On January 4 and 7, 2011, the National Development and Reform Commission ("NDRC") and the State Administration for Industry and Commerce ("SAIC") published a total of five newly enacted departmental regulations implementing the Anti-Monopoly Law of the People's Republic of China ("AML") within the areas for which they are responsible.
The new regulations contain the first substantive legal rules to be issued by both authorities in the AML field. The regulations may set the stage for a new phase in the enforcement of the AML, with SAIC and NDRC beginning to take a higher profile and more active role. NDRC's and SAIC's anticipated activities are to complement the enforcement work already being carried out by the Ministry of Commerce ("MOFCOM") – the third member of the triumvirate of Chinese authorities with AML enforcement powers – in merger control cases. All five regulations will become effective from February 1, 2011.
The NDRC regulations NDRC has jurisdiction over three types of anti-competitive conduct: (1) anti-competitive agreements (so-called "monopolistic agreements"), (2) abuses of a dominant market position, and (3) abuses of administrative power (so-called "administrative monopolies") but only to the extent that the conduct relates to pricing.
Substance. The regulation which sets out new principles of substantive law – the Anti-Price Monopoly Regulation (the "Anti-Price Monopoly Regulation") – covers all three types of anti-competitive conduct. The provisions on anti-competitive agreements are relatively straight-forward. For horizontal agreements (i.e., agreements between competitors), the Anti-Price Monopoly Regulation focuses on price-fixing and, for vertical agreements (i.e., between entities in different parts of the supply chain such as between a company and its distributor), they merely confirm that a company – even if not occupying a dominant market position – is prohibited from setting the resale prices charged by its distributors (so-called "resale price maintenance"). Furthermore, the broader language (relative to the AML) on anti-competitive agreements organized through industry associations may possibly point to an area of future focus for NDRC enforcement actions. NDRC's recent decision to impose the maximum available fine for associations on a paper manufacturers' association in Zhejiang (which was made public also on January 4) seems to strongly support this view.
The provisions on abuse of dominance in the Anti-Price Monopoly Regulation add some substance vis-à-vis the "bare bones" framework of the AML. The Anti-Price Monopoly Regulation expands and provides further guidance on the types of abuses that are listed in the AML which fall within NDRC's regulatory jurisdiction (i.e., excessive pricing, predatory pricing and discriminatory pricing). In addition, the Anti-Price Monopoly Regulation adds new types of conduct that can be deemed abusive if engaged in by companies with a dominant market position – namely, "margin squeeze," "loyalty rebates" and "unreasonable expenses." On the other hand, businesses will welcome the additional guidance on when potentially abusive conduct can be justified for "valid reasons", an expression that was not further explained in the AML, leaving businesses in the dark as to what forms of "reasons" would potentially justify otherwise abusive acts.
The provisions on abuse of administrative power in the Anti-Price Monopoly Regulation largely reiterate those in the AML. As with the AML, it remains unclear whether businesses have a right to seek redress against anti-competitive government conduct.
Procedure. The Regulation on Anti-Price Monopoly Administrative Enforcement Procedures ("NDRC Procedural Regulation") shows that central-level NDRC is keen to (partially) delegate its enforcement powers to NDRC's provincial or even local offices, while at the same time the national headquarters wishes to retain certain supervisory powers. This is understandable in the light of NDRC's limited manpower dedicated to AML enforcement based in Beijing (its AML unit has only 3 members of staff).
The NDRC Procedural Regulation also includes some guidance on the leniency program, whereby participants in cartels and other anti-competitive agreements can come forward to self-report to the authority in exchange for immunity from fines or a fine reduction (see below).
Interestingly, one of the requirements for accepting complaints (against other companies) under the NDRC Procedural Regulation is that the complainant must state whether or not it has filed a complaint with another administrative authority (in practice, likely to be SAIC) or brought suit in a Chinese court in relation to the same matter. This indicates that NDRC and (based on unofficial statements also) SAIC may be reluctant to initiate a procedure that might "step on the toes" of the other authority or which will run in parallel with existing court proceedings. Presumably the concern here is one of consistency: it would be embarrassing if NDRC were to reach an entirely different conclusion from SAIC or, more likely, a court on the same matter.
