China: 中国《反垄断法》配套新规律师实务评述（4/4）：行政垄断 A Practical Review Of New Supporting Regulations Of China's Anti-Monopoly Law (4/4): Administrative Monopoly

邓志松/Jet Deng, 戴健民/Ken Dai¹

China has a long tradition of state intervention in economic operation. Nowadays, China's economy is speedily modernized and globalized, in addition to economic monopolies², abuse of administrative power has become increasingly harmful to economic operation. In view of this, AML sets a chapter "Abuse of Administrative Power to Exclude or Restrict Competition", which is customarily referred to as "administrative monopoly" in academic circles.

On June 27, 2022, the SAMR issued the Provisions on Preventing the Abuse of Administrative Powers to Exclude or Restrict Competition (Draft for Comments) ("the Draft"), which is an amendment of the original regulation Interim Provisions on Curbing Abuse of Administrative Power to Exclude or Restrict Competition ("the original Provisions"). In general, the Draft did not change the original Provisions significantly, but mainly made certain modifications to the original Provisions in order to converge with the new AML, and detailed the relevant administrative monopoly provisions added by the new AML simultaneously. This article will sort out and interpret the changes in the Draft, with a view to helping enterprises better protect their rights and interests in the face of the misconduct of administrative subjects, and avoid participating in the administrative monopoly activity.

1. Improve the Type of Administrative Monopoly Behavior

The Draft has added and detailed various types of conducts that abusing administrative power to exclude and restrict competition, mainly including the following two aspects.

1. Expanding the scope of illegal subjects for formulating content of exclusion or restriction of competition

In the AML before the amendment and the original Provisions, although the subjects of other administrative monopoly activity include both administrative authorities and organizations empowered by laws or regulations to perform the function of administering public affairs, the subjects of formulating documents about exclusion or restriction of competition only mention administrative authorities. However, in practice, although organizations authorized to managing public affairs do not have the authority to formulate legal policies, they can still manage administrative matters within the scope of authorization by issuing informal documents or internal requirements, etc. There is a possibility that they may abuse their administrative power and use the formulated contents to exclude or restrict competition.

In view of this, Article 45 of the new AML includes "organizations empowered by laws or regulations to perform the function of administering public affairs" as a subject on formulating content that excludes or restricts competition. The Draft also expand the subject in Article 11 correspondingly.

2. Increase in the types of illegal conduct

According to Article 40 of the new AML, the Draft has added a new provision to include a kind of illegal conduct which is signing of cooperation agreements or memorandum with undertakings to prevent other undertakings from entering the market or differential treatment. ³ In practice, such activities have occurred and led to the monopoly of a market by one entity, which has seriously impeded other market players from participating fairly in market competition.

• In recent years, there have been a number of cases in the bicycle sharing field involving the government's disguised restriction to only allow single market subject's operations through agreements, which were found to be an abuse of administrative power. For example, in the first batch of 2022 Special Actions to Stop Abuse of Administrative Power to Exclude and Restrict Competition issued by the SAMR on June 9, 2022, there were three cases concerning "N-choice-1" in bicycle sharing area.⁴ Local governments chose to sign contracts with one particular undertaking on the grounds of avoiding the disorderly placement of bicycles, agreeing not to introduce other shared bicycles during the contract period, and to control the placement of other brands of bicycles. In particular, in the case of Huimin County Comprehensive Administrative Enforcement Administration, the Administration signed a strategic cooperation agreement with a company without going through government procurement or bidding procedures, identified the company as the exclusive shared bicycle undertakings in the region. This conduct of determining the exclusive shared bicycle undertakings through the agreement was recognized to have restricted other shared bicycle brands with qualified qualifications and service capabilities from entering the regional market, excluded and restricted the competition, and was prohibited under the AML.
• In addition to shared bicycles, the government's designate of single platform to post consumption vouchers had also been a controversial topic. In 2020, Hangzhou government cooperated with one payment platform in posting electronic consumption vouchers, and consumers could only receive the vouchers on that payment platform. Hangzhou government's act was suspected of administrative monopoly. Although the government did not give financial subsidies to the platform, the fact that it brought more "traffic" to the platform might have weakened the competitiveness of other platforms in the market.⁵
• In the field of pharmaceutical sales, monopolistic cases of government-enterprise cooperation have also occurred. For example, in the case of Hunan Provincial Administration of Market Regulation investigating the abuse of administrative power by Shuangfeng County Health Administration, the health administration and a company signed a strategic cooperation agreement for the purchase and sale of drugs, consumables, and equipment, agreeing that "all public medical institutions within Party A's jurisdiction (list attached) will give Party B a certain percentage of the purchase volume of drugs, consumables, and equipment needed. Party A will issue targets to the public medical institutions under its jurisdiction in the form of documents, and Party B will sign supply contracts with the relevant public medical institutions." The conduct was found to have impeded and restricted fair competition in the market for drugs, consumables, and device equipment in the county.⁶

