24 March 2016

Highlights of the Draft Amendment to China’s Anti-Unfair Competition Law – Series 1

This article was written by Susan Ning(partner), Hazel Yin(partner), Han Wu(associate), and Lingbo Wei(assistant associate)

I. Overview

On February 25th 2016, the State Council published the Anti-Unfair Competition Law (Draft Amendment) (the law hereinafter the “AUCL”, the draft amendment hereinafter the “Draft”) for public comments. Certain issues have arisen since the implementation of AUCL in 1993, for example, new types of unfair competitive behaviors have been under-regulated and the penalties do not have enough deterrent effects. Also, since 2008, the enactment of the Antitrust-Monopoly Law (“AML”) has resulted in overlaps and inconsistent standards of application.

The Draft not only clarifies some traditional anti-unfair competition behaviors listed in the AUCL, but also provides regulation of new types of unfair competition conducts. The current AUCL has 5 chapters 33 articles while the Draft involves amendment to 30 articles. The Draft strikes out 7 articles, adds 9 articles, and totals 35 articles. It mainly amends and improves 6 behaviors (passing off, commercial bribery, misleading advertising, infringement of business secret, sales with giveaway and commercial defamation), and adds two behaviors (abuse of comparatively advantageous position and unfair competition on the internet). Additionally, the draft substantially increases penalties on unfair competition behaviors.

In terms of amendments that have some bearing on the AML, the Draft puts forward two behaviors (abuse of comparatively advantageous position and unfair competition behavior on the internet), and deletes or modifies four behaviors that fall within the regulation of AML (exclusive dealing by public utilities, abuse of administrative power, below-cost pricing and tying). This article elaborates on abuse of a comparatively advantageous position, sets out the differences and similarities between abuse of a comparatively advantageous position and abuse of a dominant market position under the AML, and illustrates the practical implication of the Draft on the businesses. 

II. What is a comparatively advantageous position?

Article 6 of the Draft stipulates that, a business operator shall not, without any justifiable causes, take advantage of a comparatively advantageous position in restraining its trading counterparties to certain trading partners and to certain trading conditions when dealing with other operators, charging unreasonable fees or unreasonably requesting other economic benefits from its trading counterparties, or imposing other unreasonable conditions. 

The theory of a comparatively advantageous position originated from Germany. In France and Japan, there are specific regulations outside the antitrust law regime on abuse of a comparatively advantageous position that restricts competition. China has incorporated the term “advantageous position” into some administrative regulations[1], department provisions[2] and State Council regulatory documents[3]. If this Article is adopted, this will be the first time that “comparatively advantageous position” is defined by law. 

The behaviors forbidden by Article 6 of the Draft are very similar to the abuses of a dominant market position prohibited by Article 17 of the AML. The two articles both prohibit business operators from exclusive dealing without any justifiable causes, imposing unreasonable trading conditions etc. However, differences exist as to the threshold for application, legal liabilities, enforcement authority etc., as set out in the below table:

Abuse of a Comparatively Advantageous Position / Dominant Market Position

AUCL Draft

AML

Threshold for Application

Business operators with a comparatively advantageous position

Comparatively advantageous position means that, in a certain transaction, a business operator holds a comparatively advantageous position as to capital, technology, market access, sales channel and raw material purchase etc., which renders the trading counterparty to be  dependent on this business operator with difficulty to switch to other business operators.

Business operators with a dominant market position

The term “dominant market position” refers to a market position held by a business operator that has the ability to control the price or quantity of commodities or other trading conditions in the relevant market or block or affect the entry of other business operators into the relevant market.

Behaviors

Article 6 Business operators shall not take advantage of a comparatively advantageous position to engage in the following unfair competition behaviors:

Article 17 Business operators with a dominant market position are prohibited from committing any of the following acts of abusing the dominant market position:

1. Restraining their trading counterparty to certain trading partners without any justifiable causes;

2. Restraining their trading counterparty to designated products without any justifiable causes;

3. Restraining their trading counterparty to certain trading conditions when dealing with other operators without any justifiable causes;

4. Charging unreasonable fees or unreasonably requesting other economic benefits from trading counterparties;

5. Imposing other unreasonable conditions.

1. Selling products at unfairly high prices or buying products at unfairly low prices;

2. Selling products at prices below cost without any justifiable causes;

3. Refusing to deal with a trading counterparty without any justifiable causes;

4. Restricting their trading counterparty so that it may conduct deals exclusively with themselves or with the designated business operators without any justifiable causes;

5. Implementing tie-in sales or imposing other unreasonable trading conditions at the time of trading without any justifiable causes;

6. Applying discriminatory treatments on trading prices or other trading conditions to their trading counterparties with equal standing without any justifiable cause; or

7. Other forms of abuses as determined by the Anti-monopoly Enforcement Agency under the State Council.

Penalties

Article 19 Where the business operators violate Article 6 of this Law, authorities at the level of municipality or above shall order them to make rectifications, impose a fine of one to five times the illegal turnover, and where there is no illegal turnover or it is difficult to measure the amount of illegal turnover, impose a fine of RMB 100,000 and 3,000,000.

