China Law Alert: Focus on Competition - March 2012

China’s New Merger Control Regime Makes Major Progress in Its First Three Years

It is now just over three years since China’s Anti-Monopoly Law (AML) was introduced.  Compared with the well-established practices of U.S. anti-trust and EU competition authorities, AML enforcement is still in its infancy.  However, China’s AML regulators, especially the authority in charge of merger control, the Ministry of Commerce (MOFCOM), has moved quickly to make its mark on international business.  Now, most large cross-border mergers, acquisitions and joint ventures must also successfully pass the rigors of review by MOFCOM as well as the European Commission and U.S. Department of Justice (DOJ) and/or Federal Trade Commission (FTC).  Read the full article here.

NDRC and SAIC’s Actions in 2011 and Prospects in 2012

China’s National Development and Reform Commission (NDRC) and State Administration for Industry and Commerce (SAIC) are the two authorities in charge of investigation and supervision of “monopoly” agreements and abuses of dominant market position.  NDRC focuses on price-related cases while SAIC takes care of non-price related breaks of the law.  Compared to the Ministry of Commerce (MOFCOM), which is responsible for merger control, NDRC and SAIC have been relatively quite since China’s Anti-Monopoly Law (AML) came into force in August 1, 2008.  Read the full article here.

Civil Litigation under China’s Anti-Monopoly Law

Since the introduction of the China Anti-Monopoly Law (AML) in August 2008, Chinese courts have experimented with various methods of civil dispute adjudication based on breach of the AML. In general, China’s courts have very limited judicial experience with such cases. A number of civil cases have been brought before the courts but very few, if any, have resulted in a successful judgment for breach of the AML.  Read the full article here.

Might the Ministry of Industry and Information Technology (MIIT) Become A New Enforcement Authority for China’s Competition Laws?

As well as MOFCOM, SAIC and NDRC, the three major enforcement authorities for the anti-unfair competition and anti-monopoly laws, it seems the MIIT might also become a regulator of competition in the telecommunications sector.  In addition to a Draft Regulation on Internet Information Services, published for consultation in January 2012, MIIT released an “Opinion on Regulating the Business Activities of Basic Telecommunications Carriers on Campuses” (Opinion) on 30 June 2011.  Read the full article here.



China’s New Merger Control Regime Makes Major Progress in Its First Three Years

It is now just more than three years since China’s Anti-Monopoly Law (AML) was introduced. Compared with the well-established practices of US antitrust and EU competition authorities, AML enforcement is still in its infancy. However, China’s AML regulators, especially the authority in charge of merger control, the Ministry of Commerce (MOFCOM), has moved quickly to make its mark on international business. Now, most large, cross-border mergers, acquisitions and joint ventures must also successfully pass the rigors of review by MOFCOM as well as the European Commission and the US Department of Justice (DOJ) and/or Federal Trade Commission (FTC).

Significant Increase of Cases Reviewed

There has been a tremendous growth in the number and variety of “concentrations” (large mergers, acquisitions and joint ventures) that MOFCOM has reviewed. Equally, MOFCOM’s practices have developed significantly over the past three years. As can be seen from the following table, the number of cases reviewed by MOFCOM each year more than doubled from 2009 to 2011. 

 

Case Numbers

Year

Cleared without conditions

Cleared with conditions

Rejected

2008

16

1

0

2009

75

4

1

2010

116

1

0

2011

164

4

0

Total

371

10

1


One of reasons for the significant increase in cases is that more and more corporations realise that merger control filing is necessary in China, particularly after MOFCOM put some effort into educating market players about the AML. Also, as was mentioned at a recent press conference by the director of the Anti-Monopoly Bureau of MOFCOM, Shang Ming, since enterprises are growing, the thresholds set for merger control notification are becoming easier to reach. The thresholds are (i) RMB 400 million (approximately US$ 63.5 million) revenue in China for each of two parties involved, and (ii) RMB 2 billion (approximately US$ 317.5 million) for all parties’ aggregate revenue in China or RMB 10 billion (approximately US$ 1.59 billion) for all parties’ aggregate worldwide revenue. So far, there has been no indication these thresholds will change, despite significant appreciation of the RMB (compared to the US dollar) over the last five years.

