China: Antimonopoly Law
After an epic 13-year drafting process, the National People's Congress (NPC) formally adopted China's first comprehensive competition law, the Antimonopoly Law (AML), on 30 August 2007. Substantial engagement with foreign enforcement agencies, scholars and competition law practitioners paid off: the final text of the AML clearly incorporates many principles and practices adapted from the EU, Germany, Japan, Korea, the US and Taiwan. The core provisions governing 'monopolistic conduct' (fanlongduan xingwei) by commercial entities address 'monopoly agreements' among multiple firms and abusive practices by dominant firms, and prescribe procedures for reviewing concentrations on competition grounds.
Aside from sketching the general contours of a European-style competition law scheme, however, the AML is silent on the minutiae of many substantive doctrines and the mechanics of implementation. It remains to be seen whether foreign concepts embedded in the law will be applied with imported analytical techniques, interpretations and policy judgments. Moreover, the final text of the AML dodges many of the most politically and philosophically controversial aspects of competition policy in China: the allocation of enforcement authority; applicability to state-dominated and strategic sectors; and 'administrative monopoly' (the anti-competitive misuse of official power). Beyond these fights over bureaucratic turf, substantial disagreement persists within China's governmental and academic establishment as to the appropriate scope and goals of AML enforcement. A nucleus of antitrust-savvy officials and scholars view the AML as a means of promoting overall consumer welfare and efficiency. Others, however, see the AML as a means of shielding inefficient domestic enterprises from more efficient (often foreign) rivals or advancing China's key industrial policies aimed at promoting innovation, brand-building, and market leadership by Chinese companies. Tough choices have been deferred to future implementing regulations, interagency debates, and case by case enforcement decisions.
In November 2007, NPC Vice Chairman Cheng Siwei announced that over 20 implementing measures would be issued before the AML takes effect on 1 August 2008. The first implementing measures debuted on 27 March 2008, when the legislative affairs office of the State Council published draft Rules of the State Council on Notification of Concentrations of Undertakings (the Draft Notification Rules) for public comment. The pace of further rulemaking remains uncertain, and no other measures have yet been circulated. As 1 August 2008 approaches, multinationals are anxious to see where 'antitrust with Chinese characteristics' and international best practices converge - and even more anxious to see where they diverge.
Recent debates within the Chinese government seem to focus less on substantive principles than on turf wars among government agencies. As market forces eclipse central planning, government agencies are vying for authority to regulate these market forces. Three central government agencies assert authority over competition policy. The State Administration of Industry and Commerce (SAIC), the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM). Each has its own strengths, constituencies and agenda.
The SAIC administers various commercial laws, including the 1993 Unfair Competition Law. That law focuses on intellectual property and consumer protection issues, but it also prohibits predatory pricing, 'tying and unreasonable terms', and bid rigging. A January 2006 article by the head of the antitrust office of the fair trade bureau of the SAIC called for charging the SAIC's existing nationwide network of local offices with enforcing the Antimonopoly Law. The SAIC's current mandate does not, however, focus on sophisticated economic analysis. Moreover, the SAIC's release of a controversial 2004 report cataloguing allegedly anti-competitive conduct by leading multinationals in China raises concerns of a protectionist bent.
The NDRC, a powerful macroeconomic research and policy-making agency, supervises enforcement of the 1997 Price Law through provincial and local price boards. The Price Law focuses on price control policies; it also prohibits as 'abnormal pricing behaviour' collusion, predatory pricing, price discrimination and the taking of 'exorbitant' profits. The NDRC staff includes economists, but it focuses on national industrial policy and planning rather than modern competition policy. Although the NDRC responded forcefully to reported price-fixing in the food sector in 2007, it appeared more concerned with inflation than collusion.
MOFCOM has broad authority over foreign trade and investment and integration of the national economy. In January 2003, MOFCOM issued Provisional Rules for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the M&A Rules), which included skeletal procedures for reviewing both domestic and offshore mergers and acquisitions on competition policy grounds. The M&A Rules were overhauled and reissued in August 2006, but the antitrust provisions remained largely intact (though review of transactions on national security grounds was shifted to a separate inquiry). Despite ambiguities, notifications have increased. On 9 March 2007, MOFCOM released new guidelines clarifying the merger notification process. MOFCOM's experience enforcing Chinese trade remedy laws may (for better or worse) affect its approach to antitrust enforcement.
