Canadian COMPETITION LAW

February 1, 2011

We are pleased to provide this global competition law update from our friends at the leading Singapore firm Rajah & Tann.

Overview

The competition regime in China is governed by the Anti-Monopoly Law (‘AML’), which, inter alia, prohibits ‘monopoly agreements’ (defined as ‘any agreement, decision or other concerted practices that eliminates or restricts competition’) and abuse of dominance.

The AML is administered by three competition law regulators in China. The National Development and Reform Commission (‘NDRC’) deals with price-related monopoly agreements and abuses of dominance, and the State Administration of Industry and Commerce (‘SAIC’) deals with non-price-related monopoly agreements and abuses of dominance. The third agency, the Ministry of Commerce (‘MOFCOM’), reviews mergers and acquisitions.

In early January, the NDRC and SAIC each released a set of Regulations which further clarify the way they will interpret and apply the AML provisions under their purview.  This update reviews the main features of these important Regulations which will take effect from 1 February 2011.

Brief Outline of The New Regulations

The NDRC has issued two Regulations, namely the Regulations on Anti-Price Monopoly (the ‘NDRC APM Regulations’) and the Procedural Regulations on Enforcement of Anti-Price Monopoly (the ‘NDRC Enforcement Procedures’) (collectively, the ‘NDRC Regulations’). The ‘NDRC APM Regulations’ provide clarification on which agreements and conduct relating to price amount to a violation of the AML, whilst the ‘NDRC Enforcement Procedures notably sets out the NDRC’s leniency regime.

The SAIC has issued three Regulations (collectively, the ‘SAIC Regulations’). Two of them, the Regulations on Prohibition of Monopolistic Agreements (the ‘SAIC PMA Regulations’) and the Regulations on Abuse of Market Dominance (the ‘SAIC AMD Regulations’) respectively give details of which non-price related agreements and non-price related conduct are prohibited under the AML and how the SAIC will interpret and enforce these prohibitions. The third regulations issued by the SAIC, ie the Regulations on Abuse of Administrative Power to Eliminate or Restrict Competition (the ‘SAIC AAP Regulations’), elaborate on the AML provisions which prevent abusive conduct by administrative authorities.

Monopoly Agreements

A. The Concept Of ‘Agreement’

A ‘monopoly agreement’ is defined in the AML as ‘any agreement, decision or other concerted practice’.

Both the NDRC APM Regulations and the SAIC PMA Regulations clarify the meaning of ‘agreement’ in the AML with a focus on the factors they will take into account for the finding of a concerted practice.

In determining the occurrence of a concerted practice, the regulators will seek to establish whether the undertakings concerned acted in unison with one another and whether the undertakings communicated their intention or exchanged information between them. The regulators will also take into account various factors, including the structure of the market and the state of competition in the market.

The SAIC PMA Regulations further provide that a concerted practice will not be established where the undertakings can provide a reasonable explanation for acting in concert, which is similar to the approach in other jurisdictions such as Singapore or the EU.

With regards to agreements generally, the SAIC PMA Regulations also make clear that the form of an agreement, ie whether it is written or oral, is irrelevant under the AML. They also reiterate that the prohibition of monopoly agreements applies to decisions by associations of undertakings.

B. Price-Fixing Agreements

Types Of Agreements Viewed As Price Fixing

Article 13(1) of the AML prohibits competitors from fixing the price or agreeing on changes to the price of their products. The NDRC APM Regulations clarify that agreements on only a component of the price are prohibited under the AML and provide a non-exhaustive list of agreements that will be caught under article 13(1).

Such agreements include, inter alia, agreements between competitors in relation to: (a) the price level or the price range of their products / services; (b) the discounts, handling charges or other charges that affect the price of the products / services; (c) the use of a standard formula to calculate the price; and (d) the conditions under which the competitors may unilaterally modify their price.

The Role Of Trade Associations

The AML provides that trade associations must not assist or encourage their members to engage in any type of monopoly agreements. In relation to price-fixing agreements, the NDRC APM Regulations clarify that a trade association must not: (a) formulate rules, decisions or notices that would eliminate or restrict price competition; or (b) assist or encourage businesses to consider entering into or to effectively enter into price-fixing agreements or to otherwise implement price-fixing agreements.

In Singapore, the Competition Commission of Singapore (‘CCS’) has taken the view that Guidelines on recommended prices by trade associations were anti-competitive in nature. The NDRC APM Regulations suggest that the same approach will be taken by the Chinese regulator, which should prompt trade associations in China to review any Guidelines they may have issued to their members in relation to prices or components of price.

C. Other Monopoly Agreements

Apart from prohibiting price-fixing, Article 13 of the AML also prohibits various types of agreements between competitors, including the limitation of production, market-sharing and collective boycott. The SAIC PMA Regulations provide illustrations / clarifications of what would be considered as such prohibited monopoly agreements under the AML.

Limitation Of Production (Article 13(2) Of The AML)

This encompasses agreements to stop production, or to limit the production or the quantity of specific products or types of products to be sold, as well as agreements not to supply certain type of products.

