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

The Provisional Measures have not been officially released to date, and are expected to be published early next year. 

A draft of the Provisional Measures was published for comments on June 13, 2011 (see our previous article entitled "MOFCOM publishes draft rules on investigation procedures re failure to notify on concentrations" for more information).  According to earlier report, the Provisional Measures are among the three new rules on merger control that are expected to be released within this or next year.  The other two new rules deal with merger remedies and notification of concentration below notification thresholds respectively.

¹ MOFCOM's press release can be found here (in Chinese): http://bgt.mofcom.gov.cn/aarticle/c/d/201112/20111207869504.html.

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.
 

This change shows that the authority would take a rather strict approach in the enforcement of the NSR regime.  It is fair to say that it would be very hard for foreign companies to try to circumvent the NSR process by designing complex transaction structures, including by means of variable interest entities (VIEs).  It is expected that the NSR Rules will have a far-reaching effect on the landscape for foreign mergers and acquisitions in China.

Furthermore, during the foreign investment approval process, the local commerce departments (local counterparts of MOFCOM) are charged with the responsibility to screen transactions that are subject to the NSR regime yet are not voluntarily filed.  According to the Notice on Establishing National Security Review Mechanism for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors issued by the State Council (NSR Notice), MOFCOM has the sole discretion in determining whether a transaction is subject to the NSR process.  As far as we know, a list of sectors that are subject to the NSR process has been circulated to local commerce departments.  Although the list is not publicly available, the scope of industries included therein is said to be broader than expected.  In practice, we have encountered cases where local commerce departments require the foreign investors to file for national security review if the industry involved in the transaction has some bearing on the listed industries (see our article entitled Local commerce administrative agencies and the national security review process). 

Other than being requested to make a filing by local commerce departments during the foreign investment approval process, relevant ministries of the State Council, nationwide industry associations, enterprises in the same industry (in relation to the proposed transaction) and enterprises in the upstream or downstream industries (in relation to the proposed transaction) can also trigger the NSR process by proposing such to the ministerial joint committee (Joint Committee) through MOFCOM.  It is reasonable to expect that competitors who feel threatened by a transaction where NSR may be applicable may wish to trigger the NSR process if the parties have not done so.  Therefore, it is particularly important for parties involved in high-profile or controversial transactions that potentially fall under the NSR regime to carefully examine the implications of the NSR Rules on their transactions to avoid any future surprises or potential delays.

Once MOFCOM officially accepts an application, the proposed transaction would face a compulsory waiting period of 15 working days, during which MOFCOM will determine whether the transaction falls under the purview of the NSR regime and therefore should be passed onto the Joint Committee.

If the proposed transaction is deemed by MOFCOM to be within the scope for national security review, the investor should expect another 30 to 90 working days (30 working days of general review period plus a possible 60 working days of special review period) to obtain the final decision of the Joint Committee. 

The procedural framework of the NSR process is very close to that of the merger control process under the Anti-monopoly Law (AML).  Based on our experiences in handling AML filings, nowadays a greater portion of the AML filings enter Phase II (equivalent to the special review period in the NSR process).  It is yet to be found out whether it would be the same case in the NSR process. 

Since there is no requirement under China's NSR rules for publication of NSR decisions, it is not entirely clear how many NSR filings MOFCOM has accepted thus far and whether MOFCOM has approved (or disapproved) a transaction under the NSR regime.  As part of the government approval procedures for foreign investment in China, the impact of the NSR process on inbound M&As is hard to be neglected.  Foreign investors should always keep the NSR process in mind, plan ahead, and put in place a well-thought-out strategy.
 

 The following are some salient facts in the lead up to this passenger fuel surcharge “hike”:

• On 25 October 2010, the National Development and Reform Commission (NDRC) issued a notice that the price of kerosene used in the aviation industry was to be increased.(2)
• The NDRC is the authority in charge of setting or adjusting the prices of vital commodities, including setting guidelines for prices and discount margins for entities in the civil aviation industry.
• The next day (i.e. 26 October 2010), Chinese airlines (such as those listed above) announced that they were raising passenger fuel surcharges for domestic flights.

Interestingly, the margin increase for these passenger fuel surcharges were identical: (3)

• for flights of 800KMs and below, the surcharge was increased from RMB20 per passenger to RMB40 per passenger (i.e. by 100%); and
• for flights above 800KMs, the surcharge was increased from RMB40 per passenger to RMB70 per passenger (i.e. by approximately 75%).

These large increases in surcharges have caused some controversy. According to the press, the NDRC had only increased the price of RP-3 kerosene (used by airlines) by only 3%.(4) Consumers have thus questioned the justification of the comparatively large price hikes.

In respect of the aviation industry, an entity known as the Civil Aviation Administration of China (CAAC) is responsible for recommending price adjustments to the NDRC. On 30 March 2010, both the NDRC and the CAAC published a notice to do with passenger fuel charges for domestic airlines. This notice specifies the formula in which each airline must use to calculate “maximum” fuel surcharge rates. The notice also states that each airline should use its own discretion to decide whether and when to collect fuel surcharges as well as the amount of these surcharges.

Thus far, as far as we are aware, no antitrust allegations have been made against the airlines in the press.

