Anti-Trust Law: Please Leave A Window to the Private Enterprise

Abstract: The merger between Youku and Tudou has drawn wide attention of the medias. Someone event quoted the relevant administrative regulation to demand the initiation of the anti-trust investigation. Well, I hold the different opinion against it. It’s actually infeasible to take a monopoly status in China of private company in China, and to my opinion, the merger and acquisition by private sector shall be permitted by law and exempted from the investigation of anti-trust, which is complying with the purpose of legislature as well as the value orientation of the current phrase.

The Anti-Trust Law, which is known as the Constitution in economy, has been implemented for 3 and half years since 1st of August of 2008. The Ministry of Commerce gave a red card to the merger between Coca Cola Huiyuan by the law in March of 2009 and the yellow card in the case of Delphi. In November of 2011, the Commission of Reform and Development claimed the start of the investigation on the suspected monopoly of China Telecom and China Unicom, and thereafter no one will suspect any major transaction between enterprises and operation of Chinese companies will be investigated for monopoly. Surely, the enforcement department of anti-trust faces the criticism and praise from the local medias. The criticism mainly focuses on the investigation procedure for the investigated unit is scattered and the procedure is unclear. Therefore the discrimination on investigation may be resulted. But, I believe such obstacles do exist in substantive articles rather than in procedure, among which the exemption of investigation for private concentration, poor enforcement of administrative monopoly and the failure of enforcement on individual are all the points deserve reconsideration since the law enforcement.

The exemption on private sector’s concentration

The concentration of undertakings provided in Anti-Trust Law means the merger of undertakings;  control over other undertakings gained by an undertaking through acquiring their shares or assets; and control over other undertakings or the ability capable of exerting a decisive influence on the same gained by an undertaking through signing contracts or other means. According to the Regulations on the Concentrative Declaration of Manager by the State Council (the Regulation), in a merger when the volume of business of all the managers participated in a concentration in last year in China surpasses 2, 000 million yuan with leastly one of the concentrated manager owns the turnover of more than 400 million yuan, the merger parties shall declare to the State Council. And if the Ministry of Commerce decides to prohibit the concentration, then it shall be suspended.

The monopoly itself is a neutral term and only the monopoly specified in anti-trust law shall be regulated. The basis of market economy is competitive, but in any societies, the full competition is only the ideal condition with the monopoly is inevitable and important instead however, especially in the global trend nowadays. The enterprise owns the monopoly status through competition could gains more benefits, invest more fund for innovation and thereby to promote the development of the society.

The main way to realize monopoly in competition is to merge companies. At the end of 18th century, Adam Smith first proposed the concept of scale economy in the Wealth of Nations, which refers to the unit cost of the product decreases when the total amount of it increases, namely the enlargement of the operation scale may reduce the average cost so that the level of benefit could be increased. The way to realise scale economy is two: 1) to realize the horizontal integration with entering into the market of the corresponding commodity; 2) to realize the vertical integration with the continuation of the business of the existing major product. Under the guidance of the theory, with the horizontal extension and vertical merger as well as the technology innovation, the monopoly in relevant service or product market will be cultivated.

In recent years, we have seen a great development of private sector in China, while it shall also not be neglected that the system of market economy has only been adopted for 20 years, during which the competition among state capital, foreign capital and private capital has not changed the domain position of the state capital. Fortune Magazine listed the top 500 companies in the world in the year of 2011, among which the listed Chinese companies are most state owned and only two private companies are on it. By the data released by the National Association of Industry and Commerce, the total benefit of the 500 biggest private companies in China by 2010 could not match that of the best profited central state-owned companies. In 2009, the total benefit of China Telecom and Sinopec is more than that of top 500 private companies. So from this aspect, the private company is too poor rather than competitive, and currently the monopoly instead of anti-trust is more needed by the private companies. What private companies needed now is going to scale and monopolization, which could only be realized by vertical integration. The merger may contribute to the business extension of private companies, the enhancement of competitiveness, promotion of economic gains and the development of economy.

Even in the American and European countries with a mature market oriented economy, some monopoly is also exempted. The exemption system is kind of special arrangement to the basic principle as the consequence of the anti-trust law’s adaptation to the two-sideness of the monopoly in the economy, and meanwhile it also reflects the confiscated value orientation of the anti-trust law and the determination of the monopoly. The exemption also modifies the inadequate reply by the anti-trust law to the fact as well as functioning to coordinate the competition policy and industry policy of a country in a certain period. Like what USA government has done in the recent economic crisis that to assemble the capital in the industry of finance, real estate and automobile, but we have heard no news that such measures are against by the Congress or the court for it’s suspected to be monopolies. On the other hand, the Japanese government may choose to fulfill the power of exemption when thinking the industrial policy is more important for the prevention of the anti-trust. Therefore, the system of exemption is complying with the convention of the International legislature on the anti-trust law, which is always based on a value orientation. In the UK, the anti-trust law tends to protect the public interests; in the USA, it tends to protect the consumer’s interests and the promotion of economic efficiency. The anti-trust originally focuses on the cultivation of a fair environment to the company’s competition and to protect the interests of the consumers ultimately. But objectively, the domestic anti-trust law may contribute to the competitiveness enhancement to the home companies, which we hope to see on Chinese companies. China Anti-Trust Law shall refer to the beneficial experience in the establishment of an exemption system, and to determine our exempted scope basing on the condition in our country. Article 1 on Anti-Trust Law has made a clear statement to the purpose of the law that “This Law is enacted for the purpose of preventing and restraining monopolistic conducts, protecting fair market competition, enhancing economic efficiency, safeguarding the interests of consumers and the interests of the society as a whole, and promoting the healthy development of socialist market economy.” Either in theory or in the practices, the private capital has a higher efficiency than the state owned capital. Basing on the analysis above on the status of the private companies, the exemption on the private capital’s concentration meets the value orientation of our country’s anti-trust Law.

