Monopoly agreements include horizontal agreements between competitors, as well as vertical agreements between upstream and downstream undertakings. Among them, vertical monopoly agreements between manufacturers and distributors are commonly found in business practice. Monopoly agreements may have both anti-competitive and pro-competitive effects, and receive much attention because the relevant regulatory rules will have a direct impact on the business models of enterprises. On June 27, 2022, in order to implement the revised AML, the SAMR issued the Provisions on Prohibition of Monopoly Agreements (Draft for Public Comments) ("the Draft"), which adjusted the regulatory system of monopoly agreements. This article will explain the key provisions of the Draft from a practical perspective, with a view to providing reference for enterprises in their anti-monopoly compliance work.
- Clarifying the Definition of "Competing Undertakings" and Introducing the Definition of "Potential Competitors"
For the horizontal monopoly agreements between competitors, the Draft adds for the first time the definition of "competing undertakings" - the subject of the relevant agreements- and clarify that "actual competitors" and "potential competitors" may both become the subject of horizontal monopoly agreements, showing the convergence with international prevailing rules. According to the Draft, "actual competitors are undertakings actively competing in the same relevant market and potential competitors are undertakings having the plan and capability to enter the relevant market for competition in a certain period of time."
In practice, a typical scenario that may involve "potential competitors" is "reverse payment for drug patents". A "reverse payment for drug patents" refers to the payment of certain benefits from an originator to its potential competitor - a generic drug company- for the exchange of the generic drug company's promise not to challenge the validity of the relevant drug patents or to delay its entry to the relevant drug market. This practice usually delays the entry of potential competitors into the market and has a similar effect of eliminating and restricting competition as the commonly-found horizontal monopoly agreements that requires competitors to cease production or withdraw from the market. Although there are no relevant law enforcement cases in China for now, the Supreme People's Court ("SPC") has recently clarified through rulings that the People's Courts should take the initiative to preliminarily review whether agreements with the appearance of "reverse payment for drug patents" violate the AML, and may also hand in suspected illegal clues to the anti-monopoly enforcement authority when necessary.1
- Internalizing the Rules for Identifying RPM Violations under the new AML and Clarifying the Conditions of Applying "Safe Harbor" Rule
For vertical monopoly agreements, there are two main changes in the Draft: first, the internalization of the new provisions on the identification of illegal fixed or minimum resale price maintenance ("RPM") according to the second paragraph of Article 18 of the AML; second, the clarification of the specific conditions for the application of the "safe harbor" rule regarding vertical monopoly agreements according to the third paragraph of Article 18 of the AML.
- The Identification of illegal RPM
Before the amendment of the AML, when it comes to identifying illegal RPM, China's anti-monopoly enforcement authorities usually regard RPM as per se illegal and grant exemptions in exceptional cases, while the courts apply the rule of reason. In order to resolve this kind of conflict, the new AML integrates the two positions and clarifies the principle of "rebuttable presumption of illegality" applied to RPM, i.e. the undertaking needs to prove that its RPM practice does not have the effect of eliminating or restricting competition, otherwise the practice is presumed to be illegal. The same provision is also added in the Draft to match with the new AML, and it is expected that the corresponding provisions incorporated in the judicial interpretations by the SPC regarding monopoly disputes will be the next step.
- Conditions for the Application of the "Safe Harbor" Rule for Vertical Monopoly Agreements
The "safe harbor" rule is an internationally accepted system to exempt undertakings meeting certain conditions from prohibition, presuming their monopolistic acts have no anti-competition effects. The Anti-monopoly Guidelines for the Field of Intellectual Property Rights and the Anti-monopoly Guidelines for Automotive Industry issued by the Anti-monopoly Commission under the State Council in 2019 both set up the "safe harbor" provisions applicable to vertical monopoly agreements, but both guidelines are not universally applicable to all industries or legally binding. The new AML fills this gap by explicitly adding the "safe harbor" rule to vertical monopoly agreements clause in Article 18, and such universal "block exemption" and the "individual exemption" under Article 20 of the new AML provide undertakings with two lines of defense.
The Draft, on the one hand, is consistent with the new AML and excludes the application of the "safe harbor" rule on horizontal monopoly agreements; and on the other hand, on the basis of the new AML, specify the rules for applying the "safe harbor" rule on vertical monopoly agreements, including both substantive and procedural aspects:
- For the substantive aspect: vertical monopoly agreements are not prohibited if (1) the undertaking can prove that each party to the transaction, including its trading counterparty and itself, has the market share of less than 15% in the respective upstream or downstream market (unless otherwise provided by the anti-monopoly law enforcement authority of the State Council); and (2) there is no evidence to prove that the agreements eliminates or restricts competition (we understand that the burden of proof belongs to the enforcement authority or the plaintiff).
