China Law Insight : China Law Insight: China Commercial and Intellectual Property Lawyers and Attorneys, Full Service Law Firm: King & Wood

Being a lawyer himself, Mr. Liu filed a complaint against Dongfeng Nissan and the 4S store alleging that it constituted an abusive conduct for the defendants to refuse to sell the spare parts and repair services separately.  According to Mr. Liu, the spare parts sold by the 4S store were three times more expensive than the market price; and the repair services offered by the 4S store were 7 times more expensive than the market rate.

The key issue in this litigation is whether Dongfeng Nissan and its 4S store have dominant market position.  Dongfeng Nissan argued that with a market share of less than 50%, it did not hold a dominant position in the automobile market.  Moreover, Dongfeng Nissan argued that it was an industry practice for 4S stores not to sell auto parts alone, in order to ensure the quality of the auto parts and the safety of customers.  The plaintiff counter-argued that the defendant had dominant position (nearly 100%) in the market for the supply of spare parts of Nissan cars and that it was not an industry practice for "4S" stores to refuse to sell spare parts alone. 

The court eventually ruled against the plaintiff on the ground that the plaintiff failed to provide sufficient evidence to define the relevant market at issue here and to establish the defendants' dominant positions.  The plaintiff has lodged an appeal against this decision and claimed that the defendants tied the excessively expensive services to the sale of "original spare parts" of Nissan cars.

Comments

This lawsuit is the first decided AML private action after the Supreme Court published the draft judicial interpretation governing AML private actions in April ("Draft Litigation Rules") . ³ Although the Draft Litigation Rules have not yet been finalized, it appears that some of the rules have been adopted in practice.  For instance, the case was first brought before a district court in Changsha and then referred to Changsha Intermediate Court for hearing.  This is in line with the provisions in the Draft Litigation Rules regarding the jurisdiction of AML private actions.

Moreover, it appears that the Chinese courts are getting more sophisticated in trying AML private actions.  The Changsha Intermediate Court indicated in its decision that to properly define the relevant market and establish defendants' dominance, the plaintiff should conduct market research and provide evidence relating to the existing substitutable products and services in the market, their market shares and the competitiveness of the competing operators.  It shows that the court had endorsed the demand-side substitutability test in defining the relevant market and required a full analysis on the competition dynamics in the relevant market. 

This, of course, makes it more difficult for plaintiffs, especially in case of individual customers, to establish their cases.  Noticeably, the Draft Litigation Rules set forth some rebuttable presumptions of dominance to alleviate such burden.  For example, public utility enterprises or enterprises having exclusive legal authorization to supply certain products or services can be presumed to have dominance in a relevant market.  Another potential solution could be to bring a "joint action"  ⁴ which bears some resemblance to the US class action regime, so that individual consumers can come together to share resources and costs.

Back to this case, the plaintiff tried to establish a relevant market for parts or services for Nissan-brand passenger cars.  This reminds us of the Kodak case in the United States in which the Supreme Court has held that a single brand of product or service, namely Kodak parts or services for Kodak copiers, could be a relevant market under the Sherman Act as the customers were "locked in" to the "aftermarkets" for parts and services designed specifically for those copiers.  ⁵ It will be interesting to see how the plaintiff will further develop this as well as the tying argument in the appeal.

¹ See, for example, Plaintiff Lost First AML Civil Action in Automobile Industry, Legal Daily, December 17, 2011, available at http://epaper.legaldaily.com.cn/fzrb/content/20111217/Articel08007GN.htm.
²4S store refers to shops which sell vehicles and spare parts, and provide services and survey ("Sale, Spare part, Service and Survey").
³For more details, please refer to our previous article entitled Supreme People's Court Issues Draft Rules Governing Private Actions under the Anti-Monopoly Law.
⁴ For a brief introduction of the AML joint action, please refer to our article entitled AML Class Actions and The Draft Litigation Rules.
⁵Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451 (1992).

Refusal to Deal in a Disguised Form

Article 17(3) of the AML prohibits business operators holding dominant market positions from refusing to transact with trading counterparts without a valid reason. The NDRC believes that two pharmaceutical companies' act constitutes refusal to deal in a disguised form based on the below reasoning:

- Weifang Shuntong Pharmaceutical Co. Ltd. (Shuntong) and Weifang Huaxin Pharmaceutical Trading Co. Ltd. (Huaxin) controlled the entire supply of promethazine hydrochloride by entering into exclusive sales agreements with the only two manufacturers of promethazine hydrochloride. Moreover, the two pharmaceutical companies had cross shareholding relationships. The reserpine manufacturers' inability to obtain adequate supplies of promethazine hydrochloride is partly attributable to the lack of competition between the two pharmaceutical companies.

- There was sufficient production of promethazine hydrochloride and the reserpine manufacturers are willing to purchase promethazine hydrochloride under the usual trade terms.

- With the sales price of promethazine hydrochloride increased from less than RMB200/kg to RMB300-1350/kg, reserpine manufacturers were unable to carry on business as a result of not being able to obtain adequate supplies of promethazine hydrochloride on usual trade terms.  The two pharmaceutical companies effectively refused to deal with reserpine manufacturers.

Determination of the Fine

According to Article 47 of the AML, penalties associated with abusing market dominance include confiscation of illegal income and fines of 1-10% of the sales amount of the previous year.  It is, however, unclear under the AML how the sales amount of the preceding year should be calculated.  There have been speculations on whether the sales amount should be confined to that generated in the relevant market involved in the investigation or extended to the entire sales amount of the penalized company.
 
