China: Antitrust Immunity For Airline Alliances Under China's Anti-Monopoly Law?

Last Updated: 14 December 2012
Article by Yizhe Zhang

Close cooperation between air carriers in international airline alliances can raise significant competition law issues. To limit the antitrust risks, airlines often seek to take advantage of grants of antitrust immunity that may be available in the jurisdictions where the alliance may operate.

In the United States, the Department of Transportation is authorized to grant formal immunity to alliances between U.S. and foreign carriers, which it has used to encourage other countries to make "open skies" regulatory liberalization agreements with the U.S.

In Europe, British Airways, American Airlines, and Iberia have been able to obtain a form of immunity through a formal decision of the European Commission following the submission of commitments.

 In Japan, the Ministry of Land, Infrastructure, Transport and Tourism also granted a formal immunity to American Airlines and Japan Airlines on the basis of the open skies agreement with the U.S.

Alliances involving Chinese carriers or having effects in China will be subject to the PRC Anti-Monopoly Law ("AML").1 Although the AML has no formal system of antitrust immunity, which itself may deter alliances involving Chinese carriers, in this article we describe ways that airlines may be able to obtain comfort that their alliances will not lead to significant antitrust risks in China.

Overview of the AML

Airlines alliances are covered by Article 13 of the AML, which prohibits agreements between competitors that eliminate or restrict competition. Such agreements are subject to a form of rule of reason analysis: an agreement may be exempted from the application of Article 13 if (i) it is entered into for certain stated purposes, including reducing costs or improving efficiency, engaging in R&D for new products, or "protecting the legitimate interests in foreign trade and economic cooperation," (ii) it will not substantially restrict competition in the relevant market, and (iii) consumers can share the benefits derived from such agreement (see Article 15). At this stage of development of the AML, there is no case law or guidelines to assess how such principles will be applied to airlines alliances.

The AML does not require the parties to apply to the antitrust authorities to obtain an exemption. The parties must perform a "self assessment" to determine whether their agreement may qualify for the exemption under Article 15. However, the AML also includes premerger notification requirements, which require transactions meeting certain thresholds to be reported to MOFCOM and then not closed before MOFCOM's approval.

The nonmerger provisions of the AML are enforced by two ministries—the National Development and Reform Commission ("NDRC") for nonmerger enforcement involving prices, and the State Administration for Industry and Commerce ("SAIC") for non-price conduct. It is unclear how the agencies plan to tackle conduct that may have both price and non-price components, nor which agency will take the lead on airlines alliances. The merger provisions of the AML are enforced by MOFCOM. The Civil Aviation Administration of China ("CAAC") is likely to be consulted by the three antitrust regulators in any investigation involving airline alliances, even if it does not have the power to enforce the AML.

Sanctions for violations of the AML are very high: between 1 and 10 percent of the parties' turnover.2

What Kind of Antitrust Protection Could Airlines Alliances Obtain Under the AML?

Even if the AML does not include a formal immunity system, there are avenues that airlines may want to consider to limit their antitrust risks in China. Most of these avenues are untested, and the enforcement agencies have offered no guidance on whether they would be accepted.

Informal Consultations with the Chinese Government Agencies. If an alliance does not qualify as a "concentration" subject to the AML's merger control provisions (see below), but rather is subject to the AML's nonmerger provisions, the parties may consult with the relevant antitrust authorities in China to seek their view, i.e., NDRC and SAIC, as well as CAAC, the aviation regulator. However, responses to such informal consultations are not legally binding, even if they may provide the parties with informal comfort. Such an informal opinion is also unlikely to be useful within the framework of private litigation, where a plaintiff could sue the members of an airline alliance before Chinese courts claiming violation of the AML.

Merger Review. The AML's provisions on merger control may also present opportunities for reducing antitrust risk. Under the AML, "concentrations" meeting certain turnover thresholds require premerger notification by the parties and review by MOFCOM. In the case of joint ventures, each of at least two of the parent companies must have China sales in excess of RMB 400 million (approximately US$65 million), and the parents' combined worldwide turnover must be in excess of RMB 10 billion (US$1.6 billion) or their combined China sales must be in excess of RMB 2 billion (US$320 million). MOFCOM also has the power to choose to review below-threshold transactions to determine if they may have anticompetitive effects.

