23 June 2011
In August 2007, the Committee of the National People’s Congress—China’s top legislature—adopted the Anti-Monopoly Law of the People’s Republic of China (AML) and thus joined the ever swelling ranks of nations with a comprehensive cross-sector competition law.
Although the AML has been effective since 1 August 2008, the scope of enforcement has been relatively limited. Merger review remains a primary focus, with at least 200 M&A deals having been notified for review as at 31 December 2010, resulting in one prohibition decision and six cases in which transactions were approved subject to behavioural and/or structural remedies.
Enforcement in relation to other areas of the AML remains muted, with the two Anti-Monopoly Enforcement Authorities (AMEAs) tasked with enforcing the AML prohibitions targeting restrictive agreements and abuse of a dominant market position largely focused on developing implementing rules to more clearly explain the scope and application of these ‘conduct’ prohibitions. In December 2010, this process was significantly advanced with the adoption of a total of five new implementing rules relating to the conduct prohibitions. This raised expectations for broader and more vigorous enforcement of the AML during 2011 and at the time of writing there are signs this expectation is being realised.
Overview of the AML Enforcement Framework
The AML establishes a two-tier enforcement structure under the State Council, the chief executive body. Pursuant to this structure, an Anti-Monopoly Commission (AMC) coordinates the AML-related work of three AMEAs, each of whom is allocated enforcement responsibility in relation to one or more key prohibitions in the AML (or specific categories of business activity that may be challenged under those prohibitions). The AMC is also charged with tasks such as conducting relevant research, drafting competition policies and guidelines, and organising studies on the state of competition in China.
The Ministry of Commerce (MOFCOM) acts as the secretariat for the AMC, and through its Anti-Monopoly Bureau is the AMEA with responsibility for merger review.
In relation to the conduct prohibitions, enforcement responsibility is divided between the Department of Price Supervision within the National Development and Reform Commission (NDRC) and the Anti-Monopoly and Anti-Unfair Competition Enforcement Bureau of the State Administration of Industry and Commerce (SAIC). These AMEAs are also involved in administering a fragmented range of laws incorporating antimonopoly elements which pre-date the AML, such as the 1993 Anti-Unfair Competition Law and the 1997 Price Law. However, as enforcement of these pre-AML laws has been limited and in many respects incohesive, neither the NDRC nor the SAIC brought well developed investigation and enforcement methodology to their AML-related roles.
The NDRC, a government agency with broad responsibilities that include ensuring price stability in key areas of China’s economy, is responsible for enforcing the AML conduct prohibitions in the context of price-related infringements. The SAIC is responsible for non-price-related infringements of the same prohibitions.
There remains uncertainty regarding how this jurisdictional division will work in practice, given the potential for anti-competitive arrangements to incorporate both price and non-price elements. The SAIC and NDRC have implemented case coordination mechanisms to try and resolve this issue and have even jointly handled some cases to date. However, as there are indications the two agencies may take divergent views on some enforcement issues going forward (discussed further below), the AMC will have an important role to play in ensuring appropriate case allocation and coordination.
M&A deals must be notified to MOFCOM if they qualify as a ‘concentration’ (a term defined by implementing rules in a similar, but not precisely equivalent, manner to the way the term is used in the context of the EU merger control system) and if the parties involved achieve certain global and/or China turnover thresholds. A number of implementing rules have been adopted by MOFCOM to provide guidance on the required content of notifications and the process for MOFCOM’s evaluation. The substantive test applied by MOFCOM in merger review is whether a transaction will or is likely to have the effect of eliminating or restricting competition in China. Once MOFCOM is satisfied a submitted filing is complete, a two-stage review process applies. Merger review is discussed further in the ‘China: Merger Control’ chapter.
The AML conduct prohibitions are worded in a manner that broadly resembles the prohibitions relating to restrictive agreements and abuse of a dominant market position in the EU system. Each prohibition is broadly stated and includes a non-exhaustive list of examples of conduct that would be deemed to fall within the scope of the prohibition.
For example, the prohibition of monopoly agreements is divided into two parts. The first part relates to ‘horizontal’ agreements (i.e., agreements between competitors) and references examples such as price-fixing, market sharing and joint boycotts. The second part relates to “vertical” agreements (i.e., agreements between trading partners) and references practices relating to resale price maintenance as examples. The confined scope of the vertical examples has led to speculation that challenges to other types of restrictions (such as exclusivity terms in distribution agreements) will only be permitted under the prohibition of abuse of dominance. However, this is yet to be confirmed.
