The China Anti-Monopoly Law Becomes Effective

After 14 years of consultation, deliberation, and delays,

China finally adopted a new Anti-Monopoly Law ("AML")

on August 30, 2007, which became effective on August 1, 2008.

The first comprehensive antitrust law in China, it presents

serious compliance challenges and risks for Chinese and

non-Chinese companies alike.

This Commentary summarizes the AML and its

accompanying recently issued merger thresholds, discusses the

structure and responsibilities of its enforcement agencies, and

explains the latest developments regarding antitrust litigation

under the AML in the Chinese courts.

OVERVIEW

The new AML is a tremendous leap forward for China, bringing

it squarely into the modern world of antitrust and competition

law. It is based loosely on various European models with input

from U.S. law, its general structure including four substantive

sections that: (1) prohibit certain types of agreements unless

they fall within specified exemptions; (2) prohibit certain

behavior classified as abuse of dominant market position,

providing a framework for determining when dominance exists;

(3) establish a broad merger review scheme; and (4) prohibit

abuses of government administrative powers restraining

competition. The law also sets forth penalties for

noncompliance and some miscellaneous provisions, including one

that prohibits undefined "abuses" of intellectual

property rights.

The law creates two new agencies: the Anti-Monopoly

Commission ("AMC"), a policy body under the State

Council, the highest-ranking executive body in the Chinese

government; and the Anti-Monopoly Enforcement Authority

("AMEA"), which will be responsible for day-to-day

enforcement of the law. The AMEA will include offices from at

least three existing agencies: the State Administration for

Industry and Commerce ("SAIC"), the National

Development and Reform Commission ("NDRC"), and the

Ministry of Commerce ("MOFCOM").

Many aspects of the law remain to be clarified by detailed

implementing regulations or guidelines and actual enforcement

experience in both administrative agencies and courts. As of

this writing, only one such implementing regulation has been

promulgated: the Regulation on Notification Thresholds for

Concentrations of Undertakings ("Regulation"), which

sets forth thresholds for mandatory filing of notifications of

proposed mergers and acquisitions.

On its face, the law is largely consistent with the

antitrust laws of other major jurisdictions, but there are some

provisions indicating that uniquely Chinese concepts of law and

policy may bear on the interpretation and enforcement of the

law. Both Chinese and international observers will be following

developments closely to see how China chooses to enforce this

important new law, including the relative treatment of foreign

multinationals and indigenous Chinese entities.

1. SUBSTANTIVE PROVISIONS

   Prohibition of Monopoly Agreements

   The AML uses the term "monopoly agreements" to

   describe both "horizontal" and "vertical"

   agreements that eliminate or restrict competition.

   Horizontal Agreements. Article 13 of the

   AML prohibits agreements between competitors to fix, maintain,

   or change prices; limit output or sales; allocate markets;

   restrict the acquisition or development of new technology; or

   engage in joint boycotts. This list of prohibited concerted

   conduct among competitors largely comports with international

   practice.

   However, some observers have expressed concern that

   prohibiting agreements that "limit the purchase of new

   technology" may restrict the ability of intellectual

   property rights owners to license their IP rights on terms that

   may seem reasonable to them but not to potential Chinese

   licensees or the Chinese government. This prohibition might

   look unusual to U.S. antitrust practitioners, but the Chinese

   legislators appear to have referenced Article 81(1)(b) of the

   EC Treaty, which prohibits agreements that limit or control

   production, markets, technical developments, or

   investment.

   Vertical Agreements. Article 14 of the AML

   prohibits certain vertical agreements, including resale price

   maintenance, either by fixing the resale price or by imposing a

   minimum resale price. The AML does not expressly prohibit any

   other types of vertical restraints except for certain

   unjustified tying arrangements, price discrimination, and other

   restrictive trade practices, which are prohibited as abuses of

   dominant market position when carried out by dominant

   firms.

   These horizontal and vertical restrictions are not

   exhaustive, because a catch-all clause reserves to the AMEA the

   power and discretion to designate other "monopoly

   agreements" under this category.

   Broad Exemptions for Agreements. There is

   no distinction in the AML between conduct that is "hard

   core" or per se illegal and conduct that is

   subject to a rule-of-reason analysis. All horizontal and

   vertical agreements caught under Articles 13 and 14 may be

   exempted under Article 15 if they satisfy its exemptions.

