China: How China Deals With The Diverging Approaches To Monopoly Agreements

Over the first decade of China's Antimonopoly Law, we have seen a divergence between the approaches adopted by the Chinese antimonopoly enforcement agencies and the Chinese courts towards agreements that restrain trade; what in China are called "monopoly agreements," especially vertical agreements. The key difference is whether proof of anticompetitive effect is a necessary element to find an illegal agreement. Both the AMEAs and the courts have tried to converge their approaches. Until these conflicting approaches are unified, it is safer for companies operating in China to continue assuming that essentially all monopoly agreements involving cartels and resale price maintenance will be treated as per se illegal.

Over the first decade of China's Antimonopoly Law ("AML"), we have seen a divergence between the approaches adopted by the Chinese antimonopoly enforcement agencies ("AMEAs") and the Chinese courts towards agreements that restrain trade, of what in China are called "monopoly agreements," especially vertical agreements. The key difference has been with regard to whether proof of anticompetitive effect is a necessary element to find an illegal agreement.

The AMEAs tend to believe that once a conduct falls into the scope of monopoly agreements proscribed by the AML, there is no need to further prove the anticompetitive effects. On the other hand, courts pay much more attention to the effects of the alleged monopoly agreement. As a result, an alleged violator with relatively low market share is likely to be fined by the AMEAs for monopoly agreements, but may win a civil action defending its conduct.

Both the AMEAs and the courts have tried to converge their approaches, with the Hainan High Court's Yutai case being the most recent high-profile effort. Unfortunately, until these conflicting approaches finally are unified, it is safer for companies operating in China to continue assuming that essentially all monopoly agreements involving cartels and resale price maintenance will be treated as per se illegal, rather than relying on the possibility of arguing a lack of anticompetitive effects, regardless of their market positions.

THE "PROHIBITION + EXEMPTION" APPROACH UNDER THE AML

The AML Chapter 2 "Monopoly Agreements" is roughly comparable to the U.S. Sherman Act § 1 and Article 101 of the EU Treaty: Article 13 of the AML deals with horizontal monopoly agreements, which it defines as "agreements, decisions, or other concerted conducts that eliminate or restrict competition." Article 14 focuses on vertical monopoly agreements, particularly resale price maintenance ("RPM"). Article 15 provides for the exemption of monopoly agreements from prohibition under certain circumstances. In short, the AML appears to make clear that monopoly agreements falling under Articles 13 or 14 are prohibited unless an exemption applies under Article 15.1

In the past, two AMEAs, the National Development and Reform Commission ("NDRC") and the State Administration for Industry and Commerce ("SAIC"), shared responsibility of investigating monopoly agreements. The NDRC focused on cases involving price restrictions, while SAIC regulated other non-price matters. Both agencies also had provincial branches—provincial Development and Reform Commission ("DRCs") and provincial Administration for Industry and Commerce ("AICs") that were authorized to enforce the AML too. According to the government restructuring plan approved by the National People's Congress on March 13, 2018, NDRC, SAIC and MOFCOM (responsible for merger review) are in the process of integration into one antitrust enforcement agency under the Market Supervision Bureau.

Such an "administrative + judicial" antitrust enforcement system is quite common worldwide. However, as shown below, different interpretation and understandings of the monopoly agreement provisions of the AML have resulted in a substantial divergence between the AMEAs and the Chinese courts that is still being settled.

DIVERGING APPROACHES TO VERTICAL AGREEMENTS

Article 14 of the AML specifically prohibits resale price maintenance, but also has a catch-all clause authorizing the AMEAs to designate as violations "other monopoly agreements" not specifically listed in the AML. So far, the AMEAs have focused mainly on RPM cases.2 Although the AMEAs have never stated that they address vertical agreements as per se illegal, the practical effect of their enforcement approach to date has been very close to a per se standard, similar to the approach used in the United States prior to the Khan and Leegin cases, which introduced the rule of reason for RPM. On the other hand, the Chinese courts generally have applied a type of rule of reason analysis to vertical agreement cases, even RPM.

The Vertical Enforcement Approach of the AMEAs

In the early days of its enforcement efforts, the NDRC investigated and issued fines in some high-profile vertical agreement cases without engaging in any detailed anticompetitive effects analysis. In the Chinese liquor case (2013), a total fine of RMB 449 million was imposed on two domestic liquor producers, Moutai and Wuliangye, for implementing RPM. In the infant formula case (2013), six infant formula manufacturers were fined a total of RMB 668 million for fixing resale prices. Although no formal decisions have been released for these two cases, it seems that the NDRC's approach was straightforward—once the parties' conduct was found to constitute RPM, then no anticompetitive effects analysis was required.

In the recent years, it appears that the AMEAs have tried to pay more attention to anticompetitive effects. In late 2016, NDRC imposed a RMB 118.5 million fine on a US company that used fixed and minimum resale prices for its medical device products. In its decision, NDRC provided a comparatively detailed analysis of the anticompetitive effects of the RPM conduct, on both inter-brand competition and intra-brand competition.

However, the analysis and approach so far have not been very consistent among the AMEAs and their provincial branches. In other vertical agreement cases, for example, Speed Fresh Logistics (2016) and Hankook Tire (2016), the Shanghai DRC provided no anticompetitive effect analysis at all.