The AML punts this issue to the State Council, which is to designate the 'Antimonopoly Enforcement Authority' (AMEA). Possible enforcement schemes include:
- the establishment of a new independent enforcement authority, likely to draw personnel from various existing organs;
- assignment of enforcement authority to a single existing agency;
- allocation of authority to enforce different provisions among different agencies (eg, MOFCOM reviewing mergers, the SAIC police for abuses of dominance, the NDRC's price bureaus monitoring cartel activity); or
- overlapping enforcement authority.
Parcelling out authority, particularly among rival agencies with separate agendas, raises the risks of inconsistent enforcement. Moreover, unless the relationship between the AML and previous measures is clarified, there remains a risk that rival agencies may seek to regulate the same conduct by applying different standards under different rules.
Anticipating the need for interagency policy coordination, the AML directs the State Council to assemble a new 'Antimonopoly Commission' (AMC) to formulate competition policy and coordinate enforcement efforts. The AMC may provide a viable channel for resolving turf and policy tussles between agencies - if real political support from higher levels lends credibility to the process.
The NPC began a new five-year term in March 2008, precipitating a restructuring of the central government and reshuffling of key personnel. The State Council is likely to address the allocation of enforcement authority and composition of the AMC in the course of this restructuring.
The AML defines a 'relevant market' as the 'scope of commodities and the scope of territory within which the undertakings compete with each other during a specific period of time with respect to specific commodities or services.' Although this definition captures the basic product and geographic components of market definition under US and EC practice, it does not necessarily mean that markets will be defined in terms of vulnerability to exercise of market power using US or EC methods (such as the 'hypothetical monopolist' methodology).
The AML applies extraterritorially to all conduct that eliminates or restricts competition in China; there is no guarantee that Chinese officials will read a requirement for 'substantial' or 'appreciable' effects on China into this standard for extraterritorial jurisdiction.
Horizontal monopoly agreements 'among competing undertakings' are prohibited, including agreements to: fix or change prices; limit production or sales volume, divide markets, conduct joint boycotts; or 'limit the purchase of new technology and new equipment or limit the development of new products.' Vertical agreements fixing or setting minimum resale prices are prohibited. Any other monopoly agreements as determined by the AMEA are also barred.
These broad prohibitions are subject to exemptions for agreements to improve technology, conduct R&D, increase quality, reduce cost, enhance efficiency, unify standards, and contribute to conservation, disaster relief, and other public interests. Agreements to boost competitiveness and efficiency of small and medium-sized businesses may also be exempted, along with agreements for the purpose of 'alleviating serious decreases in sales volume or distinctive production surpluses due to economic depression' or 'safeguarding legitimate interests in foreign trade and foreign economic cooperation.' Following article 81(3) of the EC Treaty, these exemptions apply only to restraints that are intended for the achievement of the exempt objectives, 'enable consumers to share' the benefits of the agreement, and do not 'materially restrict competition in the relevant market'. The further requirement under EC practice that the restraints imposed be 'indispensable' to attaining exempt objectives is missing, however, and there is no 'blacklist' disqualifying hard-core restraints from exemption. As drafted, parties will bear the burden of demonstrating that a challenged monopoly agreement qualifies for exemption in the event of an investigation (or litigation); it is unclear whether the State Council will introduce mandatory approval procedures (which may delay or deter pro-competitive agreements), mandatory notification (raising risks that anti-competitive agreements may sail by an understaffed AMEA without objection), or optional notification and clearance (potentially limiting the caseload to cautious parties and novel cases).
The NPC inserted special warnings against the facilitation of collusion by trade associations. Following leniency programmes from other jurisdictions, the draft provides that participants in monopoly agreements (not limited to horizontal agreements) that report the misconduct and 'provide important evidence' to the enforcement authorities may receive reduced penalties or be spared punishment.
Abuse of dominance
The AML prohibits 'abuse of dominant market positions'. Dominance entails 'market positions held by undertakings who are able to control the price or quantity of commodities, or other transaction terms in the relevant market or to block or affect the entry of other undertakings into the relevant market.'
Dominance may either be determined by evaluating: the market shares of the dominant firm and its competitors; the dominant firm's 'ability to control the market'; the dominant firm's financial and technological conditions; the dominant firm's affiliations; barriers to entry; the extent of dependence on the dominant firm by other companies; and other relevant factors.
