Provisional pricing rules put companies at risk

“The danger is that if they've had some quite innocent contact, it could be used by the agency to say there's been collusion,” he said. “Usually elsewhere there has to be some cogent evidence of collusion, for example evidence of a meeting discussing the [relevant] subject matter.”

But JSM senior associate Gerry O'Brien pointed out that the previous drafts allowed for an even broader approach to identifying “tacit collusion” – as they contemplated that cartels could be inferred simply because competitors were acting consistently in relation to price.

“Now in the latest draft they have included wording which suggests you would need some further element of communication between the competitors,” he said.

Pricing high and pricing low
Article 12 contains one of the most positive elements of the Draft: showing how the NDRC will deal with prohibitions on unfairly high or low pricing. Since the promulgation of the Anti-monopoly Law, this issue has been one of the most controversial.

“If you're dominant, selling at an unfairly high price or buying at an unfairly low price can be considered an abuse,” explained Lovells' of counsel Kirstie Nicholson. “Article 12 attempts to define those two concepts; this is very useful.”

Several lawyers told China Law & Practice that there had been concerns about how this prohibition may be applied, given the NDRC's traditional role as a price regulator and its relative lack of resources and experience. According to a JSM client alert, earlier versions of the draft said that pricing would be deemed to be unfairly high if it was 20% higher than the maximum price of “like commodities” sold by other undertakings. This method has now been scrapped.

“That would have been a non-standard approach; now they have a series of factors to take into consideration,” said O'Brien.

Article 12 now contains a simple reference to whether the selling price is “obviously higher than the cost” or the buying price is “substantially low, or even lower than the cost”. Another clause refers to buying or selling “for the same product sold and bought by other undertakings”. Some say these concepts are too vague, however.

“Cost is an elastic concept and not defined elsewhere,” said Cox. “And … the problem with [reference to prices charged by other companies for the same product] is that an efficient company may well charge less because it's more efficient – efficiency is at the heart of effective competition.”

“It's not exactly clear what should be included in the cost,” added Nicholson, “or how you define who your competitors are. We don't have much guidance on this.”

“The concern is that it still has a bit of the ring of the command and control economy – the NDRC has the history of being a price regulator and there are a number of provisions which, if applied strictly, could hinder competition,” said Cox.

Two steps forward …
It is clear that there are some significant details of the rules which have not yet been clarified, but lawyers point out that there is still sufficient time for companies to give their input before the draft becomes law. And for some, the positive elements outweigh the uncertainties.

“Compared with the legal framework under the older regime, this is a vast improvement in terms of being more specific and setting rules – it's much clearer than it had been,” said ChunFai Lui, a Shanghai-based special counsel with Baker & McKenzie.

“There are some quite commercially-driven rules,” he added. “For example, [if you're] selling at a low price just for promotional activity, or if you're following the rest of market.” (These justifications are covered in Article 13.)

Other lawyers said the best defence against the continuing uncertainty in the Draft rules is to maintain strong compliance and risk management processes.

“Look carefully and see if you might be presumed dominant … then be very careful about pricing, discounts, refusals to supply, and so on,” said Cox. “Have very tight compliance programmes – when you have any differences [in pricing] justify with documents on file. You need a much more disciplined approach.”

The Draft is available on the website of the NDRC (in Chinese only), which is one of China's three anti-monopoly enforcement agencies and is primarily responsible for enforcing pricing issues related to the Anti-monopoly Law's prohibitions on monopoly agreements and abuse of dominant market position. The State Administration of Industry and Commerce is responsible for enforcing other aspects of those two prohibitions.