In addition, certain joint venture arrangements with significant integration, shared risk, and revenue sharing (what airlines sometimes call "metal neutral" joint ventures) could arguably also be a considered as a concentration even if there is no legal entity, although to date there has been no precedent in China in that respect.3

Thus, certain forms of alliances may have to be submitted to MOFCOM under the merger review provisions. If MOFCOM considers that an alliance does not have anticompetitive effects, it will issue a clearance decision, although sometimes with conditions. MOFCOM's allowing the joint venture to be formed implies "immunity" for the alliance partners for conduct undertaken by the joint venture. However, it may not protect the parties from challenges by other enforcement agencies or private parties for alleged harms caused by the joint venturers' coordinating their business activities. Within the framework of private litigation, it is unclear to what extent the courts will defer to a formal MOFCOM decision that a joint venture is compatible with the AML. The courts have the authority to make their own independent judgment; nevertheless, in practice, Chinese courts generally defer to (or at least take into consideration) decisions by administrative authorities unless there is a clear error in fact or in law, with a goal to maintain consistent interpretation by the courts and the agencies.

Commitments. The AML includes a system of commitments enabling the antitrust authorities to suspend or terminate their investigation if the company under investigation initiates concrete measures within a certain time limit to eliminate the competitive effects of the suspected conduct. The decision to terminate the investigation should state the concrete commitments by the undertakings. If the undertakings implement the commitments, the agency may terminate its investigation. Both SAIC and NDRC have issued guidelines in relation to commitments procedures.4

In this context, the parties to the alliance could voluntarily submit their alliance agreement for review by the antitrust agencies (NDRC or SAIC). If needed, they could suggest some commitments that the agency could impose in a formal decision (such as surrendering slots for use by competitors). This procedure would be similar to that followed by American Airlines, British Airways, and Iberia in the European Union.

A lingering question is whether an agency would consider its decision to terminate its investigation on the basis of commitments to be final, or whether it could decide later to reopen the matter. In this respect, the AML allows agencies to resume an investigation if the parties have failed to implement their commitments, if the facts upon which the decision was based have changed, or if the decision was based on incomplete facts provided by the parties.

China has not provided complete guidance on the effect on private litigants of a government agency decision to close an investigation after the submission of commitments. The April 2011 draft rules on antitrust private litigation issued by the Supreme People's Court ("SPC") included a provision stating that a court may not infer the existence of anticompetitive conduct from the submission of commitments to an antitrust agency.5 However, this provision was removed from the final rules issued by the SPC in May 2012.6 Thus, in principle, a private plaintiff may argue before the courts that a particular alliance has anticompetitive effects, even if one of the regulators has terminated its investigation into such alliance following the submission of commitments. That said, even if the case were accepted by a Chinese court, the parties should be able to use the agency's decision as evidence of the absence of anticompetitive effects. As explained above, courts are likely to show some deference to an agency's decision.

Conclusion

Despite the absence of a formal procedure to obtain antitrust immunity, informal avenues to reduce antitrust risk may be available for alliances involving Chinese air carriers or otherwise affecting Chinese transportation markets. Submitting the alliance for merger review or offering commitments in a nonmerger investigation seems most promising. These are as yet untested, and alliance parties should expect extensive discussions with the enforcement agencies before they can be put in place with confidence that they actually will provide some protection.

Given the importance of airline alliances to Chinese carriers, and considering growing competition from Korean and Japanese carriers on transpacific routes, Chinese government agencies may be motivated to look favorably on attempts to seek immunity. This attitude would be consistent with the AML's industrial policy considerations. For example, an agreement may be exempted from application of the AML for "protecting legitimate interests in foreign trade and economic cooperation." Similarly, in the context of merger review, MOFCOM must assess the effect of a transaction on the "development of the national economy." These industrial policy considerations easily could be employed by Chinese agencies to justify allowing Chinese carriers to enter into extensive cooperation agreements with foreign carriers.

Footnotes

1 See generally about the AML, the book coauthored by Jones Day lawyers, including the authors of this article: Anti-Monopoly Law and Practice in China, Oxford University Press, 2011, 574 pages.

2 At this stage, it seems that the relevant turnover to be taken into account is the worldwide turnover at the group level.

3 The term "metal neutral" refers to the carriers participating in an integrated joint venture alliance being indifferent to which member's airplane (metal) carries a passenger, due to their sharing the costs and benefits of operation within the alliance. The alliance between Alitalia and KLM (Case No COMP/JV.19) was regarded by the European Commission as a full-function joint venture, even though the companies did not create a corporate vehicle for their cooperation.

4 Rules by the Supreme People's Court on Certain Issues relating to Application of Laws for Hearing Cases of Civil Disputes caused by Monopoly Conduct (draft of April 25, 2011), available in Chinese here.

5 See Jones Day's Antitrust Alert, "China's Supreme Court to Set Framework for Antitrust Litigation," available here.

6 See Jones Day's Antitrust Alert, "Chinese Supreme People's Court Sets Framework for Antitrust Litigation," available here.

7 Another option would be to file for amnesty under both agencies' rules, but at this stage, there are many unanswered questions surrounding amnesty in China. See S. Evrard and Yizhe Zhang, "Cartels," in Competition Law in the BRICS Countries, Kluwer, 2012.

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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