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

I             Draft Regulation on Monopoly Agreements

A          Definition

The Draft Regulation on Monopoly Agreements made significant clarifications to the definition of monopoly agreements. For example, it provides that agreements organized to be reached by trade associations are monopoly agreements within the meaning of AML. It dispels the common misconception that only trade associations are liable for organizing members to reach monopoly agreements. The Monopoly Agreement Draft Rules also provides that in order to establish tacit collusion, SAIC will investigate whether the competitors have engaged in communicating with each other. The amendment is significant, as it implies that a competitor who follows the price leader in a market, without sharing its intention of doing so with other competitors doesn’t constitute tacit collusion. Hence there is no “agreement” within the meaning of AML.

B         Horizontal agreement

The Draft Regulation on Monopoly Agreements re-adjusts the scope of horizontal agreements. For example, it adds “agreement on refusing to adopt new technological standard” to the list of the proscribed horizontal agreements”. It also carves out bid rigging from the scope of horizontal monopoly agreements. These changes reflect SAIC’s concern with the interaction of AML and Tender and Bidding Law of PRC.

C           Vertical monopoly agreements

Regarding vertical monopoly agreements, SAIC only prohibits agreements which “have the effects of eliminating or restricting effects of competition and harming the interests of consumers”, without enumerating specific types of vertical agreements it condemns. It reflects SAIC’s preference for effect-based, rather than formalistic approach to vertical restraint.

D         Abuse of intellectual property rights

For the first time, the Draft Regulation on Monopoly Agreements provides that it will apply to scenarios where undertakings abuse their intellectual property rights by reaching monopoly agreements. Accordingly, for example, where undertakings with competing patent collude to restrict use of new technology, they shall break the regulation.

II           The Draft Regulation on Abusing Market Dominant Position

A          Test for rebutting presumption of market dominant position

The Draft Regulation on Abusing Market Dominant Position provides a clear and workable guidance on substantive rules for rebutting market dominant position. It provides questions on whether the competitor in question has ability to control market price or obstruct competitors from entering the market by reference to such factors as market share, ability to control sales market or raw material purchasing market, financial or technological superiority, degree of market reliance on the undertaking in question, degree of difficulty in market entry.

B         Various conducts of abusing market dominant position

The Draft Regulation on Abusing Market Dominant Position provides that the following conducts constitute refusal to deal, i.e., without due reasons, cutting back volumes of transactions with current customers, terminating current transactions, refusing to engage in new transactions, refusal to share essential facilities and imposing restrictive conditions such that the transaction parties may find it difficult to continue to deal.

Regarding exclusive dealing, the Draft Regulation on Abusing Market Dominant Position forbids exclusive dealing with the undertaking in market dominant position or its designee without due reasons. On top of that, where an undertaking in market dominant position prevents transaction parties from dealing with its competitors without due reasons, it shall also break the regulation.  

The Draft Regulation on Abusing Market Dominant prohibits the following bundling and tying:

•  to sell different commodities in forced bundling or combination, in contradiction with their functions or customs of transactions or consumption;
• to attach unreasonable restrictions to duration of contract, method of payment, transportation of commodities, delivery or methods of services;
• to attach unreasonable restrictions to the territory of marketing, buyers and after-sale services;
•   to attach conditions of transaction that are irrelevant to object of transaction.

SAIC shall look into the following factors to determine the defense of “due reasons”:

• whether the acts in question are based on customary practices and normal operations;
• whether the acts in question have the effects of eliminating or restricting market competition and harming consumers’ interests;
• the effects of the acts on economic efficiency, public interest and economic development.

C         Abuse of intellectual property

For the first time, Abusing Market Dominance Draft Rules expressly provides that it will apply to abusing intellectual property rights where the undertaking in question abuses its market dominant position. It implies that the intellectual property rights afford market dominant position to the undertaking in question.