Dominance may also be presumed based on market share. Any firm with a market share exceeding 50 per cent is presumed dominant. Collective dominance is presumed when two undertakings have combined market shares exceeding two-thirds or three undertakings have combined market shares exceeding three-quarters (excluding any firms with market shares under 10 per cent). Although earlier drafts implied that these presumptions were irrefutable, the final text allows parties to refute presumptions of dominance by presenting evidence that they do not possess dominant market positions.
Like article 82 of the EC Treaty, the AML lists illustrative abuses. Rules against predatory pricing, refusals to deal, exclusive dealing, tying and discrimination are broad and, unsurprisingly, omit key elements of foreign doctrines. Any 'other abuses' as defined by the enforcement authorities are also prohibited. Some Chinese officials have suggested that the AMEA will adopt a 'rule of reason' assessment of both the pro-competitive and anti-competitive effects of challenged conduct on a case by case basis, pointing to requirements that the alleged abusive practices be 'without justification.' The AML also bars dominant firms from 'selling products at unfair high or buying products at unfair low prices.' Although article 82(a) of the EC Treaty is similar, risks of interventionist price regulation as a surrogate for sound economic analysis seem greater in China.
The AML requires advance notification and approval of concentrations. Concentrations include mergers, acquisitions of 'control' over other undertakings through equity or asset purchases, and acquisitions of control or 'decisive influence' over other undertakings through 'contracts or other means'. Concentrations amongst affiliates under common control are exempt.
The Draft Notification Rules further define 'acquisition of control' to include acquisitions 'of more than 50% of the voting shares or assets of other undertakings', becoming the 'largest shareholder' of the voting shares or assets of other undertakings, or acquiring the de facto authority to direct majority voting rights or to appoint a jajority of the directors of other undertakings, and 'other circumstances' defined by the AMEA. This definition may needlessly broaden the scope of reportable transactions, since the 'largest shareholder' in many companies hold non-controlling minority stakes. The formulation of notification thresholds was among the most controversial technical issues in the drafting of the AML, with successive drafts featuring alternate thresholds. Many proposals were criticised for deviating from the recommended practices of the International Competition Network (ICN) by failing to require at least two parties to the concentration to have significant local nexus with China, by failing to focus on the assets or business actually being acquired rather than the selling entity as a whole, and by relying on subjective 'market share' tests. The AML itself does not specify the notification thresholds, instead authorising the State Council to determine the thresholds.
The Draft Notification Rules would require notification of concentrations where: the combined global sales turnover of all parties exceeded 9 billion renminbi and the turnover from within China of at least two parties exceeded 300 million renminbi during the previous year; the combined sales turnover from within China of all parties exceeded 1.7 billion renminbi and the turnover from within China of at least two parties exceeded 300 million renminbi during the previous year; or the concentration will 'lead to' one undertaking having a market share of 25 per cent or more within China.
Requiring a 'two-party' nexus in the revenue-based tests represents a substantial improvement over previous drafts, but the relatively low quantitative thresholds likely cast a very wide net. The Draft Notification Rules do, however, direct the AMEA to develop 'detailed measures for the calculation of turnover' and call for such calculations to account for 'actual circumstances' and differences between sectors. This invites future measures distinguishing 'targets' from 'sellers' in the aggregation of turnover from affiliates, addressing investments within the financial sector, and, perhaps, providing exclusions from notification for transactions which are not likely to affect competition. Nevertheless, retaining subjective market-share based thresholds reduces certainty.
The AML prescribes a two-phase review similar to US and EU practice. Once the parties submit their notification materials, the authorities must decide within 30 days whether to approve the concentration, permit the concentration to proceed by taking no action, or conduct further review. If the authorities opt for further review, the transaction must be delayed and the authorities must issue their decision within 90 days (extendible by 60 days if the parties consent, if the documents are incomplete, or in case of material developments).
Concentrations that may 'exclude or restrict competition' are to be blocked or approved subject to restrictive conditions, unless the parties to the transaction 'can prove that the positive effects of such concentration on competition obviously outweigh the negative effects' or that 'the concentration is in the public interest.' Likely competitive effects should be evaluated based on: the parties' market shares, the concentration of the relevant market; the effects on 'market access and technological progress,' the effects on consumers and other relevant enterprises, the 'development of the national economy'; and 'other factors that may affect the market competition' as the enforcement authorities may deem necessary. The balancing test focused on the adverse and positive effects on competition arguably comports with the US and EC practice, but broad 'public interest' exemptions may undermine this rule.