In addition, the Draft adds "using standards to impede the free flow of goods" in Article 7, prohibited activities that restrict the free flow of goods. We understand that the "standards" here mainly refers to industry standards, local standards, group standards, etc. formulated in accordance with the Standardization Law, Local Standards Management Measures and other laws and regulations. In this regard, Article 22 of the Standardization Law also provides that "prohibit using standards to impede the free flow of goods and services to exclude or restrict market competition," but the scope of coverage here should be larger, which includes national standards. Article 5 of the Local Standards Management Measures also provides that "prohibit using local standards to impede the free flow of goods and services to exclude, restrict market competition, through issuance of local standards for product quality and testing methods, etc." Previously, administrative monopoly cases using standards to restrict the flow of goods were mainly concentrated in the automotive field, for example:

• In 2021, Shanxi Provincial Administration of Market Regulation corrected the abuse of administrative power by Jinzhong Government Office and other departments to exclude and restrict competition. The government required that "The patrol cars operated in the urban areas shall be pure electric vehicles or National VI Standard methanol vehicles", which was found to exclude and restrict competition. ⁷
• In 2022, the Shandong Provincial Administration of Market Regulation corrected the case of Jinan Ecological Environment Bureau's abuse of administrative power to exclude and restrict competition, in which Jinan City required that motor vehicles transferred from other ports should meet the "provincial emission standards (National V standard) as other ports required to be implemented in Jinan City." This requirement was found to be an abuse of administrative power to impede the free flow of goods between regions and to issue policies with content of exclusion and restriction of competition.⁸

2. Adding the Fair Competition Review and Competition Advocacy Rules

The fair competition review system, as an important institutional arrangement to regulate administrative monopoly beforehand, was incorporated into Article 5 of the amended AML.⁹ Although the State Council had issued some regulations on fair competition review in the past, the system had never been written into the law before.¹⁰

To converge with the new AML, the Draft adds the content of fair competition review. Moreover, the Draft also provides that market regulation authorities at all levels the power to adopt various methods to support and promote itself as well as other administrative authorities and organizations authorized by laws and regulations to manage public affairs to strengthen the concept of fair competition, improve relevant policies, and maintain a fair and competitive market environment. These methods include " (a) publicizing fair competition laws, regulations and policies; (b) providing fair competition consultation in the process of formulating policies; (c) organizing competition impact assessment on the implementation of relevant policies and issuing assessment reports; (d) organizing training exchanges; (e) providing work guidance suggestions; and (f) other competition advocacy activities in favor of improving policy measures."

3. Refining the Interview System in Antitrust Investigation

Compared with the investigation to undertakings by antitrust enforcement authorities, the investigation to administrative subjects is more difficult. If the administrative subjects do not cooperate, it is hardly to carry out the investigation smoothly. Based on this dilemma, the newly amended AML introduces a system of enforcement interviews.

The Draft further refines the rules based on the AML. Firstly, Article 17 requires that the relevant unit or individual should cooperate with the investigation. Secondly, Articles 25 and 26 further refine the interview system, include more operational provisions on the interview's content, procedure and manner, etc. In particular, Article 26 mentions that "the media, industry associations, experts, scholars, relevant undertakings, and representatives of the public may be invited to attend the interviews", which, if can be applied widely, will help protecting the public's right to know and enhance the transparency of administrative monopoly investigations.

The interview system in the Draft also has areas that need to be improved. The interview system stipulated in Article 55 of the new AML may also be used in cases where administrative subjects violate the fair competition review system, and this should be considered to incorporate in the Draft. For example, the description "suspected of violating the provisions of the AML by abusing administrative power to exclude or restrict competition" on Article 25 can be amended to "violating the provisions of the AML by failing to conduct a fair competition review or suspected of abusing administrative power to exclude or restrict competition".

4. Practical Insights on Legal Protection and Risk Management

The object of administrative monopoly regulation is administrative subjects, mainly administrative authorities at all levels, but since administrative monopoly excludes and restricts market competition, it is also closely related to market subjects like enterprises. From the perspective of enterprises, on the one side, the enterprises should know how to protect their rights and interests in the face of administrative monopoly, on the other side, they should avoid participating in administrative monopoly and suffer economic losses or even punishment as well. In other words, the enterprises should perfect their legal protection and risk management according to the new administrative monopoly regulations.

