The antitrust enforcers' New Year resolutions

The NDRC and the SAIC decided to follow different approaches in terms of structuring their rules. The NDRC covered all types of anti-competitive conduct under its jurisdiction in a single text, the Anti-price Monopoly Provisions (国家发展和改革委员会反价格垄断规定). In contrast, the SAIC issued a set of provisions for each of the three types of conduct separately: the Provisions for the Prohibition by Administrations for Industry and Commerce of Acts of Monopolistic Agreements (工商行政管理机关禁止垄断协议行为的规定) (SAIC Monopolistic Agreements Provisions), the Provisions for the Prohibition by Administrations for Industry and Commerce of Acts of Abuse of Dominant Market Position
(工商行政管理机关禁止滥用市场支配地位行为的规定) (SAIC Abuse of Dominance Provisions), and the Provisions for the Suppression by Administrations for Industry and Commerce of Acts of Abuse of Administrative Authority to Eliminate or Restrict Competitive Acts (工商行政管理机关制止滥用行政权力排除、限制竞争行为的规定) (SAIC Abuse of Administrative Powers Provisions). Similarly, NDRC enacted a single procedural regulation, the Provisions on the Administrative Law Enforcement Procedure for Anti-price Monopoly (国家发展和改革委员会反价格垄断行政执法程序规定) (NDRC Procedural Provisions), while the SAIC adopted two sets of procedural provisions (for anti-competitive agreements and abuse of dominance, on the one hand, and for abuses of administrative powers, on the other hand) back in 2009.

The analysis below will cut across the two authorities' jurisdiction, examining each type of anti-competitive conduct in an integrated fashion by theme: anti-competitive agreements (Section 1), abuse of dominance (Section 2) and abuse of administrative powers (Section 3). An analysis of the provisions' impact on compliance for businesses will follow (Section 4).

1) Anti-competitive agreements

Concept of an “agreement”: The AML defined an “agreement” in a broad way as any “agreement, decision or other concerted practice” between companies. The NDRC Anti-Price Monopoly Provisions and the SAIC Monopolistic Agreements Provisions give additional guidance on the concept of an “agreement,” but at the same time leave many questions open.

In case there had been any doubt, the SAIC provisions make it clear that both written and oral agreements are caught under the AML. This additional guidance should remind companies that a handshake or verbal consent would amount to an “agreement” within the meaning of the AML. For example, a telephone call between competitors to discuss and fix prices can amount to prohibited cartel conduct, even if there are no documents involved at all.

In addition, both the NDRC and the SAIC attempt to clarify on what is to be understood by “concerted practice,” although their guidance does not fully overlap: such a practice is said to exist when several companies essentially coordinate their behavior. The prerequisites for a finding of a concerted practice are, first, that the companies' conduct is identical and, second, that they have “communicated intentions.” In addition, the market structure and market changes must be examined. The SAIC's provisions go a bit further, proposing to examine whether the companies have exchanged information and whether they are able to come up with a reasonable alternative explanation for the parallel conduct.

Overall, these guidelines on the “concerted practice” concept are worryingly unclear and possibly too intrusive for market players. In some industry sectors, for example, prices are set by one large market player, and many smaller companies simply follow that player's price leadership. Under specific market conditions, such a behavior pattern may be entirely “normal” in the sense that it requires no collusion, or even communication, between the market players. In the Woodpulp case, for example, the highest European Union court ruled that competition law “does not deprive economic operators of the right to adapt themselves intelligently to the existing and anticipated conduct of their competitors”.

For companies doing business in or with China, the unclear and, potentially, very broad concept of “concerted practice” will likely require an increase in compliance efforts, above all to monitor their staff's contacts with competitors. To take up the previous example, even if prices are only discussed and no agreement is reached, a telephone call between competitors could be evidence of a concerted practice under SAIC's rules. If, following the call, prices of competitors moved in parallel, the likelihood of being subject to a cartel investigation may substantially increase, even if the reasons why prices rose were entirely unrelated to the call.

Interestingly, the SAIC Monopolistic Agreements Provisions also mention the situation where companies “are in collusion without yet having entered into an agreement,” and empower the SAIC to order them to cease and desist (but no other sanctions, however). The scope of this article is entirely unclear. In the drafters' minds, perhaps, it may be related to the “concerted practice” issue, but the provisions fail to establish a clear link.

