China Near Finalizing Anti-Monopoly Law
 
July 26, 2006
 
Adam Charles Ritter - Los Angeles

In early June 2006, the State Council (the highest State administrative body in China, sometimes referred to as China’s Cabinet), approved in principle a draft anti-monopoly law (Anti-Monopoly Law).¹ The Anti-Monopoly Law states that its purpose is the prohibition of monopolistic conduct, safeguarding of market competition, protection of consumers and “public interests,”² and healthy development of China’s socialist market economy. After possible further revision, the Anti-Monopoly Law is to be provided to the Standing Committee of the National People’s Congress (China’s national legislature) for deliberation regarding still further revision before adoption, although a date for such deliberation has not yet been set. This article summarizes certain key provisions of the Anti-Monopoly Law, and certain comments regarding same from the Antitrust Law, International Law and Intellectual Property Law sections of the American Bar Association (ABA), and then offers some final observations.

Categories of Monopolistic Conduct Regulated
As currently drafted, and discussed in more detail in the next four paragraphs, the Anti-Monopoly Law would regulate four categories of monopolistic conduct that occur within China or that eliminate or restrict competition within China, specifically: (i) certain agreements among legal and/or natural persons engaged in business (collectively, Undertakings) – both horizontally among competitors, and vertically among sellers and buyers – as well as related bid rigging; (ii) abuse of dominant market position; (iii) concentrations (including mergers, acquisitions, joint ventures, share voting agreements and certain other entity or personnel control arrangements) (Concentrations); and (iv) abuse of (governmental) administrative powers to restrict competition.³ The Anti-Monopoly Law states that it also applies to industrial associations and public institutions that eliminate or restrict market competition in violation of the Anti-Monopoly Law.

Anti-Competitive Agreements
The Anti-Monopoly Law covers agreements among Undertakings with the purpose or effect of eliminating or restricting competition except agreements that fall within certain specified exemptions (Block Exemptions). The Block Exemptions cover, for example, agreements intended “for the purpose of … cost reduction,” “to moderate serious decrease in sales volumes or distinct production surplus,” or “to enhance competitiveness of exports in the global market.” However, Block Exemptions apply only if consumers will benefit, the agreements are necessary to achieve the benefits and competition will not be eliminated.

Anti-Competitive Use of Dominant Market Position
While more than half-a-dozen factors are specified for use in determining when an Undertaking has a dominant market position, an Undertaking is irrebuttably deemed to have a dominant market position in the relevant market if the: (i) Undertaking alone has at least 50 percent or more market share; (ii) Undertaking and another Undertaking together have two-thirds or more market share; or (iii) Undertaking and two other Undertakings together have three-fourths or more market share. Dominant market position status alone is not illegal, but subjects an Undertaking to restrictions on certain specified “abuses” of such position, as well as a catch-all category of “other abuses of dominant market position.”⁴

Anti-Competitive Concentrations
The Anti-Monopoly Law would create an Anti-Monopoly authority directly under the State Council (Anti-Monopoly Authority) to implement and enforce the Anti-Monopoly Law. Undertakings would be required to file with the Anti-Monopoly Authority prior notification of a proposed Concentration if: (i) the transaction value exceeds RMB 200 million, the prior year’s aggregate worldwide assets or revenue of all Undertakings concerned exceeded RMB 3 billion, and at least one Undertaking’s prior year’s China-wide assets or revenue exceeded RMB 1.5 billion; or (ii) the transaction value exceeds RMB 300 million.⁵ Otherwise, prior notification would be voluntary. After notification (and any supplemental information required by the Anti-Monopoly Authority) is received by the Anti-Monopoly Authority, the Anti-Monopoly Authority may: (i) review the Concentration but issue no decision within 30 days, whereupon the Undertakings may proceed with the proposed Concentration; (ii) inform the notifying Undertakings that it has decided to conduct further review of the Concentration, whereupon it must approve or prohibit the Concentration within 120 days (or under certain circumstances 150 days) from such decision for further review. The factors the Anti-Monopoly Authority may consider in determining whether a Concentration is likely to eliminate or restrict competition within the relevant market include, “the effect of the proposed concentration on the development of the national economy and public interest,” as well as an open-ended category of “other factors the [Anti-Monopoly Authority] deems as determinative.”

Anti-Competitive Use of Administrative Powers
The Anti-Monopoly Law would prohibit Chinese government authorities from abusing their administrative powers to: (i) “require, in any manner or in disguised form, undertakings to deal in or use only the [goods or services] supplied by any undertakings designated by [such authorities]”; (ii) block the import, export or other transportation of goods and services; (iii) engage in a variety of specified discriminatory conduct; (iv) reject investment or establishment of branch offices or engage in certain specified restrictions on market access; or (v) compel Undertakings to engage in conduct that will eliminate or restrict competition.