(1) See for instance the following press releases issued by the airlines: http://cnbusinessnews.com/chinese-airlines-to-raise-fuel-surcharges/; http://www.airchina.com.cn/cn/tripmanager/service_notice/booking_notice/10/107145.shtml;http://www.ceair.com/mu/main/gydh/ywks/201010/t20101027_21336.html；http://sc.travelsky.com/scet/DisplayNews.do?nid=201010261400465620；and http://www.xiamenair.com.cn/about_show.aspx?Id=817.
(2) See: http://www.ndrc.gov.cn/zcfb/zcfbtz/2010tz/t20101025_376815.htm
(3) See: http://www.china.com.cn/economic/txt/2010-10/27/content_21206853.htm
(4) Ibid.
 

 The collection of copyright royalties will be undertaken by the China Film Copyright Association (CFCA). According to the China Daily, the CFCA has 62 members (who own the majority of domestic movies) and will share in 90% of the royalties collected – the CFCA will keep the remaining 10% as management fees.(4)   Pursuant to the regulations, the CFCA will commence collecting royalties on 1 January 2011. The CFCA will commence collecting royalties in eight municipalities and provinces to begin with (including Beijing, Shanghai and Jiangsu). In addition, the royalties will be collected only in respect of domestic movies.

The regulations stipulate formulas for the calculation of domestic movie royalties. In respect of internet cafes, royalties will charged based on the fees they charge each visitor per hour and based on the number of computers they own. According to the China Daily, in respect of an internet café with 100 computers, that charges a visitor RMB3 per hour, it would have to pay a copyright royalty of RMB22.5 per day or about RMB8000 annually.(5)   Bus companies will have to pay between RMB365 to RMB500 annually per bus, regardless of the number or type of films shown on each bus.

Comment
Collecting societies such as the CFCA are an important part of the copyright regime in China. By allowing for the collective administration of copyright, the CFCA provide the creators of copyright material (such as domestic movie makers) the opportunity to efficiently and effectively gain returns for use of their copyright material. Collecting societies such as the CFCA minimize the costs of administering individual licences for the use of copyright by putting in place a “collective” licensing system. Users of the services provided by collecting societies also benefit by gaining easy access to a large volume of copyright material (in this instance, to a large database of domestic movies). This access may be inexpensive when compared to a situation where potential copyright users have to locate and negotiate individual licenses with individual copyright owners.

However, collecting societies also have the potential to raise antitrust or competition issues. Collecting societies bring together the rights of entities who would otherwise be competitors in their respective markets. Without collecting societies, copyright users would only be able to deal with a single entity to acquire a licence – thus collecting societies (who “control” a large segment of licences) could potentially use their “market power” to impose higher prices or less favourable conditions on users.

The antitrust or competition regimes of other jurisdictions (such as Australia) deal with this “intersect” between intellectual property law and antitrust or competition law – by putting in place an authorization system. This is where entities such as collecting societies may seek a formal opinion or clearance from the antitrust or competition authority, each time they wish to undertake certain conduct such as raise royalty fees. In China, we do not currently have a “formal” authorization system in place. Entities are encouraged to “self-assess” to see if their conduct is in breach of the AML. We expect that there should be more clarity in respect of what constitutes an “abuse of intellectual property right” once the State Administration for Industry and Commerce (SAIC) issues detailed guidelines explaining how Article 55 would operate (see our articles entitled “IP rights and Antitrust - awaiting Guidelines (and the Tsum-Sony Case)” ) and “The intersect between intellectual property law and competition law – implications for China”  for more on this issue).

(1)These regulations are: the Film Copyright Group Management Royalty Fees Collection Standards; and the Film Copyright Group Management Royalty Fees Transfer Method. See: http://www.gov.cn/gzdt/2010-10/14/content_1722409.htm.
(2)See for instance a complaint to the press by an association representing internet cafes in Shanghai at http://tech.163.com/10/1025/09/6JR3HDOS000915BF.html.
(3)Article 55 of the AML states that the AML will not apply to the exercise of intellectual property by business operators (pursuant to the relevant laws and administrative regulations on intellectual property). However, the AML will apply to the abuse of intellectual property by business operators to exclude or restrict competition.
(4)See: http://www2.chinadaily.com.cn/china/2010-10/15/content_11412828.htm
(5) Ibid.
 

 Article 55 of the AML deals with the intersect between intellectual property (IP) law and antitrust law (see also a previous article entitled “The intersect between intellectual property law and competition law – implications for China”).

Specifically, Article 55 of the AML carves out conduct amounting to the “exercise of intellectual property” from the AML, except when the said conduct amounts to an “abuse of intellectual property to exclude or restrict competition” by businesses.

The issue of the intersect between IP law and antitrust law is not new to China. There has been case law from the Chinese courts, which have dealt with this issue. A prime example is the case of Tsum (Shanghai) Technology Co Ltd vs Sony Corporation (2004) (the Tsum-Sony case).
The following are some salient pointers to do with this case:

• In 2004, Tsum (Shanghai) Technology Co Ltd (Tsum) a manufacturer and supplier of batteries alleged that Sony Corporation (Sony) sold digital cameras which were not compatible with any other brands of batteries but Sony batteries and that this was in breach of Articles 2 and 12 of the Anti-Unfair Competition Law.
• Article 2 of the Anti-Unfair Competition Law states that entities must abide by the principle of voluntariness, equality, impartiality, honesty and good faith, and also adhere to public commercial “morals” in respect of their business transactions. Article 12 of the Anti-Unfair Competition Law states that entities are prohibited from selling commodities attached with “unreasonable conditions” or force consumers to by tied commodities.
• Tsum alleged that Sony has “tied” Sony digital cameras with Sony batteries. Sony has “tied” these products by ensuring that other batteries were not compatible with Sony digital cameras. Tsum further alleged that Sony has “locked out” competing businesses (involved in the manufacture and supply of batteries) by undertaking the above mentioned conduct.
• Sony denied that it was seeking to “lock out” its battery competitors. Sony explained that they had to install a certain “digital key” in their cameras which rendered other batteries incompatible with Sony digital cameras – due to safety considerations. Sony further explained that when other brands of batteries were being used in Sony digital cameras, there were reports of “smoke, explosions and burning” – resulting in users and property being damaged.
• Sony’s digital key was patent protected – and Sony claimed that they had the right to exercise their intellectual property rights by making use of this digital key, without having to worry about the encroachment of antitrust principles and law.
• Tsum alleged that Sony’s usage of its digital key was unreasonable and harmful to consumers as companies like Tsum had to spend a lot of money (approximately more than RMB1million) to decipher how to ensure their batteries are compatible with Sony’s digital cameras and that this would result in higher prices (in relation to batteries) for consumers.
• On 20 December 2007, the Shanghai No. 1 Intermediate People’s court ruled in favour of Sony and denied Tsum’s claims.
• The court held that Sony’s digital key was necessary in Sony cameras to ensure that there was “necessary communication” between the battery and the camera. The court also held that there was insufficient evidence to show that Sony made use of its digital key to foreclose competition in relation to its battery competitors.

Comments
We expect to see many more actions like the Tsum-Sony case, now that Article 55 of the AML is in force. It is likely that Article 55 actions will commence soon after the SAIC publishes their guidelines (so Plaintiffs are clear on the sorts of arguments and evidence they would need to launch a successful Article 55 case).
 

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.

In China, pre-merger notification is required when the entities participating in the merger possess a certain amount of turnover. Specifically, pre-merger notification is mandatory when, during the previous fiscal year:

a the total global turnover of all business operators participating in the concentration exceeded 10 billion renminbi, and at least two of these business operators each had a turnover of more than 400 million renminbi within China; or

b the total turnover within China of all the business operators exceeded 2 billion renminbi, and at least two of these operators each had a turnover of more than 400 million renminbi within China.

The Anti-Monopoly Law (AML) is the primary antitrust legislation which governs merger control. Since the AML was enacted in August 2008, a number of regulations and guidelines relating to  mergers, have been promulgated. The regulations and guidelines listed below, came into effect in 2009:

a Market Definition Guidelines issued by the Anti-Monopoly Commission of the State Council (effective on 1 January 2009);

b Rules for Calculating Turnover concerning Concentration Notification of Financial Operators (effective on 15 July 2009);

c Working Guidance for Anti-Monopoly Review on Concentration of Business Operators (effective on 5 January 2009);^[1]

d Guidance on the Documentation of the Notification of Concentration of Business Operators (5 January 2009); ^[2]

e Measures for the Undertaking Concentration Declaration (released on 21 November 2009, effective on 1 January 2010); and^[3]

f Measures for Examination of Concentration of Business of Operators (released on 24 November 2009, effective on 1 January 2010).^[4]

II YEAR IN REVIEW

In 2009, we understand that Mofcom received approximately 87 merger review filings. In the same year, we understand that Mofcom made decisions on 67 of the filings. Among these 67 decisions, 62 mergers were approved without conditions; four mergers had conditions imposed; and one merger was not cleared.

As can be seen from above, the vast majority of merger filings were cleared without conditions. The four mergers that were approved with conditions along with the merger that was not approved have sparked considerable discussion and interest. The following are brief descriptions of these five merger cases.

i Merger that was not approved

The merger which was not approved was Coca-Cola Company’s (Coke) proposed acquisition of China Huiyuan Juice Group Limited (Huiyuan). In this case, Huiyuan’s market share in the Chinese juice market was 10.3 per cent. Coke’s market share in the same market was 9.7 per cent. Therefore, post-acquisition, the merged entity’s market share would be just under 20 per cent. Due to this relatively low combined market share figure, commentators therefore assumed that the proposed-acquisition would be cleared smoothly. However, Mofcom did not approve of the proposed acquisition. The main reason cited was because Mofcom was of the view that Coke would have the ability to leverage its dominant position in the carbonated soft drink market into the juice market.

According to Mofcom, this leveraging would have the effect of restricting or eliminating competition from other juice supply entities, and would eventually harm the interests of beverage consumers.

ii Mergers that were approved with conditions.

The following four mergers were approved with conditions:

Acquisition of Lucite International Group Limited (Lucite) by Mitsubishi Rayon Co., Ltd. (Mitsubishi)

Mitsubishi is a leading manufacturer of monomers and polymers, based on methyl methacrylate (MMA) and acrylonitrile (AN) complexes. Lucite is the world’s leading supplier of MMA, accounting for approximately 24 per cent of the global acrylic monomer market. The merged entity, Mitsubishi Rayon possessed approximately 64 per cent of the MMA market in China. Mofcom imposed a variety of conditions on this acquisition, including a partial divestiture of the MMA output of Lucite China and restrictions on expansion in China in respect of the merged entity over the next five years.

Acquisition of Delphi Corp (Delphi) by General Motors Company (GM)

Delphi is a supplier of automobile components. General Motors is a vehicle or automobile manufacturer. This was an acquisition between two vertical entities. The conditions stipulated by Mofcom were behavioural conditions. For instance, Mofcom stipulated that after the acquisition was completed, both Delphi and GM must guarantee that Delphi and its controlling affiliates shall continue to supply products to Chinese vehicle manufacturers without any discrimination. These behavioural conditions are aimed at eliminating and mitigating anti-competitive adverse effects on other entities in the automobile components and vehicle or automobile manufacturing markets in China.

Acquisition of Wyeth Corp (Wyeth) by Pfizer Inc (Pfizer)

Both Pfizer Inc and Wyeth Corp supply a range of pharmaceutical products in the human health and animal health sector. Mofcom stipulated that Pfizer had to divest its swine mycoplasma pneumonia vaccine business in China.

Acquisition of SANYO Electric (Sanyo) by Panasonic Corporation (Panasonic)

Panasonic and Sanyo are Japanese conglomerates with diversified businesses and operations worldwide. Mofcom identified competition issues in three specific product markets: (1) rechargeable coin-shape lithium batteries; (2) nickel-metal hydride batteries for daily use; and (3) nickel-metal hydride batteries for vehicle use. Both Sanyo and Panasonic were required to divest their businesses (to different extents) in respect of the categories in (1) to (3).

The merger control decisions listed above show that Mofcom is a very active competition authority and would not hesitate to impose conditions (structural or behavioural conditions, or both) or to deny clearance to a merger, when the need arises. Companies who wish to merge or acquire in China should therefore should plan ahead and put in place a well-thought-out merger control strategy.

In practice, we note that Mofcom consults widely with the relevant stakeholders in respect of each merger filing. Relevant stakeholders could include other government authorities, industry associations, competitors and entities in the upstream and downstream industries. We understand that Mofcom undertakes these consultations by questionnaire, by way of phone interviews and sometimes even through visiting and interviewing these stakeholders face-to-face.

III THE MERGER CONTROL REGIME

i Waiting periods and time frames

There are broadly two review phases in which a merger filing would have to go through with Mofcom. First, there is a pre-acceptance phase. Second, there is a formal review phase.

Pre-acceptance phase

When entities submit a merger filing or notification to Mofcom, a ‘pre-acceptance’ case handler within Mofcom would determine if Mofcom is able to formally accept the filing. This case handler would review the filing for completeness and may also seek clarifications or ask for more details in respect of the filing, if certain aspects of the filing are unclear or need to be supplemented. From our experience, this pre-acceptance period generally takes between two and six weeks. I n other cases (for instance in the Coke/Huiyuan and Mitsubishi/Lucite cases) this phase may even ‘stretch’ to two or three months. We understand that during this pre-acceptance phase, the entities listed above were repeatedly asked by Mofcom to submit supplementary information in respect of their filings.

Formal review phase

Pursuant to the AML, there are two phases within the formal review phase: Phase 1, the preliminary review period and Phase 2, the further review period. Phase 1 is known as the preliminary review period and lasts 30 calendar days. During this phase, Mofcom will attempt to review the merger filing and make a decision as to whether the filing should be cleared. If merging entities do not hear from Mofcom upon the expiry of these 3 0 days, then the merger or acquisition is by default cleared or approved.

Phase 2 is known as the further review period and lasts 90 calendar days. I f Mofcom has made a decision that a merger filing warrants further review, Mofcom will inform the parties (in writing) before or by the expiry of Phase 1 that the review period is extended into Phase 2.

Furthermore, Mofcom may extend the Phase 2 period by another 60 calendar days at the most, provided that:

a the applicant agrees to extend the time limit for the review;

b the documents submitted by the applicant are inaccurate and require further verification; or

c the circumstances surrounding the filing have significantly changed after notification by the applicant.

It is important to note that if Mofcom fails to make a decision upon the expiry of each set period of time as stated above, the parties may execute the transaction.

The following table summarises the various waiting periods as described above and possible outcomes of the review (i.e., approved, approved with conditions or prohibited).

ii Parties’ ability to accelerate the review procedure

Most mergers are time-sensitive. Most merging entities generally wish for the merger review period and procedures to be as swift as possible. I n order to assist Mofcom in clearing merger filings smoothly and efficiently, we would recommend the following approach: first, articulate why your merger is time-sensitive (e.g., is one entity a failing firm?); second, ensure that your merger filing report is complete (according to the Mofcom requirements) and accurate; and third, if Mofcom asks any supplementary questions or asks for clarifications, respond to these further questions swiftly.

iii Third-party access to the file and rights to challenge mergers

Third parties do not possess a statutory right to access merger control files, nor do they possess a statutory right to challenge mergers in the process of review. However, in its review process, Mofcom may seek opinions from third parties (including government agencies, industry associations and other entities) in respect of the proposed acquisition and third parties may voice their opinions through these consultations.

In addition, pursuant to Articles 7 and 8 of Mofcom’s Draft Measures for Inspecting Concentration of Business Operators, third parties may be involved in the merger control review process if Mofcom decides to conduct hearings. Participants in these hearings may include: entities involved in the filing; competitors; representatives of upstream and downstream entities (and other related entities); experts; representatives of industry associations; representatives of relevant government authorities; and consumers. Third parties may therefore express their opinions on the proposed merger or acquisition through these hearings.

iv Resolution of authorities’ competition concerns, appeals and judicial review

Pursuant to Article 29 of the AML, Mofcom has the right to impose conditions in respect of mergers, in order to alleviate the negative impact of a merger on competition. This gives Mofcom wide discretion to impose a variety of conditions, including structural and behavioural conditions or both. Further, pursuant to Article 11 of Mofcom’s Draft Measures for Inspecting Concentration of Business Operators, either the entities involved in the merger or Mofcom may propose conditions.

Pursuant to Article 53 of the AML, entities that are not satisfied with a Mofcom decision in respect of merger control, may seek a review of the decision (i.e., appeal).

