China Law Vision : China Insurance & Anti-Trust Lawyer : Dr. Zhan Hao : Grandall Legal Group : Anti-Monopoly & Competition Law : China Law Vision Blog

In early March, 2010，Diageo, the world’s leading spirits maker signed a deal whereby it acquires majority shares of SiChuan Quanxing Group, a holding company that owns Shui Jing Fang(水井坊), reputedly China’s oldest white wine. What is remarkable about the transaction is that it is the first case in which foreign capital takes over Chinese white wine. To further make the deal unique is how surreally the white whine came into being. In 1998, Quanxing Group discovered a relic site when its workers were in the process of renovating factories. Archeological excavation showed that the site was originally a wine making workshop that dates back to Yuan Dynasty, over 600 years ago. With state-of-art bio technology, several active microbes were obtained from the workshop and used to produce the white whine, branded Shui Jing Fang(水井坊). The relic site was also listed by Guinness World Records as the world’s oldest wine making workshop.

On a rough look, the Diageo/Shui Jing Fang deal is remarkably similar to the Coca-Cola bid for Hui Yuan . For example, both involve world famous brands buying Chinese famous local brands, in effort to tap into the ever increasing beverage market in China. Given the doomed Coca Cola/Hui Yuan transaction on antitrust account, one is tempted to ask whether history will not repeat itself this time. Meanwhile, media report says Diageo is preparing regulatory filing with MOFCOM, which is the authority charged with policing merger market to prevent anticompetitive consequences. There are also market speculations on the fate of the deal in the hand of MOFCOM.

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On November 26, 2009, China’s Banking Regulatory Commission (CBRC) issued the Pilot Administrative Measures for Commercial Banks to Make Equity Investment in Insurance Companies (the “Measures”). The Measures cover several key aspects of commercial banks’ equity investment in insurance companies, i.e., market access, risk control and regulatory supervision. Its enactment marks the official recognition of cross-sector operations within the banking and insurance industries. By and large, the Measures establishes the regulatory framework for enhanced partnership between the banking and insurance industry. Interestingly though, it has streaks of competition law in its provisions, which has the effect of fostering healthier competition in the future financial market of integrated operation.

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I focus mainly on two legal areas: insurance law and anti-monopoly law. Both these two areas experienced a dramatic progress in 2009. In my personal practice, I see some interesting overlapping of these two areas. In this article, I will address two cases in vehicle insurance market regarding the accusation of violation of China Anti-Monopoly Law (AML).

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On 25 January 2010, European Commission said that it is ready to review a plan by the world’s second and third largest iron ore miners, Rio Tinto and BHP Biliton, to combine some iron ore mining operations in Australia. The European antitrust watchdog said that it would investigate whether the companies’ plan to pool iron ore mining in western Australia would affect the global prices or supply for iron ore transported by sea, known as seaborne iron ore. The Commission set no deadline for completion of the investigation, citing the complexity of the case, cooperation from the companies involved and exercise of the rights of defense, among other factors, to justify the open-ended time limit.

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On January 8^th, the China Publishers Association（中国出版工作者协会），the China Book Distribution Industry Association（中国书刊发行业协会）and the China Xinhua Bookstore Association（中国新华书店协会）(collectively the “Three Associations”) jointly published the “Book Fair Trade Rules” (“BFTR”). Its enactment generated widespread outcry at its suspected violation of China’s Anti-Monopoly Law (“AML”). BFTR became effective upon its release.

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 This article appeared in the 3rd edition of The International Comparative Legal Guide to Cartels and Leniency 2010; published by Global Legal Group Ltd, London(www.iclg.co.uk)

You can aslo download a bookmarked PDF version of this guide book at the following link:

http://www.iclg.co.uk/index.php?area=4&show_chapter=3380&ifocus=1&kh_publications_id=128

 1     The Legislative Framework of the Cartel Prohibition

1.1 What is the legal basis and general nature of the cartel prohibition, e.g. is it civil and/or criminal?

The principal legal basis for cartel prohibition is the Anti-Monopoly Law (AML) and the Price Law (Price Law). At the time of writing, two of China’s antitrust enforcement authorities—the State Administration for Industry & Commerce ( SAIC) and the National Development and Reform Commission (NDRC)—have also promulgated a series of implementing regulations for public comments: the Draft of the Regulations on Prohibiting Monopoly Agreements (SAIC) and the Draft of the Regulations on Prohibiting Price Monopoly (NDRC).

