By Susan Ning, Kate Peng and Ying Zhu King & Wood Mallesons’ Commercial & Regulatory Group
On December 8th 2015, the State Administration for Industry and Commerce (SAIC) publicized on its website Guangdong Administration for Industry and Commerce (AIC)’s decision in relation to the boycott investigation into Guangzhou Panyu Animation Association (GAGA). This is the very first investigation that focuses on a boycott agreement. In previous investigations where boycotts were identified, there were always other anti-competitive agreements involved and boycott agreements were not identified as the target violations that were subject to fines.
Here we introduce the GAGA investigation and some previous boycott-related investigations. We then present a short guide to practices that may constitute boycott agreements identified by the authorities.
1. GAGA boycott investigation
Guangdong AIC’s decision states that in 2012 GAGA drafted the Exhibition Alliance Agreement (Agreement) which provides that “unless in special circumstance otherwise provided under this agreement, members of GAGA and members in the alliance of this agreement should only attend exhibitions that are sponsored or organized by GAGA in Guangzhou”; “members of GAGA and members in the alliance shall submit a written application to GAGA 30 days prior to any exhibition which the member company wants to attend that is not sponsored or organized by GAGA”; and “members of GAGA and members in the alliance all agree … not to attend any exhibition that is unrelated to GAGA or any exhibition that GAGA decides not to attend.” Guangdong AIC states in its analysis of the Agreement that signatories to the Agreement are competitors in the animation entertainment industry, and through signing the Agreement these competitors have entered into a conspiracy to boycott all other exhibitions in Guangzhou not sponsored or held by GAGA. The Agreement is thus deemed a “boycott agreement” which is prohibited by Article 13.5 of Chinese Antimonopoly Law (AML). Guangdong AIC determines that the Agreement has the effect or potential effect of eliminating or restricting competition in the animation exhibition industry in Guangzhou city. GAGA, which is in charge of drafting the Agreement, is considered a participant of the boycott agreement as well as the promoter. In its conclusion, Guangdong AIC holds that GAGA has violated Article 16 of the AML and Article 9.2 of the Rules of the Industry and Commerce Administration Authorities on the Prohibition of Monopoly Agreement Behaviors, which prohibits industry associations from “convening, organizing or promoting the operators in the industry to reach agreements, resolutions, minutes, memos and others which contain contents about the exclusion of and restrictions on competitions.” Citing Article 46.3 of the AML, Guangdong AIC imposed a penalty of 100,000 yuan on GAGA, and asked it to cease the alleged illicit behavior. It should be noted that no decision against the member companies in the current case was issued by Guangdong AIC and nor were any fines on the member companies imposed.
2. Previous boycott investigations
As we can see in the prior investigation decisions of Chinese antimonopoly authorities, a boycott agreement has been identified in several cases involving other anti-competitive agreements. For example, in one investigation conducted by Hunan Development and Reform Commission (DRC), several insurance companies in Loudi city, led by an industry association, together established an Insurance Service Center (the Center), and then respectively signed a “cooperation agreement” with the Center stipulating that all new car insurance businesses in Loudi must be uniformly retained by the Center and no individual insurance company should take in any new car insurance business on its own. In addition, all the insurance companies being investigated had entered into a self-discipline convention, which stipulated that individual insurance companies could not set their own price-setting mechanism or promotions for new car insurance. According to the press release by the local DRC, a boycott was also involved in the case. This was because the member companies all agreed to end their agency agreements with previous insurance agencies and only deal with the Center. In the end, the industry association as well as all the insurance companies was fined for violations of the AML.
Around the same time when the Hunan DRC investigated insurance companies in Loudi city, Hunan AIC conducted an investigation into an insurance industry association in Changde city involving a very similar situation. In that case, the association led several companies to establish a Center similar to the one in the Loudi case and to sign a similar contract as well. Hunan AIC in its analysis states that the business practice of the Center and agreements among insurance companies in Changde city constitute a boycott by concerted refusal to deal with insurance agencies other than the Center. Some other AML violations such as market division were also involved in this case. Quite interesting is that just like what happened in the Panyu case, Hunan AIC did not issue any decisions regarding member insurance companies in this case. Only the industry association was fined under Article 16 of the AML.