According to Mr. Zhou, the two pharmaceutical companies did not sell promethazine hydrochloride in 2010 and therefore the sales amount related to promethazine hydrochloride of the preceding year is zero.  Taking this into account, the NDRC calculated the fine on the basis of the entire sales amount of the penalized company in 2010.  We note that Weifang Shuntong was fined less than 5% of its sales amount in 2010 and Weifang Huaxin was fined little above 1% of its sales amount in 2010.

According to the report, the NDRC is not satisfied with China Telecom's current proposal because it is "too vague and too difficult to monitor".  The NDRC required China Telecom to specify more details in its commitments such as the extent and timelines of its proposed bandwidth expansion and price reduction.  The detailed plans were required to be disclosed to the public for supervision. 

The NDRC appears to be uncompromising in this investigation of the two large SOEs.  In fact, after the previous Department of Price Supervision of the NDRC was renamed in August as the Price Supervision and Anti-monopoly Bureau and restructured to include three divisions dedicated to antitrust enforcement, the NDRC has been actively pursuing after companies for price-related monopolistic conducts².   The three divisions are: the First Division of Anti-price-related Monopoly Investigation, the Second Division of Anti-price-related Monopoly Investigation and the Division of Competition Policy.  The total number of officials was increased from 26 to 46. 

The local price administration agencies have also been undergoing similar restructuring in an effort to intensify antitrust enforcement.  In September, the previous Guangdong Provincial Price Bureau was officially renamed as the Guangdong Price Supervision and Inspection and Anti-monopoly Bureau with more officials recruited to beef up antitrust enforcement forces (see our article entitled "Guangdong Provincial Price Bureau Renamed, Reflecting Strengthened Antitrust Enforcement Authority"). 

¹NDRC Investigation Ongoing, China Telecom Likely to Release More Detailed Proposal This Week, Economic Observer, December 13, 2011, available at http://www.eeo.com.cn/2011/1213/217897.shtml.

²Last month, the NDRC fined two domestic pharmaceutical companies for abusing their dominant positions in the promethazine hydrochloride market. Please refer to our previous article entitled "NDRC Fined Two Pharmaceutical Companies for Abusive Conducts".

Facts

The penalized companies, Weifang Shuntong Pharmaceutical Co. Ltd. ("Shuntong") and Weifang Huaxin Pharmaceutical Trading Co. Ltd. ("Huaxin") are both pharmaceutical distribution companies in the business of selling promethazine hydrochloride, the key ingredient for "compound reserpine tablets", a popular hypertension medicine listed among China's national essential drugs.

According to the NDRC, Shuntong and Huaxin entered into exclusive sales agreements with the only two manufacturers of the ingredient in June 2011, thereby gained full control of the domestic supply of promethazine hydrochloride. Shuntong and Huaxin then raised the sales price of promethazine hydrochloride from less than RMB200/kg to RMB300-1350/kg and further required the downstream medicine manufacturers to raise the price of compound reserpine tablets from RMB1.3/bottle to RMB5-6/bottle.

As a result, the compound reserpine tablets manufacturers could not afford the excessively high ingredient cost and were forced to suspend production, causing shortage of supply in the market. Upon receipt of complaints from these medicine manufacturers, the NDRC initiated investigations over Shuntong and Huaxin. Shuntong was imposed a punitive fine of RMB6.5 million on top of confiscation of illegal income of RMB0.377 million (about USD1.06 million in total). Huaxin was imposed a fine of RMB100,000 on top of confiscation of illegal income of RMB 52,600 (about USD23,800 in total). The NDRC also ordered the companies to terminate their exclusive sales agreements with the promethazine hydrochloride producers.

Comments

The NDRC's news release did not clearly indicate which article(s) of the AML the two companies have violated. Based on publicly available information, we understand that Shuntong and Huaxin abused their dominant position in the promethazine hydrochloride market by charging excessively high price and by imposing unreasonable conditions without valid reasons.

Dominant Position

Assuming there is no effective substitute for promethazine hydrochloride as a key ingredient of compound reserpine tablets, promethazine hydrochloride could be considered to constitute a separate relevant product market under the AML. The relevant geographic market could de defined as China-wide, given that the NDRC is only concerned with the domestic supply and demand of the product.

According to the NDRC, Shuntong and Huaxin controlled the entire supply of promethazine hydrochloride by entering into the exclusive sales agreements with the only two manufacturers of promethazine hydrochloride. The exclusive sales agreements effectively ruled out the possibility for other distributors to purchase and resell the relevant product. Moreover, it was reported that the two companies had cross shareholding relationships. Therefore, adequate competition between the two suppliers would not be expected to exist.

Pursuant to Article 19 of the AML, in case that two operators hold over 2/3 of market shares in the relevant market, the operators can be deemed to have a dominant position. In this case, it appears that the NDRC considered Shuntong and Huaxin to be dominant players in the relevant market.

Abusive Conducts

There is no evidence showing that the aforesaid dramatic increase of promethazine hydrochloride price was resulted from a rise in its cost. According to Article 17(1) of the AML and Article 11 of the NDRC's Rules on Anti-price Monopoly ("Price Monopoly Rules"), where a dominant operator increases price beyond a reasonable range when the product cost remains stable, it could be deemed as charging an unfairly high price, which is a type of prohibited abusive conducts.

Additionally, we understand that by requiring the compound reserpine tablets manufacturers to raise the price of the medicine may also constitute a violation of Article 17(5) of the AML by imposing unreasonable trading terms on trading counterparts.

It appears that in its antitrust enforcement, the NDRC is targeting not only large SOEs but also smaller companies having control over supplies of important products. Its successive actions have also indicated that the NDRC is ready to take a stronger stance in its enforcement of price-related monopoly conducts.     

