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China’s New Anti-monopoly Law: What Is it Good For?

Posted in Legal News

Absolutely nothing.

At least to me. At least so far.

I spent the early years of my legal career practicing antitrust law and I still enjoying trying to stay current, but this has, if anything, made me quite circumspect regarding China’s new anti-monopoly law. The big question is how this new law will impact foreign businesses in China or doing business with China. My unequivocal answer is that I am not prepared to say.

I have not had a chance to study the law in its entirety yet, or to discuss it with other lawyers. More importantly, so much is going to depend on enforcement that I think that at this point it is almost impossible to know what it will mean. It boggles my mind to think that Chinese lawyers and judges with no real antitrust law background will soon be seeking to interpret and enforce antitrust laws. Maybe more than any other legal area, antitrust is complicated and fact specific and rife with policy implications. Because of this, I have a sneaking suspicion that very little will happen under the new laws for quite some time. On top of this, it appears many of the antitrust provisions are intentionally vague.

I will eventually comment more fully on this new law (I am writing this post only because I have gotten so many emails asking me when I am going to post on this new law), but in the meantime, I suggest everyone go read the following mighty fine posts and articles on this issue:

  • http://wangbo.blogtown.co.nz chriswaugh_bj

    I’m certainly not in any position to comment on the law, but the reports about it I read (which I can’t find right now, unfortunately) left me with the feeling that it wasn’t so much an anti-monopoly law as a keeping the foreigners at bay to protect domestic industry and enterprise law. The reports I’m referring to seemed to start out by focussing on the laws provisions about foreign companies. Ah! Here’s one:
    http://www.china.org.cn/english/business/222645.htm
    And I quote:
    “The law requires foreign purchases of Chinese companies to go through national security checks.
    “As well as anti-monopoly checks stipulated by this law, foreign mergers and acquisitions of domestic companies or foreign capital investing in domestic companies’ operations in other forms should go through national security checks according to relevant laws and regulations if the cases are related to the issue,” it reads.
    Foreign companies have begun to acquire major state-owned enterprises or companies with famous brands in recent years, arousing concerns about China’s economic security.
    China has already established a basic national security check system for foreign mergers and acquisitions.
    Foreign investors should apply for approvals from the Ministry of Commerce (MOC) if their purchases of domestic companies affect national economic security, take place in key sectors or cause a transfer of the operating rights of famous domestic brands, according to a regulation issued by the MOC along with five other government organs last year.”
    And this one:
    http://www.china.org.cn/english/China/222703.htm
    Which opens with this sentence:
    “Foreign acquisitions of Chinese companies will be subject to stringent new checks intended to protect national economic security under a new law passed yesterday.”
    So I dunno, I don’t know what the law is really about, and admittedly china.org.cn’s English page is aimed at foreigners, but these reports leave me with the impression that it’s less about preventing monopolies and more about preventing a percieved economic colonisation of China.

  • http://chinaandi.typepad.com/ Romain Guerel (French moving back to Shanghai)

    What rises concern, is mergers and acquisitions accounted for only 5 percent of foreign direct investment in China before 2004, but this proportion rose to 11 percent in 2004 and almost 20 percent in 2005. China is now afraid is crowned jewel companies being acquired by Foreign companies like Carlyle Group who is closely linked to the Bush family and the Republican party.

  • William Lewis

    A potentially large problem in the AML is the issuance of what amount to compulsory licenses for intellectual property where the holder of the IP rights has “market dominance.” Chinese litigants have begun mounting challenges to IP rights based upon unfair competition claims. Though Beijing DongJin Xinda Technology Co. Ltd. v. Intel was settled, and I am unsure if there is yet an outcome to Sichuan Dexian Technology Co. v. Shanghai Suoguang Electronics Co. Ltd. & Sony Corp, it seems that the AML will only encourage IP challenges on unfair competition charges. This is troubling because a patent, by definition, is supposed to be an exclusive and “unfair” right for the term of the patent. The technology industry heavy weights invested in China are going to be at the mercy of the People’s Court. Hopefully the courts will take a pragmatic view towards this provision of the AML.

