China Publishes Draft Rules Relating to Anti-Monopoly Law 'Abuse of Dominance' Provisions

Two draft implementation rules relating to China's Anti-Monopoly Law ("AML") have been published by one of the enforcement agencies responsible for enforcing the law's prohibitions on abuse of a dominant market position ("Abuse of Dominance Prohibition") and monopoly (restrictive) agreements.

On 27 April 2009, the Anti-Monopoly and Anti-Unfair Competition Bureau of the State Administration for Industry and Commerce ("SAIC"), published the following draft rules relating to these prohibitions:

• Rules on Prohibiting Abuse of Market Dominant Positions ("Draft Dominance Rules"); and
• Rules on Prohibiting Monopolistic Agreements ("Monopoly Agreement Rules"), and invited public comment on the drafts.

This client alert focuses on the Draft Dominance Rules, and explains the contents of these rules in the context of a broader summary of the Abuse of Dominance Prohibition. A further client alert will be issued shortly, containing information on the highlights of the new Monopoly Agreement Rules.

What you need to know about the Abuse of Dominance Prohibition

To whom does the Abuse of Dominance Prohibition apply?

The AML applies to 'undertakings' (which term is defined broadly to include individuals, legal entities and other organisations that engage in manufacturing and selling of products, or the provision of services) regardless of where they are based, with only a handful of exceptions (such as businesses operating in the agricultural sector in China).

Only undertakings that have a 'dominant market position' are subject to the Abuse of Dominance Prohibition, and therefore such undertakings may be prevented from engaging in certain conduct that is permissible for relevant competitors and trading partners.

Article 18 of the AML lists various factors that are required to be taken into account when determining whether an undertaking does enjoy market dominance, and the Draft Dominance Rules supplement this list by more clearly defining what constitutes a dominant market position.

Specifically, the rules provide that dominance exists where an undertaking (or undertakings) can exercise control over a product's price, quantity or other trading conditions, or have a position in the market which enables them to hinder or affect the ability of other undertakings to access the relevant market.

Further , the Draft Dominance Rules expand on each of the factors that Article 18 of the AML requires to be taken into account when an assessment on dominance is made. For example, the rules:

• state that 'market share' refers to the proportion of an undertaking's sales revenue or sales volume in respect of a particular product or service in a relevant market;
• provide examples of considerations that may be relevant to determining the extent of an undertakings' relevant financial strength and technological status; and
• explain the types of control that an undertaking may exercise over a sales or purchasing market and which may be indicative of market dominance.

When will dominance be presumed?

Article 19 of the AML provides that an undertaking will be presumed to enjoy a dominant market position if:

• it has a market share of 50% or more;
• in conjunction with one other undertaking, it has a market share of 2/3 or more (provided that neither such undertaking has a market share of less than 10%); and
• in conjunction with two other undertakings, it has a market share of 3/4 or more (provided that none of the three relevant undertakings has a market share of less than 10%).

The Draft Dominance Rules clarify that undertakings may successfully rebut a presumption of dominance based on market share by proving that other undertakings are able to access the market with relative ease, competition in the market is sufficient, or the undertaking does not have sufficient control over market entry or key trading conditions.

Additionally, in relation to the presumption of joint dominance that may be raised under Article 19, the Draft Dominance Rules stipulate that parties may successfully defend themselves against this presumption by showing that (amongst other things) substantial competition exists amongst the undertakings who may otherwise be deemed jointly dominant.

What conduct is prohibited for a dominant undertaking?

Article 17 of the AML lists several types of conduct which may constitute 'abuse' conduct in relevant circumstances. This conduct includes "selling products at unfair high or buying at unfair low prices” ("Unfair High or Low Pricing") and, where this occurs “without valid reasons”, the act of selling below cost ("Predatory Pricing"), refusing to trade with partners ("Refusal to Deal"), compelling trading partners to enter into exclusive trading arrangements ("Exclusive Dealing"), imposing unreasonable trading conditions or 'tie-ins' to sales ("Tie-in Conduct"), or applying differentiated trading conditions to equivalent trading partners - including pricing conditions ("Discriminatory Pricing").

The Draft Dominance Rules elaborate on several of these 'abuse' examples.

For example, in relation to a Refusal to Deal, the rules clarify that under equivalent trading conditions, if a business operator refuses, reduces, restricts, or discontinues trading with other parties, the business operator will be deemed as not having valid reasons for the refusal. In relation to Tie-in Conduct, the rules set out common examples of such conduct, and suggest that for at least one of those examples, the prohibition will only be breached if the conduct results (or may result) in a degree of foreclosure of the relevant market.

Additionally, the Draft Dominance Rules indicate that the SAIC intends to apply a form of essential facilities doctrine (after wording relating to this issue that appeared in early drafts of the AML was removed from the promulgated version). Specifically, the provisions state that if other undertakings will be unable to carry out business operations without accessing pipes, networks, or other facilities owned by an undertaking having a dominant market position, the dominant undertaking may not block the other undertakings from using, on reasonable terms, these facilities.

