Jones Day antitrust lawyer H. Stephen Harris Jr. estimates that he’s been to China at least 20 times in his career, but a trip he took to Shanghai earlier this month was years in the making.
Harris, who is based in Atlanta and coordinates the firm’s Asia antitrust practice, was invited to Shanghai with three other foreign antitrust lawyers to train Chinese judges how to handle antitrust litigation.
The trip was prompted by China’s new anti-monopoly law, which took effect in August 2008. Harris participated in drafting the law, which took more than a decade.
“Chinese courts have no background, and judges have very little background in competition law and the economic analysis that is used,” he said.
Chinese lawyers’ lack of experience gives foreign antitrust lawyers a competitive advantage. Only Chinese firms are allowed to go to court and directly litigate, but Harris said it’s primarily U.S. and EU firms that are advising companies in China on how the new antitrust law affects doing business there.
Harris declined to name his clients but said he’s representing several U.S. and European companies in merger review matters in China, including a foreign company that opposes a large merger between two other foreign companies that China’s Ministry of Commerce is reviewing.
The Chinese government has assigned antitrust cases to its intellectual property tribunals, which Harris said may be because IP judges, who handle cases that are often complex, are some of the most highly regarded and trained in the country. Harris said 30 judges from China’s top courts attended the training, including three justices from the Supreme People’s Court and a judge from the Shanghai division of the High People’s Court.
The seminar was hosted by the Research Institute of Competition Law for the East China University of Political Science and Law and co-sponsored by the United Nations Conference on Trade and Development.
So far, very few antitrust cases have been filed in court, said Harris. The few published cases “have been pretty minor and arcane,” he said. For instance, a Chinese Internet advertiser filed suit against China’s largest search-engine company, Baidu, because it could not advertise as much as it wanted on Baidu’s Web site.
Since foreign companies can be sued as well as local ones, said Harris, “there is concern among major non-Chinese companies about the fairness in the handling of these cases.” He said they worry about bias and whether Chinese judges are trained to enforce the law consistent with international norms.
Harris said that Chinese jurists have studied the law carefully and are taking it seriously but lack practical experience in applying it. The foreign lawyers and Chinese judges discussed procedural issues for suits alleging unfair competition, which involve lots of documents and expert witnesses.
The group spent an entire day talking about how to define a market, since judges must evaluate companies’ market share in cases alleging unfair monopolies or anti-competitive practices.
“There is a great deal of economic literature on this,” said Harris. “It’s not a precise science. It can be tricky.”
While only a few antitrust cases have been filed, China’s new antitrust enforcement agencies have been active, said Harris. He said the antitrust law immediately made China a major player in the review of mergers between multinational companies.
China’s antitrust law, like those of the U.S. and the EU, prohibits cartels, bars a single company from unfairly monopolizing a market and reviews proposed mergers and acquisitions to make sure a new entity will not dominate a market.
While the law applies to foreign companies and private Chinese companies alike, said Harris, it leaves the regulation of state-owned enterprises, or SOEs, to the country’s industry regulators. Special provisions in the antitrust law “exhort SOEs to compete openly and fairly, but they do not apply the penalties of law to SOEs,” said Harris. SOEs still dominate key strategic areas like mining, steel, agriculture and banking, he said.
Like other countries, China only can block a multinational company’s merger or acquisition for its Chinese operations. But getting China’s approval is “a must-have for any business doing significant business there,” said Harris, since it’s the world’s third largest market after the U.S. and the EU.
Harris said companies with total revenues over 10 billion yuan ($1.47 billion) or Chinese revenue over 2 billion yuan ($293 million) are subject to review.
So far, China’s Ministry of Commerce has reviewed about 60 proposed transactions and blocked only three with conditions, he said. One of the three was InBev’s proposed acquisition of Anheuser-Busch. Both companies have significant market share in China, and the ministry prohibited the merged company from increasing its ownership of other Chinese breweries.
Harris said the only transaction China has blocked outright was The Coca-Cola Co.’s proposed $2.4 billion acquisition of China’s biggest juice-maker, the China Huiyuan Juice Group, in March. The ministry issued a statement saying the deal would have let Coke leverage its power in the local soft drink market into the juice market, where Coke is the second-biggest player, raising monopoly concerns.
Harris said he’s optimistic that China’s antitrust law will increase competition and further improve the standard of living of the average Chinese citizen.
Some practices, like cartels of companies fixing prices in a region, are culturally ingrained, especially outside China’s major cities, he said, so it will take time for people to adjust to the new laws. “Every country that has adopted and implemented this type of law has seen it take a period of time for businesses to get it. It can take severe penalties and education — for instance, with price-fixing. That’s been true even in countries without the same vestiges of a centrally planned economy,” he said.
Harris also called a stipulation in the law’s anti-monopoly provision that prohibits “unfair high prices” troubling to those with a more free-market perspective. In the U.S., he said, if a monopoly is lawfully acquired, a company can charge whatever price it wants, adding that this provides an incentive to innovate.
India just started implementing an antitrust law of its own this year, said Harris, pointing out that the new Chinese and Indian laws bring 2.5 billion people under competition law who weren’t last year. India’s anti-cartel and anti-monopoly provisions have gone into effect, he said, and its merger review provision is expected to go into effect before the end of the year.