Malaysia: First three sets of Guidelines Issued under Malaysian Competition Law

INTRODUCTION

Five months after the Competition Act 2010 ("Act") came into force on 1 January 2012, the Malaysia Competition Commission ("MyCC") has issued the final version of three guidelines (collectively, "Guidelines") it had previously made available for public consultation last year. The Guidelines comprise of the following:

1. Guidelines on Chapter 1 (Anti-competitive Agreements);
2. Guidelines on Market Definition; and
3. Guidelines on Complaint Procedures.

MyCC had invited comments on the draft versions of the Guidelines in a public consultation that took place between 24 November 2011 and 30 December 2011.

The Guidelines provide clarity on key procedural and substantive matters under the Act, and outline MyCC's enforcement approach and priorities with regard to the relevant provisions of the Act. Businesses should pay heed to MyCC's positions set out in the Guidelines to ensure that they have a holistic understanding of their competition compliance obligations in Malaysia.

This update summarises the key features of the Guidelines, discusses the salient changes between the draft and final guidelines, and briefly sets out the implications for businesses.

GUIDELINES ON CHAPTER 1 (ANTI-COMPETITIVE AGREEMENTS) ("CHAPTER 1 GUIDELINES")

Chapter 1 of the Act sets out the prohibition against anti-competitive arrangements or understandings, decisions by associations and concerted practices (collectively, the "agreements"). Both anti-competitive agreements with competitors (also known as "horizontal agreements"), and anti-competitive agreements between undertakings at different levels of the production or distribution chain (also known as "vertical agreements") are prohibited if they have the "object or effect of significantly preventing, restricting or distorting competition in any market" in Malaysia.

Horizontal agreements such as price-fixing, bid-rigging, market sharing, and limiting/controlling production will be regarded as having the object of restricting competition, and will be considered anti-competitive without MyCC having to assess the actual effects of these agreements. To help the industry better understand the types of agreements prohibited by object, the final Chapter 1 Guidelines elaborates on what types of behaviour would be regarded as price-fixing, bid-rigging, market sharing and limiting/controlling production.

MyCC reminds businesses that

For all other agreements (such as information sharing, restrictions on advertising or standardisation agreements), MyCC will assess the extent to which these agreements have a "significant" anti-competitive effect in a Malaysian market. Only agreements with "significant" anti-competitive effect will be prohibited. In the final Chapter 1 Guidelines, MyCC has retained the following safe harbours for when it will generally consider that agreements do not have a "significant" anti-competitive effect, namely:

1. where parties to the agreement are competitors in the same market and have a combined market share not exceeding 20%; or
2. where parties to the agreement are not competitors (eg parties in a vertical agreement) and their individual market shares do not exceed 25% in any relevant market.

Some of the more significant changes between the draft and final Chapter 1 Guidelines occur in relation to the treatment of vertical agreements, and are particularly relevant for businesses involved in supply and distribution relationships.

Unlike in Singapore, where vertical agreements are generally excluded from the scope of its prohibition against anti-competitive agreements (ie from section 34 of the Singapore Competition Act)¹, in Malaysia vertical agreements are caught by the section 4 prohibition. MyCC considers that where one of the parties in a vertical agreement has market power (but which falls short of having a dominant position), there is potential for such a vertical agreement to have an anti-competitive effect.

Resale price maintenance ("RPM") is singled out as a type of vertical agreement against which MyCC will act strongly. Notably, the draft guidelines had earlier stated that MyCC will find RPM to have the object of "significantly preventing, restricting or distorting competition" unless parties can demonstrate that there are "significant identifiable technological, efficiency or social benefits directly arising from the agreement" in accordance with section 5 of the Act.

While it is clear MyCC still intends to take a stringent approach towards RPM, instead of adopting a blanket prohibition based on object, in the final Chapter 1 Guidelines MyCC recognises that different types of RPM may have different effects on competition. In the final Chapter 1 Guidelines, MyCC states that it "will take a strong stance against minimum RPM and find it anti-competitive" [emphasis added]. For maximum RPM or other recommended retail pricing practices, MyCC will deem it to be anti-competitive if it "serves as a focal point for downstream collusion".

Another notable change in the final Chapter 1 Guidelines is with regard to the treatment of franchise agreements. The draft guidelines had stated that:

1. franchise agreements would generally be assessed based on their foreclosure effect on competition; and
2. for most franchises, "the relevant market will be wider than the franchise products and so unlikely to lead to any significant foreclosure to the market [sic]".

The final Chapter 1 Guidelines are silent on the treatment of franchise agreements, except to mention that MyCC will publish a separate set of guidelines to address both intellectual property rights and franchise agreements under Competition Law.

In relation to the treatment of exclusive distribution agreements over a geographic territory and exclusive customer allocation agreements, MyCC has removed the specific safe harbour threshold of 30% initially set out in the draft guidelines. Under the final Chapter 1 Guidelines, the general safe harbour of 25% (ie where parties to the agreement are not competitors and their individual market shares do not exceed 25%) will now apply to these two types of vertical agreements. While this is a simpler and more consistent approach, this also means that businesses are subjected to a narrower safe harbour in relation to their vertical arrangements.

