China Publishes Draft Rules Relating to Anti-Monopoly Law 'Monopoly Agreement' Provisions

This is the second in a series of two client alerts looking at draft implementation rules that the Anti-Monopoly and Anti-Unfair Competition Bureau of China's State Administration for Industry and Commerce ("SAIC") recently published in relation to the country's Anti-Monopoly Law ("AML").

Our first alert in this series, published on 13 May 2009, examined the SAIC's draft Rules on Prohibiting Abuse of Market Dominant Positions.

In this alert, we focus on the SAIC's draft Rules on Prohibiting Monopolistic Agreements ("Draft Rules"), which supplement and explain aspects of the AML's prohibition relating to restrictive (or 'monopoly') agreements ("Monopoly Agreement Prohibition"). Key aspects of the Draft Rules are explained in the context of a broad overview of the Monopoly Agreement Prohibition.

What you need to know about the Monopoly Agreement Prohibition

To whom does the Monopoly Agreement Prohibition apply?

The Monopoly Agreement Prohibition applies to nearly all undertakings that engage in manufacturing and selling of products, or the provision of services, in (or to) China. The only exception stated in the AML is for undertakings operating in the agricultural sector in China, although it seems that some state-owned enterprises may also be exempt from the prohibition in certain circumstances.

The Monopoly Agreement Prohibition will also impact the activities of industry associations.

Under the AML, industry associations are generally prohibited from involvement in the formation of monopoly agreements, and the Draft Rules provide examples of how such involvement may arise. Specifically, the rules stipulate that an industry association may not, amongst other things:

• create and issue rules, decisions or circulars that eliminate or restrict competition; or
• facilitate undertakings to communicate, discuss, or collaborate in reaching a monopoly agreement.

What does the Monopoly Agreement Prohibition restrict undertakings from doing?

The AML expressly divides the Monopoly Agreement Prohibition into separate Articles focussing on horizontal monopoly agreements on the one hand, and vertical monopoly agreements on the other.

Horizontal monopoly agreements

A number of examples of 'horizontal' monopoly agreements are set out in Article 13 of the AML, including agreements between competitors to fix prices, limit production or sales volumes, share markets, restrict technology purchases or development, or boycott competitors or customers.

Article 13 makes it clear that this is a non-exhaustive list, and this is reinforced by the fact that the Draft Rules stipulate a further type of horizontal monopoly agreement. Specifically, the rules state that collusion in bidding is prohibited, and explain that this collusion can take various forms such as secretly designating a winning bid in advance, or taking turns in winning bids.

The Draft Rules also elaborate on the various types of horizontal monopoly agreement already expressly referenced in Article 13 of the AML. For example, Article 13(iii) of the AML makes it clear that agreements between competitors that restrict production quantities or sales of a product are prohibited, and the Draft Rules provide examples of such restrictions - such as where the competing parties agree to limit the total amount of production or sales by discontinuing production, or buying out relevant unsold products.

Vertical monopoly agreements

Article 14 of the AML focuses on 'vertical' monopoly agreements, for which just two examples are provided - agreements between a company and its trading partners to fix resale prices, or to restrict minimum resale prices. Again, it is clearly stated in the AML that the enforcement authorities may identify further forms of prohibited vertical monopoly agreement, and these additional non-price related examples are now referenced in the Draft Rules:

• where, in the course of soliciting bids in a bidding process, the soliciting persons engage in certain acts undermining the competitive nature of that process (such as secretly notifying other bidders about the bidding situation, or assisting certain bidders to replace their bid proposals before the bid opening); and
• where, in the absence of legitimate reasons, an undertaking is restricted from operating outside a designated geographic market, or from trading with businesses other than those specified in the relevant agreement.

This latter example is particularly significant, as it was previously believed that China's competition authorities may be reluctant to examine such restrictions or 'exclusive dealing' terms in vertical arrangements (such as distribution and supply contracts) other than in the context of the AML prohibition regarding abuse of a dominant position.

Does the Monopoly Agreement Prohibition apply only to formal contracts?

No. It is clear from wording in both the AML and the Draft Rules that monopoly agreements do not have to be in written form. They may also arise from oral communications between undertakings, or collaborative acts (such as acts undertaken in concert, or with tacit agreement).

The Draft Rules also stipulate that in determining whether an act constitutes a collaborative act, the enforcement authorities will take into account factors such as any evident connection between or among the acts of competing undertakings, and the existence or absence of legitimate reasons for identical or similar trading conduct by competing undertakings.

