• China's Antimonopoly Law Becomes Effective on August 1, 2008
  • August 12, 2008 | Authors: J. Michael Cavanaugh; Richard "Tad" Ferris; Matthew P. Vafidis
  • Law Firms: Holland & Knight LLP - Washington Office ; Holland & Knight LLP - San Francisco Office
  • After 13 years of drafting efforts and 11 months of implementation preparation, China’s Antimonopoly Law (AML) will take effect on August 1, 2008. Undoubtedly, this new significant legislation will have a profound impact on foreign companies doing business in China as well as those who are planning to enter this booming market. This alert will highlight key provisions in the law that may affect your current China operation or future plans substantially.

    Extraterritorial Jurisdiction

    The AML applies not only to monopolistic conduct within China but also to conduct outside China that eliminates or restricts competition in China’s domestic market. Thus, activities outside China may subject a business operator to potential liability in China.

    Monopolistic Conducts Regulated Under the AML

    The AML defines and regulates three types of private conduct: (1) monopoly agreements; (2) abuse of dominant market position; and (3) business concentrations.

    (1) Monopoly Agreements

    The AML defines monopoly agreements as agreements, decisions or other concerted activities that eliminate or restrict competition. The law prohibits both horizontal and vertical agreements purported to eliminate or restrict competition. However, the AML exempts those agreements intended to promote public interest and achieve certain other objectives enumerated in Article 15.

    (2) Abuse of Dominant Market Position

    The AML prohibits business operators with “dominant market positions” from abusing such positions by conducting activities such as unfair dealing, predatory pricing, refusal to deal, exclusive dealing, tying and discrimination. Processing “dominant market positions” is defined as having the power to control the price, quantity and other dealing conditions in the relevant market and the ability to prevent or affect the entry of other business operators into the market. Although it largely drives the market dominance analysis, the definition of the “relevant market” is, unfortunately, unclear.

    (3) Business Concentrations

    The AML’s provisions on concentrations not only govern mergers and acquisitions (M&A) but also apply where one business operator attempts to exercise control or decisive influence over others through contractual or other means. The AML provides for reporting obligations and administrative review procedures for concentration activities reaching the reporting threshold set by China’s State Council. The law explicitly prohibits the consummation of any unreported concentrations meeting the reporting threshold or any consummation of a proposed concentration during the review period which may range from 30 days to 180 days. Moreover, Article 31 provides an additional potential barrier to a foreign investor’s takeover of a Chinese domestic enterprise: such transactions must undergo a national security review in accordance with relevant Chinese national security laws and regulations in addition to the reporting and review process provided in the AML.

    Limits on Administrative Power

    The AML incorporates provisions against “administrative monopoly,” prohibiting Chinese administrative agencies from adopting protectionist tactics such as discriminatory taxes, special licensing and inspection requirements, limitation of establishment of branches, restriction on bidding, etc., to protect their local business operators. Foreign companies may bring private actions in Chinese courts or file administrative complaints to enforce their rights under Article 50 of the AML.

    However, foreign companies should not be too optimistic about using the AML to protect their interest against local competitors and the administrative agencies. Article 7 explicitly provides that the government shall protect state-owned enterprises in certain industries and it is doubtful whether the AML Enforcement Authorities would have the power and resources to supervise and compel other administrative agencies to comply with the law.

    Unclear Impact on the Enforcement of IP Rights Against Chinese Competitors

    It remains unclear how the AML will influence the rights of international intellectual property (IP) rights holders. Article 55 provides that the AML does not apply to the legitimate exercise of IP rights, however, it is applicable when the abuse of IP rights eliminates or restricts competition. Many international IP rights holders are concerned that the AML Enforcement Authorities may use this provision to prevent the enforcement of their IP rights against Chinese competitors or even require mandatory licensing of such rights.

    Potential Liabilities

    The AML will mainly be enforced through administrative investigations and the imposition of administrative penalties. Violation of provisions against monopoly agreements and abuse of dominant market positions can result in injunction, the confiscation of illegal gains and administrative fines of 1 percent to 10 percent of the offenders’ annual gross income. It is unclear whether such income is limited to that from the China market. While fines for illegal concentrations are limited to 500,000 RMB (approximately $73,000 USD), the AML Enforcement Authorities may also impose other penalties such as disposal of shares or assets or the divestment of business. The AML also authorizes private enforcement of the law in Chinese courts. Article 50 allows the aggrieved parties to seek civil remedies from business operators engaging in monopolistic conduct.

    Unanswered Questions

    Due to its broad language and lack of specificity in a number of areas, the actual impact of the AML will depend more on the enforcement policy adopted by the regulators than its text. The policies prioritized by the government, the resources and practice of the AML Enforcement Authorities are among the most determinative factors. However, only hours from the effective date of the AML, the future role of the AML Enforcement Authorities remains unclear. Based on present information, the National Industrial and Commercial Bureau, the National Development and Reform Commission and the China Chamber of Commerce will jointly enforce the law. How these three Chinese entities would coordinate has not been officially disclosed.

    The policies advocated by the government also send mixed signals: on the one hand, the AML is purported to promote the traditional market economy values of efficiency and competition, on the other hand, the AML has been assigned the mission to protect the “healthy development of socialist market economy”. Moreover, the AML leaves open several important technical details for compliance. For example, it does not set the reporting obligation trigger point in concentration activities and does not provide detailed requirements and forms for reporting.

    Conclusion

    Time will tell whether the AML will function as a protectionist weapon against foreign investors or as a neutral instrument promoting the universal market economy values. Nevertheless, there is no doubt that your business plan and operation relating to China will be substantially affected.