The new Anti-monopoly Law of China (“AML”) was issued on August 30, 2007, although it will not come into effect until August 2008. During the one year time window, there is no doubt that the existing enforcement system of anti-monopoly will be greatly impacted and amended by this AML. However, it is also very important for general counsels of multinational companies in China to understand how the current anti-monopoly enforcement system might impact the future upgraded system under the AML.
Current Anti-monopoly Related Laws and Regulations
The AML is the first law and milestone of China specialized in anti-monopoly. However, it should be noted that before the issuance of the AML, China has already passed several laws and regulations relating to anti-monopoly and fair competition. The key system includes the Pricing Law, the Anti-unfair Competition Law, the Provisions on Takeover of Domestic Enterprises by Foreign Investor and its Guideline for Filing of Anti-monopoly Notification. These laws and regulations established the initial principles and framework regarding price fixing, monopoly agreement, abuse of dominant position in the market and pre-merger notification.
As part of the enforcement system in detailed industries, the current system also includes specific rules and restrictions against monopolistic conduct and illegal profit of monopoly in various key industries that exist or may exist monopoly activities. These rules are directly or indirectly provided in the Telecommunication Provisions, the Invitation and Bidding Law, Electricity Law, Shipping Law and Securities Law.
Current Enforcement Authorities
Price fixing, unfair competition and concentration are the key areas that the AML is aiming at under its sections of monopoly agreement, abuse of dominant market position and concentration. The current enforcement authorities have already covered these three areas according to their respective authorizations under the relevant laws.
1. Price Fixing
Under the authorization of Pricing Law, State Development and Reform Commission (“SDRC”) is the key supervision and enforcement authority at the central government level. SDRC has the right to formulate national price guidelines and policies, set pricing reference standards in various industries, supervise pricing activities of economy entities and punish any illegal pricing activities. SDRC establishes local pricing bureaus at provincial stage and pricing supervision departments in lower administrative regions. These local pricing authorities are the most important enforcement bodies in daily enforcement of Pricing Law. The SDRC and local pricing bureaus are authorized to issue administrative penalty to illegal pricing activities, including warning and fine.
2. Unfair Competition
The Anti-unfair Competition Law restricts or prohibits various unfair competition activities that might harm or limit the market competition. The State Administration of Industry and Commerce (“SAIC”) as the major corporate registration authority in China acts the most important role in supervising the market’s healthy competition. The Fair Competition Bureau under the SAIC and all local branches of SAIC are the “market policemen” that shoulder the daily supervision work under the Anti-unfair Competition Law. Due to the company registration function of SAIC, it has local branches in almost every city of China. Such wide extension secures the supervision of unfair competition in most basic levels of geographic location and industrial areas. Further, due to the wide scope of unfair competition, it covers most of the basic economy activities except price fixing. Thus, SAIC and its Fair Competition Bureau become the critical body of anti-monopoly system that have wide power and efficient enforcement measures.
3. Pre-merger Notification Filing
One of the hottest area of merger and acquisition in China that impact the business operation of every foreign investor and those multi-national companies is the pre-merger notification requirements issued by Ministry of Commerce (“MOFCOM”). In 2006, several departments of central government led by MOFCOM launched the Provisions on Takeover of Domestic Enterprises by Foreign Investor (“Pre-merger Provision”), which for the first time authorizes the Chinese government authority to review any overseas M&A deals that might affect Chinese market. The Pre-merger Provision, followed by its Guide of Filing of Anti-monopoly Notification issued by Anti-monopoly Review Office of MOFCOM, flagged the intention of Chinese government in establishing a modern anti-monopoly enforcement system. Such intention eventually was proved by the issuance of AML. The Anti-monopoly Review Office becomes the key government body that every corporate M&A deals worldwide has to concern, regardless it takes place in China or not. The setting of thresholds for filing authorizes MOFCOM and its Anti-monopoly Review Office to secure the market competition interest of China through supervising, reviewing, appraising and even rejecting the notification filing by multi-national companies. Without any doubt, Anti-monopoly Review Office covers the market concentration issue that hasn’t been touched by any of the previous laws and regulations.
