On November 18, 2022, the Supreme People’s Court of the People’s Republic of China (the “SPC”) published an announcement soliciting public comments on the draft of Provisions of the Supreme People’s Court of the People’s Republic of China on Several Issues concerning the Application of Law in the Trial of Monopoly-related Civil Dispute Cases (the “Draft”). Compared with the Provisions of the Supreme People’s Court of the People’s Republic of China on Several Issues concerning the Application of Law in the Trial of Civil Dispute Cases Arising from Monopolistic Conduct (the “2012 Interpretation”) issued by the SPC in 2012, which is the first judicial interpretation on China’s antitrust law, the Draft encompasses 52 articles and provides much more detailed interpretations on lots of procedural and substantive matters involved in antitrust civil litigation. When the Draft is formally adopted and comes into effect in the future, the 2012 Interpretation will be voided.
The key changes in the Draft can be divided into four categories: (1) provisions introduced or amended for being in alignment with the amendment to the Anti-monopoly Law of the People’s Republic of China (the “AML”) in 2022; (2) provisions reflecting the judicial opinions held by the people’s court in the antitrust jurisprudence; (3) provisions drawing on the provisions issued by China’s antitrust law enforcement authority; (4) provisions with groundbreaking content to some extent. The Draft includes responses to multiple complex and controversial issues in judicial practice. This article intends to introduce the key changes in the Draft with two parts, the procedural matters (Part I: Changes to Procedural Matters) and the substantive matters (Part II: Changes to Substantive Matters).
Brief regarding the changes to substantive matters: Articles 16 to 19, Articles 20 to 29, and Articles 30 to 43 of the Draft separately set out the provisions on the definition of the relevant market, the determination of monopoly agreement, and the determination of abuse of dominance, which include specified provisions on key issues in the fields of platform economy and intellectual property. In addition, the Draft introduces detailed provisions on civil liability from Articles 44 to 50.
1. Specifying the methods of defining the relevant market in monopoly civil dispute case.
Articles 17 to 19 of the Draft provide on how to define the relevant market in monopoly civil dispute case, and the provisions drawing on the content of the Guidelines on the Definition of Relevant Market issued by the Anti-monopoly Commission of the State Council and the Anti-monopoly Guidelines of the Anti-monopoly Commission of the State Council in the Field of Platform Economy (the “Guideline for Platform Economy”). The key provisions include the following:
Paragraph 1 of Article 17 of the Draft provides: “When defining the relevant product market and the relevant geographic market in which the undertaking compete with each other with respect to specific products or services (hereinafter collectively referred to as the “Products”) during a certain period, the people’s court may, on the basis of the specific products directly involved in the alleged monopolistic conduct, conduct a demand substitution analysis from the perspective of the demanders; if the competitive constraint caused by supply substitution on undertakings is similar to that of demand substitution, the people’s court may also conduct a supply substitution analysis from the perspective of the suppliers.” This article clarifies the principle and basic method of defining the relevant market in a monopoly civil dispute case, i.e., a demand substitution analysis and/or supply substitution analysis may be conducted on the specific products directly involved in the alleged monopolistic conduct.
Paragraph 2 of Article 17 of the Draft provides: “The people’s court may adopt the analysis method of the hypothetical monopolist test when defining the relevant product market and the relevant geographic market, and generally choose the hypothetical monopolist test method of price rising; and if the competition between undertakings is mainly shown in terms of quality, diversity, innovation and other non-price competition, the hypothetical monopolist test method of quality declining and cost rising may be adopted.” This article provides for different hypothetical monopolist test methods based on whether the competition between undertakings concerned is mainly shown in terms of price.
Before the issuance of the Draft, the people’s courts have already applied the hypothetical monopolist test (the “HMT”) in the context of non-price competition. For example, In Qihoo v. Tencent[1], the SPC held that the HMT, as a kind of analysis method to define the relevant market, is generally applicable, but the choice of HMT method needs to be determined on a case-by-case basis. In the fields where product differentiation is very obvious, and quality, service, innovation, consumer experience, and other non-price competition have become the important methods of competition, it is inappropriate to adopt the test of “small but significant and non-transitory increase in price” (the “SSNIP”). Under such circumstances, alternative methods of HMT shall be adopted, such as the test of “small but significant non-transitory decrease in quality” (the “SSNDQ”).
2. Introducing provisions on the determination of competitive relationship and the theory of “Single Economic Entity”.
(1) Specifying how to determine the competitive relationship between undertakings.