In China, violation of cartel prohibition carries administrative as well as civil liabilities. No criminal liability is provided for cartels in China.

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On December 18, 2009, Beijing No.1 Intermediate People’s Court (the “Court”) reached a decision in favor of defendant in China’s second “abusing dominant market position” case.

BACKGROUND

The Plaintiff, Tangshan Renren Information Service Company (“TRISC”) operates an online platform that brokers deals between pharmaceutical companies and distributors and consumers. The Defendant, Baidu, which is allegedly the largest Chinese search engine company is accused of artificially lowering TRISC’s ranking in Baidu search results in order to coerce TRISC into continuing to purchase bid ranking service from Baidu. It is alleged to have caused TRISC to lose traffic and revenue. TRISC brought the case to the Court under Paragraph 1 of Article 17 of Chinese Anti-Monopoly Law (“AML”), namely, the exclusive dealing provision that prohibits a firm with market dominance position from restricting a third party to dealing with itself or selected third parties exclusively without valid justification. TRISC petitioned the Court to grant an order to enjoin Baido from the conduct and asked for $163,000 in damage for lost revenues. Baidu defended itself by arguing that lowering TRISC’s ranking in its search result was a response to the “junk links” practice TRISC engaged in, i.e. TRISC created a robot to automatically post junk posts on websites and forums and sent out spam messages to elevate its ranking in Baidu’s search results. According to Baidu, it adopts “anti-junk links” policy and made it sufficiently clear to the outside world by putting it on its website.

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Last week, Rio Tinto, a resource giant of Australia, withdrew its proposed transaction with China’s Chinalco, and announced that it will set up a joint venture with another rival miner, BHP Billiton. If the Rio Tinto - BHP Billiton deal is finished, as analysts estimated, there will be a great concert effect, because they will be able to share their ports and railroads in Western Australia, which considerably cuts costs for both parties.

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On June 05，2009，the State Administration for Industry and Commerce (SAIC), one of the three enforcement agencies for China’s Anti-Monopoly Law (AML), released two sets of provisions on the procedures to be followed by the agency and its delegates when enforcing the AML. They are: Procedural Provisions on Stopping the Use of Administrative Power to Exclude or Restrict Competition and Procedural Provisions for Investigating Monopoly Agreement and Abuse of Dominant Position Matters. These two provisions will come into effect on July 01, 2009. On June 08, 2009, SAIC published a Set of Questions and Answers about the Two Procedural Provisions on its website, which provides answers and explanations to some of the more pressing issues.

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Last month, nearly all domestic airline companies in China raise their price simultaneously. However, they denied that their decision based upon agreement between them. On 04.27.2009, SAIC promulgated the Draft Regulation on Prohibition of Monopoly Agreements and the Draft Regulation on Prohibition of Abuse of Dominance. The two drafted regulations offer detailed instruction and important amendments on how to regulate monopoly agreements and abuse of dominance.

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Currently, there is an absence of legislation in China concerning gun jumping in the context of mergers and acquisitions. However, the Anti-monopoly Law (AML) could potentially be utilized as mode to curb and or prohibit gun jumping in the future. The following will attempt to analyze how the AML may be used in relation to gun jumping in the future.

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Last week, SAIC promulgated two draft regulations relating to China’s Anti-monopoly Law. The new regulations concern abuse of dominance and monopoly agreements.

A prohibition on anti-competitive monopoly agreements and a prohibition against the abuse of market dominance are two of AML’s main prongs; the third being a review of concentration. However, under the AML, the provisions of these two categories lack detail as they are only covered through the broad principles of China’s competition law. Hence, the new draft regulations are welcomed as a mode to increase the detail of and to further develop China’s competition law. Furthermore, substantial private litigation has emerged challenging the abuse of dominance and monopoly agreements. Therefore, SAIC’s promulgation of the two drafts is a welcomed response to this rising trend.
 

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Another hotspot related to this case is national security issue.