The Draft Notification Rules empower the AMEA to require notification of concentrations which the AMEA deems may eliminate ore restrict competition, even if notification is not otherwise required. It is unclear whether such concentrations would then be subject to the mandatory waiting periods while the AMEA reviews the transaction.
The AMEA may initiate investigations based on written complaints including 'relevant facts and necessary evidence' from any organisation or individual. Chinese civil litigation burdens plaintiffs with the production of relevant evidence with their complaints; the extent of evidence needed to trigger an investigation remains to be seen. Complainants may, however, remain confidential. The AMEA may investigate interested parties and other relevant entities or individuals through: on-site inspections (including dawn raids); seizing, copying, or sealing relevant electronic and printed materials; questioning; inquiry into bank accounts; and sealing offices, as necessary. Investigations must be conducted by at least two enforcement officials, written records of the investigation must be maintained, and any commercial secrets disclosed to investigators must be kept confidential.
The individuals and entities under investigation are entitled to submit statements and evidence in their defence, and the authorities are to verify any alleged facts, asserted justifications for conduct, and evidence as necessary. If the enforcement authority determines upon investigation that the AML has been violated, its decision is to be published.
If a target of investigation for anti-competitive conduct undertakes to take corrective action within a specified time frame, the authority may suspend the investigation and reduce or waive penalties. The investigation may resume. the target fails to comply with its remedial undertakings, circumstances materially change, or the agreement is found to have relied on incomplete or incorrect information.
Aggrieved parties may apply for administrative reconsideration or challenge the decision in court. Administrative reconsideration can be meaningful; in 2006, MOFCOM revoked a controversial anti-dumping determination through 'administrative reconsideration' in the face of a WTO challenge from the US.
Penalties for entering monopoly agreements and abuses of dominance include confiscation of illegal gains, fines of 1 per cent to 10 per cent of the offenders' total turnover from the preceding year, and orders to cease the offending conduct. Where concentrations are consummated in violation of the AML, the enforcement authorities may order corrective measures to restore pre-transaction conditions and impose fines up to 500,000 renminbi. The mandatory minimum fines are worrisome, particularly since some officials have suggested that the fines should be calculated based on annual worldwide turnover.
Compensation and private litigation
The AML authorises judicial enforcement through private actions for damages. Article 50 reads: 'undertakings that cause loss to others as a result of their monopolistic conduct shall be liable for civil liabilities in accordance with the laws.' The scope of article 50 claims will likely be determined by the Supreme Judicial People's Court (SPC) through a quasi-legislative judicial interpretation. In addition to questions of standing and damage calculations, the SPC may confine actions for damages to cases where the AMEA has already found a violation of the AML. Allowing the AMEA to serve as gatekeeper for private damages actions would, at minimum, mitigate the risks of inconsistent enforcement. Indeed, prospective plaintiffs may already be lining up to lodge antitrust claims against their dominant (often foreign) competitors and suppliers. Chinese companies have already filed claims against Intel and Sony in Chinese courts characterising alleged abuses of dominance as violations of the 1993 Anti-unfair Competition Law.
The draft explicitly applies to conduct that 'eliminates or restricts competition' by the abuse of intellectual property rights, but it provides no further guidance on the interplay between China's anaemic intellectual property rights regime and its fledgling competition law regime. With intellectual property litigation in Chinese courts already on the rise, China's antitrust authorities may have to grapple with licensing, patent pools, standard-setting, mergers of IP holders and other IP issues sooner rather than later. Some foreign observers fear that China's rules on competition and standard setting might fuel a perfect storm in which dominant foreign IP holders' refusal to license IP to competitors or collection of royalties at market rates might be construed as unwarranted 'refusals to deal', as 'unfair high pricing' or 'abuse' of IP, leading to compulsory licensing or inefficient licensing negotiations under fear of compulsory licensing. Meanwhile, pending amendments to the Patent Law would authorise compulsory licensing 'where it is determined through judicial or administrative procedure' that the patentee intends to exercise its patent rights with 'intent to eliminate or restrict competition'. Indeed, article 329 of the Contract Law already prohibits 'illegally monopolising technology and impairing technological progress', and the SPC has interpreted article 329 to prohibit several licensing practices that are subject to 'rule of reason' analysis in the US. Although some academics have called for detailed guidelines to address these complexities, the IP-antitrust interface in China, as in other jurisdictions, is likely to remain controversial.
