Recently, a book titled Collection of Antitrust Regulations and Guidelines 2019, authored by the Anti-Monopoly Bureau ("AMB") of China's State Administration for Market Regulation ("SAMR"), was published by China Industry and Commerce Press. This book officially makes public the following four long-anticipated antitrust guidelines: (1) Antitrust Guidelines for the Automobile Industry ("Auto Industry Guidelines"), (2) Antitrust Guidelines for the Intellectual Property Rights Sector ("IPR Guidelines"), (3) Guidelines on the Application of Leniency Mechanism in Horizontal Monopoly Agreement Cases ("Leniency Guidelines"), and (4) Guidelines on the Undertakings' Commitments in Antitrust Cases ("Commitment Guidelines").
For the first time, these important antitrust guidelines are released via book publication rather than official websites. Moreover, they should have been released one and a half years before. These unusual approaches have ignited widespread curiosity in the contents of these guidelines.
I. The Process of Drafting
According to China's Anti-Monopoly Law ("AML"), the Anti-Monopoly Committee of the State Council ("AMC") is responsible for formulating and issuing antitrust guidelines. In 2009, the AMC issued its first set of guidelines on market definition.
In June 2015, the AMC empowered the National Development and Reform Commission ("NDRC"), the previous antitrust authority before the establishment of SAMR in April 2018, to draft new antitrust guidelines. The draft versions were published by the NDRC for public comments from December 2015 to March 2016. In March 2017, the revised draft IPR Guidelines were published again by the AMC for public comments.
These four new guidelines were approved in November 2018 and were issued internally on 4 January 2019 by the AMC. According to the AMB's 2019 work plan announced on 9 January 2019, these guidelines were scheduled for public release in 2019. However, they were released only recently via book publication.
II. The Validity of the Four Antitrust Guidelines
Since these new guidelines were published in an unusual manner, their validity is vital for companies who may need to adjust their business practices accordingly as well as those seeking to submit antitrust complaints or lodge antitrust suits.
First of all, the AML and other legislations have not specified the nature of these antitrust guidelines. If they are administrative regulations (laws enacted by the State Council) or departmental regulations (laws enacted by the ministries/departments under the State Council), then these guidelines would be binding on both antitrust authorities and companies. Also, the drafting procedure and issuance of the administrative and departmental regulations must abide by strict rules. One important rule is that they should be issued or published on the State Council bulletin or departmental bulletin, the Chinese Government Legal Information Network, and national newspapers. Since the new antitrust guidelines were not issued via the aforesaid channels, they in nature are not administrative regulations or departmental regulations, and thus should have no binding force on companies.
That said, companies still need to take these guidelines very seriously, considering they have certain binding forces on the antitrust authorities and illustrate how the antitrust authorities view and analyze potentially anti-competitive practices. On the other hand, the courts may also refer to these guidelines in practice, albeit not bound by them.
III. Key Provisions in the Four Guidelines
The Auto Industry Guidelines and the IPR Guidelines are very comprehensive and cover almost all potentially anti-competitive practices based on the AMB's experience. While the Leniency Guidelines focuses on cartel cases and the Commitment Guidelines focuses on non-cartel monopoly agreement cases and dominance abuse cases. This alert summarizes the key provisions of these guidelines below and readers should refer to the original texts for more information.
Auto Industry Guidelines
The Auto Industry Guidelines is the first industry-specific antitrust guideline in China. However, it can serve as a useful reference to other industries for similar practices. The key provisions include:
- Exemption of certain practices otherwise penalized as resale price maintenance (RPM). For example, the manufacturers of new energy vehicles (e.g., electric vehicles) would enjoy a nine-month grace period without being penalized as RPM. This policy is to promote the development of new energy vehicles in China. Another example would be, when an automaker directly negotiates with large customers and asks its distributors to sell automobiles to these customers on specified prices, such practices is not penalized as traditional RPM practices.
- Block exemption for certain non-price vertical restraints. Automobile manufacturers whose market share does not exceed 30% may impose territorial restriction and customer restriction on their distributors. However, such block exemption does not protect passive sales restriction, cross sales restriction and restriction on the distributors' sale of auto parts to consumers.
- The relevant aftermarket may be defined in terms of brands and thus each automobile manufacturer may be dominant in the aftermarket of their own brand. Therefore, automobile manufacturers should not abuse such dominance by restricting the distributors to exclusively source auto parts or prevent them from cross selling auto parts to other distributors or to consumers.
The IPR Guidelines acknowledges the legitimate rights of IPR holders and provides safe harbors for certain horizontal and vertical restrictions. Additionally, it also provides a list of potentially abusive conducts by IPR holders who have a dominant market position. The key provisions include:
- Safe harbor for certain horizontal and vertical restrictions. For horizontal restrictions in joint R&D or cross-licensing, competitors with a combined market share not exceeding 20% would fall within the safe harbor provision. For vertical restrictions such as exclusive grant-back and non-assertion, the safe harbor threshold is market share of the licensor and the licensee not exceeding 30% respectively. When market share data is unavailable, the alternative test is whether there are four other available technologies in the market.
- Excessive pricing by IPR holders with dominant market position. When considering whether the fee rates set by a dominant IPR holder is excessively high or unfair, the IPR Guidelines provides a list of factors including comparable fee rates and royalty-stacking.
- Standard essential patent (SEP) holders may be regarded as abusing their dominance if they apply for injunctions without proper ex ante negotiation processes.
The Leniency Guidelines provides specific guidance for cartelists who would like to apply for fine exemption or fine reduction. The key provisions include:
- The applicants should submit a standard report and provide important evidence meeting the criteria specified in the Leniency Guidelines.
- The marker system is in place. The first applicant will have 30 days (extendable to 60 days in exceptional circumstances) to hold its place and supplement evidence as required by the antitrust authority.
- Normally, only three applicants can obtain leniency treatment. The first applicant may receive full exemption or at least 80% reduction in fine. The second may receive a 30%-50% reduction. The third may receive a 20%-30% reduction. In exceptional cases where leniency is provided to more applicants, these applicants may receive no more than a 20% reduction.
The Commitment Guidelines specifies when and how the antitrust authority would suspend and terminate antitrust investigations. The key provisions include:
- Exclusion of the commitment mechanism for hardcore cartels, including price fixing, output restriction and market sharing. Hardcore cartels will always receive harsh penalties unless they successfully apply for a leniency treatment.
- Companies need to apply for the commitment mechanism as early as possible and before the antitrust authority issues the pre-notice of penalty.
- The antitrust authority may seek public comments before accepting the commitments.
Although the four antitrust guidelines were internally issued by the AMC as early as on 4 January 2019, they have not been invoked in any cases to date. Normally, the antitrust authorities will provide certain grace periods after publishing these substantive guidelines (particularly the Auto Industry Guidelines and the IPR Guidelines) for companies to adjust their practices. Hence, there is still time for companies to learn and comply with the new rules before public enforcement actions are taken. As for private enforcement, some plaintiffs may be on their toes to invoke these guidelines immediately before the courts.
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.