China: Antimonopoly Law

Since China's first comprehensive competition statute, the Antimonopoly Law (AML), took effect on 1 August 2008, China's merger review programme has surged ahead while implementation of rules against monopoly agreements and abuse of dominance has lagged.¹ However, the March 2010 announcement of penalties for participants in a regional rice noodle cartel and a trio of judicial decisions in abuse of dominance cases in late 2009 may signal more robust antitrust enforcement to come.

A slow start for the NDRC and the SAIC

The AML addresses three broad categories of monopolistic conduct by business operators:

• monopoly agreements, including hard-core cartels and other horizontal and vertical restraints;

• abuse of dominance by firms with substantial market power, including collective dominance; and

• anti-competitive concentrations, such as mergers and acquisitions.

The AML also addresses 'administrative monopolies' - the anti-competitive misuse of official power.

There are three agencies of the central government that share authority to administer the AML. The Antimonopoly Bureau of the Ministry of Commerce (MOFCOM) conducts merger review. The National Development and Reform Commission (NDRC), a powerful macroeconomic planning body, has jurisdiction over price-related violations of the rules against monopoly agreements and abuse of dominance. This role builds on the NDRC's overarching power to regulate pricing of all goods and services (either through direct price regulation or extraordinary measures to stabilise prices) under the 1997 Price Law through provincial and local price bureaus nationwide. The State Administration of Industry and Commerce (SAIC) has authority over non-price related violations of the same provisions. It expanded its previous programme for administering the 1993 Anti-Unfair Competition Law (AUCL) to include AML enforcement under a new Antimonopoly and Anti-Unfair Competition Enforcement Bureau.

Merger review remains the most prominent component of China's AML enforcement. MOFCOM drew on its experience reviewing over 400 transactions under the 2003 Regulations on the Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, and the AML compels MOFCOM to review each reported transaction that satisfies the notification thresholds. (Indeed, the worldwide financial crisis might have spared MOFCOM a deluge of filings). MOFCOM has finalised several implementing rules, released many more draft measures, unconditionally cleared dozens of deals, imposed conditions on five transactions, and prohibited one transaction outright.

In contrast, the efforts of the NDRC and the SAIC to implement the AML have been far less visible. Although the SAIC has finalised procedural rules for conducting investigations and addressing administrative monopoly, the NDRC has not issued any procedural measures. Although both the SAIC and the NDRC have released draft substantive regulations, these rules are not final.

The draft regulations do, however, shed light on the likely approach of the NDRC and the SAIC. Some of the draft rules reflect careful consideration of prevailing practices in foreign jurisdictions; examples include draft measures concerning evidence of concerted practices and procedures for conferring amnesty or leniency to cooperating cartel members. Other provisions, however, fuel concerns that Chinese antitrust may become a complement to Chinese industrial policy; examples include provisions regarding essential facilities and the abuse of intellectual property.

Moreover, the draft regulations fail to clarify the basic principles and methodologies for distinguishing anti-competitive conduct from efficiency-enhancing, pro-competitive conduct. For example, the AML broadly prohibits as 'monopoly agreements' all 'agreements, decisions or other concerted conduct that eliminate or restrict competition.' This single term encompasses horizontal price fixing and other hard-core cartel agreements; competitor collaborations and other horizontal restraints; and vertical restraints. The AML also creates a general framework for exempting otherwise-prohibited 'monopoly agreements' if they advance one of the beneficial purposes listed in the AML, benefit consumers and do not eliminate competition in the relevant market. Although this structure reflects European practice, neither the SAIC nor the NDRC clarified these exemptions in their draft implementing measures.

Similarly, the AML follows European practice in prohibiting abuse of dominance and listing illustrative abuses. A key element of each listed abuse is that the dominant firm acts 'without justification' (or engages in unfair pricing). While this element provides a textual hook for a balancing of pro-competitive and anti-competitive effects, neither the SAIC nor the NDRC have clarified the standards for judging the justification of an alleged abuse. These gaps leave room to penalise competition on its merits or excuse anti-competitive conduct in the name of industrial policy or other goals.

The division of authority between the SAIC and the NDRC raises additional concerns about inconsistent enforcement. Distinguishing 'price-related' and 'non-price' violations may prove impossible. Where a single course of anti-competitive conduct combines pricing practices with other non-price measures, it is unclear whether and how the SAIC and NDRC will coordinate their investigations. More importantly, the SAIC and the NDRC may embrace divergent approaches to defining markets, gauging market power and weighing the interests of consumers and competitors when applying the many public-interest exceptions of the AML. Overlaps between the AML, the AUCL, the Price Law and other measures exacerbate these risks of contradictory results. Although NDRC and SAIC officials have publicly acknowledged the need for coordination, no concrete measures have yet been publicised. The Antimonopoly Commission (AMC), a broad policymaking body including representatives from the State Council and thirteen central government agencies, might facilitate coordination between the SAIC and the NDRC in the future, but the AMC has yet to assume a visible role in antitrust enforcement.

