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Guangdong AIC Cracks Down on Abuse of Market Power By Baisha ZHANG 2015-03-25

Last year the Guangdong Provincial Administration for Industry & Commerce (GDAIC) rendered a decision penalising Huizhou Daya Bay Yiyuan Water Purifying (Yiyuan) for abusing market dominance of bundling services. This is the first case of abuse closed by the GDAIC, and it has far-reaching implications on the enforcement of the Anti-monopoly Law (AML).

The facts
Yiyuan is the urban public water supply service provider in two regions, namely West District and Aotou in the Daya Bay District, Huizhou, Guangdong Province. As a public utility provider, Yiyuan is the only firm controlling the urban water supply network in these regions. Yiyuan’s customers, the complainants of the case who are mainly real estate developers, have no alternative to turn to for water supply service. Yiyuan’s feature of public utility not only defines the relevant market as the urban public water supply service market in these regions, but also confers absolute market dominance on Yiyuan in the relevant market.

When providing temporary water supply service to construction sites of residential blocks, Yiyuan coerced its customers to engage it for the residential water meter projects, which involve installing water meters for each household and laying a permanent water supply pipe from the city water supply point to each household. If the customers refused to sign contracts with the bundling clauses or to engage Yiyuan for future residential water meter projects, Yiyuan threatened to terminate the temporary water supply service to construction sites.

The investigation by the GDAIC revealed that Yiyuan’s bundling conducts, without reasonable justification, harmed the fair competition in the market and damaged the interests of the trading parties. The GDAIC therefore concluded that Yiyuan abused its market power and ordered Yiyuan to cease the abusive conduct. The pecuniary penalties imposed on Yiyuan totalled Rmb3.22 million, including Rmb0.86 million worth of confiscated illegal gains and Rmb2.36 million of fines equalling 2% of Yiyuan’s sales revenue in the preceding year.

Economic dependence
Economic dependence played a significant role in the GDAIC’s reasoning. In defining the relevant market and assessing market power, the GDAIC underscored that Yiyuan is the sole owner of the water supply infrastructure in the relevant market and its customers have no choice but to completely depend on it for urban public water supply. Economic dependence refers to the market power possessed by a firm in relation to its trading parties. Abusing this relative market power inflicts harm particularly on the trading party and may damage fair competition. In this case, the economic dependence of its trading parties empowered Yiyuan to bundle the residential water meter projects with the temporary water supply to the construction sites and set unreasonable trading terms in the contracts.

Before this decision, the role of economic dependence was quite ambiguous under the AML and its enforcing regulations. The AML and the Provisions for the Prohibition by Administrations for Industry and Commerce of Acts of Abuse of Dominant Market Position (工商行政管理机关禁止滥用市场支配地位行为的规定) issued by the State Administration for Industry and Commerce (SAIC) stipulate that the level of dependence of a trading party on a particular business undertaking is relevant to the assessment of market power.

The Yiyuan decision shows that the competition enforcement agencies in China are receptive to economic dependence, and that not only firms which are dominant in the marketplace but firms that are irreplaceable to its customers or trading parties may also be subject to antitrust scrutiny. Factors including past trading volumes, the duration of the trading relationship and the difficulties in switching to another trading party are essential in the evaluation of economic dependence. Firms therefore need to be aware of their antitrust exposures when adjusting trading terms with customers dependent on them.

Fair competition or free competition
The GDAIC underlined in the decision that Yiyuan’s abusive conducts harmed fair competition rather than free competition which is often termed as competition. Primarily, antitrust law protects the process of competition, rather than any specific party such as competitors or customers. Apart from analysing the restriction or elimination of competition in the neighbouring market to which Yiyuan intended to leverage its market power, the GDAIC also emphasised the damages inflicted on Yiyuan’s customers regarding their freedom to choose other service suppliers and the excessively high price of both the temporary water supply service to construction sites and the residential water meter projects.

The rationale in the decision is consistent with the goals set forth in Article 1 of the AML, one of which is to protect fair competition in the market. It can be inferred from the decision that, when evaluating the harms caused by anti-competitive conduct, China’s antitrust enforcement agencies may take the interests of the trading party into consideration. Consequently, dominant firms need to be cautious about antitrust risks when their conduct may affect the interests of the trading party, whereas the dependent customers of dominant firms may invoke the AML to protect their interests when the trading terms become unfair.

Threat of refusal to deal as an abuse?
To achieve bundling, Yiyuan threatened to terminate the temporary water supply when customers were unwilling to engage it for the residential water meter projects. Notwithstanding the GDAIC’s finding of Yiyuan’s bundling conduct as an abuse, whether the threat of refusal to deal constitutes abusive conduct is worth further discussion. Some commentators argue that repeated threats of refusal to deal not only hamper competition in the downstream/upstream/neighbouring markets, but also enable dominant firms to exploit their customers. The AML and its enforcing regulations are silent on this issue. Antitrust laws on this issue in other jurisdiction may be taken as reference. Article 33.1 under the German Act Against Restraints of Competition (8th Amendment, 2013) provides that recurrent or foreseeable anti-competitive conduct shall be regulated and the affected individual is entitled to a claim for injunction. It is hoped that China’s enforcement agencies can clarify this issue for businesses.

Looking forward
This decision implicates that, in the analysis of abuse of market power, economic dependence always goes hand in hand with harm to fair competition. Nevertheless, it remains to be seen whether threat of refusal to deal will be regulated under the AML to prevent firms from abusing their relative market power.