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

• On 8 January 2010, the Heyuan Government held a government affairs meeting on the promotion of GPS vehicle data loggers for purposes of reinforcing the administration of public transportation safety.  Decisions made at the meeting were issued in the form of the Municipal Government Affairs Meeting Minutes 2010, Issue 6 ("Meeting Minutes").  According to the Meeting Minutes, the GPS tracking and monitoring platform established by New Space-Time Navigation Technology Co., Ltd ("NST") was appointed as the only municipal tracking and monitoring platform.  All the other GPS operators must upload their monitoring data onto NST's platform.  NST was entitled to charge the other GPS operators a data upload service fee at no more than RMB 30 per months per vehicle. 

• On 12 May 2010, the Heyuan Government issued the Working Plans for Promoting GPS Vehicle Data Recorder ("Working Plans").  The Working Plans expressly set out the requirement that real time monitoring data of specified types of automobiles in Heyuan must be uploaded to the monitoring platform appointed by the Heyuan Government.

• On 11 November 2010, the Heyuan Government held another government affairs meeting, requesting the traffic management bureau not to clear the annual review of any automobile whose monitoring data was not uploaded to NST's monitoring platform.

• Until the end of 2010, there were 11 GPS operators in Heyuan, among which NST, Weiba, Yiliu and some others have established their own monitoring platform.  Before NST was appointed as the only operator of the municipal monitoring platform, the monitoring data collected by the other GPS operators were directly uploaded onto the provincial monitoring center of Guangdong. 

Based on the above facts, Guangdong AIC is of the opinions that:

Firstly, NST is a GPS operator and does not have administrative powers.  Appointing its platform as the mandatory municipal platform in effect forces the other GPS operators to accept NST's data services;

Secondly, NST charged other GPS operators a pre-paid data upload service fee.  Otherwise, NST would refuse the other GPS operators to upload their data onto its monitoring platform.  This effectively forced the other GPS operators to accept NST's paid services;

Thirdly, the Heyuan Government requested the traffic management bureau not to clear the annual review of any automobile whose monitoring data is not uploaded to NST's monitor platform.  Such a compulsory measure compelled the other GPS operators to rely on NST's services, and damaged the competition in the industry.

Under the guidance of the State Administration for Industry and Commerce ("SAIC"), Guangdong AIC officially proposed to Guangdong Government for "rectifying in accordance with law Heyuan Government's conduct that has abused its administrative powers to eliminate and restrict competition". 

In response to Guangdong AIC's suggestion, on June 12, 2011, Guangdong Government issued an administrative review decision finding that Heyuan Government violated the Anti-Monopoly Law and that its abusive conducts be revoked.

Comments:

One of the unique features of the AML is that it also regulates administrative monopoly, which refers to monopoly created by administrative agencies or organizations entrusted with public administration functions by laws or regulations.

The authority to investigate administrative monopoly is divided between the SAIC and the National Development and Reform Commission ("NDRC") in the same way as the agencies share their AML enforcement authorities in the areas of monopoly agreements and abuse of market dominance.  In other words, SAIC (together with provincial AICs) is responsible for non-price related administrative monopoly whereas NDRC (together with provincial price administration authorities authorized by NDRC) is responsible for price related administrative monopoly. 

Noticeably, pursuant to Article 51 of the AML, SAIC and NDRC cannot directly impose sanctions against administrative authorities for abuse of administrative powers.  They can only propose to the relevant superior authority on how to appropriately deal with the monopoly conducts. Article 6 of the Rules on Prohibiting Abuse of Administrative Powers to Eliminate or Restrict Competition issued by the SAIC on 31 December 2010 (see our article entitled "3 rules which shed light on non-price violations of the Anti-Monopoly Law - effective 1 February 2011") also stipulates that SAIC and provincial AICs may provide corrective suggestions to the relevant superior authority. Therefore, conducts that are abusive of administrative powers to eliminate or restrict competition could only be revoked through the administrative review proceeding.

