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After 13 years of heated debate, China enacted its first antitrust law on Aug. 30. Prior to enacting this historic law, China was the world’s largest economy without a formal antitrust law. Literally translated, the new Chinese law is an “anti-monopoly law.” The law is comprehensive in scope, covering a wide range of traditional antitrust topics and even addressing anticompetitive administrative action. While the new law is vast in the areas it covers, its weakness may lie in the often vague provisions and use of undefined terms, whether purposeful or not. It is important to note that this landmark law does not come into force until Aug. 1, 2008. This delayed enforcement creates a one-year valuable window of opportunity that should be considered and utilized by corporations doing business in China or considering doing business in China. After that date, business in China will be a new ballgame. The new Chinese antitrust law is modeled after the antitrust laws of the United States and the European Union in many ways and addresses primarily the same practices, including restrictive agreements, abuse of dominant position, mergers and acquisitions, anticompetitive administrative action, intellectual property and enforcement and remedies. While the law bans certain anticompetitive practices, it allows for certain monopolies that would promote advances in technology. Because the language in the new law is vague and many terms are undefined, it remains to be determined how the provisions will be applied and enforced. The law prohibits certain restrictive agreements. While prohibiting one type of vertical agreement, resale price maintenance, it places an emphasis on horizontal agreements, including price-fixing, supply restrictions, market division, and collusive boycotts. These terms and restrictions are familiar to anyone doing business in the U.S. or the EU, as they are typical antitrust areas monitored by enforcement authorities in both entities. The new prohibitions established by the Chinese law remain vague, though, with the provisions containing a great deal of flexibility and providing broad authority to the Chinese enforcement authorities. In that sense, it is reminiscent of the Sherman Antitrust Act, passed into law in 1890, which contained similar broad and vague language, leaving it to the courts to flesh out its intent and meaning over the past 100 years. In traditional antitrust fashion, the new antitrust law of China also prohibits dominant entities from abusing their position in a variety of ways, including imposing unfair prices, selling below cost, discriminating between equal parties and tying. However, in a common theme found throughout the law, the provision appears intentionally vague and fails to identify key terms, such as “unfairly” and “dominance.” The new Chinese law also addresses mergers and acquisitions. Mergers and acquisitions meeting certain criteria will be required to file with the newly created enforcement authority, including those where a foreign firm acquiring a business in China will obtain over 50 percent of a defined market. This is obviously aimed at controlling foreign firm domination of Chinese companies. The enforcement authority will have express power to prohibit mergers and to require divestiture of inappropriate mergers. While it is not yet established what specific criteria will trigger the requirement of such a filing, these filings will address issues similar to those required by the U.S. and EU in their merger filings. The new Chinese filing requirement will apply to both Chinese and foreign acquiring parties. However, unfair practices by public officials are also prohibited by the new law. Public authorities and entities will be prohibited from abusing their power in certain ways. Public officials will no longer be able to block free circulation of goods between regions of China, require people to deal with particular corporations or entities, or take any other action designed to eliminate competition. The new law also prohibits the abuse of intellectual property rights to restrict or eliminate competition. However, the law fails to define “abuse” and does not prohibit “legitimate” protection of intellectual property rights. National security is addressed by the anti-monopoly law. A provision of the new law allows for national security reviews of foreign investments. While it is unclear exactly how this provision would be applied or what such a review would entail, this provision is viewed by many as the most controversial section in the new law. Finally, the anti-monopoly law establishes the creation of the new anti-monopoly enforcement authority, which will conduct civil investigations, and the anti-monopoly commission, which will develop antitrust policies and supervise the civil enforcement authority. The enforcement authority will be responsible for investigating matters, seizing evidence and resolving matters. The enforcement authority will have the authority to terminate an investigation upon adequate resolution with the parties involved. Parties, if dissatisfied, will have the right to pursue an administrative review process or bring an administrative suit. The enforcement authority will also have the quasi-judicial authority to invoke fines and other remedies, including prohibiting certain activities, requiring the divestiture of certain assets and disgorgement of unlawful gains. The new law provides for no private right of action for injured parties against violators, as does the Sherman Act. The new law is also only limited to civil not criminal penalties. Earlier drafts of the law had provisions that many in the legal and business community found troubling. Even though there are still many concerns regarding the law, the more troubling provisions have been removed or altered. For example, an earlier draft of the law exempted existing “administrative” monopolies. This was construed by some to protect local monopolies. The notification requirements for mergers were also revised to address concerns that the law had the potential to monitor transactions that had no impact within China. The initial overall international reaction to China’s new antitrust law has been positive. Many practitioners and entities, including the American and European chambers of commerce, view the law as a step in the right direction and are encouraged by the passing of the law. The European Commissioner for Competition Neelie Kroes, who has been involved in a series of EU-China competition policy dialogues, applauded the passing of the law and will meet again with Chinese regulators, as well as members of the academic and business communities, in Beijing in early September. While the new law is meeting with primarily positive reaction, some are expressing hesitance regarding the law. Provisions of the law are undefined and overly broad at times, with reliance on undefined key terms, leaving many to wonder the true meaning and power of the law. For example, firms can be considered dominant with as little as 11 percent market share in certain circumstances and the law appears to ban exclusive licenses of intellectual property, which usually aid in promoting competition. Many people also wonder how the law will be enforced in a non-arbitrary fashion by the newly created powerful enforcement authorities. In fact, the most important aspect of the law has yet to be established; the powerful anti-monopoly enforcement authority and anti-monopoly commission will control how the law is implemented and enforced, and they have yet to be established. How they will function remains to be seen. Due to these uncertainties and lack of clarity, it is important to consider utilizing the one-year window of opportunity prior to the law’s enforcement commences. While the precedential law has been passed by China’s congress, it will not be enforced until Aug. 1, 2008. This leaves companies who do not wish to be the law’s first guinea pigs, particularly when it comes to mergers and acquisitions, time to consummate deals prior to the law’s enforcement. A new era in competition has been opened in China and if the Sherman Act is any example of what will ensue, it should be a whitewater experience. Carl W. Hittinger is a partner in the litigation group at DLA Piper in its Philadelphia office, where he concentrates his practice in complex commercial litigation with particular emphasis on antitrust and unfair competition matters. Hittinger is also a frequent lecturer and writer on antitrust issues and has extensive experience counseling clients on all aspects of civil and criminal antitrust law. He can be reached at 215-656-2449, or [email protected] . Lesli C. Esposito is a senior associate with DLA Piper in Philadelphia, where she focuses her litigation practice on antitrust and unfair competition matters. She was formerly a senior attorney with the Federal Trade Commission’s bureau of competition.

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