Anti-Trust & Unfair

Many foreign businesses greeted the passage two years ago of China's first antimonopoly law with trepidation. Especially at a time when multinational companies worried Chinese policy makers were growing wary of foreign investment in general, the fear was that the law would offer protectionists in Beijing a new tool. Even now there remains a sense that as the law takes effect the government is cracking down harder on foreign companies than on Chinese firms. But the reality is more complex.

When China’s new Anti-Monopoly Law (AML) took effect in August 2008, it posed substantial uncertainties for non-China businesses: Would the enforcement agencies, whose missions had focused on managing a planned economy, be competent and even-handed guardians of a market economy? Would MOFCOM, China’s vast and powerful finance-and-commerce ministry, use its merger-review role to protect Chinese firms from deals that strengthened foreign competitors? Would the State Administration for Industry and Commerce (SAIC) penalize non-Chinese firms that sought to market their products and technology efficiently? How would the National Development and Reform Commission (NDRC), China’s price-regulation agency, adapt to punishing cartel behavior instead of engaging in it? How would China’s court system enforce the law? And would the enduring role of state ownership in China lead Chinese enforcement agencies to use antitrust investigations to gather corporate intelligence?

The answers have been hard to come by. Nearly two years after the AML launched, the big picture is still fuzzy. The few solid data points so far suggest that our worst fears won’t pan out. The Chinese courts, for example, have shown impressive sophistication in evaluating and rejecting private antitrust suits. And it now looks as if non-price distributor restrictions like exclusive territories will not be condemned outright as “monopoly agreements” (comparable to per se Sherman Act section 1 violations). MOFCOM has cleared an overwhelming majority of the mergers it has reviewed, and in general, the relief it has required as a condition of clearance has been rational. For example, the veterinary vaccine divestiture it ordered in clearing the Pfizer-Wyeth merger (after a three-and-a-half month review) appears to be reasonably connected to competition concerns the deal posed. And the conduct restraints imposed upon General Motors as a condition of its acquisition of the parts-maker Delphi, while solicitous of GM’s Chinese rival auto manufacturers, are a defensible precaution against the possibility that GM was acquiring a uniquely important supplier in China.

But much remains uncertain. Was MOFCOM’s rejection of Coca-Cola’s acquisition of Huiyuan Juice based on competition concerns or the desire to protect iconic Chinese brands? Will MOFCOM aggressively enforce its premerger filing requirements, which seem to reach many major transactions that have only an incidental connection with China? Will Chinese courts be as tough on antitrust suits brought against non-Chinese firms as they have been on suits brought against, say, the state-owned China Mobile?. Meanwhile, NDRC and SAIC are only beginning to ramp up their enforcement of the provisions that correspond roughly to sections 1 and 2 of the Sherman Act. The dozens of AML regulations, some of them industry-specific, are still in the works. And while the news that non-price vertical restraints won’t be treated as monopoly agreements is encouraging, it remains unclear when they might constitute an abuse of dominance.

This ongoing uncertainty regarding the abuse-of-dominance provision is especially troubling because a business can be presumed “dominant” even if it has only a ten percent market share, if another competitor has a share of at least 55.67 percent, or two others have at least 65 percent between them. That means that NDRC could condemn an upstart firm’s use of exclusive territories, tying or special discounting to dislodge a dominant incumbent as if it were reviewing the incumbent’s own exclusionary conduct.  Until we see more of NDRC in action, issues like this will leave justifiable concern that it could use the AML to protect incumbent state-owned monopolies from foreign competition. Similarly, until the relationship between the AML and China’s intellectual property law is clarified, owners of valuable IP cannot know whether they will face antitrust liability for refusing to license their IP on terms that the Chinese antitrust enforcers consider “reasonable” or for making their IP freely available for use in conjunction with Chinese standards.

The bottom line: If your company is in China, or even sells into it, keep in close touch with your China antitrust counsel. Things are playing out there slowly, but on any given day, at any of the three Chinese antitrust enforcement agencies, something could happen that will have a substantial effect on your business there.

Several months have now passed since the second anniversary of the enactment of China's Anti-Monopoly Law ("AML"). As compared with 2009, when antitrust news was often headlined in the press, the pace of antitrust enforcement this year seems, at least on its face, to be slowing down. This is partly the result of the lack of high-profile new merger review decisions like the Coca-Cola/Huiyuan decision, and the result of slowly evolving conduct rules legislation (i.e., those referring to prohibitions of monopoly agreements and abuse of market dominate positions).

However, a careful observer could find that the enforcement authorities are actually beefing up their enforcement and composing themselves for more active applications of the AML in the future. For one, the Ministry of Commerce ("MOFCOM") has continued to further strengthen its merger control framework. Meanwhile, the National Development and Reform Commission ("NDRC)" has begun to apply the AML, in addition to pre-existing laws (such as the 1997 Price Law), to price-related cartels. The State Administration for Industry and Commerce ("SAIC") also published the second draft of its three implementing regulations for public consultation. On the private action side, Chinese courts have resolved several antitrust cases and are in the process of trying several others, though not great in number.

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