Impact on Future Enforcement System under AML
The AML requires the State Council to establish an Anti-monopoly Commission as the uniformed body in enforcing the Law. However, due to the existence of SDRC, SAIC and MOFCOM which all act as part of the current enforcement system, the AML seems to compromise on issuing a nominal management power for such Anti-monopoly Commission. As a result, the power of the Anti-monopoly Commission is defined as “organizing, coordinating and guiding” the anti-monopoly enforcement work while the members of this Commission consists of key officials from SDRC, SAIC and MOFCOM. Therefore, once the AML comes into effect in 2008, there will be three major authorities performing their duties under the AML jointly referred to as “Enforcement Authority” . Meanwhile, the AML has not clearly defined the power scope among these major authorities and the current anti-monopoly related laws will still be in force. The following impact might occur based on the above analysis:
- Efficiency of enforcing the new AML in certain complicated monopolistic case might be influenced, if the complexity of the case might trigger more than one of the authorities’ attention and interest.
- Enforcement against such case might find different legal basis other than the AML.
- The existence of natural monopoly by state-owned company in several industries will not be substantially improved by the AML since the economic interest might affect the coordination among the authorities.
- It might be time and cost consuming in indentifying which authority to inquire and report to for the companies that might be involved in any anti-monopoly activities or cases.
- The difficulty increases for multi-national companies to establish a constructive communication with every of the enforcement authorities.
Conclusion
Undoubtedly, the adoption of the current system by the AML has its positive effect that it avoids the mass situation if all authorities have to be reformed and restructured in a short time frame. However, it should be fully recognized that the overlap in jurisdiction and inefficiency in enforcing the AML will be the issue for China to search for solutions and improvement. There is an urgent demand that the legislation should promptly conclude an enforcement rule during the one year window before the effectiveness of the AML, which could clearly define the jurisdiction scope among the current authorities. We do hope and are confident that an efficient, uniformed anti-monopoly enforcement system will be soon established in China and the AML will lead China to a mature market with fair competition and healthy growth.
Authored by:
Michael Zhang
Senior Legal Consultant
mzhang@sheppardmullin.com
Bundled discounts, the practice of selling multiple products for a single price, are ubiquitous in America, ranging from Happy Meals at your local McDonald's to a single price for telephone, Internet and television service from your local cable or satellite provider.
Courts have struggled to develop an analytical model to determine when bundled discounts violate antitrust laws. They do not fit the tying paradigm because there is no conditioning; that is, a buyer can purchase the products in the bundle separately, albeit at higher individual prices. Likewise, unless the discount causes the seller's prices to be below the seller's incremental cost, bundled discounts do not constitute predatory pricing.
9th Circuit Answer
The 9th Circuit addressed and resolved these issues in Cascade Health Solutions v. Peace Health, 2007 DJDAR 13732 (9th Cir. Sept. 4, 2007). It held that only when the discount at issue results in a price below the seller's incremental cost for the competitive product at issue do bundled discounts or rebates constitute exclusionary conduct under Section 2 of the Sherman Act.
In doing so, the 9th Circuit "declined to follow" a recent decision of the 3rd Circuit, Le Page's Inc. v. 3M, 324 F.3d 141 (3rd Cir. 2003), which banned such discounts when offered by a monopolist, without regard to whether such discounts were below the seller's costs. This clear split in the circuits sets up the bundled-discount issue for resolution by the Supreme Court.
Cascade involved the pricing of hospital services in Lane County, Oregon. The defendant owned the largest hospital in the area and provided acute, secondary and tertiary care. The plaintiff owned a smaller hospital that provided only acute and secondary care. The defendant had 90 percent of the market for tertiary care, and 75 percent of the market for the other services.
The defendant offered insurers and preferred provider organizations in the area a 35 percent to 40 percent discount if they contracted exclusively with it for all three services. The defendant's offered discount was smaller if they also contracted with the plaintiff.
The plaintiff filed suit, and the court used the Le Page's rule to instruct the jury on the bundled-discount issue. The jury rejected the plaintiff's claims of monopolization, conspiracy to monopolize and exclusive dealing but awarded damages of $5.4 million each on attempted monopolization, price discrimination and tortious interference claims. The defendant's appeal centered on the conduct element of the attempt-to-monopolize claim, asserting that the District Court incorrectly instructed the jury about when bundled discounting can amount to anti-competitive conduct.
