China’s development of a central role in the global economy has been accompanied by a national commitment to demonstrate that the country’s legal and regulatory system is fully capable of conforming to and supporting established international norms of doing business.  This commitment is inseparable from China’s business, cultural and economic environment, as privatization and rapid economic growth create change that requires new judicial, regulatory and cultural frameworks.  As China continues to implement its obligations to transform from a closed society to one that is governed by transparency and the rule of law, more complex legal and regulatory compliance obligations are emerging for domestic companies as well as for companies based in other countries.  Nowhere is this more apparent, as some case studies indicate, than in the application of and interaction between China’s Anti-Monopoly Law (AML), Anti-Unfair Competition Law (AUCL), Price Law and even Criminal Law.

Compliance Overview

The 2008 enactment of the AML attracted a great deal of media attention, but the less-media favored AUCL (promulgated in 1993) and Price Law (promulgated in 1997) pose equally substantial compliance risks for foreign businesses.  The compliance mechanisms for the AML are in fact still evolving especially under the circumstance that the AML is facing amendments. 

Despite the still-evolving provisions of the AML, all three laws have potential for imposition of penalties on companies that violate their provisions:  

·         The AML does not provide for criminal liability for anti-competitive practices in violation of the law.  Nonetheless, Article 52 of the AML imposes criminal liability for serious circumstances involving obstruction of justice in the process of a governmental investigation, such as (1) refusing to provide related materials and information, (2) providing fraudulent materials or information, (3) concealing, destroying or removing evidence, and (4) refusing or obstructing investigations in other ways.

·         The AUCL seeks to regulate an array of practices that would impede the competitive orders of the market, with provisions governing the passing off and misappropriation of trade secrets, predatory pricing and tie-ins, abuse of administrative powers, bribery and unlawful discounts, misleading advertising and the organization of lotteries.

·         The Price Law prohibits business operators from engaging in a wide range of illegitimate pricing conducts, including collusion to manipulate market prices, dumping of goods, adopting discriminatory pricing, manipulating supply or information to control pricing, or reaping excessive profits.

Inter-Related Compliance Requirements

One of the greatest compliance risks involves allegations of exclusive sales arrangements, which could violate the AML and the AUCL, as well as provincial anti-unfair competition legislation.

An exclusive sales arrangement is defined as an arrangement where a seller/trader provides a certain economic benefit to its counterparty in exchange for the counterparty's promise not to sell a competitor's products. If the seller/trader is a business operator with a dominant market position (DMP operator) an exclusive sales arrangement may be considered an abusive action under Article 17.4 of the AML because it restricts the counterparty to conduct transactions only with the DMP operator or other businesses designated by the DMP operator. Similar compliance concerns may be triggered under the AUCL and provincial anti-unfair competition regulations.

These regulations do not expressly regard a payment made in relation to an exclusive sales arrangement as a commercial bribe. In practice, however, some regional Administrations for Industry and Commerce (AICs) may take such a viewpoint, which is often difficult for non-Chinese lawyers to understand. In Europe and the United States, commercial bribery is commonly viewed as a breach of fiduciary duty.  As a practical matter in this view, no breach of fiduciary duty has occurred under an exclusive sales arrangement. However, there is a peculiar form of commercial bribery under the AUCL that can be referred to as “anti-competitive commercial bribery.”

In anti-competitive commercial bribery, the offense involves the free functioning market competition that the AUCL was formulated to protect.   In addition, the AUCL provides for a blanket prohibition on a wide range of commercial bribery activities, by which a company or enterprise (not just a DMP operator) may use valuables or other methods to induce its counterparty to buy or sell goods. Commercial bribery is thus conducted with competition disordered and impaired.

The AML prohibits a DMP operator from unjustifiably restricting a counterparty to conduct a transaction only with the DMP operator or with other designated business operators. The word "unjustifiably" indicates that the enforcement authority must use a reasonability standard to take into account any defenses that would justify the exclusive sales before issuing a punishment decision.  By contrast, under the AUCL and related provincial-level regulations, there is no such reasonability standard and an exclusive sales arrangement is often construed to be a per se violation. Also, defenses that might be available under the AML would not be applicable to the cases investigated under the AUCL. The enforcement authorities (such as the AICs) would thus impose punishments according to their own views of the offending actions.