The opponents argued that this concentration will threat the national security of our country. Huiyuan is a well-known domestic brand in Chinese juice beverage market. According to a survey made by AC Nielson, pre-concentration, Huiyuan’s market share in pure juice beverage market and middle-level concentration juice beverage market reached 42.10% and 43.60% respectively. If Huiyuan was acquired by Coca-cola, a foreign giant in soft drink market, this domestic brand will suffer the same fate as those who have been acquired by foreign corporations: disappear in the market. At that time, Chinese juice beverage market will be monopolized by foreign enterprise. It will be a huge threat to China’s economic and food security.
 

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First, it is no doubt that this case has become a landmark case in the developing history of China anti-monopoly law. There are four points I should address under my first topic as to why this case is so significant to China AML.

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Last week, the so-called first case of abuse of dominant market position (DMP) was heard by the Beijing First Middle-level court. This time, the famous Chinese search-engine Baidu was brought under the sword of China’s Anti-monopoly law (AML).

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The first issue faced by SAIC (State Administration for Industry and Trade) is retaining an appropriate degree of manpower. According to the permission from State Council, SAIC has established a specific bureau to cope with monopoly behavior, though its manpower is far from adequate to deal with nationwide AML cases. Based on the provisions of the AML, SAIC may empower its subsidiaries at the provincial level in order to help resolve specific cases. This means SAIC can take advantage of nationwide resources under the present system. However, the question of how to prevent localism and how to guarantee strict compliance with the AML presents a challenging answer.

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On March 4th 2009, attorney Zhou Ze filed a claim in Beijing Dongcheng District Court. He accused China Mobile and Beijing Mobile of abusing their dominant market position (DMP) and price discrimination. The court has accepted the case and the hearing will be in the near future. For China mobile, the largest domestic mobile phone operator and the world's largest operator by subscribers, it is the first time an Anti-monopoly suit has been brought against the company.

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When referring to the anti-monopoly authority in China, many first mention the Ministry of Commerce of the People's Republic of China (MOFCOM). However, based on the provisions of the Anti-monopoly Law of the PRC (AML) and the power allocated by the State Council, the State Administration for Industry and Commerce (SAIC) will play a primary role in AML enforcement.

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The following is an excerpt from a recent interview on China's Anti-monopoly law conducted with Dr. Zhan Hao. The interview below briefly analyzes some of his comments and questions concerning China's stride towards a form of competition law.

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Since the Ministry of Commerce (MOFCOM) promulgated its decision to block the acquisition of Huiyuan Juice Group by The Coca-Cola Company, the decision has been subject to tremendous criticism from trade lawyers and economists. Some have argued China appears willing to wield its Anti-monopoly Law to fend off foreign attempts at buying promising domestic firms (though Huiyuan was incorporated in the Cayman Islands), even when the resulting market concentration would not be excessive.

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On January 7 2009 the Ministry of Commerce (Mofcom), in hope of receiving comments, published draft guidelines for the demarcation of the relevant market.

Lack of detailed guidelines for the demarcation of the relevant market is a primary criticism of the PRC Anti-monopoly Law (AML) and its enforcement. Relating to the definition of the relevant market, there has been a tremendous difference in opinion amongst Chinese experts, including legal consultants and economists. The gap between such opinions is far too wide for consolidation. Thus, the State Council has intentionally ignored the demarcation of the relevant market in regulations following the AML concerning notification of concentrations.
 

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On August 1, the Chinese Anti-monopoly Law (AML) was enforceable and four plaintiffs filed an anti-monopoly case in the No1 Intermediate People's Court of Beijing. Some members of the media and laymen cheered it as the first anti-monopoly private litigation in China.

The plaintiffs were four anti-counterfeiting companies who sued the General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ), an industry regulator. The original four plaintiffs were later joined by four other anti-counterfeiting Chinese companies from across the country . Claiming AQSIQ violated the AML, due to its efforts to popularize an online network.
 

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It is my pleasure to find some colleagues interested in Chinese AML issues. I would like to discuss with you the functions of the regulatory institutions and the possible issues surrounding investigation and litigation.

Presently, the profile of MOFCOM (Ministry of Commerce) is clear, however that of NDRC (National Development and Reform Commission) and SAIC (State Administration for Industry and Commerce) have not come into being.
 

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From the beginning of 2009, the year of the ox, the legislative framework of the Chinese Anti-monopoly Law (AML) has been accelerated. The acceleration is necessary to correct some of the major disadvantages of the AML. It is hoped the corrections will prevent the AML from being seen as abstract and hard to enforce.

