Hong Kong: Advance to go: China's competition reforms

Part 2 - Monopoly agreements and dominance - 12 January 2011
Last Updated: 19 January 2011
Article by Martyn Huckerby, Tingting Cai and Sharon Wong

On 7 January 2011, China's State Administration of Industry and Commerce (SAIC) issued long-awaited implementing regulations with respect to monopoly agreements, abuse of dominant market position and abuse of administrative power that will provide firms with greater clarity and guidance on how to comply with China's Anti-Monopoly Law (AML) and some helpful "safe harbours".

Overview

Following on the heels of the National Development and Reform Commission's (NDRC) implementation regulations relating to price (discussed in Part 1 of our last review), the SAIC has issued its complementary implementation regulations. The new SAIC regulations deal with non-price anti-competitive conduct regulated under the AML and comprise the following:

  • Regulations on Prohibiting Monopoly Agreements (SAIC Monopoly Agreement Regulations);
  • Regulations on Prohibiting an Abuse of a Dominant Market Position (SAIC Dominance Regulations); and
  • Regulations on Prohibiting an Abuse of Administrative Power (SAIC Administrative Abuse Regulations).

These new rules evolved from earlier consultation drafts issued for public comment in April 2009 (in respect of the SAIC Monopoly Agreement Regulations and the SAIC Dominance Regulations only) and May 2010. All three pieces of legislation will take effect from 1 February 2011.

1. Monopoly agreements

A monopoly agreement prohibited under the AML is an agreement, decision or other concerted conduct that is entered into by undertakings, on their own initiative or coordinated by an industry association, which has the effect of eliminating or restricting competition. The SAIC Monopoly Agreement Regulations further explain the definition of "monopoly agreement", describe the general categories of monopoly agreements provided under the AML and provide details of its leniency regime.

Definition of "monopoly agreement"

The SAIC Monopoly Agreement Regulations reiterate that a monopoly agreement is not confined to express agreements. Rather, they extend to include "concerted acts" or a tacit understanding between parties. In determining whether parties have engaged in a "concerted act", the SAIC will consider the rationale for the action and particular industry conditions. This is in addition to considering any acts of conformity and communications or exchanges of information among parties, both factors that are also stipulated in the NDRC regulation. It remains to be seen whether the additional factors to be considered by the authority, especially the rationale for the action, would suggest that when investigating alleged non-pricing cartels the SAIC will be less stringent than the NDRC's approach for price cartels.

Prohibiting anti-competitive horizontal agreements between competitors is the primary aim under the SAIC regulation as prohibited vertical agreements generally concern pricing issues and fall outside the SAIC's jurisdiction. A catch-all provision also exists to enable the SAIC to conduct investigations into any suspicious non-price related agreements.

Description of monopoly agreements

Details of the general categories of prohibited horizontal agreements are provided under the SAIC Monopoly Agreement Regulations and are clarified in the table below.

AML Prohibited Activity Clarification under the SAIC Monopoly Agreement Regulations
Article 13(1): Agreements that fix or change the prices of goods/services None provided, presumably on the basis that pricing behaviour is subject to the separate NDRC rules.
Article 13(2): Agreements that restrict volume of production or sales Prohibited agreements include those that restrict volume on production or restrict volume of production of particular types of goods or services by means of:

  • limiting or fixing volume of production, or even ceasing production; or
  • refusing to supply or restrict volume of supply.
Article 13(3): Agreements that divide up the sales market or raw materials procurement market Prohibited agreements include those that:

  • divide geographical area for sales, sales targets, type or quantity of goods/services to be sold;
  • divide procurement area, type and volume of raw materials (such as raw substances, semi-processed products, components and relevant equipments); and
  • divide raw material suppliers.
Article 13(4): Agreements that restrict the purchase of new technology or new equipment or that restrict technological development

Prohibited agreements include those that:

  • restrict the purchase and use of new technology and techniques;
  • restrict the purchase, lease and/or use of new equipments;
  • restrict the investment in and development of new technology, techniques and new products;
  • refuse to adopt new technology, techniques and equipments; and
  • refuse to adopt new technology standards.
Article 13(5): Agreements contain boycotts

Prohibited conduct includes jointly:

  • refusing to supply or sell products to a particular undertaking;
  • refusing to purchase or distribute products of a particular undertaking; and
  • requiring a particular undertaking not to deal with competitors of the parties to the agreement.

