Anti-Competitive Conduct in China: A Dialogue with NDRC and SAIC Officials on Enforcement under China's Anti-Monopoly Law

by Sheppard Mullin Richter & Hampton LLP
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On August 27, 2012 the American Chamber of Commerce, Beijing, hosted a luncheon meeting where Ms. Li Qing, Deputy Director, National Development and Reform Commission (“NDRC”) Price Supervision and Anti-Monopoly Bureau, and Ms. Yang Jie, Section Head, the State Administration for Industry and Commerce (“SAIC”) Anti-Monopoly Law Guidance Division spoke on their respective enforcement activities as well as answered questions from the audience. Ms. Becky Koblitz, Special Counsel, Sheppard Mullin Richter & Hampton moderated the panel.

The following is a brief summary of the event.

Introduction: Ms. Koblitz, Sheppard Mullin Richter & Hampton

Enforcement related to anticompetitive conduct is split between the NDRC and SAIC. The NDRC handles price-related violations and SAIC the non-price related violations. The Anti-Monopoly Law (“AML”) has been in effect since August 2008 and continues to evolve on two levels as the agencies adopt additional regulations to provide more guidance and clarification and as the agencies interact with antitrust authorities world-wide.

Effective early 2011, the NDRC and SAIC adopted rules setting forth how the two agencies would enforce the AML with respect to anticompetitive conduct (the terminology used in the AML is monopoly agreements and abuse of dominance). In July 2011, a Memorandum of Understanding (“MOU”) was signed between the US Department of Justice (“DOJ”) and US Federal Trade Commission (“FTC”) and the three Chinese enforcement agencies—NDRC, SAIC and Ministry of Commerce (“MOFCOM”) which focuses on merger control—under which they agreed to cooperate in developing competition policy and enforcement. The combination of the enforcement regulations and international cooperation has given the NDRC and SAIC more impetus to investigate and conclude cases.

In late 2011 the NDRC opened an investigation of China Telecom and China Unicom, which allegedly restricted broadband access through their pricing policies. The investigation was suspended after the two parties promised to improve internet interconnection quality, adjust their pricing system and improve the broadband network in China. In 2012, the Henan provincial division of SAIC settled a cartel case against eleven used car dealerships. The used car dealerships entered into agreements to, for example, allocate markets, unify service fees, and centralize operations. The dealerships’ illegal income (RMB 1,470,000) was confiscated and a fine (RMB 265,000) was imposed. Foreign companies doing business in China would be well advised to have effective antitrust compliance programs to prevent risks and losses related to anticompetitive activities.

NDRC: Statutory framework, types of conduct, cases: Ms. Li, NDRC

Under the AML, the NDRC’s duty is to investigate monopolistic conduct related to pricing such as price-fixing agreements among competitors, abuse of dominant positions through pricing, and the abuse of administrative positions through pricing. The NDRC’s Bureau of Price Supervision and Anti-Monopoly is responsible for antitrust enforcement. Based on the AML and subsequent decisions and provisions, the NDRC delegated enforcement authority to the provincial and municipal price control departments. NDRC issued implementation regulations which shed more light on the types of conduct which is prohibited and how the agency will enforce the AML.

The Provisions on Anti-Monopoly covers three types of behavior: monopoly (collusive) agreements related to pricing, abuse of dominant market positions by means of pricing, and abuse of administrative power by means of pricing. The Provisions on Administrative Procedures for Law Enforcement of Anti-Price Monopoly covers topics such as reporting a suspected violation, the responsibilities of the government and the rights of the targets in investigations, leniency programs, suspension of investigation and responsibilities of the price departments.

The following are examples of monopolistic conduct related to pricing:

  1. Horizontal pricing agreement where competing companies agree to fix or change prices.

    A paper association in Shejiang comprised of 20-plus members met five times in 2010 to jointly discuss ex-factory pricing of white packaging paper. The association was fined RMB 500,000. 
  2. Vertical monopolistic pricing agreement where industry associations have agreements for its members that fix prices, change prices or restrict the minimum resale prices to third parties.

    The members of the association for book publishing companies were required to agree to certain conduct, such as “newly published books which have been on the retail market for less than one year shall not be discounted” and “discount price shall not be lower than 85% of the price shown on colophon page.” The NDRC demanded the removal of such restrictions. 
  3. Abuse of dominant market positions where companies use their dominant position to sell commodities at unfairly high prices.

    Two pharmaceutical companies in Shandong which had control over promethazine hydrochloride sold the drug at unfairly high prices and refused to enter into transactions by proposing excessively high prices. The NDRC confiscated the illegal gains of the companies and imposed a fine. The total penalty for the companies was RMB 7,029,600.