MOFCOM’s Published Decisions

Up to the end of 2011, 12 decisions had been published by MOFCOM, one blocking an acquisition and ten transactions cleared with conditions, with an additional conditional approval published in February 2012. It can be seen from these published decisions that MOFCOM’s competition analysis/assessment is becoming much more elaborate and detailed. The first decision involved only a few sentences giving the reasons for the decision, while the most recent published decisions stretched to several pages. At the same time, it can also be said that MOFCOM is now less likely to be criticized by the international media and professionals for its decisions, particularly if compared to the barrage of criticism received after the blockage of Coca-Cola's US$ 2.4 billion acquisition of Huiyuan Juice.

Another notable recent development is that MOFCOM has now imposed various types of remedies (both behavioural and structural) in cases involving Chinese companies, including decisions affecting large, state-owned enterprises. The decision concerning GE’s joint venture with Shenhua is an example of this imposition of remedies.

At its annual press conference on 27 December 2011, MOFCOM emphasised that it does not discriminate between concentrations that involve foreign enterprises and those that involve only Chinese enterprises; and it does not treat enterprises differently based on the nature of the ownership of the parties involved in the concentration (e.g., private or publicly owned). Indeed, it can be concluded that MOFCOM’s clearance of Nestlé’s acquisition of Chinese candy firm Hsu Fu Chi is a sign that China may now be prepared to further open itself to multinational companies and the takeover of famous Chinese brands.

There are two other issues that have been clarified by recent merger control decisions. The first concerns joint ventures. In giving approval to GE China’s joint venture with Shenhua Coal, MOFCOM has answered positively the recurring question of whether the formation of a joint venture falls within China’s merger control rules. It is now clear that the formation of a joint venture can require clearance from MOFCOM under China’s AML (see our newsletter for more information). This policy has been reinforced in a more recent 2012 decision giving conditional approval to the formation of another joint venture.

The second issue that has been clarified, at least to some degree, is that MOFCOM will consider minority shareholdings in other competitors on the market as grounds for requiring divestiture or other remedies before giving approval to a transaction. While this was also an issue in much earlier cases, in its approval of Alpha V’s acquisition of Savio, MOFCOM made it clear it had closely scrutinized the potential influence of minority shareholdings of Alpha V in the only other competitor on the market before giving conditional approval (see our newsletter for more information).

Prospects for MOFCOM

There remain a number of challenges for China’s MOFCOM in its treatment of large mergers, acquisitions and joint ventures, particularly those that are also being reviewed by other jurisdictions, including the EU or the United States. A common criticism is that MOFCOM takes much longer to complete its review process than other merger control authorities. There are three phases to review of a concentration in China, with clearance possible in any phase. It has become normal practice, before clearance, for MOFCOM’s review of a notification to go into Phrase II. There are also complaints concerning the unpredictability and less-than-transparent way in which MOFCOM may use its discretion as to when and whether to formally accept a case. Experience suggests that it takes at least several weeks (and can occasionally take more than a month or even longer) for MOFCOM to accept a case for review under the merger control rules. In these circumstances, it is advisable for those planning a merger, acquisition or joint venture involving China to fully assess the frequently lengthy MOFCOM review process and make their filing as soon as practicable in order to meet any deadline for closing a transaction.

MOFCOM is aware of the concerns over approval delays in China. The director of the Anti-Monopoly Bureau of MOFCOM, Shang Ming, indicated at a recent press conference that MOFCOM acknowledges the comments concerning delays and is strengthening its communications with its counterparts in the United States and EU so that simple cases can be quickly singled out for a “fast-track” review. It can be expected then, that a faster approval process may soon be available in China that could be similar to the “Short Form” filing used in the EU.

Faster and more efficient procedures for merger control approval can be expected in the future also because of MOFCOM’s continuing cooperation with EU and U.S. regulators via various channels. These include the “China-EU Competition Policy Dialogue” and the Memorandum of Understanding on Anti-Monopoly and Antitrust Cooperation signed in 2011 with the Department of Justice and Foreign Trade Commission of the United States.