There is text in the AML suggesting the ‘hard-core’ horizontal monopoly agreement examples referenced in the AML will be deemed to restrict competition to an extent that renders them automatically unlawful, unless they qualify for a general exclusion from the monopoly agreement prohibition. It does not appear that the same applies to the vertical monopoly agreement examples, and, thus, it is understood that assessment of the impact on competition of relevant vertical restraints, such as resale price maintenance restrictions, is a necessary step in any review of their legality.
The general exclusion provides that an agreement that may otherwise breach the monopoly agreement prohibition will be lawful if it has a valid object (such as achieving certain operational efficiencies or specified public interests), benefits consumers and will not seriously restrict competition.
In relation to the abuse of dominance, the examples of ‘abuse’ conduct listed in the AML include making sales at unfairly high or unfairly low prices and (where it cannot be justified) refusing to trade with willing trading partners, selling at below-cost prices, imposing discriminatory terms or unreasonable trading conditions, and engaging in product tying practices.
The recently finalised implementing rules relating to these broadly worded prohibitions have only partly eased business sector concerns about their ability to ensure compliance, as the rules offer significantly less guidance than business operators in jurisdictions such as the EU and US will be used to receiving in the context of the key conduct prohibitions in those jurisdictions.
There are three main substantive implementing rules relating to the conduct prohibitions: the SAIC’s Rules on Prohibition of Abuse of a Dominant Market Position and Rules on the Prohibition of Monopoly Agreements, and the NDRC’s Anti-Monopoly Pricing Rules, as well as several further implementing rules pertaining to related procedural matters. Reflecting the division of enforcement responsibilities, the substantive NDRC rules discuss price-related violations of both conduct prohibitions, while non-price-related violations of the same prohibitions are discussed in the two substantive SAIC rules.
Each of the substantive rules restates the relevant conduct prohibitions and various associated articles in the AML, and the volume of additional guidance and explanation regarding the prevailing enforcement methodology is limited. As a consequence, while there are some textual indications that the AMEAs are drawing heavily on European practice in developing their approach to enforcement, the extent to which this will be borne out in practice remains to be seen.
For example, the Anti-Monopoly Pricing Rules supplement the AML text by providing several examples of lawful justifications for below-cost pricing (e.g., when business operators are urgently disposing of fresh produce or seasonal products), but do not explain the NDRC’s approach on potentially contentious issues, such as the measure of costs used to identify below-cost pricing and whether it is necessary to show reasonable prospects of recoupment of losses in the future. Similarly, neither the SAIC or NDRC rules provide new information to supplement or elaborate on the very general text in the AML referencing the general exclusion from the monopoly agreement prohibition.
Overall, while the willingness of the SAIC and NDRC to consult widely on AML-related implementing rules has been welcomed, the slow pace of their development and their limited scope means antimonopoly compliance in China will continue to be a challenging area.
For the time being, the level of concern this is generating among foreign and domestic business operators is relatively low, as publicised AMEA antimonopoly enforcement during 2009 and 2010 largely focused on cartels in politically sensitive sectors such as staple food production and sales (although other sectors have been impacted, such as mobile communications, insurance, concrete supply and real property management). Additionally, action was mainly taken under the authority of pre-AML laws in respect of which the AMEAs continue to exercise enforcement authority, such as the 1997 Price Law. Beyond this, the SAIC and NDRC have, until recently, seemed content to issue caution letters and informal warnings to domestic business operators in many other areas of the economy engaging in antimonopoly practices (particular where these enterprises are state-owned), and they appear to have made slow progress in investigating the many complaints understood to have been made against large domestic enterprises such as internet search engine provider Baidu.
However, with a broad framework of implementing rules relating to the conduct prohibitions now providing at least a modicum of enforcement transparency and predictability, the SAIC and NDRC are visibly expanding their enforcement efforts.
For example, according to information released via its website in January 2011, the SAIC relied on its powers under the AML to impose a 200,000 renminbi fine (and order ceasing of illegal activities) on an association of premixed concrete suppliers in Jiangsu Province and a 530,723.19 renminbi fine (and order confiscating illegal profits of 136,481.21 renminbi) on five standing association members. It is understood that after an investigation lasting more than six months, the SAIC determined the association had coordinated unlawful market sharing practices amongst members, in breach of the monopoly agreement prohibition.
Other recent enforcement action reported by the AMEAs includes the imposition (under the authority of pre-AML law) of a 500,000 renminbi fine on Zhejiang Fuyang Paper Manufacturers Association by the NDRC. The fine, announced on 4 January 2011, related to a price-fixing arrangement that the association facilitated during 2010.