1. For the original news release on the NDRC's website (in Chinese), please refer to: http://jjs.ndrc.gov.cn/gzdt/t20111115_444599.htm.

Both companies disclosed that they have submitted to the NDRC "proposal(s) for enhancement initiatives" and applications for suspension of investigation.  They both committed to improve the internet interconnection quality, adjust the pricing management of internet dedicated leased line access service and continue to invest and upgrade construction of broadband network in China.  China Telecom particularly mentioned that it would reduce the price for direct interconnection with China Tietong (a smaller backbone operator who also competes in the internet access retail area) and promised to lower the internet access unit price for public customers by approximately 35% within 5 years with higher access speed.

Later the same day, the NDRC confirmed that it has received and is reviewing the applications from the two companies.

China Telecom and China Unicom are the two largest backbone network operators in China.  On November 9, the NDRC announced that it had launched investigations into the two companies' broadband access businesses.  Ms. Li Qing, the Deputy General Director of the Price Supervision and Anti-monopoly Bureau of the NDRC, commented that by charging their competitors much higher prices than non-competitors, the two companies could constitute "price discrimination" (one of the abusive conducts) under the AML (for details, please check out our previous articles entitled "Chinese Antitrust Enforcement Agencies Ready to Show Teeth to Large State-owned Enterprises?" and "Earlier Rumor Confirmed: China Telecom and China Unicom under Antitrust Investigation".

Comments

China Telecom and China Unicom filed the application for suspension of investigation pursuant to Article 45 of the AML.  According to Article 45, if a company under antitrust investigation undertakes to take timely measures to eliminate the consequences of its alleged monopolistic practices, the AML enforcement agencies may decide to suspend the investigation.  Upon fulfillment of such commitments, the AML enforcement agency may make a decision to terminate the antitrust investigation.  Investigation may nevertheless be resumed if (a) the company fails to perform its commitments, (b) the facts based on which the suspension decision was made changed materially or (c) the information provided by the company based on which the suspension decision was made was incomplete or unauthentic. 

Both the NDRC and the State Administration for Industry and Commerce have provided similar procedural guidance relating to suspension of antitrust investigation.

If an application is successful, the company that applied for suspension can benefit from relatively speedy closing (at least temporarily) of the investigation. Moreover, we understand it would be reasonable to infer that once an application is granted, the company will not be imposed antitrust fines that could have ranged from 1-10% of its turnover for the previous year.  Nevertheless, it is not entirely clear under the AML what implications the company's undertakings may have in an AML private litigation.  We however notice that the draft rules governing AML private actions released by the Supreme People's Court in April expressly provided that such commitments made by a company cannot be used in support of direct presumption of monopolistic conducts.

Will NDRC accept the commitments and decide to suspend the investigation? We will keep a close watch on this milestone antitrust investigation.
 

¹For China Telecom's announcement in HKEx, please refer to http://www.chinatelecom-h.com/eng/announcements/announcements/a111202.pdf. For China Unicom's announcement in HKEx, please refer to http://www.chinaunicom.com.hk/files/doc/News-2011/a120200-tc.pdf.

The news

The news was released by News in 30 Minutes, the daily midday news program of CCTV (China's state television broadcaster) on November 9.  According to the exclusive interview with Ms. Qing Li, the Deputy Director General of the Price Supervision and Anti-monopoly Bureau of the NDRC, NDRC has been investigating China Telecom and China Unicom for their alleged abuse of dominance in the broadband access and inter-network settlement sector.

According to Ms. Li, the followings have already been found through investigations:
 

• China Telecom and China Unicom together account for more than 2/3 shares in the internet    access market, indicating the companies have dominant market positions;
   
• Both companies charged their competitors much higher prices than non-competitors, which   could constitute "price discrimination" (one of the prohibited abusive conducts) under the AML.

Ms. Li further stated that if the abuse is established, fines of 1% to 10% of the companies' sales of the preceding year could be imposed in accordance with the AML. She also mentioned that the turnover of China Telecom and China Unicom in relation to their internet access business is approximately RMB 50 billion and RMB 30 billion respectively.  It is therefore speculated that the potential antitrust fines can be as much as billions of RMB.

This news report verified an earlier report claiming that China Telecom has been under antitrust investigation by certain "relevant authorities". Furthermore, it suggests that the investigation has extended to another telecommunication giant—China Unicom. As mentioned in our previous article, the two companies almost duopolize China's broadband access market.

The news led to a plunge in the two companies' share prices. Later on the same day, both China Telecom and China Unicom, in conformity with their disclosure obligations under the Hong Kong Stock Exchange rules, made announcements in response to the news. China Telecom claimed that it would fully cooperate with the authorities on the investigation.¹  China Unicom declared that it was in the process of providing the NDRC with pricing, volume, turnovers and other relevant information of its involved business.²  

Comments

NDRC's confirmation of its antitrust investigations against the two giant State-owned telecommunication operators can be seen as a clear indication that Chinese competition authorities are ready to show their teeth to all violators of the AML regardless of their identity.  In this sense, it is an improvement for AML enforcement, and clears doubts as to whether state-owned enterprises will be treated differently under the AML.

From a technical perspective, as mentioned in our previous article, assuming the alleged abusive conducts existed, the companies are likely to be caught by Article 17 (1) or Article 17 (6) of the AML.  According to Ms. Li, the companies potentially violate Article 17(6) of the AML for conducting "price discrimination".

 What is "price discrimination"?

