Compliance risks of enterprises from administrative monopoly

By Zhan Hao and Zhu Libo, AnJie Broad Law Firm
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Administrative monopoly refers to abuse of administrative power to eliminate or restrict competition by administrative authorities and organisations authorised by laws and regulations to administer public affairs.

In recent years, administrative monopoly has become a key field in China’s antitrust enforcement practice, especially under the current background of “accelerating the construction of a unified national market” and “breaking administrative monopoly”.

Although enterprises are not the entities conducting administrative monopolistic conduct, they should also pay attention to their own compliance risks concerning administrative monopoly. It may lead to termination of projects and other consequences if policy documents issued by administrative authorities or signed government-enterprise co-operation agreements are deemed administrative monopoly.

Q: What are the forms of administrative monopoly?

A: The Anti-Monopoly Law, amended in 2022, specifies the following seven forms of administrative monopoly:

  1. Restricting, directly or indirectly, entities or individuals from operating, purchasing or using any commodities provided by designated undertakings;
  2. Obstructing undertakings from entering relevant markets or subjecting them to unequal treatment through the signing of co-operation agreements, memoranda, or similar means, thus eliminating or restricting competition;
  3. Obstructing the inter-regional free flow of commodities;
  4. Eliminating or restricting undertakings from participating in tendering, bidding or other business activities;
  5. Excluding, restricting, forcing, directly or indirectly, non-local undertakings to invest locally or set up local branches;
  6. Forcing, directly or indirectly, undertakings to engage in monopoly stipulated by the Anti-Monopoly Law; and
  7. Formulating regulations that eliminate or restrict competition.

Q: What is the relationship between administrative monopoly and fair competition review?

Zhan Hao, AnJie Broad Law Firm
Zhan Hao
Partner
AnJie Broad Law Firm

A: The fair competition review system is an ex ante (estimate) review system of regulations, normative documents and other policy measures related to economic activities of market entities formulated by administrative authorities, aiming to prevent administrative authorities from issuing policies and measures that eliminate or restrict competition.

Such activities embrace market access, industrial development, investment promotion, bidding and tendering, government procurement, business conduct standards and qualification standards.

The updated Anti-Monopoly Law clearly states that “the state shall establish and improve the fair competition review system”. It requires that “administrative authorities and organisations authorised by laws and regulations to administrate public affairs shall conduct fair competition review when formulating regulations concerning the economic activities of market entities”.

Administrative conduct suspected of constituting administrative monopoly may violate the regulations of the fair competition review system at the same time, for example, if a policy measure is subject to fair competition review but no such review is conducted in accordance with the law before its introduction, and the policy measure also contains content abusing administrative power to eliminate or restrict competition.

Q: What are the legal liabilities of an administrative authority for committing administrative monopoly?

A: Legal liabilities of administrative authorities for committing administrative monopoly include:

  1. The superior authority shall order rectification of the administrative monopolistic conduct and impose sanctions on the person directly in charge, and other directly liable persons;
  2. The antitrust enforcement authority may propose suggestions to the relevant superior authority on handling the conduct in accordance with the law; and
  3. The administrative authority shall submit a written report on relevant rectification information to its superior authority and the antitrust enforcement authority.

In addition, an administrative authority violating other laws or regulations when committing an administrative monopoly shall be handled in accordance with relevant laws and regulations.

Q: What compliance risks might an enterprise face if an administrative authority is suspected of committing administrative monopoly?

Zhu Libo, AnJie Broad Law Firm
Zhu Libo
Associate
AnJie Broad Law Firm

A: If an administrative authority is suspected of committing an administrative monopoly in the course of government procurement, government-enterprise co-operation, or response to policies and measures, the compliance risks that an enterprise might be exposed to include but are not limited to:

  1. It may cause termination of relevant projects and agreements. For example, a local emergency management authority was determined to be committing administrative monopoly by abusing its administrative power to designate a company as sole supplier, and issuing relevant regulatory requirements. Rectification measures taken by this authority included abolishing all relevant documents such as the invitation of project selection and winning announcement, and sending letters and agreements of project termination to relevant parties.
  2. If notices, policies and other documents issued by an administrative authority contain content requiring undertakings to engage in monopolistic conduct, it may lead to a determination that undertakings making business decisions based on such a documents have engaged in monopolistic conduct.

For example, if an industry regulatory authority releases a document requiring undertakings in the same industry to divide their sales geographic market based on revenue proportion, undertakings responding to such document risk being deemed to have reached horizontal monopoly agreements.

Q: Will an enterprise be liable for compensation if it profits from administrative monopolistic conduct?

A: In the Provisions on Several Issues Related to the Application of Law in the Trial of Civil Monopoly Dispute Cases (Draft for Comment) issued by the Supreme People’s Court on 18 November 2022, a new provision is added that if administrative conduct is deemed to constitute administrative monopoly, the party concerned may bring a lawsuit to the people’s court to claim compensation from undertakings benefiting from it. However, determining the civil liability of undertakings remains to be further clarified by relevant regulations and judicial practice.

Q: How can enterprises reduce compliance risks related to administrative monopoly in practice?

A: In the course of government procurement projects and government-enterprise co-operation projects, enterprises should attach great importance to whether there is risk of being determined administrative monopoly.

Enterprises should regard it as an important part of project compliance assessment.

This includes: evaluating whether the policies or regulatory documents involved are subject to ex ante fair competition review; whether it involves compulsory or disguised requirements to reach or implement monopoly agreements and other monopolistic conduct; whether the requirements have the basis of laws and regulations or other higher-level normative documents; and whether it may hinder fair market undertakings.

Zhan Hao is a partner and Zhu Libo is an associate at the AnJie Broad Law Firm

AnJie Broad Law Firm

AnJie Broad Law Firm

19/F Tower D1, Liangmaqiao Diplomatic Office Building
19 Dongfang East Road

Chaoyang District
Beijing 100600, China

Tel: +86 10 8567 5988

Fax: +86 10 8567 5999

E-mail: zhanhao@anjielaw.com
zhulibo@anjielaw.com

www.anjielaw.com

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