We understand that this review process and decision will be undertaken by the Treaty and Law Department of Mofcom.

Entities who are dissatisfied with the decision of the Treaty and Law Department of Mofcom may then seek a further review of the Treaty and Law Department’s decision in the courts (i.e., judicial review).

Entities may only seek a review of Mofcom’s decisions based on an error of law (including because administrative procedures are in violation of the law, administrative discretionary power has been abused or the result of the merger control review is unjust).

v Effect of regulatory review

Mofcom is the sole authority formally in charge of reviewing mergers. Therefore, it is not obligated by law to consult with or seek the opinions of other authorities or regulators.

However, we are aware that Mofcom does consult with other government agencieson certain mergers. For instance, Mofcom may consult with the State Administration of Radio, Film and Television (SARFT) and obtain the SARFT’s opinions in respect of a merger within the broadcasting industry. Such consultation procedures will take time and this is a factor that entities have to consider when submitting a merger filing. Mofcom may consider that such consultations are important and a merger filing may therefore last into Phase 2 if Mofcom is awaiting responses from other government agencies.

IV OTHER STRATEGIC CONSIDERATIONS

i How to coordinate with other jurisdictions

We are not aware of any formal agreements signed between Mofcom and the competition authorities of other jurisdictions in respect of sharing information or otherwise coordinating with each other (in the context of multi-jurisdictional merger filings). We note also that China has not yet joined the International Competition Network.

However, we understand that Mofcom does regularly consult with the competition authorities from the more experienced jurisdictions such as the United States and European Union. The competition authorities from these jurisdictions also conduct capacity building or technical assistance programmes for Mofcom officials.

In practice (in the context of multi-jurisdictional filings), we note that Mofcom will monitor the progress of merger control reviews in other jurisdictions very closely. Mofcom may also ask the entities involved in the proposed merger or acquisition to supply information in respect of their filings in other jurisdictions.

ii How to deal with special situations – financial distress and insolvency, hostile transactions, minority ownership interests, etc.

Financial distress and insolvency

Previously, foreign entities that wished to purchase domestic entities in financial distress or insolvency could apply to Mofcom for an exemption (in respect of notification or review). Despite the fact that there are no statutory exemptions (pursuant to the AML or in related regulations and rules) in respect of acquiring entities in financial distress or insolvency, we are of the view that Mofcom will take this factor into consideration when undertaking the merger review. This is, in particular, in terms of allocating a time-frame for the review.

Hostile transactions

There are no provisions within the AML or in its related regulations or rules that address the manner in which a hostile transaction will be reviewed. We are of the view that under such circumstances, the target entity should nevertheless submit its views to Mofcom for consideration.

Minority ownership interests

There are no provisions within the AML or in its related regulations and rules that address acquiring minority ownership interests. However, the conduct of acquiring minority interests in another entity may also be a notifiable transaction (depending on whether such conduct is construed by Mofcom, as acquiring ‘control’ of the target company).

V OUTLOOK & CONCLUSIONS

i Pending legislation

Currently, the measures listed are in draft form:

a Tentative Measures for Investigation and Handling of Concentration of Business Operators That Are Not Legally Notified (Draft); Cf Article 54(2) of the now-repealed Acquisition of Domestic Enterprises by Foreign Investors Provisions.

b Tentative Measures for Investigation and Handling of Concentration of Business Operators Not Satisfying Notification Thresholds But Involving Alleged Monopoly Acts (Draft); and

c Tentative Measures for Collection of Evidences on Concentration of Business Operators Not Satisfying Notification Thresholds But Involving Alleged Monopoly Acts (Draft).

ii Unresolved issues

In our view, it would be useful for the merger control regime if Mofcom could clarify matters pertaining to the following issues:

a the factors that Mofcom would consider when determining whether a joint venture is a notifiable transaction;

b the factors that Mofcom would consider when determining whether acquiring minority shares in an entity is a notifiable transaction; and

c whether the resale of goods to China should be taken into consideration when considering an entity’s turnover in China.

In addition, it would be helpful if Mofcom could issue public statements (or give a summary of issues considered) in relation to some of the mergers that have been cleared.

This would be helpful in terms of building jurisprudence and increasing transparency in relation to the merger clearance process.

 The market for the supply of potash is highly concentrated, with Potash being one of the large players globally. According to Potash’s 2009 annual report, Potash currently supplies 20% of world production. According to media reports, China is one of the largest importers of potash in the world (along with India, the United States and Brazil) and it appears that chinese companies buy up approximately 7% of the output of Potash(3). In this regard, the sale of PotashCorp is likely to have some impact on Chinese potash buyers and in the fertilizer industry in China.

The media has reported that there has been a lot of concern amongst the players in the Chinese agriculture industry in relation to the bid. This is not BHP’s first bid to buy up a potash company – in 2008 and early 2010, BHP acquired Canadian potash explorers Anglo Potash Limited and Athabasca Potash Inc. Hence, if the bid is successful, BHP will become a major player in the global potash industry. Chinese agricultural industry players (including fertilizer distributors, industry associations and even farmers) are concerned that BHP will significantly raise potash prices – and in light of the level of concentration in the global potash market – customers would not have many other choices. In light of this, Chinese agricultural industry players are currently urging the antitrust authorities in China to investigate into this potential acquisition and specifically into the acquisition’s impact on the potash industry in China.

Pursuant to the Anti-Monopoly Law (AML), merging companies which meet specified turnover thresholds (in relation to their global turnover and turnover within China) are required to seek clearance in respect of their mergers from the Ministry of Commerce (MOFCOM).