Where the business operators of the designated product violate any of the circumstances prescribed in Article 6 of this Law, penalties shall be imposed by making reference to the preceding paragraph.

Article 47 Where the business operators abuse their dominant market position in violation of this Law, the Anti-monopoly Law Enforcement Agency shall order them to stop such violations, confiscate the illegal gains, and impose a fine of 1% up to 10% of the total sales revenue made in the previous year.

Enforcement Authority

Administration of Industry and Commerce at the level of municipality or above.

National Development and Reform Council (“NDRC”) and State Administration of Industry and Commerce (“SAIC”), and their authorized provincial agencies.

A comparatively advantageous position and a dominant market position share many similarities. First, both a comparatively advantageous position and dominant market position relate to the economic power of an enterprise. For example, a comparatively advantageous position requires that the “business operator holds a comparatively advantageous position as to capital, technology, market access, sales channel and raw material purchase etc.” As to dominant market position,  Article 18 of AML stipulates that it  shall be determined based on several factors, e.g. “the ability of the business operator to control the sales market or the raw material supply market”, “the financial and technological conditions of the business operator” and “the degree of difficulty for other business operators to enter the relevant market”. 

Second, both a comparatively advantageous position and dominant market position indicate other parties’ dependency on this business operator. The key for determining a comparatively advantageous position is economic dependency. Dependency can be established if the feasibility to reasonably switch to other trading partners is so limited. Article 18 of AML also identifies “the extent of reliance on the business operator by other business operators in the transactions” as a factor to determine a dominant market position.

Nevertheless, it is clear from the legislative intention that the application scopes of a comparatively advantageous position and a dominant market position are different. As stated in the Explanatory Note to the Draft issued by the Legislative Affairs Office of State Council, Article 6 of the Draft intends to regulate “unfair trade practices of business operators with a comparatively advantageous position, though without a dominant market position”. 

More specifically, “dominant market position” concerns market power against other competitors, suppliers and customers in a relevant market, while “comparatively advantageous position” relates to the comparison of market power between a company and its trading counterparties in a specific transaction. Thus, to determine a dominant market position, the “relevant market” usually needs to be defined first. Subsequently, when determining a “dominant position”, a comprehensive analysis should be conducted by taking into account the business operator’s market share, the competition status in the relevant market, etc. 

By contrast, the determination of a comparatively advantageous position mostly comes down to whether the other party is economically dependent on the business operator. Normally one needs to analyze whether the other party depends on such a business operator due to the brand reputation of the latter, long-term contractual relationship, the latter’s possession of scarce materials, indispensable equipment etc., such that the other parties have no choice but to accept unreasonable trading conditions.

III. What is the practical implication of this article? 

The threshold for determining a dominant market position is comparatively high, making it difficult to establish dominance and challenge abuses in practice. In the 29 antitrust enforcement notices released by SAIC, there are only 7 cases concerning abuse of a dominant market position. Among those 97 price-related antitrust cases investigated by NDRC during the “Twelfth Five-Year Plan” period (2011-2015), only 13 cases related to the abuse of a dominant market position. The number of private litigations relating to abuse of dominant market position is also rather limited, and cases where the plaintiff won are very rare. Since a comparatively advantageous position mainly concerns a comparison of marker power between the two parties, theoretically, the threshold could be lower, which may allow companies to protect their interest at a lower cost.

However, the standard for determining a “comparatively advantageous position” in the Draft is not very clear, which will create uncertainties in practice. It will be extremely burdensome if a company with more bargaining power needs to assess whether it has a comparatively advantageous position and whether its conduct involves any abuse of such a position whenever it negotiates a deal with other parties. It may also lead to vexatious litigations. It will be helpful to incorporate a clearer standard of “comparatively advantageous position” and a list of factors for the analysis of “dependency”, e.g. the likelihood and feasibility (in terms of time, cost, etc.) to switch to other business operators, so as to provide more predictability and transparency to the business community.


[1]E.g. Article 24 of the Regulations of the People's Republic of China on International Maritime Transportation provides that, those engaging in the international shipping or non-vessel shipping business may not abuse their advantageous status, and impairing the dealing party through discriminatory prices or other restrictive conditions.

[2]E.g. Article 6 of the Administrative Measures for Fair Transactions between Retailers and Suppliers stipulates that, no retailer may conduct unfair transactions by abusing its advantageous market position.

[3]E.g. the Opinions of the State Council on Promoting the Modernization of Domestic Trade Circulation and Building the Law-based Business Environment regulates trading relationship between retailers and suppliers by prohibiting charging unreasonable fees or forcing to attach unreasonable conditions by abusing advantageous market position.

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