SAIC: Update on case load, leniency program, and coordination between SAIC and NDRC, cooperation between China and United States: Ms. Yang, SAIC

As of August 2012, SAIC has authorized provinces and cites, such as Jiangsu, Jiangxi, Chongqing, and Zhejiang, to investigate a total of 16 cases for suspected monopolistic conduct. One case concerns suspected abuse of dominance and fifteen concern suspected cartel agreements. Decisions have been reached in four cases. The investigations are time consuming because the agencies will carefully and seriously conduct investigations and make decisions based on adequate evidence.

SAIC encourages companies to voluntarily report illegal conduct. Under the Provisions for Industry and Commerce Administrations on the Prohibition of Monopolistic Agreements, reference is made to “important evidence”. Important evidence refers to evidence which has significant influence on either the decision by the industry and commerce administrations to open investigations or the identification of the monopoly agreements including such information as the participants of the monopoly agreements, the range of products involved or the methods used to reach such agreements.

The first company to voluntarily report the relevant information related to a monopoly agreement, provide important evidence and fully cooperates during the investigation will be exempted from penalties. Companies that subsequently voluntarily report relevant information and important evidence about the monopoly agreement will receive reduced penalties.

NDRC and SAIC have a division of responsibilities: SAIC handles investigations and cases where there are non-price related violations and will not open an investigation or file a case where the case only concerns price-related violations. In the event a complaint involves both price and non-price violations of the AML, the agency that opens a file first will be in charge of the investigation and decide the penalties. The NDRC and SAIC are continuing to strengthen the coordination and exchange of information.

In July 2011, a Memorandum of Understanding (“MOU”) was signed between the DOJ and FTC on the one side and the three Chinese enforcement agencies—NDRC, SAIC and MOFCOM –to promote communication and cooperation among the agencies of the two countries. The key to such cooperation is the exchange of policies and development of antitrust enforcement. This cooperation is achieved through high-level consultations and exchange of information and advice.

SUMMARY of issues raised during Q&A

  • Legislation-related

Intellectual Property Rights

Are there any updates regarding the progress of the fifth draft of the Guidelines for AML Enforcement with respect to Intellectual Property Rights which were drafted by SAIC?

Answer: Article 55 of PRC AML provides:” This law is not applicable to business operators who exercise their intellectual property rights in accordance with the laws and administrative regulations on intellectual property rights; however, this Law shall be applicable to the business operators who eliminate or restrict market competition by abusing their intellectual property rights.” This article is a little abstract and needs more provisions to clarify the details in practice. A specialists committee has been established for this issue, and questionnaires have been designed and widely spread to address related concerns. Due to an absence of cases in this area in China to date, there has been insufficient understanding of IP abuse and it may not be ripe to release these guidelines. However, relevant agencies treat these guidelines as important and will do more research on related issues.

  • Conduct-related

Retail price maintenance:

Article 14 of PRC AML prohibits the restriction of the lowest prices for commodities resold to a third party. However, it doesn’t prohibit the restriction of the highest party. Thus, when manufacturers “suggest” the lowest prices/ highest prices of their products to distributors, is it legal?

Answer: Vertical monopoly agreements are complicated. And the identification of vertical monopoly agreements should consider lots of elements, including the dominant marketplace position. As to China, things can be even more complicated. Governmental agencies will consider different economic models and adjust their approach accordingly. Agencies have clear knowledge about how important economic analysis is in the AML enforcement, and will refer to the experiences of developed countries.

Trade associations

You have mentioned the case regarding trade associations. When trade associations make arrangements for members to engage in monopolistic practices, wouldn’t it be unfair for members to bear the responsibility?

Answer: When making decisions regarding trade associations, the agencies will consider both their actions and the influence on the marketplace. Their motives will be considered, however most of the time the motive is to protect the interest of their industry. The agencies know sometimes that enterprises are forced to participate in those monopolistic practices. The approach of NDRC is to punish the trade associations and to educate the member enterprises by criticism, while the approach of SAIC is to punish both the associations and their member enterprises.

Mergers

Some business operators will conduct anti-competitive behaviors by means of merger. Will the agencies have active intervention regarding this?

Answer: The PRC AML defines “monopoly agreements” as “agreements, decisions and other concerted conducts designed to eliminate or restrict competition”. Regarding merger, MOFCOM would be the agency to review an operator’s concentration; while for other concerted conduct, SAIC and NDRC would refer to MOFCOM’s experience and consider the consensus and collusion of such concerted operators.

  • Enforcement-related

NDRC’s dual roles

It is interesting because the NDRC is not only responsible for pricing, but also responsible for enforcing the AML. How can NDRC price commodities at one hand while investigating unfair pricing on the other hand?

Answer: It is actually not contradictory. There are regulations dividing different kinds of commodities into different categories; some commodities are priced by the government, some in accordance with government guided-price, while others are priced by the market price. Those commodities which are priced by the government may become the object of price monopoly. Also, there are internal allocations of functions, namely, some bureaus would be responsible for anti-price monopoly and some other bureaus would be responsible for pricing.

