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Sunday, December 20, 2009

China’s Antimonopoly Law—One Year Down: Abuse of Dominance Under the AML—A Chaotic Scene

Posted by Wentong Zheng

In this blog series on China’s Antimonopoly Law (“AML”), I have so far focused on issues related to merger review.  An equally important—if not more important—component of the AML deals with abuse of dominant market position.  Unlike merger review issues, abuse-of-dominance issues in China have received surprisingly little amount of attention, despite that they arguably pose more significant challenges for China’s fledgling antitrust regime.  We have already seen some of those challenges in my earlier post on China’s first court decision under the AML (see here).  In this post, I will provide a broader view of the abuse-of-dominance issues in China.

 

The AML’s abuse-of-dominance provisions are contained in Articles 17, 18, and 19.  As discussed in my earlier post, Article 17 of the AML sets forth an exhaustive list of conducts that constitute abuse of dominant position and therefore are prohibited by the AML.  This list of conducts shows a striking resemblance to the conducts that are generally considered abuses of dominance under the antitrust laws of the United States and the European Union.  The conduct specified in Articles 17(1)—selling products at unfairly high prices or buying products at unfairly low prices—mirrors the conduct outlawed under EC Article 82(a).  The conducts specified in Articles 17(2) through 17(6) correspond to what are known in the United States and the European Union as predatory pricing, refusal to deal, exclusive dealing, tying, and price discrimination, respectively.  Article 17(7) grants the antimonopoly enforcement agency the power to identify abuse-of-dominance conducts other than those specifically enumerated in the other sections of Article 17.

 

But how to determine whether a firm possesses a dominant position?  Article 18 of the AML provides for a list of factors that are relevant for such a determination, including the firm’s market share, the competitiveness of the relevant market, the financial and technological capabilities of the firm, the ease of market entry, and some other factors that I will not cite one by one here.  Article 19 of the AML further provides for a rebuttable presumption of dominant position based on market shares of firms in the relevant market.

 

Like other provisions of the AML, the abuse-of-dominance provisions of the AML are enforced by the “antimonopoly enforcement agency” as well as by private actions in courts.  The AML as a general matter prefers administrative enforcement to judicial enforcement, as evidenced by the fact that the administrative enforcement provisions are prominently figured in the AML text while the provision that authorizes private right of actions is ambiguously worded and is placed in a non-conspicuous place in the AML text (see my earlier postfor more details on this).  When it comes to abuse-of-dominance issues, the AML’s preference for administrative enforcement is more explicit: Under Article 17, the conducts that constitute abuse of dominant position include those determined as such by the antimonopoly enforcement agency.

 

But who is the “antimonopoly enforcement agency”?  That question is widely believed to be among the key ones that led to the prolongation of the AML’s drafting process.  The question was not sorted out until well after the AML was adopted.  Under the current arrangement, two existing agencies—State Administration of Industry and Commerce (“SAIC”) and National Development and Reform Commission (“NDRC”)—split the responsibility of enforcing the AML’s abuse-of-dominance provisions.  The division of labor between the two agencies is in keeping with the historical roles the two agencies and their predecessors played in enforcing various ad hoc antitrust rules prior to the enactment of the AML.  SAIC is the agency charged with enforcing China’s Anti-Unfair Competition Law, which contains several provisions that were, prior to the enactment of the AML, the legal basis of the prohibition of certain abuse-of-dominance conducts.  Not surprisingly, SAIC is now responsible for enforcement against abuse-of-dominance violations under the AML, except those that involve price.  Abuse-of-dominance violations involving price are carved out to be enforced by NDRC, which has traditionally been the agency charged with price regulations and, to an increasingly less extent, price setting.  The same division of labor exists between SAIC and NDRC as to enforcement against horizontal agreements, another important component of the AML that I will not specifically address in this blog series because of its less controversial nature.

 

After the AML took effect, both SAIC and NDRC established or designated their respective “bureau” responsible for abuse-of-dominance enforcement.  The two agencies also issued draft regulations concerning procedural and substantive issues in implementing the AML’s abuse-of-dominance provisions and sought public comments on the draft regulations. As of now, only SAIC’s procedural regulations have taken effect; both SAIC’s and NDRC’s substantive regulations have yet to be officially promulgated. 