Horizontal agreements: The NDRC Anti-Price Monopoly Provisions and the SAIC Monopolistic Agreements Provisions contain more detail on the types of horizontal agreements (that is, agreements between competitors) prohibited by the AML, but in general do not significantly alter the scope of the obligations imposed upon businesses. The prohibitions are 1) price-fixing; 2) limiting output or sales volumes; 3) market partitioning; 4) limiting technology purchases or R&D; and 5) collective boycotts.

The provisions also give additional guidance on the prohibition on trade and industry associations organising anti-competitive acts by their members. The relatively detailed rules (as compared to the high-level principles contained in the AML) indicate that such associations may be possible targets for future enforcement actions. The NDRC's recent decision to impose the maximum permitted fine on a paper manufacturers' association in Zhejiang seems to support this view.

Vertical agreements: None of the new rules adds obligations for non-dominant companies as regards their vertical agreements (that is, agreements with their distributors, customers or suppliers). This is a very positive development for businesses, and contrasts with earlier drafts of the SAIC Monopolistic Agreements Provisions where territorial, customer and other restrictions were mentioned as possible anti-competitive clauses in agreements by non-dominant players.

Therefore, the only prohibited conduct for a non-dominant company in its distribution arrangements remains the setting of resale prices by distributors (so-called “resale price maintenance”).

Leniency programs: Both the NDRC Anti-Price Monopoly Provisions and the SAIC Monopolistic Agreements Provisions contain articles on leniency programmes. They allow a party to an anti-competitive agreement, in most cases, a cartel, to voluntarily come forward to disclose the illegal conduct and provide “important evidence.” In exchange, the authority grants the company immunity from fines or a reduction in the amount of the fine.

The main issue with the NDRC's and SAIC's programmes is that they are not entirely consistent. First, the concept of “important evidence” is defined differently. The NDRC Procedural Provisions require that the evidence submitted make a significant contribution to the authority's finding of an anti-competitive agreement. The SAIC Monopolistic Agreements Provisions follow the same approach but, in addition, accept evidence making a significant contribution to the SAIC's decision to initiate a procedure as important evidence. Presumably, the evidence required for the SAIC to start proceedings need not be as detailed or as pertinent as the evidence on which the authorities base their finding of an infringement of the law.

The SAIC provisions also give further guidance on what kind of evidence the authority seeks to obtain: the agreement itself; the products involved; the way the agreement was entered into and its content; and specific facts relating to the agreement's implementation.

Second, the extent of leniency granted to an applicant varies according to the authority concerned. Admittedly, both the NDRC and the SAIC seem willing to grant full immunity to the first whistle-blower. However, while the SAIC provisions clearly stipulate that the first company will obtain immunity, the NDRC provisions simply state that the NDRC “may” grant immunity to the first whistle-blower. In addition, while the NDRC intends to grant a reduction in the amount of the fine of no less than 50% for the second one to turn himself in and up to 50% for all other leniency applicants, the SAIC's provisions are silent on the exact percentage by which the fine will be reduced for all but the first whistle-blower.

Third, while the SAIC's 2009 procedural rules specifically mentioned that ring leaders do not qualify for leniency, the NDRC Procedural Provisions are silent on this point.

More generally, the leniency programmes of both the NDRC and the SAIC lack detail and thus create uncertainty for businesses. Experience in other jurisdictions demonstrates that any uncertainty in the leniency system can work as a major deterrent for whistle-blowers to come forward. For example, the European Commission amended its leniency programme twice, recognising that “there was a need for further guidance for potential applicants”.

2) Abuse of dominance

In the abuse of dominance field, the NDRC Anti-Price Monopoly Provisions and the SAIC Abuse of Dominance Provisions have a double effect. First, the provisions contain additional guidance on the AML's relatively high-level rules, and second, they add essentially new types of conduct that are deemed abusive.

Following the enactment of the NDRC and SAIC provisions, the two authorities will have enforcement powers over the following types of conduct deemed abusive:

Excessive pricing: As regards excessive pricing, the AML prohibits unfairly high sales prices and unfairly low purchasing prices but does not indicate any benchmark for the analysis. The initial draft of the NDRC Anti-Price Monopoly Provisions circulated for comments in 2008 suggested, inter alia, that a profit margin of over 20% would be excessive. Fortunately, such an extreme solution was not retained in the provisions' enacted version. Instead, the relevant questions now are:

(a) is the price clearly higher/lower than those charged by competitors for similar products?