Article 17 of the Anti-monopoly Law of the People’s Republic of China (the “AML”) sets forth the provisions regarding horizontal monopoly agreement, that is, the undertakings with competitive relationship reaching an agreement, decision or other concerted practice to exclude or restrict competition. Therefore, to determine whether undertakings have reached or implemented a horizontal monopoly agreement, the first thing is to determine whether they have a “competitive relationship”. For undertakings with no “competitive relationship”, even if the agreement reached by them may have the effect of excluding or restricting competition, it shall not fall within the scope of horizontal monopoly agreements prohibited by Article 17 of the AML.
Paragraph 1 of Article 21 of the Draft provides: “Undertakings with a competitive relationship as provided for in Article 17 of the Anti-monopoly Law refer to two or more actual or potential undertakings that are at the same stage of production and operation, provide products with close substitution relationship, make independent business decisions, and assume legal liability.”
This new provision of the Draft specifies how the people’s courts determine the competitive relationship between undertakings. Actually, before the issuance of the Draft, the people’s courts have already adopted the above methods and principles in precedents. For example, in Shanghai Huaming v. Wuhan Taipu[2], the SPC held that, the competitive relationship under the Anti-monopoly Law is defined as two or more undertakings at the same operation stage of production or distribution of products, that provide substitutable products or have a realistic possibility of entering into the same relevant market. (Note: For a detailed introduction, please see, Why Settlement Agreements in Patent Litigation were Deemed as Monopoly Agreements? — — Analysis Of the Judgement and Criteria for Determining Monopoly Agreement by the Supreme People’s Court)
(2) Introducing the theory of “Single Economic Entity”.
Paragraph 2 of Article 21 of the Draft provides: “Two or more undertakings that shall be deemed as a single economic entity do not constitute an undertaking with a competitive relationship as mentioned in the preceding paragraph. To make a judgment, the people’s court shall take into account the specific situation and consider factors such as whether the undertaking has control over other undertakings concerned or can exert a decisive influence on them, whether such two or more undertakings are controlled by the same third party or have decisive influence thereon.”
This is the first time that the SPC explicitly indicates that the theory of “Single Economic Entity” can be applied to determine whether undertakings have a competitive relationship in an anti-monopoly dispute case. The Draft does not specify how to identify “control” or “decisive influence”, but based on the anti-monopoly law enforcement practice, especially in the merger control review cases, the determining factors are not limited to the factors for the identification of control under the company law, the security law or the financial audit regulation. All of the relevant factors such as the equity structure, the appointment of senior management, and the control of business and financial arrangements may be identified as determining factors of “control” or “decisive influence”.
For example, in the penalty decision against three calcium gluconate active pharmaceutical ingredient (“API”) suppliers — Shandong Kanghui Medicine (“Kanghui”), Weifang Puyunhui Pharmaceutical (“Puyunhui”) and Weifang Taiyangshen Pharmaceutical (“Taiyangshen”) — for abuse of dominance imposed by the State Administration for Market Regulation (the “SAMR”) on 9 April 2020, the SAMR identified a de facto controlling relationship among the three API suppliers even if they have no equity relationship, with each registered as an independent legal entity. The SAMR held that both Puyunhui and Taiyangshen were controlled by Kanghui and carried out their business under the instructions of Kanghui: (1) Kanghui regarded Puyunhui and Taiyangshen as its departments and coordinated relevant matters through work contact forms; (2) when Kanghui took the inventory of API products, the inventories of Puyunhui and Taiyangshen were also counted; (3) Kanghui carried out its business by sending instructions to Puyunhui and Taiyangshen and exerted a full control of the transactions of API products distributed by Puyunhui and Taiyangshen.
Where two or more undertakings are deemed as a single economic entity, it may not only affect the judgment on whether the agreement reached by them constitutes a horizontal monopoly agreement, but also affect the judgment on whether they have dominant position in the relevant market considering that their market share will be aggregated as that of one single economic entity. For example, in the above-mentioned penalty decision against the three API suppliers, when the SAMR determined the dominance of the three API, their market share in the relevant market were aggregated as a single economic entity.
3. Amending the provisions on the determination of monopoly agreement.
(1) Specifying the determining factors of “other concerted practices”.
Article 16 of the AML provides: “For the purposes of this Law, monopoly agreement refers to agreement, decision or other concerted practice that excludes or restricts competition.” According to Article 5 of the Interim Provisions on Prohibition of Monopoly Agreements (the “Provisions on Monopoly Agreements”) issued by the SAMR, “… other concerted practice refers to a practice carried out by undertakings in the absence of a definite agreement or decision between undertakings which nevertheless has been coordinated in substance.”