 

Despite the great fanfare that accompanied the adoption of the AML, more than one year later, the number of enforcement actions brought by SAIC and NDRC under the AML against abuse-of-dominance conducts is—zero.  One possible explanation for the two agencies’ inaction is their lack of capacity in dealing with abuse-of-dominance issues in the context of antitrust law.  The two agencies also face a more fundamental problem: with few exceptions, most of the enterprises in China that possess dominant market position are China’s largest state-owned-enterprises (“SOEs”), many of which wield enormous political clout and occupy a position in the Chinese bureaucratic hierarchy one or two levels above the antimonopoly enforcement bureaus of SAIC and NDRC.  Within the current enforcement framework, it is simply very difficult, if not outright impossible, for the antimonopoly enforcement bureaus of SAIC and NDRC to pursue most abuse-of-dominance cases.

 

There could be many other reasons for SAIC’s and NDRC’s passivity in their enforcement against abuse-of-dominance conducts, but scarcity of the conducts is certainly not one of them.  China has no shortage of highly publicized abuse-of-dominance violations, committed primarily by its largest SOEs.  Take China’s gasoline market for an example.  China has a large number of independent gasoline retailers, most of which are privately owned.  Those independent gasoline retailers have to purchase their gasoline from China’s two state-owned integrated oil companies, China National Petroleum Corporation (“CNPC”) and China Petroleum and Chemical Corporation (“Sinopec”), which under a 1999 law became China’s only two lawful gasoline wholesalers.  In the meantime, the independent gasoline retailers directly compete with gasoline stations owned and operated by CNPC and Sinopec.  In 2007-2008, when the Chinese economy was booming and the demand for gasoline soaring, CNPC and Sinopec limited or cut off their supplies of gasoline to the independent gasoline retailers, resulting in one third of them shutting doors.  It was not until early 2009, after world oil prices plummeted in the wake of the global financial crisis, that CNPC and Sinopec restored their gasoline supplies to the independent gasoline retailers.  In the face of such brazen violations of the AML’s “refusal to deal” prohibition, SAIC and NDRC simply stood on the sidelines and did nothing.

 

In stark contrast to SAIC’s and NDRC’s inactivity, the Chinese public has been very aggressive in pursuing private lawsuits in Chinese courts against alleged abuse-of-dominance violations.  Unfortunately, those private lawsuits tend to raise spurious claims that could be said to arise under the AML’s abuse-of-dominance provisions only through semantic manipulation.  We have already seen an example of such spurious claims in my earlier poston China’s first court decision under the AML, where a web portal’s efforts to enforce its copyrights in an online novel were somewhat claimed to constitute “exclusive dealing” as prohibited under Article 17(4) of the AML.  As I also mentioned in that post, another example of the spurious claims is that a bank that refused to “deal” with one of its retail customers was said to have violated the “refusal to deal” provision under Article 17(3), when the refusal to deal in question had no adverse effects on competition.  Yet another example of the spurious claims is the now-settled lawsuit against China Mobile, where the plaintiff, a mobile phone subscriber of China Mobile, claimed that China Mobile violated the AML’s prohibition of price discrimination under Article 17(6) by charging subscribers different fees for substantially similar services.  It is obvious that the complained conduct in that lawsuit, even if true, does not cause any injury to competition and therefore does not constitute an antitrust violation.  Littered with so many spurious lawsuits, China’s abuse-of-dominance scene has become confusing to the point of being chaotic.

 

I previously mentioned that the two agencies in charge of enforcing the AML’s abuse-of-dominance provisions are hamstringed in pursuing China’s largest SOEs and as a matter of fact are not pursuing those SOEs.  In my next post, I offer some thoughts on what that fact, along with some other facts, means for China’s broader competition framework.  I argue that more than a year after the AML went into effect, there appears to be a de-facto “dual-track” competition regime taking shape in China, with one track laid within the AML governing private and foreign enterprises and the other track laid outside of the AML governing the largest SOEs. 

 

 

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