Latest judicial practice with horizontal monopoly agreements

By Ryan Fang and Simon Shi, Jingtian & Gongcheng
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A horizontal monopoly agreement refers to an arrangement between competing business operators regarding the price, output, sales market and technical restrictions of their competing products or services. These agreements on price fixing, output restriction, market division, technology restriction and trade boycott often directly exclude and restrict competition, harming the interests of consumers – and are regarded as major monopolistic misconduct in most countries and regions. Hence, they are under strict regulation and control.

CURRENT LEGISLATION

Ryan Fang, Jingtian & Gongcheng
Ryan Fang
Partner
Jingtian & Gongcheng

Under the Anti-Monopoly Law (AML), the principle of “prohibition + exemption” is adopted for determination of illegality of horizontal monopoly agreements. Article 13 prohibits competing business operators from reaching six types of monopoly agreements, while article 15 further enumerates seven circumstances where article 13 may not apply. The common denominator is if benefits of the agreement between the competitors outweigh adverse effects on the competition. Thus the agreement may be exempted.

It is worth noting that the Draft Amendment to the Anti-Monopoly Law, issued in October 2021, adds a “safe harbour” provision similar to the European Commission’s De Minimis Notice, stipulating that if the operator can prove its relevant market share is lower than standards set by the AML enforcement agencies of the State Council, article 16 (article 13 of the current law) will not necessarily apply. After implementation of the amendment, its “safe harbour” provision will further improve the determination standard of horizontal monopoly agreements.

Based on the current law, as well as its enforcement and judicial practice, three elements are required for determining horizontal monopoly agreement as prohibited by law, namely: (1) operators compete with one another in the relevant market; (2) competing operators arrived at an agreement, decision or other concerted action to exclude or restrict competition in respect of competing products or services; and (3) such agreement, decision or other concerted action does not meet exemption conditions under article 15.

It should be noted that if competitors reached any agreement provided in article 13(1) to article 13(5), it can be presumed in principle that such an agreement has the effect of excluding and restricting competition. If competitors reached other types of monopoly agreements, determining whether they are prohibited by law requires further judgment in terms of any effect of excluding or restricting competition.

LATEST JUDICIAL PRACTICE

Horizontal monopoly agreements have long been the focus of anti-monopoly crackdowns in China. In practice, they are mainly concluded by operators themselves, or through industry associations. As China continues to step up its AML enforcement efforts, horizontal monopoly agreements have become more concealed or disguised.

Simon Shi, Jingtian & Gongcheng
Simon Shi
Counsel
Jingtian & Gongcheng

In the following, the authors share their observations on latest judicial practice, taking as examples a ruling and a judgment recently issued by the Supreme People’s Court (SPC):

Case 1: Ruling of AstraZeneca v Jiangsu Aosaikang Pharmaceutical (2021). In this case, the SPC clarified for the first time that the court should, to a certain extent, actively examine whether contracts or agreements in the form of “pay-for-delay agreements for drug patents” violate the law – and should handle any suspected violation according to law or, when necessary, transfer detail of suspected violation to AML enforcement agencies.

The SPC further clarified that the core of determining monopoly in a pay-for-delay agreement lies in whether it has the effect of excluding and restricting market competition. To judge an agreement on its effect of restricting competition, one option is the “assuming non-existence” method – in other words, comparing the actual circumstance where the agreement is entered into and performed, with the hypothetical circumstance where it is not entered into or performed, so as to determine whether and to what extent such an agreement has caused damage to market competition.

Case 2: Judgment of Huaming Power Equipment v Taipu Transformer Changer (2021). In this case, the SPC held that the mediation agreement reached by both parties in the civil action to resolve a patent dispute constituted a horizontal monopoly agreement, which violated mandatory provisions of the law, and was thus invalid.

The SPC further clarified that:

  • Whether an agreement between operators constitutes a monopoly agreement should be determined based on the core criteria of whether it has the effect of excluding and restricting competition, while the background and subjective motives for entering into the agreement are for reference only;
  • In determining whether an agreement constitutes a monopoly agreement, one should not be content with juxtaposing the agreement content with that of the five horizontal monopoly agreements listed in article 13. Instead, a comprehensive analysis of the agreement content should be conducted from the perspective of market competition order, taking into consideration the agreement terms, their relevance, and the actual or potential effect of excluding or restricting competition;
  • The principle of illegal per se is applicable to the five horizontal monopoly agreements listed in article 13. Therefore the defendant should bear burden of proof that the relevant agreement does not have the effect of excluding or restricting competition; and
  • Ownership and exercise of patent right do not preclude determination that the relevant agreement violates the law.

These SPC decisions are expected to exert strong guiding and referential significance for enforcement and judicial practice in such cases, as well as having a heavy impact on anti-monopoly compliance concerns of operators involved in patent disputes when reaching similar agreements.

Operators are not only advised to pay attention to anti-monopoly risks in traditional agreements, decisions or concerted actions related to production and sales arrangements, but also to fully review and consider anti-monopoly compliance and risks in special arrangements such as settlement agreements to resolve IP disputes reached with competitors or potential rivals.

Ryan Fang is a partner and Simon Shi is a counsel at Jingtian & Gongcheng

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