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Overview Of Competition Law (Part 1).

Doing Business in ASEAN: Legal Considerations – Malaysia Chapter

 
June, 2014

Background

 

Competition law in Malaysia has come a long way since the idea of introducing fair trade law was discussed in the 1990s. A Fair Trade Practices Policy was finally approved by the Cabinet in October 2005, which scope was modified in 2009 to address only competition issues. Consequentially, the Fair Trade Practices Bill, which contained elements to address unfair trade practices, evolved into the current Competition Law Act 2010 (“Act”) which is enforced by the Malaysia Competition Commission (“MyCC”). With the passing of the Act, Malaysia joined a hundred over other countries worldwide and became the fourth ASEAN nation after Indonesia, Singapore, Thailand and Vietnam to introduce competition law.

 

The Act seeks to promote and protect the process of competition and governs all commercial activities within Malaysia as well as commercial activities carried out outside Malaysia which have an effect on competition in any market in Malaysia. The Act therefore applies to companies, partnerships, trade associations, sole traders, state-owned corporations, Government-linked companies and non-profit making bodies. The communications and energy sectors are however excluded from the application of the Act and competition matters relating to these two sectors are enforced by sector regulators, namely the Malaysian Communications and Multimedia Commission and the Energy Commission.

 

Two main prohibitions are covered under the Act ie. anti-competitive agreements and abuse of dominance. Although there is no merger control regime under the Act, a merger control may potentially fall under one of these two categories. Where there are concerns that a merger or acquisition may result in a dominant position, parties to the transaction can either conduct self-assessment that the benefits to competition outweigh the detriments or apply for an individual exemption.  

 

Anti-Competitive Agreements

 

Section 4 prohibits horizontal and vertical agreements between enterprises which have the object or effect of significantly preventing, restricting or distorting competition in any market for goods or services. Horizontal agreements are between enterprises operating at the same level in the production or distribution chain whilst vertical agreements refer to agreements by enterprises operating at a different level in the production or distribution chain. “Agreement” is broadly defined and encompasses any form of contract, arrangement or understanding between enterprises, whether legally enforceable or not, and includes a decision by an association and concerted practice. Incorporating elements from case law in Europe, “concerted practice” has been defined to mean any form of coordination between enterprises which knowingly substitutes practical co-operation between them for the risks of competition. This usually involves some form of informal cooperation or collusion where parties enter into an informal arrangement or understanding.

 

Agreements are prohibited only if they have or are likely to have a significant restriction or distort competition in any market for goods or services in Malaysia ie. the agreements must have more than a trivial impact. The impact would be assessed in relation to the identified relevant market. MyCC will generally not consider agreements between competitors in the same market whose combined market share does not exceed 20 per cent of the relevant market to have a “significant” effect on competition, provided that such agreements are not hard-core cartels. Under certain circumstances, an agreement between competitors below the threshold may nonetheless have a significant anti-competitive effect and MyCC reserves the ability to take enforcement action against the parties to such agreement.

 

When assessing whether an agreement has the object of restricting competition, MyCC will not only examine the actual common intention of the parties but will assess the aims of the agreement taking into consideration the surrounding economic context. If the object of any agreement is highly likely to have a significant anti-competitive effect, then the agreement is considered to have an anti-competitive object. Once an anti-competitive object is shown, MyCC does not need to examine the anti-competitive effect of the agreement. However, if the anti-competitive object is not found, the agreement may still infringe the Act if there is an anti-competitive effect.

 

Horizontal Agreements

 

There are certain horizontal agreements between enterprises which are deemed as having the object of significantly restricting competition where MyCC does not need to examine and prove any anti-competitive effects of such agreements. These are agreements which:

 

  • Fix, directly or indirectly, a purchase or selling price or any other trading conditions;
  • Share markets or sources of supply;
  • Limit or control production, market outlets or market access, technical or technological development or investment; or
  • Perform an act of bid rigging.

 

Vertical Agreements

 

Compared to horizontal agreements, MyCC generally considers vertical agreements to be less harmful to competition because parties to a vertical agreement usually have a joint interest in ensuring that the final product or service is competitive as opposed to horizontal agreements which involve competitors operating at the same level in the production or distribution chain. Anti-competitive non-price restraints are generally not considered to be significant where the market shares of the seller or buyer do not exceed 25% of their relevant market.

 

MyCC considers resale price maintenance or similar schemes such as maximum or recommended retail pricing as highly anti-competitive maximum prices. However, genuine recommended prices would be permissible provided that they are not guises for fixed resale prices. This may apply even where the market shares of the parties are less than the 25%de minimis threshold.  

