On April 27, 2009, the Antimonopoly and Anti-unfair Competition Enforcement Bureau of the State Administration for Industry and Commerce (“SAIC”), the government body responsible for handling abuse of non-price-related dominance and monopoly agreement matters in China, circulated the third draft of two implementation rules for public comments.1 The two rules are: (i) Rules on the Prohibition of Monopoly Agreements; and (ii) Rules on Prohibition of Abuse of Dominant Market Position.2 SAIC stated on its website that the deadline for the public solicitation period for these two rules is May 31, 2009. On May 8, 2009, SAIC also held a seminar in the Beijing headquarters with a small circle of approximately 25 firms and industry associations to seek some preliminary comments on the substantive provisions of these two implementing rules.

Rules on the Prohibition of Monopoly Agreements

Types of Monopoly Agreements: The Rules on the Prohibition of Monopoly Agreements sets out the types of monopoly agreements that are prohibited. Horizontal agreements are agreements that (i) restrict output or sales volume; (ii) segment sales market or raw material market; (iii) restrict purchases of new technologies or new facilities, or restrict the development of new technologies or new products; (iv) jointly block transactions; (iv) collude in bidding; and (v) catch-all clause, i.e., to be later determined by SAIC. Vertical agreements include monopoly agreements reached between tenderee and bidder; agreements providing, without justification, that the parties to a transaction may only operate in a specified territory; agreements providing, without justification, that parties to a transaction may only deal with the other party of the agreement or designated party, and other monopoly agreements to be determined by SAIC.

Determination of Monopoly Agreements: The Rules on the Prohibition of Monopoly Agreements provides that monopoly agreements refer to agreements, decisions and other coordination actions (excluding price-fixing agreements) between two or more business operators that have the effect of restricting or eliminating competition, which may be written, oral, or inferred from concerted acts or decisions.

Prohibition on Industry Association’s Monopoly Agreements: Unlike their counterparts in industrial countries, many major industry associations in China evolved out of former government departments in charge of particular industries, and the associations tend to maintain very close relationships with government regulators and with their member companies. It is not uncommon for these industries to organize meetings with their member companies to reach agreements on key terms such as output. The Rules on the Prohibition of Monopoly Agreements prohibit industry associations from organizing their members to conduct activities that have the effects of monopoly agreements, including (i) formulating industry regulations, making decisions or issuing notices that have the effect of preventing or restricting competition; (ii) convening members of the business association to discuss and form agreements, resolutions, minutes and/or memorandum; (iii) providing facilities for business operators to communicate, discuss and coordinate; and (iv) other activities to be determined by SAIC.

Delegation of Enforcement Power: The Rules on the Prohibition of Monopoly Agreements provide that SAIC is responsible for enforcement concerning monopoly agreements that have national impact and agreements over which the SAIC determines it has jurisdiction. When necessary, SAIC may delegate its enforcement work to industry and commerce authorities at the provincial level.

There have been concerns that some local industry and commerce authorities may not have sufficient experience dealing with complex competition matters. In its May 8 meeting, SAIC emphasized that it would adopt a “case-by-case authorization” principle in deciding what kind of investigation and punishment for violations will be authorized to the provincial industry and commerce authorities, and that SAIC will maintain the sole power to decide whether to initiate an investigation.

Penalties for violations: Liability for monopoly agreements is covered under Article 11, which provides that SAIC can order business operators who reach and implement monopoly agreements to cease their acts, turn over their illegal income and pay a fine of 1 to 10 percent of their sales turnover for the preceding year. If the agreement has not yet been implemented, the operator is subject to a fine of up to RMB500,000. The Rules on the Prohibition of Monopoly Agreements also includes a penalty provision for industry associations that organize companies in their sector to reach monopoly agreements, providing that they may be subject to fines of up to RMB500,000 and, in serious cases, may lose their registration licenses. While the fine is not huge, it may be significant for smaller industry associations. Deregistration, of course, would be very serious. The inclusion of this provision is encouraging, both for controlling the actions of industry associations within China and for helping to keep industry associations out of trouble overseas. Further, the associations generally have very close relationships with the Chinese government, often employing former officials and in some cases playing regulatory roles, yet the participation of foreign invested companies in the associations has, sometimes, been limited. Enforcement of the Antimonopoly Law (“AML”) against the associations could help level the playing field for foreign investors.

Leniency: There is some leniency for self-reporting. Where an operator voluntarily provides information on a monopoly agreement and important evidence, SAIC may reduce the penalty or grant an exemption from penalties altogether.

Rules on Prohibition of Abuse of Dominant Market Position

Determination of Market Dominancy: Rules on Prohibition of Abuse of Dominant Market Position provides that “a dominant market position” means a market position in which a business operator is capable of controlling the price, the output, or other transaction conditions of the relevant product, or is able to impede or prevent entry into the relevant market by other business operators. In determining a dominant market position, SAIC will take factors into consideration such as: (i) market shares and the competition status in the relevant market; (ii) the ability to control the sales market or raw material markets; (iii) the financial technology conditions of the business operators; (iv) the extent to which other business operators rely on this business operator in a transaction; (v) degree of difficulty in entering the relevant market for other business operators; and (vi) other elements concerning determination of a dominant market position.

The Rules on Prohibition of Abuse of Dominant Market Position provide that a dominant market position may be presumed where (i) the market share of one business operator reaches 50 percent of the relevant market; (ii) the market share of two business operators reaches two-thirds of the relevant market; or (iii) the market share of three business operators reaches 75 percent of the relevant market. However, a business operator that has a market share of less than one-tenth of the relevant market will be presumed not to have a dominant market position. Business operators can rebut the above presumptions if they can prove that (i) the entry into the relevant market for other competitors is relatively easy; (ii) there is relatively sufficient competition in the relevant market; and (iii) the business operator has no ability to control the price, the output, or other transaction conditions, or the ability to impede or prevent entry into the relevant market by other business operators.

Prohibition of Abuse of Market Dominant Position: The Rules on Prohibition of Abuse of Dominant Market Position prohibit business operators with dominant market position, without justification, from abusive acts such as the following practices: (i) reducing, limiting or discontinuing the transaction with the current transaction counterpart, or refusing to start a new transaction; (ii) imposing conditions on exclusive dealing or designated dealing; (iii) imposing tying arrangements or unreasonable dealing conditions; (iv) discriminating in transaction volume, quality degree, payment terms, delivery terms, or after-market service.

Access to essential facilities: The Rules on Prohibition of Abuse of Dominant Market Position provide that the dominant business operator in possession of the essential facilities shall not refuse to provide such essential facilities for reasonable consideration. This issue has raised many concerns because actions against “dominant” foreign firms may raise issues of IP licensing (and refusals to license). The previous draft of this rule included the Intellectual Property Right (“IPR”) abuse clauses; however, such clauses were deleted in the third draft. Given that IPR abuse under AML is a very complex and controversial topic, SAIC expressed at the May 8 meeting that it will draft a separate guideline to address this issue, which is expected to be finished later this year.

Delegation of Enforcement Power: The SAIC may delegate its enforcement powers regarding market dominance to the relevant provincial authorities.

Penalties for violations: The penalties for abuse of market dominance are similar to those for monopoly agreements. The Authorities can order the operator to cease its unlawful acts, and can confiscate the operator’s illegal income and fine it between 1 to 10 percent of its sales turnover for the preceding year. As in the case of monopoly agreements, the scope of “turnover” is not clear.