Notwithstanding the recent rise in publicised enforcement of antitrust-related laws in China, the scope and level of enforcement clearly remains limited by reference to the size of China’s economy and in comparison to many mature antitrust systems. It remains to be seen whether recent cases such as those mentioned above will mark the commencement of more vigorous efforts in this field and a widening of the scope of AMEA investigations to include more focus on arrangements other than hard-core cartels.
A shortage of sufficiently trained staff is perhaps the biggest obstacle to this. While the SAIC is understood to have around 1,000 competition enforcement staff at all levels, only a small fraction of these are highly trained and involved in coordinating efforts at the national level. At the NDRC, the staffing situation is understood to be even more problematic. However, each of the AMEAs is continuing to hold regular seminars and training sessions to improve the capabilities of staff with AML-related responsibilities. Additionally, the SAIC and NDRC are taking steps to facilitate better case management by, and coordination with, their subordinate offices at provincial levels to whom some key enforcement tasks have been delegated.
In the short to medium term, however, resourcing limitations are likely to cause the SAIC and NDRC to be very selective in choosing investigation targets. This, and recent efforts by AMEAs to strengthen cooperation with foreign antitrust regulators (such as the signing in the first quarter of 2011 of new memorandums of understanding to facilitate enhanced cooperation between the UK Office of Fair Trading and each of the NDRC and SAIC) has heightened anticipation that the AMEAs may, in the short term, focus on becoming more involved in multi-jurisdictional anti-cartel enforcement, where it can to some extent leverage off information gathering and investigation by other bodies.
The AML prohibits government agencies and organs from abusing their administrative powers to curb competition. Inclusion of this type of prohibition in the AML was widely welcomed, given the tendency for local government agencies to try and protect local enterprises through taxes and trade restrictions that stifle inter-provincial and inter-regional commerce.
However, the AMEAs are provided with no powers to punish contraventions in this area. Instead, the AML contemplates that contraventions will be referred to a superior agency of the perpetrator, with proposals for imposing discipline on that perpetrator and rectifying the situation. To date, there do not appear to be any developments in terms of enforcement or the content of recent implementing rules that suggest the AML provisions in this area are likely to prove a more effective or more utilised tool for combating administrative monopoly practices than the many previous legislative initiatives in this area.
The AMEAs are given broad powers under the AML to investigate suspected contraventions of all of the key prohibitions in the AML besides administrative monopoly. These include powers to engage in onsite inspections, conduct interviews, and seize relevant electronic and printed materials.
The AMEAs are required to provide business operators under investigation with an opportunity to be heard in relation to the relevant allegation or case. Further, the AMEAs must keep confidential any commercial secrets obtained when carrying out investigations.
Penalties and Remedies
In relation to monopoly agreements or the abuse of a dominant market position, the AMEAs have the power to make ‘cease-and-desist’ orders, confiscate illegal gains, and impose fines.
The level of fines that can be imposed range from up to 500,000 renminbi in cases where an unlawful monopoly agreement has not yet been implemented, to up to 10 percent of a business operator’s turnover in the preceding year in other cases involving a breach of the conduct prohibitions. Nothing in the AML or relevant implementing rules suggests that the turnover considered in this context is only that derived from business operations in China or the product market concerned by the relevant contravention.
At the present time, the fines being imposed by the NDRC and SAIC in relation to identified AML violations or violations of anti-cartel provisions in pre-AML laws are commonly quite low by international standards. It is expected that penalty levels may increase substantially once the NDRC and SAIC are satisfied that domestic enterprises better understand required standards of behaviour under China’s antimonopoly laws.
While the AML itself does not criminalise contraventions of the conduct prohibitions, a number of China’s criminal laws are worded vaguely enough to be invoked in all manner of circumstances—including where cartels are identified. Indeed, there were reports that executives of a rice noodle manufacturer in Guangxi were held in criminal detention while the NDRC investigated their alleged participation in a cartel in early 2010. While it is hoped that the AMEAs will strive to provide business operators with some clarity and comfort in this area, the fact remains that the application of China’s criminal laws remains an area where a degree of opaque standards and politically influenced decision making can always be expected. Accordingly, it is likely the risk of criminal prosecution in relation to cartel participation and even other forms of antimonopoly behaviour will remain a low but live risk for the foreseeable future.