Priority Action in 2012 on Failure to Submit Concentrations to MOFCOM for Clearance

Companies should take particular note of MOFCOM’s clear statement at its annual end-of-year press conference in Beijing that, in 2012, one of its priorities will be to investigate and sanction parties to a concentration who, contrary to the AML, fail to properly submit notification of a concentration and to have it cleared by MOFCOM. As part of this priority action, MOFCOM has already introduced, in January 2012, new “Preliminary Regulations on Investigation and Treatment of Failure to Notify Business Operator Concentration” (see McDermott’s article for more information).

MOFCOM also announced that later in 2012 it will introduce new regulations on the investigation and treatment of concentrations suspected of having failed to be notified when they should have been notified and cleared by MOFCOM under the AML.

National Security Review

Another major development in 2011 was the introduction by China’s State Council of the “Notice of the General Office of the State Council on Launching the Security Review Mechanism for Mergers and Acquisition of Domestic Enterprise by Foreign Investors”. This Notice established a national security review system for merger and acquisition (M&A) transactions by foreign investors in China. In August 2011, after a trial implementation period of about six months of an interim regulation on the security review system, MOFCOM finalised and issued a “Regulation on Implementation of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors”. This national security review system could have a broad impact on prospective M&A transactions by foreign investors in China. This is because the scope of any national security review is still ambiguous and could be an option of last resort for the Chinese authorities to block a transaction at its discretion.

Because of the detailed information and justification required to be submitted to the merger control (and potentially also the national security) authorities, together with the increasingly sophisticated approach of MOFCOM, parties considering international M&A and investment in China will require experienced counsel to conduct pre-notification consultations and communications face-to-face with MOFCOM. Parties will also need to understand whether the intended transaction falls within the scope of review and to be able to put a convincing position directly and effectively to MOFCOM. McDermott is unique in its ability to provide such counsel—it is both an international law firm and can appear directly before MOFCOM and the Chinese courts without the intervention of an intermediary. This is because all lawyers at MWE China hold a current practising certificate in China.

Authors: Frank Schoneveld and Brian Fu


NDRC and SAIC’s Actions in 2011 and Prospects in 2012

China’s National Development and Reform Commission (NDRC) and State Administration for Industry and Commerce (SAIC) are the two authorities in charge of investigation and supervision of “monopoly” agreements and abuses of dominant market position. NDRC focuses on price-related cases while SAIC takes care of non-price related violations of the law. Compared to MOFCOM, which is responsible for merger control, NDRC and SAIC have been relatively quite since China’s AML came into force on 1 August 2008.

We know that, according to Article 46 and 47 of the AML, NDRC and SAIC are entitled to impose a fine of up to 10 per cent of an undertaking’s turnover in the previous year. Despite such significant punishment power in hand, NDRC and SAIC seem to be proceeding prudently. From 2008 to 2010, NDRC and SAIC have dedicated their resources to creating detailed rules for implementing the AML. After implementation rules were introduced, 2011 saw more action from NDRC and SAIC.

Major Actions in 2011

SAIC Imposes First Fine in Anti-Monopoly Case

According to SAIC’s website of January 2011, the Jiangsu branch of SAIC (Jiangsu AIC) fined the Committee for Concrete (which belongs to the Lianyungang City Construction Material and Machinery Association) RMB 200,000 for illegally organizing a cartel in the local concrete market. According to news from online media, Jiangsu AIC also fined five participants of the cartel RMB 530,723.19 and confiscated their illegal profits amounting to RMB 136,481.20. These actions were taken by Jiangsu AIC in response to the participants’ illegal division of the concrete sales market. This was the first fine under the AML that was handled and imposed by SAIC.

Eighteen months earlier, in June 2009, the local branch of SAIC in Lianyungang City received “whistleblower” information from construction companies alleging that the Committee for Concrete forced its member concrete manufactures to honour an “agreement” in which the signatories cannot conclude a contract with buyers independently. The local branch of SAIC in Lianyungang City reported such information to Jiangsu AIC. With the authorization of SAIC, Jiangsu AIC formed a special investigation team to conduct the investigation, with team members carefully chosen from all its local branches. It was not until 200 days later that the team had collected sufficient evidence for their investigation. Finally, it was found that the Committee for Concrete organised (required) 16 premixed concrete manufacturers to abide by various agreements such as the Self-Discipline Regulations for Premixed Concrete Manufacturers, Regulations of Inspection and Punishment, together with other agreements (Self-Discipline Agreements), and conspired to monopolize the premixed concrete industry through coordination between its members. Further investigations revealed that in order to implement the Self-Discipline Agreements, the Committee for Concrete partitioned the market and sold zones of control to member manufacturers by making assessments of their production lines, cement mixers and pumping equipment.