Until now, we have heard little from regulatory organizations related to the enforcement of Chinese Anti-monopoly law including the; Ministry of Commerce (MOFCOM); State Administration for Industry and Commerce (SAIC) and the National Reform and Development Commission (SDPC). However, there appears to be a consensus amongst the organizations for a need to focus on the legislation progress, and to promulgate Guiding Opinions, Guidelines, Working Guidelines and Regulation and Administrative Procedures in an expedited fashion. Among these three organizations, it seems MOFCOM is moving far quicker than the others.
 

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Today afternoon, just twenty minutes ago, Ministry of Commerce (MOFCOM) promulgated its decision regarding the concentration between The Coca-Cola Company and China Huiyuan Juice Group Limited, which prohibited this acquisition. This prohibition decision is the first prohibition decision issued by MOFCOM since the enforcement of Chinese Anti-monopoly Law (AML).
On September 3, 2008, The Coca-Cola Company announced its intention to make cash offers to purchase China Huiyuan Juice Group Limited; a Hong Kong listed company which owns the Huiyuan juice business throughout China.
 

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At the beginning of November, Mr. Xi Xiaoming, the Vice Chief Justice of the Chinese Supreme Court, informed the media at a press conference that the Chinese Supreme Court would initiate the drafting of judicial explanations to compliment the Chinese Anti-monopoly Law (AML). Before such formal expression, another Justice in the No.3 Civil Division of the Chinese Supreme Court publicly stated plaintiffs may file civil AML cases directly, bypassing the wait for administrative decisions.

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China’s Anti-monopoly Law was promulgated on August 30^th 2008.  Although the legislation is constantly developing, experts have forecasted an urgent need for those willing to act as Chinese Anti-monopoly lawyers.  The need for Chinese Anti-monopoly lawyers stems from the intense concerns expressed by multi-national corporations.  These corporations fear harsh penalties, restrictions on business practices and complex regulatory burdens under the new regime.  Considering these fears, sound advice provided by a Chinese Anti-monopoly lawyer is of the utmost importance.

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Since October 2008, Private oil companies in China have been urging one another to take advantage of the Anti-Monopoly Law（AML） to secure a stable supply of oil and avoid over-reliance on the country's two major oil producers for survival. They want new policies to create a level playing field. Currently they depend on the oil supplies of the China National Petroleum Corporation (CNPC) and the China Petroleum and Chemicals Corporation (Sinopec) as they are forbidden by law to extract or import their own.

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During the drafting of the Chinese Anti-monopoly Law (AML), the level at which the threshold of concentration notification was to be set, aroused fierce debate. In the end however, AML did not specifically stipulate the notification criteria in detail.Article 21 of AML states:

Business operators shall declare in advance the concentration reaching the threshold of declaration prescribed by the State Council to the Anti-monopoly Law Enforcement Agency, otherwise, they shall not implement the concentration.

Such a vaguely worded clause has caused confusion within the legal profession. It certainly begs the question: Why did AML not explicitly stipulate the threshold of notification? Examining both the lawmaking process prior to the creation of AML as well as the drafting of AML itself may prove to be helpful. 

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November 2008, Mr. Xi Xiaoming, Vice Chief Justice of the Chinese Supreme Court, informed the media the Chinese Supreme Court would initiate drafting of judicial explanations complimenting the Chinese Anti-monopoly Law (AML). Before such formal expression, another Justice in the No.3 Civil Division of the Chinese Supreme Court publicly stated plaintiffs may file civil AML cases directly, bypassing the wait for administrative decisions.

Due to the characteristic of the AML, the administrative departments, other than courts, are the leading force in law enforcement. Presently, there is uncertainty in the AML administrative procedure and administrative departments take caution in announcements and practices. In such an atmosphere, Chinese courts come to the front.
 

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It is difficult to overstate the importance of concentration control regulations in the broader context of Chinese Anti-trust law as regulated by the Anti-monopoly Law of the People's Republic of China (Anti-monopoly). No area of anti-monopoly enforcement commands closer scrutiny or arouses more impassioned debate. In fact, creating a proper definition for concentration was the most vigorously contested issue during the drafting of the new Anti-monopoly Law.

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