Jurisdiction - Malaysia
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Malaysia – Antitrust Overview: Part 2.

9 May, 2014

 
 

Chapter 2 Of The Competition Act: Prohibition On Abuse Of Dominance


Chapter 2 of the Act prohibits an enterprise, whether independently or collectively, from engaging in any conduct which amounts to an abuse of a dominant position in any market for goods or services in Malaysia. This prohibition is substantially similar to article 102 of the Treaty on the Functioning of the European Union and the concept of joint dominance from case law in other jurisdictions is expressly included within the Act. It should be noted that where there is collusion between enterprises, this may also be caught by the chapter 1 prohibition of both horizontal and vertical agreements which restrict competition. As there is no need to establish dominance in a chapter 1 prohibition, collective dominance cases are expected to be rare. Establishing an infringement of the chapter 2 prohibition is a two-step process. The MyCC will first assess whether the enterprise that is being complained about is dominant in the relevant market in Malaysia; and, if so, the MyCC will assess whether the enterprise is abusing that dominant position.


By implication, the chapter 2 prohibition of the Act therefore does not apply to non-dominant enterprises. While the Act prohibits a dominant enterprise from engaging in certain conduct that non-dominant enterprises can do, a dominant enterprise is not restricted from engaging in conduct which has a reasonable commercial justification or which is a reasonable commercial response to market entry or conduct by a competitor.


Dominance


A ‘dominant position’ is defined as a situation in which one or more enterprises possess such significant power in a market to adjust prices or outputs or trading terms without effective constraint from competitors of potential competitors. An enterprise, whether it is a supplier or a buyer, is considered to be dominant if it has significant market power in a relevant market in Malaysia.


As a starting point, the MyCC will define the relevant market to assess whether the enterprise has significant market power. This involves the identification of close substitutes for the product under investigation in the relevant product market as well as the geographic market applying the hypothetical monopolist test, ie, the smallest group of products (in a geographic area) that a hypothetical monopolist can profitably sustain a price above the competitive price. The MyCC will typically apply a small but significant non-transitory increase in price of 5 to 10 per cent above the competitive price.


Once the relevant market has been defined, the MyCC will determine whether an enterprise has a dominant position. While the MyCC considers that a market share above 60 per cent is indicative of dominance, the Act expressly specifies that market share is not by itself conclusive of dominance, which is to be assessed in terms of the enterprise’s ability to act without regard to its competitors’ response or to dictate the terms of competition in a market in Malaysia. Thus, even if an enterprise has a high market share, it would not be considered dominant if it was not in a position to increase price above the current level due to the possibility of new entrants or imports.


Although market share is a starting point for the assessment of dominance, the MyCC will also consider constraints on the enterprise including existing competitors (as indicated by market shares), potential competitors, barriers to entry and other constraints imposed by significant buyer power or economic regulation imposed by the government such as price regulation, degree of product differentiation and the degree to which innovation drives competition. The MyCC’s chapter 2 prohibition guidelines indicate that a new product with patented features may be considered dominant even though its market share is only 20 to 30 per cent of the market if there is a rapid growth of consumers who switch to this product.


Abuse Of Dominance


The concept of abuse is not defined in the Act. Broadly, the chapter 2 prohibition of the Act generally provides for two main types of abuse of dominant position:

 

  • Exploitative conduct, such as excessive pricing that may result from structural conditions in the market whereby the dominant enterprise is able to set a high price to exploit consumers where there is no or low likelihood of new entrants in the relevant market. In determining whether prices are excessive, the MyCC will, in principle, consider the actual price set in relation to the costs of supply and other factors such as the dominant enterprise’s profitability. 
  • Exclusionary conduct, which refers to the ability of an enterprise to dictate the level of competition in a market by preventing efficient new competitors from entering or significantly harming existing equally efficient competitors either by driving them out of the market or preventing them from effectively competing.
 

The MyCC will apply an effects-based approach in assessing whether an exclusionary conduct amounts to abuse and apply two key tests: does the conduct adversely affect consumers; and does the conduct exclude a competitor that is just as efficient as the dominant enterprise? Exclusionary conduct includes predatory pricing, price discrimination, exclusive dealing, bundling up and tying.


Section 10(2) of the Act provides a non-exhaustive list of conduct that may constitute an abuse of dominant position:

 

  • directly or indirectly imposing an unfair purchase or selling price or other unfair trading condition on a supplier or customer;
  • limiting or controlling production, market outlets or market access, technical or technological development or investment to the prejudice of consumers;
  • refusing to supply to particular enterprises or group or category of enterprises;
  • discriminating by applying different conditions to equivalent transactions that discourage new market entry or market expansion or investment by an existing competitor, seriously damage or force a competitor that is just as efficient from the market or harms competition in the market in which the dominant enterprise operates or in any upstream or downstream market; 
  • forcing conditions in a contract which have no connection with the subject matter of the contract (eg, making the contract conditional on buying an unrelated product); 
  • any predatory behaviour towards competitors; or 
  • buying up scarce supply of inputs (either goods or services) where there is no reasonable commercial justification.