Authorization

This is one of the main focuses before the promulgation of these two regulations. As the Procedural Provisions for Investigating Monopoly Agreement and Abuse of Dominant Position Matters stipulates, the SAIC will be fully in charge of the enforcement of the AML to regulate monopoly agreements and abuses of dominance. This means that the decision as to whether to initiate an investigation procedure will be the complete power of the SAIC. When required, the SAIC may also authorize its local branches to enforce the AML. The local branches consist only of branches within provinces, autonomous regions and municipalities directly under the central government. These branches should not vest the power to lower level branches. The purpose of the strict limitation on authorization is to maintain the same standard in cases in different regions and avoid any potential local protectionism.

The provision says that SAIC should investigate the case by itself, or it should entrust its local branches to make the investigation. Here the local branches include not only the branches mentioned above, but also branches in some of the lower level branches of Administrative of Industry and Commerce as specified in the provisions. The reasoning for such stipulation is due to the fact that it is more convenient for a local branch of the Administrative of Industry and Commerce to access the evidence, which makes their investigations more effective and efficient.

Lenient Policy

The party involved in the monopoly agreement matters, when offering crucial evidence to the enforcement institution, will be imposed mitigated or even no punishment. This lenient policy was restated in Procedural Provisions for Investigating Monopoly Agreement and Abuse of Dominant Position Matters. Besides this, there are two new points in this new regulation. Firstly, the organizer of the monopoly agreement should not be entitled to the lenient policy. Secondly, the reference to crucial evidence refers to the evidence that plays a key role in triggering the investigation or the recognizing monopoly agreements.

In practice the monopoly agreement is hard to be recognized due to its secretive nature. The lenient policy is aimed to encourage the parties involved to report such agreements, thus facilitating the enforcement of the AML.

Administrative Monopoly

Administrative monopoly is one of the four forms that are regulated by AML. For historical reasoning, the use of administrative power to exclude or restrict competition is very common in China. According to the Procedural Provisions on Stopping the Use of Administrative Power to Exclude or Restrict Competition, the SAIC and its branches are empowered to offer suggestions to each level of government as to how to deal with these sorts of violations.
This suggestion power, when used effectively, may be helpful in stopping the use of administrative power to block or restrict competition. However, many people still possess a skeptical attitude towards the effects of these suggestions. There are no such procedural provisions to the administrative institutions as to how to deal with the suggestions. The current law and regulations do not require any disclosure of such suggestions to the public meaning that it is not subjected to public supervision.

Promise System

When those who are undertaking in the violation agree to stop, the enforcement institutions may suspend the investigation. If, in the designated period those undertakings substantially cease the violation, then the institution may terminate the investigation. This system will save in the costs of investigation and has been accepted by most of the countries. The Provisions offer some new detailed rules. For example it stipulates what should be included in the application form and the decision form of suspended investigations; and under what circumstances the enforcement institution should terminate or reopen the investigation procedure.

Reporting System

Both the AML and the new provisions stipulate that the enforcement institution should protect the reporter from being exposed. The Provisions go even further detailing what materials should be included when reporting such violations. Furthermore, the provision also notes how each level of branch of the Administrative of Industry and Commerce should deal with the reporting. This makes the regulation more practical.

It is acknowledged that the existing of the procedural provisions is the precondition for the effective enforcement of AML. These two provisions, although improvements are still needed, are welcomed by the public.
 

Upon a review of the drafts, substantial detail is revealed. Instructions as well as amendments have been provided making the AML a more practical and effective tool. What is more, new content has also been included in the regulations.

Citing an example to illustrate these amendments is the Regulation on Abuse of Dominant Market Position. What is considered a dominant market position is restated as in the AML. However, two amendments are made regarding the definition. First is clarification of what other transaction conditions are. Other transaction conditions in this provision include factors which can exert substantial influence on a market transaction outside the realm of price and quantity. Such examples include quality of goods, payment terms, transfer measures and warranty services. The second amendment stipulates what can be labeled as having the capability to block or exert influence on other competitors’ entry to the relevant market. It includes expulsion or delay of entry, or dramatically increasing the cost of entry which makes competition uneconomical.