Enforcement Powers
The Anti-Monopoly Authority would be able to investigate anti-monopolistic conduct upon: (i) its own initiative; (ii) receiving (required or voluntary) notification from a party to a transaction subject or potentially subject to the Anti-Monopoly Law, or upon receiving a “report” of a violation from interested parties, consumers; or (iii) any other organizations or individuals. Depending on the type of monopolist conduct involved, the Anti-Monopoly Authority would have the power to investigate, to require production of documents and information, to render null and void ab initio agreements violating the Anti-Monopoly Law, and/or to order an Undertaking violating the Anti-Monopoly Law to: (i) cease and desist offending conduct; (ii) pay a fine (of up to RMB 10 million or 10 percent of the prior year’s revenue in the relevant market); (iii) dispose of all or some of its stock; (iv) transfer part of its business; and/or (v) resign from a position. The Anti-Monopoly Authority would also be able to impose fines of up to RMB 1 million for a person’s failure to cooperate with an investigation under the Anti-Monopoly Law. The Anti-Monopoly Law also provides that, “The undertakings that violate the provisions of this law and injure the lawful rights and interests of others shall make compensations to the victim.”⁶

Due Process and Transparency
The Anti-Monopoly Law would also afford a measure of due process and transparency. It would require Anti-Monopoly Authority investigators to present documents proving their identity and to make written records of their investigations. It would require the Anti-Monopoly Authority, its staff, and “other relevant authorities” to “keep confidential the commercial secrets obtained when carrying out their duties pursuant to law.” It would require the Anti-Monopoly Authority to give Undertakings and other interested parties “the opportunity to submit statements and defenses [sic],” and would require the Anti-Monopoly Authority to “hear the opinions” of Undertakings and other interested parties, and to check whether alleged facts, justifications and evidence are “valid.” It would permit the Anti-Monopoly Authority to accept a request for “conciliation” in lieu of its making a decision, and would require an Anti-Monopoly Authority investigation be stopped during conciliation until such time as the Undertakings concerned fail to execute a conciliation agreement. A conciliation agreement may provide for administrative penalties, but may not harm “public interests.” The Anti-Monopoly Law would provide for decisions of the Anti-Monopoly Authority to be published, and for an Undertaking dissatisfied with such a decision to apply for administrative reconsideration or judicial review. The Anti-Monopoly Law would also require administrative sanctions or criminal penalties for any Anti-Monopoly Authority staff that violate the Anti-Monopoly Law.

ABA Sections’ Comments
With work on the Anti-Monopoly Law beginning as early as 1987, and drafts of the law having been under development since 1994, drafting of the Anti-Monopoly Law has been measured, providing domestic and foreign parties an opportunity to comment upon its provisions. By way of example, the Antitrust Law and International Law sections of the ABA provided extensive comments on an earlier draft of the Anti-Monopoly Law in 2003⁷ and, together with the Intellectual Property Rights section of the ABA provide comments on a subsequent draft in 2005⁸ (collectively, Joint Submissions).⁹ The Joint Submissions recommend a number of additional revisions to the Anti-Monopoly Law, such as: (i) restricting application of the Anti-Monopoly Law to conduct occurring outside China that eliminates or restricts competition within China to only that conduct which “substantially” eliminates or restricts competition within China; (ii) eliminating restrictions on agreements between sellers and buyers, because “agreements between sellers and buyers are much less likely to raise competition concerns”¹⁰; (iii) eliminating from the list of prohibited acts for an Undertaking with a dominant market position “selling or buying products at unfair high or low prices,” so as to avoid causing the Anti-Monopoly Authority to be a price regulator, and to avoid the ambiguity and subjectivity of the word “unfair” in this context; (iv) revocation of the Interim Provisions on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors when the Anti-Monopoly Law becomes effective; (v) making the Anti-Monopoly Authority the sole authority enforcing the Anti-Monopoly Law, for efficiency and avoidance of inconsistent enforcement policies and decisions; (vi) eliminating presumptions of market power based solely on percentage market share (a determination of which can be subjective and complex, and the data for which may not be readily available to Undertakings when needed), or at least making them rebuttable by showing ease of entry and expansion by rivals, or by showing countervailing buyer power; and (vii) clarification regarding the interaction of the Anti-Monopoly Law and intellectual property rights law in China.¹¹

Final Observations
A comprehensive competition law regime is essential for a modern economy to ensure vigorous competition in the marketplace. While a very important step in China’s development of such a regime, and highly anticipated both domestically and abroad, the Anti-Monopoly Law remains subject to possible revision before it is enacted by the National People’s Congress.

During this period of revision and deliberation by the National People’s Congress, clarifications or changes may be made to the Anti-Monopoly Law. Perhaps they will include some of those suggested in the Joint Submissions, as well as clarification as to what constitutes “public interests” or “abuse” under the Anti-Monopoly Law, and as to whether an injured party and/or the Anti-Monopoly Authority may initiate a proceeding under the Anti-Monopoly Law for compensation of the injured party, and whether that proceeding is to be conducted as a court or administrative one. Another area that might be clarified is the relationship of the Anti-Monopoly Law to China’s other competition laws. Even if the Anti-Monopoly Authority is made the sole authority for all aspects of enforcing the Anti-Monopoly Law, if China’s existing Unfair Competition Law, Price Law and Interim Price Monopoly Rules are not revoked or revised when the Anti-Monopoly Law becomes effective, in addition to revoking the Interim Provisions on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, then Undertakings may well find the same conduct is governed by different government agencies applying different standards under different laws.