Pursuant to Article 17(6) of the AML, a dominant operator shall not abuse its dominance by "adopting differentiated terms of transactions, such as transaction price, with trading counterparts of same conditions without a valid reason".  We have said before that one of the key points in establishing price discrimination is whether the companies' competitors and other internet bandwidth renters (such as Internet Content Providers) can be regarded as "trading counterparts of same conditions" thereby deserving equal trading terms.  Furthermore, the companies can also defend their differentiated pricing policies by claiming they have "valid reasons" for doing so.

 What are possible "valid reasons" as defense?

There is no hint in the NDRC's Rules on Anti-Price Monopoly about what could constitute a "valid reason" for a dominant company to exercise price discrimination. However, we may find some clue in the State Administration for Industry and Commerce ("SAIC")'s Rules on Prohibition of Abuse of Dominance ("SAIC Rules") that governs non-price-related abuse of dominance.  The SAIC Rules provide that when determining valid reasons, SAIC may consider: (1) whether the conduct is based on normal operations and for normal benefits of the company; and (2) the impact of the conduct on economic efficiency, public interest and economic growth.  Although the SAIC Rules are not binding on the NDRC, it is reasonable to make reference to these provisions since the SAIC and NDRC are both antitrust authorities having close relationships.

 What is the finable turnover?

Another interesting issue we noticed in the news report is that the turnover of the companies the NDRC official referred to only relates to the companies' internet access business, which is the subject of this investigation.

Article 46 of the AML provides that an operator in violation of the AML could be imposed a fine of 1% to 10% of its turnover of the preceding year. The AML and the relevant rules provide no further guidance as to whether the turnover here, as the basis for calculating penalties, refers to a company's total turnover or it only relates to a company's business segment where violation is found.  Neither is there clarification as to whether the turnover here is on worldwide or China–wide basis. The NDRC's statement shed some light on this unsettled issue: it appears that at least for now, only the turnover of the relevant business is taken into account.

Although the NDRC has yet to make a definitive finding on its investigation of China Telecom and China Unicom, its fierceness on this event is ground-breaking and reflects the growing emphasis and attention on AML enforcement in China. Whatever the result is, this investigation will become a milestone of AML enforcement in China.   

As one of the most powerful state agencies, the NDRC had been challenged for not taking significant actions to enforce the AML. Apparently, the NDRC is trying to change the landscape and it is reasonable to expect that it would become more active in the future in combating price-related anti-competitive conducts.

¹Available at http://www.chinatelecom-h.com/eng/announcements/announcements/a111109.pdf.

² Available at http://www.chinaunicom.com.hk/tc/investor/ir_annouce.html. As a dual listed company, China Unicom also made a similar announcement with Shanghai Stock Exchange.

Facts

SCTG is a Taiyuan company active in many transportation related services.  It has been running the railway ticket agent business since 1987, and currently owns 15 railway ticket agent stores in Taiyuan city.  Ever since 2007, SCTG has been applying for establishing new railway ticket agent stores with the Taiyuan Bureau of Railways for 4 years, but has never received any responses.

According to the current regulations in China, local bureaus of railways, like Taiyuan Bureau of Railways, are in charge of granting authorization to railway ticket agents.  The local bureaus of railways are also the authority in charge of the operation of railways.  Since 2006, the Taiyuan Bureau of Railways has authorized 74 new railway ticket agents, all of which are controlled by affiliates of Taiyuan Bureau of Railways.
 
SCTG alleged that Taiyuan Bureau of Railways had abused their dominance in the railway ticket agent market, unfairly deprived other non-related applicant like SCTG the right to engage in the railway ticket agent service; and that this was in breach of the AML.

It is not exactly clear what SCTG's petitions are from public information . 

Comments

China's railway authorities faced lots of blames for its monopolistic management and operation of the railway and railway related industries.  The SCTG Case represents the pressing demand of the public for an open market and fair competition in these industries. 
The interesting issue of the SCTG Case is that the case is an administrative litigation rather than a civil litigation, although SCTG accused Taiyuan Bureau of Railways for abuse of dominance, rather than abuse of administrative power to eliminate and restrict competition. 
The AML only provides that civil litigation can be initiated against business operators' monopolistic conducts (i.e. Article 50), and does not expressly provide administrative litigation as the dispute resolution mechanism for alleged abuse of administrative powers.  If the government agencies abuse its administrative power to eliminate and restrict competition, according to Article 51 of the AML, its superior authority shall order it to correct such action. 

It remains to be seen how the SCTG Case would proceed after the acceptance.
 

Fact

From the news and other public available sources, we understand that the antitrust investigation may focus on whether China Telecom abused its dominance in broadband backbone network market by charging other broadband access network operators a price for using its backbone network that is much higher than the price China Telecom charge the other internet operators, for the purpose of squeezing out the other access network operators.
 

• China Telecom's position in the market of broadband backbone network services and broadband access network services

The broadband backbone network is the principal data routes that connect different networks among cities, countries or even continents. In China, there are only two nationwide duopolists running backbone networks, i.e. China Telecom and China Unicom. In fact, rather than competing with each other, China Telecom monopolizes the backbone network service market in South China, while China Network monopolizes  the market in North China.
 

Broadband access networks are built to approach the broadband end-users such as families and enterprises. China Telecom and China Unicom also are big players in providing access network services, whereas other operators such as Great Wall Broadband, China Railcom and China Mobile are active as well. Since all of these broadband access network operators have to connect to the broadband backbone network, they are heavily dependant on broadband backbone network operators, i.e. China Telecom in South China, and China Unicom in North China. In particular, under  the Measures for Inter-network Settlement at Internet Exchange Center (hereinafter referred to as "Settlement Measures") promulgated by the Ministry of Industry and Information Technology (MIIT), these operators are required to pay backbone network access fees (access fees) to China Telecom and China Unicom.  Moreover, the cap of the access fees is also provided in the Settlement Measures.
 