- For the procedural aspect: the undertaking may submit a written application to the AML enforcement authority2 to prove that it complies with the conditions for the application of the aforementioned "safe harbor" rule. The authority may decide not to file the case (if no case has been filed) or to terminate the investigation (if the case has been filed) if the relevant provisions have been satisfied after investigation and verification (third parties or the public may be consulted). From the perspective of systematic interpretation, the written application procedure is "ex post" (i.e., the undertaking has committed the relevant act and is facing investigation and verification by the authority or a case has been filed), rather than "ex ante" in case of seeking advice or comfort letter from antitrust enforcement authority. After all, the Draft does not provide that undertakings may seek "individual exemption" in advance. At present, with limited enforcement resources, the AML enforcement authority may not provide opinions or a comfort letter in advance on application of the "safe harbor" rule and individual exemption, but rather leave it to the undertakings' self-assessment and judgment.
For substantive aspect of the conditions for the application of the "safe harbor" rule, the following five points is noteworthy:
First, the "safe harbor" rule in the Draft apply equally to all vertical monopoly agreements (including RPM), but the market share threshold established is less than 15%, which significantly differs from both China's previous regulations and the prevailing international practice.3 In addition, the Provisions on Prohibition of Monopoly Agreements (Draft for Public Comments) issued by the SAMR in 2019 ("the 2019 Draft") had attempted to incorporate the "safe harbor" rule. Although it was not finally incorporated at that time due to factors such as lack of the basis in the higher law, the relevant provisions are still beneficial for reference. According to the 2019 Draft, the "safe harbor" rule does not apply to horizontal monopoly agreements and RPM explicitly prohibited by the AML; and apply to other horizontal or vertical monopoly agreements when the relevant market share does not exceed 15% or 25%. Obviously, compared to the "safe harbor" rule in the 2019 Draft, the Draft extends the application of the "safe harbor" rule on vertical monopoly agreements to RPM on the one hand, and, on the other hand, significantly lowers the market share threshold for all vertical monopoly agreements referring to the original provisions for other horizontal monopoly agreements. This provision is currently much controversial, and it remains to be seen whether further changes will be made to the scope of application of the "safe harbor" rule and the market share threshold in the final version, but it cannot be ruled out that the SAMR may still retains the market share threshold of 15% and will separately issue other departmental regulations in the future to increase the market share threshold of the "safe harbor" rule applied to non-RPM practices.
Secondly, the Draft only provides market share threshold for the application of the "safe harbor" rule, not the statistical caliber of market share. In practice, there are often multiple statistical calibers in the same market, and the market shares under different calibers may be different, or even significantly distinct. Moreover, undertakings are in dynamic competition, and the market share is constantly changing. Therefore, undertakings may need to adopt a relatively conservative compliance mindset when applying the "safe harbor" rule and carefully analyze the complex scenarios in practice.
Third, both the undertaking and the trading counterparty shall meet the market share threshold of less than 15%. Where there are several trading counterparties, the market share in the same relevant market shall be aggregated for calculation. In addition, the calculation of market share of the undertaking and its trading counterparty in the relevant market shall not only include the market share of the undertaking and the counterparty itself, but shall include the aggregate of market share of other entities controlled by them or on which they have decisive influence. The determination of "control" and "decisive influence" needs to be analyzed case by case and is highly professional, it is recommended that companies consult external anti-monopoly counsel if necessary.4
Fourth, according to the Draft, if undertakings want to apply the "safe harbor" rule, besides meeting the market share threshold, they also need to respond to "evidence to the contrary to prove that the agreement eliminates or restricts competition" proposed by the AML authority or the plaintiff. As for what is the standard for the "effect of eliminating or restricting competition" in dispute between the parties, referring to the decision of the SAMR in the Yangzijiang RPM case (2021), we understand that the vertical monopoly agreements not resulting in the price of the relevant products higher than the appropriate "competitive level price" may be a key criterion.5
Finally, the way in which the relevant market is defined will directly affect the level of market share, requiring demand and supply substitution analysis and comprehensive consideration of the specific products or services involved, as well as the specific transaction model. Considering that the definition of the relevant market is highly technical and professional, it is recommended that enterprises consult external anti-monopoly counsel if necessary.
- Clarifying the Criteria for Determining the Organizers and Substantive Helpers of Monopoly Agreements
The new AML adds that "an undertaking shall not organize other undertakings to reach a monopoly agreement or provide substantive assistance for other undertakings to reach a monopoly agreement", otherwise the undertaking will be liable for the same legal responsibility as the undertakings who reached the monopoly agreement. Based on this, the Draft clarifies the criteria for determining "organize" and "substantive assistance":
- The term "organize" refers to the following circumstances: (1) where the undertaking is not a party to a monopoly agreement, but it plays a decisive or dominant role in the process of reaching or implementing a monopoly agreement on the subject scope, main particulars and conditions of performance of the agreement; and (2) where the undertaking enters into an agreement with multiple trading counterparties and intentionally causes competing trading counterparties to carry out intention contact or information exchange through the undertaking to reach a monopoly agreement.
