China: China Issues Rules for Price-Related Antitrust Enforcement

On January 4, 2011, the National Development and Reform Commission ("NDRC"), one of China's three antitrust agencies, published two sets of implementing rules detailing how it intends to handle enforcement against price-related conduct under the Chinese Anti-Monopoly Law ("AML"). These new Anti-Price Monopoly Rules, covering both substantive prohibitions and procedure, become effective on February 1. They provide additional detail on price-related enforcement, which should make enforcement policies and procedures more transparent and assist companies in complying with the law.

The new Anti-Price Monopoly Rules

The substantive rules address so-called "price monopolies," which include (1) anticompetitive agreements relating to price, (2) abuses of dominant market position through conduct relating to the price of the firm's goods or services, and (3) "administrative monopolies relating to price," that is, anticompetitive conduct undertaken or coordinated by governmental entities. (For a general overview of the AML, see our prior alert here.

The procedural rules elaborate on several aspects of price-related AML enforcement, including leniency for cooperating price-fixing cartel participants, reporting of potential violations, investigation methods, and possible commitments by companies under investigation.

The NDRC is charged with enforcing the provisions of the AML applicable to price-related, non-merger monopolistic conduct, and enforcing the earlier Price Law. The other two AML enforcement agencies are the State Administration of Industry and Commerce ("SAIC"), responsible for non-price, non-merger enforcement, and the Ministry of Commerce ("MOFCOM"), responsible for merger control. In May 2010, SAIC published for public comment three sets of draft rules addressing monopoly agreements, abuses of dominance, and administrative monopolies. (See our prior alert here.) Those rules reportedly will also be finalized soon.

The new Anti-Price Monopoly Rules apply to the activities of the NDRC, as well as to Development and Reform Commissions ("Local DRCs"), agencies of the provincial, autonomous regional, and municipal governments. Under Article 10 of the AML, the NDRC has the discretion to authorize Local DRCs to undertake AML enforcement activities; while the NDRC is in charge of anti-price monopoly conduct throughout the country and shall handle "important cases," Local DRCs shall be in charge of enforcement within their geographical jurisdictions.

Key points on price agreements

Prohibited horizontal price restraints. The new, substantive NDRC Anti-Price Monopoly Rules provide new detail about what price-related horizontal agreements are prohibited by Article 13 of the AML. The new rules broaden the definition of price-fixing to include agreements to:

  1. fix or change the prices of products and services
  2. fix or change the range of price changes
  3. fix or change fees, discounts or other charges that affect price
  4. set an agreed price as the basis for negotiating with third parties
  5. adopt a formula for calculating price
  6. not change price without consent
  7. fix of change price in disguised form by other means.

The final version removes prohibitions that were in the draft NDRC rules against indirectly fixing prices through output restriction or market allocation schemes. However, the final rules add a prohibition on "fixing or changing price in disguised form by other means," and they define "price monopoly agreements" to include those with the effect of "eliminating or restricting competition with regard to price," without specifying that the agreements themselves must involve price. The rules also leave open the possibility for NDRC to define other types of price monopoly agreements that violate the AML.
Vertical agreements. The substantive NDRC Anti-Price Monopoly Rules do not extend coverage of vertical restraints beyond what is specified in the AML itself, which prohibits fixing or setting resale prices.

Details on leniency. The NDRC procedural rules provide more detail on how leniency may be applied in cases involving anticompetitive agreements such as by cartels. Article 46 of the AML provides that a reduced penalty or exemption from penalty may be granted to a participant in a "monopoly agreement" that reports its monopolistic conduct to the enforcement agency and provides important evidence. The rules provide that the first participant to report a cartel and provide "important" evidence to NDRC "may" be fully exempted from any penalty; the second applicant may obtain a reduction of at least 50%; later applicants may be granted a reduction of penalties of at most 50%.

