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SAIC Speeds Up Rule-making Process to Implement Anti-monopoly Law By Yi XUE 2010-06-11

Contents

1. Introduction
2. Rules on Prohibiting Abuse of Dominance
3. Rules on Prohibiting Monopoly Agreements
4. Rules on Prohibiting Administrative-related Monopoly Behaviors

Introduction

On May 27 2010, the State Administration for Industry and Commerce (“SAIC”) published new sets of draft rules on monopoly agreements, abuse of dominant position and administrative monopoly for public comments. The new rules were revised on the basis of pubic opinions and comments from last June, when SAIC published the initial draft rules. The new drafts have made considerable improvements on the initial drafts: they have added more detailed guidance on certain critical concepts under the Anti-monopoly Law, e.g., “legitimate reason”, “tacit collusion” and “tying”, and removed some controversial provisions. The amendments of the initial drafts also demonstrate SAIC’s open attitude to solicit public opinions from the industry as well as professionals. The new drafts seem to be more practical, while several issues (in particular, those relating to vertical monopoly agreements) still need to be clarified. These rules are expected to be promulgated soon after the close of this round of consultation on 7 June 2010.

Rules on Prohibiting Abuse of Dominance

Compared with last year’s draft, there is no significant change under the new draft. The new draft actually does not create any new criteria for determining a dominant market position. Although the new draft has amended a few wordings in the old version, Article 3 remains unchanged which provides that “dominant market position refers to a market position held by an undertaking that is able to control the price, quantity or any other trading terms for the products in the relevant market, or otherwise is able to impede or affect entry of other undertakings into the relevant market”.

Some commentators’ view that the new draft takes a stricter approach to abuse of dominance might be a misinterpretation. Instead of adopting stricter standards of abuse of dominance, the new draft clarifies certain practical issues, such as “tying”, “bundling” and “differential treatment”. For example, Article 6 under the new draft provides that undertakings are prohibited from engaging in forced bundling or tie-in sales of different products, in violation of commercial conventions or consumer habits or in disregard of functions of the products. This is an improvement on the old draft which provides that undertakings are prohibited from engaging in forced bundling or tie-in sales without legitimate reasons but fails to provide any example of “legitimate reasons”.

Moreover, the new draft provides principle guidance on “legitimate reasons” that should be considered in deciding a case of abuse of dominance. Such legitimate reasons include “common trading customs”, “consumer benefits” and “economic efficiency”. The recognition of “common trading customs” as one of the possible “legitimate reasons” might indicate the existing trading practice widely adopted by undertakings would be less likely to be challenged by competition authorities.

Rules on Prohibiting Monopoly Agreements

Compared with last year’s version, one of the major changes of the new draft is that the new draft has dropped specified types of vertical monopoly agreements. Under the old version, vertical agreements involving “geographic restriction” and “exclusive dealing” are expressly prohibited without sufficient legitimate reasons. Companies have also raised concerns over whether their existing distribution systems need to be adjusted accordingly. The new draft only contains one clause dealing with vertical agreements, i.e. Article 8, which provides that “Undertakings are prohibited from entering into agreements with counterparties that have the effect of eliminating or restricting competition and harm the interests of consumers.” This implies that SAIC tends to take a prudent or more flexible approach in identifying vertical monopoly agreements. However, how this simple clause will be implemented and interpreted in practice by SAIC remains to be seen. Further guidance would be expected in this regard.

The new draft also sets out detailed criteria regarding concerted practice or tacit collusion. In addition to behavioral consistency among competitors, reasons, market structure or change in market conditions which were stipulated under the old draft, the new draft adds the factor of “communication or exchange of information” in determining collusion leading to horizontal monopoly agreements.

The new draft expands the scope of horizontal monopoly agreements. Some forms of cooperation among competitors, e.g. refusal of adopting new technologies or new technology standards, will be regarded as monopoly agreements under the new draft. Most significantly, Article 10 of the new draft provides that formulating and promulgating articles of association or industry standards of industry association which contain provisions eliminating or restricting competition will also fall within the scope of monopoly agreements.

Under the new draft, the first whistleblower shall be 100% exempted from penalties subject to stringent conditions, such as voluntarily reporting, providing key evidence and full cooperation with the investigation. However, the new draft drops specific percentages of reduction in penalty for the second and third whistleblowers, while under the old draft the second whistleblower shall get a reduction of 50% and the third of 30%. Instead, it simply provides that other whistleblowers may be granted reductions according to specific conditions. This will leave SAIC substantial discretionary power in granting leniency to whistleblowers.

Rules on Prohibiting Administrative-related Monopoly Behaviors

The new draft sets out a detailed list of administrative monopolistic behaviors. The notable point is that under the new draft, undertakings cannot rely on the argument of “being forced by administrative authorities and organizations” as to its monopolistic behavior. Article 5 provides that undertakings shall not use the exercise of overt or covert compulsion by administrative authorities and organizations as a justification for entering into a monopoly agreement or abusing their dominant market position based on administrative rules, orders or authorizations.