Consistent with provisions in the AML and the NDRC regulations, industry associations are prohibited from organising undertakings from engaging in monopoly agreements.

Penalties and leniency regime

The principles on penalties and the leniency regime contain some important differences to those set out in the NDRC regulations. In particular, the SAIC Monopoly Agreement Regulations are more general and do not detail the level of fine reductions available for informants who are not the first to report. The SAIC clarifies it will apply leniency to administrative fines only. This leaves it open to the SAIC to confiscate illegal income concerning relevant monopoly agreements. As previously noted, the differences between the leniency regime put in place by the SAIC and the NDRC highlights the potential uncertainty for firms arising from the overlapping jurisdiction of both regulators.

A notable amendment from earlier drafts is that the leniency provisions do not expressly exclude their application to informants who acted as ringleaders of a monopoly agreement. As such, it would be important to monitor future investigations and cases to understand the SAIC's approach in respect of the leniency provisions.

In addition, the SAIC Monopoly Agreement Regulations also add that the authority may, at its discretion, reduce or exempt administrative penalties if an offending undertaking voluntarily ceases the concerned monopolistic conduct. The discretionary nature of the leniency regime makes it less likely that firms will be comfortable relying on it.

2. Abuses of dominant market position

The SAIC Dominance Regulations complete the framework under the AML on prohibitions imposed on dominant market players by settling outstanding issues raised under the NDRC regulations.

Indicative factors referenced under Article 18 of the AML to determine whether an undertaking is dominant are explained and detailed under the new regulations. When assessing barriers to entry, for example, the SAIC will consider market entry regulations, the availability of key infrastructure, sales channels, capital and technological requirements and costs etc. Or, when assessing the degree of reliance between firms, the SAIC will consider volume of trading, the duration of the trade relationship and the difficulty in switching to other parties. Indicative factors can also be used to rebut presumptions to determine dominant players.

The SAIC Dominance Regulations also list out what is considered abusive conduct by a dominant firm falling under SAIC's jurisdiction:

AML Prohibited Activity Listed examples under the SAIC Dominance Regulations
Article 17(1): Selling or purchasing at an unfairly high or low price None provided, presumably on the basis that pricing behaviour is subject to the separate NDRC rules.
Article 17(2): Selling below cost without justification None provided, presumably on the basis that pricing behaviour is subject to the separate NDRC rules.
Article 17(3): Refusal to deal without justification
  • reducing the number of current trading deals or delaying or ceasing the current trade with counterparties;
  • refusing to enter into a new deal with counterparties;
  • imposing restrictive conditions to block counterparties; or
  • prohibiting counterparties from accessing its essential facilities/network that are necessary for others' operation on reasonable terms and conditions.
Article 17(4): Exclusive dealing without justification
  • restricting counterparties to trade exclusively with itself or a designated undertaking; or
  • restricting counterparties from trading with its competitors.
Article 17(5): Tying or bundling without justification
  • bundling or packaging sales that are inconsistent with trade practices;
  • imposing unreasonable restrictions on trade terms such as payment method or term of contract;
  • imposing unreasonable restrictions on sales region, sales target or post-sales services etc; or
  • imposing conditions that are irrelevant to the transaction.
Article 17(6): Applying discriminatory treatments without justification
  • setting different trading volumes, variety, quality or grade;
  • applying preferential terms differently;
  • applying different payment or delivery methods; or
  • implementing post-sales services differently.

The SAIC Dominance Regulations do not provide guidance on what justifications would be satisfactory. The provisions simply state that the SAIC will consider whether the concerned conduct is with respect to normal business activities and interests or whether it impacts economic efficiency, public interest and economic development. Consideration of whether concerned conduct is consistent with trading practices or will harm consumers' interests and have an anti-competitive impact have been removed. Given this, dominant firms should be cognizant that monopolistic conduct that aligns with industry practices may not be a viable justification.