This case showed a changing of attitude by SAIC. The head of the Anti-Monopoly and Anti-Unfair Competition Enforcement Bureau of SAIC, Ning Wanglu, pointed out that it was a good start in terms of AML enforcement and would set a precedent to warn others against illegal activity by market players. This case also suggested a typical case and the practice under SAIC’s investigation procedure: the local AIC receives whistleblower information; the local AIC reports to the provincial AIC; the provincial AIC reports to (central) SAIC and obtains investigation authorization from SAIC; the provincial AIC forms a special team and then conducts the investigation.

NDRC Investigating China Unicom and China Telecom’s Abuse of Dominant Position

In an interview with China Central TV Station, Li Qing, deputy director of the Price Supervision, Inspection and Anti-Monopoly Bureau of NDRC, revealed that NDRC is investigating China Telecom and China Unicom for abuses of their dominant market position in the broadband internet market. The two telecom state-owned enterprises (SOEs) are being investigated for discriminatory pricing for access to their broadband network by charging competitors more than what they charge non-competitors. The investigation therefore concerned Article 17.6 of the Anti-Monopoly Law, which provides that enterprises with dominant market positions may not apply, without justification, differential prices or other discriminatory transaction terms with their trading parties.

This is a significant development, as it shows that, contrary to many foreign commentators’ views, the NDRC is prepared to take action against powerful SOEs. Until this case, it was assumed that because large SOEs were so close to the government, no government agency would subject these companies to investigations or public criticism. Clearly, however, the NDRC has not taken this approach.

According to an announcement published on China Telecom’s website on 2 December 2011, China Telecom had submitted a correction plan and applied for a suspension of the investigation with NDRC. However, no news indicated that NDRC accepted such an application. The investigation may be still ongoing.

NDRC Fines Two Pharmaceutical Distributors for Monopolistic Practice

News concerning this case was released on 14 November 2011, just days after NDRC revealed its investigation into suspected anti-competitive behaviour of China Unicom and China Telecom (see above).

In this case, two pharmaceutical distributors, Shandong Weifang Shuntong Pharmaceutical Co. Ltd. and Weifang Huaxin Medicine Trading Co. Ltd., were found to have dramatically raised the price and monopolized the supply of promethazine hydrochloride, a raw material of the compound reserpine, which is a medicine included in China’s essential drug list for high blood pressure treatment. Annually in China, more than ten million patients, mostly low- and middle-income earners, consume in total eight to nine billion reserpine tablets.

The two pharmaceutical distributors are related companies and are controlled by the same individual shareholder. Each concluded separate, exclusive distribution agreements with the only manufacturer of promethazine hydrochloride in China. The two companies (although actually "one operator") obtained a dominant position by means of such exclusive arrangements. After controlling the supply for promethazine hydrochloride, the two distributors raised the price from less than RMB 200 to a range of between RMB 300 and RMB 1,350. Many producers of compound reserpine tablets could not afford such price increases and were forced to cease production in July 2011. This endangered the supply of compound reserpine tablets and resulted in a serious price increase. Such behaviour was deemed a violation of Article 17.1 of the AML, which prohibits a dominant undertaking from selling products at an “unfairly high price".

The NDRC ordered the two distributors to terminate the exclusive agreements immediately and imposed fines of RMB 6.877 million (approximately US$ 1.08 million) on Shuntong (including confiscating illegal gains of RMB 3.77 million) and RMB 152,600 on Huaxin (including confiscated illegal gains of RMB 52,600).

This case indicates that NDRC is beginning to take a more active role in enforcing the AML. Those doing business in China should be careful when entering into exclusivity arrangements with suppliers and distributors.

