Formally adopted on 30 August 2007, after almost 15 years of extensive discussion and debate, the Anti-Monopoly Law (AML) of the People’s Republic of China (PRC) finally came into force on 1 August 2008. The PRC has thus fulfilled a promise made before joining the World Trade Organisation in 2001 that it would formulate a comprehensive competition law.
In the first of two articles on China’s new AML, Marc Waha and Philip Monaghan examine the objectives and scope of the new law, the enforcement authorities, monopoly agreements, exemptions and exclusions, and merger control. A second article (to appear in the next issue of China Insight) will focus on the AML’s provisions on abuse of dominant position, abuse of administrative power, investigations of suspected monopoly conduct and private enforcement.
Aims of the AML
Article 1 of the AML sets out five purposes for the enactment of the new law: (i) the prevention and prohibition of monopoly conduct; (ii) the protection of fair competition; (iii) the improvement of economic efficiency; (iv) the protection of the interests of consumers and the public interest generally; and (v) the promotion of the healthy development of the socialist market economy.
Of these five aims, the last is perhaps the most problematic. Despite such wording typically appearing in most PRC laws, the meaning of the phrasing “the healthy development of the socialist market economy” is still unknown and, potentially, could allow authorities and courts to apply the AML in ways that would be contrary to the protection of the competitive process. The best that can be hoped for - from an economic perspective - is that this particular wording in Article 1 will remain a dead letter. The reiteration of the socialist market economy objective in Article 4 (“The state shall formulate and implement competition rules suitable for a socialist market economy”) does however give some cause for doubt.
Scope and general overview
In drafting the AML Chinese legislators had regard to the scope and application of competition laws in jurisdictions with well-established competition law regimes. It is therefore unsurprising that in several respects the AML is similar in terms of content to the competition laws of other jurisdictions - in particular:
- It applies to “undertakings” - defined as any natural person, legal person, or other organisation that produces and/or deals in commodities/goods or provides services (unless stated otherwise, the words “commodity” and “goods” include services in this article).
- It catches the following types of “monopoly conduct”:
- “Monopoly agreements” between undertakings;
- “Concentrations” of undertakings that have - or may have - the effect of eliminating or restricting competition; and
- Abuse of a dominant market position by an undertaking.
- The AML has extraterritorial application - if conduct eliminates or restricts competition in the PRC it can amount to an infringement under the AML regardless of whether that conduct took place in the territory of the PRC or elsewhere. It follows that undertakings with sales or other commercial activities in the PRC, where they make decisions on pricing and commercial terms etc, must act in accordance with the AML regardless of whether they have a formal presence in mainland China.
- Infringements of the AML may result in serious adverse consequences. In respect of anti-monopoly (or restrictive) agreements and abuse of dominance, the financial sanctions under the AML are potentially more severe than in many other jurisdictions as undertakings face both fines and the possibility of having their illegal gains confiscated (Article 46) as well as civil liability.
AML competition authorities
Article 9 of the AML provides that the State Council shall establish an Anti-Monopoly Commission (AMC) with responsibility for the organisation, coordination and guidance of anti-monopoly work. Article 10 of the AML provides that enforcement shall be carried out by the Anti-Monopoly Enforcement Authorities (AMEAs):
The AMC is currently headed by Mr Wang Qishan (vice-premier for trade and finance) and includes three deputy directors being the heads respectively of the following ministries: (i) the National Development and Reform Commission (NDRC); (ii) the Ministry of Commerce (MOFCOM); and (iii) the State Administration for Industry and Commerce (SAIC). The AMC makes use of staff from MOFCOM’s competition division (see below) for day-to-day operations and it has the following notable functions:
- Formulating competition policies and guidelines.
- Organising market investigations and issuing reports of results (which presumably could lead to action by one or other of the AMEAs).
- Coordinating enforcement work.