Additional amendments included in the regulation also warrant our attention. For example, within the Regulation on Abuse of Dominant Market Position, the relevant market is stated as the basis in analyzing and presuming a position of dominance. In addition, the behaviors associated with abuse of dominance are rephrased by the above regulation: they are not in one provision as in the AML, rather they are separate terms allowing for a fuller explanation. Article 8 of the regulation may be seen as the core concept: it is the general principle on deciding what constitutes abuse of dominance. It stipulates that those who possess dominance shall not decrease, block or stop a current transaction with another party without justified reason, or decline to enter into new transactions. Under the same transaction terms, decrease, block or stop the transaction can be interpreted as without justified reasons. That is to say, if under the same transaction conditions, the dominant party declines to further a transaction with the other party, without justifiable cause, the behavior will likely constitute an abuse of dominance. Finally, within the Regulation on Monopoly agreements, Collaborative Bidding is added as a form of monopoly agreement.

Overall these draft regulations should be welcomed by the AML. They provide further detail which has been anxiously anticipated. These details will help increase the certainty of the ALM and it is hoped further regulations and guidelines will be promulgated in the future.

 

The question of how to balance relations between administrative departments remains unanswered. Under the State Council, there are a number of ministries, general bureaus, and commissions, which are at the same level as SAIC and some of which truthfully represent the interests of their specific sectors. The end result is conundrum.

Additionally, even for some state-owned enterprises, there are competitors in the relevant market, though their management is decided by regulatory departments, perhaps even by the State Council. In order to punish certain administrative departments and some state-owned enterprises, SAIC should take account of factors both within and outside the legal realm. The practical solution is for SAIC to give proposals to administrative departments regarding their violation of the AML and then suggest how to correct the prohibited actions.

Finally, the absence of specific procedures for enforcement of the AML is another problem for SAIC. Fortunately, SAIC has recognized this and has begun to draft an investigation procedure.

The aforementioned questions why people link the AML authority with MOFCOM; a primary reason comes to light.

Prior to the promulgation of the AML, the first regulation to address anti-monopoly issues was The Interim Provisions on the Takeover of Domestic Enterprises by Foreign Investors (Interim Provisions). Within the framework of the Interim Provisions, MOFCOM will accept, investigate and decide the notification regarding a concentration, with SAIC. In practice, MOFCOM played a prevailing role in determining a concentration. Typically, MOFCOM frequently exchanges information with foreign counterparts, including the FTC, MOJ and the European Commission. Therefore, MOFCOM has a large responsibility over foreign investment, inbound and outbound trade, ect., and such responsibility easily allows the public to link MOFCOM with the enforcement of the AML This is especially true due to the most prominent misunderstanding that the AML shall primarily focus on the actions of foreign entities.

After studying the AML carefully, you should begin to recognize that SAIC will act as the indispensable and fundamental AML regulatory organization.

First, as per the power allocation regulation, SAIC retains responsibility over AML affairs related to monopoly agreement(s), abuse of dominance and administrative monopoly(s), though this excludes price-related monopoly behaviors.

The scope of monopoly agreement, abuse of dominance and administrative monopoly is so wide that almost every market power will fall within the grasp of the regulation. Price Fixing, restriction of output, market division, restriction of development and purchase of new technology/products, boycott(s), monopoly high prices above fair market levels, predatory pricing, refusal to trade, tie-in sales, discriminative treatments, etc., are typical monopoly agreements (cartels) and what would be categorized as an abuse of dominance. Thus, domestic and international giants must take caution when embarking upon specific market strategies.

Secondly, triggering SAIC action lies in the hands of the general public. MOFCOM under normal circumstances cannot forwardly investigate monopoly behaviors except where a business operator is directly involved in a concentration, or where they are notified of the presence of a concentration. For SAIC, the initiation of investigation proceedings is triggered by wider sources, including claims from the public, information forwarded by administrative departments and other SAIC information channels. Presently in China, the public including consumers are generally unsatisfied with the presence of monopoly powers and market dominators; this tendency will in turn provoke the action of SAIC.