However, all such leniency appears to remain at NDRC's discretion, as made explicit in Article 46. The rules say NDRC "may" grant leniency, not "shall," leaving uncertainty about whether, for example, NDRC may choose to refuse a full exemption to the first leniency applicant, even if it satisfies all requirements of the rule. This lack of certainty, especially for first applicants, may reduce the incentives for cartel participants to self-report.

During the first two years of AML enforcement, no cases involving self-reported leniency applications have been publicized by NDRC or the other enforcement agencies. However, Local DRCs have granted exemptions from fines to violators who have cooperated with investigations, provided important evidence, and corrected their violations voluntarily, most notably in connection with an enforcement action against a local rice noodle price cartel taken under both the AML and the Price Law (see our prior alert here. Further details about how the leniency program will work and how frequently "first" applicants will be exempted in practice will be important determinants for companies deciding how to handle cartel matters affecting Chinese markets.

Key points on abuses of dominant market position

Finding dominant market positions. The new NDRC rules repeat the definition in Article 17 of the AML that a "dominant market position" means one in which an undertaking is able to control the price, output, or other transaction conditions of a product in the relevant market or to impede or prevent entry into the relevant market by other undertakings.

The rules explain that "other transaction conditions" include elements other than price and output that may substantially affect transactions, such as product grade, payment conditions, delivery method, after-sale service, transaction options, and technical constraints. The last two factors – impede or prevent entry – in particular may affect companies with unique products or technology, which could be found to have dominant positions even if their market shares would be low under standard market definition analysis.

Price-related abuses of dominance. The NDRC Anti-Price Monopoly Rules elaborate on the 6 forms of abuses of dominant market position listed in Article 17 of the AML, focusing on price-related violations:

  1. selling at "unfairly high" prices or buying at "unfairly low" prices
  2. selling at a price below cost, without valid justification
  3. refusing to deal with a trading counterparty in a disguised form by setting excessively high or low prices, without valid justification
  4. requiring exclusive dealing by means of a price discount, without valid justification
  5. imposing "unreasonable fees" in addition to price
  6. price discrimination between similarly-situated trading counterparties, without valid justification.

Some of these prohibitions could be troublesome to business. For example, selling at an unfairly high price is interpreted in the Rules to include (a) selling products at a price "obviously" higher than charged by other suppliers for the same kind of product, (b) price increases more than "normal" where costs are stable, and (c) price increases obviously greater than increases in costs. If strictly enforced, these might significantly limit "dominant" firms in pricing their products or services, making their pricing subject to competitors' pricing and tying price changes directly to costs.

Valid justifications for otherwise prohibited conduct. One helpful development is that the new rules provide "valid justifications" for most forms of abuse of dominance. This should allow undertakings to self-assess whether certain conduct may be justified by legitimate commercial reasons. For example, valid justifications for price discounts encouraging exclusive dealing include protection of product quality and safety, protection of brand image and level of service, and benefits from significant cost savings or improvement of efficiencies that will be shared by consumers.

Similarly, justifications for disguised forms of refusal to deal by charging high prices include poor credit history of the refused trading party, continuing deterioration of its operations, and existence of an alternative source of supply at a reasonable price (although the latter appears to be an application of an indispensability requirement akin to the EU Bronner decision rather than a business justification).

Early enforcement

Administrative enforcement actions and decisions under the AML are not regularly publicized. NDRC publishes selected enforcement actions and statistics through announcements or speeches, generally without disclosing details. According to the NDRC, 8 out of the 34 provincial Local DRCs have established specialized teams for AML enforcement. Local DRCs already have handled a dozen cases under the AML or the Price Law during the first two years of AML enforcement. Most involved price-fixing or similar cartels as well as trade or industry associations, although at least one case involved abuse of dominance by tying. Interestingly, some investigations appear to have been started because of media reports. (For further details about some recent enforcement actions, see our prior alert here.)

The two implementing Rules are available in Chinese at NDRC's website: http://www.ndrc.gov.cn/zcfb/zcfbl/2010ling/W020110104330950438166.pdf and http://www.ndrc.gov.cn/zcfb/zcfbl/2010ling/W020110104333527987891.pdf.

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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