Developments in Chinese Competition laws

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We are now into the eighth year of China’s Anti-Monopoly Law (“AML”) and anti-trust enforcement investigations in the PRC. In the past seven years, we have seen a divergence in enforcement aims and remedies of the PRC authorities and Western authorities. However, in 2015 and lately, in 2016, the PRC authorities appear to be taking steps to narrow the divide but is this reality or just a mirage? In this article, we review some of the significant developments in PRC antitrust investigations in 2015 and the potential impact of proposed amendments to legislation on businesses.

Proposed changes to legislation

The AUCL was implemented in 1993 to regulate the conduct of individual businesses. In 2008, the Anti-Monopoly Law (“AML”) was implemented to regulate markets and competition at a macro level.

Although the AML was introduced 14 years after the AULC, there are significant areas of overlap between the two legislations. At the same time, neither legislation has been amended to include new types of anti-competitive behaviour, for example conduct amounting to an abuse of a comparatively advantageous position, a concept adopted into French and Japanese laws. Further, compared to its Western counterparts, the penalties imposed under the AUCL and AML are insignificant and lack deterrent effect.

To remedy these perceived defects in the current legislation, on 25 February 2016, the State Council published Draft Amendments to AUCL.

First, the draft proposes to delete or modify several conducts from the AUCL that also fall within the scope of AML, namely exclusive operation of public utilities, abuse of administrative power, pricing below-cost and tying and bundling.

Second, the concept of “abuse of a comparatively advantageous position” is introduced in Article 6 of the Draft Amendments. This provides that a business operator, shall not, without any justifiable causes, take advantage of a comparatively advantageous position in restraining its trading counterparties to certain trading partners and to certain trading conditions when dealing with other operators, charging unreasonable fees or unreasonably requesting other economic benefits from its trading counterparties, or imposing other unreasonable conditions. At first blush, this concept sounds similar to the prohibition of the abuse of dominant market position (Article 17, AML), but it is not. Whether a business is in a dominant market position and has abused that market position, must be determined and assessed against the relevant market as whole. Whereas, the concept of “comparatively advantageous position” requires an assessment of the balance of bargaining power between a business and its direct trading counterparts in a specific transaction, even if the business does not hold a dominant position in the wider market.   In addition to the “abuse of a comparatively advantageous position”, in response to an evolving  market place and the growth of e-commerce, the Draft Amendments further propose to clarify the rules regulating the following anti-competitive or unfair conduct:-:

  • unfair competition on the internet
  • passing off
  • misleading advertising
  • infringement of business secret
  • sales with giveaway or lucky-draw
  • commercial defamation

Third, it is proposed that the terms be redefined to align with AML for example, the definition of “business operator” has been extended to cover non-profit organisations.

Perhaps one of the most significant proposed changes is the imposition of greater penalties in the event of a breach. Under the proposed changes, a wrongdoer can potentially face far higher fines of between RMB 1,000,000 and RMB 3,000,000 whereas the penalties under the current regime are between RMB 100,000 and RMB 200,000. As with the proposed penalties for commercial bribery offences, the Draft Amendment explicitly emphasizes the importance of cooperation with the competition law enforcement authorities by explicitly permitting cooperation to be taken into account when evaluating the penalty.

In addition to the Draft Amendment, the State Council’s Anti-Monopoly Commission has entrusted the NDRC to draft six sets of antitrust guidelines to provide more clarity on key procedural aspects of antitrust laws for example, enforcement, leniency applications and exemptions. Interestingly, one purpose of the guidelines is to develop standards of enforcement that are more aligned with EU and US standards for example, the draft leniency guidelines introduce a marker system similar to EU rules which enable a leniency applicant to reserve its first place in a queue by submitting initial documentary evidence, with more evidence to follow later. Four sets of guidelines have been issued and it is expected that some of the guidelines will be enacted before the end of 2016.

Implications for businesses

The Draft Amendments and proposed guidelines to the AML enhance clarity on what activities constitute anti-competitive behaviour. It may also lead to further alignment of China’s competition/ anti-monopoly policies with more mature jurisdictions like the US and EU. However, enforcement remains an issue. A review of investigations conducted in 2015 reveal that enforcement activities in 2015 were more aligned to the West than in 2014. One significant divergence in 2014 was the P3 Alliance between A.P Moller Maersk, CMA CGM and the Mediterranean Shipping Company, which was approved by the US regulators but rejected by the Chinese regulators. The EU regulators did not issue an official statement on the matter. However, in 2015, the Chinese regulators approved the acquisition of Freescale Semiconductors Ltd by NXP Semicodnuctors N.V on similar conditions to the US/ EU regulators. However, a different decision was reached by the Chinese regulators on the acquisition of Alcatel- Lucent by Nokia Corporation, with the Chinese regulators imposing various structural conditions which would ensure that local Chinese standard essential patents to ensure that local Chiensew wireless equipment and handset makers would be protected. This is a clear indication that approval by the US/ EU authorities does not guarantee acceptance by the PRC authorities. The question remains how much is enforcement dictated by concerns over protecting China’s domestic industries.

Multinational companies operating within China, especially in high risk industries like pharmaceuticals, medical devices, shipping, telecoms and financial services, are advised to monitor developments in anti-trust laws and enforcement decisions. Businesses should also revise internal compliance policies and accounting procedures to respond to the proposed changes.

With regards the Draft Amendment, the period for public consultation has ended and the SAIC is now considering whether further the draft needs to be further revised before submitting it to the National People’s Congress for review. The process could take between a few months to years. Ince & Co will continue to monitor the progress and issue regular updates.

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