What Constitutes Anticompetitive Tying in China? The Wuchang Salt Company Case

By: Susan Ning, Zheng Ziqing and Angie Ng.

On 15 November 2010, the National Development and Reform Commission (NDRC) issued a notice entitled “Hubei Province Price Bureau to investigate and punish tying case”.[1] 

Facts:

The following are the salient facts of this case:

• On 9 July 2010 and 3 August 2010, Wuchang Salt Company (WSC) (a supplier of table salt) made their supply of salt (to local distributors) contingent on purchase of “Huo Li Er Ba” branded washing detergent powder. It appears that WSC was a distributor of “Huo Li Er Ba” branded washing detergent powder.
• On 11 August 2010, the above facts were published by local newspapers. Subsequently (on 12 August 2010), the Hubei Province Price Bureau (HPPB) commenced an investigation into this case.
• On 15 November 2010, the HPPB announced that WSC had violated Articles 7 and 17(5) of the AML: 
  • Article 7 of the AML prohibits business operators operating in industries pertinent to the national economy and national security from using their market power to harm the interests of consumers. Article 7 also stipulates that these business operators must conduct their businesses “honestly and trustworthily and exercise self discipline”. 
  • Article 17(5) of the AML prohibits business operators from abusing their dominance by bundling the sale of commodities without a valid reason or imposing unreasonable terms within a transaction.
• The HPPB did not really explain in much detail in relation to how or why they have deemed the WSC to have violated the above mentioned provisions. However, from the NDRC’s announcement, we gather that: 
  • The HPPB was of the view that the WSC was “dominant” in the Wuchang area because it was the only authorized sale supplier in that area. 
  • After thorough investigations, the HPPB found that WSC did “tie” its salt supply with the sale of “Huo Li Er Ba” branded washing detergent powder in breach of Article 17(5) of the AML. 
  • Since WSC is a state-owned enterprise dealing with an essential commodity, the HPPB also found that the WSC breached Article 7 of the AML.
• During the investigation process, it appears that WSC voluntarily returned revenue earned from the “tied” sales to the relevant local distributors and submitted an undertaking letter to the HPPB to this effect.
• From the NDRC notice, it also appears that the HPPB required that the WSC undertake certain “corrective measures” within a month (however, it does not state what these “corrective measures” are). The notice also states that the HPPB will “keep tabs” on this issue for a period of 2 months and if for some reason the HPPB fails to undertake these corrective measures, then the HPPB will recommence investigations into this matter.
• In the NDRC notice, the HPPB notes also that the WSC was very cooperative during the HPPB investigation process.

Comments:

It is interesting that the NDRC issued the notice with respect to this case. The NDRC is responsible for breaches of the AML involving price; whereas the State Administration of Industry and Commerce (SAIC) is in charge of breaches of the AML which involve no price elements. From the NDRC notice, it does not appear that there are specific “price” elements to this case. Pursuant to Article 10 of the AML, the NDRC may delegate the enforcement of the AML to provincial agencies. The HPPB is a provincial agency related to the NDRC – and hence possesses the jurisdiction to enforce provisions pursuant to the AML.

Further, the AML regime is a civil administration regime. This is where authorized agencies (such as the HPPB) is able to investigate any alleged breaches (see Article 45, AML) as well as impose remedies (see Article 47, AML) on business operators.

The HPPB’s decision or notice has been conservative with information in relation to the manner in which the HPPB went about establishing the breaches of Articles 7 and 17 of the AML. Many questions remain, such as:

• The HPPB did not explain how the WSC failed to “act honestly and trustworthly” or “used their controlling power in the industry…to harm the interests of consumers” (i.e. in breach of Article 7)?
• The HPPB was of the view that WSC was a “dominant” supplier in the Wuchang area. However it did not explain why it chose to view the relevant geographic market as this local area only and not wider than this local area. If the relevant geographic market is wider than the Wuchang area, would the WSC be considered dominant?
• The HPPB did not explain how by tying salt with the washing powder, the WSC had eliminated or restricted competition either in the market in relation to the supply for salt; or the market in relation to the supply for washing powder. In other words, how did the WSC harm competition (to the detriment of consumers) and in which industry or “market” did they harm competition?
• The HPPB did not elaborate on whether the WSC had legitimate commercial reasons for “tying” their salt with the washing powder.

It is also not clear what types of “corrective measures” the HPPB is requiring the WSC to undertake within a month. However, it is possible that because of the WSC’s cooperative behaviour during the HPPB’s investigation, that this will impact on the scope or degree of remedies imposed on the WSC.

Since the enactment of the AML, many commentators have been suspicious of the intentions of Article 7 of the AML. Many commentators say that this provision effectively “protects” state-owned enterprises (SOEs) by effectively “protecting” these enterprises from the provisions of the AML. The second portion of Article 7 outlines the prohibition in respect of business operators who operate within the scope of industries pertinent to the national economy or national security. However, the first portion of Article 7 states that the State possesses the right to protect these same business operators. This WSC enforcement action is one instance which shows that SOEs really aren’t above the law or the AML.