Navigating China's Anti-Monopoly Law With Attorney Who Helped Write It

NEW YORK (The Deal) -- Winston & Strawn partner Stephen Harris was one of the first non-Chinese lawyers to advise U.S. and other foreign companies in dealings with China's competition regulators after that country enacted its anti-monopoly law in 2008.

The law assigned the duty of enforcing China's competition regime to three agencies: the Ministry of Commerce (MofCom), which is responsible for reviewing mergers, joint ventures and other transactions that could lead to market concentration; the National Development and Reform Commission (NDRC), which has jurisdiction over price-fixing and other price-related conduct; and the State Administration for Industry and Commerce (SAIC), which oversees non-price-related monopolistic behavior, including monopoly agreements and abuse of market dominance.

Harris, who already had experience advising firms on competition matters in Japan and Korea established his China practice after being recruited to advise Chinese authorities as they drafted the anti-monopoly law.

The final product blended the modern U.S. and European approach to competition law, which requires government authorities to prove a company's business practices harm consumers before bringing an enforcement action, and China's effort to modernize its economy by promoting what it calls a "socialist market economy."

To say the anti-monopoly law has produced some decisions on mergers and other competition matters that Western executives would find surprising is a bit of an understatement. Harris, who has just written a guide to help foreign companies navigate China's somewhat bewildering competition rules, sat down with The Deal's Bill McConnell to discuss doing business in the Middle Kingdom. 

The Deal: How did you get involved with China's anti-monopoly law process and what did you do?

Harris: I consulted with the government during the drafting process. I was invited because of a request from the American Bar Association's antitrust section to go to a consortium with a small number of foreign lawyers and Chinese officials and academics where a very early draft was tabled and we got a look at it and gave our views. They were kind enough to invite me back and I stayed engaged both through Chinese sponsored symposia and consortia and through outreach the Chinese drafters made through bodies like the ABA and the International Bar Association.


The Deal: Why were you recruited to the effort?

Harris: I had become known as someone who had an interest in antitrust law in Asia and particularly in Japan. I used to live in Japan and I had handled a couple of significant matters for U.S. companies under Japanese antitrust law and I had been involved in some matters involving the Korea Fair Trade Commission. So when the request for a representative from the ABA came in, I seemed like the logical candidate. But Japan is about different from China as it can be. And, knowledge of the antitrust law drafted by the American occupation force after World War II in Japan bears little resemblance to the one in China or the industrial policy goals that underlie some aspects of the antimonopoly law in China.

It was strictly an accident that I was picked, in a sense. I had this experience in Asia and they extrapolated that to include China, where I knew very little about what was going on, although nobody really knew much about this draft outside China. That's how I was tapped and I'm glad I was.


The Deal: And from there you have been able to build a substantial practice representing clients before Chinese authorities?

Harris: Because of my involvement with the drafters . . . and subsequent to enactment of the law, Oxford University Press invited me to co-write one of the first treatises on the law. As a result of that I've had the opportunity to represent some great companies in connection with some of the early significant foreign company matters to go before the antimonopoly enforcement authorities in China.

I represented Rio Tinto (RIO) in a very complex joint venture submitted to MofCom and represented Microsoft (MSFT) in its acquisition of Nokia  (NOK) before MofCom.
The law's merger provisions were enforced first because the conduct agencies, the NDRC and SAIC, were building capacity and establishing themselves and getting staffs organized after enactment of the law in 2008. MofCom didn't have that luxury because it had to start accepting merger filings on day one after the law went into effect. More recently the NDRC and SAIC have become quite active and I've had the honor or representing Qualcomm  (QCOM) in the NDRC investigation into certain licensing practices by Qualcomm.


The Deal: How has the law worked since it became effective in 2008?

Harris: As with every law there were some bumps in the road early on. I don't say that critically, because if you look at the early history after the [U.S.] Sherman Antitrust Act was passed in 1890 the initial interpretations and applications of that law are regarded as quite wrong by modern antitrust scholars and practitioners. So each jurisdiction has to find its feet. And China went through that process.

There were some early decisions of MofCom, particularly its decision to block a proposed acquisition by Coca-Cola   (KO) of a Chinese juice company -- that was based on an analysis regarded outside of China as unique and hard to reconcile with accepted tenets of antitrust analysis. But the Chinese law does have unique characteristics that modern U.S. law and most other major jurisdictions do not take into consideration.