• China Telecom's alleged abusive conducts
  

As alleged in news reports, China Telecom may have charged competing access network operators an access fee that is three times or even a dozen times higher than other types of users such as internet content providers (ICPs). By forcing its rivals to pay much higher access fees, China telecom may thus be in a better position to expand its own business in providing broadband access network services. 

In practice, to avoid the hefty access costs, the other access network operators usually buy bandwidth from third parties (such as the ICPs), as the cost could be much lower. 

• Reported antitrust investigation
  

The investigation is said to be triggered by an August 2010 internal circular of China Telecom, under which China Telecom required its provincial branches to cut down connection to the backbone network if the access is achieved through buying the bandwidth from a third party.  The crackdown measures are reported to have adversely affected a wide range of broadband access network operators including many state-owned operators, and as a result affected thousands of internet end-customers.

It is reported that the antitrust investigation by "a relevant antitrust authority" started in the first half of 2011 and it has already carried out many rounds of inquiries and evidence collections with China Telecom. A number of access operators, research institutions and experts were also approached for verification. It is also reported that the authority has drawn a preliminary conclusion that the conducts of China Telecom as mentioned above can be found as constituting abuse of dominance. So far, there is no official response from any government authorities in this respect.

Comments

Since large state-owned enterprises in telecommunications, a traditionally highly concentrated industry, are involved, the news attracted lots of attention in spite that the sources and accuracy of the information still need to be verified.  Observers are pondering whether this is a sign that the Chinese competition authorities are ready and eager to show their teeth to large state-owned enterprises.
 

• Whether an abuse of dominance can be found?

Assuming China Telecom's accused conducts truly existed, we consider that such behaviors are likely to be caught by Article 17(1) or Article 17 (6) of the AML. Article 17(1) of the AML provides that a dominant operator shall not abuse its dominance by charging unfairly high or low prices. Article 17(6) of the AML provides that a dominant operator shall not abuse its dominance by "implementing differential treatment for terms of transaction such as transaction price for similar trading counterparts without a valid reason".

As is the case for all abuse of dominance cases, the threshold issue would be to identify a relevant market and then to determine whether there is a dominant position in the relevant market. In addition, in relation to Article 17(1) of the AML, the key issue would be whether the access fee is unfairly high, which could be drawn by a comparison with China Telecom's relevant costs. In relation to Article 17 (6), it is still left to be argued whether the access network operators and other types of users are "similar trading counterparts" that deserve to be charged at the same price level.

To defend itself from both accounts, China Telecom may argue that the highest access fee it charges its rivals is still below the price cap set in the Settlement Measures by MIIT.  In other word, the price charged by China Telecom to other access network operators is still in compliance with the guidance price set by the government. 

We understand that this case is similar to the famous Deutsche Telekom case, in which Deutsche Telekom charged a higher access fee at wholesale level than at the retail level to force its competitors to charge their end-user higher price (so-called "margin squeeze"). This was found to be an abusive conduct by European Commission in 2003 and confirmed by the European Court in 2008 (Case T-271/03),  and the defendant's similar argument was not accepted by the European Court. The Court pointed out that compliance by Deutsche Telekom with the industrial regulation did not absolve it from responsibility under competition law. Besides, we also noticed that, according to the news report, it is China Telecom's crackdown measures (rather than the higher price charged) that triggered the possible investigation.  We consider that the crackdown itself may also be suspicious of violating Article 17 (3) of the AML which prohibits the dominant operators from refusing to transact with trading counterparts without a valid reason. The disputable point in this scenario is whether China Telecom has any valid reasons to prohibit resale of bandwidth if such resale does not violate any laws or regulations.
 

• Who is the investigation authority and what are the possible results?
  

Although no public sources have identified the specific authority, we understand the proper investigation authority should be the National Development and Reform Commission ("NDRC") since the major conducts under the said antitrust investigation (i.e., charging the other access network operators a much higher access fee) are price-related.

According to Article 47 of the AML, once an operator was found guilty for abusing dominance, the anti-monopoly enforcement agency, who in this case is possibly NDRC, shall order the operator to stop the illegal act, confiscate its illegal income and impose a fine of 1% to 10% of the sales amount of the preceding year. If such penalties are to be imposed, it will not only be the first time for a fine to be imposed on a state-own enterprise under the AML but also will likely involve a huge sum of money, given that, according to the mid-term report published by China Telecom, the revenue generated from broadband access services in the first half of 2011 amounts to almost RMB30 billion. Furthermore, if fines were imposed here, it will be interesting to see how the "illegal income" and specific amount of fines would be determined, by considering the nature, extent and duration of the illegal acts according to Article 49 of the AML.
 

• Will the fine be imposed to China Telecom.

Early this June, the European Commission imposed a fine on a Polish telecommunications company for abusing its dominant position on the Polish broadband market. We notice that the Polish case as well as the aforesaid Deutsche Telekom case shares many similarities with the reported China Telecom case although we doubt that the Chinese competition authorities would go that far as the European Commission and European Court.

On the other hand, stakeholders in the industry seem to hold a negative view on the antitrust investigation and the possible fines.  Some of them believe that the issue in the spotlight can only be addressed by revising the Settlement Measures which set a too high price cap for the access fee that is totally outdated. Some even believe that this issue can only be dealt with once and for all by reconstructing the whole broadband industry.  MIIT, who is responsible for updating the Settlement Measures and regulating the industry, may also be expected to adopt some measures to solve the issue. This brings us to the common problem of how the anti-monopoly enforcement agencies and industry regulators will cooperate with each other when antitrust issues come forth.