On a separate note, this is yet another example of AML enforcement actions made by provincial AICs under the guidance of SAIC.  Earlier this year, the provincial AIC of Jiangsu issued sanctions against a local industry association of concrete manufacturers and 16 concrete manufacturers for entering into a monopoly agreement (see our article entitled "First Public Enforcement Decision by SAIC against Concrete Manufacturers").  As the Chinese anti-monopoly enforcement agencies become increasingly experienced, we expect to see more enforcement actions coming up in the future.
 

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").

Article 14 of the AML prohibits business operators from fixing the prices (including minimum resale prices) of distributors.  The objective of Article 14 is to prohibit suppliers from imposing vertical restraints on distributors, to the detriment of competition in the relevant market. [For more on the operation of Article 14 of the AML, please see our article Rules Governing Resale Price Maintenance in China  Conduct is exempted from Article 14 of the AML, only if these fall into one of the exemption categories pursuant to Article 15 of the AML.  Article 15 of the AML lists out categories of conduct which are exempt from Article 14, including efficiency or other public benefit type considerations.

We note that certain vertical co-operative arrangements between entities in the automobiles sector (and in fact in most high-capital intensive sectors) may be justified – in order to keep suppliers and distributors efficient and competitive.  Specifically, certain types of vertical cooperative arrangements improve economic efficiency by facilitating better coordination between the participating entities (in particular these may lead to a reduction in transaction and distribution costs and/or an optimization of their sales and investment levels).

It is for the above reasons that the European Commission has, in place, a block exemption in relation to certain categories of vertical agreements and concerted practices in the motor vehicle industry (See Commission Regulation 461/2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices in the motor vehicle sector).  The following are some salient points which characterize the EC block exemption on motor vehicles:  

• this block exemption focuses on very specific types of vertical restraints, including the purchase, sale or resale of spare   parts; restraints to do with the repair and maintenance services for motor vehicles and concerted practices relating to the   conditions under which businesses may purchase, sell or resell new motor vehicles;
   
• the block exemption does not cover hard core restraints such as minimum resale price maintenance; and
   
• the block exemption exempts conduct from the prohibition against anticompetitive agreements but does not exempt conduct in    relation to an abuse of dominance.

In China, we do not have a block exemption regime.  However, at an AML conference recently, an official from the National Development and Reform Commission (NDRC) (the antitrust authority in charge of enforcing price-related breaches of the AML) said that the NDRC was currently looking into the possibility on granting exemptions in respect of certain sectors, including the automobile industry.  However the NDRC official did not go into detail into whether individual exemptions or block exemptions are being contemplated or the breadth or scope of these exemptions.  The NDRC official also did not disclose a timeline in which the NDRC anticipated setting up such an exemption regime.

It will be interesting to monitor developments on the CADA complaint front.
 

Because the price increases by the manufacturers above were undertaken at the same time, there has been some discussion in the press in relation to whether this "collective price increase" would amount to collusion between competitors (in breach of the Anti-Monopoly Law). 

When competitors increase prices of specific goods and services at the same time; this does not automatically or necessarily amount to collusion.  It is possible that "unconscious parallelism" has taken place; that is that competitors have raised their prices independently as a result of common perceptions of industry developments.  For instance, in relation to the above matter, we understand that some of the manufacturers have explained that the price hikes in washing agents is due to the increase in cost in raw materials used to manufacture these products (including petroleum).  Other examples of where unconscious parallelism may take place include when a new product is introduced and demand for an outdated product shrinks – this would generally propel manufacturers of the outdated product to lower prices in relation to this product – in order to stimulate sales.

Pursuant to Article 13 of the Anti-Monopoly Law (AML), in order for an antitrust authority or a plaintiff to establish that a monopoly agreement exists, there must first be the existence of "an agreement, decision or [a] concerted practice" between competitors. 

Pursuant to Article 6 of the Anti-Pricing Monopoly Regulation promulgated by the National Development and Reform Commission (NDRC)¹ in establishing whether there has been a "concerted practice", the NDRC will consider a number of factors including: whether the business operators' "pricing behaviors are consistent" and whether the business operators "have engaged in communication of intentions".  Other factors such as market structure and any recent changes to this market structure will also be taken into consideration.  Pursuant to Article 3 of the Regulation on Prohibition of Monopoly Agreements promulgated by the State Administration for Industry and Commerce (SAIC)² , in order to establish a "concerted practice", the SAIC would also consider whether the business operators can justify this "consistent" business behavior with other reasons (other than collusion or coordination).