2012 Prospects

At the National Price Supervision, Inspection and Anti-Monopoly Meeting held on 23 and 24 December 2011, the deputy chief of NDRC indicated that in 2012 NDRC will proceed with further enforcement of the AML, and investigate and inspect fees charged by banks, prices of coal for generating electricity, and educational expenses. Undertakings in the banking, thermal coal and educational sectors should therefore be ready for inspections and ensure they have effective compliance programs in place. At this meeting, Mr. Xu Kunlin, the head of the Price Supervision, Inspection and Anti-Monopoly Bureau of NDRC, pointed out that NDRC will strictly enforce the law and impose heavy punishments.

Equally, at a national meeting held by SAIC in early February 2012, Wang Dongfeng, deputy chief of SAIC, also indicated that SAIC will strictly punish anti-competitive behaviour in 2012.

In 2012 we expect that there will very likely be even more investigations conducted by NDRC and SAIC, and potential fines in the millions of Renminbi.

Author: Alex An


Civil Litigation Under China’s Anti-Monopoly Law

Since the introduction of the China AML in August 2008, Chinese courts have experimented with various methods of civil dispute adjudication based on breach of the AML. In general, China’s courts have very limited judicial experience with such cases. A number of civil cases have been brought before the courts, but very few, if any, have resulted in a successful judgment for breach of the AML.

According to incomplete statistics, there have been no less than 13 civil lawsuits based on the AML brought before China’s courts since the AML came into force. Only two of the thirteen cases concern an agreement allegedly prohibited by the AML. The remainder concern abuse of dominant market position. Companies sued as defendants include China Mobile, China NetCom and Tencent for abuse of dominance. Cases in which the defendant was sued for entering into and performance of prohibited monopoly agreements include the Chongqing Insurance Association case and the Johnson & Johnson case for alleged resale price maintenance.

Three cases were settled, which includes the case involving the Chongqing Insurance Association. For the remaining nine abuse of dominance cases, four cases ended with withdrawal or non-prosecution of the case by the plaintiffs. Three cases are still pending, and the results of another three cases are unknown. As far as is publicly available, none of the defendants in the above cases ever won a single case, for which there seem to be common reasons. One of the common reasons given is that it is difficult for a plaintiff to meet its burden of proof, which is very well illustrated by the case of Renren v. Baidu.

- Renren v. Baidu

Baidu, the Chinese flagship search engine provider, was sued by Renren, a Chinese corporate client, for alleged abuse of Baidu’s dominant market position. In this first private lawsuit brought under the AML of China, Renren lost the case.

Baidu has become the largest website and search engine in the Chinese language, handling hundreds of millions of internet search requests on a daily basis. Baidu has been referred to as a “Chinese Google”, but Baidu operates a ranking-by-bidding mechanism that differs from Google’s search ranking results. Under ranking-by-bidding, when an internet user searches through Baidu using a keyword, the company that has paid Baidu for a better ranking would show up in a priority position in Baidu’s search results. If the internet user clicks the website of the company, Baidu would then charge the company an agreed-upon sum.

From March to September 2008, Tangshan Renren Information Service Company (Renren) purchased ranking-by-bidding services from Baidu for its Quanmin Medicine Net website (www.qmyy.com). In June 2008 Renren began scaling down its payments for the ranking-by-bidding service. As a result, the links presented by Baidu to Renren’s website decreased sharply from more than 80,000 down to four per page. The daily traffic on Renren’s website dropped precipitously. Its website had only 701IP on 10 July 2008, as compared with 2,961IP the previous day. As compared with the 4 pages listed on Baidu, a search of the Renren website on Google produced a listing of 6,690 pages.

Renren sued Baidu in the Beijing First Intermediate People’s Court, alleging that Baidu had abused its dominant market position in violation of the AML.mArticle 17 of the AML provides for seven prohibited violations in respect of abuse of dominant market position; however, news reports did not indicate what provision Renren was citing under Article 17. Renren sought to require Baidu to de-block its website and demanded compensation of just over RMB 1,100,000 in damages.

In support of its claims, Renren pointed to several industry reports that state that Baidu’s market share is well above the 50 per cent level that gives rise to a presumption of dominance under the AML. Most notably, Renren cited a press release issued by Baidu itself in October 2008 in which Baidu asserted that its market share exceeded 70 per cent. Renren went on to argue that, as a consequence of Baidu’s dominance, it had no choice but to seek a listing on Baidu and that Baidu’s ranking-by-bidding architecture is the kind of forced transaction prohibited under the AML.

