China: SAIC - first decision on discriminatory treatment

Last Updated: 15 December 2014
Article by Susan Ning, Kate Peng and Yang Yang

On 4 November 2014, the State Administrative for Industry and Commerce ("SAIC") published a decision in which it found that the Pizhou branch of the Xuzhou City Tobacco Corporation (the "Pizhou Tobacco Branch") had abused its dominant position in the tobacco wholesale distribution market by treating customers of equal standing in a discriminatory manner. The SAIC found that the Pizhou Tobacco Branch had violated Article 17 of the PRC Anti-Monopoly Law (the "AML"), which prohibits business operators in a dominant market position from engaging in abusive conduct that eliminates or restricts competition, and it imposed a fine of RMB 1.7 million.

We set out in this article some points that are of particular relevance to undertakings subject to the jurisdiction of the AML in evaluating the legal risks of conduct which may constitute an abuse of a dominant market position.

On 4 November 2014, the SAIC published a decision in which it found that Pizhou branch of the Xuzhou City Tobacco Corporation ("Pizhou Tobacco Branch"), a tobacco sales company, had abused its dominant position by treating customers of equal standing in a discriminatory manner without justifiable cause. The Pizhou Tobacco Branch is the only entity that is authorized by the government to engage in the wholesale distribution of cigarettes due to the government's monopoly of tobacco production and supply in China. The SAIC's local branch in Jiangsu found that the Pizhou Tobacco Branch had supplied two of its identified key account customers ("KA customers") with different volumes of cigarettes and at different levels of frequency. The Jiangsu AIC considered that the two KA customers had equal standing and that their different treatment by the Pizhou Tobacco Branch was discriminatory in nature. Therefore, it imposed a fine of RMB 1.7million on the Pizhou Tobacco Branch for violating Article 17 of the PRC Anti-Monopoly Law (the "AML"), which prohibits business operators in a dominant market position from engaging in abusive conduct that eliminates or restricts competition.

We set out below some points that are of particular relevance to undertakings subject to the jurisdiction of the AML in evaluating the legal risks of conduct which may constitute an abuse of a dominant market position.

  1. Which entity should be fined

It is interesting to note that the Pizhou Tobacco Branch was fined, even though it is only a branch of the Xuzhou City Tobacco Corporation. According to Article 14 of the PRC Company Law, a branch does not qualify as an independent legal entity and its civil liabilities should be borne by its parent company. Therefore, it is arguable that the Pizhou Tobacco Branch's parent company, Xuzhou City Tobacco Corporation, should have been fined rather than the Pizhou Tobacco Branch itself.

In the SAIC's responses to queries raised by the Wuhan AIC (dated 16 June 1990) and the Anhui AIC (dated September 1999) respectively, it specifically stated that branches set up by a legal entity can be the subject of an administrative penalty, even though they cannot bear civil liabilities independently.1 According to these responses, the SAIC's view is that branches which have registered as economic entities with their local AIC are engaged in business operations and therefore can be the subject of an administrative investigation and consequent penalties.

Therefore, in practice, if a branch of an independent legal entity violates the AML, the SAIC may penalize the branch instead of its parent company. Accordingly, the SAIC may use the annual turnover of the branch instead of the parent company to calculate the fine.

  1. Determining whether two customers have equal standing

Article 17(6) of the AML prohibits dominant market players from treating customers of equal standing differently, in terms of price, volume etc., without justifiable cause. In practice, however, it is very difficult for business operators to determine whether their customers have equal standing and should be treated equally. In the present case, the Jiangsu AIC analyzed the circumstances of the two relevant KA customers, providing some insight into its approach in this regard.

While determining whether the relevant customers, Golden Eagle Company ("Golden Eagle") and Jiangsu Happy Buy Company and Xuzhou Happy Buy Company ("Happy Buy"), had equal standing, the Jiangsu AIC carefully considered the Pizhou Tobacco Branch's distributor classification policy. According to its policy, the Pizhou Tobacco Branch divided its 7,300 retailers into 42 categories according to the form of their business, location and size. In particular, it selected its KA customers by evaluating their cigarette retail qualifications, compliance with tobacco sales laws, ability to settle accounts, their location, sales capability, fairness in trading, etc. Golden Eagle and Happy Buy were classified as KA customers by the Pizhou Tobacco Branch based on the above standards.

After examining the circumstances of Golden Eagle and Happy Buy, the Jiangsu AIC concluded that they were customers of equal standing, as they were both: (i) at the retail level of the distribution chain; (ii) classified by the Pizhou Tobacco Branch as KA customers and had entered into KA customer agreements with the same terms and conditions; and (iii) were willing and able to sell a relatively high volume of cigarettes. The Jiangsu AIC also pointed out that even though each customer had its own characteristics, the above factors were sufficient to show that they were of equal standing.