We will keep an eye on this case and follow up if there is any substantive development.

The WB-WCR case has been filed with the Wuxi Intermediate People’s court. The court hearing is scheduled for 18 November 2010.

While we do not currently have many details to do with the pending WB-WCR case, earlier this year, there was a similar case being filed (the “CB-CE case”). The CB-CE case was settled in the end. However, it is likely that the plaintiff and defendant in the WB-WCR case will raise similar issues that were raised in the CB-CE case (as the fact patterns are similar between both cases). The following is a summary of what we know about the CB-CE case.

CB-CE case - facts(2) 
The plaintiff was Changzhou Baocheng Vehicle Cylinder Inspection Co. Ltd (CB). CB is engaged in the business of inspecting and installing compressed natural gas vehicle cylinders.

The defendants were Changzhou ENN Gas Development Co Ltd (CE) and Changzhou ENN Gas Engineering Co Ltd (CE Engineering). CE owns and operates natural gas filling stations. CE Engineering is, like CB, engaged in the business of inspecting and installing compressed natural gas vehicle cylinders. CE and CE Engineering are affiliated companies.

On 15 and 16 November 2009, CB installed compressed natural gas vehicle cylinders for 10 taxis. Subsequently, the taxis attempted to fill gas at CE’s natural gas filling stations. CE refused to fill gas for the 10 taxis. CB therefore has alleged that CE has abused their dominance by refusing to transact or fill natural gas for the 10 taxis in breach of Article 17(3) of the Anti-Monopoly Law (AML).(3)   CB alleged that the reason CE has refused to transact with the 10 taxis is because they (the 10 taxis) contained natural gas vehicle cylinders installed by CB. Further, CB alleged that by refusing to transact with the 10 taxis for the alleged reason above, CE has abused their dominance by indirectly suggesting that the 10 taxis should use natural gas vehicle cylinders installed by CE Engineering instead – in order to be served at CE natural gas filling stations. CB has alleged that this is a form of “restricting” the 10 taxis to transact only with CE Engineering, in breach of Article 17(4) of the AML.(4) 

CE and CE Engineering’s defence was that their employees refused to fill natural gas for the 10 taxis because they thought that there might be safety risks and considerations if they filled CE natural gas into natural gas cylinders installed by CB. CE and CE Engineering claimed that because they were unfamiliar with the manner in which CB installed these natural gas cylinders into the 10 taxis (and were not able to verify that CB staff possessed the requisite qualifications and technical skills to conduct these installations), it was risky for CE to fill their natural gas into these taxis.

CB-CE case - court process and settlement
This matter was filed in the Changzhou Intermediate People's Court on 28 January 2010. A public hearing was listed for 11 March 2010. However, the parties settled the matter privately before the hearing. CB withdrew their application on 26 March 2010.

Comments
The terms of settlement for the CB-CE case have not been made public. However, it is interesting to note that companies are increasingly becoming aware of the parameters of the AML and are using the AML as a tool to defend their “competitive” rights. It will be interesting to watch the outcome of the WB-WCR case and see if the case raises similar issues to the CB-CE case.

(1) Pursuant to Article 17(3) of the AML, business operators who hold a dominant position may not abuse their dominance by engaging in a refusal to deal or transact with other business operators, without a valid reason.

(2) These facts were pieced together from a variety of public sources including Chinese press articles about the CB-CE case, such as this one: www.zhong5.cn/article-122780-1.html.

(3) Pursuant to Article 17(3) of the AML, business operators who hold a dominant position may not abuse their dominance by engaging in a refusal to deal or transact with other business operators, without a valid reason.

(4) Pursuant to Article 17(4) of the AML, business operators who hold a dominant position may not abuse their dominance by restricting other business operators to transact only with the business operators or only with designated business operators without a valid reason.
 

Facts
The plaintiff was Huzhou Yiting Termite Prevention Service Co., Ltd (HY). HY was established in November 2008 as a corporation for the purpose of engaging in the business of supplying termite prevention services.

Pursuant to Article 6 of the Termite Prevention Management Rules for Urban Houses issued by the Ministry of Construction in 2004, corporations wishing to engage in the business of supplying termite prevention services must fulfil a number of requirements, including: possessing a registered capital of RMB 30 million or above; and employing full time professional and technical staff who are skilled in the fields of biological testing, drug testing and construction.

The Planning and Construction Bureau of Huzhou (the Bureau) was of the view that HY failed to meet the requirements pursuant to the Termite Prevention Management Rules for Urban Houses and thus did not approve HY’s application to register as a business engaging in the supply of termite prevention services.

Prior to 2005, the Bureau owned an entity known as the Huzhou Termite Prevention Research Institute (the Research Institute). The Research Institute was engaged in the supply of termite prevention services. Post 2005, the Research Institute was privatized. However, post 2005, the Bureau still continued to have some involvement in the Research Institute’s accounts and revenue. HY launched an administrative challenge and alleged that the Bureau’s involvement in the Research Institute’s accounts and revenue amounted to an illegal collection of fees against this conduct and won. HY won this administrative challenge.

