China: China’s Anti-Monopoly Law Enforcement Authorities Issue Long-Awaited Regulations For Implementing The Anti-Monopoly Law

In late 2010, the National Development and Reform Commission ("NDRC") and the State Administration for Industry and Commerce ("SAIC"), two of the three key Anti-Monopoly Law Enforcement Authorities ("Enforcement Authorities") in the People's Republic of China ("PRC"), formally issued five (5) long-awaited implementing set of rules in relation to the enforcement of the PRC Anti-Monopoly Law ("PRC AML"), which respectively address the enforcement policies against pricing monopolies and prohibition of abuse of market dominance and monopoly agreements. All these rules were announced during the first week of 2011 and took effect on February 1, 2011. It is worth noting that the PRC AML and these implementing rules are applicable to business activities occurring both within and outside the territory of China that may have the effect of eliminating or restricting competition in the China market. Multinational companies will need to pay close attention to the implementation and enforcement of these implementing rules and review their respective PRC-related business transactions carefully to ensure compliance, in particular, when restructuring their global purchase and supply channels or entering into business collaborations or setting pricing policies.

Under the PRC AML, the Enforcement Authorities designated three ministries, namely, NDRC, SAIC, and the Ministry of Commerce ("MOFCOM"). NDRC primarily oversees monopoly pricing concerns, SAIC is mainly responsible for regulating abuse of market dominance and monopoly agreements, while the Anti-Monopoly Bureau in MOFCOM is mainly in charge of merger control review. MOFCOM has promulgated several implementing rules regulating merger control review and premerger filings during the past two years after the PRC AML took effect on August 1, 2010. The promulgation of these five new implementing rules by NDRC and SAIC indicates that the PRC AML Enforcement Authorities are making joint efforts to facilitate the enforcement of the PRC AML. Below is our summary of these new implementing rules:

NDRC's Two Rules Related to Anti- Price Monopoly

Prohibition of Tacit Collusion between/among Competing Parties on Pricing

NDRC's two new rules, namely, the Anti- Price Monopoly Regulations and Anti-Price Monopoly Administrative Enforcement Procedural Regulations (the "NDRC Regulations") aim to crackdown on price fixing and make transparent the enforcement procedures by NDRC. The NDRC Regulations prohibit coordinated activities and tacit collusion between competing parties to implement any monopoly agreements, in particular price manipulation and conspiracies to fix, control or change prices.

Furthermore, the NDRC Regulations prohibit trade associations from formulating internal rules, decisions and notices eliminating or restricting competition on pricing and from soliciting and consulting with members to fix or restrict prices.

The new NDRC Regulations also contain so called "whistle-blower" provisions allowing those who first expose violations to be exempted from punishment. The first company to report to the NDRC and its local counterparts and produce evidence of tacit collusion or pricing coordination may avoid punishment, and any companies that follow the first reporting company by reporting and providing evidence in price-fixing cases may have their punishment reduced. However, such protection is not guaranteed, which means that the NDRC has discretion to decide the actual level of punishment.

Cracking-Down on Price Fixing between Trading Partners

In addition, the NDRC Regulations also bar vertical trading partners from fixing or restricting resale prices. The NDRC Regulations prohibit business operators who are in competition with each other from reaching various types of monopolistic pricing agreements, including the following:

• fixing or changing the prices of products/services;
• fixing or changing price variance; and
• fixing or changing commission charges, discounts and other fees that impact on prices, and agreeing a price calculation formula.

Also, the NDRC has discretion to determine what other types of agreements are objectionable.

Furthermore, the NDRC Regulations bar horizontal trading partners from reaching pricing agreements that will fix resale prices or restrict minimum resale prices.