Responsibility for enforcement of the AML is currently shared as follows: (i) the Department of Price Supervision of the NDRC handles price-related cases; (ii) MOFCOM’s newly founded competition division (the Anti-Monopoly Bureau) assesses concentrations; (iii) the Law Enforcement Bureau for Anti-Monopoly and Unfair Competition of the SAIC has jurisdiction in relation to non-price abuse of dominance cases, monopoly agreements, and abuse of administrative power. The AML further provides that the AMEAs may delegate enforcement functions (although presumably not merger review) to relevant departments at the provincial, autonomous region and municipal level.
There are a number of comments one could make in respect of this rather complicated institutional architecture but the primary comment must be that it has all the appearances of something in transition - a legislative compromise with an eye on something more unified where possibly the AMC and AMEAs are merged. Until that happens there must however be a genuine concern that this fragmented model will lead to confusion, inconsistency and - at worst - inter-regulatory turf wars (consider the case of a sales quota cartel which includes a back-up arrangement on pricing). The possibility of delegation of functions by the AMEAs to decentralised authorities does nothing to alleviate these concerns. And while China might look to Europe as the model for decentralisation, the post-modernisation decentralised enforcement of competition law though the European Competition Network of national regulatory authorities is underpinned by a long and developed jurisprudence. Delegated enforcement of the AML is not something that can be recommended in the short term.
Subject to the possibility of exemption, Article 13 of the AML prohibits various types of monopoly agreement - any agreement, decision or concerted practice that eliminates or restricts competition - and sanctions can be imposed even where the agreement has not been implemented. In catching informal arrangements or understandings (concerted practices) - as well as formal agreements - the law is consistent with international practice. Similarly, the AML is in line with international practice in prohibiting industry associations from organising undertakings to engage in prohibited conduct. Particular guidance on the types of agreement that are prohibited is provided in the AML:
- Horizontal conduct
Five types of monopoly agreement are prohibited; in addition there is a “catch-all” provision:
- agreements that fix prices;
- agreements that limit supply;
- agreements that divide (downstream) sales markets or (upstream) raw materials procurement markets;
- agreements that limit the purchase - or development - of new technology or equipment;
- joint boycott agreements; and
- other agreements as determined by the relevant State Council anti-monopoly enforcement authority.
- Vertical conduct
Two types of monopoly agreement between undertakings at different levels of the supply chain - such as between a manufacturer and a distributor - are prohibited; and again there is a “catch-all” provision:
- agreements that fix resale prices;
- agreements that fix minimum resale prices; or
- other agreements as determined by the relevant anti-monopoly enforcement authority.
However, for all types of monopoly agreement, the agreement will be permitted if an undertaking can demonstrate that the agreement was concluded for a particular beneficial purpose:
- Provided the undertaking can demonstrate the agreement will not seriously restrict competition in the relevant market and consumers will share in the resulting benefits , any of the following beneficial purposes is sufficient: (i) improving technology or researching and developing a new product; (ii) improving product quality, reducing costs and increasing efficiency, unifying product specifications or standards, or implementing a specialised division of work; (iii) improving the operational efficiency and/or enhancing the competitiveness of SME s; (iv) achieving societal or public benefits such as energy conservation, environmental protection, provision of disaster relief among others; or (v) mitigating a serious decline in sales or marked overproduction in an economic downturn.
- Regardless of whether the undertaking can demonstrate the agreement will not seriously restrict competition and consumers will share in the resulting benefits , either of the following would suffice: (vi) “securing legitimate interests in foreign trade and foreign economic cooperation”; or (vii) such other circumstances as might be provided in law or by the State Council.
Competition law regimes elsewhere do not allow for the possibility of exemption where particularly serious anticompetitive horizontal conduct is concerned. Typically this is the case for hard core cartel conduct which usually includes undertakings agreeing - or reaching an understanding - to fix prices, limit output or sales or allocate markets or customers between them (including bid-rigging). In so far as the AML would allow for the possible exemption of “naked” monopoly agreements of this type it would seem inconsistent with international practice. In particular the scope of the exemption in Article 15(6) (“securing legitimate interests in foreign trade…”) would seem to allow for the possible exemption of hard core conduct where other industrial policy considerations are in play and might be seen as a specific expression of the general intention to promote the healthy development of the Chinese economy. Similarly, the exemption of “crisis cartels” by Article 15(5) (“…for the purpose of mitigating a serious decline in sales or… overproduction in an economic downturn”) is not always permitted elsewhere.
