Trade or industry associations bring substantial benefits to their members and enhance competition in the economic sectors they represent.  However, member activities can also create major antitrust risks that are subject to aggressive enforcement and penalties under China’s Antimonopoly Law (AML).  This article shows how associations and their members can manage these risks through a compliance program that defines acceptable and prohibited activities.

Regulatory Structure

China highly regulates the formation and operation of trade associations.  Some of the country’s trade associations were spun off from governmental entities and are still quasi-governmental in nature. The Ministry of Commerce views trade associations as unique organizations for China’s transition from a planned to a market economy.  In effect, trade associations function as an extension of governmental authority in the business sectors they represent.

Beyond quasi-governmental associations, prospective members may voluntarily establish their own trade associations.  However, this process is still highly controlled by the government and must follow specific steps for formation and operation.

·         Before establishment, the association must categorize itself under a certain industry and obtain the approval of the governmental authority overseeing that industry. 

·         After this approval, the trade association must register with the Ministry of Civil Affairs or its local administrative branch. 

·         As a non-profit social organization registered with the government, the association must conform its charter to the model dictated by the Ministry of Civil Affairs.  This covers areas such as business scope, membership, structure, administration and use of assets, charter amendment, and termination, but does not provide AML risk management mechanisms. 

·         Trade associations must reflect the doctrines of Communist Party of China.  For example, the model charter requires that the association’s senior executive adhere to Party guidance and policy with a sense of political discipline.

AML Impact

Under competition law, trade associations consist of individuals and businesses with common commercial interests who unite to further commercial or professional goals.   Typical activities include discussing industry trends and representing members’ common interests.  This has pro-competitive benefits which competition law enforcement authorities recognize worldwide and which are implicitly acknowledged by China’s AML.  But these benefits can also create antitrust risks if legitimate activities lead to collusive or exclusionary conduct such as price fixing.   The AML warns that “[i]ndustry associations shall not make arrangements for Operators within their respective industries to engage in the monopolistic practices prohibited by [the AML].”

In April 2009, the State Administration for Industry and Commerce issued draft regulations that implement the AML’s prohibition on Monopoly Agreements. Because these regulations offer little practical guidance, Chinese trade associations and their members, may not be prepared for AML compliance, and thus risk severe penalties.  For example, if the government determines that association members have engaged in price fixing under the AML,  the association can be fined a maximum of RMB 500,000 (approximately US$72,000), with member companies fined from 1% to 10% of prior year sales revenue.

To avoid such potential penalties, associations and their member companies should make their conduct consistent with the AML.  However, because the AML has only been in force since August 1, 2008, there is little precedent on enforcement or interpretation.   The most practical alternative is to examine U.S. antitrust law and EC competition law for guidance on conduct that is likely to create risks for associations and their members.  Chinese trade associations and member companies that observe the following “dos and don’ts” in four key areas of activity can reduce their AML enforcement risk.  

1) Association Formation

Associations create antitrust risk if they place certain industry participants at a competitive disadvantage by excluding them.  Associations can still choose their members, but should handle admission and other activities using clear, objective criteria that DO:

·         Follow formal, written rules and procedures for membership, voting, appropriate discussion and scope of activities.

·         Establish an appeal process for companies that are denied membership or that, once admitted, are expelled or subjected to disciplinary action.

·         Receive review by the association’s own legal counsel, who should be familiar with the AML and other competition laws, and who attends association meetings.

·         Rely for implementation on who are trained in the AML and who can provide effective leadership in avoiding anticompetitive conduct.

Associations should make certain they DO NOT impose excessive fees or create restrictive admission criteria that would unduly restrict membership.

2) Conduct of Association Meetings

Association meetings present heightened antitrust risk because discussions between direct competitors can result in market collusion that, if proven, is subject to severe monetary penalties and even prison terms although the AML does not provide for criminal liability for a violation of the AML.  Rules and safeguards must ensure that formal and informal association meetings are strictly limited to appropriate topics that do not include sensitive competitive information.  To accomplish this, associations should ensure that they DO:

·         Circulate written, advance notice of all meetings to all members.

·         Ask legal counsel to review meeting agendas before distribution to members, and to attend each association meeting. 

·         Take detailed meeting minutes and review them with legal counsel prior to dissemination.

Adhering to these formal safeguards requires that associations DO NOT:

·         Conduct ad hoc, private or informal meetings that are not officially announced in advance.

·         Discuss commercially sensitive topics, such as prices, volumes, customers, commercial strategies, or any other business secrets.

3) Information Exchange

Trade associations often gather and disseminate market information, but when that material covers prices, production volumes, customers, or business strategies it raises antitrust risk.  To avoid this, associations should require exchanges of information DO:

·         Involve data that is historical (i.e., older than three months) and aggregated so no individual contributor can be identified.

·         Use an independent party, who is not affiliated with any association member, to gather information from member companies. 

The mirror image of these requirements is the warning that associations DO NOT:

·         Exchange any information that could be considered a business secret, such as on current prices, customers, production volumes, capacity, costs or business strategies. 

·         Disseminate information that can be traced to an individual member(s), or that relates to current or future market conditions. 

4) Standard Setting

Trade associations often seek to establish quality, environmental, technical or other standards for their industry.  Competition law risks arise if an association crafts standards that unfairly place competitors at a market disadvantage.  To avoid this risk, standards should be written so that they DO invite broad, voluntary participation, and establish open, objective, clear and non-discriminatory criteria.  To avoid competition law violations, draft standards that DO NOT:

·         Intentionally exclude certain competitors.

·         Arbitrarily promote a technical objective.

·         Require the compliance of industry participants.

·         Utilize an intellectual property right that all industry participants have to license.

Self-Enforcement

Competition laws encourage, but provide no immunity for, self-enforcement by trade associations. All activities that are unlawful for individual companies acting together are equally illegal when undertaken by a trade association.  Ongoing meetings, discussions and information exchanges among association members inevitably create opportunities to violate such competition laws as the AML.  However, following the rules of conduct suggested here will show antitrust regulators that a trade association and its members are vigilant in seeking to avoid any inference of involvement in illegal activities.  

* Licensed in China and New York State of the U.S., Henry Chen is the compliance counsel of choice for many Fortune Global 500 and Fortune 500 companies within and outside China.  Clients come to him for sophisticated and strategic legal advice because he understands the practical workings of China’s legal, business and cultural landscape.  Henry is available via chenlitong@hotmail.com