It is unclear if BHP and/or Potash meet the turnover thresholds and would subsequently be required to file a merger control notification in China. If so, this would be an interesting case to follow, given the highly concentrated global potash market.

Even if BHP and/or Potash did not meet the turnover thresholds in China, pursuant to the merger control regulations in China, MOFCOM would still have the right to commence investigations into this acquisition (provided they had a reason to believe that the acquisition has or may have the effect of eliminating or restricting competition in the relevant market in China). At the conclusion of any such investigations (and at the conclusion of the acquisition), if MOFCOM is of the view that the acquisition has or may have the effect of eliminating or restricting competition in China, then MOFCOM would be able to apply a variety of remedies, including fines on the merging parties.

Currently, it is unclear if the BHP-Potash deal will go ahead. There is some speculation that Chinese state owned enterprise Sinochem Group, could launch a competing bid. Potash, owns a 22% stake in Sinofert (a Sinochem subsidiary), one of China’s largest fertilizer producer.

It will be interesting to follow the developments in relation to this BHP-Potash bid – it appears that significant antitrust issues may arise in relation to this proposed deal.

[1] BHP Billiton is made up of BHP Billiton Plc (based in the UK) and BHP Billiton Limited (based in Australia).

[1] Potash is short for potassium carbonate it is a globally traded commodity used in fertilizers. 

[1] See for instance: http://www.reuters.com/article/idUSTRE67G1R620100902

 Private actions refer to actions being commenced by third parties who have suffered loss or damage due to an offending party’s anti-competitive conduct. In this regard, private actions work hand-in-hand with public actions (i.e. actions commenced by the antitrust or competition authority) in relation to enforcing the antitrust or competition law.

Out of these 10 cases, 9 of the cases are abuse of dominance cases; and 1 case is a cartel case.

The following is a brief description of the 10 antitrust private actions to date:

 The following are some salient features of these recently enacted divestiture regulations:

• the objective of the regulations are to ensure that any divestiture or assets or business pursuant to the merger control regime is conducted smoothly (Article1);
• business operators who are required to divest assets pursuant to the merger control regime (known as “divestiture obligors”) would have to divest their assets within a time limit stipulated within a merger control decision by MOFCOM (including finding a purchaser and enter into the relevant sales agreements) (Article 3);
• divestiture obligors may appoint a “supervision trustee” and a “divestiture trustee” to assist in the divestiture process. The former will supervise the divestiture process and the latter would assist with locating a purchaser as well as assist with the actual sale process (Article 4);
• supervision trustees and divestiture trustees must
  • be equipped with the resources and capabilities necessary for conducting trust businesses; and
  •  not possess substantial interests in any of the business operators participating in the merger under scrutiny.

In addition, supervision trustees and divestiture trustees may be the same natural person or legal entity (Article 5); and

• purchasers of divested business must satisfy the following requirements;
  • they must not possess substantial interests in any of the business operators participating in the merger under scrutiny;
  • they must be equipped with the necessary resources and capabilities and must be willing to maintain and develop the business to be divested; and
  •  the purchase of the business to be divested must not result in eliminating or restricting competition (Article 8).

It is timely that MOFCOM has enacted these divestiture regulations. These regulations provide some sort of structure from which business operators can expect to divest their assets pursuant to a merger control decision issued by MOFCOM. In our view, these regulations are consistent with the divestiture regulations in the more experienced antitrust jurisdictions such as the European Union.

In practice, it is important to work closely with MOFCOM when a business has been told to divest pursuant to a merger control decision. Regular consultations with MOFCOM will ensure that the divestiture process goes smoothly. In our experience, it takes approximately 6 months for a business to find a suitable purchaser for the divested business and to reach the relevant agreements for the sale. It is also noteworthy that MOFCOM has stipulated that divested businesses should be transferred to the purchaser within 3 months after the execution of the sales and other agreements, although this time limit may be extended with MOFCOM’s consent.

 The following are some details of what has been alleged:

• several commercial banks have come together and agreed to raise various fees and charges to similar amounts (including bill printing fees, small account management fees and inter-bank ATM fees);
• it was alleged that this collusive conduct was facilitated by meetings hosted by the China Banking Association between 2005 and 2010.

It remains to be seen if the NDRC will formally launch an investigation into this issue. We note that currently the China Banking Regulatory Commission (CBRC) and the NDRC are putting together rules which would regulate the service fees of commercial banks (entitled “Interim Measures on the Administration of Service Fees of Commercial Banks) (service fee rules). These service fee rules, once enacted, will no doubt provide clearer guidance in relation to what conduct is permitted, both pursuant to the proposed rules as well as pursuant to the AML.

[1] Including in the Beijing Daily  and in the Global Times.

Novartis and Alcon (the parties) are global suppliers of pharmaceutical products. Post-acquisition, Novartis would become the majority shareholder in Alcon. This transaction is worth approximately US$28 billion.

King & Wood acted as the sole Chinese legal counsel in respect of the antitrust aspects (including the antitrust filing) of this transaction.

Antitrust issues

During consultations with Novartis, Alcon and other stakeholders, MOFCOM was of the view that there were antitrust concerns in the following relevant markets: (a) the market for ophthalmic anti-inflammatory and anti-infective combination products; and (b) the market for lens care products. (2)

MOFCOM was concerned about the impact of the acquisition on the markets described in (a) and (b) above (in light of Novartis’ and Alcon’s market shares in the relevant markets both globally and in China).