The number and type of beneficial purposes available to exempt monopoly agreements under the AML also differs to other regimes. For instance, there are fewer opportunities for exemption under the equivalent EC law provision (Article 81(3) of the EC Treaty), while less obviously economic - more public interest oriented - bases for an exemption are permissible under the AML (energy conservation, environmental protection, and disaster relief).
Where an undertaking enters into a prohibited monopoly agreement the relevant anti-monopoly enforcement authority will order it to cease and desist, confiscate any illegal earnings and impose a fine of 1 to 10 per cent (depending on the nature, degree and duration of the violation) of the undertaking’s turnover in the preceding year (or - if the arrangement has been agreed but not implemented - up to RMB 500,000 (around US$ 72,000 / € 46,000)). While it is not clear whether this turnover-based fine relates to worldwide turnover, turnover in China, or turnover in the relevant market, the capped fine for non-implemented arrangements indicates that an infringement may occur even if conduct is not followed through - that is, where there is no anticompetitive effect.
Industry associations for their part, where they organise undertakings to enter into a monopoly agreement, may face fines of up to RMB 500,000 (around US$ 72,000 / € 46,000). Where the infringement is serious, the industry association may have its registration cancelled.
Exemptions and exclusions
In the context of monopoly agreements, certain conduct which might otherwise amount to an infringement will be exempted where a particular beneficial purpose can be demonstrated by the undertaking(s) concerned. The various beneficial purposes - set out in Article 15 - are discussed above in detail. In brief these include: improving technology or R&D for a new product; improving product quality, reducing costs and increasing efficiency, unifying product specifications or standards, or implementing a specialised division of work; improving the operational efficiency and/or enhancing the competitiveness of SMEs; achieving certain societal and public benefits (energy conservation, environmental protection, etc.); mitigating a serious decline in sales or overproduction in an economic downturn; securing legitimate interests in foreign trade and foreign economic cooperation; or other circumstances as provided by law or the State Council.
What is not entirely clear from this list is whether private parties can self assess their agreements so as to determine the availability of an exemption or whether they must apply to the relevant authorities for the grant of an individual exemption. Possibly both routes will be available. Pointing away from self-assessment are those beneficial purposes which seem to require a broader societal perspective (energy conservation, environmental protection, disaster relief, legitimate interests in foreign trade etc.) which individual undertakings are ill-placed to provide or judge. The foreign trade exemption is intriguing in that it would seem to permit cartels where a certain measure of the anticompetitive effects would be felt overseas (where they would presumably run the risk of falling foul of antitrust rules elsewhere).
In addition to the above, the AML contains the following exclusions:
- State-controlled industries. Article 7 of the AML provides that “[t]he State protects the lawful business activities of undertakings in sectors that relate to the lifeline of the national economy and state security and are controlled by the state-owned part of the economy as well as sectors in which exclusive operation and exclusive sale are implemented”. Further it is provided that the State “oversees and regulates” the business activities and pricing practices of these operators thus safeguarding the interests of consumers and promoting technological progress.
While not clearly stated Article 7 seems to take certain activities of certain State-controlled undertakings of the type mentioned above (service of general economic interest type undertakings - water companies, electricity undertakings are obvious candidates) and undertakings possessing certain exclusive rights (telecoms operators perhaps) outside the scope of the AML ostensibly because - as regards those undertakings - the State is already actively protecting (through its ownership rights or by way of regulatory means) those same interests which the AML was enacted to protect (though Article 7 also places a burden of self-regulation on the undertakings to which it applies). Unfortunately, it is not at all clear which undertakings are removed from scope and whether those undertakings are removed from scope for all purposes. The opening wording of Article 7 (“[t]he State protects the lawful business activities …”) suggests that certain activities of these undertakings may still fall within scope of the AML.
