China: Vertical Agreements And Dominant Firms 2018

Last Updated: 4 March 2019
Article by Liang Ding
Most Read Contributor in China, September 2019

 1 General

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

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 the law enforcement against price related vertical agreements and abusive conduct, and the State Administration for Industry and Commerce ("SAIC") was responsible for the investigations against 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". 

A bureau-level agency under the SAMR is carrying out the antitrust investigation against vertical agreements and dominant firm conduct.

1.2 What investigative powers do the responsible competition authorities have?

When investigating a 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 correspondences,

electronic data, files, or documentations 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 who are under investigation.

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

After the opening of an investigation, the SAMR may conduct an on-site inspection to collect and fix evidence, conduct interrogations, and request the undertaking under investigation to provide documents. Undertakings which are under investigation and interested parties shall have the right to voice their views. The SAMR shall verify the facts, reasons and evidence presented by undertakings under investigation or interested parties.  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, then the SAMR may decide to suspend the investigation.  If the SAMR determines that a suspicious monopolistic conduct violates the AML, the SAMR shall make a decision on how to deal with the monopolistic conduct, and may publicise its decision.

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 a 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 fines, the SAMR shall consider such factors as nature, extent and duration of the monopoly conducts.

Step 1: identify relevant revenues

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 launch of the investigation. In some cases, the "preceding year" is the year prior to the decision of imposing fine. 

The scope of the fine could be narrowed to the relevant products under the investigation and the geographical area covered by the monopolistic conduct. If the geographical area concerned is larger than 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. 

The undertaking subject to the fine could be narrowed as the undertaking who directly implement 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: identify percentage proportion

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%. The initial proportion will be increased by 1% for each year of the infringement, up to a total of 10%.

Step 3: adjust the proportion according to aggravating or mitigating circumstances

If the undertaking under investigation meets the following criteria, the proportion will be increased by 1% for each circumstance:

1. playing a leading role in the monopolistic conduct, coercing or inviting other undertakings to implement the monopolistic conduct, or preventing other undertakings from stopping the monopolistic conduct;

2.  committing multiple infringements in the same case, or having infringed the AML in the past;

3. actively compelling or facilitating administrative authorities or organisations to eliminate or restrict competition through abusing administrative power; and/or

4.  continuing the monopoly conduct after being ordered to stop by the SAMR.

If the undertaking under investigation meets the following criteria, the proportion will be decreased by 0.5% or 1% for each circumstance:

1. being coerced by other undertakings to implement monopolistic conduct;

2. being forced or coerced by administrative authorities or administrative organisations to implement the monopolistic conduct;

3.  cooperating with administrative agencies in the investigation and making meritorious contribution;

4.  actively eliminating or mitigating negative effect of monopolistic conduct; and/or

5.  voluntarily providing relevant evidence of other undertakings' violation of the AML.

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

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

The leniency policy and the commitment negotiation do not apply to vertical agreements. A possible solution to avoid fines in a vertical agreement investigation is to apply the exemption under Article 15 of the AML (please refer to the response under 1.10).

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

1. timely file 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 conducts, the SAMR may decide to suspend the investigation.

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 shall be responsible for the AML enforcement.  It does not need to defend its claims in front of a legal tribunal or in other judicial proceedings before issuing the decision.

1.8 What is the appeals process?

Where any party concerned is dissatisfied with any decision made by the SAMR about monopoly agreement or abusive conduct, it may apply for an administrative reconsideration or lodge 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 the private enforcement and public enforcement are as follows:

1. The SAMR treats the resale price maintenance ("RPM") as per se violation, but allows the undertaking to justify its conduct under Article 15 of the AML. In the private enforcement, however, the RPM is reviewed by the People's Court under the rule of reason.

2. The plaintiff of a private action can withdraw the complaint, which means it has certain control over the proceeding. However, after the SAMR initiated the antitrust investigation based on the report of the whistle blower, the whistle blower cannot stop the public enforcement by withdrawing the report.

3. The fine imposed by the SAMR will be much higher than the damage ruled by the People's Court.

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

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 operation 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 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?

The AML does not contain any provisions on vertical agreement and abusive conduct that apply to specific sectors. The Anti-monopoly Guideline in the Automobile Sector has been drafted and released for public comments; however, the Guideline has not been issued. Based on the current laws and regulations, the anti-monopoly enforcement does not vary between industries or businesses.

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, "the state protects the lawful business activities of the undertakings from 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 monopolization legally..."