Paragraph 1 of Article 20 of the Draft provides: “The people’s court shall consider the following factors when determining other concerted practice under Article 16 of the AML: (1) whether there is consistency or relative consistency in the market conducts of undertakings; (2) whether there has been communication or exchange of information between undertakings; (3) market structure, competition status, market changes and other situations in the relevant market; and (4) whether the undertakings can provide reasonable explanations on the consistency or relative consistency of their conducts.” Paragraphs 2 and 3 of Article 20 of the Draft introduce the provisions on the burden of proof. (Note: For more details, please see, Part I: Changes to Procedural Matters)
The factors for determining “other concerted conducts” listed in the Draft are basically the same as the provisions in Article 6 of the Provisions on Monopoly Agreements. Actually, before the issuance of the Draft, the people’s courts have already determined whether the defendants have carried out “other concerted conduct” based on the above-mentioned factors in precedents. For example, in Li Bingquan v. Xiang Pin Tang[3], the SPC determined whether the five defendants had carried out “other concerted conduct” from the following aspects: (1) the purchase records submitted by the plaintiff could prove that the five defendants had sold the same water product at the same price; (2) a preliminary assumption that the undertakings concerned had exchanged information or intentions could not be made only based on the fact that the similarity of prices of the same water product in the limited area; (3) the plaintiff failed to provide evidence regarding the market structure, competition status, market change and other circumstance of the relevant market. Considering the factors such as the similarity of the water product concerned, the limited area where the undertakings concerned sold the products, the transparency of product price, and the limited number of undertakings, the SPC determined that the existing evidence submitted by the plaintiff is insufficient to exclude the possibility of independent pricing by the five defendants.
(2) Specifying how to determine whether the vertical monopoly agreements have the effect of excluding or restricting competition.
Paragraph 1 of Article 18 of the AML provides: “Conclusion of any of the following monopoly agreements between undertakings and their trading counterparts is prohibited: (1) fixing the price of products for resale to a third party; (2) restricting the minimum price of products for resale to a third party; and (3) any other monopoly agreement as determined by the anti-monopoly law enforcement authority of the State Council.” In practice, the first two monopoly agreements are generally referred to as “Price-related Vertical Monopoly Agreements” or “Resale Price Maintenance Agreements” (the “RPM agreement”), while the third circumstance is generally referred to as “Non-price Vertical Monopoly Agreements”.
The amendment to the AML adds a new provision as Paragraph 2 on the determination of the RPM agreement: “An agreement specified in Item (1) or (2) of the preceding Paragraph shall not be prohibited if the undertakings concerned can prove that such agreements do not have effects of excluding or restricting competition.” Based on the amendment to the AML, the undertakings can argue that the agreement with the content specified either in Item (1) or Item (2) of Paragraph 1 of Article 18 of the AML does not constitute the RPM agreement prohibited by the AML if they can prove that such agreement does not have effects of excluding or restricting competition.
Article 26 of the Draft provides: “When reviewing and determining whether an alleged monopolistic conduct has the effect of excluding or restricting competition in accordance with Paragraph 1 of Article 18 of the Anti-monopoly Law, the people’s court may comprehensively consider the following factors: (1) whether the defendant has significant market power in the relevant market; (2) whether the agreement has adverse competition effects such as raising the entry barrier to market, hindering more efficient distributors or distribution models, or restricting inter-brand competition; and (3) whether the agreement has favorable competition effects such as preventing free-riding, promoting inter-brand or intra-brand competition, safeguarding brand image, improving pre-sale or after-sale service levels, or promoting innovation. Where the defendant has significant market power in the relevant market, the favorable competition effects that can be proved by the documented evidence are insufficient to outweigh the adverse competition effects, the people’s court shall rule that the agreement has the effect of excluding or restricting competition.”
This provision specifies how to determine whether the vertical monopoly agreements have the effect of excluding or restricting competition. The theoretical bases of the determining factors such as preventing free-riding and the promotion of inter-brand competition are the same as those set out in the Anti-monopoly Guidelines of the Anti-monopoly Commission of the State Council for the Automobile Industry (the “Guideline for Automobile Industry”).
(3) Circumstances where the people’s court may preliminarily determine that the agreement concerned does not constitute a vertical monopoly agreement.