Market Sharing (Article 13(3) Of The AML)

Market sharing amongst competitors is prohibited whether through the allocation of designated territory between competitors, the allocation of customers or class of customers or through the division among the competitors of sources of supply.

Restricting The Purchase Or The Development Of New Technology Or New Products (Article 13(4) Of The AML)

Such agreements would include those not to purchase or invest in new technologies or new products, or new equipment as well as agreements not to adopt new technical standards.

Joint Boycotting (Article 13(5) Of The AML)

The SAIC PMA Regulations highlights that this prohibition would cover the cases of competitors jointly refusing to buy from or sell to specific businesses, or agreeing on preventing other businesses from dealing with competitors.

The clarifications and examples provided by the SAIC PMA Regulations are welcome as they provide clarity to businesses in China. On substance, the approach taken should be familiar to businesses already active in Singapore as the activities listed above are similarly prohibited under the Competition Act. Indeed, the approach is similar to most competition law regimes in various countries.

D. Leniency Regime And Commitments

Under Article 46 of the AML, undertakings who voluntarily report the existence of a cartel to the regulators may benefit from leniency, ie be exempted from financial penalties or subject to lesser penalties. The NDRC Enforcement Procedures and SAIC PMA Regulations provide useful guidelines on the circumstances under which undertakings can benefit from leniency.

Leniency

The NDRC Enforcement Procedures provides that the first undertaking to report a cartel and to provide ‘important’ evidence, ie evidence that will effectively allow the regulator to establish the existence of a cartel, may benefit from a total immunity from penalties. The second undertaking to come forward may get at least 50% reduction on the penalties whilst subsequent leniency applicants to the NDRC may get up to 50% reduction.  Note that the ability to grant immunity or a reduction in the amount of the fines is at the discretion of the NDRC.

The SAIC PMA Regulations also provide immunity from, or a reduction in the level of, fines for the undertakings which disclose a (non-price related) cartel and which provide evidence allowing the SAIC either to start an investigation or to establish the existence of a monopoly agreement. Whilst the first undertaking to come forward may get immunity from fines, the SAIC PMA Regulations do not provide guidance on the level of reduction subsequent leniency applicants can get. In making its decision on the level of leniency, the SAIC will notably take into account the point in time at which the undertaking comes forward, the quality of the information provided, the circumstances under which the monopoly agreement was entered into and implemented as well as the level of cooperation of the undertaking during the investigation.

Both the Regulations are, therefore, not consistent. As cartels generally involve agreements not only on prices but also on quotas for instance, it will be interesting to see how both agencies deal with such cases. Further, it is recommended to undertakings considering applying for leniency to apply to both the SAIC and the NDRC where their agreements cover both price-related and non-price related restrictions.  Of course, the specific facts of each case must first be carefully considered.

Commitments

Apart from a leniency regime, the NDRC Enforcement Procedures provide that an undertaking under investigation can apply in writing to the NDRC for the investigation to be suspended in exchange of a commitment to take appropriate remedy or to stop any further involvement in the cartel. In such a case, the NDRC may decide to cease the investigation and not to impose fines.

Abuses of Dominance

A. Definition Of Dominance

Article 17 of the AML states that ‘market dominance means a market position where an undertaking has the ability to control the price or quantity of goods or other trade conditions in the relevant market or to impede or affect the entry of other undertakings into the relevant market’.

Both the NDRC AMP Regulations and the SAIC AMD Regulations clarify this definition by providing that the reference to:

(a) ‘other trade conditions’, is to factors that have the ability to affect the market, such as product quality, payment terms, mode of delivery and after sales services; and

(b) ‘impede or affect’ is to the undertakings’ ability to exclude, delay or make it more difficult for other undertakings to enter or expand into the relevant market within a reasonable time. This, for instance, would include the ability of the undertaking to raise the cost of entry in the market for its competitors.

The SAIC AMD Regulations also provide guidance on the interpretation of the various factors that have to be looked at in determining dominance, as set out in Article 18 of the AML.

To illustrate, the SAIC AMD Regulations states that the market share of an undertaking will be calculated both in value and in volume and that in reviewing an undertaking’s market share the SAIC will also take into account the state of development of the market, product differentiation, potential competition, amongst other factors. When reviewing the financial and technical resources of an undertaking, the SAIC will look at the undertaking’s assets, its financial position and its ability to raise funds, its R&D capabilities as well as any intellectual property rights it may have.

Whilst, under the AML, undertakings are presumed to be dominant if they exceed certain market share thresholds set out in the law, the SAIC further provides that the factors used for establishing dominance can also be relied on by the undertakings which want to rebut the presumption that they are dominant.

B. Price-Related Abuse Of Dominance

Selling At An ‘Unfairly High Price’ Or Selling At An ‘Unfairly Low Price’

Article 11 of the NDRC APM Regulations lists out the criteria that will be considered in determining whether a price is excessively high or low. These include: (a) whether the price is significantly higher or lower than the price at which other operators buy / sell the same type of goods; (b) whether the price is higher or lower than the average price applied when production costs are stable; and (c) when production costs vary, whether the change in price is significantly larger than justified.