Ophthalmic anti-inflammatory and anti-infective combination products

MOFCOM noted that the combined global shares of the parties in relation to ophthalmic anti-inflammatory and anti-infective combination products was over 55%. The parties’ combined shares for the same product market in China was over 60% (Alcon’s share is over 60%; whereas Novartis’ share is less than 1%).

In its antitrust submission to MOFCOM, Novartis articulated that it had planned to cease manufacturing and supplying its ophthalmic anti-inflammatory and anti-infective product known as “Infectoflam” (both in China and globally).

As a condition of clearance, MOFCOM made it mandatory that Novartis cease to supply Infectoflam in China by the end of 2010.(3)   MOFCOM stipulated that Novartis was not to supply Infectoflam in China for a period of 5 years. In addition, Novartis is also not to supply a different version or type of product like Infectoflam under a different brand-name in China.

Lens care products

The parties’ combined global shares in relation to lens care product is almost 60%. In addition, the parties’ combined shares for the same product market in China is almost 20%. Post-acquisition, the parties would become the second largest supplier of lens care products in China.

MOFCOM noted that one of Novartis’ subsidiaries (Shanghai Ciba Vision Trading Co., Ltd) (Shanghai CV) has in place a distribution agreement with Haichang Contact Lens Co., Ltd (Haichang) to distribute lens care products in China. Haicheng is currently the largest manufacturer and supplier of lens care products in China (its share in China is over 30%).

MOFCOM was concerned that the parties would be able to collude on pricing and other issues with Haichang (via the distribution agreement), post-acquisition. According to MOFCOM, such collusion would restrict or exclude competition in the lens care product market in China. In light of this concern, MOFCOM stipulated that Novartis terminate its distribution agreement with Haichang, within 12 months after closing.

Comments

In its public announcement, MOFCOM did not take a stand as to whether the relevant geographic markets for the ophthalmic anti-inflammatory and anti-infective combination product market as well as for the lens care product market was global or China-wide. However, it appears that MOFCOM might have taken the parties’ shares in both the global context as well as in the China context into consideration, in determining whether the acquisition would eliminate or restrict competition in China.

The Novartis and Alcon transaction is a cross-border or global deal. The parties have filed merger review applications in some 19 jurisdictions. Currently, the acquisition has been cleared by antitrust authorities in most of these jurisdictions.

(1) The first 5 mergers that were approved with conditions were: (a) the acquisition of Lucite International Group Limited by Mitsubishi Rayon Co; (b) the acquisition of Anheuser Busch Companies Inc by InBev NV/SA; (c) the acquisition of Delphi Corp by General Motors Company; (d) the acquisition of Wyeth Corp by Pfizer Inc; and (e) the acquisition of SANYO Electric by Panasonic Corporation.

(2) In their announcement dated 13 August 2010, MOFCOM did not stipulate whether the relevant geographic market was global or limited to China only.

(3) Note that MOFCOM did not explain in their announcement how this restriction would assist in reducing any anti-competitive or harmful effect of the acquisition in the global or China-wide ophthalmic anti-inflammatory and anti-infective combination product market.
 

• From 2008 to June 2010, MOFCOM accepted 140 merger review applications for review. Out of these 140 merger review applications, MOFCOM has completed review of approximately 90% of the cases.
• 95% of these merger reviewed were approved unconditionally. In the European Union (EU) and in the United States (US), on average only 93% of mergers are approved unconditionally.
• Thus far, only 5 mergers have been approved with conditions and only 1 merger was rejected (Coca-Cola’s proposed acquisition of Huiyuan).
• The merger control review process in China is divided into 3 stages. The first stage of review lasts no more than 30 days; the second stage of review spans for a further 30 to 90 days; and the third stage of review spans for a maximum of 60 days after the second stage. The entire merger control review process is not to exceed a total of 180 days.
• Out of all the mergers reviewed, more than half of the mergers were cleared within the first stage; the remainder of the mergers were cleared within the second and third stages.
• Shang Ming noted that the proportion of mergers entering the second stage of review was somewhat higher than that in the US or the EU. Shang Ming commented that at times, merger reviews enter the second stage of review not due to antitrust issues but due to process issues (e.g. MOFCOM undertaking public consultations etc).
• 62% of the merger applications received by MOFCOM are horizontal mergers; 14% of the merger applications received by MOFCOM are vertical mergers; and the remainder of the merger applications received by MOFCOM are conglomerate mergers.(2)
• A majority of the cases reviewed by MOFCOM involved business operators in the manufacturing industry. In addition, three-quarters of mergers accepted for review by MOFCOM involved public listed business operators.
• Shang Ming noted that some commentators believe that Chinese State Owned Enterprises (SOEs) obtain “special treatment” from MOFCOM pursuant to merger clearances. Shang Ming emphasised that this was not the case. All business operators, including SOEs, privately-owned companies and foreign companies are treated equally by MOFCOM.
• MOFCOM has received more merger clearance applications which involve foreign companies (as opposed to merger clearance applications which involve domestic companies only). Shang Ming said that this could be because the “financial strength” of these multinational foreign companies trigger the turnover notification thresholds more easily. In addition, Shang Ming also noted that since the global financial crisis, foreign multinational companies have been quite active acquirers.

It is timely for MOFCOM to conduct a stock-take of the merger control process in China, since its inception in 2008. It is interesting that a significant number of merger applications received by MOFCOM spill into the second stage of review. Shang Ming’s explanation that some of these “second stage review” merger applications do not necessary involve complex antitrust issues, but rather “process” issues, is also interesting.