Article 27 of the Draft provides: “If the defendant can prove any of the following circumstances, the people’s court may preliminarily determine that agreement concerned does not constitute a monopoly agreement stipulated in Paragraph 1 of Article 18 of the Anti-monopoly Law: (1) the transaction counterparty of the agreement is an agent of the undertaking, and does not bear any substantive commercial or operational risks; (2) the defendant’s market share in the relevant market is lower than the standard established by the anti-monopoly law enforcement authority of the State Council, and it also satisfies the other conditions specified by the anti-monopoly law enforcement authority of the State Council; or (3) the agreement is implemented within a reasonable period to incentivize the transaction counterparty to promote new products.”
In addition to specifying the application of the “Safe Harbor” rule in vertical monopoly agreement disputes (Note: For more details, please see, Part I: Changes to Procedural Matters), the Draft also involves two other circumstances where the people’s court may preliminarily determine that the relevant agreement does not constitute a vertical monopoly agreement. These circumstances are also included in the Guideline for Automobile Industry. Specifically, Part (2) of Article 6 of the Guideline for Automobile Industry lists the common situations where undertakings in the automobile industry may apply for exemption of resale price restrictions on a case-by-case basis pursuant to the AML, including:
§ Short-term restrictions on sub-sale price of new energy vehicles. In order to conserve energy, protect the environment and avoid “service free rider”, the short-term fixing of sub-sale price and specifying the minimum sub-sale price of new energy vehicles are necessary for encouraging the dealers to strive to promote the new energy products, make greater sales efforts, and expand the market demands for the new products, which may promote the successful release of new products into the market and give the consumers more choices.
§ Sub-sale price restrictions in sales by a dealer that only plays the role of an intermediary party. Sale by a dealer that only plays the role of an intermediary party refers to the sales where the auto supplier and a particular third party or a particular end customer directly agree on the sales price, and only have the dealer to complete the vehicle delivery, funds collection, invoice issuing or other parts of selling steps. In such transactions, the dealer assists in completing the transaction by playing the role of the intermediary party only, different from the dealer in the general sense.
Article 18 of the AML stipulates that the vertical monopoly agreement is a monopoly agreement concluded between the undertaking and its counterparty, but it does not provide for the definition of the “counterparty”. In practice, vertical monopoly agreements are usually concluded either between the manufacturer and the wholesaler/retailer or the wholesaler and the retailer. Item (1) of Article 27 of the Draft specifies that the people’s courts may preliminarily determine that the agreement concerned does not constitute a vertical monopolistic agreement if the counterparty is an agent and does not bear any substantive commercial or operational risks. In determining whether the counterparty shall be deemed such an agent, the key considerations may include whether the counterparty is responsible for the costs of the supply of goods, the storage of goods, the damages caused to third parties, and certain investments for selling the goods.
(4) Introducing provision on the determination of the organizer and facilitator of monopoly agreement, and the joint and several liability borne by them.
The amendment to the AML introduces new provision under Article 19 stating that “An undertaking shall not organize other undertakings to reach a monopoly agreement or provide substantive assistance for other undertakings to reach a monopoly agreement.” In addition to the provisions on horizontal monopoly agreements (i.e., monopoly agreements concluded between competitive undertakings) and vertical monopoly agreements (i.e., monopoly agreements concluded between undertaking and its trading counterparty), the amendment introduces the above provisions on circumstance theoretically referred to as “Hub and Spoke Conspiracy”. In addition, the amendment to AML keeps the provisions on the prohibition against the industry associations from organizing undertakings to conduct monopolistic conducts.
Paragraph 1 and 2 of Article 28 of the Draft introduces provisions that the plaintiff has the rights to claim that the undertaking or organization of undertakings which conduct organization or provide substantive assistance for other undertakings to conclude or implement a monopoly agreement bear the joint and several liability for the damages caused by the monopoly agreement concerned. Paragraph 3 and 4 of Article 28 of the Draft separately provides how to determine “organize other undertakings to reach a monopoly agreement” and “provide substantive assistance for other undertakings to reach a monopoly agreement” stipulated in Article 19 of the AML.