On 25 November 2009, HY proceeded to file a suit (in the Hangzhou Intermediate People's Court) against Huzhou Termite Prevention Research Institute Co., Ltd (the Research Institute). The Research Institute is a private entity engaged in the supply of termite prevention services.(1)   HY alleged that the Research Institute had abused their dominance, in breach of the Anti-Monopoly Law (AML) (during the period where the Bureau refused to register HY). It is unclear on what basis that HY has alleged that the Research Institute has abused its dominance – however, during the period where HY was unable to be registered as a legitimate termite prevention services company, the Research Institute was the only entity supplying this service in Huzhou city (Zhejiang province).
HY also alleged that the Research Institute had abused its dominance by blocking the former’s access to the market for the supply of termite prevention services. HY demanded a total of approximately RMB 2.2 million in damages.

Court Process
On 25 November 2009, the Hangzhou Intermediate People's Court accepted the case. On 7 June 2010, the Hangzhou Intermediate People's Court issued a first instance judgment in which the court dismissed HY’s claims. HY has appealed to the Zhejiang Higher People's Court – the case is currently pending.

Key findings
The following are the salient points raised in the court’s first instance judgment:

• the court found that the relevant market was the supply of termite prevention services to houses and construction sites in Huzhou city (Zhejiang province);
• the court found that the Research Institute was dominant in the relevant market, as it was the only entity (during the period where HY was not registered) which engaged in the supply of termite prevention services to houses and construction sites in Huzhou city (Zhejiang province);
• the court was of the view that the Bureau’s refusal to register HY as a legitimate termite prevention services provider was based on legitimate grounds pursuant to the Termite Prevention Management Rules for Urban Houses; and
• the court held that there was insufficient evidence to prove that there was any abusive conduct on the part of the Research Institute. The court held that there was insufficient evidence to prove that the Research Institute had the intention of restricting or eliminating competition in the relevant market.

Comments

This case is significant because it is the first case in which the court has found that an entity was dominant in a relevant market. However, it is not surprising that the Research Institute was found to be dominant in the relevant market – because the Research Institute was the only service provider in the relevant market (i.e. they possessed 100% market share of the relevant market).

We note that HY has chosen to bring an action against the Research Institute instead of bringing an action against the Bureau. If HY had decided to bring an action against the Bureau, they could have relied on Article 51 of the AML which states that administrative agencies are prohibited from abusing their administrative powers to exclude or restrict competition. However, Article 51 does not say explicitly that entities would be entitled to damages upon winning a case pursuant to that article.

(1) Until 2005, the Research Institute was owned by the Bureau (and was a public body). However post-2005, the Research Institute was privatized. However, post-2005, even after the Research Institute was privatized, invoices and documents issued by the Research Institute still bore the Bureau’s seals and letter head. It is unclear why the Research Institute still made use of the Bureau’s seals and letterheads.

This was an abuse of dominance case – the case was ruled in favour of the defendant.

The first instance judgment (from the Beijing First Intermediate People’s Court) was handed down on 18 December 2009. This judgment was affirmed on appeal (by the Beijing Higher People’s Court) on 9 June 2010.

Facts
The Plaintiff, Li Fangping (a lawyer by profession) (Li) commenced proceedings against the Beijing Branch of China Netcom (Group) Co. Ltd (CNC Beijing) (a telecommunication services provider); alleging that the latter had abused its dominance in relation to their fixed telephone line services.

CNC Beijing offered two payment plans in relation to their fixed telephone line services: (a) a “pre-pay” payment plan; and (b) a “post-pay” payment plan. Pursuant to Article 2 of the CNC Beijing standard form customer service contract, customers who are not residents registered in Beijing are generally not eligible for “post-pay” payment plans.

Li lived and worked in Beijing – but he was not registered as a resident in Beijing. Li attempted to register for their “post-pay” payment plan but was refused this service by CNC Beijing, due to his residency status. Li alleged that since CNC Beijing restricted a number of special offers in relation to their fixed telephone line services (including the “post-pay” payment plan) only to Beijing registered customers, they have abused their dominance.

Specifically, Li alleged that CNC Beijing abused their dominance by implementing “differential treatment” for customers registered in Beijing versus customers (like himself) who were not registered in Beijing – in relation to CNC Beijing’s fixed telephone line services.

Judgment
The following are some of the salient issues raised and discussed in the first instance judgment:

• the court affirmed that the plaintiff bore the burden of proof in relation to market definition and to prove that the defendant held a dominant position in the relevant market;
• Li alleged that CNC Beijing was dominant in the fixed line services market. To prove this, Li relied on CNC Beijing’s high ranking in a website called “Netcom Listing” as well an article sourced on the web about how successful CNC Beijing was in the fixed line services industry. The court found that Li’s evidence was insufficient to prove that CNC Beijing was dominant. The court also found that from the evidence provided, Li had failed to articulate and provide evidence as to what the “relevant market” was.
• Li alleged that CNC Beijing was in breach of Article 17(6) of the Anti-Monopoly Law; that is they abused their dominance by implementing differential treatment in relation to their fixed telephone line services to registered and non-registered Beijing customers, without a valid reason.
• CNC Beijing argued that it was not true that there were strictly different conditions for registered and non-registered Beijing customers. For example, persons not registered in Beijing could still be eligible for special offers such as the “post-payment” plan provided they own real estate in Beijing. If CNC Beijing did not implement such restrictions on persons not registered in Beijing, they claimed that they would face significant “operational risks”. The court accepted this “operational risk” reason as a “valid reason” in terms of CNC Beijing explaining its conduct in relation to the different limitations and conditions in relation to customers who wished to apply for fixed telephone services.

