Many horizontal collaborations among competitors, and most
vertical supply or distribution arrangements, have both
procompetitive and anticompetitive effects. Exceptions, of course,
are price fixing and other "hardcore" or "per
se" illegal antitrust violations, which are considered
inherently anticompetitive. Until recently, the Chinese
Anti-Monopoly Law ("AML") provided little guidance for
companies operating in China about how to evaluate and balance
those procompetitive and anticompetitive effects so as to assess an
agreement's compliance with antitrust law. Recent guidance will
help in counseling companies doing business in China.
In effect since 2008, the AML prohibits certain horizontal and
vertical agreements that may restrict competition, so-called
"monopoly agreements." At the same time, monopoly
agreements may be exempted from the AML when three conditions are
met:
- The agreement has one of several enumerated beneficial purposes, namely to improve technology or R&D for new products; upgrade product quality, reduce costs, or improve efficiency; unify product specifications and standards, or implement production specialization; improve efficiencies or the competitiveness of small and medium enterprises; or save energy or protect the environment;
- The agreement will not substantially restrict competition; and
- Consumers will share the benefits.
This interplay between monopoly agreements and potential exemptions
has often been viewed as a sort of "rule of reason"
framework within the AML. But there had been little specific
guidance on how this framework might be applied. Nor are there any
published decisions from the Chinese anti-monopoly enforcement
agencies to shed light on actual practice.
This dearth of guidance began to change last year with the issuance
of intellectual property guidance by the State Administration for
Industry and Commerce ("SAIC"), one of China's three
antitrust agencies. The SAIC Rules on the Prohibition of Abuses of
Intellectual Property Rights that Eliminate or Restrict Competition
("SAIC IP Rules") contain "safe harbor"
provisions for agreements in certain low-market-concentration
contexts. Since then, the National Development and Reform
Commission ("NDRC"), another antitrust agency, has issued
for public comment several draft guidelines on AML exemptions.
These draft guidelines flesh out how the AML exemption process
should work going forward.
Once finalized, these guidelines are expected to be promulgated by
the Anti-Monopoly Commission ("AMC") of the Chinese State
Council and become binding on all three antitrust agencies (the
third being the Ministry of Commerce or MOFCOM, which handles
merger review).
The other five draft guidelines so far issued by NDRC on behalf of
the AMC are the Guidelines on Prohibiting Abuse of Intellectual
Property that Eliminates and Restricts Competition ("Draft IP
Guidelines"), Guidelines on Anti-Monopoly in the Automobile
Industry ("Draft Automotive Guidelines"), Guidelines on
Leniency, Guidelines on Commitments of Undertakings, and Guidelines
on Calculation of Illegal Gains and Penalties.
Most recently, in May 2016, the NDRC issued draft guidelines on the
General Conditions and Procedure for Exemption of Monopoly
Agreements ("Draft Exemption Guidelines"), which directly
address the issue of exemption under Article 15 of the AML.
Overview of the Guidelines
Most of the Draft Exemption Guidelines address the procedure for
a company to apply for an exemption when one of the anti-monopoly
agencies is investigating it for having made an anticompetitive
agreement. This includes the process for application, the materials
that must be submitted, factors to be considered by the agency,
publication of exemption decisions, and details about the
investigation process, including the collection of opinions and
data from other government agencies and third parties. Articles 7-9
of the Draft Exemption Guidelines provide more details regarding
the substantive exemption assessment.
Self-Assessment and Consultation. The overall
approach to exemption contemplated by the Draft Exemption
Guidelines appears similar to that taken by the European
Commission. Companies are encouraged to engage in "self
assessment" and are not required to apply to the authority in
advance for an exemption, but they may defend themselves based on
an exemption after the authority initiates an investigation. The
Draft Exemption Guidelines do provide for an "exemption
consultation" procedure, similar to the business review
process in the United States. However, the consultation procedure
appears to be available only under the unusual circumstance where
the agreement may affect competition in multiple jurisdictions and
the parties also plan to apply for exemption elsewhere or
consultation is filed by a nationwide industry association
regarding an agreement with issues of industrywide
significance.
Application for Exemption. Under the Draft
Exemption Guidelines, once an agreement is being investigated by
one of the antitrust agencies, the parties to the agreement can
file an application for exemption along with the relevant
supporting documents. It is not clear from the draft guidelines
whether the antitrust authority needs to prove the anticompetitive
effect of the agreement before the parties should file an
application exemption. That is, how can an investigated party know
whether its agreement falls under the monopoly agreement
prohibitions of AML Articles 13 and 14 and therefore that it should
apply for exemption? In practice, the investigated party may know
only when the agency orally tells it that the agency has
"competition concerns" about the agreement, shifting to
the party the decision whether to apply for an exemption.
Agreements that May Benefit from the Guidelines
Theoretically, all monopoly agreements caught under Articles 13
and 14 of the AML are eligible to qualify for exemption under
Article 15. As a practical matter, price fixing or other hardcore
violations should never be exempted.
Safe Harbor Provisions. Agreements covered by a
safe harbor would benefit most from the various draft guidelines,
because if enacted, the guidelines would provide confidence that
the conduct would not be challenged.
