China: China Publishes New Draft Rules on Monopoly Agreements, Abuse of Dominance, and Administrative Monopolies

On May 25, 2010, the State Administration of Industry and Commerce ("SAIC") published for public comment three sets of draft rules. These address (1) "monopoly agreements," that is, anticompetitive agreements, (2) abuses of dominant market position, and (3) "administrative monopolies," anticompetitive conduct undertaken or coordinated by governmental entities. The first two are revised versions of earlier drafts published for comment on April 27, 2009. Once adopted, these rules will guide SAIC's enforcement priorities under China's Anti-Monopoly Law.

The revised SAIC draft rules contain many welcome improvements over the versions published one year ago. However, some changes will raise concerns from the business community and reflect the Chinese enforcers' continuing focus on issues regarding technology, abuse of intellectual property rights, and abuses of dominant market position.

SAIC is one of three Chinese government agencies that enforce the Anti-Monopoly Law ("AML") and is responsible for non-price, non-merger enforcement. The National Development and Reform Commission is responsible for price-related, non-merger enforcement and previously issued its own draft rules, although the precise allocation of responsibility between the two agencies remains unclear. The third enforcement agency, MOFCOM, enforces the concentration provisions of the AML, including reviewing mergers and acquisitions that meet notification thresholds.

Key changes on monopoly agreements

Fewer prohibited vertical restraints. The revised draft rules remove a provision that had prohibited territorial restraints and exclusive dealing in vertical agreements even in the absence of dominant market position. They clarify that vertical agreements are prohibited only if they restrict competition and impair consumer interests. This appears to suggest a more liberal attitude towards vertical restraints that is more consistent with international norms.

More detail on leniency. The rules provide more detail on how leniency will be applied under the AML in cases involving anticompetitive agreements such as cartels. Most importantly, they state that the first undertaking that reports a cartel, provides material and important evidence, and cooperates with SAIC in the investigation "should" (as compared to "may" in the earlier draft) be exempted from any penalty, while parties that self report later "may" receive penalty reductions at SAIC's discretion. This provide some comfort that leniency will be available at least for one self-reporting party and thus greater incentive for cartel participants to self-report. Unfortunately, there remain few details about other aspects of leniency, such as how the "first" reporting party will be determined and whether parties can ascertain their priority before submitting substantive information about a violation.

Broad language on antitrust and intellectual property issues. The rules reiterate the broad language in the AML stating that, although the law does not apply to the "exercise" of intellectual property rights, it is applicable to "abuse" or "misuse" of rights to eliminate or restrict competition. It has been reported that SAIC and other agencies are drafting detailed guidelines regarding enforcement of the AML with regard to IP rights.

Additional language on restricting new technology. The draft elaborates on several circumstances that might constitute horizontal anticompetitive agreements restricting the purchase or development of new technology in violation of Article 13(4) of the AML: restricting purchase and use of new technology; restricting use of new equipment; restricting investments or R&D in new technology or equipment; refusing to use new technology or equipment; and refusing to adopt new technical standards.

Key changes on abuses of dominance

Criteria for evaluating valid justifications. The new draft rules provide criteria for evaluating "valid justifications" for abuses of dominance, under Article 17 of the AML: (1) whether the allegedly abusive conduct is based on commercial custom or the normal operation of the investigated undertaking and whether it produces "normal" (presumably not "excessive") levels of profit; (2) whether the conduct will restrict competition and impair consumer interests; and (3) the impact on the efficiency of economic operations, public interest, and economic development. Although consideration of effects on competition is welcome, the inclusion of non-competition factors such as the public interest and economic development would appear to complicate enforcement, even though consistent with the broader purposes of the AML.

Additional potential abuses of dominance. The draft lists several actions that would constitute refusals to deal under the AML (absent valid justification), including (1) reducing current transaction volume; (2) terminating a current transaction; (3) refusing to enter into a new transaction; (4) setting up restrictive conditions that render it difficult for the counterparty to continue a transaction; and (5) refusing reasonable access to an essential facility. Unfortunately, it appears that the rules seek to further expand the types of conduct that will constitute refusals to deal.

Essential facilities doctrine. The potentially most far-reaching provision in the rules prohibits dominant firms from refusing access by a transaction counterparty to an essential facility on reasonable conditions, apparently based upon the prohibition of refusals to deal under Article 17(3) of the AML. The draft rules provide that, in considering such an essential facility claim, SAIC will evaluate factors such as the feasibility of constructing alternative facilities; the reliance of the counterparty on the facility for the effective operation of its business; the feasibility of providing access to the essential facilities; and the impact on the owner of providing access to the essential facility. These factors somewhat constrain the essential facility concept and generally are consistent with European decisions such as Microsoft and IMS Health – and they embrace the essential facilities doctrine much more than U.S. cases such as Trinko. However, in contrast to EU case law, which has established mandatory prerequisites to compelling access, the SAIC drafts rules require only "evaluation" of factors. This may provide insufficient guidance to firms that have valuable intellectual property rights or physical networks for which there are no substitutes (and are unable to determine what is "valid justification"), and thus as a practical matter may reduce the freedom of firms with dominant positions to choose their business partners.

Rules on administrative monopoly

The draft Rules on Prohibition of Administrative Monopoly are the first published draft addressing the issue of administrative monopoly, that is, abuse of governmental power to restrict or eliminate competition. Because the AML does not provide the enforcement agencies any power over administrative monopolies – only the right to make suggestions to the superior authority of the violating government authority – these prohibitions will be difficult to enforce.

One interesting provision states that, if a business engages in monopoly conduct pursuant to administrative decision or regulation, then SAIC should "order" the offending firm to cease such conduct and may prescribe "heavy" penalties for firms that continue such conduct after the restrictive administrative decision or regulation is revoked. Thus, it appears that approval by an administrative agency will provide temporary immunity from antitrust penalties.

Although there remain some areas of concern, SAIC's publication of these revised drafts, after incorporating comments from many parties, reflects a consistent effort by the enforcement agencies to enhance transparency in the AML legislative and regulatory process and a willingness to seek input from all stakeholders.

The three draft Rules are available in Chinese at SAIC's website .

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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