(b) does the price increase/decrease go beyond a “normal extent” while costs remain stable?

(c) is the price increase/decrease clearly higher/lower than the increase/decrease in costs?

Predatory pricing: The article on predatory pricing adds some explanations on when prices below cost, in principle prohibited for dominant players, can be justified, for example to promote new products.

Margin squeezes and loyalty rebates: By prohibiting margin squeezes and loyalty rebates for dominant companies, the NDRC adds new types of abusive conduct, which were not explicitly mentioned in the AML. The margin squeeze article prohibits a dominant firm from refusing to deal by way of setting excessively high/low prices (for sales/purchases). The loyalty rebates article prohibits tying customers to the dominant company by way of granting rebates, which can have a similar effect as exclusive dealing. Interestingly, by enacting these articles, the NDRC may be viewed as encroaching upon the SAIC's enforcement “territory”. Both refusal to deal and exclusive dealing are, in principle, non-price-related acts which, as such, would appear to fall under the SAIC's jurisdiction. On the upside, the NDRC provisions recognise a variety of “valid reasons” that can justify margin squeezes and loyalty rebates in specific circumstances.

Unreasonable expenses: The prohibition on imposing unreasonable expenses was not set out in the AML. However, the new article does not add any guidance as to what should be considered as “unreasonable.”

Discriminatory pricing: The discriminatory pricing article in the NDRC Anti-Price Monopoly Provisions essentially repeats the principle in the AML, without adding any substance.

Refusal to deal: The refusal to deal article in the SAIC Abuse of Dominance Provisions displays a rather curious line of thought. On the one hand, the refusal to grant access to an “essential facility” is regulated in a relatively strict way. As a threshold matter, only “reasonable access” must be granted. For this analysis, it should be considered whether the party requesting access can invest in and develop an alternative facility, how much its business depends on access to the facility, whether the dominant firm is able to grant access and to what extent such access would impact its own business. On the other hand, the prohibition to refuse to engage in other transactions – namely, the supply or purchase of goods and services – has extremely low thresholds for government intervention. Refusing to engage in new transactions, and reducing quantities in, or delaying, existing transactions seem to be prohibited without any further analysis required. Finally, the prohibition extends to “constructive” refusals to deal. The dominant firm should not adopt restrictive measures that have, in practice, the same effect as an outright refusal to deal. A margin squeeze, for example, would fall under this definition.

Exclusive/restrictive dealing: The exclusive/restrictive dealing article adds very little to the text of the AML. In essence, a dominant company is prohibited from requiring that its customers or suppliers grant it exclusivity.

Unreasonable conditions: The prohibition on imposing unreasonable conditions (that are not price-related) will probably require dominant companies to make further investments in compliance. One part of this article concerns bundling, whose basic principle was already contained in the AML. The other part appears to significantly expand the concept of “unreasonable conditions:”

(a) unreasonable conditions as regards the duration of the contract, the payment method, the transportation of goods or provision of services, etc.;

(b) unreasonable conditions as regards sales territories, sales partners, after-sales service, etc.; and

(c) conditions unrelated to the transaction at issue.

Discriminatory treatment: Finally, the SAIC Abuse of Dominance Provisions give guidance on which aspects of a transaction may involve discriminatory treatment. Interestingly, the provisions mention the grant of rebates as an aspect where companies may be treated in a dissimilar way. Rebates are likely to be considered as price-related conduct and, hence, the SAIC's approach may be interpreted as attempting to impinge on the NDRC's turf.

3) Abuse of administrative powers

The NDRC Anti-Price Monopoly Provisions and the SAIC Abuse of Administrative Powers Provisions largely follow the corresponding provisions of the AML. As with the AML, it remains unclear whether businesses have a right to seek redress against anti-competitive government conduct.

Perhaps the most interesting feature of the SAIC provisions may be that the addressees of the obligations imposed by these so-called “administrative monopoly” rules extend beyond government bodies and officials to also encompass business operators. The latter are prohibited from implementing monopolistic agreements and abusing their dominant position “by means of” administrative decisions, delegation or regulation.