None of the Draft Exemption Guidelines provides a safe harbor
provision. But the SAIC IP Rules and the Draft IP Guidelines and
Draft Automotive Guidelines both contain such provisions and
provide useful guidance.
For example, the SAIC IP Rules have safe harbors for agreements
involving: (i) competitors with combined market shares of no more
than 20 percent of the affected relevant markets (or in markets
with at least four other independently controlled substitutable
technologies available at reasonable cost); or (ii) companies in
vertical relationships and none having more than a 30 percent
market share (or where at least two other independently controlled
substitutable technologies are available at reasonable cost).
Similarly, the Draft IP Guidelines indicate that, absent hardcore
violations specifically proscribed under Article 13 or 14,
IP-related agreements are presumed to satisfy the conditions for
exemption if they involve competitors with combined market shares
below 15 percent or vertical relationships in which no party has a
share exceeding 25 percent.
Finally, the Draft Auto Guidelines provide a safe harbor for
vertical territorial restrictions and customer restrictions if no
company has more than a 25-30 percent market share and the
agreement does not prohibit passive sales or cross-selling between
distributors.
It appears reasonable to conclude that, with the exception of price
fixing or other collusion and resale price maintenance
("RPM"), the antitrust risk for other types of agreements
will be low absent a dominant market position. There may even be a
presumption that the Article 15 exemption applies if the combined
market share is less than 15 percent in a horizontal relationship
or less than 25 percent in a vertical relationship. Agreements not
covered by the safe harbors will be evaluated for exemption on a
case-by-case basis, as discussed next.
How to Conduct Self-Assessment for Compliance
For all monopoly agreements falling outside safe harbors, the
parties still may seek to prove that the agreement meets the three
conditions set out by AML Article 15. The Draft Exemption
Guidelines' Articles 7-9 set out the factors that will be
considered by the agencies in determining whether to grant an
exemption based on the three conditions.
1. Beneficial purposes and indispensability.
Article 7 of the Draft Exemption Guidelines requires proof of
specific form and effect in realizing one of the beneficial
purposes listed in Article 15. Moreover, there must be a causal
link between the agreement and the claimed procompetitive purposes
plus proof the agreement is needed to realize such purpose. It
appears that the Exemption Guidelines have added a requirement of
"indispensability" for exemption, an element that is not
spelled out under the AML itself.
2. No substantial effect on competition. The
agencies also will examine whether the agreement substantially
restricts competition in the relevant market. From the Draft
Exemption Guidelines and other draft guidelines, it appears that
the factors to consider are essentially the same as those used to
determine whether one company has market power or a dominant market
position. The agencies will look at market share and also other
factors such as ability to control the downstream or upstream
market, financial or technical strength, the level of reliance of
their contractual counterparties on the products or technology
involved, barriers to entry, and the like.
3. Consumer's share in the benefit. That
customers will share the benefits of the agreement can be proved by
evidence that the agreement will produce innovation in products or
services, an increase in output volume or the variety of products,
an increase in quality or safety, lower prices, greater convenience
for customers, or other procompetitive benefits that customers will
enjoy.
Unclear How to Remedy an Anticompetitive Agreement
The draft Exemption Guidelines Article 12 provides for only two
decisions after the authority investigates and finds a prohibited
monopoly agreement: grant an exemption or refuse an exemption and
impose a penalty for AML violation. The draft Guidelines provide
that the agency will, before its notice of penalty decision, inform
the investigated company of the right to apply for an
exemption—presumably including the facts and legal basis for
potential violation.
It would be beneficial for businesses if the antitrust authorities
had greater flexibility to remedy anticompetitive effects while
preserving the social and economic benefits of an otherwise
prohibited agreement. In other words, it would be better for the
authorities to have the power to modify an underlying agreement
rather than making an absolute "yes or no" decision. This
flexibility could be achieved through a number of ways under the
AML, including by granting the powers to (i) recognize an exemption
subject to conditions (something that is not explicit in, but may
be implied from, AML Articles 44 and 45) or (ii) suspend or
terminate an investigation if the parties agree to remedy the
anticompetitive effect under AML Article 45. It would be helpful if
the final Exemptions Guidelines would clarify whether an agreement
subject to Article 45 commitments, if approved by the agency, could
be granted an Article 15 exemption or otherwise avoid a penalty
decision.
Article 13 of the draft Exemption Guidelines provides that the
agency will publish its exemption decisions. Publication will
assist the business community and legal counsel in understanding
the types of conduct that might qualify for exemption and providing
guidance on self-assessment in the future.
Conclusion
There is as of yet no published precedent of a monopoly agreement that has been granted exemption under the AML. This is partly due to the fact that so far there has been little enforcement of the AML except involving collusion and RPM, which generally will not qualify for exemption. However, the recent Draft Exemption Guidelines, IP Guidelines, and Automobile Industry Guidelines confirm the apparent willingness of the antitrust authorities to grant exemption or even a block exemption, if the competitive benefits of an agreement outweigh the potential anticompetitive effects. The draft Guidelines also provide detail and guidance designed to encourage companies to engage in self-assessment of any restrictive agreement that may give rise to competition concerns. Some of the draft Guidelines have been submitted to the State Council for review, possible change, and approval.
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.