 

Non-price restraints may significantly affect competition where the market shares of the seller or buyer exceed 25% of their relevant market. Examples of such restraints include:

 

  • Exclusivity or single branding, where a buyer is required or incentivised to buy exclusively or nearly all of its needs from a single supplier, resulting in foreclosure of the market.
  • Exclusive territorial allocation, where a distributor is given exclusivity over a demarcated area thereby limiting intra-brand competition.
  • Exclusive customer allocation, similarly raises competition issues where there is no significant inter-brand competition.
  • Tied sales, where a customer who purchases a product is forced to also purchase another product. Such tying could restrict access to the tied product market by competitors, particularly if the first product is a ‘must have’.
  • Up-front access payments which suppliers pay to distributors to get exclusive access to distribution, for example, the best shelf-space in a retail outlet.

 

Anti-competitive restraints may be permissible where they bring about benefits which satisfy the grounds in section 5, below.

 

Relief From Liability And Exemption

 

Section 5 allows parties to anti-competitive agreements to seek relief from liability and in practice, convincing evidence is needed to prove that the benefits to competition outweigh the detriments. Parties to an agreement should conduct a self-assessment and determine whether it is able to justify its conduct under Section 5. In order for an enterprise engaged in an anti-competitive agreement to be relieved from liability, all the following criteria must be cumulatively met:

 

  • There are significant identifiable technological, efficiency or social benefits directly arising from the agreement;
  • The benefits could not reasonably have been provided without the agreement having the anti-competitive effect;
  • The detriment to competition is proportionate to the benefits provided; and
  • The agreement does not eliminate competition in respect of a substantial part of the goods or services.

 

There is no requirement to notify the MyCC of the grounds for relief of liability and enterprises may choose to raise their Section 5 arguments if and when MyCC investigates the conduct or issues a notice of a proposed finding of infringement. Alternatively, where more certainty is needed, enterprises may choose to apply for individual exemptions (granted to specific applicants) or block exemptions (granted to a class of enterprises).

 

Leniency Regime

 

The Act also empowers MyCC to establish a leniency regime which provides for reduction of up to a maximum of 100 per cent of any penalties, which would otherwise have been imposed if the enterprise has admitted its involvement in an anti-competitive agreement and provided information or other form of cooperation to the MyCC which significantly assisted, or is likely to significantly assist, in the identification or investigation of any finding of the infringement against any other enterprises.

 

The leniency regime permits different percentages of reductions made available to an enterprise. This would depend on whether the enterprise was the first to bring the suspected infringement to the attention of MyCC as well as the stage in the investigation at which it admits its involvement in the infringement. An infringing enterprise that is second in line may still benefit from the leniency regime. However, the percentage of reduction would largely depend on the stage in the investigation at which it admits its involvement in the infringement and the value of the incremental information or other cooperation it is able to provide.

 

Prohibition On Abuse Of Dominance

 

Section 10 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. Establishing an infringement of abuse of dominance involves the following process:

 

  • Whether the enterprise that is being complained about is dominant or has significantmarket power in a relevant market in Malaysia (MyCC has stated that 60% market share is indicative of significant market power); and
  • If so, MyCC will assess whether the enterprise is abusing that dominant position.

 

The Act generally provides for two main types of abuse of dominant position:

 

  • Exploitative conduct, for example, when a dominant enterprise excessively raises its price to exploit consumers where there is no or low likelihood of new entrants in the relevant market. In determining whether prices are excessive, MyCC will assess whether the conduct is adversely affecting customers and locks out an equally efficient competitor.
  • Exclusionary conduct, which is assessed based on its effects on competition. MyCC will apply an effects-based approach in assessing whether an exclusionary conduct amounts to abuse and apply two key tests: (i) Does the conduct adversely affect consumers? (ii) Does the conduct exclude a competitor that is just as efficient as the dominant enterprise?  Exclusionary conduct includes predatory pricing, price discrimination, exclusive dealing, tying and bundling.

 

Section 10(2) 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.

 

Whilst the Act prohibits a dominant enterprise from engaging in certain conduct which non-dominant enterprises can do, a dominant enterprise is not restricted from engaging in a conduct which has a reasonable commercial justification or which is a reasonable commercial response to market entry or conduct by a competitor.

 

In contrast to anti-competitive agreements which potentially have relief from liability, there is no exemption process for abuse of dominance. Defence will therefore have to be raised in response to 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.

 

Related: Overview Of Competition Law (Part 2)

 

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For further information, please contact:

 

Sharon Tan, Partner, ZICOLaw

[email protected]

 

ZICOlaw Competition & Antitrust Practice Profile in Malaysia 

 

Competition & Antitrust Law Firms in Malaysia

Doing Business in ASEAN: Legal Considerations

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