This feature is intriguing in two ways. First, conceptually, it is astonishing that a set of rules meant to apply to government behavior is extended so as to regulate market players. Second, the concepts used are not clear. In particular, the question of how exactly the companies can cause (“by means of”) the government to act in an anti-competitive way remains a puzzle. For example, would lobbying the government to adopt a uniform industry tariff be caught? On the upside (at least potentially), the new rule might provide a legal basis to challenge an intertwined “cluster” of interests between a state-owned enterprise and its “protector” regulatory body.

4) Compliance tasks

Compliance programmes to avoid cartel behavior: Judging from past cases, the NDRC's main enforcement focus will be cartels.

On January 10 2011, the NDRC signed a Memorandum of Understanding (MoU) with the United Kingdom's Office of Fair Trading on cooperation in the antitrust field. Although the MoU does not foresee the passing of information related to specific cases between the authorities, it reveals their plan to exchange information on competition policy and laws and to “shar[e] best practice, knowledge and expertise in tackling market problems and encouraging compliance”. While the MoU illustrates the NDRC's desire to become a recognised player in the international arena, it may also signal a broader shift in policy. It cannot be excluded that, in the long-term, the NDRC will want to participate in international cooperation in specific cases, in particular cartel cases. Perhaps not so far in the future, we may see the NDRC launching coordinated dawn raids with the European Commission or the US Department of Justice. Companies should already start thinking about such possible scenarios.

Although far from perfect, the NDRC and SAIC provisions may lead some companies to come forward and self-report, perhaps after first having obtained sufficient procedural guarantees on an ad hoc, no-names basis. For other companies, this logically means stepping up compliance efforts, in order to make sure that they do not end up on the receiving end of a case which comes to the authorities' attention due to a company seeking leniency.

Given the specifics of Chinese business culture, with its interwoven relationships, it may be wise for companies to carefully screen the activities of their staff. A rogue employee entering into a cartel agreement with his university friend at a competing company may be sufficient to render the company liable. If so, fines of between 1% and 10% of the company's annual sales revenues may be on the horizon.

Review of distribution and sales agreements: For many businesses in China, the new provisions will require review of their existing and planned distribution and sales agreements. A company that is entirely certain it does not have a dominant position in any “relevant market” – as defined by the AML implementing guidelines – may not require revision of agreements. It merely needs to ensure that its distribution agreements do not include a resale price maintenance clause (or maintain such clause if it is sufficiently comfortable that the conduct can be justified).

In contrast, if a company cannot determine with certainty that it is not dominant in any of the markets in which it operates, additional compliance efforts may be warranted. At a minimum, it would seem prudent to conduct a thorough analysis of whether or not the company is dominant in a relevant market. This includes looking at both market definition, and the calculation of the company's market share to check whether the AML's dominance presumptions are triggered. If they are, additional factors indicating dominance as described in the AML and the SAIC Abuse of Dominance Provisions should be examined.

As a next step, companies should screen their distribution and sales agreements for clauses that may qualify as abusive conduct under the new NDRC and SAIC provisions. Perhaps the most obvious candidates to fall afoul of the new rules are loyalty rebates, and territorial or sales restrictions. If likely to fall under the prohibitions, it should be examined whether “valid reasons” can justify the clauses.

Scrutiny of management, sales policies and behavior: Many if not most types of conduct can only be assessed within their proper context. For example, the articles on excessive and predatory pricing cannot be analysed without reference to costs (at least in part). In principle, margin squeezes and discriminatory pricing cannot be examined without data on the prices of other products, or other customers. In turn, the prohibition on imposing “unreasonable conditions” requires consideration of the entire context of the transaction at issue and of the circumstances of the parties involved, as does the “valid reasons” analysis.

More generally, conduct aimed to exclude competitors from the market, as implemented through predatory pricing, for example, is unlikely to appear in written agreements but can, at times, be found in corporate documents or email communications. Staff training and other compliance measures may help companies reduce their risk exposure in this regard.

Conclusion

The NDRC and the SAIC may have been relatively slow out of the gate as compared to Mofcom in terms of AML enforcement. In part, this may be attributable to the fact that in the absence of implementing regulations such as those just enacted, both agencies felt their hands were somewhat tied.

Admittedly, Mofcom may have dealt with many more cases, but it should not be forgotten that it is the breaches of the rules on monopolistic agreements and abuse of dominance that carry by far the heaviest penalties under the AML. For that reason alone, the new NDRC and SAIC provisions, however imperfect, have to be considered carefully by companies doing business in or with China.

Adrian Emch, Hogan Lovells, Beijing