  • feng37

    Why are these reports mentioning only foreign enterprise? Is this an anti-monopoly law or a protectionism treaty?

  • Duncan

    I have been working on an unofficial English translation and have been contacted by a few clients with the following questions:
    1.What will be regarded as a monopoly?
    Enterprises or Undertakings, as the term is referred to in the EU Law (an undertaking is which is a natural person, legal person, or other organization that engages in the production or business of commodities or provides services), will be regarded as a monopoly in three situations: (i) when an undertaking reaches a monopolistic agreement, (ii) when an undertaking abuses a dominant market position, and (iii) when undertakings form an undertaking cartel.
    2.What is a monopoly agreement?
    A monopoly agreement is defined in Chapter 2 as an agreement, decision or other coordination that excludes or limits market competition. Seven types of monopoly agreements are prohibited under the Law which are agreements: (i) restricting the output volume or sales volume of products, (ii) restricting the output volume or sales volume of a product, (iii) carving up the sales market or raw material purchasing market, (iv) restricting purchasing new technology, new equipment or restricting the development of new technology or new products, (v) jointly boycotting transactions and (vi) other monopolistic agreements that the Anti-monopoly Commission (Commission) determines.
    The Law also identifies specifically the type of agreements between undertakings and their trading counterparties which are prohibited, these include: (i) fixing the price of re-sale to third parties, (ii) restricting the minimum price the products will be sold to third parties, and (iii) other agreements determined by the Commission.
    There are also seven exceptions to when agreements will be regarded as monopoly agreements. the onus of proof in convincing the Commission in on the undertaking seeking to prove that it is not a monopoly agreement. Such exceptions include agreements concerning the improvement of technology, the research and development of new products, the improvement of product quality, protecting the environment, increasing efficiency, etc.
    3.What is abuse of a dominant market position?
    In assessing whether an undertaking has a dominant market position six factors will be examined including: (i) the related market share, (ii) the ability of that undertaking to control the sale market or to purchase raw materials, (iii) the monetary assets and technology of the undertaking, (iv) the reliance other undertakings have on that undertaking in transaction and (vi) other related factors verified by that undertakings dominant market position. The dominant market position will also be determined by the total market share of the undertaking/s according to the following formula: (i) if one undertaking has more than 1/2 of the total market share in a related market, (ii) if two undertaking jointly have more than 2/3 of the total market share, and (iii) if three undertakings jointly have more than 3/4 of the total market share they will be considered to have a dominant market position.
    There are seven types of conduct that are prohibited by undertakings that have a dominant market position which are (i) selling products at prices below cost without any justification, (ii) selling products at unfairly high prices or buying products at unfairly low prices, (iii) refusing to trade with trading counterparties without any justification, (iv) forcing trading counterparties to make deals with them or restrict trading counterparties freedom to deal with other parties, (v) impose unreasonable trading conditions, (vi) applying discriminatory transaction terms to relative trading parties with equal standing without any justification, and (vii) other conduct that abuses a dominant market position as determined by the Commission.
    4.What is an undertaking cartel?
    According to the Law undertaking cartels are defined as any of the following three types: (i) mergers of undertakings, (ii) an undertaking obtaining the controlling power of another undertaking by purchasing the stock ownership or assets of that undertaking, and (iii) an undertaking obtaining the controlling power of another undertaking or exerting controlling influence on the decision making ability of another undertaking by a contract. All undertakings intending to form undertaking cartels must seek prior approval from the Commission, or they will be prohibited from forming such a cartel. This involves submitting: (i) a report (outlining names and other basic information), (ii) an evaluation report, (iii) the cartel agreement, (iv) financial reports audited by a certified public accountant, and (vi) other information required by the Commission.
    5. How will the Commission examine an undertaking cartel?
    When examining the cartel the Commission will investigate: (i) the market share of the participants and their controlling power, (ii) degree of concentration, (iii) influence over market access and advanced technology, (iv) influence over consumers, (v) influence over national economic development, and (vi) other factors determined by the Commission. If the Commission determines that the undertaking will or may negatively influence market competition then the Commission can decide to prohibit the cartel. However if the relevant undertakings can prove to the Commission that the benefits of the cartel are much larger than the detriments the Commission has a discretionary power to permit the cartel.