Leniency programs

Regarding the leniency programs, it was mentioned that so far no company has reported itself violating AML. Why do you think are those companies are taking the wait-and-see approach? Are there any guidelines that are more specific regarding the regulation of the procedures of how the leniency programs work?

Answer: Currently there are no specific published procedural regulations for leniency programs; however, there are standard regulations on how penalties will be reduced according to the actions of the reporting companies.

To be precise, the penalties of first reporting company will be eliminated, the penalties of second reporting company will be reduced at least 50%, and the penalties of third reporting company will be reduced at most 50%. The government agencies will keep their promises on leniency programs. Another aspect the governmental agencies will strengthen regarding leniency programs is transparency. We admit there are still issues to be perfected, and perhaps this is one of the reasons why companies have taken the wait-and-see approach.

Exemptions/justifications

Article 15 of AML provides several circumstances where Articles 13 and 14 will not be applicable. What elements or facts will the enforcement agencies consider when doing such reviews?

Answer: The general principle is to prohibit monopoly agreements stated in Article 13 and Article 14, with very limited exceptions. The agencies will consider each case specifically—whether the actions will substantially restrict competition in the relevant market and whether they can enable the consumers to share the benefits derived therefrom.

Article 43 of AML provides that business operators under investigation and interested parties shall have the right to make statements. At the same time, enforcement agencies will consider the statement of those concerned parties.

International cooperation

Can you further describe the agencies’ activities to support international cooperation with regard to antitrust enforcement?

Answer: One of the divisions under NDRC is called the Division of Competition Policy and International Cooperation Bureau of Price Supervision and Anti-monopoly. This division is formulated with the purpose to strengthen the international cooperation and research on foreign antitrust policies/experiences. Communication mechanisms have been established between China and foreign governments to exchange information.

Currently these types of communication are not for specific cases, just at a general and theoretical level. There are clauses in relevant memoranda of understanding to protect confidential information. In general, the governmental agencies are currently attaching increasing importance to international cooperation.

Objectivity of enforcement

I am anxious about the AML enforcement in China, because it appears to be subjective and lack certainty. I doubt the credibility of the resources for data and am fully aware of the complex nature of China. How can the agencies ensure objectivity of AML enforcement?

Answer: Initially the agencies thought people would be anxious about our omissions and it turns out that people are also anxious about our actions! It is better for people to assume that we are reliable. The decisions made by agencies are not easy ones and usually take years to make, based on thorough investigation and analysis.

Treatment of state-owned enterprises (“SOEs”)

Will the governmental agencies give preferential treatment to SOEs in terms of AML enforcement?

Answer: No. The government will treat every company as the same, regardless of its corporate nature.

Interpretation of “cooperation”, extraterritorial enforcement of AML

Recently, 13 agencies including the NDRC and SAIC jointly issued an “Implementation Opinion” entitled “Encouragement and Guidance on Private Capital’s Healthy Development.” There is language potentially ripe for misinterpretation in the Implementation Opinion: “The government intends to guide the enterprises to intensify the coordination and cooperation among each other to prevent disorderly and malicious competition.” Will the coordination and cooperation requested by the government lead to the risk of being identified as anti-competitive behavior? Does the AML have exterritorial effect on anti-competitive behavior overseas?

Answer: The cooperation here in the Implementation Opinion is not the same as the cooperation, namely the concerted conduct, mentioned in AML. The government’s intention is to better regulate the behavior of enterprises doing business in foreign countries.

However, the AML may provide different treatment of overseas conduct. According to Article 15 of the AML, conduct can be defined as not anti-competitive under several conditions: (1) improving technologies, or engaging in research and development of new products; or (2) improving product quality, reducing cost, and enhancing efficiency, unifying specifications and standards of products, or implementing specialized division of production; (3) increasing the efficiency and competitiveness of small and medium-sized business operators; (4) serving public interests in energy conservation, environmental protection and disaster relief; (5) mitigating sharp decreases in sales volumes or obvious overproduction caused by economic depression; (6) safeguarding legitimate interests in foreign trade and in economic cooperation with foreign counterparts; or (7) other purposes as prescribed by law or the State Council.

In the circumstances specified in Subparagraphs (1) through (5) of the preceding paragraph, where the provisions of Articles 13 and 14 of the AML are not applicable, the business operators shall, in addition, prove that the agreements reached will not substantially restrict competition in the relevant market and that they can enable the consumers to share the benefits derived therefrom.

Note that under Article 15, when business operators are claiming they intend to safeguard legitimate interests in foreign trade and to cooperate with foreign counterparts, they do not need to prove that the agreements reached will not substantially restrict competition in the relevant market and that they can enable the consumers to share the benefits derived therefrom.

In addition, just as with other foreign AMLs, the PRC AML also has exterritorial effect, which means operators doing business in foreign countries should comply with PRC AML and foreign AMLs at the same time.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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