An additional dimension to the regulation of exclusive sales arrangements comes from the Criminal Law, which was promulgated in 1997 – the same year as the Price Law.   Article 226 of the Criminal Law prohibits anyone from forcing other people to buy or sell goods, or forcing other people to provide or buy services.  If the circumstance is serious, a sentence of three years of imprisonment or detention shall be imposed.  A fine may be imposed singly or jointly.  It remains to be seen the extent to which the provision of Article 226 will be applicable to accommodate the enforcement of the AML—for example, whether or not Article 226 will be applicable to some practices in respect of abuse of dominant market position.

The Price Law adds yet another dimension to this regulatory structure, by focusing strictly on pricing behavior that may or may not be part of the anti-competitive conduct prohibited by the other statutes.  Article 14.1 of the Price Law is similar to Article 13.1 of the AML, but as a matter of practice (given the still-evolving provisions of AML enforcement) Chinese governmental authorities to this point continue regulating price-fixing activities in accordance with the Price Law.   Article 13.1 of the AML prohibits competing business operators from reaching a monopoly agreement to fix or change the price of the goods.  Similarly, Article 14 of the Price Law prohibits a business operator from doing the following:

·         Colluding with another party to manipulate market prices and damage the legitimate interests and rights of other business operators or consumers

·         Dumping its goods, except for fresh goods, seasonable goods and old stock, at a price lower than the costs of the goods in order to influence normal manufacturing and business pricing

·         Manipulating and dispensing price-raising information to boost prices

·         Adopting a discriminatory price to a business operator with the same transaction conditions

·         Increasing or decreasing the price of goods indirectly by increasing or decreasing the supply levels of the goods

·         Reaping excess profits in violation of laws

·         Engaging in other unlawful pricing activities.

Note that some of these provisions, particularly those relating to collusion and discriminatory pricing, could have application to exclusive sales arrangements, anti-competitive commercial bribery and other prohibited practices, depending upon the interpretation of the circumstances.  Also figuring into the regulatory equation is the fact that each AIC is assigned an annual target for how large an anti-bribery fine should be imposed and collected. The financial motivation might give a falsely positive impression of the efforts of the AIC, but indicate the commitment of the Chinese government in fighting anti-competitive conduct.

Compliance Case Study

How do all these significant and occasionally conflicting regulatory efforts work in actual practice?  The following example involves domestic Chinese companies, but offers a cautionary example to foreign-owned companies as well.

There were 16 rice powder factories in Liuzhou City in 2010.  In January 2010, 15 of the 16 Liuzhou factories entered into a collusion agreement with Xian Yi Ge Food Factory (Xian Yi Ge) to raise the price of rice powder, and Xian Yi Ge adopted carrot-and-stick measures to make sure the agreement would be executed.  As a result of the agreement, the colluding rice powder factories issued notice of a 25 percent-plus price increase to downstream business operators, including rice powder wholesalers, retailers, rice powder food peddlers and stores.  The subsequent dramatic food cost increase caused a significant outcry inLiuzhou.

The Liuzhou government responded quickly by forming a joint investigation team.  Within three days, the Liuzhou City government ordered all of the colluding rice powder factories to unconditionally rescind their price increase.  Within a week 12 people were arrested, including Xian Yi Ge’s legal representative.  By mid-February five individuals were criminally detained on the suspicion of committing the crime of forcing other person(s) to transact with their companies.  Simultaneously, the Pricing Bureau of Liuzhou City issued the first round of administrative punishment decisions, by which two Liuzhou rice powder factories were fined RMB 300,000 (US$44,118) each.  Although news reports did not mention by which law the Pricing Bureau issued the penalizing decisions, the applicable statute could have been either the Price Law or the AML.  Given that Article 14.1 of the Price Law is similar to Article 13.1 of the AML, either statute could be applied in this or future similar cases.  And to the extent that the penalized activity involved predatory pricing and tie-ins, provisions of the AUCL could also apply. 

The real lesson here is not which statute was used for enforcement, but rather the fact that any of four statutes could have been applied.  Businesses should analyze their compliance with the AUCL, the Pricing and Criminal Laws, and various provincial anti-unfair competition regulations and not depend on AML compliance alone.  What is more, the AML is under the discussion for amendment.  It remains to see if the AML to amend will punish hard-core anticompetitivel actions criminally.

* 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.  Henry is the author of the book of Commercial Bribery Risk Management in China