Antitrust Alert: China's SAIC Publishes its Final Anti-Monopoly Law Rules

Two days after China's National Development and Reform Commission ("NDRC") published its final rules implementing China's Anti-Monopoly Law ("AML"), China's other non-merger antitrust agency, the State Administration of Industry and Commerce ("SAIC"), published three sets of implementing rules pertaining to abuses of dominant position, anticompetitive agreements ("monopoly agreements"), and administrative monopolies.  These rules constitute the primary substantive and procedural rules governing the enforcement of the AML against anticompetitive conduct. 

Except for detailed guidelines on the application of the AML to intellectual property rights, China's non-merger antitrust agencies now have released all their anticipated rules and guidelines, procedural and substantive, placing them in position to start to enforce the AML against anticompetitive conduct much more vigorously.

This Alert highlights key changes in the final SAIC substantive rules as compared to earlier published drafts, as well as some main differences between the SAIC and NDRC rules.

Background

These final substantive rules come after a round of public comments in June 2010 (see previous Antitrust Alert).  SAIC previously issued final procedural rules relating to its the enforcement of the AML, which came into effect in July 2009 (see previous Antitrust Alert).

SAIC is responsible for enforcement of the conduct (non-merger) provisions of the AML, except for price-related monopolistic conduct.  NDRC is entrusted with enforcement against price-related violations of the AML as well as the earlier Price Law.  (For our summary of the recent NDRC rules, see previous Antitrust Alert.) The distinction between "price" and "non-price" anticompetitive conduct is not clear-cut, so in certain cases it may be possible for both agencies to claim jurisdiction.

Key points in the SAIC rules

Abuses of dominant position.  The AML prohibits abuses of dominant position.  Article 17 of the AML lists several examples of conduct that, absent valid justification, constitutes such abuses:  imposition of unfair prices, refusals to deal, exclusive dealing, sales below cost, tying and other unreasonable trading practices, and discrimination in pricing and other terms.

The final SAIC rules unfortunately remove language contained in the draft rules that had directed the agency, when assessing the validity of an asserted justification, to examine whether the conduct actually restricts competition and harms consumer interests.  Instead, the final rules provide that the agency "shall generally consider" two factors:  "whether the activities are based on normal operations and normal benefits for the undertakings" and "the effect of the activities on economic efficiency, public interest, and economic growth."  It is unclear whether these listed factors are meant to be exhaustive – precluding the agency from considering competitive effects or other factors – or are merely illustrative examples.

In contrast, the NDRC rules provide more concrete guidance on possible valid justifications for each category of potentially abusive conduct.  For example, according to the NDRC rules, a refusal to deal could be justified by the existence of alternative sources of supply for the purchaser, while exclusive dealing may be imposed to maintain brand image or improve service.

A second, more welcome change in the final SAIC rules compared to the draft version is the addition of language expressly providing the agency with discretion to grant a mitigated penalty or even complete exemption from punishment to a dominant firm that ceases its abusive conduct.  The possibility of leniency in such a circumstance is helpful especially in view of the potentially high fines imposed by the AML.  However, it appears that this will remain entirely at the discretion of the agency.

Both the SAIC and NDRC rules also permit companies under investigation to propose commitments to remedy their challenged behavior.  The agencies may accept such commitments, suspending their investigations, and eventually close the investigations if those commitments are fulfilled.  One apparent difference between the two agencies' procedures is that the SAIC may reduce a penalty independent of the commitment regime if the violator voluntarily ceases its conduct.

The final SAIC rules retain most of the additional elaborations on abuses of dominant position originally set forth in the draft rules and discussed in our earlier alert .  These include (1) "refusing to deal" by reducing trading volume with a current counterparty or refusing access to "essential facilities under reasonable conditions," (2) discriminating between similarly situated counterparties by offering different trading volumes, discounts, or other terms, (3) imposing "unreasonable trading conditions" that are in violation of prevailing trade practices or customer habits, and (4) imposing "unreasonable restrictions" regarding sales territories or target customers.

Monopoly Agreements.  The final SAIC rules regarding monopoly agreements also no longer include language from the draft that appeared to prohibit all vertical agreements that restrict competition and harm consumers.  This may suggest that, absent a dominant market position, vertical arrangements other than resale price maintenance (expressly prohibited by the AML) – such as exclusive or selective distribution – will be subject to a rule of reason analysis.

The new NDRC rules also do not mention any types of vertical agreements beyond resale price maintenance.

The final SAIC rules also include some changes regarding leniency.  First, they no longer explicitly state that cartel organizers may not benefit from leniency, although such an exclusion remains in SAIC's final procedural rules.  Second, as with abuses of dominant position, the SAIC monopoly agreement rules state that undertakings that voluntary terminate monopoly agreements may be granted a mitigated or exemption of penalty at the discretion of the agency.

The final SAIC rules do not explicitly specify whether the first self-reporting undertaking "should" or "may" be exempted from penalty, although a literal reading suggests it is "should."  Moreover, the SAIC press release announcing the rules stated that the first applicant "should" be exempted.  In contrast, the NDRC rules, like the AML itself, retain the term "may," appearing to give the agency full discretion to award or withhold leniency.  The SAIC rules thus seem to provide greater assurance of grants of leniency to qualifying candidates.

Another important distinction is that the NDRC rules contain explicit ranges of penalty reductions for second-reporting (at least a 50% reduction) and later-reporting applicants (at most a 50% reduction), while the SAIC rules merely state that the agency may grant reduced penalties without mentioning particular ranges.

Finalization of these rules provides additional guidance on the approaches of these agencies and may mark the beginning of more vigorous antitrust enforcement in China.

Documents

SAIC documents (in Chinese) on the rules:

• Announcement
• SAIC Q&A
• Rules on Abuse of Dominant Market Position 
• Rules on Monopoly Agreements 
• Rules on Abuse of Administrative Powers

Unofficial Chinese-English translations of the SAIC rules:

• Rules on Abuse of Dominant Market Position
• Rules on Monopoly Agreements  
• Rules on Abuse of Administrative

Lawyer Contacts

For more information, please contact your principal Jones Day representative or either of the lawyers listed below. 

Peter J. Wang
Shanghai / Beijing
+86.21.2201.8040 / +86.10.5866.1111
pjwang@jonesday.com

Sébastien J. Evrard
Beijing / Brussels
+86.10.5866.1112 / +32.2.645.14.11
sjevrard@jonesday.com

Yizhe Zhang
Beijing
+86.10.5866.1111
yzhang@jonesday.com

H. Stephen Harris, Jr.
Atlanta / Washington
+1.404.581.8197 / +1.202.879.3939
sharris@jonesday.com

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