New Legal Developments in the PRC Antimonopoly Regime

By David Livdahl, Jenny Sheng, and Lisa Li

More than four years ago, the PRC Antimonopoly Law (AML) took effect, designating three ministries to review different types of AML violations, including price fixing and other anti-competitive practices. In 2012 and early 2013, the PRC enforcement authorities have made their respective efforts in rule making, case decisions or information disclosure, which has further developed the AML. This article addresses the recent legal developments in the PRC antimonopoly regime and discusses future trends.

The Antimonopoly Bureau of the Ministry of Commerce (MOFCOM) conducts merger control review. The Price Supervision and Antimonopoly Bureau of the National Development and Reform Commission (NDRC) reviews price-related violations of anti-competitive agreements and abuse of market dominance. The Antimonopoly and Anti-Unfair Competition Enforcement Bureau of the State Administration for Industry and Commerce (SAIC) reviews non-price-related violations, such as monopoly agreements between business competitors. The law allowed parties injured by violations of the AML to sue for damages in Chinese courts.

New merger control review regulations

If a merger, acquisition, establishment of a joint venture, or other action that creates a concentration of business operators is big enough—meaning the business operators’ revenues  from the preceding year meet certain thresholds—the transaction is subject to AML review by MOFCOM. After the AML was passed, MOFCOM did not initially issue procedures for dealing with concentrations that failed to file for review. MOFCOM’s Interim Measures for the Investigation and Handling of the Failure to Declare Concentration of Business Operators in Accordance with the Law, which took effect February 1, 2012, established procedures for MOFCOM to investigate and penalize companies that fail to notify the PRC government of a transaction that violates the AML.

According to the interim measures, MOFCOM can initiate investigations of business operators on its own or with the help of third parties that provide evidence of business concentrations that have not filed for review. An investigation consists of two phases. In the preliminary investigation stage, MOFCOM will look into materials submitted by or about the investigated business operators to determine whether the transaction should have been filed under the AML. If no filing is needed, MOFCOM will close the investigation; if a filing should have been made, MOFCOM will further investigate the transaction. In the second investigation stage, MOFCOM will review whether the transaction will have any adverse impact on the competition in the relevant market, as it would for a normal antimonopoly review.

On June 6, 2012, MOFCOM issued a revised form (the Declaration Form for Antimonopoly Review of a Concentration of Business Operators) based on the agency’s more than three years’ experience in merger control review. The new declaration form will standardize and streamline the antimonopoly filing procedures. Applicants are required to use the new declaration form to organize all filing materials.

Compared to the previous declaration form, the revised form has 50 explanatory notes and is more detailed and systematic. The new declaration form categorizes the business operators involved in concentration transactions into two types: business operators participating in concentrations and other parties involved in concentrations. Such classification is important because only the revenue of the business operators participating in concentrations should be calculated to determine whether the filing thresholds are met.

Cases

MOFCOM received 201 filings in 2012, among which 186 cases were accepted for review, according to the Antimonopoly Bureau. For the cases that MOFCOM reviewed in 2012, 55 percent were equity acquisitions while 36 percent were joint ventures. As of December 26, 2012, MOFCOM had reviewed 154 cases, of which 142 cases were approved without conditions, six cases were approved with conditions, and six cases were withdrawn.

MOFCOM conditionally approved on February 9, 2012 the establishment of a joint venture by Henkel Hong Kong Holdings Co., Ltd. and Tiande Chemical Industry Co. Ltd., one of the six cases approved with conditions. This was the second conditional approval published by MOFCOM in relation to establishment of a joint venture, reaffirming that the formation of a joint venture is subject to MOFCOM’s antimonopoly review. MOFCOM imposed behavioral remedies on this case to maintain the market structure and supply levels that existed prior to the transaction. In this case, MOFCOM imposed commitments that required Tiande to supply products to all downstream customers based on “the fair, reasonable, and non-discriminatory principles.” Specifically, Tiande was prohibited from providing more favorable supply conditions to the manufacturing subsidiary of the joint venture to be established by Tiande and Henkel. The company was also prohibited from communicating competition-related information with this manufacturing subsidiary and selling products with unreasonably high prices.

Future developments

MOFCOM is aware that it needs to improve the efficiency of its merger control review. During a December 27, 2012 news conference held by the Antimonopoly Bureau, MOFCOM said that it is drafting regulations to simplify procedures for business concentration cases and categorize the pre-merger antimonopoly clearance applications into three classes (simple, normal, and major) to review cases more efficiently. The draft has not been published or been made public, but we expect that these new provisions will be released sometime in 2013.