How will the Abuse of Dominance Prohibition be enforced?

The SAIC shares enforcement responsibilities in relation to the Abuse of Dominance Prohibition with China's National Development and Reform Commission ("NDRC"). The NDRC's primary focus will be on those aspects of the prohibition relating to pricing matters (such as Unfair High or Low Pricing, Predatory Pricing and Discriminatory Pricing), while the SAIC will take charge in relation to other forms of conduct.

The AML also allows the SAIC and NDRC to delegate their enforcement powers to provincial-level branches, and this is addressed further by the Draft Dominance Rules.

Specifically, the rules empower the SAIC's provincial level branches (AICs) to enforce the Abuse of Dominance Prohibition in relation to relevant (i.e. non-price related) abuse cases that take place within their administrative area, or relevant inter-provincial acts where the main acts occur within that area. Additionally, the rules contemplate that the SAIC may authorize the provincial-level AICs to take jurisdiction in respect of any other abuse cases as it deems appropriate.

Enforcement against relevant abusive acts that have material effects nationwide, as well as any other abusive acts that it determines to fall within its jurisdiction, is reserved for the SAIC.

What penalties apply for a violation of the Abuse of Dominance Prohibition?

The Draft Dominance Rules repeat the list of available penalties set out in the AML in respect of a violation of the Abuse of Dominance Prohibition. Namely, undertakings found to have engaged in such a violation may be ordered to cease the violation, have their illegal gains confiscated, and face a fine of up to 10% of sales revenue from the previous year. Additionally, it is clear from the AML that undertakings who suffer loss as a result of such conduct may bring private actions for damages.

What further information can we expect in relation to the Abuse of Dominance Prohibition?

To date, the Draft Dominance Rules are the only implementation rules that have been publicly released in respect of the Abuse of Dominance Prohibition. However, it is anticipated that the NDRC may soon publish a consultation draft of its 'Anti-Price Monopoly Rules' - which, amongst other things, should provide a level of guidance in relation to issues of Unfair High or Low Pricing, Predatory Pricing and Discriminatory Pricing.

Additionally, it has been reported that the SAIC is working on implementation rules specifically explaining how AML provisions (including the Abuse of Dominance Prohibition) will be applied in relation to cases involving significant intellectual property matters.

More generally, it is hoped that both the SAIC and NDRC will engage in a 'continuous improvement' process in relation to the AML implementation rules they are drafting - even once 'initial' finalised versions are published. The drafts that have surfaced to date are relatively limited in the scope of guidance they provide, which is perhaps understandable at this early stage in the development of antitrust enforcement in China. However, there is a risk that the authorities may wish to continue to reserve for themselves a very wide discretion regarding how abuse of dominance cases are handled and decided. If this is the case, the business sector may find it difficult to implement compliance and risk management initiatives that provide the same level of comfort they are able to achieve in more mature competition law jurisdictions such as the US and EU.

The SAIC's consultation period in relation to the Draft Dominance Rules is scheduled to run until 31 May 2009. JSM has already provided the SAIC with comments in relation to an earlier draft of these provisions, and will continue to work with the enforcement agency to try and ensure that appropriate improvements are introduced and that the provisions can be finalised soon - to provide more certainty and clarity in relation to this area of the AML.

Thankfully, it appears that both the SAIC and NDRC are avoiding active enforcement of the Abuse of Dominance Prohibition while the relevant implementation rules and associated guidance documents are being developed. However, businesses who are at risk of being deemed 'dominant' in one or more markets in China should not be complacent, as it has been reported that the enforcement agencies are currently preparing a list of 'targets' who may be investigated as soon as relevant enforcement processes are in place.

There is also no guarantee that the progress of private actions in this area will be suspended until the relevant implementation rules and guidance documents are finalised. While China's courts have thus far evidenced a reluctance to progress the hearing of private actions in this area (for example, abuse of dominance claims have been made against Microsoft, China Mobile, and the Chinese search engine provider Baidu - however little substantive progress has been made towards a judicial hearing of such claims), the fact remains that the courts are not required to rely on the guidance, or determinations, of the SAIC and NDRC. Accordingly, there is a risk that the courts may see fit to determine AML private actions on the basis of their own reading of the relevant AML provisions, particularly if there is too great a delay before the relevant guidance documents are finalised.

Businesses that do have a strong market position or market share in China are encouraged to seek legal advice in respect of their relevant trading activities, to ensure they can take appropriate steps to minimise the risk of a private action or regulatory investigation under the AML Abuse of Dominance Prohibition.

For more information, please contact:

Hannah Ha (hannah.ha@mayerbrown.com)

Gerry O'Brien (gerry.obrien@mayerbrown.com)

Learn more about our Hong Kong and PRC offices and Antitrust & Competition practice.