The Guangxi rice noodle cartel case

The lack of finalised regulations has not deterred the NDRC and the SAIC from quietly probing alleged AML violations through the provincial Price Bureaus and Administrations of Industry and Commerce (AICs). The AML does not mandate the publication of enforcement decisions against cartels or abuse of dominance, so the disposition of earlier inquiries remains unclear. The first publicised administrative enforcement action emerged on 30 March 2010, when the NDRC announced the punishment of several Chinese manufacturers of rice noodles in Guangxi province for price fixing.

According to the NDRC, the cartel evolved through a series of dealings among competing rice noodle manufacturers in the neighbouring cities of Nanning and Liuzhou. On 1 November 2009, a senior executive of Nanning Xianyige Food Plant invited local competitors to a meeting at which he proposed to reorganise the local industry through a series of outsourcing, cross-investment, and profit-sharing agreements. Nine competitors subsequently signed outsourcing agreements, and one signed a joint operation agreement. On 16 December 2009, a broader group of 18 rice noodle producers from Nanning attended a meeting aimed at 'reaching consensus' on a price increase. After further negotiations, the 18 meeting participants 'jointly increased prices' by 0.2 renminbi per 500g of rice noodles on 1 January 2010. Other producers that had not participated in the meeting soon followed suit. On 21 January 2010, 15 competitors from neighbouring Liuzhou agreed to a joint price increase and signed profit-sharing agreements with the Nanning group.

This price hike before the traditional lunar New Year celebration provoked protest from local consumers. Indeed, the NDRC emphasised concerns about holiday-season price increases (the announcement of the action, on 30 March 2010, came one week before the Chinese Tomb Sweeping holiday). In response, the NDRC, the municipal governments of Nanning and Liuzhou, and 'other relevant government agencies' launched an investigation.

Remedial orders

The local price bureaus confronted the cartel by invoking both the AML and the Price Law. The NDRC notice explains that 'once it was preliminarily confirmed that the collective rice noodle price raising involved a 'price-fixing cartel', relevant government agencies of the two cities, in accordance with relevant laws and regulations, ordered the operators to stop illegal activities, correct their faults, and formulated the emergency proposal for stabilising the rice noodle price and ensuring the market supply.' Although article 46 of the AML contemplates ordering cartel participants to 'cease illegal acts' by ending collusion, the local price bureaus specifically directed the cartel participants to restore pre-cartel pricing pursuant to the Price Law and the Regulations on Administrative Penalties for Price Related Violations. The NDRC explained that these expedient measures were taken 'to quickly stabilise the rice noodle market, protect the consumers' legal rights and interests, and ensure the people to have a peaceful and happy Chinese New Year'. In essence, the price bureaus opted to reverse the price effects of the cartel through regulatory intervention rather than allowing resumed competition to reset pricing.

Administrative fines and leniency

Under article 46 of the AML, parties to monopoly agreements should be fined 'no less than 1 per cent and no more than 10 per cent of their sales revenue in the previous year'. Accordingly, the three organisers were fined 100,000 renminbi, while 18 of the companies received fines ranging from 30,000 to 80,000 renminbi 'in accordance with the seriousness of their respective cases'.

This case also represents the debut of China's leniency programme. Article 46 of the AML permits the reduction or exemption from penalties for cartel participants that 'on their own initiative, report information concerning the conclusion of monopoly agreements and provide important evidence' to the authorities. In this case, 12 plants that cooperated with the investigation received only warnings. Warning letters were also issued to other rice noodle plants which were found to have raised prices following the initial moves by the cartel members, even though they did not actually participate in any agreements.

Criminal antitrust in China

The most provocative aspect of the case was not reflected in the NDRC's announcement. Chinese media have reported that one cartel participant was actually arrested pursuant to article 225 of the Criminal Law, which broadly prohibits 'other illegal business activities that seriously disrupt the market order'. The AML itself does not criminalise any conduct not already covered by the Criminal Law. Article 52 of the AML provides that 'where any conduct constitutes a criminal offense, the relevant individual or organisation shall be prosecuted for criminal liability in accordance with the law'. If the media reports of arrests in this case are accurate, then Chinese prosecutors may be emboldened to treat AML violations as predicates for criminal charges under article 225. While the US and many other jurisdictions criminalise hard-core cartels, grave doubts about the political independence and procedural soundness of Chinese criminal prosecutions endure. Moreover, nothing in the text of article 225 would confine such criminal charges to hard-core cartels as opposed to competitor collaborations (such as standard-setting initiatives or patent pools) or abuse of dominance that 'seriously disrupts' the market order. It remains to be seen whether the People's Procurators will limit criminal antitrust cases to hard-core cartels.