In a decision by Judge Ronald M. Gould, the 9th Circuit began by noting that bundled discounts are generally pro-competitive because buyers "get more for less" and sellers often achieve some cost savings. Here, however, where the plaintiff apparently showed it could provide primary and secondary care at a lower price than the defendant, bundling may have been anti-competitive, because it was used to exclude a less-diversified but more-efficient rival. The issue, according to the court, was how to draw the line between lawful and unlawful bundling in such cases.
'Le Page's' Lead
In Le Page's, the plaintiff was the market leader for private-label transparent tape. The defendant, 3M, had a monopoly on the manufacture of Scotch tape, manufactured some private-label tape and manufactured many other products, such as health care and automotive products. 3M's bundled-rebate structure offered progressively higher rebates when customers increased purchases across its multiple product lines. Le Page's could not match these discounts because it did not offer the same diverse product line. Thus, its market share and profitability declined. Le Page's filed suit, saying that the bundled-rebate program was an unlawful attempt by 3M to maintain its monopoly power over Scotch tape. The jury found in favor of Le Page's.
On appeal, 3M argued that its rebate structure was legal as a matter of law because it never priced below cost. 3M relied heavily on Brooke Group v. Brown & Williamson, 509 U.S. 209 (1993), which held that a predatory-pricing claim in a single-product case required below-cost pricing coupled with the likelihood of recoupment of its losses after the period of predation.
The 3rd Circuit rejected the analogy to Brooke Group, stating that it did not involve the bundling issue and should not apply to cases in which the defendant had monopoly power and thus could recoup its losses readily. Instead, it permitted the jury to find an antitrust violation when a bundled rebate is offered by a monopolist and thus forecloses portions of the market to a competitor that does not offer the full range of products.
Citing the recent report by the bipartisan Antitrust Modernization Commission, the court criticized the Le Page's rule as protecting a less-efficient competitor at the expense of consumer welfare.
The Supreme Court, according to the 9th Circuit, has emphasized repeatedly that antitrust law should protect competition, not competitors. Absent the "clearest" showing that injury to the competitive process will result, courts should leave "unhampered" pricing practices that might benefit consumers. Because bundled discounts are price discounts, the 9th Circuit concluded that the exclusionary conduct of an attempt to monopolize claim is not satisfied unless the discount results in prices that are below an appropriate measure of cost.
Measuring Pricing
The court considered the various price/cost tests that could be used. The 9th Circuit rejected the defendant's suggested test - the discounted price of the entire bundle must be below the bundling firm's incremental cost to produce the entire bundle - as one that would allow discounts that harm competition to escape liability, because an equally efficient competitor could be excluded.
It also rejected a test from Ortho Diagnostic Sys. Inc. v. Abbott Labs, 920 F. Supp. 455 (S.D.N.Y. 1996). Under the Ortho test, an above-cost discount would be anti-competitive if the plaintiff proved that it was an equally efficient producer and was excluded only because the defendant sold in more product markets.
The downside to the Ortho test, however, is that it does not provide adequate guidance to sellers, because it looks to the costs of potential plaintiffs - to which a potential defendant considering a bundled discount would not have access. It also would, according to the 9th Circuit, require multiple suits to determine the legality of a single bundled discount.
The court adopted the "discount attribution" standard advocated by the Antitrust Modernization Commission. Under this approach, it wrote, "the full amount of the discounts given by the defendant on the bundle are allocated to the competitive product or products."
"If the resulting price of the competitive product or products is below the defendant's incremental cost to produce them, the trier of fact may find that the bundled discount is exclusionary for purposes of section 2," the court wrote.
This standard, said the court, makes the defendant's bundled discounts lawful unless the discounts have the potential to exclude a hypothetical equally efficient producer of the competitive product. The court concluded that the appropriate measure for incremental costs is average variable costs.
The court also addressed the plaintiff's price-discrimination and tortious-interference claims, as well as the plaintiff's appeal of the lower court's grant of summary judgment to the defendant on its tying claim under Section 1 of the Sherman Act. The price-discrimination claim was based on Oregon law patterned after the federal Robinson-Patman Act. Under Brooke Group, this federal price-discrimination law requires that in primary line cases (those between sellers), the plaintiff must show below-cost pricing and the likelihood of recoupment.