Our concluding comments on the final Chapter 1 Guidelines are with regard to the analytical framework for assessing a claim for relief from section 4 of the Act. The Act provides that companies may claim relief from section 4 of the Act under an individual or block exemption, or as a defence in the event of an investigation by MyCC. The criteria for claiming such relief is provided in section 5 of the Act. The draft guidelines originally included an appendix that provided further elaboration of the analytical framework MyCC would use to assess such claims for relief. This appendix has been removed in its entirety in the final Chapter 1 Guidelines, possibly to give MyCC some flexiblity in its assessment of such claims.

The criteria in the Act for claiming exemption is similar to the Net Economic Benefit test used by Singapore, which in turn is largely based on Article 101(3) in Europe. It is expected that a claim made under section 5 of the Act will similarly require a robust assessment and a balancing of the pro and anti-competitive effects of an agreement. Prior to there being any precedents on the approach MyCC will take in the assessment of claims for relief, parties looking to apply for such relief may be guided to some extent by the approaches taken in these jurisdictions.

GUIDELINES ON MARKET DEFINITION ("MARKET DEFINITION GUIDELINES")

The Market Definition Guidelines set out the approach MyCC will use to define the relevant market. There were no substantive differences between the draft and final versions of the Market Definition Guidelines.

1. identifying all the competitors of the subject of the complaint and determining whether there is a significant anti-competitive effect in that market;
2. determining whether an enterprise is dominant in a market and is therefore capable of abusing this dominant position;
3. determining the relevant turnover of the infringing party in order to assess the amount of the financial penalty in the event of an infringement decision.

MyCC's approach to market definition is consistent with the approach adopted by competition authorities around the world. Specifically, the MyCC will use the "hypothetical monopolist test" ("HMT") as the fundamental test for defining the boundary of a market. The HMT envisages a price increase by a hypothetical monopolist over the product in question (ie focal product), and questions whether a 5% to 10% price increase would be profitable for the monopolist, or whether sufficient customers would switch to other products, thereby making the price increase unprofitable for the hypothetical monopolist. If it is the latter, this would suggest that the market should be more broadly defined to include the substitute product(s) that customers switched to. This process continues until the group of products allows the hypothetical monopolist to profitably sustain a price above the "competitive price". The same HMT is used for defining the geographic market (ie to determine the boundary of the geographical area or region where substitution takes place).

In the Market Definition Guidelines, MyCC also indicated that enterprises which can potentially supply the focal products and its substitutes in less than 12 months would normally be included in the definition of the relevant market.

Applying the HMT accurately and consistently is a complex exercise, even for very experienced competition authorities. MyCC acknowledges this in its Market Definition Guidelines, and states that market definitions used in other countries may provide a useful starting point, although ultimately local conditions will guide MyCC's determination of the relevant market. In this regard, cases from Singapore, the United Kingdom and the European Union will be likely to carry some persuasive force (given the similarities in the laws between Malaysia and these countries).

GUIDELINES ON COMPLAINT PROCEDURES ("COMPLAINT GUIDELINES")

The third set of Guidelines issued by MyCC sets out the procedures for parties seeking to make a complaint. Among other things, the Complaint Guidelines state MyCC's policies in relation to the treatment of confidentiality, including the possibility that MyCC may need to reveal the source of the complaint and/or the information provided during the course of its investigation. The Complaint Guidelines also make clear that MyCC will retain the discretion to decide whether to launch a formal investigation in response to a complaint, based on a consideration of its strategic priorities.

Parties seeking to make a complaint are requested to use a specific complaint form to ensure that they provide MyCC with sufficient information.

CONCLUDING REMARKS

The release of the final Guidelines mark an important milestone for MyCC in its development as a new competition agency. Besides developing the guidelines, MyCC also expended substantial effort to engage businesses and seek their feedback during the public consultation phase.

The final Guidelines reflect MyCC's endeavors at putting together a meaningful, balanced set of Guidelines that is useful for businesses while still affording MyCC flexibility in its enforcement approach. Given that it is still early days and there is a lack of case precedence in Malaysia, the final Guidelines provide vital and much needed clarity for businesses as they seek to ensure they remain compliant with competition law in Malaysia.

MyCC has also just announced that it will be holding a public consultation on its draft guidelines on Chapter 2 (abuse of dominance), which is the other key competition prohibition in the Act. The consultation period will take place between 15 May 2012 and 15 June 2012.

Footnote

¹ The Third Schedule of the Singapore Competition Act (Cap. 50B) states that the section 34 prohibition shall not apply to any vertical agreement, other than such vertical agreement as the Minister may by order specify. Vertical agreement refers to any agreement entered into between 2 or more undertakings each of which operates at a different level of the production or distribution chain, and relating to the conditions under which the parties may purchase, sell or resell certain goods or services and includes provisions contained in such agreements which relate to the assignment to the buyer or use by the buyer of intellectual property rights, provided that those provisions do not constitute the primary object of the agreement and are directly related to the use, sale or resale of goods or services by the buyer or its customers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.