The Anti-monopoly Law's next stage of evolution

Proposed implementing rules

The SAIC previously issued draft rules on monopoly agreements and abuse of dominant market positions, but these new proposed regulations supersede that earlier effort.

The proposed rules on administrative conduct is the SAIC's first public foray into the area. The SAIC accepted public comment on the drafts through to June 7 2010.

Monopoly agreements. The proposed new regulations on monopoly agreements prohibit “agreements, decisions or other concerted acts eliminating or restricting competition.” The regulations list several specific types of prohibited horizontal agreements between competitors or potential competitors, including:

- agreements to limit production output or sales;

- division of sales or procurement markets or divisions of raw material suppliers;

- agreements restricting the purchase or investment of new technologies or equipment or to object to new technical standards;

- joint boycotts; and

- other monopoly agreements as determined by the SAIC.

Industry associations are likewise prohibited from enacting rules or standards that eliminate or restrict competition, or encourage competitors to enter into prohibited agreements.

The proposed monopoly agreements regulations also address situations where a company blows the whistle on an illegal agreement in which it participated, particularly with respect to cartels engaged in market allocation or other hardcore anti-competitive conduct. Under the proposed rules, the first company that reports “important evidence” to the antitrust authorities under certain circumstances obtains immunity. Companies that subsequently come forward with “important evidence” can also receive mitigated penalties.

The draft rules restate the penalty provision in the AML, directing the authorities to confiscate undefined “illegal gains” and impose fines between 1% and 10% of the violator's turnover in the preceding year, setting the maximum fine for a monopoly agreement that was not implemented at Rmb 500,000. In addition, the draft rules direct the authorities to consider the nature, seriousness, gravity and duration of the illegal conduct when determining fines.

Abuse of dominant market position. The proposed regulations prohibit companies with a “Dominant Market Position” – defined as the ability to “control” prices or quantities or “hinder or influence the entrance of other operators to the relevant markets” – from engaging in the following conduct “without any due cause”:

- refusing to deal with counterparties if it eliminates or restricts competition, including refusing to allow a counterparty to use any “necessary facilities on reasonable conditions”;

- requiring a party to deal exclusively with the company or another designated company or prohibiting the party from dealing with any competitors;

- bundling or attaching other “unreasonable conditions” like limitations in the methods of transportation or restrictions on sales regions and after-sales service; and

- implementing discriminatory treatment toward counterparties including differential quality, discounts, payment terms or warranty scope.

Under the proposed regulations, the SAIC will consider certain factors when determining whether a company has illegally abused its dominant position, including the industry custom, damage to the interests of consumers, and any impacts on efficiency, public interest or economic development.

Importantly, the new rules explicitly state they will not apply to exercises of intellectual property rights made in accordance with the relevant intellectual property laws.

Prohibitions on administrative power to exclude or restrain competition. The proposed regulations direct China's administrative agencies not to abuse their authority to exclude or restrain competition. Specifically, the regulations prohibit an agency from:

- manipulating licensing or inspection requirements to restrict a company's operations;

- imposing different technical standards on non-local goods;

- impeding the shipping of non-local goods into the region through checkpoints;

- excluding non-local companies from participating on local bidding and tender activities;

- subjecting non-local companies to unfair tax or market access;

- coercing companies into entering monopoly agreement restraining competition or to abuse its dominant market position; and

- formulating or promulgating rules that exclude or restrain competition.

Despite these prohibitions, the SAIC has no authority to punish administrative agencies that violate these provisions, but directs the violators' superiors to take appropriate measures to rectify the anti-competitive conduct and punish those responsible. It may make recommendations concerning the legal measures that an offending agency's superiors should take.

