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Client Note on PRC Anti-Abuse of Dominance Rules (I)

2010年6月12日

Client Note on PRC Anti-Abuse of Dominance Rules (I)

(Updated June 2010)

1.           Introduction

1.1         Articles 17-19 of the Anti-Monopoly Law of the People’s Republic of China (“AML”) set forth the skeletal framework of PRC anti-abuse of dominance regime, leaving enforcement agencies the tasks of formulating detailed substantive and procedural rules of enforcement.  State Administration for Industry and Commerce (“SAIC”) and National Development and Reform Commission (“NDRC”) are competent enforcement agencies in respect of abuse of dominant market position.  Specifically, SAIC is responsible for enforcement against non-price related abuse of dominance, while NDRC is responsible for enforcement against price related abuse of dominance.

1.2         Since the AML took effect on 1 August 2008, Chinese regulators have yet to publish any ruling on anti-abuse of dominance case (such as its EU counterpart’s ruling on Microsoft and Intel).  Nevertheless, They are growing their regulatory teeth by introducing a slew of implementing rules (some are in draft form) aimed at curbing abuse of dominance. In substantive aspects, SAIC published an exposure draft of the Rules on Prohibition against Abuse of Dominant Market Position on 27 April 2009, and released an updated version on 25 May 2010 (“Draft DMP Rules”); NDRC published an exposure draft of the Rules on Anti-Price Monopoly (Articles 11-20 deal with abuse of dominance), on 12 August 2009 (“Draft APM Rules”). In procedural aspects, SAIC issued the Procedural Rules for Administration for Industry and Commerce to Investigate and Dispose of Cases Involving Monopoly Agreement and Abuse of Dominant Market Position on 5 June 2009, which took effect on 1 July 2009 (“SAIC Procedural Rules”); NDRC is in the process of drafting the Procedural Rules on Anti-Price Monopoly Administrative Enforcement.

1.3         In this Note, we will examine the basic framework of PRC anti-abuse of dominance rules established by AML, and the corresponding efforts of SAIC and NDRC to augment the basic framework through issuance of administrative rules.  Firstly, the definition of “dominant market position” and the instances of abuse of dominance will be discussed.  Secondly, we will explore the factors to be considered in determining whether an undertaking possesses a dominant market position, and the presumption/rebuttal of dominant market position. Thirdly, we will take a closer look at each specific instance of abuse of dominance, as well as the possible legal consequences for a dominant undertaking which has been found to have engaged in abusive practices. This Note will conclude by outlining certain proactive compliance strategies for market leading firms.

2.           Abuse of dominance and Rebuttal through “Justifiable Cause”

2.1         Article 17 of AML defines a “dominant market position” (“DMP”) as the market position of an undertaking which enables it to control the price or volume of a product or other trade terms in the relevant market, or to impede or affect the ability of another undertaking to enter the relevant market.  The Draft DMP Rules further clarifies the terms “other trade terms” and “capable of impeding or affecting the ability of another undertaking to enter the relevant market” as follows:

“Other trade terms” refer to factors (other than the price or volume of a product) which can produce a material impact on market transactions, including

Ÿ   product grade;

Ÿ   terms of payment;

Ÿ   method of delivery; or

Ÿ   after-sales service, etc. 

“Impeding or affecting the ability of another undertaking to enter the relevant market” refers to:

Ÿ   exclusion from market entry;

Ÿ   delay of market entry within a reasonable period; or

Ÿ   increase of entry cost of a potential entrant, such that it cannot viably engage in effective competition, etc.

2.2         AML lists six specific instances of abuse of dominance, including Monopolistic Pricing, Predatory Pricing, Refusal to Deal, Exclusive Dealing, Tying/Imposition of Unreasonable Conditions and Trade Counterparty Discrimination. The Draft APM Rules and Draft DMP Rules provide more detailed guidelines for each of the specific instances of abuse.

2.3         Of the six listed instances of abuse, except for Monopolistic Pricing, which is illegal per se under AML, the other five instances of abuse are subject to the qualification of “without justifiable cause”. The Draft DMP Rules provide the following factors in determining whether a justifiable cause exists:

Ÿ   Whether there is the basis of trade customs, the undertaking’s own normal business operations and normal economic return considerations.