MOFCOM is making greater efforts to publish information related to antimonopoly reviews.  Previously, MOFCOM only published on its website cases that were blocked or approved with conditions. However, on November 16, 2012, MOFCOM voluntarily published information on all reported concentration transactions (458 in total) that were approved without conditions from August 2008 to September 2012. Although the information for these transactions is only limited to the names of the transactions and the participating business operators, it provides the public with a general understanding of market trends and the regulatory environment. MOFCOM has also promised that it will publish such information for all approved cases on a quarterly basis.

Monopoly agreement developments

On August 14, 2012, SAIC released the fifth draft of the Guide on Antimonopoly Law Enforcement in the Intellectual Property Rights Field. The guide prohibits discriminatory refusal to license intellectual property, additional conditions imposed by owners of intellectual property against the contracting party’s will—such as demanding that the other party grant the improved technology exclusively back to the original owner—and collusion agreements among competing operators. This could include fixing or changing the intellectual property license fee or restricting the quantity of intellectual property licensing or the production and sales quantity. The guide also states that the key to determining whether the act of a business operator constitutes abuse of its intellectual property rights is for the enforcement authority to review whether the competition is limited by a business operator’s act to enforce its intellectual property rights. SAIC has not yet said when the final version of the guide will be released.

In August 2012, the local SAIC office in Henan province announced that it had fined 11 used car dealers for entering into an agreement to allocate markets, unify service fees, and centralize operations. According to the agreement, a dealer could not reduce fees without authorization and would be fined ¥15,000 ($2,402) each time it is found making an unauthorized reduction. After almost one year of investigation, SAIC confiscated roughly ¥1.5 million ($240,186) of illegal income and imposed a ¥265,000 ($42,433) fine.

NDRC found in early 2013 that Chinese liquor companies Kweichow Moutai Group and Wuliangye Group had engaged in monopolistic pricing that violated the AML. In February 2013, it was reported that NDRC fined the companies ¥449 million ($72 million). However, NDRC officially claimed that it had not yet decided how to penalize the liquor companies.

Implementation of AML in the courts

On May 3, 2012, the Supreme People’s Court issued the Provisions on Certain Issues Concerning the Application of Law in Civil Disputes Cases Arising out of Monopolistic Acts. The provisions, which took effect on June 1, 2012, clarified certain antimonopoly litigation issues, such as the filing, acceptance, jurisdiction, evidence rules, civil liabilities, and time limits for case filings. The court provisions confirm that a person can file a law suit in relation to antimonopoly-related violations or disputes, which previously was unclear. According to the provisions, natural persons, legal persons or other organizations can file a civil AML lawsuit with a court if they have a claim regarding losses suffered as a result of monopolistic conduct; or violations of the AML in contract provisions or a trade association’s bylaws. It appears that under the second circumstance described, a party can file a civil AML lawsuit even though it has not suffered any direct losses resulting from a violation of the AML.

On April 18, 2012, the Guangdong Higher People’s Court held the first court hearing for a case filed by Qihoo, the operator of 360 computer security software, against Tencent, the operator of QQ instant messaging software, under the AML. Qihoo claimed that Tencent abused its market dominance in online instant communication services by attaching QQ safety software to its instant messaging software and by forcing Chinese customers to choose between itself and Qihoo. The court has not yet released the judgment.

The future of the AML

Since 2010, the enforcement authorities have become more active in cracking down on violations of the AML. In 2012 and early 2013, all AML enforcement authorities indicated that they will continue efforts to implement the AML, indicating that enforcement authorities are determined to cultivate an antimonopoly culture in China.

We anticipate that release of the court provisions will likely result in increased private civil claims against companies relating to the enforcement of the AML. Multinational companies and the leading state-owned enterprises or industrial monopoly giants will need to pay more attention to compliance with the AML and implement effective internal compliance plans to mitigate the risk of being sued. To reduce the risks of non-compliance with the AML, companies should:

• Be careful about publishing any information regarding its market position;
• Be prudent in communications with their competitors and trading counterparties and establish internal reporting rules related to sending and receiving communications from competitors and business partners;
• Carefully review their distribution and sales agreements (especially if they are dominant in a “relevant market”);
• Develop internal measures to avoid antimonopoly behavior; and
• Screen basic policies and behavior regarding sales, management, and marketing.

[author] David Livdahl ([email protected]) is a partner, Jenny Sheng ([email protected]) is a partner, and Lisa (Huiyuan) Li ([email protected]) is a China associate with Paul Hastings LLP in Beijing. [/author]

(Photo by Alvin Smith via Flickr)