China: China Amends Anti-Monopoly Law: What You Need To Know

In late June 2022, the 13th National People's Congress Standing Committee adopted the First Amendments to China's Anti-Monopoly Law ("AML"). The amendments will take effect on August 1, 2022. Although the First Amendments to the AML (the "Amendments") are far from a complete overhaul of China's antitrust laws, they introduce new approaches for resale price maintenance and hub-and-spoke agreements, a market share-based safe harbor for vertical agreements, strengthened enforcement against internet platforms, a "stop-the-clock" mechanism in merger review, a new criminal violation, and increased fines and broadened liability for violations, among others.

This Jones Day White Paper details how key changes to the AML could impact businesses operating in China. Among the most significant changes, the Amendments harmonize previously inconsistent rules related to resale price maintenance and introduce a safe harbor for agreements in the vertical supply chain. The Amendments, together with the establishment of the State Anti-Monopoly Bureau ("SAMB") in November 2021, indicate that China will continue to ramp up its antitrust enforcement.

VERTICAL "MONOPOLISTIC AGREEMENTS"

Resale Price Maintenance ("RPM")

The most significant change to the AML is its approach to RPM. RPM, also known as "vertical price fixing," occurs when a supplier of goods or services sets (or attempts to set) a minimum price below which a reseller cannot resell its products. The AML regulates "monopolistic agreements"1 under the so-called "prohibition + exemption" framework, in which the AML prohibits certain conduct like RPM unless an exemption applies (i.e., by proving that the alleged monopolistic agreement had reasonable justifications, did not severely restrict competition, and benefited end consumers) under AML Article 15, now Article 20 following the Amendments. Exemptions are rare and granted only on a case-by-case basis.

As detailed in our prior White Paper, there has long been disagreement about how to apply the "prohibition + exemption" framework for RPM cases. Notwithstanding the view of the State Administration for Market Regulation ("SAMR") (and its predecessors) that the AML prohibited RPM outright (consistent with the European Commission's approach to RPM), in civil cases, the Chinese courts typically required that plaintiffs first prove that the defendant's RPM was anticompetitive, closer to the rule of reason approach under U.S. federal law.²

The Amendments adopt a middle ground between SAMR's per se illegal approach and the Chinese courts' rule of reason approach. RPM remains subject to the "prohibition + exemption" framework; however, under Article 18 of the Amendments, RPM will be lawful if a company can prove that the RPM does not have the effect of eliminating or restricting competition. In sum, the AML still presumes that RPM is unlawful, but that presumption is now rebuttable.

The Amendments harmonize China's approach to RPM in public enforcement and private litigation, eliminating divergent standards of proof. Because SAMR treated RPM as per se unlawful, many companies were loathe to adopt RPM, even if it benefitted competition. On the other hand, the Chinese courts' approach to RPM in private litigation might have deterred some plaintiffs from bringing cases in the past. We therefore expect that the Amendments will trigger a new wave of RPM litigation as companies consider whether to adopt RPM under the new shifted-burden framework and private litigants look for new opportunities.

Safe Harbor Rules

Article 14 of the AML prohibits "vertical monopolistic agreements," including RPM and other such vertical agreements as determined by SAMR. Article 18 of the Amendments introduces a safe harbor for all types of vertical monopolistic agreements. Under the new safe harbor, vertical agreements-including RPM-are not prohibited under the AML if the parties to an agreement establish that their market share in the relevant markets is lower than the threshold(s) prescribed by the enforcement authority.³

The safe harbor approach to vertical agreements is similar to the European Commission's Vertical Block Exemption Regulation ("VBER"), updated in June 2022 as detailed in this Alert. The VBER establishes a safe harbor for: (i) vertical agreements that are not a "hardcore restriction" (e.g., RPM) and (ii) where neither party's market share exceeds 30%.

Unlike in Europe, the safe harbor in China will apply to RPM, and according to SAMR's draft Rules on Prohibition of Monopoly Agreements, the to-be-established benchmark for the market share safe harbor likely will be lower than the VBER (15% in both the upstream and downstream markets, compared to the European Commission's 30%). Vertical agreements that fall outside the safe harbor will still be subject to the existing "prohibition + exemption" framework. Once implemented, however, the safe harbor will help companies self-assess the risks of a vertical agreement and improve the predictability of SAMR enforcement.

Although the Amendments do not change the overall "prohibition + exemption" framework for vertical agreements, the rebuttable presumption for RPM and the safe harbor rules substantially alter how to assess the risk of certain vertical agreements in China. The flow chart in Figure 1 describes how to analyze the risk of a vertical agreement in China.

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