China Law Insight : China Business and Intellectual Property Lawyers & Attorneys : King & Wood Law Firm : IP, Arbitration, Litigation, Securities, Foreign Investment

 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.