Adelaide Luke, Aaron Ong and Amanda Tay
Malaysia’s Competition Act (Act) was first enacted in 2010 (becoming effective in 2012), and is regulated by the Malaysian Competition Commission (MyCC). Whilst the MyCC’s initial focus was on education and advocacy, this has firmly shifted to enforcement. The last few years have seen an increase in the level of enforcement, and the indications are that this trend is set to continue.
As with most competition law regimes around the world, the Act is extraterritorial in its effect. This means that it does not matter where the conduct at issue takes place: the Act will apply if there is an effect on competition in Malaysia. Hence, it is important for both local and foreign enterprises to be aware of the implications of the MyCC’s increased level of activity.
In this article, we discuss the background and key takeaways of the recent case of Competition Commission v. Dagang Net Technologies Sdn. Bhd. (Case No. 700-2/2/003/2015) (Dagang Net Case), where MyCC held that Dagang Net Technologies Sdn Bhd (Dagang Net) enjoyed a dominant position, and abused that position by imposing excessive exclusivity provisions with software providers. Following its investigation, the MyCC imposed a fine of MYR10.3 million.
Background of the Dagang Net Case
Dagang Net, a wholly owned subsidiary of the public listed Dagang NeXchange Berhad, has been the Malaysian government’s sole service provider in the provision of Malaysia’s National Single Window (NSW) for trade facilitation since 2009.
Following complaints by software providers regarding Dagang Net’s conduct, the MyCC commenced an investigation in or around 2016. The complainants alleged that, between 2015 and 2017, Dagang Net had imposed an exclusivity clause in its agreements with software providers. The effect of these clauses was the reinforcement of Dagang Net’s position on the market because the software providers were prevented from providing similar services to future competitor(s) of Dagang Net.
The MyCC held that Dagang Net contravened Section 10(1) of the Act, which prohibits an enterprise from engaging, whether independently or collectively, in a conduct which amounts to an abuse of a dominant position in any market for goods or services in Malaysia.
In its provisional decision, the MyCC also made a provisional finding that Dagang Net refused to supply electronic mailboxes to certain customers. However, in its final decision, the MyCC concluded that Dagang Net’s refusal to supply did not significantly prevent, restrict or distort competition and therefore did not amount to an infringement of section 10.
Key to the infringement decision were the MyCC’s findings that: (a) at the time of the alleged infringement, Dagang Net held a dominant position in the relevant market, and (b) that Dagang Net had abused that dominant position.
The decision held in the Dagang Net Case is important for a variety of reasons. We set out below some key takeaways.
1. Legal monopoly is considered a “dominant position”
Under the Act, a dominant position arises where one or more market players possess such significant power in a market such that they are able to adjust price or outputs or trading terms, without effective constraint from competitors or potential competitors.
Dagang Net had contended that, as it is a monopolist without competitors, it cannot be held to have a dominant position. MyCC disagreed.
MyCC held that the Act regulates the behaviour of enterprises and not its form or structure. Further, MyCC referred to established EU principles and cases1 wherein it has been established that an enterprise vested with a legal monopoly may be regarded as occupying a dominant position within the meaning of Article 102 of the Treaty for the Functioning of the European Union (TFEU).
2. Future operations could be included as part of “relevant market”.
In its decision, the MyCC identified the market for the provision of trade facilitation services in Malaysia as the relevant market within which to conduct its assessment.
The MyCC determined that the relevant market here included not only the current NSW system Dagang Net was operating in, but also a new system, known as uCustoms that while not yet in operation is due to be implemented imminently, and both systems will serve as platforms to end-users to submit trade declarations.
In making this determination, the MyCC examined documentary evidence and concluded that the new system would inevitably come into operation in the future. The MyCC rejected Dagang Net’s argument that this new system was a “hypothetical market” and not to be included as part of the “relevant market”.
3. Danger of the exclusivity clause
As mentioned above, since 2015, Dagang Net had imposed exclusivity clauses on its software providers which prevented them from providing similar services to Dagang Net’s future competitors that provided the upcoming system.
The MyCC rejected the arguments put forth by Dagang Net and held that there were no reasonable commercial justifications to impose the exclusivity clause. It determined that the purpose of the exclusivity was to protect Dagan Net’s current market share and that it had the effect of foreclosing the market for the provision of the trade facilitation services..
Some observations on MyCC’s findings in relation to exclusivity clauses:
- Similar to the discussion on relevant market above, MyCC found that potential competitors had been foreclosed from the market. Dagang Net had argued that the exclusivity clauses had no effect because Dagang Net did not face any current competitors, but this was rejected.
- Lack of knowledge of the counterparty’s objection to an exclusivity clause is irrelevant. It is sufficient that the exclusivity clause is capable of having anti-competitive effects. MyCC held that Dagang Net as the incumbent will be held to a higher standard not to behave in such a way as to distort competition.
4. Reiteration of the requirement to show “effects” in an abuse of dominance case
The Commission reiterated that Section 10 of the Act is “effects based”, which means that actions that are potentially abusive must give rise to anti-competitive effects, and are not “per se” illegal. However, as to the standard of proof, the Commission also cited well-established principles set forth by the European Courts2 that it is sufficient to show that the conduct generally has or is capable of having anti-competitive effects.
In applying these principles, the Commission concluded that Dagang Net’s exclusivity clauses gave rise to anti-competitive effects. On the other hand, Dagang Net’s refusal to supply only gave rise to “insignificant” effects and therefore did not amount to an infringement.
Conclusion and lessons learnt
The Dagang Net case highlights the importance for large companies to take a proactive approach when handling competition matters. We set out below a summary of the two key lessons learnt from the Dagang Net case:
- Are you at risk of being characterised as “dominant”? There are a number of factors that are considered as part of the assessment, and market share is not the MyCC’s sole consideration. It also factors in whether the company faces any effective competitive constraint, or whether it can dictate the terms of competition in a market in Malaysia.
- Could any of your business practices be characterised as anti-competitive? Competition risks can materialise in a number of different ways. We recommend to conducting regular competition law training for staff and periodic competition audits on a company’s ongoing commercial activities.
- Always check your contracts, in particular ones with exclusivity clauses. It is worth noting that exclusivity clauses are not fatal and will not automatically be deemed to be anti-competitive by the MyCC. Evergreen contracts can be problematic – shorter contracts that are subject to renewal negotiations at regular intervals pose a lower risk from a competition law perspective. Note also that an exclusivity clause may result in a breach of the Act by virtue of it being an anti-competitive agreement (which is a separate offense to an abuse of dominant position).
1 Case 26/75 General Motors Continental NV; Case 311/84 Telemarketing (CBEM) SA and C-41/90 Klaus Hofner and Fritz Elser v Macrotron GmBH
2 Case C-52/09 TeliaSonera Sverige; Case T-336/07 Telefonica and Telefonica de Espana v Commission, Case T-398/07 Spain v Commission; Case C-457/10 P AstraZeneca v Commission and Case C-23/14 Post Danmark A/S v Konkurrencradet.
Herbert Smith Freehills LLP is licensed to operate as a Qualified Foreign Law Firm in Malaysia. Where advice on Malaysian law is required, we will refer the matter to and work with licensed Malaysian law practices where necessary.