As explained in our first post (see here), the State Administration for Market Regulation (“SAMR”) circulated the draft Regulation Prohibiting Monopoly Agreements (“Agreements Regulation”) for public comment on 27 June 2022. The consultation period ends on 27 July.
There are two main changes in the monopoly agreements rules in the revised AML and the Agreements Regulation:
The prohibition against anti-competitive horizontal agreements is expanded to include third parties which act as “organizers.”
A market share “safe harbour” is introduced, below which a supplier’s determination of fixed or minimum resale prices of its distributors is no longer illegal.
We will analyse the two elements below.
Expansion of horizontal prohibition
As currently in force, the AML’s prohibition of anti-competitive horizontal agreements (essentially focused on cartels) only applies to the companies active in the relevant market where the illegal conduct takes place.
Now, the revised AML expands the prohibition to include third parties which are not themselves active in the same relevant market. The goal here to is have an instrument to sanction consultancies and other intermediaries if they “abet” the parties in reaching or implementing an illegal agreement.
In particular, the revised AML makes it illegal for third parties to either “organize” or “provide substantial assistance” to the members of the agreement (usually, cartel participants). In turn, the Agreements Regulation provides further clarification on the scope of the new AML prohibition.
To facilitate the analysis of whether a company is deemed to “organize” a cartel or other illegal agreement for companies, the Agreements Regulation proposes to examine whether it played a leading role for the scope, the content, or the implementation of the agreement. Importantly, the Agreements Regulation puts forward a specific scenario of cartel “organization” – namely, where a company signs agreements with “trading partners,” which are competitors among themselves, and intentionally facilitates a “meeting of minds” or information exchange between them.
This rule is essentially aimed to prevent “hub and spoke” situations, the most prominent of which is likely where a supplier sets up a cartel for its own distributors. Going forward, companies will need to make sure that their distribution agreements do not provide for any mechanisms for distributors to exchange competitively sensitive information among themselves. Compliance measures should also be stepped up where a supplier plans to meet with several of its distributors at the same time.
The Agreements Regulation also provides some further guidance on what “substantial assistance” means. In particular, this may be the case where the company provides support for the conclusion or implementation of the anti-competitive agreement, which has a “cause effect relationship” (likely meaning makes a contribution to the conclusion or implementation), and the company’s role is evident.
Resale price maintenance – a liberalization?
Under the current AML, the only prohibited vertical restriction is resale price maintenance (“RPM”) – i.e., when a supplier determines the resale prices or minimum resale prices of its distributors. This circumstance remains untouched by the AML revision.
Still, the revised AML brings about a small “revolution” on how RPM is assessed. While in the past SAMR and its predecessor essentially considered RPM to be a per se offense – irrespective of the specific circumstance of the supplier, for example its market share – the revised AML provides for two important changes.
First, RPM is not illegal if the company in question can prove that the conduct does not have anti-competitive effects. Although it would have theoretically been already possible for a company to bring an “absence of anti-competitive effects” defense under the current AML, the AML revision now leaves no doubt about the possibility and legitimacy of this approach.
Second, RPM can be legal if the company’s market share is below a “safe harbour” and “fulfills the other conditions stipulated by” SAMR.
On its face, the market share safe harbour is a major change of policy, as it could help smaller companies reduce their compliance burden considerably.
Unfortunately, however, the Agreements Regulation puts cold water on anyone with too high expectations. On the one hand, SAMR sets the threshold very low, at 15% market share. This is much lower than the 30% market share benchmarks for safe harbours for vertical restrictions in the Anti-Monopoly Guidelines for the Automotive Sector and the prior IPR regulation.
On the other hand, the Agreements Regulation stipulates that, when challenged by SAMR, a company wanting to avail itself of the market share safe harbour as a defense will not only need to prove convincingly that its market share is below the threshold. But it will also need to prove that “the agreement will not eliminate or restrict competition in the relevant market.” Although the revised AML left SAMR the opportunity to stipulate “other conditions,” requiring companies to prove the absence of anti-competitive effects seems to be a high extra hurdle (which would also overlap with the first change brought about by the revised AML, as explained above).
If the Agreements Regulation is enacted unchanged, the rhetorical question is if the 15% benchmark should still be considered a “safe harbour” – a space where companies can be “safe” from government intervention. The more practical question for companies is whether they want to change their business practice or just continue to consider RPM as per se illegal irrespective of market share, in order to err on the side of caution. If companies move to a more permissive system of handling distributors’ resale prices, they will need to do conduct an in-depth screening of their market shares and decide whether the more permissive system applies to all products (see more below).
Conclusion & to-do’s
The expansion of the “cartel prohibition” to third parties is in line with international developments to tackle “hub and spoke” situations. To that extent, the expansion will not come as a shock to companies doing business in China. However, the specific focus on cross-distributor discussions will require suppliers to “go over” their compliance measures in that area, to be on the safe side.
In contrast, the establishment of a market share safe harbour represents a real breakthrough, which can potentially alleviate compliance burdens for companies. Assuming the Agreements Regulation provides companies with enough comfort about the safe harbour’s operations, companies can examine whether (and for which products) they can benefit. If they fall below the safe harbour threshold, companies can consider changing their distribution systems and be more permissive about resale price directions to distributors.
screen their distribution agreements and policies to ensure they do not provide a platform for cross-distributor exchanges of sensitive information
check their policies and practices for multi-distributor meetings (such as annual dealer conferences)
confirm with business teams that there are no other communication channels (such as WeChat groups) where there are multiple distributors discussing sensitive topics
judge whether the final enacted version of the Agreements Regulation gives enough comfort to shift to a more permissive resale price system for products falling below the safe harbour threshold
conduct an internal investigation into all products/services to see if they fall below the safe harbour threshold and can be moved to the more permissive system (in that regard, the relevant market needs to be defined in an objective, antitrust-compliant way, before the assessment of market shares is made based on reliable figures)
consider how to deal with those products/services which are above the safe harbour threshold (for example, carve-out) or reconsider the move to a more permissive system in case measures do not seem workable.
Our next posts will discuss the developments in the areas of abuse of dominance, abuse of IPR, and “administrative monopoly” conduct.
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If you would like to obtain a courtesy copy of our inhouse English/Chinese translation of the revised AML, please contact us.
Authored by Adrian Emch, Qing Lyu, and Jingwen Hou.