Commentary

It appears that Li did not provide sufficient evidence as to CNC Beijing’s dominance in the fixed telephone line services market. It also appears that Li failed to articulate and provide evidence in relation to what the “relevant” market was. It is important that plaintiffs clearly articulate what the relevant market is; as well as submit clear evidence in relation to a defendant’s dominant position in that market. It does not appear that web rankings and articles on the web are sufficient to prove a defendant’s dominant position in a relevant market. This calls to question what evidence would be required to prove dominance – some possibilities are survey data from credible reports or sources or perhaps other quantitative or qualitative data from credible economic agencies or economists.

It is also interesting that the court accepted CNC Beijing’s “operational risk” reason as a valid reason in relation to their different conditions for registered and non-registered Beijing customers. In other jurisdictions, courts and antitrust authorities have also recognised such similar “legitimate commercial reasons” as defences in relation to abuse of dominance cases.

B. IPRs and abuse of dominance

Article 55 also subjects the exercise of IPRs to the abuse of dominance conduct rule (Article 17 of the AML). This is similar to the approaches of the competition laws of the US, Singapore, EU and Australia.

The key phrase is “abusing… intellectual property rights”. However, this phrase has not been defined in the AML.

This phrase, is, however used in Article 40 of the World Trade Organisation’s (WTO) Agreement on Trade Related aspects of Intellectual Property Rights (TRIPS). Article 40(2) may shed some light in relation to the AML phrase “abuse of intellectual property rights”:
“…nothing in this Agreement shall prevent Members from specifying in their legislation licensing practices or conditions that may in particular cases constitute an abuse of intellectual property rights having an adverse effect on competition in the relevant market …a Member may [however] adopt, consistently with the other provisions of this Agreement, appropriate measures to prevent or control such practices, which may include for example exclusive grantback conditions, conditions preventing challenges to validity and coercive package licensing, in the light of the relevant laws and regulations of that Member.”

China acceded to the WTO in 2001 and as such has an obligation to comply with all WTO agreements including TRIPS. In paragraph 286 of the Report of the Working Party on the Accession of China, some members of the Working Party expressed some concern as to the compatibility of China's rules on control of anti-competitive licensing practices or conditions with the corresponding obligations under Article 40 of TRIPS. Notably, the representative of China stated in response that China's legislation would comply with these obligations. The representative of China stated that these rules would apply across the board to all intellectual property rights. The Working Party on the Accession of China took note of this commitment. Hence, there is some suggestion that Article 55 of the AML may not stray too far from Article 40(2) of TRIPS.

On October 11, 2007, the European Communities raised the following question with China during a WTO Council for TRIPS meeting: “…[t]he EC welcomes the recently adopted Chinese Anti-Monopoly Law. This new legislation refers to the concept of ‘abuse of intellectual property rights’ in particular in Article 55. Can China clarify what this concept means in practice? Can China confirm that this concept does not go beyond what the TRIPS Agreement considers as abusive practices under Article 31(k) (compulsory licensing) and Article 40 (competition)?” This question may be indicative of concerns from other WTO members as to whether China will ignore Article 40 of the TRIPS Agreement when defining the term “abuse of intellectual property rights”.

Dominant entities exercising IPRs may still have to be concerned about the following provisions: (a) the prohibition against refusal to deal (without justification) ; (b) the prohibition against exclusive dealing (without justification) ; (c) the prohibition against tying ; and (d) the prohibition against applying differential treatment to parties . In a typical IP licence, it is common to find tying and exclusive dealing provisions. It is also common for IPR owners to refuse to deal with certain entities for various reasons.

Given that no guidelines or regulations have been issued in relation to the AML, there is much uncertainty as to how the dominance provisions (or the rest of the other provisions) of the AML will operate.

In relation to Article 55, the following questions arise: Should dominant entities (exercising IPRs) be subject to the same competition scrutiny as dominant entities selling other goods or services? Or would Chinese competition regulators apply a different standard in relation to IP licences and assignments, in recognition of the fact that IP differs from all other forms of property? Does the Chinese government intend for there to be transitional provisions in relation to the AML? Will the AML apply to IP licences and assignments entered into after 1 August 2008 (the date in which the AML will come into effect) or will it apply retrospectively to IP licences and assignments entered into before 1 August 2008?

C. The Article 15 “improving technology, research and new products” exception

If entities are somehow not able to get their IP related agreements exempt from the AML pursuant to Article 55, then there is a possibility that these agreements may be exempt pursuant to Article 15. Specifically, Article 15 of the AML exempts certain categories of agreements from the “monopoly agreements” conduct rule (located in Article 13 and 14). However, it is important to note that Article 15 does not exempt an agreement from the abuse of dominant position conduct rule (located in Article 17).

The most relevant Article 15 exemption in relation to IP related agreements is the “improving technology, research and new products” exception located in Article 15(1). Specifically, Article 15(1) exempts agreements made “for the purpose of improving technology, researching and developing new products” from the monopoly agreements conduct rule.

The EU has a similar exemption in the form of a block exemption entitled “categories of research and development agreements”. However, in order for an agreement to fall under the EU block exemption, there are several conditions which need to be fulfilled, including the condition that, if the agreement only provides for joint research and development but excludes joint exploitation of the results, then each party conducting the research must be free to exploit the results and any necessary pre-existing know-how independently. In addition, agreements exempt under this block exemption are immune from competition law only for a limited period of time (usually 7 years) and the market share of the participant undertakings must not exceed a particular threshold (for non-competing undertakings, the threshold is 25%).

It is unclear whether the Article 15 exemption will apply in a similar way as the EU’s “categories of research and development agreements” block exemption.

There are still many grey areas to iron out in relation to Article 55 and Article 15 of the AML. Hopefully guidelines or regulations, which are able to shed light on some of the issues and questions above, will be issued before the AML comes into effect.