 

The MyCC’s Guidelines on the chapter 2 prohibition indicate that an enterprise which is dominant in one market can abuse that dominance in a separate market. For example, where a dominant company sells an essential input to downstream enterprises, sets up a subsidiary in the downstream market and then refuses to sell the input to the other buyers in the downstream market or initiates a margin squeeze. The MyCC’s first abuse of dominance case involves an alleged margin squeeze in the steel sector.


Defence For Abuse Of Dominance


Dominant enterprises are not precluded from engaging in conduct that has reasonable commercial justification or represents a reasonable commercial response to the market entry or market conduct of a competitor, the so-called ‘meeting the competition defence’.
Examples given by the MyCC include:

 

  • refusing to sell to a buyer who did not pay for past purchases;
  • refusal to grant access to a dominant enterprise’s infrastructure that is already being used to capacity;
  • offering a loyalty rebate that is related to the reduced costs of supplying that particular customer; and
  • meeting a competitor’s price even though the price may be below cost in the short term.
 

In contrast to the chapter 1 prohibition (where an enterprise can get confirmation that an agreement which is at risk of being anti-competitive can nevertheless be justified based on pro-competitive benefits), there is no exemption process for a Chapter 2 infringement. The defence will have to be raised in response to the MyCC’s allegations of an abuse of a dominant position. The onus of proof of the reasonable commercial justification or response lies on the dominant enterprise.


Investigations By The MyCC


The MyCC may conduct any investigation, on its own accord, as it thinks expedient where it has reason to suspect that any enterprise has infringed or is infringing any prohibition under the Act. The minister charged with the responsibility for domestic trade and consumer affairs also has powers to direct the MyCC to investigate any suspected infringement. The MyCC may also conduct an investigation when it receives a complaint from a person or information from a participant in a cartel seeking benefits under the leniency regime. If the MyCC decides not to investigate a complaint, it must inform the complainant of the decision and the reasons for the decision.


The MyCC has a wide discretion on how it collects evidence and may direct a person to give the MyCC access to his books, records, accounts and computerised data. However, these powers are subject to lawyer-client privilege and may, at the request of the person disclosing, be protected by confidentiality. As anti-competitive conduct is not a crime, there is no privilege against self-incrimination.


The MyCC may, by written notice, require any person (not only those suspected of being in a cartel but also third parties) whom the MyCC believes to be acquainted with the facts and circumstances of the case to produce relevant information or documents. The MyCC may also require the person to provide a written explanation of such information or document. Where the person is not in custody of the document, he must, to the best of his knowledge and belief, identify the last person who had custody of the document and state where the document may be found. A person required to provide information has a responsibility to ensure that the information is true, accurate and complete, and such person must provide a declarationthat he or she is not aware of any other information that would make the information untrue or misleading.


The MyCC may search premises with a warrant issued by a magistrate, where there is reasonable cause to believe that the premises has been used for infringing the Act or there is relevant evidence of such infringement on the premises. The warrant may authorise the MyCC officer named on the warrant to enter the premises at any time by day or night and by force, if necessary. During such searches, MyCC officers may seize any record, book, account, document, computerised data or other evidence of infringement.


The powers extend to the search of persons on the premises and there is no distinction in the powers for business or residential premises. Where it is impractical to seize the evidence, the MyCC may seal the evidence to safeguard it. Attempts to break or tamper with the seal constitute an offence.


Where the MyCC officer has reasonable cause to believe that any delay in obtaining a warrant would adversely affect the investigation or the evidence will be damaged or destroyed, he or she may enter the premises and exercise the above powers without a warrant. In addition to the powers under the Act, the MyCC investigating officers have the powers of a police officer as provided for under the Criminal Procedure Code.


Penalties


On finding an infringement under the Act, the MyCC may impose a financial penalty of up to 10 per cent of the enterprise’s worldwide turnover of an enterprise over the period during which the infringement occurred. Liability may be imputed on the parent company if its subsidiaries do not have autonomy to determine their actions on the market.


The financial penalty is potentially higher in Malaysia than that in other jurisdictions where the fine is limited to a specified number of years. This is because, in Malaysia, the penalty imposed may be for the entire duration of an infringement. However, the magnitude of this may not be felt for a while as this relates back only to 1 January 2012, the date on which the Act came into force.