  1. What behavior would be considered discriminatory

It is clear from the Jiangsu AIC's reasoning that it did not object to the categorization of customers into different groups according to specified criteria. It was also not problematic that the Pizhou Tobacco Branch had different sales policies for KA customers and customers in other categories. However, the Jiangsu AIC considered that treating two KA customers differently constituted discriminatory treatment prohibited by Article 17(6) of the AML.

The Jiangsu AIC found that the Pizhou Tobacco Branch treated Golden Eagle and Happy Buy differently in as least two aspects: the frequency which with it supplied its cigarettes and the quantities of bestselling cigarettes it supplied to each. First, Golden Eagle was entitled to purchase supplies twice a week, while Happy Buy was only allowed to place orders once a week. Second, Golden Eagle was entitled to order a maximum of 300 boxes of bestselling cigarettes in each purchase, while Happy Buy was only allowed to order up to 20 – 50 boxes. The Jiangsu AIC considered that the Pizhou Tobacco Branch had intentionally manipulated the supply of cigarettes to different KA customers, which was discriminatory conduct.

  1. Justifiable causes for discriminatory treatment

The Pizhou Tobacco Branch argued that Golden Eagle had strong business capabilities, large volumes of sales and it provided more jobs compared with the other distributors, and therefore it should receive more favorable treatment. The Jiangsu AIC did not accept this argument. It found that Golden Eagle's larger volume of sales was a consequence of the Pizhou Tobacco Branch's historical preferential treatment to it, rather than the reason for it.

It is interesting to note that Golden Eagle is in fact an affiliate of the Pizhou Tobacco Branch and it had been enjoying free office space provided by the Pizhou Tobacco Branch up to 2011. However, the Jiangsu AIC did not consider that this justified the Pizhou Tobacco Branch's favorable treatment to Golden Eagle. It considered that the Pizhou Tobacco Branch should treat Golden Eagle and its non-affiliated retailers equally.

In practice, business operators tend to treat their affiliates as group members and consequently treat them more favorably. However, when a business operator holds a dominant market position, it should be cautious about favoring its affiliated companies over its non-affiliated trading parties, as such conduct could constitute an abuse of dominance following this case.

  1. Which year should be used to calculate turnover

The AML stipulates that antitrust regulators may fine undertakings which violate the AML between 1-10 percent of their sales revenue from the previous year. However, the AML is silent on the definition of "previous year". In the present case, the Jiangsu AIC imposed a fine on the Pizhou Tobacco Branch equal to 1 percent of its sales revenue in 2012, i.e. the year prior to the year in which the Jiangsu AIC initiated its investigation.

This approach is different from the approach that has been taken by the NDRC in other cases. The NDRC has previously calculated fines by reference to the turnover from the year preceding the year in which it makes its penalty decision. The difference in approach by the different authorities should be borne in mind by business operators which are evaluating the possible range of fines for potential violations of the AML.

Summary

The SAIC has released several decisions relating to abuses of dominance this year, which demonstrates its increasing confidence in dealing with abuse of dominance cases, as well as its intention to clarify important aspects of Article 17 of the AML.2 With the publication of more decisions, we are certain that we will see more clarity and stability in antitrust enforcement in China. Business operators will also benefit from the improvements in transparency by the antitrust enforcement authorities as it will enable them to better understand the boundaries of their behavior and identify what conduct will likely constitute a violation of the AML.

Footnotes

1The SAIC's Reply Regarding the Request for Instructions on Whether Non-independent Accounting Branches of Legal Enterprises Can Act as a Party in Administrative Cases (SAIC [1990] No.174) published on 16 June 1990, and the SAIC's Reply to the Relevant Issues Concerning the Determination of the Liable Party for a Violation (Gong Shang Qi Zi (1999) No.233) published on 3 September 1999.

2The abuse of dominance cases published by the SAIC since 2014 are as follows: Abuse of dominance case of Guangdong Huizhou Dayawan Yiyuan Purified Water Ltd. (Competition Law Enforcement Bulletin 2014 No.13, published on 6 January 2014); Antitrust case of Beijing Shengkai Sports Development Ltd. (Competition Law Enforcement Bulletin 2014 No.14, published on 11 June 2014); Abuse of dominance case of Tobacco companies Ltd. Chifeng City, Inner Mongolia Autonomous Region (Competition Law Enforcement Bulletin 2014 No.16, published on 30 July 2014); Abuse of dominance case of Pizhou Branch of Jiangsu Xuzhou Tobacco Companies (Competition Law Enforcement Bulletin 2014 No.18, published on 4 November 2014); Antitrust case of Chongqing Gas Group Ltd. (Competition Law Enforcement Bulletin 2014 No.19, published on 28 November 2014).

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions