‘Safe harbour’ rule’s effect on anti-monopoly compliance

By Michael Gu, AnJie & Broad Law Firm
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After its implementation 14 years ago, the Anti-Monopoly Law (AML) has welcomed its first set of amendments, with the amended Anti-Monopoly Law (the new AML) implemented on 1 August 2022. The new AML adapts to the regulatory requirements of the digital economy, draws on concepts in international anti-monopoly rules, and rectifies shortcomings of the original legislation.

The deterrent effect of the new AML has been greatly enhanced, substantially increasing the costs of violations. Ensuring business interests and normal operations of enterprises while avoiding running afoul of the Anti-Monopoly Law will pose serious challenges for enterprise compliance. This column summarises key compliance issues and recommendations on the potential impact of the “safe harbour” rule in the new AML on the risks faced by enterprises in vertical monopoly agreements that relate to distributor management and channel management.

Q: What is the “safe harbour” rule?

‘Safe harbour’ rule’s effect on anti-monopoly compliance, Michael Gu
Michael Gu
Partner
AnJie & Broad Law Firm

A: The new AML establishes the “safe harbour” rule for the first time at the legislative level. The safe harbour rule is where the relevant agreement reached between or among business operators is not regarded as a violation of the Anti-Monopoly Law as long as certain preconditions are satisfied. The safe harbour provision under the new AML, the third paragraph of article 18, provides that: “A business operator whose market share is below the threshold set for the relevant market by the State Council’s Anti-Monopoly Law enforcement authority, and satisfies other conditions specified by the State Council’s Anti-Monopoly Law enforcement authority, shall not be prohibited.”

Before the issuance of the new AML, the safe harbor rule was provided somewhat in relevant anti-monopoly guidelines, rules and regulations – such as the Antitrust Guidelines of the Anti-Monopoly Commission of the State Council for the Automobile Industry, and the Provisions on Prohibiting the Abuse of Intellectual Property to Eliminate or Restrict Competition – but the above-mentioned provisions are not uniform on the relevant market share threshold and the kinds of monopolistic acts, etc., for the safe harbour. The new AML brings in the safe harbour rule for monopoly agreements at the level of law for the first time, and makes it applicable to all industries.

Q: What agreements does the safe harbour rule apply to?

A: Since article 18 of the new AML regulates monopoly agreements reached between a business operator and a transaction counterparty, i.e. vertical monopoly agreements, the safe harbour rule applies only to vertical agreements, rather than to horizontal agreements.

It should be noted that the safe harbour rule applies to vertical resale price maintenance agreements (RPM agreements), including agreements for the resale of goods to third parties at a fixed price, and agreements that limit the minimum price at which goods can be resold to third parties, which were previously the targets of regulation by Anti-
Monopoly Law enforcement authorities.

Q: What are the specific criteria for the application of the safe harbour rule?

A: The criteria for application of the safe harbour rule in the new AML are more in the way of principles, and include two aspects: (1) the business operators being able to show that their market shares in the relevant market fall below the threshold set by the authority; and (2) it satisfies other conditions specified by the authority. On 27 June 2022, the State Administration for Market Regulation issued the Provisions on Prohibiting Monopoly Agreements (Draft for Comment) to complement the new AML. The Draft for Comment sets out specific criteria for the safe harbour rule, providing business operators certainty in compliance guidelines and their expectations.

Pursuant to the draft for comment, the market shares of the operator and the transaction counterparty who are applying the safe harbor rule are required to be less than 15%, and there cannot be any evidence showing that their agreement eliminates or restricts competition. What specific criteria will ultimately apply will be clarified after the issuance of the final version of the Provisions on Prohibiting Monopoly Agreements.

Q: How is the safe harbour rule applied?

A: From a practical point of view, since the establishment of the safe harbour rule, enterprises have undoubtedly more flexibility in carrying out commercial arrangements, particularly in sales channel and distributor management. However, enterprises that elect to utilise the safe harbour rule to design their business models need to accurately understand the rule, which also imposes more stringent requirements on their Anti-Monopoly Law compliance.

An enterprise that wishes to apply the safe harbour rule needs to first accurately define the relevant markets and, second, calculation of its market share needs to be based on objective and credible data. In practice, differences in the understanding of law enforcement with judicial authorities and enterprises often occur, in respect of defining the relevant product market and geographical market, the turnover base figure for calculating market share and other factors, which can result in significant discrepancy in the final market share.

Accordingly, if the market is incorrectly defined or the market share incorrectly calculated, blind application of the safe harbour rule may result in an underestimation of the monopoly agreement risk, and it may become a trap that leads to violation of the law. The author recommends that enterprises seek professional analysis and assessment from external counsel and relevant experts regarding the relevant business and market to avoid committing potentially illegal and dangerous acts due to simple mechanical application of the market share threshold of the safe harbour rule.

Q: How are the anti-monopoly risks of RPM agreements to be assessed under the safe harbour rule and other provisions of the new AML?

A: Since the implementation of the new AML, the principles for determining RPM agreements have changed significantly. With respect to a resale price maintenance agreement, the New AML provides that “a business operator, who can prove that there is no act in the business operation to eliminate or restrict competition, shall not be prohibited”.

This signifies that the rules for determining RPM agreements, which have long been the subject of heated debate, are now more uniform and clearer. Previously, in the administrative Anti-Monopoly Law enforcement field, the harsh principles of “per se illegal” or “prohibition plus exemption” were usually applied to RPM cases, and in the civil anti-monopoly litigation field, the courts tended to conduct anti-competition effect analyses of RPM agreements on the basis of the “rule of reason” principle.

Pursuant to the new AML, RPM agreements are presumed to be illegal in principle, but business operators may seek exemptions by asserting application of the safe harbour rule, or mount a reasonable defence on the grounds that their agreements do not have the effect of eliminating or restricting competition.

Michael Gu is a partner at AnJie & Broad Law Firm

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