If one's rights and interests are damaged because of administrative monopoly, one can analyze and question in the following three stages.

• First, ex-ante attention should be paid to whether the relevant policies and provisions have undergone the fair competition review. There are legal flaws on the policies and provisions that have not undergone the fair competition.
• Secondly, during the administrative activity, the attention should be paid to whether the administrative subject conduct the prohibited activities, whether the decision-making and implementation procedures are legitimate, and whether the relevant administrative activity belong to the types of illegal conducts stipulated in the new regulations, or although not clearly categorized, the activity has or may have the effect of excluding or restricting competition.
• Third, ex-post, pay attention to whether the investigation of the suspected administrative monopoly is conducted in accordance with the procedures, including whether the relevant person in charge is interviewed, and whether a written report on rectification is submitted.

In terms of risk management, enterprises as market subjects should be aware of the risk management and avoid engaging the prohibitions during the cooperation with administrative subjects, so as to avoid the economic loss of the enterprises themselves due to the inability to continue the cooperation as a result of the illegality of the administrative activity, or even receiving administrative investigation or administrative punishment by the antitrust enforcement authorities as a participant of the illegal activity.

Footnotes

1 Jet Deng and Ken Dai are Partners with Dentons' China Antitrust team, respectively based in Beijing and Shanghai. They can be reached via zhisong.deng@dentons.cn and jianmin.dai@dentons.cn. The authors would like to thank Dentons' China Antitrust team, particularly Cathy Zhang and Rangi He for their valuable contribution.

2 Economic monopoly refers to monopoly agreements, abuse of dominant market position, and concentration of undertakings with the effect of excluding or restricting competition, which are the "three pillars" of anti-monopoly law in traditional market economy. In China, administrative monopoly has become the fourth pillar of China's antitrust legal system, because of the regulation of administrative monopoly.

3 Provisions on Preventing the Abuse of Administrative Powers to Exclude or Restrict Competition (Draft for Comments) Article 6 Administrative agencies and organizations empowered by laws or regulations to  perform the function of administering public affairs shall not abuse administrative power to prevent other operators from entering the relevant market or apply unequal treatment to other operators to Exclude and restrict competition by signing cooperation agreements, memoranda, etc.

4 See 2022 Special Actions to Stop Abuse of Administrative Power to Exclude and Restrict Competition cases (the first batch): (1) Shandong Provincial Market Regulation Administration's investigation on Gaomi City Comprehensive Administrative Enforcement Bureau re abuse of administrative power to exclude, restrict competition, (2) Shandong Provincial Market Regulation Administration's correction to Binzhou City Urban Administration Bureau re abuse of administrative power to exclude, restrict competition, and (3) Shandong Provincial Market Regulation Administration's correction to Huimin County Comprehensive Administrative Enforcement Bureau re abuse of administrative power to exclude, restrict competition. https://www.samr.gov.cn/jzxts/tzgg/qlpc/202206/t20220608_347613.html.

5 See Xu Guangjian: "The Return of Consumer Vouchers Around the World" Is the Government-Enterprise Cooperation Procedure Compliant?

https://mp.weixin.qq.com/s/6TU2y7U2hzgtN0JaCy6I8A.

6 See the announcement of the Hunan Provincial Administration of Market Regulation, https://amr.hunan.gov.cn/amr/zwx/xxgkmlx/xzzfx/yasf/202206/t20220609_25441722.html.

7 See the announcement of the Shanxi Provincial Administration of Market Regulation, https://scjgj.shanxi.gov.cn/zwgk/zdgkjbml/tcfl/gstg/202111/t20211108_3054505.shtml。

8 See the announcement of the SAMR, https://www.samr.gov.cn/fldes/tzgg/xzjj/202204/t20220424_342264.html.

9 Article 5 of the AML, "The State establishes the fair competition review system. The fair competition review shall be conducted in the formulation of the rules involving the economic activities of market players by administrative agencies and organizations empowered by laws or regulations to  perform the function of administering public affairs.

10 See Jet Deng and Ken Dai, A Practical Review of the Amended Anti-Monopoly Law of China: Highlighting Nine Areas with Twenty-three Changes, available at https://www.lexology.com/library/detail.aspx?g=4e974b81-b256-45f4-8590-4533f33e7541.

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