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. 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 2017, the NDRC strengthened law enforcement in upstream industries of pharmaceutical and chemical industries, and the SAIC strengthened law enforcement against natural monopoly enterprises. In 2017, the NDRC imposed fines in 20 anti-monopoly enforcements; two of them were against upstream enterprises in the pharmaceutical industry and 18 of them were against upstream enterprises in the chemical industry. In 2017, nearly 80% of the anti-monopoly enforcement cases published by SAIC were against natural monopoly enterprises. 

It is hard to predict the enforcement trends after the consolidation of the SAMR.

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

In an antitrust litigation against an infringement decision issued by the Hainan Provincial Price Bureau concerning an RPM violation, the Hainan Higher People's Court ruled in the second instance that AML enforcement agencies were not required to prove that the RPM in question had the effect of eliminating or restricting competition, and thereby supported the Price Bureau's infringement decision. This case endorsed the SAMR's per se approach in the RPM investigation.

In 2017, the NDRC fined two pharmaceutical firms, Second Pharma Co, Ltd of Zhejiang Province and Tianjin Handewei Pharmaceuticals Co, Ltd for selling Isoniazid active pharmaceutical ingredients (API) at excessively high prices and for refusal to deal, which violates the AML. For the first time, the NDRC applied the collective dominance to find Handewei, a company with over 10% of the market share to be collectively dominant with Second Pharma, where the combined market share of the two companies exceeded two thirds on the relevant market. The two companies raised the price of Isoniazid API to a range between 3.52 and 19 times of the price at other time periods and of other batches, which were considered excessively high by the NDRC

In 2017, the NDRC investigated Shanghai and Tianjin port and found the following AML violation: (1) the imposition of restrictions on shipping companies to use services provided by subsidiaries of the ports; (2) charging unfairly high prices in non-contestable local international trade container services; and (3) the imposition of unreasonable trading conditions on trading parties such as loyalty terms. 39 ports were asked to conduct self-examinations and rectify their practices.

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 the RPM is prohibited. The wording of Article 14 is strong and the SAMR treats the RPM as per se illegal.  In addition, Article 46 of the AML authorises the anti-monopoly enforcement agency to impose a fine of 1% to 10% of sales revenue of the preceding year, which is no difference to the cartel. The explicit wording of the AML and the practice of public enforcement indicate that China takes a high level of concern over illegal vertical agreements.

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 Article 14, Article 15 and Article 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 type 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 per se violation. The People's Court will evaluate the vertical agreement under rule of reason.  However, the SAMR treats the RPM as per se violation, but allows the undertaking under investigation to submit the application for exemption under Article 15 of the AML

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 set 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 fulfills 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 at two different markets, it may involve two relevant markets. However, as a vertical agreement will only affect the completion of 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 difference 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.

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, the integration of the other party should be considered. Assume party A is a manufacturer and has its own distribution channel, and party B is just a distributor for distributing goods for party A, the relationship between Party A and Party B is vertical. Assume party A is a manufacturer and has its own distribution channel, party B is a competing manufacturer and also has its own distribution channel. Party A enters a vertical agreement with party B to distribute its products through party B's channel. In such case, even if the agreement is vertical on its face, the relationship between party A and party B is horizontal. Such "vertical" agreement will be considered as a horizontal agreement.

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

If the undertaking in a vertical agreement has a large market share, it is more likely that the vertical restraint has a negative effect on competition.  More importantly, the vertical restraint could be considered as 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 the 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.

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

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.

In addition, article 15 of the AML provides the possibility to exempt 'monopoly' agreements, including vertical ones, if certain conditions are fulfilled, including increasing efficiency.

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 of 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 of 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 against allegations that a vertical agreement is anticompetitive is to argue that there is no vertical agreement under the AML. So-called "vertical agreement" could be an agent-principal agreement in which an undertaking agrees to perform certain services on a supplier's behalf for a sales-based commission payment. Such agent-principal agreement is not a vertical monopoly agreement under the AML.

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 the resale price maintenance on Article 14, Article 15 and Article 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 treated 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 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 is an abusive conduct regulated under Article 17 of the AML. Exclusive dealing is not a target of vertical agreement investigation unless the undertaking holds dominant market position in the relevant market.

 Assuming that an undertaking holds the dominant market position, the exclusive dealing in a vertical arrangement is very sensitive. The SAMR can presume the firm holds dominance if the market share of the firm is above 50%. The SAMR is likely to determine exclusive dealing by a dominant firm violating Article 17 of the AML, unless there is an acceptable justification.

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 the exclusive dealing, it is harder for the plaintiff to succeed on the exclusive dealing claims.

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

Tying is an abusive conduct regulated under Article 17 of the AML.

Tying is not a target of vertical agreement investigation unless the undertaking holds dominant market position in the relevant market.