Abusing Market Dominant Position

Companies that have dominant market share will be barred by the NDRC Regulations from charging "unfairly high prices" for their products and from paying "unfairly low prices" for supplies, or for selling products at a price lower than cost without appropriate reasons allowed by the same regulations. The definition of "dominant position" under the NDRC Regulations mirrors the one in the PRC AML, whereby a company may be presumed to have market dominance position if meets one of the following conditions:

• one business operator has a market share of at least one half in the relevant market;
• two business operators have a total market share of at least two-thirds in the relevant market; or
• three business operators have a total market share of at least three-fourths in the relevant market.

However, in circumstances under items (ii) or (iii) above, if the market share of one business operator is less than one-tenth, the business operators would not be presumed to have a market dominant position.

Notably, the NDRC Regulations specify the factors for determining whether a company has an "appropriate reason" for engaging in what would otherwise be an abuse of a dominant market position. These factors differ depending on the particular abuse. For example, the "appropriate reasons" for selling products at a price lower than cost include the following:

• selling fresh or live commodities, seasonal commodities and fragile or fresh commodities or over-stocked supplies;
• reducing the price of commodities for sale due to debt repayment obligations, property transfers or because of a discontinuation of business; and
• adopting sales promotions for the purpose of promoting new products.

SAIC's Regulations on Abuse of Dominant Market Position and Anti- Monopoly Agreements

It appears that the NDRC and SAIC are coordinating with each other in the issuance of the new implementing rules for the enforcement of the PRC AML. Three days after NDRC's announcement of the NDRC Regulations, SAIC announced the formal promulgation of three rules, i.e., Regulations on Prohibiting Monopoly Agreements ("Monopoly Agreement Regulations"), Regulations on Prohibiting Abuse of Dominant Market Positions ("Market Dominance Abuse Regulations") and Regulations on Curbing Abuse of Administrative Power to Eliminate or Restrict Competition ("Administrative Power Abuse Regulations") (collectively, the "SAIC Regulations"). These three SAIC Regulations were finalized after two rounds of revisions in 2009 and 2010, and by soliciting public comments on the drafts of these regulations.

Monopoly Agreement Regulations

The SAIC's Monopoly Agreements Regulations provide more detailed definitions than the ones in the PRC AML regarding the definitions of monopoly agreements. In addition to the identification of several prohibited monopoly agreements that restrict production volume, allocate sales markets and/or material markets, or restrict the purchase, use of and/or investment in new technology and new products, etc., the Monopoly Agreement Regulations also provide the SAIC with broad administrative discretion to identify and determine whether any other non-price-related monopoly agreements or activities not enumerated in the regulations constitute monopoly agreements that eliminate or restrict competition. Also, the Monopoly Agreement Regulations provide specific examples of each of the above category of monopoly agreements.

Under the Monopoly Agreement Regulations, monopoly agreements may be in written or oral form, or may consist of collaborative acts. The following factors should be taken into account when determining if coordinated activity or tacit collusion exists:

• Whether there is a uniform pattern between or among competitors' collective behavior;
• Whether competitors have engaged in communications or the exchange of information; and
• Whether the competitors can provide reasonable explanations with regard to any apparent uniform pattern of behavior.

Similar to the NDRC Regulations, more specific guidelines are given regarding trade associations and prohibited conduct.

In accordance with the Monopoly Agreement Regulations, business operators who reach and implement monopoly agreements will be assessed a fine in the range of one percent (1%) to ten percent (10%) of their sales volume in the preceding year and their income resulting from the monopoly agreements will be confiscated by the SAIC or its local counterparts. Even if the aforementioned business operators do not actually implement any monopoly agreement, they can be assessed a fine up to RMB500,000.

Market Dominance Abuse Regulations

The Market Dominance Abuse Regulations specifically define dominant market position to mean a situation in which a company or certain companies has or have control over the price, quality or other transactional terms and conditions for a product or service in a relevant market, or has a position which enables such company or companies to hinder or influence the ability of other business operators to enter into the relevant market. The Market Dominance Abuse Regulations also set out specific examples of behavior prohibited under the PRC AML as abuse of market dominance. For example, a company is prohibited, without legitimate reasons, from giving different treatment to parties with equivalent circumstances, attaching unreasonable transactional terms, and refusing transactions with trading counterparties.