Are there any exceptions to the Monopoly Agreement Prohibition?

The various types of monopoly agreement referenced in the AML and the Draft Rules are deemed to unlawfully restrict competition unless the parties qualify for an exception under Article 15 of the AML.

Article 15 provides that such agreements will not be prohibited if the parties can show that they were formed for a legitimate purpose - such as improving technology, raising product quality and production efficiency, or enhancing the competitiveness of small or medium-sized entities. Unfortunately, the Draft Rules do not provide any new information on these exceptions, leaving unclear their precise scope, and the issue of how the existence of a legitimate purpose may be proved.

How will the Monopoly Agreement Prohibition be enforced?

As with the AML prohibition relating to 'abuse of dominance', the SAIC shares enforcement responsibilities in relation to the Monopoly Agreement 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 price-fixing and resale price maintenance activities), while the SAIC will take charge in relation to other forms of conduct.

The Draft Rules also contemplate the delegation of certain of the SAIC's enforcement powers to provincial-level branches (AICs), in substantially the same manner as was described in relation to the enforcement of the AML's abuse of dominance prohibition in our first alert in this series.

What penalties apply for a violation of the Monopoly Agreement Prohibition?

The Draft Rules repeat the list of available penalties set out in the AML in respect of a violation of the Monopoly Agreement 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.

However, the Draft Rules also introduce specific leniency treatments for undertakings who come forward with information on monopoly agreement conduct. According to the rules, the first proactive whistleblower of a monopoly agreement may completely avoid penalties, and the second and third reporter may enjoy a 50% or 30% reduction of penalties respectively.

However, the rules make it clear that this leniency policy does not apply to the organizers and promoters of monopoly agreements, nor do they apply to undertakings who coerce other parties to engage in a monopoly agreement. To enjoy waived or reduced penalties, the relevant undertakings must also provide the SAIC or NDRC with important evidence to help with their investigation and determination of a case.

What further information can we expect in relation to the Monopoly Agreement Prohibition?

In our first client alert in this series, we noted that the SAIC is reported to be working on implementation rules specifically explaining how relevant AML prohibitions will be applied in relation to cases involving significant intellectual property matters.

Although these rules are likely to be most instructive in relation to the AML prohibition regarding abuse of a dominant position, it is also hoped they will clarify certain issues relating to the Monopoly Agreement Prohibition. For example, Article 13(iv) of the AML provides that an agreement between competitors that restricts the purchase of new technology or new facilities, or the development of new technology of new products, is a prohibited monopoly agreement. The broad wording of this horizontal monopoly agreement example has raised concerns, as it could potentially be applied to a wide array of arrangements not typically deemed anticompetitive in other jurisdictions. An example is technology and intellectual property licence agreements, which often include field-of-use restrictions.

Accordingly, it is hoped that further guidance on this issue will be provided by the forthcoming implementation rules concerning intellectual property .

Focus your compliance endeavours

As noted in our first client alert in this series, it appears that both the SAIC and NDRC are holding back from active enforcement of the AML's behavioural prohibitions while relevant implementation rules and associated guidance notes are developed. However, as finalisation of these documents is likely to occur in the coming months, and China's courts remain free to hear private actions in this area in the interim (although they appear reluctant to do so), it will be prudent for businesses with operations or sales in China to take steps now to maximise their prospects of compliance.

In this context, it is noted that authorities in emerging competition regimes regularly make 'horizontal' monopoly agreements (cartels) a priority for their investigation and enforcement activities - as cartels are generally perceived as one of the most harmful forms of anti-competitive manifestation. Successful cartel prosecutions also commonly result in huge fines and significant media exposure, which can help competition regulators 'spread the message' about the need for competition compliance.

Accordingly, ensuring that dealings with competitors are 'risk free' under the AML should be one of the main areas of focus for compliance endeavours at this stage - and in addition to review of relevant contracts (such as cooperation deals and joint venture agreements) this may require that staff be provided with guidance on how to conduct themselves in any formal or informal liaison with competitor representatives.

Additionally, the expansion of the scope of the vertical monopoly agreement prohibition by the Draft Rules reinforces the need for undertakings to ensure their distribution and supply agreements are reviewed for AML compliance - even where their market share or degree of market power in China may be limited.

For more information, please contact:

Hannah Ha (hannah.ha@mayerbrown.com)

John Hickin (john.hickin@mayerbrown.com)

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

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