Chinese antitrust law said to be imminent

August 29, 2007, 11:44 PM UTC

[See updates at bottom of post: law was, in fact, passed on August 30, 2008; copy of actual new law is linked in second update.] 

The long gestating Chinese antitrust law — awaited with trepidation by many Western lawyers — is expected to become law either this week or next, Chinese news sources are reporting.

Since June 2006, unofficial drafts of the Antimonopoly Law of the People’s Republic of China have been circulating among lawyers. The third and latest such draft, which came out just this month, is available here.

Western lawyers have expressed concern about the law not so much because of its content, which is likely to be generally consistent with U.S. and European competition law, but because of the potential for abusive enforcement by protectionist provincial judges or regulators.

In an interview last night, Peter J. Wang, a partner in Jones Day’s Shanghai office, sounded cautiously optimistic. “There may be some things in the law that are not the way you’d write them from a Western point of view,” he said, but “the law itself is not bad, and has all the basic points of a good broad antitrust law. The devil will be in the details of enforcement and the implementing regulations.” He continued: “We have every reason to believe it will be enforced in a fair, even-handed way,” at least by the central government authorities.

Because of their products’ large market shares in China, companies like Microsoft (MSFT), Intel (INTC), and Kodak (EK) are among those with obvious reason to be watching these developments closely.

Even upon passage, however, the law will most likely not take immediate effect. The most recent draft, for instance, lists August 1, 2008, as its effective date, which would allow the Antimonopoly Enforcement Authority — a new regulatory body that would be created by the law — time to draw up implementing regulations.

The law’s stated goals include some familiar concepts — promoting “market competition,” and “improving economic efficiency” — as well as some less familiar ones, like “promoting the healthy development of the socialist market economy.” It also provides that certain state-owned industries “shall be protected by the State,” and that the state “shall supervise and control the price of commodities and services provided by [these] . . . so as to protect the . . . the consumer and facilitate technical progress.”

The first substantive section (chapter II) of the 11-page, single-spaced draft prohibits “monopoly agreements,” which seem to correspond roughly to “combinations in restraint of trade” under U.S. law. Interestingly enough, these happen to include “restricting the minimum price for resale to a third party” — an act that our own Supreme Court just removed from the realm of per se prohibitions (after 96 years) this past term in Leegin Creative Leather Products v. PSKS.

The next section (chapter III) prohibits acts that constitute an “abuse of dominant market positions,” roughly corresponding to the monopolization prohibitions of Section 2 of our Sherman Act. The Chinese law specifically defines companies as being presumptively “dominant” if they have a 50% share of the relevant market. (It doesn’t prohibit holding a dominant share; it merely prohibits abuse of dominant position, much as European and U.S. law do.) Abuses can include “selling products at unfairly high prices or buying products at unfairly low prices.”

The third substantive section (chapter IV) requires that certain large-scale mergers obtain prior approval from the Antimonopoly Enforcement Authority, in a process analogous to our Hart-Scott-Rodino process. The authority can take into account “national security” concerns, in addition to market concentration concerns, when a foreign company tries to acquire a Chinese company, for instance. (Some lawyers suspect this is a bit of payback for the political outcry in this country when state-owned oil company CNOOC (CEO), put in a bid to acquire Unocal in 2005. It was ultimately outbid by Chevron (CVX).)

The next section (chapter V) prohibits administrative agencies from abusing their powers in ways that would restrict competition.

The powers of the enforcement authority are laid out in chapter VI. These include the right to raid companies doing business in China, to seize books and documents, and to “inquire after” their bank accounts. Alarmingly, the central enforcement authority seems to be authorized to delegate its powers to local authorities at the “provincial, autonomous region, and municipal level” (see Chapter I, Article 10).

The penalties authorized for violators under the law include confiscation of illegal gains and fines of up to “10% of the total sales volume of the relevant market from the previous year” (chapter VII, article 45).

Though it’s unclear if the law creates a private cause of action — i.e., the right of one business to go into court and directly sue another — a short provision in the latest draft might arguably do so. It says that businesses that violate the law and cause damage to others “shall bear civil liability” (chapter VI, article 49).

UPDATE (8/30/2007 at 9:18 am):  According to the AP, the statute was, in fact, passed into law earlier today, on August 30, and it will, in fact, go into effect on August 1, 2008. I’ll try to get and post a copy of the law as passed.

UPDATE (9/1/07 at 11:35): Here’s an unofficial English translation of the actual law, done by the Chinese law firm T&D Associates.

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