Baidu countered that the “search engine market” alleged by Renren is not a cognizable antitrust market since most search engine activity is free of charge. Baidu also argued that, in all events, Renren’s market share evidence was defective since the cited industry reports were unreliable, amongst other reasons, because they merely captured snapshots over limited periods of time. Baidu also asserted that any claim that it has a dominant market position is rebutted by the fact that competition among fast-emerging search engines is fierce and users can easily switch between competing service providers. Finally, Baidu argued that it had a legitimate business justification for blocking Renren’s website because the site was full of spamming links, which effectively resulted in cheating. The news report was not clear about how these spamming links result in cheating or about whom Renren was cheating.

Renren lost its case because, from the perspective of the court, it failed to prove what constituted the relevant market or the market share of Baidu on that supposed relevant market. Although Baidu asserted that its market share exceeded 70 per cent, the court did not take the assertion as “self-admission” evidence in favor of Renren because Baidu made the assertion prior to, and other than in the course of, the court proceedings. In addition, the court held that the determination of relevant market and market share is to be made on the basis of a scientific and objective analysis, by which the court hinted that mere “assertion or bragging” would not be accepted as evidence in lieu of a scientific and objective analysis.

Similarly, in another case where the defendant was sued for abuse of dominance in the relevant market of the internet e-book and literature market of China, the court did not admit the “bragging” information of the defendant as the evidence against the defendant; in this case, the defendant had previously declared that it had more than 80 or 95 per cent of the internet e-book market of China.

- Supreme People’s Courts Reform on the Burden of Proof

To address the apparent imbalance in the failure ratio between plaintiffs and defendants, in April 2011, China’s Supreme People’s Court (SPC) issued a call for comments on a draft regulation titled “Relevant Issues Concerning the Application of Law in the Trial of Civil Monopoly Dispute Cases” (Draft Regulation). The proposed Draft Regulation seeks to build a working judicial framework for civil disputes under the AML. However, the Draft Regulation does not totally shift the burden of proof required of a plaintiff in an abuse of dominance case.

According to Article 9 of the Draft Regulation, the plaintiff in an abuse of dominance case nonetheless bears the burden to prove what constitutes the relevant market, whether the defendant has dominance, and the monopolistic conduct of the defendant that amounts to abuse of its dominance. Once the plaintiff proves the aforementioned facts, the defendant then bears the burden of proof to show the legitimacy of and/or justification for its actions. It remains to be seen whether or not the SPC will alleviate the burden of proof required of plaintiffs in the finalized regulation.

It seems that plaintiffs in civil litigation alleging a prohibited monopoly agreement would have fewer evidentiary obstacles than plaintiffs in abuse of dominance cases. With respect to monopolistic agreements that are obviously intended to eliminate or restrict competition, the aggrieved party does not bear the burden of proof to show that the effect of the alleged monopolistic agreement eliminates or restricts competition, unless the defendant has provided sufficient proof to the contrary. However, it is not clear what constitutes an obvious intention to eliminate or restrict competition.

- Plaintiff May Wait Until After Administrative Decision or File Lawsuit Immediately

Article 6 of the Draft Regulation allows the plaintiff to file a legal action with the People’s Court immediately, or to wait until a formal decision is published by the relevant anti-monopoly regulatory agency.

In this context it will be noted that China has introduced two mechanisms, administrative and judicial, for enforcing the AML. These two mechanisms have their own distinctive procedures and are intended to complement each other. Often during a civil anti-monopoly dispute, the plaintiff lacks the ability to collect evidence or has no professional expertise to properly assess potentially relevant evidence. If a regulatory agency, such as the NDRC or SAIC, has already published a decision sanctioning a party for monopolistic behaviour, the plaintiff can rely upon the expertise and evidence of the relevant administrative decision to help the plaintiff’s civil lawsuit.