After finding that the Oregon Supreme Court likely would follow Brooke Group, the 9th Circuit vacated the jury verdict on the price-discrimination claim. It had the same defect as the attempt-to-monopolize claim: the failure of the jury instruction to address the below-cost issue. The verdict on the tortious interference, based as it was on antitrust violation, was also vacated.
In its tying claim, the plaintiff asserted that the tying product was the tertiary services and the tied products were the primary and secondary services. The lower court's grant of summary judgment was based on the absence of coercion, with the court finding that the defendant did not coerce the purchase of the tied products by offering a price discount.
The 9th Circuit rejected the plaintiff's assertion, based on Heatransfer Corp. v. Volkswagenwork, A.G., 553 F.2d 964 (5th Cir. 1977), that, as a third party to the tying arrangements, it need not show coercion. It did, however, find a disputed factual issue regarding coercion, such that summary judgment was inappropriate.
Although higher prices to purchase the tied products separately do not, standing alone, create a fact issue on coercion, the fact that only a trivial portion - 14 percent - of the insurers purchased the services separately may indicate some degree of coercion. It also may indicate that the package discount is as effective as an outright refusal to sell the tying product - the tertiary services - separately. This fact, coupled with the market power of the defendant as the only provider of tertiary services in the relevant geographic area, was sufficient to create a factual issue for the 9th Circuit to vacate the summary judgment in favor of the defendant on the tying claim.
Although the Supreme Court denied certiorari in Le Page's, Cascade has created an environment in which the antitrust legality of bundled pricing likely will have to be addressed by the Supreme Court soon.
Authored by:
Carlton A. Varner
213-617-4146
cvarner@sheppardmullin.com
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© 2007 Daily Journal Corporation. All rights reserved.
The California Court of Appeal has held that Korea Supply Co. v. Lockheed Martin Corp., 29 Cal.4th 1134 (2003), did not preclude an award of restitution under California's Unfair Competition Law ("UCL") to plaintiff by defendant Microsoft even though plaintiff paid a retailer, not Microsoft, for the product. Plaintiff asserted that he had been misled by statements on Microsoft's packaging into purchasing a Microsoft product. Shersher v. Superior Court, 154 Cal.App.4th 1491, 1494, 65 Cal.Rptr.3d 634 (2007) (plaintiff "alleged that he paid money to a retailer to purchase Microsoft's product based on false or misleading statements on the product package"). The Court of Appeal, which reviewed the writ at the direction of the California Supreme Court, reversed the Superior Court order granting defendants' motion to strike plaintiff's claim for restitution.
The central issue in Shersher was whether Korea Supply had limited the restitution available under the UCL, Cal. Bus. & Prof. Code § 17200, et seq., to plaintiffs who had dealt directly with the defendant. In Korea Supply, plaintiff alleged that defendants had offered bribes and sexual favors to various officials in order win a contract. Plaintiff had acted as the agent for a competing bidder that had bid less than the defendants. Defendants won the contract despite their bid being higher. Plaintiff sued for "restitution" under the UCL to recover the $30 million commission it would have netted had its client's bid been accepted.
The Supreme Court in Korea Supply rejected plaintiff's claim for monetary relief under the UCL: "Any award that plaintiff would recover from defendants would not be restitutionary as it would not replace any property or money that defendants took directly from plaintiff." Korea Supply, 29 Cal.4th at 1149 (emphasis added).
The Shersher court did not find the "directly" language in Korea Supply to be controlling:
Nothing in the language of Korea Supply suggests that the Supreme Court intended to preclude consumers from seeking the return of money they paid for a product that turned out to be not as represented. Rather, the holding of Korea Supply on the issue of restitution is that the remedy that plaintiff seeks must be truly "restitutionary in nature"—that is, it must represent the return of money or property the defendant acquired through its unfair practices.
Shersher, 154 Cal.App.4th at 1498. "Here, plaintiff and the putative class members clearly had an ownership interest in the restitutionary relief sought because they purchased Microsoft's product." Id. at 1499.
The court stated that it based its result on the importance of UCL actions to "the enforcement of consumers' rights" (id. at 1496); the "full range of inherent powers" that may be exercised by a court of equity (id. at 1497); and "the plain language of the UCL and the Supreme Court's mandate that the UCL be interpreted broadly." Shersher, 154 Cal.App.4th at 1500.