Article 6 of the Provisions of the Industry and Commerce Administration Organs on Prohibition of Abuse of Dominant Market Position provides that an undertaking with dominant market position is prohibited from engaging in tie-in sales of products without justified reasons, such as: forcing different products to be sold as a bundle or package that would not normally be bundled together according to normal transaction practice and consumption habits, or disregard of the functions of the products.

In several SAIC tobacco antitrust investigations, the local AIC found the tobacco companies bundled the sale of popular tobacco with unpopular tobacco brands by restricting the supply of popular brands. In the NDRC Qualcomm antitrust investigation, the NDRC found Qualcomm abused its dominant market position in the wireless SEP licensing market by tying non-SEPs licensing with the 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 decided that the undertaking with market dominant position which bundled sales of separate services or products constituted a tie-in sell 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 dominant market position in the relevant market. 

Assuming that an undertaking holds dominant market position, it will be very difficult for the SAMR and the People's Court to identify the 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 for 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 SAIC 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 SAIC recognised that discount is a common commercial behaviour, which can promote market competition and benefit consumers. In the meantime, the SAIC believe 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?

There is no provision under the AML for regulated bundled discount. Bundled discount has aspects of, but is different from predatory pricing, tying, and exclusive dealing under Article 17 of the AML. 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.

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

The territory allocation among distributors is mentioned in many decisions issued by the anti-monopoly enforcement agency. Territory allocation in a vertical agreement may facilitate the horizontal agreement between distributors.  It could be a cartel under the cover of a "vertical agreement".

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 may reduce the incentive to lower the resale price and may facilitate RPM. There are no fines against MFN.

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)?

China attaches great importance to the abuse of dominance. In 2017, the SAIC conducted nine antitrust investigations. Seven of them related to the abuse of dominant market position.  Considerable antitrust litigation is against abusive conduct by dominant firms.

The law also requires undertakings who abuse their market dominance to bear high legal liability. 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".

3.2 What are the laws governing dominant firms?

Article 6, 17–19, and 47 of the AML regulate abusive conduct by the dominant firms. The following regulations also regulate the dominant firms:

1. the Regulations on Procedures for Investigating and Handling Cases of Monopoly Agreements and Abuse of Market

Dominance by SAIC;

2. the Regulations on the Prohibition of Abuse of Dominant Market Positions by SAIC;

3. the Regulations on the Procedures for Administrative Anti-Price Monopoly Law Enforcement by NDRC;

4. the Regulations on Anti-Price Monopolies by NDRC;

5. the Regulation on Prohibition of Abuses of Intellectual Property Rights by SAIC.

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

The analytical framework for defining a relevant market in dominant firm case will be no difference 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.

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

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

1. an undertaking has a 1/2 or higher market share in a relevant market;

2. two undertakings have a 2/3 or higher market share in a relevant market; or

3. three undertakings have a 3/4 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 itself, only the abuse of dominant market position. No abusive conduct by the dominant firm is per se illegal.

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 are decisive.

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

Market share is very important in assessing market dominance, but it is not the only factor that determines the dominant position of the market. 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.

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 to 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. The efficiencies will be touched 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 2/3 or higher market share in a relevant market; or three undertakings have a 3/4 or higher market share in a relevant market, they could be assumed to hold dominance in the relevant market.  Since to apply collective dominance in a case must meet many conditions, collective dominance is rarely used in China.Isoniazid API investigation in 2017 is the first time the collective dominance has been used by the NDRC.

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 occurred 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 stipulating 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?

According to the Article 17 of the AML, an operator who holds a dominant market position is prohibited from engaging in the following practices of abuse of the said position:

1. selling products at unfairly high prices or buying products at unfairly low prices;

2. selling products 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 operator 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 an 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 fair, reasonable and non-discriminatory ("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 was used in several antitrust litigation cases by submitting 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, which 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 the 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 operator who holds a dominant market position is prohibited from "refusing to trade with relevant trading counterparts without justified reasons". On November 16, 2017, the NDRC issued the Guideline to the Price behavior of undertakings of shortage drugs and API (the API Guideline), in which the abuse of market dominance, such as refusing to trade, were refined. According to the API Guideline, the undertakings of drugs and API with dominant 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 behavior 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 regards to vertical agreements and dominant firms.

Compared with cartels, the compliance level regarding vertical agreements and abusive conduct is low. RPM or disguised RPM can be identified in the daily practice of many undertakings in China. The anticompetitive effect of abusive conduct is hardly to be understood by many dominant firms, which triggers more antitrust litigation and antitrust investigations against dominant firms 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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