Test case or warning shot?

The rice noodle producers' written agreements to raise prices on a Chinese staple food in the holiday season presented an ideal test case - a straightforward fact pattern with visceral appeal to average Chinese citizens. The NDRC similarly trumpeted its response to alleged price fixing in the food industry amidst inflationary fears in mid-2007 (although that incident resulted in no penalties). However, the Chinese adage of 'killing the chicken to scare the monkey' also resonates in the selection of targets. Although collusive practices in other sectors likely inflict far greater harm on Chinese consumers, tackling prominent industries would entail more complicated fact-patterns, more nuanced legal questions and much higher political stakes. It remains to be seen whether busting the rice noodle cartel was simply an easy test case or a warning to other cartels.

Private litigation

The AML, like most Chinese laws, emphasises administrative enforcement over judicial enforcement. However, the AML also permits judicial enforcement by People's Courts through private actions for damages. Article 50 of the AML provides that 'undertakings that cause loss to others as a result of their monopolistic conduct shall be liable for civil liabilities in accordance with the laws'. Even before the AML took effect, Chinese courts received complaints asserting antitrust-type claims under the AUCL. People's Courts across China have reportedly received numerous complaints under article 50. With the release in late 2009 of the first judicial decisions under article 50, Chinese courts have cautiously assumed a greater role in the evolution of Chinese antitrust law.

Jurisdiction

The Supreme People's Court (SPC) issued a notice on 31 July 2008 exhorting People's Courts at all levels to study the new AML and stressing the complicated blend of legal and economic issues in competition cases. That notice assigned actions involving claims under the AML to intellectual property tribunals, in the view that AML cases are generally closely related to intellectual property rights, and cases under the AUCL had historically been assigned to the same courts responsible for intellectual property matters.

The SPC has not, however, determined which level of court should hear AML cases. China's judicial system has four levels: the SPC at the national level; the High People's Courts at the level of the provinces, autonomous regions, and special municipalities (ie, Beijing, Shanghai, Chongqing, and Tianjin); the Intermediate People's Courts at the prefecture and city level; and the Basic People's Courts at the county and district level. The chief judge of the SPC and several scholars have suggested that jurisdiction over AML cases should initially lie in the Intermediate People's Courts. The Beijing High People's Court has issued regulations placing initial jurisdiction over AML actions in the Beijing Intermediate People's Court. In December 2008, the Shanghai Second Intermediate People's Court reportedly established China's first Anti-Monopoly Special Collegiate Bench, which is uniquely designed to hear both private actions under article 50 and judicial challenges to the enforcement decisions of administrative agencies under the AML. In the absence of detailed guidance from the SPC, local courts have routed AML claims to appropriate chambers on an ad hoc basis.

Sursen v Shanda

The first substantial judicial decision under the AML involved a dispute between plaintiff Beijing Sursen Electronic Technology Co Ltd (Sursen) and defendants Shanda Interactive Entertainment Ltd (Shanda) and Shanghai Xuanting Entertainment Information Technology Co Ltd (Xuanting). Sursen contended that Shanda, a leading Chinese operator of online games and publisher of other online entertainment material, had abused its dominance in the 'online literature' market by causing two authors to cease writing material for publication on the plaintiff's website. The material in question was written as a sequel to an online novel previously published by other authors on the defendant's website. On 23 October 2009, the Shanghai First Intermediate People's Court dismissed Sursen's claim. The court ruled that the plaintiff had failed to establish that Shanda possessed a dominant position in the market for online literature, noting in part that the plaintiff proclaimed itself to be the world's largest online book website. Foreign commentators noted that the court did not address the more controversial question of whether Shanda's conduct might in any event be covered by article 55 of the AML, which provides that the AML 'shall not apply' to 'the exercise of intellectual property rights pursuant to the stipulations in laws and administrative regulations relating to intellectual property' but 'shall apply to actions taken [...] to eliminate or restrict competition by abusing intellectual property rights.'

Zhou v China Mobile

Also on 23 October 2009, the Beijing Second Intermediate People's Court announced the settlement of another abuse of dominance complaint filed by a Chinese lawyer, Zhou Ze, against China Mobile Group Corporation (China Mobile) and its subsidiary China Mobile Group Beijing Co Ltd (China Mobile Beijing) before the Beijing Dongcheng District People's Court in March 2009. In China, mobile phone service is controlled by a duopoly of two state-owned companies, China Mobile and China Unicom. Zhou complained that the defendants abused their dominant market position by imposing unreasonable trading conditions and applying differential treatment in violation of articles 17(5) and 17(6) of the AML. Zhou alleged that China Mobile possessed a 70 per cent market share in China's mobile phone service market, exercising joint dominance with China Unicom. Zhou complained that China Mobile had abused its dominance by charging him a monthly rental fee of 50 renminbi as part of the 'Go-Tone' plan, even though he owned his own mobile phone. Zhou also alleged that China Mobile Beijing charged 'Go-Tone' users a monthly fee of 50 renminbi while charging users of the service brands 'Easy own' and 'M-zone' a much lower monthly fee or none at all. Zhou challenged these practices as price discrimination in violation of the AML and the Price Law.