The SAIC regulations The three SAIC regulations cover the same types of anti-competitive conduct as NDRC's, the only difference being that the SAIC regulations cover non-price-related conduct (pricing conduct falls under NDRC's remit). SAIC decided to take a slightly different approach in terms of how it structured its regulations by issuing a single regulation covering each of the three types of conduct separately – i.e., the Regulation on the Prohibition of Acts involving Monopolistic Agreements (the "SAIC Monopolistic Agreements Regulation"), the Regulation on the Prohibition of Conduct constituting an Abuse of a Dominant Market Position (the "SAIC Abuse of Dominance Regulation") and the Regulation on the Prevention of Conduct constituting an Abuse of Administrative Powers to Eliminate or Restrict Competition (the "SAIC Abuse of Administrative Powers Regulation"). It should be noted that SAIC adopted procedural rules addressing these forms of anti-competitive conduct in 2009.
Monopolistic agreements. Similar to the NDRC approach, the SAIC Monopolistic Agreements Regulation provides more detail on the categories of anti-competitive agreements listed in the AML, but does not significantly alter the scope of the obligations they impose upon businesses. Perhaps most importantly, there is no reference to vertical agreements, indicating that SAIC's focus may lie on cartel conduct and the like (such as coordinated capacity reduction, market partitioning, collective boycotts, etc.).
The SAIC Monopolistic Agreements Regulation also contains certain procedural rules, including a few provisions on leniency applications, but which are different from NDRC's approach. As for sanctions, the SAIC Monopolistic Agreements Regulation predictably repeats the extraordinarily high fine of between 1% and 10% of the infringing company's annual sales revenues which can be imposed for anti-competitive agreements (and abuses of a dominant market position), but states that monopolistic agreements which have not (yet) been implemented should trigger fines below RMB 500,000 (approximately USD 75,000; EUR 58,000). The hopes that the SAIC Monopolistic Agreements Regulation would provide greater clarity on the calculation of the fine – i.e., whether the fine would be based on sales revenues in China or worldwide, and be based on the revenues generated by the products to which the cartel or abusive conduct relates or all products of the company in question – were not fulfilled, as the regulation is silent on this point. In addition, the regulation does not seem to give SAIC flexibility to impose fines below the 1% minimum threshold.
Abuse of dominance. As with the NDRC Anti-Price Monopoly Regulation, the most interesting and – for companies – likely most challenging part of SAIC's legislative output lies in the field of abuses of a dominant market position. The SAIC Abuse of Dominance Regulation targets four types of abusive conduct by dominant companies –i.e., (1) refusal to deal, (2) exclusive/restrictive dealing, (3) imposition of unreasonable conditions and (4) discriminatory treatment. The exact scope of these prohibitions is unclear but potentially far-reaching (in the absence of further implementing rules). The regulation also provides some guidance on when conduct can be justified for "valid reasons," although in a more limited and abstract way as compared to the NDRC Anti-Price Monopoly Regulation.
Abuse of administrative power. The SAIC Abuse of Administrative Powers Regulation largely follows the corresponding provisions of the AML. Perhaps its most interesting feature is that the addressees of the obligations imposed by the rules extend beyond government bodies and officials to also encompass business operators: the latter are prohibited from implementing monopolistic agreements and abusing their dominant position "by means of" administrative decisions, delegation or regulation, but it is not clear what these concepts exactly mean.
Inconsistencies and uncertainties While the entry into force of these five new regulations may pave the way for a new era of AML enforcement, businesses in China will face a number of challenges when trying to comply with these regulations.
