increasing efficiency. The AML is vast in scope. In general, it is intended to protect free competition and consumer rights, as well as allow for the healthy development of China’s socialist market economy. More specifically, the law is split into four broad sections covering: (1) monopoly agreements, (2) abuses of dominant market position, (3) anticompetitive mergers, and (4) abuses of administrative powers.
Though it is unquestionably a step in the right direction in terms of promoting a free market in China, the AML leaves open large gaps that must be filled by regulations to be adopted by the newly created Anti-Monopoly Enforcement Authority (“AMEA”) before the law goes into effect on August 1, 2008. Further, the law has drawn criticism based on its potential use as a weapon against foreign multinational corporations, its departure in some cases from international norms and the possibility that what elsewhere would be considered legitimate uses of intellectual property rights, the AML would consider to be abusive conduct. Developments in this area should be closely monitored by firms presently doing business in China, as well as those seeking to deal there, as the application of the AML has the potential either to make China a safer place to invest by strengthening competition or, conversely, to put obstacles in the way of those seeking to increase their presence in the Chinese marketplace.
Background and Scope of the AML
The AML is the culmination of a number of pressures on the Chinese government stemming back several decades, and ultimately it marks a radical departure from the traditional Chinese economic structure. The first work toward a serious antitrust law in China began in 1993, but intensified in 2002 upon China’s accession to the World Trade Organization. Since that time, the Chinese government has engaged in extensive dialogue with foreign antitrust agencies, NGOs, academics and practitioners from around the world, reforming the language of the law many times before passing a final version.1 H. Stephen Harris, Jr., a partner with Alston & Bird and leader of the firm’s Antitrust Group, acted as chairman and co-chairman for several working groups that prepared comments on various drafts of the AML on behalf of the American Bar Association Sections of Antitrust and International Law.
The AML is divided into four major sections, each covering a wide range of conduct. Chapter II prohibits monopoly agreements, including, among other prohibited conduct, price fixing, collusion to depress product output and other agreements determined to be violative by the AMEA, unless the agreement falls under a listed exemption and does not substantially restrict competition. Chapter III prohibits the abuse of a dominant market provision, notably including prohibitions on selling products at “unfair” prices and on refusing to enter transactions without justification. It must also be noted that, though the AML lists factors for determining whether a market participant is in a dominant position, there is also an automatic presumption of dominance based on market share, a presumption not found under U.S. law. Chapter IV governs merger control, including factors to be examined when determining whether to approve mergers, though it leaves the thresholds for notification to be defined by the State Council. Chapter V limits the ability of Chinese administrative agencies to hinder competition, though there is concern that local and sectoral authorities may devise methods to exempt themselves from the full effect of the law. The AML goes on to grant the AMEA broad powers to investigate suspected conduct in violation of the AML, along with creating penalties for violation and the potential for leniency where a party reports a violation to the AMEA and provides important evidence (even so, leniency is at the discretion of the AMEA). Finally, a supplemental provision notes that the AML, though it does not apply to valid exercises of IP rights, does apply to “abuses” of such rights, but without description of exactly what constitutes an abuse.2
Issues in the AML as Passed
Commentators have already identified a number of significant issues with the AML that could prove problematic for foreign firms doing business or considering doing business in China. Of these, three large issues to be aware of are: (1) the potential for aggressive application against foreign corporations to benefit Chinese companies and state-owned enterprises, (2) the departure from international norms in China’s stance on abuses of dominant position, and (3) the possibility that legitimate exercises of IP rights in other countries will be considered “abuses” under the AML.
In reporting on the passage of the AML, Chinese reporters emphasized its potential impact on foreign corporations, noting that foreign acquisitions of domestic companies would be subject to stringent new checks under the law.3 Some of the law’s broad language, in combination with China’s history of protecting competitors in the marketplace rather than competition, indicates that this statute may be used to shield Chinese companies from the international marketplace. For example, the statute is empowered to reach any conduct outside of China that could eliminate or restrict competition within China. Similarly, other language in the AML, including exemptions to the monopoly agreement prohibition, is quite broad and could be used by biased actors to grant preferences to domestic undertakings.
The AML’s treatment of abuses of dominant position is a more clear departure from international norms and should be watched closely to avoid violations. Under the AML, and unlike the law of the United States or the EC, an actor or group of actors is presumed to have a dominant position where one party holds 50 percent of the relevant market share, where two actors together hold 66 percent, or where three actors hold 75 percent together, though an actor that holds less than 10 percent will not be considered to hold a dominant position. Though a party can rebut this presumption, there is no guidance as to how this may be accomplished. This scheme raises several concerns: first, it seems to punish smaller market share holders in small markets, creating incentives to remain under 10 percent if an actor is close to that threshold. Second, this treatment of dominant position seems to encompass the concept of collective dominance of multiple entities, rather than the traditional single-firm focus of monopoly law in the United States.
The AML also explicitly applies to “abuses” of IP rights, yet fails to explain what constitutes an abuse. Language indicating that the enforcement of IP rights in accordance with the laws that created them would not be considered abusive was removed from the AML as passed and, therefore, there is the possibility that even otherwise lawful use of IP rights could violate the AML. At least one current Chinese official, Wu Zhenguo, Deputy Director General of the Department of Treaty and Law/Anti-Monopoly Office in the Chinese Ministry of Commerce, has recently termed actions such as compulsory licensing schemes, “irrational” conditions, and “irrational” license fees as abuses, further lending credence to this fear.4 Without further explanation as to what will be considered an abuse of intellectual property, foreign corporations exercising what seem like traditional property rights may be deemed to have abused their rights under the AML.
China’s economic policy throughout much of the twentieth century focused on protecting competitors instead of competition. This coming year will be very instructive in determining whether the AML will be used to continue the more recent trend toward agreement with international competition law norms. Without clear guidance as to how parties can rebut presumptions of dominant position and what will constitute an abuse of IP rights, foreign investors may pause before making a full commitment to the Chinese marketplace. Even if such guidance is provided and the AMEA fully clarifies the law, it remains to be seen whether the AML will be applied in practice to create a free Chinese marketplace or to shield weaker Chinese actors, including state-owned enterprises, from actual competition.