Upon finding an infringement, the MyCC must require that the infringement be ceased immediately, and may specify steps to be taken to achieve this or give any other appropriate direction. The MyCC may bring proceedings before the High Court against any person who fails to comply with its directions and the High Court shall make an order requiring the person to comply with the direction or decision. If there is a failure to pay a penalty within the specified period, the High Court shall, apart from ordering the person to pay the penalty, order the person to pay interest at the normal judgment rate running from the day following that on which the payment was due.


The MyCC recently released draft guidelines on how it detemines financial penalties, including aggravating and mitigating factors.


The aggravating factors taken into consideration include the following:

 

  • the role of the enterprise as an instigator or leader, or the enterprise having engaged in coercive behaviour with others;
  • obstruction of, or lack of cooperation in, the investigation;
  • the enterprise having a record of committing similar infringements or other infringements of a part II prohibition (recidivism);
  • continuance of the infringement after the start of investigation; and
  • involvement of board members or senior management in the infringement.
 

The following non-exhaustive list of mitigating factors may also be taken into consideration:

 

  • a low degree of fault;
  • a relatively minor role in the infringement especially if involvement is secured by threats or coercion;
  • cooperation by the enterprise in the investigation;
  • the existence of a corporate compliance programme that is appropriate with regard to the nature and size of the enterprise; and
  • any compensation made to victims of the infringements.
 

Appeal Process


A person aggrieved by the decision of the MyCC may appeal to the Competition Appeal Tribunal (CAT), which has exclusive jurisdiction to review any findings of infringement or non-infringement made by the MyCC. The president of the CAT is a judge of the High Court and the CAT is composed of between seven and 20 other members appointed by the prime minister on the recommendation of the minister charged with the responsibility for domestic trade and consumer affairs.


An appeal is commenced by the filing of a notice of appeal to the CAT within 30 days of the decision, which states in summary form the substance of the decision of the MyCC appealed against, and an address for service of notices related to the appeal.
The CAT has the power to confirm or set aside the MyCC’s decision from being appealed, or any part of it, and may:

 

  • remit the matter to the MyCC;
  • impose or revoke, or vary the amount of, a financial penalty; and
  • exercise the MyCC’s powers to make decisions, give directions, or take such other appropriate actions.
 

The CAT’s decision is final and binding on the parties to the appeal. Nonetheless, the CAT’s decision, and any other administrative decision of the MyCC, may be subject to judicial review by the High Court.


Undertaking


The MyCC may accept an undertaking from an enterprise to do, or refrain from doing, anything as the MyCC considers appropriate. Where the MyCC believes that it has a strong case, it is unlikely to accept an undertaking. Conversely where an undertaking enables the MyCC to bring about a quick and effective remedy without lengthy legal proceedings, this may be seen as a more effective use of the MyCC’s resources which can then be channelled into other infringement cases.


Where the MyCC accepts an undertaking, it shall close the investigation without any finding of infringement and it shall not impose a penalty on the enterprise. Any undertaking accepted by the MyCC will be made publicly available for inspection by the public and can be enforced in the High Court. Offering a suitable undertaking is particularly useful to avoid a finding of infringement, which can trigger follow-on civil actions.


Private Action


The Act specifically allows persons who have suffered loss or damage directly as a result of an infringement under the Act a right of action in civil proceedings in a court. This right is not contingent on a finding of infringement by the MyCC, although such a finding would greatly aid the claimant in proving that the Act has been infringed. A plaintiff may also claim damages even if the plaintiff has not dealt directly with the enterprise which infringed the Act.

 

Recent Developments


The MyCC focused on cartel activities during its first two years of enforcement since the Act came into effect on 1 January 2012. In its first cartel case in 2012, the MyCC imposed non-financial remedies on the Cameron Highlands Floriculturist Association (CHFA) after discovering that members of the CHFA were engaging in an anti-competitive agreement to increase the prices of flowers by 10 per cent. The MyCC, however, did not impose a financial penalty on the CHFA due to its exemplary cooperation in complying with the Act.


The second cartel case involves a collaboration agreement entered into by Malaysia Airlines and AirAsia, which the MyCC alleged had the object of market sharing resulting in the withdrawal of some routes on which both airlines competed. The MyCC concompetitive agreement to increase the prices of flowers by 10 per cent. The MyCC, however, did not impose a financial penalty on the CHFA due to its exemplary cooperation in complying with the Act.The second cartel case involves a collaboration agreement entered into by Malaysia Airlines and AirAsia, which the MyCC alleged had the object of market sharing resulting in the withdrawal of some routes on which both airlines competed. The financial penalties were adjusted based on mitigating factors taken into account by the MyCC such as cooperativeness in providing data and information and the voluntary action taken by the parties to amend the agreement to remove offending clauses.