Admittedly, Anti-Trust Law has been a commonly applied law, but for the current condition in China, it shall grant a conditional exemption to the concentration by the private companies in some industries, which may help to increase the competitiveness of home companies when participating in the global competition. Specifically, at least in the industry encouraged to be invested by foreign capitals, like high-tech manufacturing industry and information science and other high tech industries, the exemption shall be granted to the private sector when it could guarantee the development fee. But regretted, there regulates no such provision on the exemption of the existing anti-trust law.

The individual enforcement to guarantee the anti-trust

The enforcement of anti-trust includes two main parts: enforcement by public or by individual. The enforcement by public refers to the enforcement organ taking measures by the law to the monopoly. By the relevant laws and regulations in China, the State Administration of Industry and Commerce is taking charge of the enforcement against the monopoly agreement and the abuse use of the dominant position in the market, the State Commission of Development and Reform is taking charge of the price monopoly agreement and the Ministry of Commerce is taking charge of the concentration. These three departments’ enforcement is all included in the public enforcement. Besides to it, the individual enforcement is also regulated in the Anti-Trust Law, namely to be initiated by the individual besides the enforcement organ, and the main enforcement methods of it are reported and lawsuit.

The private lawsuit against the monopoly has an important position in the developed Western countries, and it occupies more than 90% of the total anti-trust cases. Private enforcement also has many advantages and could help the enforcement of anti-trust law in the public enforcement.

The private enforcement system is also regulated in China Anti-Trust Law, by Article 38 of it. “All units and individuals shall have the right to report to the authority for enforcement of the Anti-Trust Law against suspected monopolistic conducts. ” And its Article 50 says that “Where the monopolistic conduct of an undertaking has caused losses to another person, it shall bear civil liabilities according to law.” By these regulations, on 31st July 2008, Dong Zhengwei, a Chinese citizen made the application to the relevant departments and commissions to start the anti-trust investigation against Microsoft and demand the penalty of 1 billion dollars. Also, Dong demanded the openness of the source code of its program and to set up the hearing system to Microsoft’s products’ price.

In November of 2011, Hudongzaixian, a IT company in China, filed the lawsuit against Baidu, claiming the monopoly by the latter one in the First Intermediate People’s Court. The product of both companies is competing in the market. The plaintiff, Hudong, claimed that Baidu has the dominant position in the search engine market in China, and with this position, Baidu shielded and fall the website of Hudong, and for this reason, the plaintiff claimed Baidu has violated the Anti-Trust Law and the compensation of 1 million yuan. The case might be the first privately filed lawsuit heard openly. Furthermore, Hudong has made an application to the State Administration of Industry and Commerce for the anti-trust investigation.

But judging from the enforcement in the recent 3 years, the system of private enforcement is a failure, and that could also be concluded from its small amount. The main reason is that the regulation concerning the private enforcement in Anti-Trust Law is the very principle and is less infeasible in practices. First, in a civil lawsuit of our country, the principle of who advocate who proof is adopted, but it’s impossible for the plaintiff to prove its losses from the defendant’s monopoly. Second, for the victim is so much that the procedure of the anti-trust investigation could not be enforced successfully. Therefore, to our opinion, in the private enforcement of the anti-trust lawsuit, the court shall file the case once the plaintiff could provide the preliminary evidence, and also the burden of proof reversed shall also be regulation for such cases that the defendant shall take the burden to prove no monopoly has been conducted by him. Furthermore, on the procedure, the legislature shall also make further regulation on the burden of a lawsuit fee, attorney fee, group lawsuit and other aspects.

The relationship between competition and monopoly is kind of two-edged blade, for on one hand the monopoly could damage the interests of consumers while the over competition will lead to the unreasonable allocation of the social resources and low efficiency. The anti-trust law shall find a balancing point between them. The monopoly of companies in China is mainly from those administrative organs and state companies, which make the monopoly in China a pseudo-proposition to private sectors in China. To the merger and acquisition by the private companies, we suggest an open attitude and a legal exemption in the law which both complies to the purpose of the legislature and the value orientation of the current phrase. The anti-trust law is a system of law which shall also be amended accompanied with the revision of civil litigation law, the criminal law and other administrative regulations. Also the purpose of the legislature could only be fulfilled through the private and public enforcement, thus the fair competition, high efficiency of the market, the protection of consumer’s interests and public interests could be guaranteed.

The essay is quoted from DeBund Newsletter.

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Author: Bai Lituan
Attorney-at-law of DeBund Law Offices

Founder & Editor-in-Chief of Bridge IP Law Commentary
Mr. You Yunting
Partner & Attorney-at-law of Shanghai DeBund Law Offices
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