The regulations also list the specific elements that SAIC will consider in determining whether market dominance exists, such as the following:

• market share;
• ability of a company to control sales or supply markets;
• financial and technical capabilities; and
• level of difficulties for other business operators to enter into the relevant market.

Detailed sets of factors which can be applied in analyzing the aforementioned specific elements are also provided under each of the elements. For example, when analyzing the ability of a company to control sales or the supply market, the SAIC should consider the company's ability to:

• control sales channels or supply channels;
• impact the trading terms and conditions (such as price, quantities and contract terms); and
• obtain priority access to materials, components and other relevant equipment necessary for the company's operations and production.

These factors are not included in either the AML or the NDRC Regulations. However, we anticipate that when the SAIC considers these various elements, market share may be the key element to determine the existence of market dominance since, in practice, it may require greater effort and be more complicated to collect information supporting the other elements mentioned above.

Administrative Power Abuse Regulations

These regulations specifically prohibit administrative behavior such as limiting the supply of products or other business transactions through delaying or refusing to issue licenses, setting barriers by adopting different standards for products from external sources to enter into the local market, etc. These regulations may be a basis for multinational companies to lobby against local protectionism in certain geographic areas or industries.

Our Observations

Simultaneously with the announcement of the NDRC Regulations, the NDRC cracked-down on a pricing monopoly which involved a Zhejiang paper manufacturing association arranging joint price fixing by member companies on packaging paper. The offenders were fined RMB500,000. In 2010, NDRC also punished several price-fixing activities in agriculture. There does not seem to be a requirement for any formal announcement of initiation of an anti-price monopoly investigation. That means the NDRC can carry out an unannounced inspection of business premises. Furthermore, the SAIC is also increasingly supervising the nature of competition in China's overall markets. Based on our review of these cases and other cases involving PRC companies being sued in US courts for anti-competitive behavior, it is apparent that the PRC authorities are recently more aware of the efforts other countries are giving to controlling price fixing and other monopoly activities. We believe the PRC authorities will focus not only on PRC domestic companies' business in China but also on foreign entities' transactions that may impact on the China market.

Multinational companies need to be prudent in communications with their competitors and trading counterparties and establish internal reporting rules related to setting and receiving communications from competitors and business partners. Also, other types of business cooperation or cross-ownership arrangements between competing parties may trigger possible anti-monopoly agreement issues. For example, there is a possibility that an interlocking directorate arrangement between two competing companies that have cross-ownership structures may be deemed to be a coordinated activity, though there are no specific prohibitions against interlocking directorates under PRC law.

In practice, if a manufacturing or trading company has its own manufacturing or sales affiliates in China, and if such company also exports to China, through offshore or onshore third party trading partners, products that are the same as the ones sold by its China affiliates, the Enforcement Authorities are concerned that such multinational company seek arrangement to protect its own affiliates' sales in China from being jeopardized by the third party trading partner's sales in China. Such arrangements may be deemed to be a disguised form of fixing resale prices under the NDRC Regulations unless there are any legitimate grounds deemed by the Enforcement Authorities as reasonable and acceptable based on the broad administrative latitude provided by the NDRC Regulations.

Given the increasing disputes between upstream and downstream business operators in certain industries (such as commercial retailing and wholesale and IT-related industries), multinational companies engaged in these industries should pay more attention to the conditions and terms for their respective upstream and downstream operators, to prevent challenges against such conditions and terms on the grounds of unfair treatment and/or abuse of market dominance.

In summary, in order to be in compliance with the newly promulgated regulations, multinational companies need to:

• develop internal measures to avoid anti-monopoly behavior;
• carefully review their distribution and sales agreements (especially if they are dominant in a "relevant market"); and
• screen basic policies and behavior regarding sales, management and marketing.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.