Anti-unfair Competition Law empowers SAIC enforcement against abuse

This draft would dramatically expand the SAIC's authority to scrutinize the fairness of asymmetrical commercial relationships. In 2006, the SAIC and several other regulators issued the Measures for the Administration of Fair Transactions Between Retailers and Suppliers, which prohibited retailers with an annual turnover of above Rmb10 million from abusing their “advantageous positions”. The proposed rules against abuse of a relative advantageous position, however, would not be limited to specific sectors or companies exceeding minimum size requirements (based on revenues, assets, or registered capital). Even a tiny company's dealings with tinier parties could be captured. The new rules also reach further than those of the AML against abuse of dominance. The explanatory notes accompanying the draft confirm that the law would apply to “unfair trade practices by business operators that do not have market dominance but have relative advantageous position in transactions.” Unlike the AML rules against vertical monopoly agreements, the proposed rules against abuse of a relative advantageous position would not require a finding of elimination or restriction of competition in a relevant market. Abusive pricing practices are also covered, which may overlap with the principal jurisdiction of the National Development and Reform Commission over pricing-related AML violations.

The definition of relative advantageous position emphasizes two factors commonly found in foreign ASBP laws: (1) the extent of reliance on the advantaged firm; and (2) the difficulty in switching to an alternate supplier or distribution channel. However, it is unclear how the SAIC may apply these principles, particularly outside the retail sector.

Moreover, the proposed draft not clarify the core concepts of “justification,” “reasonability,” or “abusive overcharge,” nor does it prescribe standards for making these determinations. The AML contains similarly phrased prohibitions against dominant firms unjustifiably restricting counterparties' other trading partners, unjustifiably compelling trading parties to purchase designated products or imposing other unreasonable trading terms, but the AML and its implementing measures also contain language emphasizing consumer welfare and economic efficiency, alongside other goals. While several proposed amendments to the AUCL highlight consumer interests, it is uncertain how economic assessments of downstream consumers' interests (as opposed to normative judgments of the “fairness” to disadvantaged parties) would guide enforcement of the new rules against abuse of a relative advantageous position. Consequently, the SAIC might construe the AUCL rules against this type of abuse to restrain the commercial practices of large firms in their dealings with smaller suppliers, distributors or customers more than the AML rules against abuse of dominance. If enacted, the draft could empower the SAIC to scrutinize commercial dealings between companies with unequal bargaining power based on fluid standards of fairness.

Nate Bush and Lining Shan
[email protected] and [email protected]

The 1993 PRC Anti-unfair Competition Law (AUCL) was among China's first reform-era laws targeting unfair trade practices, ranging from commercial bribery and false advertising to predatory pricing and tying. The AUCL lagged behind China's economic development, and the PRC Anti-monopoly Law (AML) eclipsed the AUCL as China's principal competition law in 2008. On February 25 2016, the State Council released for public comment draft revision of the AUCL, prepared by the State Administration of Industry and Commerce (SAIC). The SAIC handles violations of the AUCL as well as non-price related AML rules against monopoly agreements and abuse of dominance. The draft eliminates many overlaps between the AML and the AUCL by deleting obsolete rules against predatory pricing and tying, abusive practice by utilities and state businesses, and administrative monopoly. At the same time, it could dramatically expand the SAIC's authority by creating a new offense: “abuse of a relative advantageous position.”

Article 6 of the revised AUCL defines a “relative advantageous position” as existing where “during a specific transaction process, a party to the transaction holds an advantageous position in terms of funds, technology, market entry, sales channels, raw materials sourcing, etc., its counterparty relies on it and it is difficult to switch to another business operator.” Business operators may not utilize such a position to engage in five “unfair trading practices”: restricting counterparties' trading partners without justification; requiring counterparties to purchase designated goods or services without justification; restricting trading terms and conditions between counterparties and other firms without justification; excessively overcharging or unreasonably demanding counterparties to offer other economic benefits; or imposing other unreasonable trading terms. Penalties for abusing a relative advantageous position include fines of up to five times the value of illegal revenues or Rmb100,000 to Rmb3million ($15,400 to $462,000) where the illicit gains are difficult to quantify.

Similar rules against “abuse of superior bargaining position” (ASBP) apply in other jurisdictions including Germany, France, Japan, Korea and Taiwan. ASBP rules prohibit firms from exploiting bargaining power in long-term relationships with specific counterparties to extract unfair concessions. Many ASBP cases involve retail chains' dealings with small local suppliers or franchisor's with local franchisees.

This draft would dramatically expand the SAIC's authority to scrutinize the fairness of asymmetrical commercial relationships. In 2006, the SAIC and several other regulators issued the Measures for the Administration of Fair Transactions Between Retailers and Suppliers, which prohibited retailers with an annual turnover of above Rmb10 million from abusing their “advantageous positions”. The proposed rules against abuse of a relative advantageous position, however, would not be limited to specific sectors or companies exceeding minimum size requirements (based on revenues, assets, or registered capital). Even a tiny company's dealings with tinier parties could be captured. The new rules also reach further than those of the AML against abuse of dominance. The explanatory notes accompanying the draft confirm that the law would apply to “unfair trade practices by business operators that do not have market dominance but have relative advantageous position in transactions.” Unlike the AML rules against vertical monopoly agreements, the proposed rules against abuse of a relative advantageous position would not require a finding of elimination or restriction of competition in a relevant market. Abusive pricing practices are also covered, which may overlap with the principal jurisdiction of the National Development and Reform Commission over pricing-related AML violations.

The definition of relative advantageous position emphasizes two factors commonly found in foreign ASBP laws: (1) the extent of reliance on the advantaged firm; and (2) the difficulty in switching to an alternate supplier or distribution channel. However, it is unclear how the SAIC may apply these principles, particularly outside the retail sector.

Moreover, the proposed draft not clarify the core concepts of “justification,” “reasonability,” or “abusive overcharge,” nor does it prescribe standards for making these determinations. The AML contains similarly phrased prohibitions against dominant firms unjustifiably restricting counterparties' other trading partners, unjustifiably compelling trading parties to purchase designated products or imposing other unreasonable trading terms, but the AML and its implementing measures also contain language emphasizing consumer welfare and economic efficiency, alongside other goals. While several proposed amendments to the AUCL highlight consumer interests, it is uncertain how economic assessments of downstream consumers' interests (as opposed to normative judgments of the “fairness” to disadvantaged parties) would guide enforcement of the new rules against abuse of a relative advantageous position. Consequently, the SAIC might construe the AUCL rules against this type of abuse to restrain the commercial practices of large firms in their dealings with smaller suppliers, distributors or customers more than the AML rules against abuse of dominance. If enacted, the draft could empower the SAIC to scrutinize commercial dealings between companies with unequal bargaining power based on fluid standards of fairness.