Ÿ   Whether the conduct has eliminative or restrictive competitive effect and harms consumer interests;

Ÿ   The impact of the conduct on economic efficiency, public interests and economic development.

3.           Finding/Presumption of Dominant Market Position

3.1         Factors for Finding of Dominance

The AML lists five factors to be considered in finding of dominance, and the Draft DMP Rules and AMP Rules provide further guidance as follows:

(i)         market share and the competitiveness of the relevant market.

Market share refers to indicators such as the proportionate share of the turnover, sales volume, etc. of an undertaking’s particular product in the relevant market during a particular period.

In analyzing the "competiveness of the relevant market" the following factors shall be taken into account: the developmental status of the relevant market, the number of existing competitors and their respective market shares, the degree of product differentiation, etc.

(ii)        ability to control sales market or procurement market.

Such undertaking's ability to control the channels of product sales or input procurement, the ability to affect or decide the price, volume, term of contract or other trade terms, and the ability to obtain priority in acquiring input.

(iii)       financial strength and technical resources.

The undertaking’s assets scale, financial capacity, earning capacity, financing ability, research and development capacity, technical equipment, technical innovation and application capabilities, and intellectual property rights, etc..

In analyzing and determining the financial strength and technical resources of the undertaking, the financial strength and technical resources of its affiliates shall also be taken into account.

(iv)      the extent of other undertakings’ reliance.

In determining the extent of other undertakings' reliance on such undertaking in their trade, the following factors shall be taken into account: transaction volume and the duration of trade relationship between the undertaking and other undertakings, the degree of difficulty in switching the trade to other trade counterparties, etc.

(v)       the degree of market entry difficulty.

In determining the degree of difficulty for other undertakings to enter the relevant market, the following factors shall be taken into account: market access scheme, the circumstance concerning possession of essential facilities, sales channels, funding and technology requirements and costs, etc.

(vi)      other factors relevant to the finding of dominant market position of the undertaking.

3.2         Presumption of Dominance

According to the AML, the relevant undertaking(s) may be presumed to have a dominant market position or joint dominant market position if the market share reaches the thresholds shown below:

Type of Dominance

Number of Undertakings

Minimum Market Share in the Relevant Market

Exception

Sole Dominance

Single Undertaking

≥1/2

None

Joint Dominance

Two Undertakings

≥2/3

If one of the undertakings only possesses a market share less than 10%.

Three Undertakings

≥3/4

 

3.3         Rebuttal Against Presumption of Dominance

Even if an undertaking’s market share meets the threshold of presumption, such presumption can be rebutted by the undertaking if it can prove that based on the factors enumerated in Section 3.1 hereof, the undertaking does not have the ability to control the price, volume or other trade terms in respect of a product in the relevant market, or the capability to impede or affect the ability of another undertaking to enter the relevant market.

Undertakings which meet the criterion of joint dominance in the table above shall also prove that there is substantive competition among them, and that no single undertaking has a prominent market position compared to the rest of them.

4.            Specific Instances of Abuse of Dominance

4.1         In respect of Monopolistic Pricing, the Draft APM Rules provide that a dominant undertaking shall not sell a product at unfairly high price or buy a product at unfairly low price, and the finding of “unfairly high price” and “unfairly low price” shall take comprehensive account of the following factors:

Ÿ   whether the sale price obviously exceeds the cost of the product, or whether the purchase price is obviously excessively low, even below the cost of the product;

Ÿ   where the cost is essentially stable, whether the sale price is increased, or the purchase price is decreased, in excess of the normal extent;

Ÿ   whether the extent of price increase in the sale of product obviously exceeds the extent of cost increase, or whether the extent of price decrease in the purchase of product obviously exceeds the extent of the decrease in the counterparty’s cost;

Ÿ   whether the price is obviously above or below that of the same product sold or purchased by other undertakings.

However, if the counterparty may procure the same product or substitute product from another undertaking at reasonable price, the finding of Monopolistic Pricing shall not apply.