The AML allows for leniency to be exercised where companies ‘own up’ to participation in prohibited conduct and cooperate in investigations. However, this is an example of an area where potential inconsistency is evident in the implementing rules of the SAIC and NDRC.
Both the NDRC Rules on Anti-Price Monopoly Administrative Law Enforcement Procedures and the SAIC Rules on Industry and Commerce Authorities’ Prohibiting Monopoly Agreements provide that a business operator who actively reports involvement in an unlawful monopoly agreement (such as a price cartel), and provides significant evidence regarding that violation, may qualify for a fine reduction.
According to the relevant NDRC rules, the fine reduction will be 100 percent for the first reporting entity, no less than 50 percent for the second reporting entity, and no more than 50 percent for other reporting entities. However, the relevant SAIC rules do not mention specific fine reduction percentages for the second-in-time and any later reporting entity.
There are no reported cases of application of these specific leniency provisions to date. However, there have been recent instances where the NDRC has appeared to apply a form of leniency to business operators involved in conduct addressed by the NDRC in accordance with pre-AML laws. For example, the NDRC announced in June 2010 that significant fines had been imposed on a group of rice noodle manufacturers in Guangxi province, due to their involvement in a joint action to increase prices in the region. However, a number of plants that cooperated with the investigation received only warnings.
Parties who suffer loss as a result of a business operator’s contravention of the AML can institute a civil action to recover that loss. The Supreme People’s Court (SPC) has designated the relatively well-regarded and well-trained intellectual property divisions of the People’s Courts to handle AML cases at first instance, and is developing judicial interpretations that will address matters such as standing and burden of proof. However, as discussed below, the ongoing work on development of civil action rules has not prevented a limited number of civil actions in this area from being permitted to proceed.
According to official records released by the SPC at the end of June 2010, 11 civil action cases under the AML had been submitted to and accepted by China’s people’s courts at that time. While it is clear further cases have arisen since that time, no comprehensive records on the precise number of cases are understood to be available. It is also not clear whether other potential cases are being rejected by the courts for any reason; however, this is not inconceivable given that the courts may be reluctant to hear cases involving state-owned enterprises or foreign multinationals, or involving particularly complex issues, before more authoritative guidance is provided on the appropriate handling of such cases.
Among the 11 cases reported by the SPC up to June 2010, 10 are antimonopoly civil actions and one is an antimonopoly administrative action. In relation to the civil actions, the claims of the plaintiffs mostly focused on abuse of dominant market position. Only one case concerned the monopoly agreement prohibition. Interestingly, a large number of the plaintiffs have been law practitioners in China, some of those claims were for nominal damage amounts and thus appear designed for purposes such as to try and elicit clarification on key AML interpretations from the people’s courts.
At the time of writing, it is understood that no plaintiff’s claims under the AML have been sustained by the people’s courts. Instead, each concluded case has involved either a court decision against the plaintiff or withdrawal of the case by the plaintiff (usually in the context of a settlement agreement with the defendant). In the cases in which the court has decided against the plaintiff, a common reason was that insufficient evidence was provided to establish the relevant market and/or the defendant’s dominant position. Accordingly, few of the decided cases appear to have required or involved a conclusive determination of whether relevant conduct by the defendant would constitute unlawful abuse of dominance, and thus published jurisprudence in this area does not significantly assist understanding of the scope of the AML conduct prohibitions.
It is understood that several key issues that may be dealt with in the SPC’s judicial interpretations remain under debate, such as whether civil actions should in future be limited to follow-on actions following administrative enforcement of the AML, and whether a double damages system should be implemented to encourage civil litigation.
At the time of writing, the AML has been in effect for over two and a half years. Although progress has been made in relation to the development of a broad framework of implementation rules to guide AML enforcement and compliance, it is suggested that the law’s impact on market behaviour in China remains relatively low outside of sectors that have traditionally been a major focus of NDRC supervision, such as staple food sales.
As noted above, this situation may be changing, and it can be expected that the attention paid to the AML conduct prohibitions (and the calls for more clarity in this area) will increase dramatically once there are signs regular and vigorous investigation of complaints against large domestic companies and foreign multinationals is under way, and as the claims of private action litigants in this area become more sophisticated and compelling.
In the meantime, business operators in China who are keen to ensure compliance with the law to mitigate risk will continue to face considerable challenges due to the lack of clear standards and guidance on enforcement methodology. In this context, adherence to relevant international standards such as those prevailing in mature antitrust jurisdictions such as the EU and US, with adjustments in those few areas where the Chinese authorities have signalled their own approach and enforcement priorities, appears to be the prudent way forward. u