Practical implications

The SAIC's proposed regulations contain a number of important provisions that are likely to impact companies operating or doing business in China.

n Horizontal agreements: The proposed regulations provide helpful examples of the types of horizontal agreements that are prohibited, such as agreements to reduce output and divide markets. These provisions are largely similar to the restrictions in both the United States and Europe, and describe classic cartel behaviour.

n Vertical agreements: Under the proposed regulations, firms which have a dominant position are prohibited, absent “due cause,” from a series of business practices, particularly with respect to refusals to deal with another company in the same market and discriminatory practices. Although examples of prohibited vertical restraints are not present in the regulations, this is an improvement over the SAIC's earlier version of the draft regulations, which prohibited territorial restraints and exclusive dealing agreements even in the absence of dominant market position. Moreover, the proposed rules appear to introduce a rule of reason element into the assessment of vertical agreements by inserting the caveat “without any due cause” on the restrictions on vertical practices.

n Abuse of dominant position: One of the most significant provisions of the proposed rules is that a company that enjoys a “Dominant Market Position” – which can be presumed if the company has as little as an 11% market share in a relevant product market where three companies have an aggregate share of 75% – cannot, among other things, refuse a counterparties' use of “necessary facilities” on reasonable conditions without “due cause.” The SAIC will consider factors such as the feasibility of a competitor building a similar facility, the reliance on such facility, and the production and business impact to the facility's owner from allowing another party to use that facility. By contrast, the “essential facilities” doctrine has been viewed with increasing skepticism by US courts. The European Commission does enforce a similar restriction, but the complaining party must show that it is actually impossible for it to access its own facilities. Thus, in China a company may face stricter requirements forcing it to assist a competitor than in the United States or Europe.

n Intellectual property rights: Intellectual property (IP) concerns often arise in the context of complaints about abuse of Dominant Market Position. Unfortunately, the new proposed regulations do not add any detail on how IP laws and antitrust laws will interact and therefore do little to address the criticism that the AML's treatment of IP is inadequate.

n Leniency: The proposed regulations on leniency clarify the steps a company must take to obtain immunity or mitigated punishment in the event it runs afoul of the non-price provisions of the AML enforced by the SAIC (the NDRC has yet to announce its leniency guidelines):

• It must be the first party to seek leniency voluntarily;

• report the agreement;

• provide key evidence enabling the SAIC to initiate an investigation or identify the participants, product range, or substance and form of the agreement; and

• fully cooperate with the investigation.

If a company meets all four requirements, the SAIC shall grant immunity. Other companies can receive mitigated penalties if they, on their own initiative, report relevant information and provide key evidence to the authorities. The old draft regulations specified that the second company to report on its violation would receive a 50% reduction, and the third company would receive a 30% reduction. However, those percentages are not included in the new proposed regulations, making them more flexible. There are a few reports of non-M&A investigations under the AML, but the NDRC recently published a decision imposing penalties against several Chinese rice noodle manufacturers allegedly engaged in a price-fixing conspiracy, while exempting other manufacturers from penalties under the general leniency provision of the AML.

n Administrative agency action: Some foreign companies may worry that China will use or abuse its laws, including the antitrust laws, to favour state-run firms over a foreign competitor. The SAIC's proposed regulations on Abuse of Dominant Market Position list “public interests” and “economic development” as factors it shall consider when determining if a company has “due cause” to take certain actions. Skeptical observers may suggest that the SAIC will list those factors to support protectionist decisions. Perhaps in an effort to alleviate those kinds of concerns, the SAIC issued restrictions on abuses of administrative power to exclude or restrain competition. While these provisions are admirable, they lack a mechanism for real enforcement. At most under the proposed new rules, the SAIC can only make recommendations to the offending agencies' superior. Time will tell whether the SAIC emerges as a credible and effective deterrent for state-sponsored anticompetitive or protectionist conduct.

In China's emerging antitrust enforcement regime, any additional clarifications are helpful for companies who now operate in China or plan to enter the market. Though still in draft form, the proposed SAIC regulations provide clarity in some areas (leniency), while coming up short in others (for example, vertical agreements and IP). They also suggest that China may be poised to take a more aggressive stance against companies that have obtained a so-called dominant market position. Finally, China may be taking steps to alleviate the concerns of foreign companies that they will be at an unfair disadvantage against state-run competitors in the application of the antitrust laws. Despite these initial efforts, the SAIC's lack of enforcement authority in this area will probably leave many foreign companies wanting greater assurance.

Douglas Markel, David Vann, Peter Thomas and David Shogren, Simpson Thacher & Bartlett, Beijing, London and Washington D.C.