Similar to the SAIC Monopoly Agreement Regulations, the SAIC Dominance Regulations prescribe that the SAIC may, at its discretion, reduce or exempt penalties if an offending firm voluntarily ceases the concerned abusive conduct.

While the clause that excludes application of the rules to the non-monopolistic exercise of intellectual property rights has been removed from the earlier draft, the same general principle that is set out under the AML and the NDRC regulations remains applicable. As such, the removal of the clause in the SAIC Dominance Regulations is not of major significance.

3. Abuses of administrative power

Based on the SAIC's experience in enforcing the Anti-Unfair Competition Law and references to the State Council's Regulations to Prohibit Regional Blockades in Market Economy Activities, the SAIC Administrative Abuse Regulations provide examples of abusive conduct by administrative organisations and agencies prohibited under the AML, including the following:

  • expressly or impliedly requesting undertakings to purchase or use designated goods or services (including by rejecting or delay in providing administrative approval/licence);
  • adopting local protectionism by applying discriminatory technical requirements or imposing different requirements to obtain relevant administrative approvals on goods or services from outside the region;
  • setting up toll-gates to restrict or prevent the movement of goods or services between local and other regions;
  • excluding or restricting undertakings from outside the region from participating in public biddings by imposing discriminatory qualification requirements or assessment standards;
  • excluding or restricting undertakings from outside the region from investing in or operating in the region; and
  • forcing undertakings to implement monopolistic conduct.

Administrative organisations are also prohibited from formulating all kinds of rules (including in the form of decisions, announcements, notices, opinions or meeting minutes) that eliminate or restrict competition.

Where there is a violation of the above provisions by any administrative organisation or agency, the SAIC or its local counterparts may propose remedial action to a higher competent authority.

Separately, the SAIC Administrative Abuse Regulations for the first time include specific provisions prohibiting undertakings from implementing monopolistic conduct based on administrative related justifications. These include alleging that the concerned monopolistic conduct was required, authorised or appropriately legislated by administrative organisations or agencies.

Non-complying undertakings will be subject to penalties stipulated under the SAIC Monopoly Agreement Regulations and/or the SAIC Dominance Regulations.

Conclusion

The three enforcement agencies, the SAIC, the NDRC and the Ministry of Commerce (MOFCOM, who is responsible for merger control) have now issued a relatively comprehensive set of implementation rules that provide a framework for enforcement of the AML. With the necessary foundation now laid, the agencies are expected to be more vigilant in their enforcement. As such, firms should anticipate that the informal and unofficial "grace period" since the AML took effect in 2008 has now come to an end, and they should take steps to prepare for unannounced inspections by regulators (so-called "dawn raids"), formal investigations, and the possibility of targeted enforcement activity.

It is also likely that the remaining gaps in the regulatory framework will shortly be filled. In particular, further guidelines are expected to be developed by the SAIC and the NDRC, especially in the areas where the two have differing approaches i.e. leniency regime and definition of "concerted acts".

In addition, guidance on other outstanding AML related matters anticipated to provide firms with greater clarity in terms of compliance, include regulations dealing with:

  • national security review in the context of mergers and acquisitions, likely by the State Council;
  • the exercise of intellectual property rights, likely by the State Council;
  • judicial guidelines for handling litigation under the AML, by the Supreme People's Court; and
  • substantive guidance on merger review covering outstanding issues such as the notion of "control" and methods of analysis adopted for mergers, by MOFCOM.

As such, firms carrying on business in China should continue monitoring developments that may impact the validity of their contractual arrangements and business operations.

In the meantime, firms should immediately take steps in response to the SAIC regulations (and the NDRC regulations that were the subject of our previous alert), including considering exemptions to and justifications for monopoly agreements when contracting with others (i.e. in the context of joint ventures). Dominant undertakings in particular should review their trading policies to ensure that their activities do not contravene its AML obligations.

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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