China: Vertical Agreements And Dominant Firms 2019

Last Updated: 26 July 2019
Article by Liang Ding
Most Read Contributor in China, July 2019

1  General

1.1 What authorities or agencies investigate and enforce the laws governing vertical agreements and dominant firm conduct?

The State Administration for Market Regulation ("SAMR"), a consolidated anti-monopoly enforcement agency, investigates and enforces the Anti-monopoly Law of China ("AML"), which regulates vertical agreements and dominant firm conduct.

Before April 2018, the National Development and Reform Commission ("NDRC") was responsible for law enforcement against price-related vertical agreements and abusive conduct, and the State Administration for Industry and Commerce ("SAIC") was responsible for investigations into non-price-related vertical agreements and abusive conduct.

According to the Institutional Reform Plan of the State Council, released by the National People's Congress on March 18, 2018, "the duties of the SAIC, the duty of the NDRC in price supervision and antitrust law enforcement, the duty of the Ministry of Commerce in antitrust law enforcement for concentration of undertakings and the duty of the Office of Anti-monopoly Committee of the State Council shall be consolidated to form the SAMR as an organization directly under the State Council".

The Anti-monopoly Bureau under the SAMR carries out antitrust investigations into vertical agreements and dominant firm conduct.  More specifically, the Division of Monopoly Agreement Investigation is in charge of vertical agreement investigation and the Division of Abusive Conduct Investigation is in charge of investigations into abuse of market dominance.

According to the Circular of the SAMR on the Authority for the AML Enforcement issued on December 28, 2018, "market regulatory departments of people's governments of all provinces, autonomous regions, and municipalities directly under the Central Government (the 'Provincial Market Regulatory Departments' or 'PMRD') are hereby authorized, according to the work needs and in accordance with the relevant provisions of the Anti-monopoly Law of the People's Republic of China, to be responsible for antitrust law enforcement work within their respective administrative areas".This means both the central-level SAMR and the provincial-level PMRD have the authority to investigate vertical agreements and dominant firm conduct.

1.2  What investigative powers do the responsible competition authorities have?

When investigating monopolistic conduct, the SAMR may take the following measures:

  1. enter the business premises of undertakings which are under investigation or any other relevant place to inspect;
  2. conduct interrogations of undertakings which are under investigation, interested parties, or other relevant entities or individuals, requiring them to disclose relevant information;
  3. review and duplicate the relevant business documents, agreements, accounting books, business correspondence, electronic data, files, or documentation of undertakings which are under investigation, interested parties, and other relevant entities and individuals;
  4. seize and detain the relevant evidence; and
  5. check the bank accounts of undertakings which are under investigation.

1.3  Describe the steps in the process from the opening of an investigation to its resolution.

  1.  Pre-investigation

At this stage, the SAMR or local PMRD will conduct the external investigation to understand the background and verify the evidence obtained to determine whether to formally initiate the antitrust investigation.  The local PMRD may communicate with the SAMR before initiating the investigation.

  1. The initiation of the investigation

A local PMRD shall, within seven working days after the initiation of an antitrust investigation, report the case to the SAMR for its records.  No notice of investigation can be obtained by the entity under investigation.

  1. Fact-finding and dawn raid

After the initiation of the investigation, the SAMR may carry out a dawn raid on the undertaking under investigation by conducting an on-site inspection to collect and fix evidence, conducting interrogations, and requesting the undertaking under investigation to provide documents.

Undertakings which are under investigation and interested parties have the right to voice their views.  The SAMR shall verify the facts, reasons and evidence presented by undertakings under investigation or interested parties.

The SAMR will ask undertakings under investigation to submit documents or provide explanations for certain conduct.  The fact-finding process may last for several months, even years, and the scope of the investigation may be upstream, downstream or involve competitors of the undertaking under investigation.

  1. Decision on cancelation, suspension of investigation, resumption of investigation or termination of investigation

The investigation can be cancelled if no violation can be found. The investigation can be suspended if the undertaking which submits an application agrees to undertake certain specific measures that will lead to the elimination of the effect of suspicious practices within a time limit designated by the SAMR. If such measures are well implemented in the agreed period of time, the SAMR may terminate the investigation. The investigation could be resumed if the measures are not implemented as promised.

  1. Expert argumentation meeting

There is an Expert Committee under the Anti-monopoly Commission of the State Council.17 experts in the Expert Committee can be called on by the SAMR to attend an expert argumentation meeting to give an expert opinion on the findings and preliminary decisions of the SAMR.

  1. Oral notice for the finding of the case

After the expert argumentation meeting, the SAMR will release its findings and preliminary decision to the undertaking under investigation orally.  The oral notice will not include the fine base or the rate of fine.  The undertaking under investigation can provide the SAMR with a statement or argument to challenge the facts and the law's application.

  1. Prior notice for the administrative penalty

After communication between the SAMR and the undertaking under investigation, the SAMR will issue the Prior Notice for the Administrative Penalty.  This is a notice in written form stating the fact, the violation found, the fine base and the rate of fine.  It will state the right for the undertaking under investigation to make a statement, argument or apply for a hearing.  The undertaking under investigation may challenge the decision, the fine base and the rate of fine to reduce the penalty.

  1. Final decision on the administrative penalty

After the undertaking under investigation provides the statement, argument and/or attends the hearing, the SAMR will issue the final decision on the administrative penalty.  The wording of the decision could be negotiated if it contains the trade secret of the undertaking under investigation.

  1. Publication

A decision on the administrate penalty or a decision on suspension or termination of investigation, will be released to public through the website of SAMR at http://www.samr.gov.cn/fldj/tzgg/xzcf/.

  1. Administrative review or administrative lawsuit

If the undertaking under investigation does not accept a decision made by the SAMR, it may apply for administrative review or file an administrative lawsuit.

1.4  What remedies (e.g., fines, damages, injunctions, etc.) are available to enforcers?

In the case where an undertaking violates the AML by entering into and implementing a vertical monopoly agreement, the SAMR shall order a halt to illegal activities, confiscate illegal earnings, and impose a fine of between 1% and 10% of the preceding year's sales revenue; if the monopoly agreement had been entered into but not yet been implemented, a fine of no more than RMB 500,000 shall be imposed.

Where an undertaking reports, on its own initiative, a monopoly agreement entered into by said undertaking to the SAMR as well as providing key evidence, the SAMR may consider a lighter fine, or forgo the fine altogether.

Where an undertaking violates the AML by abusing its dominant market position, the SAMR shall order a halt to the offending conduct, confiscate the illegal earnings, and impose a fine of between 1% and 10% of the preceding year's sales revenue.

1.5  How are those remedies determined and/or calculated?

To determine the specific amount of a fine, the SAMR shall consider factors such as the nature, extent and duration of the monopolistic conduct.

Step 1: The fine base

The fine will be imposed on the basis of the preceding year's sales revenue. In general, the "preceding year" shall be the year prior to the initiation of the investigation.  In some cases, the "preceding year" is the year prior to the decision of imposing the fine.

The scope of the fine may be narrowed to the relevant products under the investigation and the geographical area covered by the monopolistic conduct.  If the geographical area concerned is beyond the territory of China, the SAMR generally takes the China-wide domestic sales revenue of relevant products as the basis for calculating fines, but it may take worldwide sales as the basis for calculating fines.  However, since the establishment of the SAMR, it has used the total sales revenue of the undertaking under investigation as the base to impose a fine, in order to increase deterrence and unify the standard of antitrust enforcement.

The undertaking subject to the fine could be narrowed down to the undertaking which directly implements the monopolistic conduct.  However, the SAMR may impose fines on a parent company, provided that the parent company can exercise decisive influence over the undertaking which has engaged in the monopolistic conduct.

Step 2: The ratio of fine

In general, the initial proportion of the fine against vertical agreements will be 1% according to the Draft Guidelines on the Determination of Illegal Gains and Fines in Relation to undertakings' Monopolistic Conduct ("Draft Guidelines on Fines"). The initial proportion of the fine against abusive conduct will be 2% or 3%.

Step 3: Adjust the ratio according to aggravating or mitigating circumstances

1. Adjustments due to aggravating circumstances

Aggravating circumstances Adjustment
Playing a leading role or coercing other undertakings to implement the monopolistic conduct or preventing other undertakings from discontinuing the monopolistic conduct. +1%
Committing multiple monopolistic conduct in the same case or having violated the AML in the past. +1%
As to the duration, one year shall be taken as the base; the proportion of fines will increase by 1% for each additional year; by 0.5% for addition of a period less than six months; and by 1% for addition of a period more than six months but less than one year. +0.5% up to a total of 10%
Continuing the monopolistic conduct after being ordered to stop by anti-monopoly enforcement agency. +0.5%
Other aggravating circumstances. +0.5%

2. Adjustments due to mitigating circumstances

Mitigating circumstances Adjustment
Being coerced by other undertakings to implement the monopolistic conduct. -1%
Being forced or coerced by administrative authorities to implement the monopolistic conduct. -1%
Cooperating with the anti-monopoly enforcement agency and making meritorious performance. -1%
Taking the initiative to eliminate the harm and consequences of illegal activities. -1%
Taking the initiative to mitigate the harm and consequences of illegal activities. -0.5%
Voluntarily providing relevant evidence of other undertakings' violation of the AML. -0.5%
Other aggravating circumstances. -0.5%

The SAMR has full discretion to adjust the initial ratio of fines by considering the above aggravating or mitigating circumstances.

1.6  Describe the process of negotiating commitments or other forms of voluntary resolution.

In general, the leniency policy and the commitment negotiation do not apply to vertical monopoly agreements.  However, according to the Interim Provisions on the Prohibition of Monopoly Agreements to be effective on September 1, 2019, the commitment negotiation is applicable to vertical monopoly agreements.

The investigation against abusive conduct may be suspended through commitment negotiation.  The process is as follows:

  1. timely filing of the application to suspend the investigation, together with the initial commitment to establish the foundation of the negotiation between undertakings and the SAMR;
  2. the undertaking may negotiate with the SAMR regarding the content of commitments; and
  3. if the SAMR holds that (1) the facts are clear, and (2) the committed measures are sufficient to eliminate the effects caused by the suspicious monopolistic conduct, the SAMR may decide to suspend the investigation.

Not all antitrust investigation can be ended with commitment.  It should be evaluated and negotiated on a case-by-case basis.  After the SAMR investigates and verifies the suspected monopoly agreement, if the monopoly agreement is constituted, the SAMR no longer accepts the application for suspension of the investigation proposed by the undertaking.

1.7  Does the enforcer have to defend its claims in front of a legal tribunal or in other judicial proceedings? If so, what is the legal standard that applies to justify an enforcement action?

The SAMR, as the anti-monopoly law enforcement agency designated by the State Council, is responsible for the AML's enforcement.  In general, it does not need to defend its claims in front of a legal tribunal or in other judicial proceedings before issuing a decision.

However, in some cases the Anti-monopoly Commission could be involved in the final decision-making process if the proposed decision by the SAMR is controversial.  Article 9 of the AML provides that the State Council establishes the Anti-monopoly Commission to take charge of organising, coordinating, and directing anti-monopoly activities and to fulfil its duties; inter alia, to coordinate anti-monopoly administrative law enforcement.

1.8  What is the appeals process?

Where any party concerned is dissatisfied with any decision made by the SAMR about vertical monopoly agreement or abusive conduct, it may apply for an administrative review or file an administrative lawsuit according to law.

1.9  Are private rights of action available and, if so, how do they differ from government enforcement actions?

Yes.  Parties and non-parties to a vertical agreement can bring damages claims if they have suffered losses due to an anticompetitive clause contained in a vertical agreement.  Anyone who suffered from the abusive conduct can file an antitrust suit against the undertaking which holds dominant market position to claim damages.

The differences between private and public enforcement are as follows:

  1. The SAMR treats resale price maintenance ("RPM") as a per se violation, but allows the undertaking to justify its conduct under Article 15 of the AML. In private enforcement, however, the RPM is reviewed by the People's Court under the rule of reason.
  2. In a private litigation against abusive conduct, the plaintiff has to establish a prima facie case.  It is will be very difficult to find evidence to prove dominance and illegal conduct.  However, in a public enforcement case, the SAMR has the authority to request documents from the undertaking under investigation and can carry out a dawn raid on the target to obtain a large volume of materials.  It comparatively easier for the SAMR to prove abusive conduct.
  3. The plaintiff of a private action can withdraw the complaint, which means it has a certain control over the proceeding.  However, after the SAMR has initiated the antitrust investigation based on the report of the whistleblower, the whistleblower cannot stop the public enforcement by withdrawing the report.
  4. The SAMR can confiscate the illegal earnings, which could be higher than the damage claimed by the plaintiff, assuming the illegal conduct lasts for years and there are many victims similar to the plaintiff.  In addition, the fine imposed by the SAMR could be 10% of all sales revenues of the target, which may be much higher than the damage ruled by the People's Court.

1.10  Describe any immunities, exemptions, or safe harbours that apply.

  1. Safe harbour

There are no safe harbours available under the AML and relevant antitrust regulations of China.

  1. Exemptions

Article 15 of the AML lists the circumstances under which an agreement containing a vertical restraint can be exempted from the prohibition under the AML.  These circumstances are:

  1. advancing technology, or researching and developing new products;
  2. improving product quality, lowering cost, increasing efficiency, unifying specifications and standards, or implementing a division of labour based on specialisation;
  3. improving the operational efficiency and competitiveness of small and medium-sized undertakings;
  4. realising public interests such as energy conservation, environmental protection, and rescue and relief efforts;
  5. alleviating problems related to a serious drop in sales or obvious overproduction during an economic downturn;
  6. protecting legitimate interests during foreign trade or foreign economic cooperation; or
  7. other circumstances specified by laws or the State Council.

If the undertaking claims that one of the first five circumstances exists, it must also prove that the agreement does not significantly restrict competition in the relevant market and allows consumers a share of the resulting benefit.

1.11  Does enforcement vary between industries or businesses?

In general, the AML does not contain any provisions on vertical agreement and abusive conduct that apply to specific sectors.  Based on the current laws and regulations, the anti-monopoly enforcement does not vary between industries or businesses.

However, an Anti-monopoly Guideline in the Automobile Sector (draft for comments) was released in April 2016.  If the Guideline can be released as scheduled in 2019, it will be the first industry-specific guideline to regulate anti-monopoly enforcement and compliance.

1.12  How do enforcers and courts take into consideration an industry's regulatory context when assessing competition concerns?

The SAMR and the People's Court will consider the regulatory context of the industries of vital economic or national security importance in which the state-owed sector of the economy holds the position of control or industries which implement monopolisation legally.  Article 7 of the AML provides that "the state protects the lawful business activities of the undertakings from industries of vital economic or national security importance in which the state-owned sector of the economy holds the position of control or industries which implement monopolization legally...".

According to Article 22 of the Interim Provisions on Prohibiting Acts of Abuse of a Dominant Market Position to be effective on September 1, 2019, "undertakings in public utility domains such as water supply, power supply, gas supply, heat supply, telecommunications, cable TV, postal services and transportation shall operate according to the law, and shall not abuse their dominant market position to harm consumers' interests".

1.13  Describe how your jurisdiction's political environment may or may not affect antitrust enforcement.

In general, the SAMR shall only consider competition issues when making the decision.  The political environment does not affect anti-monopoly enforcement.

Article 4 of the Interim Provisions on Prohibiting Acts of Abuse of a Dominant Market Position provides, "when investigating and dealing with acts of abuse of a dominant market position, anti-monopoly law enforcement agencies shall treat all undertakings equally".  Similarly, Article 4 of the Interim Provisions on the Prohibition of Monopoly Agreements provides, "an anti-monopoly law enforcement agency shall treat all undertakings equally when investigating and punishing monopoly agreements".

However, the industrial policy may be considered by the SAMR.  For instance, when an undertaking applies for exemption under Article 15 of the AML, most circumstances listed in that provision are related to industrial policy.  The exemption is to find a balance between the competition policy and the industrial policy.

1.14  What are the current enforcement trends and priorities in your jurisdiction?

 In 2018, the SAMR investigated 32 monopoly and abuse-of-dominance cases, 15 of which were closed.  The investigations mainly targeted the pharmaceutical, utilities and transportation sectors.

In December 2018, two chlorpheniramine maleate API (active pharmaceutical ingredient) manufacturers were fined RMB 10.04 million (USD 1.4 6million) for abuse of dominance.  There are pending antitrust investigations against API suppliers as of early 2019.  In 2019, antitrust enforcement towards API producers is a high priority for the SAMR.

The SAMR has publicly expressed that in 2019 it will focus on anti-competitive conduct in sectors including utilities, pharmaceuticals (especially API), construction, and consumer products, which directly relate to people's livelihoods.

1.15  Describe any notable case law developments in the past year.

1. Chlorpheniramine maleate APIs

In December 2018, the SAMR imposed RMB 10.04 million (USD 1.46 million) in cumulative fines on Hunan Er-Kang Medical Operation and Henan Jiushi Pharmaceutical for abuse of dominance in the domestic market for chlorpheniramine maleate APIs.  The SAMR held that the two companies had a dominant position in the Chinese market for chlorpheniramine maleate APIs and engaged in the following activities involving abuse of market dominance:

  1. selling chlorpheniramine maleate APIs to downstream operators at unfair high prices;
  2. refusing to provide chlorpheniramine maleate APIs to downstream operators without justification; and
  3. forcing downstream operators to buy other pharmaceutical excipients.

The SAMR determined that both companies hiked the price of chlorpheniramine maleate APIs and caused a supply shortage, severely impaired fair competition in the market, infringed on the interests of downstream undertakings, and caused adverse effects on society.  The SAMR determined that their conduct violated Article 17 of the AML and amounted to an abuse of dominance in the relevant market.

2. Chang'an Ford RPM

In June 2019, the SAMR fined Chang'an Ford, Ford Motor Co's local joint venture, RMB 162.8 million for setting a minimum resale price for its cars in the Chinese municipality of Chongqing since 2013.  The SAMR determined that Chang'an Ford's actions deprived downstream dealers of their pricing autonomy, eliminated and restricted intra-brand competition, as well as impairing fair competition in the market and consumers' legal interests.

The fine is equivalent to 4% of Chang'an Ford's sales in Chongqing in 2014, the year before the investigation was formally initiated.

2  VERTICAL AGREEMENTS

2.1  At a high level, what is the level of concern over, and scrutiny given to, vertical agreements?

Article 14 of the AML states that RPM is prohibited.  The wording of Article 14 is strong and the SAMR treats RPM as per se illegal.  In addition, Article 46 of the AML authorises the SAMR to impose a fine of 1% to 10% of sales revenue of the preceding year, which is no different from that imposed on cartels.  The explicit wording of the AML and the practice of the SAMR indicate that China takes a high level of concern over RPM.

2.2  What is the analysis to determine (a) whether there is an agreement, and (b) whether that agreement is vertical?

Article 13 of the AML defines a monopoly agreement as an "agreement, decision or other concerted practice which eliminates or restricts competition".  The agreement does not need to be in written form.

Vertical agreement is a kind of agreement made by undertakings in different markets, which have upstream and downstream relationships.

2.3  What are the laws governing vertical agreements?

The laws governing vertical agreements are Articles 14, 15 and 46 of the AML.  Currently, there are no antitrust regulations which provide more detailed rules beyond the scope of the above provisions.

2.4  Are there any types of vertical agreements or restraints that are absolutely ("per se") protected?

There are no laws and regulations to state that any type of vertical agreements or restraints are a per se violation.  The People's Court will evaluate a vertical agreement under the rule of reason.  However, the SAMR treats RPM as a per se violation, but allows the undertaking under investigation to submit an application for exemption under Article 15 of the AML.

The rule of reason approach to RPM litigation was first introduced in Rainbow v. Johnson & Johnson heard by the Shanghai Higher People's Court in 2013.  In 2018, the Guangdong Higher People's Court reconfirmed the rule of reason approach in Dongguan Guochang v. Dongguan Shengshi & Dongguan Heshi when judging RPM.  The judge held that whether RPM violates the AML depends on the purpose and effect of eliminating and restricting competition.

2.5  What is the analytical framework for assessing vertical agreements?

The general analytical framework underpinning the assessment of vertical agreements under the AML is as follows: if the SAMR finds that an agreement fixes resale prices or sets minimum resale prices, it is likely to conclude that entering such vertical agreement violates Article 14 of the AML.  However, the undertakings can still argue that the prohibition in Article 14 should be exempted on the grounds that the agreement fulfils one of the circumstances listed in Article 15 of the AML and the agreement does not significantly restrict competition in the relevant market and allows consumers a share of the resulting benefit.

2.6  What is the analytical framework for defining a market in vertical agreement cases?

Because a vertical agreement is concluded between undertakings in two different markets, it may involve at least two relevant markets.  However, as a vertical agreement will only affect competition on one relevant market, the market definition may only focus on the market affected.

The analytical framework for defining a relevant market in a vertical agreement case will be no different to any other antitrust case.  The relevant product market and the geographic market will be defined.  In defining the relevant market, demand substitution may be analysed based on the characteristics, purpose, and price of product.  Supply substitution may, when necessary, also be analysed.  If the scope of the market in which undertakings compete is unclear or difficult to define, the relevant market may be defined according to the SSNIP (Small but Significant Non-transitory Increase in Price) test.

2.7  How are vertical agreements analysed when one of the parties is vertically integrated into the same level as the other party (so-called "dual distribution")? Are these treated as vertical or horizontal agreements?

When dealing with the dual distribution, both vertical issues and horizontal issues may be considered.

  1. Vertical agreement

If the following conditions are met, the dual distribution is likely to be considered a vertical agreement:

  1. the agreement is non-reciprocal; and
  2. the supplier is a manufacturer/service provider and distributor, while the purchaser is just a distributor.
  1. Horizontal cooperation

If parties are competing at both manufacture/service level and the distribution level and the agreement is reciprocal, the agreement is more likely to be considered a horizontal arrangement.  Exchange of sensitive information between the parties is prohibited.

2.8  What is the role of market share in reviewing a vertical agreement?

In practice, if the relevant market share of the undertakings participating in a vertical agreement does not exceed 25%, it may be assumed that the agreement will not eliminate or restrict competition.  According to the Interim Provisions on the Applicable Standards for Cases of Concentration of Operators Subject to Simplified Procedure, if both upstream and downstream operators participating in concentration hold less than 25% of market share in the upstream and downstream market, the transaction is subject to the simplified procedure.

If the undertaking in a vertical agreement has a market share of 25% or more, it is likely that the vertical restraint will have a negative effect on competition.  More importantly, the vertical restraint could be considered abusive conduct if the undertaking holds a market share of more than 50%.

2.9  What is the role of economic analysis in assessing vertical agreements?

Economic analysis is inevitable in every antitrust case, including cases involving vertical agreement.  According to Article 10 of the Provisions of the Supreme People's Court on Application of Laws in the Trial of Civil Disputes arising from Monopolistic Practices, the parties may apply to the People's Court for permission to engage professional organisations or personnel to conduct market research or make economic analysis reports with respect to the relevant professional issues.

In addition, according to Article 7 of the Guidelines of the Anti-monopoly Commission under the State Council Concerning the Definition of Relevant Markets, the SAMR shall encourage undertakings to define relevant markets according to the specific circumstances of each case by using objective, genuine data and adopting economic analysis methods.

In Rainbow v. Johnson & Johnson both parties retained economists to provide expert reports regarding RPM to the People's Court.

2.10  What is the role of efficiencies in analysing vertical agreements?

According to Article 1 of the AML, said law pursues multiple objectives, which include promoting efficiency of economic operations.  The objective of promoting efficiency would also apply to the vertical agreements.

In addition, if the vertical agreement can result in a higher quality of product/service, lower price, easing of market entry, or promoting innovation, the undertaking may apply for an efficiency exemption under Article 15 of the AML.

2.11  Are there any special rules for vertical agreements relating to intellectual property and, if so, how does the analysis of such rules differ?

The SAIC issued the Rules on Prohibition of Restriction or Elimination of Competition through Abuse of Intellectual Property Right in 2015, which address the issue of exclusive grant-back of technology improvement, prohibition of challenging the validity of the IPR, etc.  The Rules do not change the analysis framework of vertical agreements under the AML.

2.12  Does the enforcer have to demonstrate anticompetitive effects?

When the SAMR decides whether a vertical agreement is illegal, it only needs to determine whether the agreement falls under the circumstances described in Article 14 of the AML.  The anticompetitive effects may be evaluated only when the undertaking under investigation files an application for exemption under Article 15 of the AML.

2.13  Will enforcers or legal tribunals weigh the harm against potential benefits or efficiencies?

The People's Court will weigh the harm against potential benefits or efficiencies in a litigation regarding vertical agreement.  The SAMR may not consider benefits or efficiencies unless there is an application for exemption under Article 15 of the AML.  In addition, according to Article 46 of the AML, where the monopoly agreement has not been implemented, a fine of less than RMB 500,000 may be imposed.

2.14  What other defences are available to allegations that a vertical agreement is anticompetitive?

A possible defence is to argue that there is no vertical agreement under the AML. An agent-principal arrangement in which an undertaking agrees to perform certain services on a supplier's behalf for a sales-based commission payment shall not be considered a vertical monopoly agreement under the AML.

Since the People's Court will consider the anti-competitive effect of the vertical agreement, undertakings may prepare evidence regarding the market share of the parties, the competition situation on the relevant market, the ability of the undertaking to control the market, the financial and technical ability of undertaking, the degree of reliance of the trading counterpart, and market entry, to formulate possible defences.

2.15  Have the enforcement authorities issued any formal guidelines regarding vertical agreements?

There are no formal guidelines regarding vertical agreements.

2.16  How is resale price maintenance treated under the law?

The AML mainly stipulates resale price maintenance in Articles 14, 15 and 46.  Article 14 (1) and (2) respectively prohibit fixing the price of commodities for resale to a third party and restricting the minimum price of commodities for resale to a third party.

The SAMR treats RPM as per se illegal.  The People's Court will evaluate the anticompetitive effect.  In Rainbow v. Johnson & Johnson, the Higher People's Court of Shanghai held that when analysing the nature of the RPM, there are four prongs that should be considered, and that constitute the basic method for the Shanghai Higher People's Court to analyse and evaluate the RPM.  They are:

  1. whether the relevant market competition is sufficient;
  2. whether the defendant has a very strong market position;
  3. the motive of the defendant to impose the RPM; and
  4. the competition effect of the RPM.

2.17  How do enforcers and courts examine exclusive dealing claims?

Exclusive dealing could be considered abusive conduct under Article 17 of the AML.

In an antitrust investigation, the SAMR can presume an undertaking holds dominance if its market share is above 50%.  The SAMR could determine that exclusive dealing by a dominant firm violates Article 17 of the AML, unless there is an acceptable justification.

Justifications for exclusive dealing include:

  1. it is essential for meeting the product safety requirements;
  2. it is essential for protecting intellectual property rights;
  3. it is essential for protecting particular investments undertaken for transactions.

In an antitrust lawsuit, because it is not sufficient for the plaintiff to presume dominance solely on the basis of high market share, and it is hard to prove the anticompetitive effect of exclusive dealing, it is very hard for the plaintiff to challenge exclusive dealing.

2.18  How do enforcers and courts examine tying/supplementary obligation claims?

Tying could be considered abusive conduct under Article 17 of the AML.

In several antitrust investigations against tobacco companies, the local anti-monopoly enforcement agencies found the tobacco companies bundled the sale of popular cigarette brands with unpopular ones by restricting the supply of popular brands.

In the Qualcomm antitrust investigation, the anti-monopoly enforcement agency found Qualcomm abused its dominant market position in the wireless standard essential patent ("SEP") licensing market by tying non-SEP licensing with SEP licensing without justification.

In the retrial of Wu Xiaoqin v. Shaanxi Radio and Television Network Media (Group) Co., Ltd., the Supreme People's Court ruled that the undertaking with a market-dominant position bundled sales of separate services or products, constituting a tie-in sale prohibited by the AML.

2.19  How do enforcers and courts examine price discrimination claims?

Price discrimination is an abusive conduct regulated under Article 17 of the AML.  Price discrimination is not a target of vertical agreement investigation unless the undertaking holds a dominant market position in the relevant market.

It is very difficult for the SAMR and the People's Court to identify price discrimination.  First, it is normal for a firm to provide different prices to different trading counterparts.  The price difference within a reasonable range will be legal under the AML, even for dominant firms.  Second, it is very hard for enforcers or judges to draw a line as to what price difference constitutes discrimination, because the markets vary from one to another, and as the markets are changing, the enforcers and courts cannot set up a benchmark that is forever correct.

2.20  How do enforcers and courts examine loyalty discount claims?

Loyalty discount is an abusive conduct regulated under Article 17 of the AML.  Loyalty discount is not a target of vertical agreement investigation unless the undertaking holds dominant market position in the relevant market.

In the antitrust investigation against Tetra, the anti-monopoly enforcement agency concluded that from 2009 to 2013, Tetra abused its dominant market position in three relevant markets in China, and concluded that the company had no legitimate reason to carry out loyalty discounts.  In the penalty decision, the anti-monopoly enforcement agency recognised that discount is a common commercial behaviour, which can promote market competition and benefit consumers.  In the meantime, the authority believes the loyalty discount implemented by undertakings with dominant market position should be regulated when it combines with specific market conditions and has obvious anticompetitive effect.

2.21  How do enforcers and courts examine multi-product or "bundled" discount claims?

Multi-product or "bundled" discount is an abusive conduct regulated under Article 17 of the AML.  It is not a target of vertical agreement investigation unless the undertaking holds a dominant market position in the relevant market.

Multi-product or "bundled" discount may be determined illegal if the bundle is priced below cost, or a competitor providing a competitive product cannot match the discount without pricing below cost on that product.  The bundled discount is very popular in the Chinese online and offline markets.  However, there is no antitrust investigation or litigation against bundled discount in China.

2.22  What other types of vertical restraints are prohibited by the applicable laws?

1. Prohibiting distributors from passive sale

To restrict passive sale under the territory allocation in a vertical arrangement could be determined by the SAMR to be a violation of the AML.

According to the Guidelines on Anti-Monopoly in the Automobile Industry (Draft for Comment), manufacturers could restrict the distributor to provide goods within a certain region and not to carry out sales in any other distribution region.  However, manufacturers may not restrict passive sales by a distributor.

Passive sales mean that distributors do not actively market the goods or services to consumers but deliver the goods or services upon their request.  The following are passive sales, which cannot be prohibited by manufacturers:

  1. Where a consumer from region A buys goods in region B, this is a passive sale for distributors designated within region B.
  2. Where a consumer contacts the distributor after visiting the website of either such distributor or a third party and such contact contributes to a deal, such deal is regarded as a passive sale.
  3. Where distributors publish relevant information for indefinite consumers on their own website or the website of a third party and consumers contact the distributors, the deals made therefrom shall be deemed as passive sales of distributors.

2. Prohibiting distributors from cross-supply among themselves

To restrict distributors from cross-supply among themselves under the territory allocation in a vertical arrangement could be determined by the SAMR as a violation of the AML.

2.23  How are MFNs treated under the law?

Most-favoured-nation ("MFN") clauses in the context of vertical agreements are most-favoured-customer clauses, where the supplier grants the distributor a price that will not be less favourable than the prices granted to its other customers.  MFN clauses may reduce the incentive to lower the resale price.  In addition, since the undertakings are prevented from applying differing prices in different distribution channels, MFN clauses may facilitate RPM.

The anti-monopoly enforcement agencies investigated the hotel reservation sector, but no fines were imposed in relation to MFN.

2.24  Describe any notable case developments concerning vertical merger analysis.

In April 2014, the China anti-monopoly enforcement agency approved Microsoft's acquisition of Nokia's mobile handset business under conditions.  The anti-monopoly enforcement agency found that the parties had vertical relationships in several markets.  Its review focused on three product categories: (1) smartphones; (2) mobile operating systems; and (3) patent licensing related to smartphones.

The anti-monopoly enforcement agency concluded that, post-acquisition, Microsoft would have the capability to restrict competition in the upstream patent licence market for smartphones, particularly with respect to Microsoft's package licence for Android phones.  It stated that Microsoft's patents covered by the Android program licence include technology that is "essential" for the production and manufacture of Android phones, which make up more than 80% of the Chinese smartphone market, including many standard-essential patents as well as 26 families of non-essential patents.  The anti-monopoly enforcement agency found that Microsoft has the motivation to increase competitors' costs by raising its patent royalty rates.  By contrast, it stated that the majority of Chinese smartphone manufacturers lack the "strength" to engage in effective cross-licensing; that patent licensing is a key barrier to entry for smartphone manufacturing; and that any increase in royalty fees would endanger the ability of Chinese smartphone manufacturers to compete, thereby reducing competition and injuring consumers.

The anti-monopoly enforcement agency also found that, post-acquisition, Nokia will have the incentive and ability to increase its own patent licensing royalty rates for smartphone-related patents.  It noted that Nokia has "thousands" of standard-essential patents relevant to telecommunications and was a "leader" in that area "in terms of patent quantity and quality", and that its patents are needed by smartphone manufacturers to conduct production activities.  The anti-monopoly enforcement agency posited that, because Nokia is exiting the downstream device and service market through the transaction, it will have reduced motivation to maintain lower patent royalty fees for the mobile industry.

As a result, the anti-monopoly enforcement agency imposed conditions on both Microsoft and Nokia:

1.With regard to its standard-essential patents ("SEPs"), Microsoft is required:

  • to honour its FRAND (fair, reasonable and non-discriminatory) commitments for SEPs;
  • not to seek injunctions or exclusion orders based on its SEPs against smartphones made in China;
  • not to require reciprocal licensing from licensees unless the licensee holds SEPs for the same industry; and
  • to transfer its SEPs only to third parties that agree to abide by these conditions.

2. For its non-essential patents, Microsoft is required:

  • to continue to provide non-exclusive licences to smartphone manufacturers within China;
  • to license such patents (a) for fees not exceeding those it charged prior to the concentration or contained in current licence agreements, and (b) on the same (in substance) non-price terms and conditions as prior to the concentration; and
  • for five years, not to transfer these patents to any third party, and thereafter to transfer them only to third parties that agree to abide by these conditions.

The conditions on Microsoft generally are imposed for eight years, with some exceptions.

3. Nokia is required:

  • to continue to honour its existing FRAND commitments for SEPs;
  • to confirm its support for the principle that, subject to reciprocity, injunctions should not be enforced based on SEPs to prevent implementation of a standard subject to FRAND undertakings unless the prospective licensee is unwilling to enter into or comply with a FRAND licence;
  • not to require licensees also to license Nokia's patents not subject to FRAND undertakings;
  • to transfer its SEPs to a new owner only subject to existing FRAND undertakings and its commitments to the Ministry of Commerce ("MOFCOM"); and
  • not to depart from its current generally offered FRAND per-unit running royalty rates for its current portfolios of cellular communication SEPs.

The conditions on Nokia are subject to a reporting duty for five years, but there does not appear to be a specific time limit on the conditions themselves.

3  DOMINANT FIRMS

3.1  At a high level, what is the level of concern over, and scrutiny given to, unilateral conduct (e.g., abuse of dominance)?

Abuse of dominance is the major claim in both antitrust litigation and antitrust investigation in China.

In 2018, 66 antitrust lawsuits were adjudicated by People's Courts at all levels in China; inter alia, 36 were abuse-of-dominance cases, 25 were monopoly agreement cases, and five were antitrust administrative lawsuits.  Abuse-of-dominance litigation accounts for more than 50% of all antitrust lawsuits in China.

In 2017, the SAIC conducted nine antitrust investigations, seven of them related to the abuse of dominant market position.  The statistics show that the big companies holding dominance are more likely to be targeted by the AML.

3.2  What are the laws governing dominant firms?

Articles 6, 17–19, and 47 of the AML regulate abusive conduct by dominant firms.

  1. Definition of dominance

Article 17 of the AML provides, "dominant market position refers to a market position where an undertaking can control the prices or volume of commodities or other trades in a relevant market, or can obstruct or affect other undertakings' capability to enter into a relevant market".

  1. Sanctions

According to Article 47 of the AML, "where an undertaking violates the provisions of this Law by abusing their dominant market position, the anti-monopoly law enforcement authorities shall order a halt to the offending behavior, confiscate the illegal earnings, and impose a fine of between 1% and 10% of the preceding year's sales revenue".

The Interim Provisions on Prohibiting Acts of Abuse of a Dominant Market Position to be effective on September 1, 2019 provide more detailed regulation to guide enforcement by the SAMR against abusive conduct.

3.3  What is the analytical framework for defining a market in dominant firm cases?

The analytical framework for defining a relevant market in a dominant firm case will be no different to any other antitrust case.  The relevant product market and the geographic market will be defined.  In defining the relevant market, demand substitution may be analysed based on the characteristics, purpose, and price of a product.  Supply substitution may, when necessary, also be analysed.  If the scope of the market in which undertakings compete is unclear or difficult to define, the relevant market may be defined according to the SSNIP test.

3.4  What is the market share threshold for enforcers or a court to consider a firm as dominant or a monopolist?

Market share is the first factor to be considered when determining dominance.

According to Article 19 of the AML, it may be assumed that one or more undertakings have a dominant market position if:

  1. an undertaking has one half or a higher market share in a relevant market;
  2. two undertakings have a two-thirds or higher market share in a relevant market; or
  3. three undertakings have a three-quarters or higher market share in a relevant market.

If one of the undertakings under the circumstances of Item 2 or 3 of the preceding paragraph has a market share of less than 10%, the undertaking shall not be assumed to have a dominant market position.

Where there is evidence showing that an undertaking which has been assumed to hold a dominant market position does not hold such a position, the undertaking shall not be determined to hold a dominant market position.

3.5  In general, what are the consequences of being adjudged "dominant" or a "monopolist"? Is dominance or monopoly illegal per se (or subject to regulation), or are there specific types of conduct that are prohibited?

The AML does not prohibit market dominance, only the abuse of dominant market position.

No abusive conduct by the dominant firm is per se illegal.  Article 17 of the AML provides, "an undertaking who holds a dominant market position is prohibited from engaging in the following practices of abuse of the said position:

  1. Selling commodities at unfairly high prices or buying commodities at unfairly low prices;
  2. Selling commodities at a price lower than cost without justified reasons;
  3. Refusing to trade with relevant trading counterparts without justified reasons;
  4. Restricting trading counterparts to the trading only with the said undertaking or its designated undertaking without justified reasons;
  5. Conducing tie-in sales without justified reasons, or adding other unreasonable conditions to the trading;
  6. Discriminating against trading counterparts of the same qualifications with regard to transaction price, etc., without justified reasons; and
  7. Other practices determined by the anti-monopoly law enforcement authorities as abuse of dominant market position".

3.6  What is the role of economic analysis in assessing market dominance?

Economic analysis is crucial in assessing market dominance.  In determining the dominant market position of an undertaking, the following factors should be taken into consideration:

  1. the market share of the undertaking and the competitive conditions in the relevant market;
  2. the ability of the undertaking to control the retail market or procurement market for raw materials;
  3. the financial status and technical conditions or capabilities of the undertaking;
  4. the extent of dependence on the undertaking by other undertakings in transactions;
  5. the level of difficulty for other undertakings to enter the relevant market; and
  6. other factors relating to the determination of the dominant market position of the undertaking.

None of the above factors is decisive.

3.7  What is the role of market share in assessing market dominance?

Market share is a very important factor to be considered in assessing market dominance, but it is not decisive.  The market dominance should be determined on a case-by-case basis.

In Qihoo 360 v. Tencent, even though QQ has had a market share of over 70% in the instant message market in China for more than seven years, the Supreme Court did not determine that Tencent holds a dominant market position in the relevant market because the market competition on the internet is dynamic.

In Shuqing Xu v. Tencent, an abuse-of-dominance litigation, the Intellectual Property Tribunal in the Supreme People's Court held that competition in internet environment has highly dynamic characteristics, and the role of market share cannot be overestimated.  The Court did not determine that Tencent holds a dominant market position in the relevant market, and stated that internet platform operators have the right to set reasonable platform management and disciplinary rules in order to achieve good platform management.

3.8  What defences are available to allegations that a firm is abusing its dominance or market power?

The most frequently used defences in a private enforcement case against abusive conduct are:

  1. the market definition is incorrect;
  2. the market share data is inaccurate;
  3. there is no dominant market position of the undertaking, because (1) the market share is under 50%, (2) the undertaking has no ability to control the retail market or procurement market for raw materials, (3) there is no substantial difference between the undertaking and other competitors on financial status and technical capabilities, (4) the trading partners are not dependent on the undertaking, and (5) there is no barrier for other undertakings to enter into the relevant market;
  4. there is no abusive conduct under Article 17 of the AML;
  5. there is no anticompetitive effect derived from the abusive conduct;
  6. there are justifications to justify the conduct;
  7. the plaintiff has no standing to file the lawsuit;
  8. there is no damage to the plaintiff by the alleged conduct; and
  9. there is no causation between the conduct and the alleged damage.

3.9  What is the role of efficiencies in analysing dominant firm behaviour?

In general, the AML pursues multiple objectives, which include both micro-economic efficiency and macro-economic development.  These objectives would also apply to the regulation of vertical agreements.  Specifically, these objectives are:

  1. preventing and prohibiting monopolistic conduct;
  2. protecting market competition;
  3. promoting efficiency of economic operations;
  4. safeguarding the interests of consumers and the general public; and
  5. promoting the healthy development of the socialist market economy.