In light of the above, companies that are interested in mergers or acquisitions that meet the turnover thresholds pursuant to the AML should ensure that they factor in the notification and review periods into their planning processes.

(1) The AML was enacted on 1 August 2008.

(2) The term “conglomerate mergers” refers to mergers involving businesses that operate in different product markets (i.e. they are neither “vertical” nor “horizontal” mergers).

In practice, there are some instances in which advertising slogans are granted copyright protection. For example, in the case of Cheng Du Huangchenglaoma restaurant vs. Beijing Huangronglaoma hotpot restaurant, the court held that the slogans used by the plaintiff possessed the originality to qualify as a literal work and thus should be protected under the copyright law. Accordingly, the defendant infringed on the copyrights of the plaintiff in using the same slogans during its daily business. As to how to judge the originality of advertising slogans, the court specifically made the following analysis and statement on the verdict, " 'original' mentioned in the copyright law means that the works are created by the author independently without plagiarism or imitation, which is mainly manifested in the selection, design and composition of certain material. Although the vocabulary which comprises the slogans was not original, through the plaintiff's selection, combination and arrangement, they have reflected certain personalized characters.

Moreover, if advertising slogan has become a symbol or identifier of the company through long-term use and promotion, hence closely associated with the goodwill and the products of the company, it may also seek protection under the Anti-unfair Competition Law against other party's unauthorized use.

Conclusion

In fierce market competition, companies tend to promote their brand and products by adopting unique advertising slogans. Advertising slogans could become a symbolic sign of the company and thereby attain an intangible value just like a trademark. Under the existing legislation and in practice, advertising slogans can 1) be protected under the Trademark Law through trademark registration, as long as it is original and could function as a source indicator. 2) slogans that have built a connection with certain enterprises in the course of business should also fall within the protection scope of the Anti-Unfair Competition Law. 3) original advertising slogans may also be protected under the Copyright Law. Among the three, trademark registration is the most effective means of protection.
 

Negative influences on the market due to Coke’s existing dominant position in the carbonated drink market

MOFCOM believed that after the completion of the Transaction, Coca-Cola would have had the ability to leverage its dominant position in the carbonated drink market in the juice drink market.

The ability to leverage is where an operator has a dominant position in a certain market and by taking advantages of its current dominant position, it is also able to obtain a new dominant position in a similar product market through tie-ins or bundle sales, imposing exclusive trading conditions, or other methods.

As Coca-Cola may have a dominant position in the carbonated drink market, MOFCOM believed that after the Transaction, Coca-Cola may (i) tie or bundle in Coca Cola’s juice drinks by utilizing its customers’ preferences in its carbonated drink, or tie its carbonated drink in as a means of promotion when selling juice drink; (ii) by offering discounts or refunds, encourage carbonated drink retailers to purchase a large number of its juice drinks, or limit their purchase and distribution of juice drinks manufactured by other competitors; (iii) increase sales volumes of its juice drink and supplant other juice drink products by taking advantage of its current sales channels, for example, its in-store refrigeration units installed at down-stream retailers.

Dominant market position in a certain market may be leveraged in adjacent or other closely related markets, which has already raised competition concerns by authorities in other jurisdictions. For instance, according to the decision made by the Australia Competition and Consumer Commission (ACCC) of the acquisition of Berri Limited (Berri) by Coco-Cola Amatil Limited’s (CCA) on October 8, 2003, ACCC believed that CCA would have the ability and incentive to leverage its market power in CSD (carbonated soft drinks) to increase distribution of Berri’s FB (chilled and ambient fruit juice and fruit drinks) product to the exclusion of rivals in the non-grocery trade channels.

Coke’s ability to impede market entry by controlling brands

Through review, MOFCOM believed that the brand is a key factor that influences effective competition in the drink market, that is, among other factors which may influence competition, such as capital and technology, the brand is considered one of the most important as opposed to other industries where technology may be more important. New entrants may not successfully gain market share in that it is difficult for them to obtain consumers’ recognition of their brands, even though they own certain technologies, facilities and capital. Coca-Cola may also restrain new market entrants by using its dominant position in the carbonated drink market as well as the leverage effect.

Accordingly, MOFCOM believed that after completion of the Transaction, Coca-Cola would have significantly stronger power to control the juice market by controlling two famous juice brands: “Meizhiyuan” and “Huiyuan”, as well as using its dominant position in the carbonated drink market. Therefore, the Transaction would significantly increase obstacles for potential competitors to enter the juice drink market from the prospective of branding.

The negative influences of the proposed concentration over small and medium operators and for the competition within the industry

MOFCOM believed that the Transaction would reduce survivability of domestic small and medium juice manufacturing enterprises, inhibit the ability of domestic enterprises to compete in the juice drink market, and harm the effective competition structure in the China juice drink market.

MOFCOM may have also believed that in the juice drink market, Coca-Cola and Huiyuan are direct competitors and therefore after the completion of the Transaction, Huiyuan, as an important and competent competitor, will no longer exist, which may lead to an increase of concentration. In addition, after the Transaction, Coca-Cola may soon gain a new dominant position by better utilizing Huiyuan’s current purchasing channels for raw materials, distribution channels of products, manufacturing equipment, market share, brand effects, and other advantages, as well as the leverage effects resulting from its dominant position in the carbonated drink market. Therefore, it could be concluded that the Transaction may negatively impact small and medium operators and may have a bad influence on the competition structure of juice drink industry and its further development.
 

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.