    6. Who is the responsible government authority?
    The responsible government authority is the Anti-Monopoly Commission that is subordinate to the State Council.
    7. What are the responsibilities of the Commission?
    The responsibilities of the Commission are to research and draft competition policies, conduct investigations and examinations, formulate and publish anti-monopoly guidelines, co-ordinate the anti-monopoly enforcement work of the Commission, as well as other function that are assigned to it by the State Council. The Commission may empower government agencies at the provincial, autonomous and municipal levels to conduct anti-monopoly enforcement activities.
    8. What powers does the Commission have?
    By virtue of its office the Commission has wide ranging powers to regulate monopolies both domestically and internationally. In the case of undertaking cartels the Commission in the body that approves such entities through a preliminary investigation and further investigation that normally takes 120 days, but may be extended to 180 days in some circumstances. The Commission may also place restrictive conditions on undertaking cartels to ensure any harmful effects are minimized, the decision which must be published.
    Wide investigation are provided to the Commission to investigate suspected monopolies including power to conduct on-the-spot inspections, question the investigated undertaking and other interested parties, requesting the submission of relevant documents such as agreements, accounting books, seize and detain relevant evidence, as well as inquire after bank accounts of the undertaking concerned. Written approval from senior officials of the Commission must be obtained before such an investigation can be conducted.
    9. If my enterprise is investigated what is the procedure?
    When conducting an investigation the law enforcement personnel from the Commission must present their enforcement credentials to you. During the time they are investigating they must make a written record that should be signed by all parties. The investigating officers are under a legal obligation to keep the commercial secrets obtained during the investigation confidential, and that administrative sanctions, as well as criminal sanctions in certain cases, will be levied upon those officers that breach their duties.
    You should be aware that during an investigation you are prohibited from refusing or obstructing the officers, and must at all time cooperate. If you refuse to submit related material and information, or submit fraudulent material then as an individual you may be fined up to 20,000 RMB, or as an enterprise up to 200,000 RMB. Should it be considered as serious matter than you may be fined up to 100,000 RMB or up to 1,000,000 RMB respectively, and criminal liability may be pursued in certain circumstances. The investigation will be conducted according to the law and all interested parties have the legal right to submit statements. Once the Commission has made their decision then it will be published. In certain circumstances if the investigated undertaking admits to forming a monopoly and undertakes to cease the monopoly, as well as eliminate the adverse effects then the officers may suspend the investigation.
    10. Will I be treated differently as a foreign enterprise
    The Law does not state that a foreign enterprise will be treated any differently apart from those circumstances where national security is concerned. When a foreign enterprise intends to purchase a domestic enterprise then the transaction will have to be examined according to the relevant laws. Chapter 5 also protects foreign enterprises from the very real risk of local protectionism in China, by specifically prohibiting administrative agencies and public organizations from abusing their powers to block commodities from outside of their areas by employing such tactics as fixing discriminatory prices, imposing technical requirements or inspection standards, creating special licensing procedures, as well as other unfair protectionist methods.
    11. Will I be protected as a whistleblower?
    The Law specifically provides protection to individuals or enterprises who report suspected monopolies. There is a legal obligation on the Commission to keep the names of the individual or enterprise reporting such activity confidential.
    12. Legal Liability
    The Commission can penalize an un-authorized monopoly by ordering the monopoly to cease, confiscating the illegal gains and imposing a fine of more than 1% and less than 10% of the total yearly sales volume and can issue a penalty of 500,000 RMB. If a monopoly self-reports then the Commission may decide to issue a less severe penalty or exempt the undertaking from punishment.
    Interestingly enough, an entire chapter of the Law deals solely with the abuse of administrative powers to restrict competition, which is both a bold and encouraging step forward against the fight against local protectionism in China which has held back market equality and fairness in many areas to the detriment of China.