We are of the view that mere parallel conduct in itself would not constitute a breach of the AML (or its accompanying regulations); rather, there must be some evidence of collusion or coordination between competitors, in order to establish a breach of Article 13 of the AML.  This is the position also, pursuant to United States antitrust laws and jurisprudence. 

We will continue to monitor developments in relation to the above proposed price hikes – it will be interesting to see how this matter unfolds. 
 

¹The NDRC is the antitrust authority that governs price-related breaches of the AML.
²The SAIC is the antitrust authority that governs non-price related breaches of the AML.

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

It establishes that after a foreign insurance institution has received approval from the China Insurance Regulatory Commission to open a foreign representive office the instituion has 90 days to register the representive office with the State Administration of Industry and Commerce. Failure to properly register a representative office or failure to adhere to the Chinese government's requirements for the activities that a foreign representative office can engage in will result in a fine of up to RMB 500,000 ($76,000 US dollars) being levied against the representive office, and this illegal activity could hinder a foreign insurance institution's ability to expand its activities in the Chinese market in the future.

If you have any questions about your representive office's registration and the scope of activities it can engage in within China please contact us immediately.

If you would like detailed information on the China Insurance Regulatory Commission's approval and registration requirements to set up a foreign representative office please contact us.

Article 148, paragraph, 2 of the Company Law establishes that “directors, supervisors and senior managers shall not take advantage of their position to take bribes or other illegal income, and they shall not speculate with the company’s assets.” Article 91 of the Meeting Minutes of the Second National Forum on Foreign-Related, Commercial Maritime Trials (Fafa [2005] No. 26), issued by the Supreme People Court on December 16, 2005, provides that “the people’s courts will accept petitions from foreign invested companies attempting to retrieve a company seal from a natural person, legal person, or other entity.” Therefore, based on Article 148 of the Company Law and the published meeting minutes, a company can take legal action against a removed legal representative to have the company seal returned to the company.

However, in practice, this remedy is hard to implement. When a company files a lawsuit to seek the return of the company seal, the indictment must be stamped with the company seal. If the company seal is not available, then the court will accept the legal representative's signature on the petition, but the legal representative that signs the petition must be the legal representative list on the company's business license. When the person illegally holding the company seal is the company's removed legal representative, and the company has not filed the application to change its registered legal representative, the terminated legal representative will remain the legal representative on the company's business license. In a situation where the preceding legal representative is the defendant, he or she will clearly be unwilling to execute a petition against him or herself to return the company seal. Although the Supreme People's Court has confirmed a company can effectively change its legal representative even if it does not file a change in legal representative with the SAIC or its local branch office, the new representative must still provide the court his or her identification and company authorization stamped with the company seal to be able to act in the company's name. Therefore, the company has several procedural problems it must overcome if it wants to file a lawsuit to retrieve the company seal in its own name.

When a company has trouble retrieving the company seal from a removed legal representative, another potential option is to report the lost company seal to the police. Although the public security bureau (“PSB”) in each city and province has its own requirements for reporting a lost company seal, all PSBs require a company to state how the seal was lost or stolen, and publish an announcement about the loss in a designated newspaper for prescribed period of time. Once the announcement has been published for long enough, the new legal representative may bring an original copy of the company's business license to SAIC or its branch office, and apply to make a new company seal and file related registrations. However, there are two roadblocks to using this technique. First, a company cannot get a new company seal, unless, the new seal registration is completed by the legal representative listed on the company’s business license with the approval of PSB. Second, the question of when a company’s seal should be considered “lost” or “stolen” is a subjective question. Therefore, many PSBs tend not to approve a company's request to replace a lost seal. However, some PSBs will consider a terminated legal representative's continued possession of a company seal to be an acceptable exception to the requirements, and they will approve the company’s application for a new company seal after the company provides a detailed explanation about why it cannot follow the proper procedure.

The company seal, as the symbol of power of the company, is critical for obtaining corporate control. However, regaining the seal from a displaced and uncooperative executive is a time-consuming and oftentimes difficult undertaking. Foreign investors should take care to regain possession of the seal prior to replacing management if at all possible.