AML to benefit from SAIC draft regulations

Prohibition of anti-competitive monopoly agreements and prohibition against the abuse of market dominance are two of the AML's main prongs; the third being a review of concentration. However, under the AML, the provisions of these two categories lack detail as they are only covered through the broad principles of China's competition law. Hence, the new draft regulations are welcomed as a mode to increase the detail of and to further develop China's AML.

Furthermore, substantial private litigation has emerged in areas concerning the abuse of dominance and monopoly agreements. Ultimately there is a need for certainty and increased detail. SAIC's two drafts will help meet this need and have received a warm welcome by concerned parties.

But the current situation is far from perfect. Problems still exist and modifications are needed. I will underscore three important issues which should be addressed.

Definition

Both of the draft regulations have an article that stipulates that when a business operator is in violation of the regulation, SAIC should: stop the violation; forfeit the income generated from the violation; and impose 1% to 10% of the undertaking's previous year's turnover as the fine. However, this article does not define the term 'turnover', which leads to two aspects of confusion.

Firstly, turnover can be interpreted as turnover from all of the undertaking's subsidiaries and/or parent corporations as opposed to just the business operator itself. This causes tremendous variation in the levied fine and can be incredibly unfair. There should be a balance between punishment and conduct. When the mistake of one subsidiary extends to the whole group, a balance fails to exist.

Alternatively, turnover may be interpreted as only being generated from the product or service that was directly involved in the alleged anti-monopoly behaviour. Whether profit gained from other types of products/services should be included is under question.

Concerns have also been raised over the level of discretion granted to enforcement institutions. As the article above stipulates, the fine should be 1% to 10% of the turnover. But this range is too broad, especially when the undertakings may involve enterprises where even 0.01% may be crucial to them. Results will ultimately become unpredictable with such unconstrained discretion.

The article in the draft regulations should be revised and the definition and scope of turnover clarified. The range of punishment should also be redesigned to prevent uncertainty.

Provincial enforcement

Both regulations stipulate that SAIC should vest its enforcement power to branches located in provinces, autonomous areas, or the municipality directly under the central government. There are at least three reasons that make this subject of great concern.

Firstly, although dramatic improvements have been achieved, it is still hard to deny that the enforcement ability of a local branch of SAIC is rather weak due to economic and human resource limitations within local government. There are simply fewer professionals in a local branch who fully understand the statutes and regulations to ensure proper enforcement.

Secondly, some people worry that the large potential fines may spur the local branch of SAIC to exaggerate alleged anti-competitive behaviour. They also argue that local government, for the same reason, may exert substantial influence on the decision of the local branch.

Thirdly, a monopoly occurs when several corporations based in the same province enter into an agreement in order to block competitors. Because this form of agreement will, to some extent, protect local corporations and therefore the local economy, the local enforcement institution may lack incentive to enforce the regulations.

A review system on a case-by-case basis would be desirable and most cases should be reviewed by SAIC. Even if SAIC cannot review all cases due to limited resources – and must vest some authority to local branches – it should at least review all documents submitted by local branches before reaching a final decision.

Exemption

Finally, and in reference to the AML, the draft Regulation on Prohibition of Monopoly Agreements stipulates some exceptions. If undertakings can prove that they meet a threshold, their agreement can be granted an exception. But there are no such exemptions in the AML or draft regulations. The exemption clause is in need of amendment.

Although problems continue to exist, these draft regulations should be welcomed by the AML. They provide further detail, which has been anxiously anticipated and which will help increase the certainty of the AML. It is hoped further regulations and guidelines will be promulgated in the future.

Grandall Legal Group (Beijing)
9/F Floor, Taikang Financial Tower
No. 38 North Road East Third Ring
Chaoyang District, Beijing 100026

Mobile: +86 139 1178 1654

Office Phone: +86 10 6517 6805

Website: www.grandall.com.cn