Justification Of Price-Related Conduct By A Dominant Undertaking

Article 17 of the AML lists five types of conduct by a dominant operator which are prohibited if they cannot be justified. The NDRC APM Regulations further explain what would amount to a legitimate justification under the AML in various instances:

(a) Selling below cost

Article 12 of the NDRC APM Regulations states that undertakings may sell below cost if they are promoting new products, having a closing-down sale, or selling overstocked or perishable goods.

(b) Refusal to deal via setting on excessive sale price

Article 13 of the NDRC APM Regulations allows undertakings to set a very high sale price that, in effect, amounts to a refusal to deal with other trading parties in cases where the trading party has poor credit record, or if that counterparty is able to obtain similar goods at a reasonable price from a third company.

(c) Exclusive dealing

Article 14 of the NDRC APM Regulations first clarifies that a dominant undertaking cannot offer price discounts or otherwise to ensure that its trading parties will exclusively deal with it. Apart from that, Article 14 of the NDRC APM Regulations provides circumstances where imposing an exclusivity requirement may be justifiable by the dominant undertaking. This would be the case where the exclusivity is required to protect and maintain product safety, quality or brand image, improve service standards, or lead to efficiencies. In this latter case, efficiencies must be passed on to consumers.

Note that where a legitimate justification such as the ones mentioned above can be provided, no finding of abuse will be made.

C. Non-Price Related Abuse Of Dominance

The SAIC AMD Regulations do provide various illustrations of what would constitute non-price related abuse of dominance. These key ones are discussed briefly here.

Refusal To Deal

This includes not only a straight refusal to deal but also a reduction of volume supplied, or the delaying, suspension or refusal to enter into new transactions with an existing counterparty. It also includes setting terms so restrictive that they make it extremely difficult for the counterparty to continue dealing with the dominant undertaking.

Access To Essential Facilities

A dominant undertaking cannot unreasonably refuse access to essential facilities. In assessing whether a facility is effectively ‘essential’ and whether access should be granted, the SAIC will have regard to whether: (a) it is feasible for the counterparty to separately invest in, develop or construct a similar facility; (b) the counterparty needs such a facility to carry on its activities; or (c) it is feasible for the dominant undertaking to share its facilities and the effect this would have on the dominant undertaking’s own activities.

Exclusive Dealing

Article 5 of the AMD Regulations clarifies that the prohibition of exclusive dealings covers situations where the dominant undertakings prevents its trading parties from dealing with the dominant undertaking’s competitors.

Tying And Unreasonable Trade Conditions

Article 6 of the SAIC AMD Regulations prohibits undertakings from bundling different products together without regard to product function or consumer demand.

Undertakings also may not impose ‘unreasonable’ terms relating to contract duration, mode of payment, delivery, after-sales service, sales area, target customers and trade terms which have no relation to the subject matter of the contract.

Applying Discriminatory Treatment To Trading Parties With Equal Standing

Article 7 of the SAIC AMD Regulations defines discriminatory treatment as offering to / supplying equivalent trading partners with products that are different in terms of type or quality, applying different discounts, preferential terms, payment terms, after-sales services (such as the scope of warranty) etc.

Justifications Of Non-Price Related Conduct

Article 8 of the SAIC AMD Regulations provides that in establishing whether a conduct by a dominant undertaking amounts to an abuse of dominance, the SAIC will review whether: (a) the conduct was undertaken as part of its normal business operations; or (b) it resulted in more efficient operations and had an impact on public welfare or on economic development.

Article 8 is couched in rather vague language, which means that the SAIC will have considerable discretion when reviewing any justification put forward by a dominant undertaking trying to defend itself from an allegation of abuse of dominance.

The SAIC AAP Regulations

Part V of the AML contains six articles designed to prevent administrative authorities from abusing their powers to eliminate or restrict competition. The SAIC AAP Regulations flesh out the provisions of the AML, and demonstrate the resolve of the SAIC to tackle abuse of their power by government agencies and officials in ways that hamper competition.

The SAIC AAP Regulations, whilst reiterating the contents of Part V of the AML, also state that:

(a) An administrative authority may not request, or indirectly suggest to, an undertaking to purchase or use the products / services of another designated undertaking; and

(b) Administrative authorities are not allowed to issue decisions, public notices, announcements, notices, opinions, minutes of meeting or regulations which restrict competition.

Importantly, Article 5 of the SAIC AAP Regulations provides that administrative stipulations, authorizations or regulations may not be used as a defence by undertakings that have entered into or have implemented monopoly agreements or abusive conduct as the case may be.

Conclusion

The SAIC Regulations and the NDRC Regulations provide long awaited guidance on key provisions of the AML. They also attest of the resolve of both agencies to effectively continue to enforce the AML and to further encourage undertakings to be more responsible when doing business and to help the regulators in developing fair competition in China. On this, the introduction of a leniency regime is a significant step towards tackling cartels in China, which is a welcome move by the regulators in charge.

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