In any event, however finalized, it is obvious that the Anti-Monopoly Law will hold great import for Chinese domestic state-owned monopolies like those in insurance, tobacco, land rights, telecommunications and energy, as well as for foreign-owned companies engaging in monopolistic conduct in or with respect to China. Indeed, Wang Xiaoye, a law professor who helped draft the Anti-Monopoly Law, was recently quoted as saying, “Some foreign-invested businesses have become a little uneasy about the law in the wake of a State Administration for Industry and Commerce report in 2004, which warned that foreign business giants were building monopolies in China.”¹² The report apparently listed a number of industries subject to alleged monopolistic conduct by foreign-invested businesses, such as cameras, mobile phones, photosensitive material, soft packaging, software and tires.¹³ Importantly, the Anti-Monopoly Law does not incorporate any grandfather clause or similar exemption for existing agreements or circumstances from its provisions. Accordingly, Undertakings with any question as to whether they are engaged in an anti-competitive agreement, have a dominant market position in China, are involved in a covered Concentration, or are otherwise engaged in conduct that would be subject to the Anti-Monopoly Law would be well advised to seek competent counsel prior to its enactment.

For more information, please contact Richard J. (Tad) Ferris, Jr. at 202-457-5945, tad.ferris@hklaw.com; Hongjun Zhang at 202-457-5906, hongjun.zhang@hklaw.com; or Adam Ritter at 213-896-2502, adam.ritter@hklaw.com.

¹ An unofficial translation of the July 27, 2005, draft of the proposed Anti-Monopoly Law can be obtained by e-mailing a request for it to adam.ritter@hklaw.com. In this article, references to content of the Anti-Monopoly Law are based upon such translation, and unattributed quotations are of the text of such translation. The Anti-Monopoly Law will no doubt be further revised before finally enacted.

² The Anti-Monopoly Law refers to protection of “public interests” as a purpose of the law, and to “public interests” as a factor in determining when a Concentration (defined in the next paragraph of the text) or a conciliation agreement is illegal. Query whether such use of this subjective phrase (and concept) will create opportunities for selective enforcement, as well as enforcement that benefits non-consumer public interests at the expense of consumers. Such use could broaden the role of the law far beyond that traditionally played by antitrust laws in other countries, and/or create uncertainties as to its application that could ultimately discourage the very business it is intended to foster.

³ The Anti-Monopoly Law prohibits “abuse” of dominant market position or administrative power to engage in certain specified activities. Reference to “abuse” of intellectual property rights is also contained in the heading to a section concerning persons who “eliminate or restrict market competition beyond the laws and administrative regulations on intellectual property rights.” Nevertheless, as currently drafted, the Anti-Monopoly does not define what will constitute “abuse.”

⁴ The Anti-Monopoly Law defines “relevant market” to mean “the territorial area or business scope within which the undertakings compete against each other during a time period for relevant commodities. Relevant markets include relevant commodity markets and relevant geographic markets. A relevant commodity market refers to a market in which a group or category of commodities which are mutually substitutable in terms of their characteristics, prices, intended use and other factors. A relevant geographic market refers to a territorial area within which undertakings supply commodities and consumers buy commodities and within which the conditions of competition are basically homogeneous.”

⁵ For purposes of these alternative formulae, an Undertakings’ assets or revenue are deemed to include those of Undertakings under its control or with which it is affiliated.

⁶ It is unclear from this language whether the Anti-Monopoly Authority and/or the victim may initiate an action for such compensation, and whether such an action is to be initiated before (and thus the amount of compensation determined by an order of) the Anti-Monopoly Authority or a Chinese court.

⁷ A draft of such 2003 comments with its appendices can be viewed at: http://www.abanet.org/antitrust/comments/2003/jointsubmission.pdf.

⁸ A draft of such 2005 comments with its appendices can be viewed at: http://www.abanet.org/antitrust/jt-pdf/joint-comments/abaprcat2005finalcombowapp.pdf (2005 Comments).

⁹ As a further example, in October 2005, a delegation from the National People’s Congress came to the United States to meet with representatives of the ABA and of the United States Council for International Business (USCIB) to better understand the Joint Submissions and antitrust regulation in America, and a meeting of the USCIB was organized for this purpose by Holland & Knight LLP partners Richard “Tad” Ferris and Hongjun Zhang (a former official of the National People’s Congress) at the New York offices of the firm.

¹⁰ 2005 Comments, Section 3.a of the Executive Summary.

¹¹ On this subject, the current draft of the Anti-Monopoly Law states only that, “This Law is applicable to the undertakings who eliminate or restrict market competition beyond the laws and administrative regulations on intellectual property rights.”

¹² China Daily, June 8, 2006 (see: http://www.china.org.cn/english/government/170749.htm )

¹³ Id. (NOTE: The report was entitled, “Competition-Restricting Behavior of Multinational Companies in China and Possible Countermeasures.”)