Government entities at the national, provincial and local levels routinely promote and protect favoured companies (often state-owned enterprises), shielding them from competitors and other regulatory bodies. Previous countermeasures have only met with tepid results, so many academics advocated tough new rules against administrative monopoly in the AML. The final text devotes an entire chapter to detailed rules addressed to governmental entities against known tactics of local protectionism and agency protectionism. Most of these rules, however, parrot existing measures. The only 'new' rules prohibit governmental entities from compelling commercial firms to violate the AML and from 'abusing' their power by issuing rules which 'restrict or eliminate competition.' Since commercial regulations necessarily restrain market conduct, this rule turns on judgments of the abusiveness of specific measures. Problematically, government agencies are responsible for policing their own subordinate departments and agencies; aside from acting as an advocate and watchdog, the AMEA lacks power to compel compliance by other government agencies.
State-owned industries, strategic sectors and national security
Public discussion of the AML's enactment highlighted the tensions between safeguarding the commercial interests of state-owned enterprises and the demands of China's increasingly vocal consumers and the Chinese government's discomfort with growing foreign investment in sensitive sectors. The NPC responded with several last-minute revisions addressing these issues.
Article 7 carves out industries that are 'controlled by the state-owned economy' (SOE) and that are 'critical to the wellbeing of the national economy and national security' and unspecified sectors involving state-sanctioned exclusive monopolies for special treatment under the AML. Article 7 may cover state monopolies and SOE-dominated sectors such as aviation, telecommunications, petroleum, rail transport, and energy.
Article 7 appears to be a two-edged sword - and a dull one, at that. Cutting in favour of the SOE companies, article 7 declares that 'the state shall protect the lawful business activities of the undertakings in such industries.' SOE companies might plead article 7 when seeking a 'public interest' exemption for a monopoly agreement or for an otherwise anti-competitive concentration. Cutting in favour of Chinese consumers, article 7 admonishes such SOE companies to 'conduct their business in accordance with the law', to 'be honest and reputable in their business dealings', to 'maintain strict self-discipline', to 'accept public supervision' and to abstain from 'harming the interests of consumers by utilising their controlling positions or their status as the exclusive provider of certain services or products.' Article 7 further declares that the government shall regulate such sectors 'so as to protect the interests of the consumers and to promote technological progress.' In showdowns between pro-consumer enforcement of the AML and the commercial interests of incumbent SOE companies (eg, a finding of abuse of dominance or the clearance of a concentration strengthening private competitors), article 7 provides no meaningful guidance.
Similarly, the AML severs the review of transactions on antitrust grounds from separate reviews on national security grounds. Article 31 provides that where a foreign investor merges with or acquires an enterprise within China or where any other form of concentration 'concerns national security,' the transaction will be subject to separate review on national security grounds 'in accordance with relevant regulations of the state.' This framework was consciously modeled on US practice of separating antitrust review from the separate national security review by the Committee on Foreign Investment in the United States (CFIUS).
Installing a nationwide enforcement programme will be difficult, particularly given the shortage of qualified legal personnel and industrial organisation economists with antitrust experience. Reliable market data also be scarce. Though some Chinese firms have sophisticated accounting systems, bookkeeping in other firms remains manual and rudimentary.
Statistics from China's official and quasi-official sources are notoriously inaccurate, and antitrust officials may avoid contradicting the official pronouncements of other ministries or the State Council. Nevertheless, Chinese officials have suggested preference for government statistics and figures generated by China's state-organised industry associations and export chambers over published data from independent sources or data supplied by companies themselves. China's fragmentation into regional markets, rampant graft and tax evasion and poor cooperation at local levels may compound these problems. It might be prudent to concentrate initially on cartels and administrative monopoly before phasing in more complicated enforcement efforts. Unfortunately, China's top antitrust priorities - policing abuses by dominant firms and international mergers - entail intricate economic analysis.
Refinement of the AML has laid a workable foundation for modern competition policy in China, but much depends on the competence, capacity, and clout of China's new competition authorities. It remains to be seen whether Chinese competition policy will promote consumer welfare and economic efficiency, advance protectionism and industrial policy, or oscillate between goals depending on the parties, sectors, and political interests at stake.