- The term "substantive assistance" refers to the act of an undertaking that does not carry out the organization activities stipulated in the preceding paragraph, but provides support for reaching or implementing a monopoly agreement, and has a causal relationship with and has a significant effect on elimination or restriction of competition.
The aforementioned new provisions are mainly to solve the issue of hub-and-spoke agreements. Previously, the undertakings who played the role of the "hub" in such cases were not punished because there was no legal basis. For example, in the Loudi Insurance Industry Monopoly Agreement (2012), an insurance brokerage company played the role of "hub" in the monopoly agreement involving eleven property insurance companies. Another example is the Glacial Acetic Acid Monopoly Agreement (2018), in which a drug wholesaler helped exchange sensitive information among three drug manufacturers to reach the monopoly agreement. After the new AML takes effect, all such intermediaries may be subject to anti-monopoly penalties.
- Internalizing Other Revisions in the AML and Improving the Application Rules for Commitment System and Leniency Program
In addition to the aforementioned points, the Draft also internalizes other amended provisions in the new AML, such as significantly increasing the administrative penalties for monopoly agreements, increasing the personal legal liability of executives, adding interviews with the person in charge as an investigation method, adding new confidentiality obligations of the AML enforcement authority regarding the personal privacy and personal information, emphasizing that platforms shall not engage in monopoly agreements and so on.
Meanwhile, the Draft further improves the rules for the application of the commitment system and the leniency program for monopoly agreements. For the commitment system, it is clarified that the authority shall not suspend the investigation (i.e., the commitment system shall not be applied) if it believes that the agreement constitutes a monopoly agreement after investigation and verification. For the leniency program, it is clarified that the application for leniency program should be made prior to docketing of a case, commencement of investigation procedures or issuance of an administrative penalty notice by the authority, and it also clarifies the materials to be submitted for the application and the applicant's obligation to fully cooperate with the investigation of the authority, showing the convergence with the Guidelines for the Application of Leniency Program to Horizontal Monopoly Agreement Cases.
Overall, this amendment has made significant changes to the regulatory system of monopoly agreements, absorbing the experience accumulated by the legislative, law enforcement and judicial bodies in the past 14 years. However, at the same time, some key issues, such as the scope and conditions of application of the "safe harbor" rule, are waiting for further refined. The changes in rules and the significant increase in penalties bring new challenges to corporate compliance. It is recommended that companies pay close attention to relevant legislative developments and carry out anti-monopoly compliance work in time to avoid the risk of monopoly agreements and the corresponding personal liability of executives.
1 (2021) Civil Judgment No.388 of the Supreme People's Court, AstraZeneca Co., Ltd v. Jiangsu Aosaikang Pharmaceutical Co., Ltd for infringement of invention patent rights.
2 Paragraph 1 of Article 16 of the Draft provides that: "An undertaking may submit a written application to the anti-monopoly law enforcement authority to prove that it complies with the provisions of Article 15 hereof. The application form shall state the following matters: (I) the operation status and equity relationship of the undertaking and its trading counterparty in the relevant market; (II) the market share of the undertaking and its trading counterparty in the relevant market and the calculation basis; (III) the agreement will not eliminate or restrict competition in the relevant market; and
(IV) other details to be stated as required."
3 The safe harbor rule in the Anti-monopoly Guidelines for the Field of Intellectual Property Rights and the Anti-monopoly Guidelines for Automotive Industry do not apply to vertical price restraints, and the market share threshold is set as no more than 30%. The safe harbor rule in the EU Vertical Block Exemption Regulation (2022/720) also do not apply to core restraints (including RPM, restrictions on passive sales and cross-supply, etc.) and the market share threshold is also set as no more than 30%.
4 According to the provisions of the Draft, control and decisive influence refer to "the rights or actual conditions of the undertaking that has or may have a decisive influence on the production and business activities or major decisions of other undertakings directly or indirectly, individually or jointly." This concept may be similar to the definition of "control" in the review of concentration of undertakings. The Interim Provisions on the Review of Concentrations of Undertakings issued by the SAMR in 2020 explicitly set out 8 factors to be considered in determining control or decisive influence. Article 4 of the Draft provides that: "for the determination of an undertaking's control over other undertakings or ability to exert decisive influence on other undertakings, the following circumstances shall be considered: the undertaking directly or indirectly holds voting rights or similar equities of other undertakings, and it has impact on the operation decisions and management such as the appointment and removal of senior management personnel, financial budgets and business plans of other undertakings, etc."
5 The Administrative Penalty Decision of the State Administration of Market Regulation (Antitrust Investigation  No. 29), the SAMR found that one of the key reasons why Yangtzijiang's behaviour had the effect of eliminating and restricting competition was that "the monopoly act of the party ... directly or indirectly raised the prices of the relevant products, resulting in retail prices as well as hospital prices not being reduced to the competitive level prices as they should, to the detriment of consumer welfare".
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