3. Boycott agreements prohibited by the AML
A boycott agreement refers to an agreement among competitors not to do business with targeted individuals or companies. Article 13.5 of the AML prohibits competitors from reaching boycott agreements that eliminate or restrict competition. Article 7 of the Rules of the Industry and Commerce Administration Authorities on the Prohibition of Monopoly Agreement Behaviors further specifies three kinds of boycott between business operators in a competitive relationship: (a) concerted refusal to supply goods or sell commodities to specific operators; (b) concerted refusal to procure or sell the commodities of specific operators; (c) concerted efforts to restrict specific operators from engaging in transactions with other operators in a competitive relationship. Though Article 7 applies the word “specific operators” as the target of boycott or concerted refusal to deal, we can see in Panyu case that concerted exclusive dealing where the target of the boycott is not “specific” in the common sense, can also constitute boycott that is prohibited by the AML (the Agreement in that case requires member companies to deal exclusively with Panyu and not to attend exhibitions held by other companies). In other words, unspecified third parties can also be the target of boycott.
In practice, boycott agreements may occur alongside other anti-competitive agreements. In fact, sometimes a boycott agreement could be the means to achieve other anti-competitive agreements. For instance, a boycott agreement may be used to implement a price-fixing agreement where competing companies agree not to do business with others except on agreed-upon terms, typically with the result of raising prices. In addition, boycott agreements to prevent a competitor from entering a market or to disadvantage an existing competitor also raise anticompetitive concerns especially when the target competitor is a “price-cutter.”
Moreover, in the context of exercising intellectual property rights, boycott concerns have also been noted. SAIC and NDRC recently published for consultation respective drafts of their Anti-Monopoly Guidelines on abusing Intellectual Property Rights. (SAIC published its newest draft IP Guidelines on February 4th 2016 while NDRC published its newest draft version on December 31st 2015.) According to Article 17 of SAIC’s draft IP Guidelines, boycott agreements are reached between competitors if, through establishing IP agreements, they collectively refuse to license their patents to a specific counterparty or collectively refuse to sell goods provided by using IP rights to a specific counterparty. Meanwhile, in NDRC’s draft IP Guidelines, under the section on anti-competitive agreements between competitors, it states that exclusive cross-licensing agreements between patent owners may also raise anti-competitive concerns. Exclusive cross-licensing agreements between competitors also have the feature of a concerted refusal to license to other competitors, and thus may form an IP boycott agreement.
In the investigations involving boycott violations, the authorities did not provide any explanation regarding why in some of the investigations member companies did not get caught or fined. However, we notice that in some of those cases members companies were coerced by the associations to enter into boycott agreements, which is probably the reason why the members of the associations were not fined. It is worth noting that according to Article 6 of the Notice of the National Development and Reform Commission on Releasing Several Provisions on Regulating the Authority of Price-related Administrative Penalties, a party shall be given a lighter penalty in accordance with the law if the party commits a price-related violation of law under duress of others. However, this may not fully immunize member companies from being fined for reaching boycott agreements. It is the authorities that have all the discretion. Therefore, business operators should be mindful of this kind of anti-competitive agreement, even though in some of the cases participants other than the industry association concerned were not fined.
Although boycott agreements are not as common as some other anti-competitive agreements, such as price-fixing and market division agreements, we expect to see more investigations of boycotts by the Chinese antimonopoly authorities in the future. While it may be sometimes common to see clauses in association agreements or in membership agreements that require member companies not to deal with non-member companies, it is advisable that business operators have a second thought and ask their legal department for a compliance review before entering into such agreements. Business operators should also keep in mind that boycott agreements can occur as a concerted refusal to deal as well as concerted exclusive dealing. Companies should keep an eye out for agreements containing such clauses. It should also be noted that industry associations are equally, if not more, at risk compared to member companies of being investigated or penalized for boycott agreements.