   For example, monopoly agreements can be exempted if they

   have the purpose (even if not the effect) of improving

   techniques or research and development, upgrading quality,

   unifying product models and standards, improving the

   competitiveness of small and medium-sized enterprises

   ("SMEs"), mitigating a severe decrease in sales

   volume during a recession, or protecting legitimate interests

   of international trade and foreign economic cooperation, among

   other enumerated justifications. Some listed purposes seem to

   have no connection with competition and leave room for

   preferential treatment of domestic cartels or national

   champions where such protection is perceived necessary for

   China to compete on the global stage.

   However, businesses seeking to use such exemptions to escape

   liability under Chapter II of the AML bear the burden of

   proving that the agreement: (1) is for one of the listed

   purposes in Article 15; (2) will not substantially restrict

   competition in the relevant market; and (3) will enable the

   consumers to share the benefits derived from the agreement.

   These factors appear to be modeled after EU law, but without

   the element of indispensability, which potentially makes resort

   to the exemptions too easy.

   Detailed guidance in the implementing regulations will be

   needed to avoid creating so much room for competitors to claim

   exemptions that the law either will be rendered ineffective or

   will require the regular exercise of administrative discretion,

   rendering enforcement arbitrary and unpredictable.

   Prohibition of Abuses of Dominant Position

   Dominance. Dominant market position is

   defined in the AML as the ability to control the price or

   output of products or other trading conditions in the relevant

   market or to block or affect the entry of other undertakings

   into the relevant market. Under Article 19, dominance is

   presumed if: (1) one of the entities has ? 50 percent market

   share; (2) two entities have ? 66? percent joint

   market share; or (3) three entities have ? 75 percent joint

   market share, although it excepts entities with under 10

   percent share. This provision arguably raised the most concern

   by commentators during the drafting process. In particular, the

   AML does not appear to require that collectively dominant firms

   (e.g., one of three companies with a combined 80

   percent market share) act together in order to bear liability

   for prohibited abuses of their dominant position.

   The law as enacted includes a paragraph in Article 19 that

   allows a firm that is presumed to be dominant under these

   market share tests to present countervailing evidence to rebut

   the presumption. Article 18 prescribes a number of factors to

   be considered when determining dominant market position,

   including market share, competition condition in the relevant

   market, ability to control the sales market or raw material

   purchase market, the financial status and technical conditions

   of the business operator, and ease of entry. The standard of

   proof under which these countervailing factors will be assessed

   is not defined.

   Abuses of Dominance. Article 17 of the AML

   provides a nonexhaustive list of abuses that dominant firms are

   expressly prohibited from engaging in, including:

   Selling at unfairly high or buying at unfairly low

   prices;

   Selling below cost without justification;

   Refusing to deal without justification;

   Exclusive dealing without justification;

   Tying or imposing other unreasonable trading conditions

   without justification; and

   Price discrimination without justification.

   Some of these categories of conduct are not found in many

   other major jurisdictions' laws or are invoked only in

   extremely rare circumstances, such as "selling at unfairly

   high prices or buying at unfairly low prices." This

   provision appears to reflect a desire by the government, or

   elements within the government, to continue to regulate

   pricing, even in unregulated markets. It is far broader than

   typical prohibitions on, for example, predatory pricing under

   U.S. law, where a plaintiff must prove that the challenged

   prices are below a measure of cost and that the price-cutting

   firms will be able to recoup the costs of predation. The AML

   provides no guidance as to how a price will be determined to be

   "unfair," or whether a defendant will be permitted to

   present economic evidence of the likely competitive effects (or

   absence thereof) of pricing that is alleged to be unfair.

   Prohibition of Abuses of IP Rights

   Article 55 of the AML. Article 55, the

   provision prohibiting abuses of IP rights, is contained in

   Chapter VIII, titled "Supplementary Provisions,"

   rather than in Chapter III, which contains the provisions on

   abuses of a dominant market position. Consequently, it appears

   possible that a company could violate this provision without

   being found dominant. Article 55 reads:

   This law is not applicable to conducts by business operators

   to exercise their intellectual property rights in accordance

   with the IP laws and relevant administrative regulations;

   however, this law is...