China's Anti-Monopoly Law, implemented in August 2008, continues to take shape. The National Development and Reform Commission recently issued draft regulations regarding price monopolies. The proposed regulations apply to monopoly price activities both within and outside China, when the activities outside China affect price competition in the domestic market.
What The Proposed Regulations Cover
The regulations cover monopolistic price actions that:
- Are performed by any business or any administrative agency that eliminate or limit price competition
- Occur within China
- Occur outside China, but have the effect of eliminating or restricting price competition in China’s domestic market
Monopolistic price actions include price monopoly agreements and actions concerning price that abuse dominant market position.
Definition Of Price Monopoly Agreements
A price monopoly agreement is an agreement or other concerted actions by two or more businesses that eliminate or restrict price competition. Similarity among companies' pricing actions, market structure and market dynamics help determine whether similar pricing actions can be considered independent action or concerted action.
Companies may not enter into price agreements that do any of the following:
- Fix or change prices of goods
- Fix or change volume of goods
- Fix or change a commission or discount that affects prices
- Apply a uniform price to negotiate with a third party
- Agree to apply a standard formula as a basis to calculate prices
- Agree that a price will not be changed without other companies' consent
- Fix or change the price for a goods by restricting production and sales or allocating markets
- Other price monopoly agreements identified by the State Council
Trade associations may not:
- Develop rules or standards to fix or change prices
- Bring together companies to discuss and form agreements to fix or change prices
- Help members reach price monopoly agreements, or enter into any other monopoly agreements that Chinese law prohibits
Price monopoly agreements and other prohibited activities may be exempted under Article 15 of the Anti-Monopoly Law if there is "a justifiable reason." Such reasons include:
- No significant negative effect on market competition
- The companies involved can obtain the same kind of goofs from other businesses at a reasonable price
- Any other justifiable reason identified by the price authority of the State Council
Price Monopoly Actions That Abuse Dominant Market Position
Dominant market position means a market position held by businesses that have the ability to control the prices or quantities of commodities in the relevant market, or to block or influence the entry of other businesses into the relevant market.
For individual businesses, violations will result in a fine of a maximum of 10% of the previous year's sales revenues. Trade associations will be fined about $80,000 USD and/or be disbanded.
Public comments on the regulations may be submitted until September 6, 2009.
Implications For International Businesses
1. The Extraterritorial Reach Of The Chinese Anti-Monopoly Law
The regulations cover price monopoly actions that occur outside China so long as such actions restrict price competition within China. The extraterritorial reach of the regulations affects companies that do not intend to, but nevertheless affect price competition in the Chinese market. As a result, international companies that do not have substantial sales or operations in China must be cautious in undertaking any price monopoly actions, lest they have an unintended effect on price competition in China.
2. Are The Consequences Sufficient To Deter Price Monopoly Actions?
The potential benefits of violating the Anti-Monopoly Law may potentially outweigh the consequences. Compared to the multi-hundred million dollar fines that the U.S. Department of Justice has brought against Sherman Act antitrust violators, a fine of 10% of the previous year's sales revenues seems quite small. If a violator's price monopoly actions can increase revenues by more than 10%, the company has an incentive to engage in price fixing conspiracies.
However, this analysis does not take into account other actions that the Chinese government may take. As the controversy over the BHP Billiton/Rio Tinto merger illustrates, Chinese companies are sensitive to the pricing power that foreign companies that wield within the Chinese market. The draft regulations were issued while the BHP/Rio Tinto situation is ongoing.
3. Implications for Business Strategy
If implemented in their draft form, the regulations will cause companies to think carefully about their merger and acquisition strategy. With respect to industries that the Chinese government wants to develop locally, companies should think about how the Chinese government and Chinese companies may react to a merger or acquisition.
Even before you announce a merger or acquisition, you may want to identify and address potential reactions from the Chinese government and Chinese companies. This may involve entering into discussions with the relevant individuals, government bodies, and business people.
Only with a solid understanding of these factors can you develop a Legally Informed Strategy -- a business strategy properly informed by legal risk and legal strategy.
Douglas Y. Park
Twitter: @DougYPark