This case is interesting for several reasons:

 

  • It concerns an agreement which was entered prior to the Act coming into force, and serves as a reminder that parties to agreements which infringe the Act remain at risk for continuing conduct, although it is clear that the Act does not have retrospective effect. 
  • Despite the parties voluntarily amending the agreement, the MyCC continued with investigations culminating in a proposed decision one year later following public outcry and complaints from the Federation of Malaysian Consumers Association. 
  • This is also the MyCC’s first application of the principle of a single economic unit, as it attributes liability to AirAsia for its wholly owned subsidiary, AirAsia X (which serves the long-haul sector). The MyCC’s investigation of the alleged infringing conduct began immediately after the Act came into force, indicating its aggressive enforcement of the Act.
  • In support of the objective to promote the process of competition, rather than any specific players in the market, the MyCC had no hesitation in investigating the national airline carrier, which is a government-linked company.
 

At this juncture, the airlines made oral representations on their respective defences prior to the MyCC coming to a decision. Similar to the position in the European Union, the MyCC has an enforcement team which investigates and presents its case to members of the MyCC who will decide whether or not there has been an infringement of the Act. The MyCC is empowered to determine procedural matters subject to rules of natural justice and procedural fairness.


As a new regulator, the MyCC has flexed its muscles as it continues to aggressively enforce the Act. In October 2013, it issued interim measures against the Pan-Malaysia Lorry Owners Association for agreeing to fix an increase of transportation charges by 15 per cent. The MyCC has also issued directions to refrain from entering into any form of communications or to facilitate any communications concerning pricing for services provided by lorry enterprises; and to amend and remove from the Association’s Constitutions any provision concerning any discussions and determination of any chargeable prices.


More recently, the MyCC has issued proposed interim measures to 26 ice manufacturers to desist from acting in accordance with their announcement, on 24 December 2013, that they will collectively raise prices. These measures are intended to prevent serious and irreparable damage, economic or otherwise, in protection of the public interest. The MyCC has also probed alleged cartel behaviour following announcements of price hikes in stationery supplies.Despite focusing on cartel cases, in November 2013 the MyCC also issued its first proposed decision for abuse of a dominant position. The MyCC proposed a 4.5m ringgit financial penalty on a producer of long steel, Megasteel Steel Sdn Bhd (Megasteel) for a margin squeeze following a complaint from a competitor of Megasteel.


Based on the investigations carried out by the MyCC, Megasteel is the only domestic manufacturer of hot rolled coil in Malaysia and is also involved in the production of cold rolled coil for the downstream cold rolled coil market. The MyCC alleges that Megasteel’s conduct of charging or imposing a price for its hot rolled coil is disproportionate to the artificially low selling price of its cold rolled coil and amounts to a margin squeeze that has the effect of preventing competition in the downstream market, making it a serious breach of competition law.


In determining the basic amount of the proposed financial penalty, the MyCC said that it took into account the nature of the product, the structure of the market, the market share of the enterprise, entry barriers and the effects of Megasteel’s margin squeeze on its downstream competitors, as well as the seriousness of the infringement. Based on the factors cited above, the MyCC considers Megasteel to be dominant in the hot rolled coil market, which is an essential input for the downstream manufacturers of cold rolled coil, and observed that the entry barriers and restrictions into the hot rolled coil market are high.


The MyCC alleged that Megasteel, using its very special position over the other cold rolled coil producers, imposed prices for cold rolled coils which were artificially lower that those charged by its competitors in the downstream cold rolled coil market. The MyCC alleges that the monthly margins (between cold rolled coil and hot rolled coil prices) earned by Megasteel were all insufficient for the recovery of its monthly costs of transforming hot rolled coil into cold rolled coils. Megasteel was expected to submit its defence before the MyCC in December 2013.


Since its establishment, the MyCC has issued guidelines relating to market definition, anti-competitive agreements, abuse of domnant positions, complaints procedures and compliance procedures.


The MyCC recently released draft guidelines relating to the leniency regime and financial penalties, which are available for public consultation. The MyCC also plans to issue guidelines on bid rigging in the future.

 

Related: Antitrust Overview: Part 1

 

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For further information, please contact:

 

Sharon Tan, Partner, ZICOlaw

sharon.suyin.tan@zicolaw.com

 

ZICOlaw Competition & Antitrust Practice Profile in Malaysia

 

Competition & Antitrust Law Firms in Malaysia

 

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