4.2         In respect of Predatory Pricing, the Draft APM Rules provide that a dominant undertaking shall not sell a product at a price below its costs without justifiable cause. For purposes of determining Predatory Pricing, “selling a product at price below its cost” refers to the sale of a product by an undertaking at sustained loss, for the purpose of eliminating competitors or potential competitors; and “justifiable cause” includes:

Ÿ   reducing price lawfully in order to dispose of fresh or live products, seasonal products, expiring products and overstocks;

Ÿ   sale of product at reduced price on account of debt discharge, business change, or business cessation;

Ÿ   short-term or small volume promotional activity in order to solicit customers;

Ÿ   forced price reduction as a countermeasure to the below-cost sales strategy of another undertaking;

Ÿ   where an economy of sale may be achieved, thereby reducing cost, and consumers are capable of sharing the resulting benefits;

Ÿ   any other justifiable cause determined by NDRC.

4.3         In respect of Refusal to Deal, the Draft DMP Rules and Draft APM Rules set out the following guidelines:

Ÿ   Downsizing the existing transaction volume with its trade counterparty;

Ÿ   Suspending an existing transaction with its trade counterparty;

Ÿ   Refusing to engage in a new transaction with its trade counterparty;

Ÿ   Imposing restrictive conditions or quoting excessively high or excessively low price, such that its trade counterparty cannot viably engage in or continue the transaction with such undertaking;

Ÿ   Denying a trade counterparty’s access to its essential facilities on reasonable terms during the production and operation activities.

4.4         In respect of Exclusive Dealing, the following conducts without justifiable cause are prohibited.

Ÿ   Requiring a trade counterparty to deal exclusively with itself;

Ÿ   Requiring a trade counterparty to deal exclusively with its designated undertaking;

Ÿ   Requiring a trade counterparty not to engage in transactions with its competitors.

4.5         Tying/imposition of unreasonable conditions include the following instances :

Ÿ   Forcing different products to be sold as a bundle or package in contravention to  trade customs or consumer habits, etc., or without regard to the functions of the products;

Ÿ   Imposing unreasonable restrictions in respect of the term of the contract, payment method, product transportation and delivery method or method for provision of services, etc.;

Ÿ   Imposing unreasonable restrictions in respect of the product sales territory, sales customer or after-sales service, etc.;

Ÿ   Imposing trade conditions not relevant to the transaction subject matter.

4.6         In respect of Counterparty Discrimination, The Draft DMP Rules and APM Rules elaborate as follows.

4.6.1      In the case of price discrimination, same conditions” refer to similar or identical conditions such as transaction mode, transaction stage, transaction quantity, settlement of payment, after-sales service, etc. when the undertaking deals with its counterparty in the same product with the same grade; and “justifiable cause” includes:

Ÿ   the price difference does not create substantial adverse impact on the market competiveness of the counterparty;

Ÿ   the counterparty can procure the same product or substitute product from other undertakings at a reasonable price;

Ÿ   Any other justifiable cause determined by NDRC.

The Draft APM Rules further provide that application of the same price to counterparties who are under different conditions shall be deemed discriminatory.

4.6.2      In the case of non-price related trade counterparty discrimination, the Draft DMP Rules sets out the following instances:

Ÿ   Applying different transaction volume, product class or product grade;

Ÿ   Applying different preferential terms such as volume discount;

Ÿ   Applying different payment terms or delivery methods;

Ÿ   Applying different after-sales service terms such as different warranties and warranty periods, scope of repairs and repair schedules, supply of components and spare parts, technical guidance, etc.

The Draft DMP Rules do not specify what constitute the “same conditions” for purposes of determining whether non-price related trade counterparty discrimination exists.  For products which are homogenous and require minimum customization/pre-sale services, it would be more feasible to treat all customers in the same geographic market as substantially under the same conditions.  On the other hand, for products requiring customized after-sale services and the service costs are substantial, such after-sales services sometimes evolve into a separate market. Therefore, to the extent that the after-sales services of a particular product can be shown to constitute a separate market on the basis of relevant market analysis and trade customs, it may not be appropriate to use the variation in after-sales service terms as an indicator of discriminatory practice in the original product market.

Note: Prepared by John Jiang, with assistance from Jenny Zhang and Frank Jiang of Zhong Lun Law Firm, for reference purposes only, and should not be construed as legal advice.  For more information, please contact the author at johnjiang@zhonglun.com.

 
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