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

Noticeably, at the forum, Mr. Jiang Tianbo, the Deputy Director General of the Anti-monopoly and Anti-unfair Competition Enforcement Bureau of SAIC¹ , said that the internet industry has become a "hot" area where a lot of anti-monopoly complaints are raised.
According to Mr. Jiang, most of the complaints relating to the Internet industry are against  the following 4 types of conducts:

• joint boycottof transactions;

• tying – such as tie-in sales of software with the operating system;

• disparaging competitor's reputation – such as disseminating information that the software of other Internet companies is not safe or contains virus;
• selling products at below-cost prices for the purpose of maintaining the market share.

In response to complaints on the absence of SAIC in the QQ / 360 case, Mr. Jiang expressed the determination of SAIC to strengthen its enforcement of the Anti-monopoly Law and Anti-unfair Competition Law in the Internet industry. 

Comments

Commercial libel indicated by Mr. Jiang above is mainly regulated under the Anti-unfair Competition Law (AUCL), the enforcement of which also falls within the purview of SAIC.  On the other hand, MIIT, the authority responsible for the administration of the Internet industry, may also have the privilege or intention to handle competition issues raised in the Internet industry.  The recent Interim Rules for Supervision and Management of Internet Information Service Market (Draft for Comment) promulgated by MIIT contains similar regulations as the AUCL and the AML.²   It will be interesting to see whether and how the MIIT will work with SAIC to enforce the AUCL and/or AML in relation to competition issues in the Internet industry.
 

Furthermore, compared with traditional industries, the Internet industry may pose greater challenges to the competition authorities as it is one of the fastest changing industries and the economic theories for analyzing the behaviors of the businesses in the industry are more complicated and less well-established.  On a global scale, we have seen leading Internet search engine firms challenged in major competition jurisdictions for abuse of market dominance.  It remains to be uncovered how Chinese authorities will show their teeth towards potentially monopolistic conducts or unfair competition conducts of enterprises in this highly dynamic industry.
 

¹ The Anti-monopoly and Anti-unfair Competition Enforcement Bureau of SAIC is the Anti-monopoly Law (AML) enforcement agency responsible for oversight of anti-monopoly enforcement of none-price related monopoly agreement and abuse of market dominance.

 ²Partly driven by the QQ-360 disputes, the MIIT released the Interim Rules for Supervision and Management of Internet Information Service Market (Draft for Comment), on 12 January 2011 (see our article entitled "MIIT releases draft rules which govern antitrust issues").

Facts

The salient facts of this case are as follows:

On 3 March 2009, the Association facilitated the coordination of 16 members (who were manufacturers of premixed concrete) to enter into what they called a "Self-disciplinary Agreement" and the "Supervision and Punishment Rules". The following agreement was reached:

•  Allocating market shares to each of the 16 members according to their capacities;
•  dividing the market in Lianyungang City;
•  requiring the manufacturers to file their concrete sales agreements to the Association for record (any failure in doing so would incur some sort of sanction or "punishment" by the Association);
• manufacturers who do not cooperate with the Association will be fined by the Association.

According to the SAIC press release, the "Self-disciplinary Agreement" and "Supervision and Punishment Rules" were put into effect by the Association and the members. On 17 March 2009, the Association required the manufacturers to report their daily project volumes with the Association. On 21 March 2009, the Association required the manufacturers to file their sales agreements with the Association.  The Association governed and enforced the Self-disciplinary Agreement.  The Association also organized inspections to the sites of the members and also punished manufacturers for allegedly violating the "Self-disciplinary Agreement".

Jiangsu AIC's Investigation

• In June 2009, a construction enterprise filed a complaint to the Lianyungang Bureau of Industry and Commerce (Lianyungang AIC) against the Association, alleging that several construction projects had to be suspended because there wasn't sufficient supply of premixed concrete.  The construction enterprise alleged that the Association prohibited its members from entering into sales agreements with downstream entities, without first seeking the Association's approval.
   
• The Lianyungang AIC immediately reported this case to the Jiangsu AIC as it considered this case involved a violation of the AML.
   
•  After undertaking a preliminary investigation, the Jiangsu AIC submitted a written report to SAIC seeking instructions.
   
• The Antimonopoly and Anti-Unfair Competition Enforcement Bureau of SAIC identified this case as possibly having the effect of restricting competition (by wat of a monopoly agreement) and therein authorized the Jiangsu AIC to initiate a formal investigation.
   
• The Jiangsu AIC formed a special investigation team comprising 10 officers ("the Special Investigation Team") in order to undertake investigating this case. The Special Investigation Team interviewed employees working at the Association and employees of some 18 concrete manufacturers.  The Special Investigation Team also conducted on-site inspections of more than 20 construction projects, and collected  approximately150 "pieces" of evidence including the Self-disciplinary Agreement, meeting minutes, evidence which displayed the effects of the conduct of the Association and its members on the pricing of concrete, etc. The investigation lasted for more than 200 days.

Final Decision by the Jiangsu AIC

• Jiangsu AIC found that the Association violated the AML by organizing for competing concrete manufacturers to enter into the Self-disciplinary Agreement.  This conduct was found to have restricted competition in the premixed concrete industry in Lianyungang City, in breach of Article 16 of the AML (prohibition against industry associations who "organize" business operators to engage in monopoly conduct) Taking into consideration that Association actively cooperated with the investigation, the Jiangsu AIC ordered an injunction against the Association to cease the illegal conduct; as well as a fine of RMB 200,000.
   
• Jiangsu AIC also found that the 16 manufacturers entered into the monopoly agreement to divide sales regions, in breach of Article 13 (3) of the AML. In light that the 16 manufacturers cooperated with the investigation and stopped the illegal conduct timely, pursuant to Article 46 of the AML, Jiangsu AIC ordered the 16 manufacturers to stop the illegal conduct and imposed fines to 5 of them.  The SAIC press release did not stipulate the amounts in relation to these fines.

Comments

From a procedural point of view, it appears that the investigation procedure of the case is fully in compliance with the Procedural Rules by Administration for Industry and Commerce regarding Investigation and Handling of Cases relating to Monopoly Agreement and Abuse of Dominant Market Position issued by SAIC which became effective on 1 July 2009.

(a)   The Jiangsu AIC imposed sanctions on both the Association as well as its members.  This is distinct from the first public enforcement decision by the National Development Reform Commission (NDRC, the authority in charge of price-related prohibitions of the AML) against the Zhejiang Fuyang Paper Making Industry Association,  where only the association, rather than its members, was found to have breached the AML (see article entitled "First price enforcement action by the NDRC in 2011 - against paper association" for more on the Zhejiang Fuyang Paper case).  It is clear that both "facilitators" and "implementers" of monopoly acts will be punished pursuant to the AML.

We note that amongst the 16 business operators that were being investigated in this case, only 5 members were being fined.  There are two possible explanations: either the rest of the members were "let off" pursuant to the leniency regime; or there wasn't sufficient evidence to establish a breach in relation to the other members (with the exception of 5 members).  We note also that there was some recognition in the SAIC press release that cooperation during investigation was a mitigating factor in relation to the determination of remedies.

Pursuant to the SAIC press release, we note that Mr. Ning Wanglu (SAIC Director General of the Antimonopoly and Anti-unfair Competition Enforcement Bureau) was quoted as saying that this case sets a good example for AIC to get involved in the enforcement of the AML.  We can expect that more AICs will be active in the governing and enforcing the AML in the near future.

¹Please see SAIC's press release at http://www.saic.gov.cn/ywdt/gsyw/dfdt/xxb/201101/t20110126_103772.html

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.