For monopolistic conduct that has not been investigated by a regulatory agency, the plaintiff can still bring a lawsuit directly to a court. If an administrative action and a judicial procedure occur simultaneously, the court, depending on the circumstances, may decide to suspend the judicial proceeding pending the outcome of the administrative procedure. In any event, a court of competent jurisdiction will have the authority to issue a civil anti-monopoly decision without any administrative action having been initiated.

The current civil litigation procedures may not be particularly friendly to plaintiffs under the AML. However, if this Draft Regulation is introduced as proposed, the barriers that currently appear to be limiting private civil anti-monopoly actions in China will be lowered to some extent, at least in terms of showing proof of damage. This will, in turn, very likely result in increased corporate risk of private civil claims relating to enforcement of the AML. Compliance with the AML, and implementing an effective compliance program to mitigate such risks, becomes even more compelling once the Draft Regulation is in force.

Author: Henry Chen

Might the Ministry of Industry and Information Technology (MIIT) Become A New Enforcement Authority for China’s Competition Laws?

In addition to MOFCOM, SAIC and NDRC, the three major enforcement authorities for the anti-unfair competition and anti-monopoly laws, it seems the MIIT might also become a regulator of competition in the telecommunications sector. In addition to a Draft Regulation on Internet Information Services, published for consultation in January 2012, MIIT released an “Opinion on Regulating the Business Activities of Basic Telecommunications Carriers on Campuses” (the Opinion) on 30 June 2011.

According to the Opinion, any activities that exclude or restrict competition among telecommunications carriers on college campuses are strictly prohibited, including the following:

(i) Entering into exclusive agreements to provide basic telecommunication services in college campuses

(ii) Instituting promotions that would “smear” competitors; mailing SIM and/or UIM cards together with enrollment notices to freshmen without authorization

(iii) Compelling campuses to use designated telecommunications services or equipment

Very shortly after the Opinion came into effect, China Mobile was criticized for violating the Opinion by excluding other competitors from providing telecommunication services on college campuses via exclusive agreement. Towards the end of August 2011, staff from China Mobile’s Nanjing Branch went to destroy most of the telecommunications equipment provided by another supplier at Nanjing Industry and Technology College (the College). This resulted in a serious disruption of internet services at the College. Subsequently, China Mobile explained that it had entered into a service agreement with the College at the end of June 2011, in which it was agreed that China Mobile would be exclusively responsible for providing telecommunications services at the College. Thus, China Mobile considered itself entitled to restrict other suppliers from providing services at the College and enforced the restriction by destroying competitors’ telecommunications equipment.

Such action by China Mobile caused consternation at the College and was widely denounced by commentators in the media, with many, based on the MIIT Opinion, challenging China Mobile’s “exclusive agreement”. However, it is not clear whether any follow up action has been taken by MIIT, such as conducting an investigation of the matter, either individually or in collaboration with an AML enforcement authority.

In any event, MIIT’s Opinion targeting telecommunication services on campuses, has shown that it may use its powers as the responsible telecommunications regulator to also take action from the perspective of the AML and other anti-unfair competition laws.

The AML enforcement authorities (NDRC, SAIC and MOFCOM) and sector-specific authorities such as MIIT all seem be addressing competition, but not necessarily in the same manner. In other countries, certain competition law tasks must be performed by sectoral regulators, and it would be no surprise if a sectoral regulator such as MIIT did not start to do the same in China. Examples of tasks undertaken by sectoral authorities in other countries include the following:

(i) Protection of competition: control of anti-competitive conduct

(ii) Access regulation: securing non-discriminatory access to infrastructural networks

(iii) Economic regulation: adopting cost-based measures to control monopoly pricing

(iv) Technical regulation: setting and monitoring standards so as to assure compatibility and to address privacy, safety and environmental protection concerns, etc.

An example in the EU of a sectoral regulator and the competition regulator both having a role in enforcing the competition rules, is the Telecommunications Framework Directive, which provides that the general competition authority must be involved in legal enforcement and that for this purpose information must be exchanged between the competition authorities and the telecommunication authorities if that sector is concerned.

With the development of the competition law regime in China, it remains to be seen how MIIT will enforce and work with the three antitrust authorities in China in relation to enforcing the antitrust provisions outlined in the Opinion and other regulations or rules which can be enforced by both MIIT and the three competition law enforcement authorities.

Author: Angel Wang