- Intellectual property rights. The AML does not apply to conduct relating to the exercise of IP rights in accordance with applicable IP laws and regulations - although conduct which amounts to an abuse of an IP right which eliminates or restricts competition will be caught. The question here of course is when does legitimate exercise of a right give way to an abuse. One is tempted to suggest that the PRC authorities might show less deference to property rights on cultural grounds than perhaps the US authorities. On the other hand, the fact that it is the IP court that will have jurisdiction for AML related matters might be taken as an indication that abuse of an IP right will be difficult to demonstrate - at least in the litigation context.
Farmers and rural economic organisations. The AML does not apply to cooperative or coordinated acts of farmers and rural economic organisations in agriculture-related activities (such as the production, processing, sale, transportation and storage of produce).
Merger control is not new in the PRC, but the AML - together with the State Council Regulation on Notification Thresholds for Concentrations of Undertakings (the Notification Thresholds Regulation) - establishes a new regime:
- The AML provides for the mandatory pre-notification of “concentrations” where certain turnover thresholds are met.
- Concentrations include mergers and acquisitions of control by share and/or equity purchase. Acquiring the ability of exercising a decisive influence over other undertakings by contractual or other means is also caught.
- The applicable thresholds set out in the Notification Thresholds Regulation are:
- During the previous financial year, total global turnover of all undertakings involved in the concentration exceeded RMB 10 billion (around US$ 1.5 billion / € 939 million), with each of at least two of these undertakings having had a turnover of more than RMB 400 million (around US$ 58 million / € 38 million) in the PRC; or
- During the previous financial year, total turnover in the PRC of all undertakings involved in the concentration exceeded RMB 2 billion (around US$ 292 million / € 188 million), with each of at least two of these undertakings having had a turnover of more than RMB 400 million in the PRC.
- Where a concentration satisfies one of the above thresholds it must be notified to, reviewed and cleared by, the relevant anti-monopoly enforcement authority before implementation.
- The merger review process will typically last 30 days (for a Phase 1 or Preliminary Examination), extendable to 120 days (or possibly 180 days) if further review (a Phase 2 or Further Examination) is needed and will conclude with the concentration either being cleared (unconditionally or subject to conditions aimed at reducing its anticompetitive effect) or prohibited.
- In addition to a review on competition grounds, the AML allows for the possibility of a national security review in cases of M&A activity involving a foreign investor acquiring an interest in a domestic PRC undertaking.
- Implementing a notifiable concentration without first obtaining clearance (or the relevant review period having elapsed following notification if the authority does not make a decision) may result in a fine of up to RMB 500,000 (around US$ 72,000 / € 46,000) with the concentration being reversed. In such circumstances, if other parties suffer loss, the undertakings involved in the concentration could potentially also face civil liability under Article 50.
The PRC should be congratulated on making good on its promise to introduce a comprehensive competition law. However - as the AML comes into force - there is still considerable uncertainty as to its future operation.
To some extent current difficulties are a by-product of the PRC legal system - and perhaps therefore inevitable. In particular, in common with other Chinese legislation, the AML contains general and often open-ended (in some cases obscure) provisions with few defined terms. As a result, the PRC’s new law is in urgent need of comprehensive and detailed guidelines to provide clarification on a wide-range of important topics - for instance market definition, the scope of exemptions and whether applications for individual exemption are permissible (and if so setting out procedure) and in the merger context, rules for turnover calculation (including its geographic allocation).
To date, the only substantive guidance made public in respect of the detailed provisions of the AML concerns the thresholds for MOFCOM jurisdiction in the context of merger review. However, though clearly helpful, the particular regulation - the Notification Thresholds Regulation - is itself unclear in some important respects. Further, the failings of the Notification Thresholds Regulation have arguably more to do with a lack of legislative foresight (or possibly insufficient legislative focus given more pressing concerns in the sporting realm) rather than the particular characteristics of the PRC legal system. In that regard it is difficult to avoid the conclusion that the transitional period of almost one year since the formal adoption of the AML on 30 August 2007 could have been better used.
As matters stand businesses active in the PRC are in a difficult position. On the one hand they must now act in accordance with the AML, on the other they must live with the uncertainty of not knowing how many of the AML’s provisions will be applied in practice.