The Deal: Does the law specifically allow China to take into consideration other policy goals, such as promoting Chinese companies over firms from other countries?

Harris: Yes, although it depends on who you listen to and how you read it. But there is language in the law stipulating that one of the stated purposes of the law, in addition to others that are quite consistent with U.S. enforcement, is one that promotes the healthy development of the socialist market economy. Besides being vague, that language would indicate that considerations of industrial policy or industrial planning can be taken into account, whereas in modern times protection of consumer interest is the be-all and end-all of U.S. enforcement. So there are other considerations in Chinese law.

Also regarding possible violations of the law there are provisions that seem inconsistent with the way antitrust laws are applied in most other major jurisdictions, although to date we haven't seen a lot of those provisions relied on. On recent example, though, is a set of intellectual property rules issued in April by the SAIC that deal with how the anti-monopoly law will be applied to abuses of intellectual property rights, including what will be considered an abuse of IP rights. The topic is touched on in only the vaguest terms in one article of the law itself.
First and foremost among the concerns about the rules within the international bar is a broad version of what has come to be known as the "essential facilities doctrine" addressing when one company has control over a particular facility-which can be either a physical facility or something like IP rights.

There's a great deal of concern about the damage that could be done to innovation if antitrust law were used in a ham-fisted way to punish IP owners for refusing to license or demanding what [Chinese] regulators might deem to be unreasonable or unfair terms.
[Globally] we're in the early days of figuring out how to reconcile antitrust law with intellectual property rights, particularly in areas like patent pools or standard essential patents. So, in the areas of high-tech and IP, markets that are as worldwide as you can get, the risk that there may be divergent or inconsistent rules that IP owners must comply with presents a daunting prospect.

The recent SAIC rules don't have the strict limitations on application of the doctrine as in Europe, so we're going to have wait and see how it will be applied. One SAIC official who spoke at an ABA conference recently said the agency is aware of the concerns and intends to apply the doctrine cautiously, which is good news. But in terms of having guidance of what conduct is on the lawful side of the line, the SAIC version of the doctrine is fairly vague and companies don't have much guidance with regard to their right to refuse to license or to license on whatever terms they can negotiate freely in open talks with the licensee.


The Deal: Going back to the Coca-Cola decision, do you think MofCom would block that deal today now that it has experience under its belt?

Harris: That's a great question. It might not. One of the things we have seen is the rigor of analysis, and the sophistication at MofCom in particular but also at the conduct agencies, is reflected in the length and complexity of published decisions. They were very rudimentary at the outset and are now quite sophisticated in terms of applying more normative antitrust doctrine.

In the Coca-Cola case, the conditions being discussed were unacceptable to the merging parties. MofCom has since become more creative in structuring remedies that are less disruptive, though some are still more disruptive than I would like. What sets MofCom apart is that it uses behavioral remedies much more frequently than do either U.S. or European authorities.


The Deal: By behavioral remedies you mean conditions imposed on a deal that govern how a company may conduct business as opposed to divestitures and other structural remedies preferred in the U.S. and Europe. Why does China lean toward behavioral fixes?

Harris: Culturally China comes from a recent history of a command and control system that involved detailed regulation of almost every aspect of businesses conduct. So this is not as foreign to them as it is to the U.S. agencies. That's part of the difference but it's still one of the principle areas of concern and areas of divergence MofCom has with the U.S. and Europe.


The Deal: Can MofCom work with the other major jurisdictions given those differences?

Harris: At a recent Brookings event we were discussing the significance of the collaborations between the U.S. agencies and MofCom on mergers that have global effects. In many cases companies are waiving the confidentiality they are otherwise entitled to in order to allow agencies in multiple jurisdictions to discuss the analysis and consider ways to arrive at consistent remedies rather than having international transactions approved in various countries with remedies that are wholly inconsistent and unworkable when taken together.


The Deal: There have been some rule revisions streamlining reviews for simple cases in order to allow deals that pose no competition issues in China to be approved quicker and to free up MofCom resources for more complicated transactions. How well have they addressed the perceived shortcomings?