According to Zhou, the Beijing Dongcheng District People's Court accepted the case on 30 March 2009 and conducted a hearing on 7 May 2009. On 5 June 2009, Beijing Dongcheng District People's Court informed the plaintiff that the case had been transferred to Beijing Second Intermediate People's Court, the proper court of competent jurisdiction. The Beijing Second Intermediate People's Court accepted the case on 30 July 2009 and heard arguments on 7 September 2009 and 19 October 2009.

Under Chinese judicial procedure, courts routinely seek to mediate disputes and recommend settlements before proceeding to judgment. In this case, both parties accepted a settlement through which China Mobile agreed to permit Zhou to switch to an alternative mobile phone service plan without a monthly fee and to make a one-time payment of 1,000 renminbi (characterised as a 'premium') to Zhou. Accordingly, this highly-publicised litigation did not result in any formal judicial decision entailing the interpretation or application of the AML.

Renren v Baidu

The most detailed judicial ruling under article 50 of the AML emerged on 18 December 2009, when the first Intermediate People's Court of Beijing dismissed claims that Baidu, a leading Chinese language search engine, had abused its dominant market position in violation of the AML.

The plaintiff, Tangshan Renren Information Service Co Ltd(Renren), provides information on pharmaceuticals and other medical issues through its website, www.qmyyw.com. Renren's allegations focused on Baidu's 'bid-ranking' practices. Baidu enters bid-ranking agreements with website operators through which keywords are auctioned off to website operators. When an internet user searches for one of the keywords through the search engine, the companies which have bid on the ranking of those keywords will be listed among the top results. The bidding company is charged whenever an internet user clicks its link and enters the web page of the ranked company. To promote traffic to its website, Renren entered a bid ranking agreement with Baidu for the period from March 2008 to September 2008. In May 2008, Renren began lowering its bids. According to Renren, it subsequently determined that the number of its pages that could be found through Baidu (regardless of bidding) dropped substantially. Renren alleged that Baidu had blocked its webpages in response to Renren's reduced participation in bid-ranking, noting that it could find 6690 pages of its website through Google but find only four of its website pages through Baidu.

In October 2008, Renren filed an administrative complaint with the SAIC alleging that Baidu had abused its dominant position. On 25 December 2008, Renren filed a complaint with the First Intermediate People's Court of Beijing. Renren alleged that Baidu's conduct constituted an abuse of dominance and sought compensation of 1.106 million renminbi and the unblocking of its website pages.

The court formally accepted the complaint on 6 January 2009. On 22 April 2009, the court conducted a hearing involving testimony from technical experts from both parties. On 18 December 2009, the court announced the judgment.

First, the court agreed with the plaintiff that the relevant market was 'the market for the search engine services in China', rejecting Baidu's claim that services provided to consumers for free could not be considered a 'market.' Second, the court ruled that the plaintiff had failed to prove that Baidu was dominant in this mark. Although the plaintiff had submitted articles from business periodicals estimating Baidu's market share at between 65 per cent and 70 per cent, the court considered such evidence insufficient to 'to assure the court that the market share is determined based on scientific and objective analysis' because the underlying data and methodology was not provided. Third, the court accepted Baidu's argument that any reduction in the ranking of Renren's pages was pursuant to Baidu's published policy of downranking websites affected by 'hyperlink cheating', a practice whereby website operators embed hidden or irrelevant contents in their pages to manipulate page rankings. Baidu submitted notarised reports indicating that Renren's pages contained many 'junk hyperlinks'. Accordingly, the court concluded that such measures would be justified under chapter 3 of the AML, and hence should not be considered an abuse of dominance. The court thus dismissed all charges against Baidu.

These decisions represent the first steps in Chinese antitrust jurisprudence. Although China's quasi-civil system does not treat precedents as binding, judicial rulings in high-profile cases often reflect informal consultation among courts at different levels and careful consideration of government policies. These rulings may signal the judiciary's wariness of inviting frivolous abuse of dominance claims or undermining critical industrial policies or economic reforms with a liberal approach to abuse of dominance claims. Decisions on more incendiary issues - from complaints of abusive IP licensing practices by allegedly dominant foreign firms or challenges to alleged cartels among former or current SOE's - lie ahead, and it remains to be seen whether the SPC will confront novel issues with a sweeping judicial interpretation or leave these questions to the lower courts.