For example, both the NDRC Anti-Price Monopoly Regulation and the SAIC Monopolistic Agreements Regulation attempt to provide guidance on the concept of an "agreement," which was broadly defined in the AML as an "agreement, decision or concerted practice." But – quite apart from the fact that the drafting of the NDRC and SAIC regulations is not exactly the same – the new regulations at times appear to raise more questions than they answer – e.g., how is the "meeting of minds," a factor supposedly indicating the existence of a concerted practice, to be interpreted, and to what extent can SAIC order companies engaging "in collusion without yet having entered into an agreement" to cease and desist from engaging in such conduct?
Another important source of uncertainty for businesses lies in the authorities' leniency programs. At the very basic level, NDRC's and SAIC's programs are similar: those participants in cartels and other monopoly agreements which voluntarily come forward to disclose the illegal conduct and provide "important evidence" may receive immunity or a reduction in the fine. However, there are also notable differences between the two programs. Not only is "important evidence" defined differently by the two authorities, but even the extent of leniency which an applicant can hope for varies according to the authority concerned: both NDRC and SAIC seem willing to grant full immunity to the first whistle-blower. But while NDRC intends to grant a reduction in the amount of the fine of no less than 50% for the second one to turn himself in and up to 50% for all other leniency applicants, SAIC's regulation is silent on the exact percentage by which the fine will be reduced for all but the first whistle-blower. Even for the first one to turn himself in, whilst the SAIC Monopolistic Agreement Regulation clearly states that it will obtain immunity, under the NDRC Anti-Price Monopoly Regulation, it does not necessarily follow that immunity will be granted. More generally, the leniency programs of both NDRC and SAIC lack detail and thus create uncertainty for businesses. Experience in other antitrust jurisdictions shows that uncertainty in the leniency system can work as a major deterrent for whistle-blowers to come forward.
Compliance burden For companies doing business in or with China, the main focus for additional compliance triggered by the new regulations may be the abuse of dominance rules. The NDRC Anti-Price Monopoly Regulation prohibits exclusive dealing arrangements imposed by dominant companies "by means of granting rebates" and the imposition of "unreasonable expenses", while the SAIC Abuse of Dominance Regulation appears to prohibit the imposition of certain territorial and customer restrictions as well as unreasonable contractual provisions. Hence, both regulations clearly appear to be extending the original scope of the AML's provisions. In addition, the SAIC regulation contains a very broad interpretation of the AML's refusal to deal provision.
For companies that have a dominant position in a relevant market (whether big or small), the new regulations are likely to create additional obligations and provide substantial uncertainty. On the one hand, granting rebates for meeting purchase targets is a widespread business practice in some sectors. Likewise, contracts with territorial restrictions or, say, customer-group restrictions can be seen in many industries. With the new regulations, these kinds of practices will now need careful screening and analysis. On the other hand, the new regulations refer to the concept of "unreasonable conditions," in relation to expenses (NDRC) or other contractual terms (SAIC). In jurisdictions with a longer legal tradition, such issues would normally be addressed under consumer protection or unfair contract term legislation, rather than antitrust laws. The inherent risk for dominant players is that such vague concepts may engender a high degree of uncertainty and encourage speculative lawsuits, particularly by publicity-seeking companies and individuals targeting high profile multinationals in China.
The new regulations clearly demonstrate that cartels may be one of the major areas of focus for both NDRC and SAIC. Companies with operations in China will need to step up training and monitoring of staff behavior to mitigate the risk of becoming subject to a NDRC or SAIC investigation. Past business practices and policies will need to be reviewed and updated in the light of the new rules. Whilst far from perfect, the very existence of defined leniency programs is likely to increase the risk of companies ending up being investigated due to the actions of a whistle-blower.
Whilst NDRC and SAIC may have been relatively slow out of the gate as compared to MOFCOM in terms of AML enforcement, this may be attributable to the fact that in the absence of implementing regulations such as those just enacted, NDRC and SAIC felt their hands were somewhat tied. MOFCOM may have dealt with many more cases, but it should not be forgotten that it is the breaches of the rules on monopolistic agreements and abuse of dominance that carry by far the heaviest penalties under the AML; for that reason alone, these rules – however imperfect – have to be considered carefully by companies doing business in or with China.