Normally, the economic analysis will be aimed at specific economic issues, such as defining the relevant product market and geographic market, to prove dominance, to evaluate the anticompetitive effect, calculate damages, and to prove the causation.  In some cases, economic models will be established and calculation is involved.  Efficiencies will be touched on in the above economic analysis.

3.10  Do the governing laws apply to "collective" dominance?

Article 19 of the AML does apply to collective dominance.  If two undertakings have a two-thirds or higher market share in a relevant market, or three undertakings have a three-quarters or higher market share in a relevant market, they could be presumed to hold dominance in the relevant market.

Since the application of collective dominance in a case must meet many conditions, collective dominance is rarely used in China.  The Isoniazid API investigation in 2017 is the first time collective dominance has been used by the anti-monopoly enforcement agency.

3.11  How do the laws in your jurisdiction apply to dominant purchasers?

Dominant purchasers are subject to the AML.  Article 17 of the AML expressly prohibits undertakings with dominant market positions from purchasing goods at unfairly low prices.

According to the Administrative Measures on Fair Trade Between Retailers and Suppliers 2006, retailers may not abuse their advanced position to conduct the following unfair dealing:

  1. to refuse to accept the products after entering into a supply contract, unless the refusal may be attributed to suppliers, or upon the consent of suppliers, unless the retailers are willing to bear the incurred loss;
  2. to request suppliers to bear the liabilities for the loss of the products unstipulated in advance;
  3. retailers have no justifiable reasons to remove the products of suppliers, unless retailers remove the products of suppliers in accordance with the laws and regulations or the administrative decisions made by administrative authorities under law;
  4. to impel suppliers to unconditionally return sales profits, or stipulate the return of sales profit based on a certain sales amount, or request return sales profits without accomplishment of the agreed sales amount; or
  5. to impel suppliers to purchase the designated products or accept the designated service.

3.12  What counts as abuse of dominance or exclusionary or anticompetitive conduct?

Article 17 of the AML provides, "an undertaking who holds a dominant market position is prohibited from engaging in the following practices of abuse of the said position:

  1. Selling commodities at unfairly high prices or buying commodities at unfairly low prices;
  2. Selling commodities at a price lower than cost without justified reasons;
  3. Refusing to trade with relevant trading counterparts without justified reasons;
  4. Restricting trading counterparts to the trading only with the said undertaking or its designated undertaking without justified reasons;
  5. Conducing tie-in sales without justified reasons, or adding other unreasonable conditions to the trading;
  6. Discriminating against trading counterparts of the same qualifications with regard to transaction price, etc., without justified reasons; and
  7. Other practices determined by the anti-monopoly law enforcement authorities as abuse of dominant market position".

3.13  What is the role of intellectual property in analysing dominant firm behaviour?

Article 55 of the AML provides that: "this Law is not applicable to the undertakings' conduct in exercise of intellectual property rights pursuant to provisions of laws or administrative regulations on intellectual property rights; but this Law is applicable to undertakings' conduct that eliminate or restrict market competition by abusing its intellectual property rights."

According to the Provisions on the Prohibition of the Abuse of Intellectual Property Rights to Eliminate or Restrict Competition, undertakings with dominant market position are prohibited from engaging in certain types of conduct in exercising their IP rights that are deemed to constitute abusive conduct, which includes:

  1. refusal to license IP rights that amount to "essential facilities";
  2. imposing certain exclusivity restrictions;
  3. imposing unjustified tying and bundling requirements;
  4. attaching unreasonable trading conditions to an IP agreement, including inserting no-challenge clauses;
  5. engaging in discriminatory treatment; and
  6. engaging in practices that are inconsistent with FRAND principles in relation to the licensing of standard essential patents.

3.14  Do enforcers and/or legal tribunals consider "direct effects" evidence of market power?

Direct effects analysis has been used in several antitrust litigation cases, through the submission of an expert report by economists.  However, the judges are inclined to follow the traditional way to prove dominant market position.  In practice, it is hard to let enforcers and judges consider direct effects evidence of market power.

3.15  How is "platform dominance" assessed in your jurisdiction?

Platform dominance is very difficult to prove in China, because it involves a two-sided market, and the data are all in hands of the defendant and cannot be obtained by the plaintiff.  The concept of the platform market is introduced by the defendant in several civil antitrust litigations.  The aim of the defendant is to make it more difficult for the plaintiff to define the relevant market and to establish dominance.  Without the tool of discovery under the common law, it will be difficult to evaluate platform dominance.  It is possible for the SAMR to collect data in a public enforcement case, but to prove platform dominance will still be a big challenge.

3.16  Under what circumstances are refusals to deal considered anticompetitive?

Article 17 (3) of the AML stipulates that an undertaking who holds a dominant market position is prohibited from "refusing to trade with relevant trading counterparts without justified reasons".

According to the Guideline to the Price Conduct of undertakings of shortage drugs and API ("API Guideline"), undertakings of drugs and APIs with dominant market position may not, without justified reason, refuse to deal with the relative party in disguise by setting an excessively high selling price or an excessively low purchase price.  In analysing whether refusal to deal is justified, the API Guideline explicitly considers its impact on competition in the downstream market, namely that "the undertaking's existing capacity cannot meet the market supply, or the product needs to be produced for its own use, and its supply or self-use conduct has not seriously excluded competition in the downstream market".

4  MISCELLANEOUS

4.1  Please describe and comment on anything unique to your jurisdiction (or not covered above) with regard to vertical agreements and dominant firms.

Aftermarket dominance is addressed in several pending antitrust litigations.  In addition, according to the Guidelines on Anti-Monopoly in the Automobile Industry (Draft for Comment), original equipment manufacturers ("OEMs") without the dominant position in the sales market of new automobiles may be identified to have the dominant position in the automobile aftermarket of their respective brand.  Aftermarket dominance could be a shortcut to establish dominance in China.

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.

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