The Approach of the Chinese Courts to Vertical Agreements

By contrast, in 2012, the Supreme People's Court ("SPC") indicated a very different approach in its Rules on Certain Issues relating to Application of Laws for Adjudicating Cases of Civil Disputes caused by Monopoly Conduct ("SPC 2012 Rules"). Article 7 of the SPC 2012 Rules provides that, for horizontal monopoly agreements (such as cartels), the courts will presume anticompetitive effects, unless that presumption is rebutted by the defendants. The SPC 2012 Rules do not articulate whether anticompetitive effects also should be presumed for vertical agreements, but by default, when the law falls silent, "A party shall have the responsibility to provide evidence in support of its own propositions."3

Since then, Chinese courts have been consistently applying such an approach in civil cases involving vertical monopoly agreements. For example, in Johnson & Johnson (2013), Rainbow, a distributor of Johnson & Johnson, complained that the defendant had implemented vertical price restrictions and stopped supplying medical products when Rainbow bid at a lower price than required by Johnson & Johnson. The Shanghai High Court held that proof of the effect of eliminating and restricting competition was a required element of proving an illegal vertical monopoly agreement and that the plaintiff should bear the burden to prove those anticompetitive effects. In other words, rather than following the AMEAs' approach of considering anticompetitive effects to be selfevident after RPM is found, the Court instead took a "rule of reason" approach. After assessing (1) competitive conditions, (2) Johnson & Johnson's market position, (3) the reasons for the RPM agreement, and (4) the alleged procompetitive effects of the RPM, the Court then found that the conduct had resulted in anticompetitive effects and ruled against Johnson & Johnson.

Confrontations and Reconciliations

The courts continued to take this "rule of reason" approach in subsequent matters. In Gree (2016), the plaintiff, a distributor of Gree air conditioners, complained that Gree terminated the distribution agreement and imposed punishment for the plaintiff's violating minimum resale prices. The Guangzhou IP Court found that the agreement in that case did not constitute a vertical monopoly agreement because it lacked the object or effect of eliminating and restricting competition. Specifically, the Court found that (1) air conditioners are a competitive market, in which Gree is one of many manufacturers and has no substantial market share and (2) Gree's vertical restriction did not eliminate competition among Gree distributors, who can still compete on non-price aspects such as service.

Coincidentally, Haier, another well-known Chinese household appliance manufacturer, was fined by the Shanghai DRC for implementing vertical price restrictions during the same month as the Guangdong IP Court judgement in Gree. Because it appears that Gree and Haier face similar competitive situations— both are leading brands in their respective industries, but lack dominant market positions because of fierce competition— the juxtaposition of these two cases in 2016 made the divergence between the courts and AMEAs more apparent.

Shortly thereafter we witnessed the first judicial ruling overturning an AMEA's administrative decision. In 2016, the Hainan Provincial Price Supervision and Antimonopoly Bureau, NDRC's Hainan branch, fined Yutai, a local animal feed company, RMB 200,000 for alleged RPM agreements with its distributors. Yutai then filed an administrative lawsuit at the Haikou Intermediate Court. In mid-2017, the Haikou Court overturned the agency's decision, holding that (1) the bureau had wrongly applied the AML, as Yutai's RPM agreements did not eliminate or restrict competition due to the plaintiff's relatively low scale of operations and market share; and thus (2) the RPM conduct did not qualify as a monopoly agreement under Article 13 of the AML.

The Yutai case was appealed by the agency to the Hainan High Court. In its final judgement in late December 2017, the Hainan High Court generally accepted the agency's view and reversed the first instance court. The High Court held that, as far as public enforcement against illegal vertical agreement is concerned, no analysis of anticompetitive effects is required once an agreement falls under Article 14 of the AML. It noted that one key distinction between public enforcement and civil lawsuits is that, in civil lawsuits, it is necessary to prove "actual losses," which in turn are preconditioned on anticompetitive effects. On the other hand, in cases of administrative enforcement, AMEAs are not obliged to follow this approach, and are entitled to prohibit monopolistic conduct aiming to eliminate or restrict competition, even if it results in no actual anticompetitive effects.

In short, the Hainan High Court's ruling has recognized the AMEAs' approach to RPM and seems to hold that public enforcement and civil litigation may take different approaches to RPM and vertical agreements.4 But the divergence of opinion between the AMEAs and the courts is not yet solved, and indeed it is not clear yet whether the ruling will be widely adopted by other courts across the country.

Footnotes

1 In this regard, the AML's structure resembles that of Article 101 of the EU Treaty.

2 In some cases, AMEAs have expressed the concern of vertical nonprice restrictions. The draft Antimonopoly Guidelines in Automobile

Industry expressly provide that non-price vertical restrictions may violate Article 14 of the AML, although a safe-harbor is set for parties with relatively low market shares.

3 Article 64 of the Civil Procedure Law.

4 It is apparent that Hainan High Court's judgement has encouraged the AMEAs' enforcement. As a matter of fact, just two weeks after Yutai case, Shanghai DRC released two more penalty decisions against RPM, one involving sales by a US chemicals company, fined a total of RMB 2.37 million for engaging in RPM in sales of turbine lubricating oil in China, the other by a Shanghai electronic equipment firm , fined RMB 2.3 million for reaching RPM agreements with its dealers in the distribution headset products.

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