Harris: The simple cases rule has had limited effect on global deals. MofCom had gotten the reputation as one of the slower if not the slowest of the major jurisdictions. There are quite a few instances where the review is significantly longer than anything we would see in the U.S. or Europe. MofCom says the rule has worked well, but I will tell you it hasn't changed my life much. Large foreign transactions tend not to qualify and sometimes it's unclear as to whether a deal would qualify and you risk losing time if you file as a simple case only to have the filing bounced back by MofCom and being told to make a standard filing.

There has been an indirect benefit. According to MofCom, the average time for a review is 52 days after acceptance after a merger filing and even acceptance of a filing can take a while. I think MofCom been able to focus more resources on more difficult transactions because fewer resources are now being devoted smaller deals or deals between China-only parties. There does seem to be less of a logjam than had been the case but this is looking like a record year in terms of deal volume in China and no more staff is being devoted to MofCom so we could be in back in the soup.


The Deal: What are some of the biggest mistakes filers make in preparing to deal with MofCom?

Harris: When they structure transaction documents they often don't' take into account length of time it will take to get approval in China. Parties that have no experience in China fail to account for the different timeline when they draft risk sharing and indemnification provisions and when those rights need to shift.

Another frequent mistake we see is not anticipating the kinds of unique behavioral remedies China has been prone to make. Sometimes a remedy is foreseeable in China, even those not likely to be seen elsewhere. It's important during drafting to have someone seeing through the eyes of Chinese enforcement.

The Deal: Ostensibly MofCom is supposed to reach decisions independently, but other agencies do end up playing a role. In practice how much influence do other government agencies have over MofCom?

Harris: MofCom certainly consults with other agencies in ways we don't see in the U.S. I've not been in the room during those discussions but MofCom has made clear at times they were trying to find ways to satisfy concerns of other agencies. That approach is unusual here unless there is sector regulation like the Federal Communications Commission with telecom or other industries where another agency have parallel jurisdiction to the antitrust regulators. In China this issue comes up in many major transactions, particularly in key or sensitive sectors. This is seen as acceptable in China. In the legal and cultural traditions and history of the People's Republic of China, the government managed everything and the various ministries are used to having a lot of involvement. It doesn't trouble them.

It does slow down the process and those other agencies have little experience with competition analysis and are focused on non-core competition concerns and what sometime called industrial policy. That's what their charter says they are supposed to be doing. MofCom's lack of independence is matter of how the system is structured and how the legal culture has grown up. So, I don't think MofCom is free to ignore other agencies.



The Deal: In drawing up your recent paper on the anti-monopoly law, did you come across any surprises in MofCom practices?

Harris: I'm constantly being surprised and learning new things. Part of the reason is because this is moving fast and we are still in the early days. Every issue almost is an issue of first impression for the Chinese agencies, and the courts for that matter. There are almost always surprises in how complex decisions are handled. Obviously I knew that behavioral remedies were relied upon by MofCom but one thing that really jumped out is how frequently MofCom relied on them and how many different kinds there are.

Two or three come up frequently and sometimes cause concerns and criticism. But there are tons of additional creative remedies that haven't generated much press or discussion and are unique. The willingness of MofCom to come with one-of-a-kind remedies that reflect a very different view of the appropriate role of an antitrust agency after a transaction has closed than is deemed appropriate or healthy in other jurisdictions continues to surprise me.

I have a pretty good track record of guessing what kind of remedies they are likely to impose in transactions that present certain issues, but they present me a curve ball fairly often.


The Deal: Give an example of one of these curve balls.

Harris: It's now been used several times but the first time MofCom threw me for a loop was with a hold-separate order. This is a remedy in which the parties were told, 'Yes your companies can merge but you're going to have to run them as competitors in China.' That means duplicate marketing and pricing teams and all sorts of things that are highly inefficient. Here, we worship efficiency so the notion that you must hold separate after, at least on paper, being allowed to merge was a head-scratcher for those of us who went to law school in the U.S. and practiced here for a long time.
That it was highly counter-intuitive is a fair way to put it, but again it addresses particular concerns about particular issues in key, sensitive industries, etc. I think in some of these cases these kinds of remedies are used to satisfy other governmental entities that get involved in the process and to provide them with some assurances on particular fronts that we would not consider to be pure antitrust considerations. n 

Originally posted at 3:04 P.M. EDT, June 12, 2015

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