New Chinese Anti-Monopoly Law Concerns also the Abuse of IPRs

(IPRinfo 1/2008)

Juha Vesala
LL.M., Researcher, University of Helsinki
Liguo Zhang
LL.M., Researcher, University of Helsinki, INNOCENT graduate school

The Chinese Anti-Monopoly Law covers monopoly agreements, abuses of a dominant position and concentrations.

Following over 13 years of preparation, the People’s Republic of China has approved its first general competition act, the China Anti-Monopoly Law (’the Act’). In this article we describe the main features of the Act and how it will be enforced, as well as its background.

13 Years of preparation
Since the end of 1970s, when China initiated the reform to transfer from a planned economy to a market economy, competition has emerged in the Chinese market. The Chinese legislation, however, lacked effective means to tackle restrictions of competition. To make up for this deficiency, the Standing Committee of National Congress decided to draft an anti-monopoly law and set a drafting group for that purpose in 1994.

Initially, the need for anti-monopoly legislation was not seen as urgent. Among other reasons, there were concerns that such legislation could impede the growth of Chinese companies. Thus, it was not until in 2000 that the drafting group finished its work.

Subsequent developments, however, accelerated the legislative process. A report indicating that foreign companies’ unrestricted takeovers may threaten national industry aroused the government’s concern. Finally, in August 2007 the Committee approved the Act. It will enter into force on 1 August 2008.

The Act applies even outside China
The Act covers three main areas of conduct by undertakings: monopoly agreements, abuses of a dominant position and concentrations. Enforcement is to be provided by the Anti-Monopoly Enforcement Authority (’the Authority’), which is yet to be established.

The Act also prohibits certain abuses of administrative powers that may eliminate or restrict competition.
The Act applies not only to conduct taking place in China but also outside the Chinese territory in case the conduct eliminates or has restrictive effects on competition in the Chinese market.

Horizontal and vertical monopoly agreements
The term ’monopoly agreement’ refers to agreements, decisions and other concerted activities that eliminate or restrict competition. Six categories of prohibited monopoly agreements between competing undertakings are enumerated in the Act:
o Fixing or changing the price of products;
o Restricting the output volume or the sales volume of products;
o Dividing the sales market or the raw material purchasing market;
o Restricting the purchase of new technology or new facilities or restricting the development of new technology or new products;
o Jointly boycotting transactions;
o Other monopoly agreements condemned by the Authority.

In addition to horizontal agreements, the Act also enumerates three categories of prohibited vertical agreements:
o Fixing the price for resale to a third party;
o Setting the minimum price for the resale to a third party;
o Other monopoly agreements condemned by the Anti-monopoly Enforcement Authority.

Certain agreements can, however, benefit from an exemption. These include research and development agreements leading to improved technologies or new products, and some others enlisted in the Act or stipulated by the State Council. To benefit from the statutory exemptions, an undertaking must show that the agreement does not substantially restrict competition in the relevant market and that it enables consumers to share the benefits provided by the agreement.

Who is dominant?
The Act defines a dominant market position and the criteria for determining it. Presumptions based on market shares are also provided, including that a 50 % market share is assumed to convey a dominant position. By providing opposite evidence, the company can get the presumptions overcome.

The Act identifies seven categories of the abuse of a dominant position:
o Selling products at unfairly high prices or buying products at unfairly low prices;
o Selling products at a price below cost without any justification;
o Refusing to trade with trading parties without any justification;
o Restricting trading parties to deal exclusively with the dominant company or designated parties without any justification;
o Implementing tie-in sales without any justification, or imposing other unreasonable trading conditions;
o Applying discriminating treatment on prices or other terms to trading parties with equal standing without any justification;
o Other activities that abuse the dominant market position as condemned by the Anti-monopoly Enforcement Authority.

Concentrations subject to merger control
Certain transactions constituting ’concentrations’, the threshold of which will be set by the State Council, must be notified to the Authority. A preliminary investigation of 30 days is provided for, which may, by a decision of the Authority, be followed by a 90 day second phase. Undertakings may not implement the concentration prior to it having been cleared.

If a concentration will or may eliminate or restrict competition, the Authority will prohibit it. However, the concentration may be approved if it provides advantages that exceed the disadvantages or if it is in harmony with the public interest. Conditions may be attached to such an approval. Concerns for the security interest of the nation may lead to additional examination upon concentrations involving foreigners.

In China, administrative agencies traditionally have a strong influence on economic activities, which can sometimes harm competition. The Act therefore prohibits an administrative agency from abusing its administrative powers by requiring organizations or individuals to deal, purchase, or use only commodities provided by the undertakings which the agency has designated. Also, certain measures that block trade of commodities between regions are prohibited.

Sanctions and remedies determined by the Authority
The Anti-monopoly Enforcement Authority investigates suspected infringements of the competition rules. It is empowered, for instance, to carry out on-the-spot investigations.

The Authority can impose fines up to 10% of the total turnover of the previous year, order the undertakings to cease and desist the infringing acts. The Authority can also confiscate illegal gains in case a prohibited monopoly agreement or an abuse of a dominant position is established. If the undertaking self-reports the violation, this confession may result in exemption from or mitigation of the punishment.

In case the rules on concentrations are violated, the Authority can order fines and measures to restore the pre-concentration situation.

The undertakings that violate provisions of the Act and cause damage to others also bear civil liability in civil proceedings.
Undertakings dissatisfied with a decision by the Authority may apply for an administrative reconsideration and/or bring a suit against the Authority before a competent administrative tribunal.

Intellectual property rights
The exercise by a company of its intellectual property rights, which can even be deemed as statutory monopolies, does not fall into the scope of the Act. However, the Act does apply to activities of undertakings to eliminate or restrict competition by abusing intellectual property rights. For instance, the Act prohibits such monopoly agreements between competing undertakings as restrict the purchase of a new technology or restrict the development of a new technology or product.

Outside the Act, other rules on the exploitation of intellectual property rights are found for instance in the Regulations on Technology Import and Export Administration (2002) and in the Contract Act (1999).

Supplementary guidelines expected to clarify the principles
As can be noted, the China Anti-Monopoly Act bears a great resemblance to European competition law, in so far as the rules for undertakings are concerned. The Act reflects the drafters’ extensive consultations with academics, enforcement agencies and practitioners from around the world and borrows from advanced competition regimes. It is yet, however, too early to tell in detail how the rules will be applied because the Act is drafted in general terms.

The Act allows the government to conduct ”national security reviews” of foreign acquisitions of domestic enterprises. It is not, however, clear how such a security review will be applied, especially given that it is not yet defined in the Act nor in other legislation.

It is expected that the State Council will pass supplementary rules and guidelines to specify the conditions and procedures in the Act. The clarification of the principles underlying the rules is therefore likely in the near future.