Malaysia Update: Section 4(2) of the Competition Act 2010: Magic Wand or Key to Floodgates?

Introduction

With the coming into effect of the Malaysian Competition Act 2010 (“CA”) in January 2012, Malaysia’s competition regulator, the Malaysia Competition Commission (“MyCC”)’s determination to pursue potential infringers is apparent from the volume of investigations and infringement decisions issued.

With the coming into effect of the Malaysian Competition Act 2010 (“CA”) in January 2012, Malaysia’s competition regulator, the Malaysia Competition Commission (“MyCC”)’s determination to pursue potential infringers is apparent from the volume of investigations and infringement decisions issued.

Legal Provisions

Section 4(1) of the CA provides that a horizontal or vertical agreement between enterprises is prohibited if it has the object or effect of significantly preventing, restricting or distorting competition in any market for goods or services.

Curiously, Section 4(2) of the CA further states that:

(2) Without prejudice to the generality of subsection (1), a horizontal agreement between enterprises which has the object to-

• fix, directly or indirectly, a purchase or selling price or any other trading conditions;
• share market or sources of supply;
• limit or control-

1.production;

2.market outlets or market access;

3.technical or technological development; or

4.investment; or

• perform an act of bid rigging
• is deemed to have the object of significantly preventing, restricting, or distorting competition in any market for goods or services.

Observations

Reading in tandem the Act and the Guidelines of the MyCC, several observations are noted:

(A) Disjunctive reading of “object” and “effect” under Section 4(1)

The provision of CA is clear – where a horizontal or vertical agreement between enterprises has the object or effect of significantly preventing, restricting or distorting competition in any market for goods or services, it will be prohibited.

On the presumption that Parliament does nothing in vain, one must give significance to every word of an enactment, since the word “or” appears in the Act, the intention of Parliament in using the word ‘or’ must be that Section 4(1) should be read disjunctively2. 

In this regard, only either an anti-competitive “object” or “effect” of an agreement needs to be established for a finding of infringement under Section 4(1). This position is echoed by MyCC in its own guidelines3.

(B) Conjunctive reading of “object” for deeming provision at Section 4(2)

Having established only either anti-competitive “object” or “effect” of an agreement needs to be shown for an infringement under Section 4(1), one further examines the deeming provision under Section 4(2).

The wording of Section 4(2) is patently clear that where a horizontal agreement has the object to fix prices, share market or sources of supply, limit or control production, market outlet or access, technological or technical development or investment or rig bids, such agreement is deemed to have the object of significantly preventing, restricting, or distorting competition in any market for goods or services.

In this respect, to invoke the deeming provision, one needs to firstly examine whether the agreement in question has the object to carry out the exhaustive list of actions under subsections 4(2)(a) to (d).

As the CA does not define the term “object”, MyCC, in its own Guidelines on Chapter 1 Prohibition, stated that to be consistent with the Act’s economic goal “to promote economic development by promoting and protecting the process of competition”, in examining the kinds of agreement listed under Section 4(2) for anti-competitive “object”, the MyCC “will not just examine the actual common intentions of the parties to an agreement but also assess the aims pursued by the agreement in light of the agreement’s economic context. ”4

If the “object” of an agreement is highly likely to have a significant anti-competitive effect, then MyCC may find the agreement to have an anti-competitive “object”5 .

In short, notwithstanding an “object/effect” dichotomy under Section 4(1), to examine “object” for purpose of application of Section 4(2), MyCC stated that it will examine the likelihood of an agreement having a significant anti-competitive effect by adopting a contextual approach examining the surrounding economic circumstances which form the setting for the agreement to assess the common intentions and aims pursued in light of the agreement’s economic context.

Why the need for “by object” restriction? 

Certain types of coordination between undertakings can be regarded, by their very nature, as being harmful to the proper functioning of normal competition6 . Thus, it can be redundant to prove negative effects in every case since experience shows that by object restrictions result in anti-competitive effects7.

However, the distinction between “object” and “effect” is only meaningful if “recourse to the concept of restriction by object is clearly defined, failing which this could encompass conduct whose harmful effects on competition are not clearly established8 . If not properly defined, there is a real danger that a “by-object” provision, especially a deeming one like Section 4(2) may open up floodgates and render businesses easy targets without the need for proper analysis nor assessment of harm.

The fine line between definition of restriction by object and effect has triggered much discussion, particularly in the EU sphere (see paragraphs 18 to 25 below).

Is our Section 4(2) a departure from other jurisdictions?

Firstly, unlike our CA, foreign competition laws lack a deeming provision which imputes liability if there is an object to, for example, share market.

Lack of deeming provision aside, the object/effect distinction comes with its own set of problems. For example, EU competition laws have oft faced criticism for lax interpretation of by object restrictions by vacillating between a strict approach without looking at effects of the agreement in question9 and at times, weighing in effects of the conduct in question10 . This has resulted in inconsistent application of law and blurring of the line between “object” and “effect”.

If one considers the complications surrounding the object/analysis distinction and add a deeming provision like our Section 4(2) into the equation, it immediately becomes clear that such a deeming provision will be extremely onerous to businesses as commercial decisions will be rife with uncertainty and pose as easy targets to competition regulators.

European Union (EU)

Recent EU cases suggest an adherence to a contextual approach not unlike that propounded by the MyCC in its guidelines (see paragraph 12 above). To assess whether an agreement has an anti-competitive object, these cases held that regard must be had to the content of the agreement, the objectives it seeks to attain, and the economic and legal context of which it forms part of11 . “ [T]he concept of restriction of competition ‘by object’ can be applied to certain types of coordination between undertaking which reveals a sufficient degree of harm to competition that it may be found that there is no need to examine their effects”12 .

United States (US)

Antitrust law in the US also provide that there are certain agreements or practices which, “because of their pernicious effect on competition and lack of any redeeming virtue, are conclusively presumed to be unreasonable, and therefore illegal, without elaborate inquiry as to the precise harm they have caused or the business excuse for their use”13 . Such agreements are manifestly anticompetitive and illegal per se14.

Nonetheless, even a finding of per se illegality or per se categories cannot conjured from thin air and requires antitrust regulators to have “considerable experience with the type of restraint at issue” and “demonstrable economic effect rather than … formalistic line drawing”15.

Singapore

Singapore’s Competition Act16 provides an illustrative list of the types of restrictions that may be regarded as anti-competitive. It does not prescribe a deeming provision.

Again, Singapore competition authorities have held that in assessing object, it will be guided by a contextual approach (not unlike the EU) and assess whether the conduct in question reveals a sufficient degree of harm to competition17 .

Conclusion

A deeming provision like Section 4(2) may render it exceedingly convenient for regulators to circumvent the need to properly access the degree and extent of harm in an arrangement. As seen from MyCC’s own guidelines18 and other jurisdictions – notwithstanding an object/effect distinction, a finding of “by-object” restriction does not and cannot stand in vacuum – whatever the approach adopted, there is a need to adopt a contextual analysis and look at perceived effects and whether the alleged infringement reveals a sufficient degree of harm.

Hence, since the Section 4(2) deeming provision is one that is distinct to the Malaysian jurisdiction and one that is particularly onerous, more clarity and guidance is required from our competition authorities on the applicability and approach for this provision to adequately promote and protect the process of competition.

By Tay Beng Chai & Heng Jia, Tay & Partners, Malaysia, a Transatlantic Law International Affiliated Firm.

For further information or for any assistance please contact malaysia@transatlanticlaw.com

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