Authored by:
Thomas D. Nevins
415-434-9100
tnevins@sheppardmullin.com
Since the venerable case of Ace Beer Distributors v. Kohn, Inc., numerous courts have held that the substitution of one distributor for another is competitively neutral. The courts have generally upheld refusals to deal and distributorship substitutions, even where a manufacturer decides to abandon a geographic area for product distribution, a line of business, or makes significant changes in the means by which it offers its product for distribution.
In Norris v. Hearst Trust, No. 05-20710, (5th Cir. September 18, 2007), the Court of Appeals for the Fifth Circuit reaffirmed this trend by holding that forward vertical integration resulting in the termination of six former distributors of the Houston Chronicle newspaper, failed to state a claim upon which relief can be granted. The court so held despite allegations that the defendant was an alleged monopolist, and the terminations resulted from a refusal by the distributor plaintiffs to agree to inflate circulation figures, which would allow the defendant to artificially inflate its advertising rates. The Fifth Circuit held that the distributors were "neither consumers nor competitors in the market" in which trade was allegedly restrained. As such, the complaint failed to adequately allege "antitrust injury", and thus, plaintiffs lacked antitrust standing under Section 4 of the Clayton Act.
The complaint alleged violations of Section 1 and 2 of the Sherman Act and Section 2(a) of the Robinson Patman Act. It alleged that the plaintiffs had for a number of years been contract distributors of the Houston Chronicle newspaper. Plaintiffs alleged that they were terminated by Hearst as distributors because they refused, or complained of, Hearst's requests that they certify to the Audit Bureau of Circulations, falsely inflated numbers of "Home Delivery Subscribers". The complaint alleged that the request was made because Hearst wished to increase the Chronicle's advertising sales and revenues, where advertising rates were a function of home delivery subscriptions.
In granting defendant's motion for summary judgment, on the ground that the complaint could not state a claim under Federal Rule of Civil Procedure 12(b)(6), the Court noted that there was no allegation that prices had been increased to subscribers, or to advertisers. Thus, the Court held that because the plaintiffs were neither consumers nor competitors in the relevant market for the distribution of daily newspapers of general circulation in the greater Houston metropolitan area, the plaintiffs had failed to establish the required element of "antitrust injury". The Court rejected the plaintiff's argument that they had sustained "antitrust injury" because they were terminated due to their refusal to participate in alleged antitrust violations.
Citing the United States Supreme Court's recent decision in Twombly the Court noted that "a naked allegation of conspiracy or agreement without more specific factual allegations is not to be accepted as sufficient to state a claim under Section 1 of the Sherman Act." Citing Brunswick the Court noted that "the antitrust laws were enacted for the protection of competition not competitors." As the distributor plaintiffs were neither consumers nor competitors in the relevant market, they could not allege antitrust injury. Thus, even with allegations that the motive for the termination of the distributors was their refusal to participate in a scheme to artificially inflate the newspaper's general circulation figures, and even where the vertical integration forward was by an alleged monopolist in the relevant market, plaintiffs flunked the Associated Gen. Contractor's test relative to adequacy and remoteness. The Court distinguished McCready on the ground that Mrs. McCready, a subscriber to her employer's Blue Shield of Virginia pre-paid group health plan, was injured in her "business or property", in that the charges assessed against her for psychologist services had not been reimbursed. The Court noted that Mrs. McCready was an appropriate plaintiff because:
"McCready has paid her psychologist bills; her injury consists of Blue Shield's failure to pay her. Her psychologist can link no claim to injury to himself arising from his treatment of McCready; he has been fully paid for his service and has not been injured by Blue Shield's refusal to reimburse her for the cost of his services. And whatever the adverse affect of Blue Shield's action on McCready's employer, who purchased the plan, it is not the employer as purchaser, but its employees as subscribers, who are out of pocket as a consequence of the plan's failure to pay benefits."
Thus, the case represents perhaps an expansive view of the proposition that the substitution of one dealer for another, even where a manufacturer vertically integrates forward, cannot affect competition, even though the net result is the termination of the plaintiffs as dealers, and even where the defendant is an alleged monopolist.
Authored by:
Don T. Hibner, Jr.
213-617-4115
dhibner@sheppardmullin.com