According to Paragraph 3 and 4 of Article 28 of the Draft, (1) “organize” refers to conducts such as forming, leading, planning, manipulating, directing and initiating that play a decisive or dominant role in concluding or implementing a monopoly agreement; (2) “provide substantive assistance” refer to conducts such as guiding the occurrence of illegal intent, providing convenience, serving as an information channel and assisting in imposing punishments, which play a direct and important role in promoting the conclusion or implementation of a monopoly agreement. The Provisions on Prohibition of Monopoly Agreements (Draft for Comments) published by the SAMR on June 27, 2022, also sets forth provisions on how to determine “organize” and “provide substantive assistance”. The key factors and theoretical basis of the provisions under this document are basically the same as that of the Draft, but this document has not been formally adopted either.
4. Amending the provisions on the determination of market dominance and abuse of dominance.
(1) Introducing provision on the determination of market dominance which includes rebutting the assumption of collective dominance.
The Draft introduces provisions on the determination of market dominance of the undertakings concerned in monopoly dispute cases under Article 30, Article 32, Article 34, Article 35 and Article 36. The provisions are basically consistent with the relevant content of the Interim Provisions on the Prohibition of Abuse of Dominant Market Position (the “Provisions on Abuse of Dominant Market Position”), the Provisions of the State Administration for Market Regulation on the Prohibition of Abuse of Intellectual Property Rights to Exclude or Eliminate Competition (the “Provisions on the Abuse of Intellectual Property Rights”) and the Guideline for Platform Economy and the opinions formed in administrative enforcement. These new and amended provisions reflect the connection between administrative enforcement and judicial practice. Limited to the length of this article, we will not elaborate on this section, but only introduce the provisions on rebutting the assumption of collective dominance.
Article 36 of the Draft provides: “Where the people’s court presumes that two or more undertakings collectively have dominant market position in accordance with Item (2) and (3) of Paragraph 1 of Article 24 of the Anti-monopoly Law, such presumption may be rebutted if the undertaking has evidence to prove either of the following circumstances: (1) there is substantial competition between such two or more undertakings; or (2) such two or more undertakings, as a whole, are subject to effective competitive constraints from other undertakings in the relevant market.” These are detailed interpretations of the provisions under Paragraph 3 of Article 24 of the AML, which stipulates that “Where an undertaking presumed to hold a dominant market position is able to provide evidence that it does not hold such a dominant market position, it shall not be deemed to hold the dominant market position.” Although “substantial competition” and “effective competitive constraints” are yet to be further clarified by the people’s court, the opinions held by the people’s court in precedents can be used for reference.
In Ma Lijie v. China Mobile Communications Group Henan[4], the SPC for the first time mentioned the factors and standards for determining the collective market dominance. The SPC held that “Based on the common sense regarding the market operation, if multiple undertakings in the relevant market adopt different behaviors in respect of the same business, this is usually a normal result of market competition among the undertakings, and thus it is unnecessary to consider determining the collective market dominance. Therefore, only when multiple undertakings in the relevant market adopt the same behaviors in respect of the same business which reflects the consistency of behavior, it is necessary to consider determining the collective market dominance. For this reason, to determine whether multiple undertakings have formed a collective market dominance, in addition to examination of their market shares, factors such as the consistency of their behaviors also need be considered.”
(2) Introducing provision on the determination of abuse of dominance.
The Draft introduces provisions on the determination of abuse of dominance conducted by the undertakings concerned in monopoly dispute case under Article 37 to 43. The provisions draw on the content of with the relevant content of the Provisions on Abuse of Dominant Market Position, the Guideline for Platform Economy, the Provisions on the Abuse of Intellectual Property Rights, the Anti-Monopoly Guidelines of the Anti-Monopoly Commission of the State Council in the Field of Intellectual Property Rights (the “Guideline for Intellectual Property Rights”), and the opinions formed in administrative enforcement. These new and amended provisions reflect the connection between administrative enforcement and judicial practice. Limited to the length of this article, we will not elaborate on this section.
5. Introducing provisions on the key issues in the field of platform economy.
The Draft provides specified provisions on the key issues in the field of platform economy which draw on the content of the Guideline for Platform Economy, and the opinions formed in administrative enforcement. In addition, the Draft introduces reference provisions to the relevant provisions of the E-commerce Law of the People’s Republic of China (the “E-commerce Law”). Limited to the length of the article, we will not elaborate on this section of the content, but only introduce the provisions on the Most-Favored-Nation Clause and interconnection issues in the field of platform economy.
(1) Introducing provisions on Most-Favored-Nation Clause.
Article 24 of the Draft provides: “Where the agreement between an undertaking operating internet platform and an undertaking using the internet platform requires that the undertaking using the internet platform provides the same or more preferential transaction conditions on the internet platform as other transaction channels, the people’s court may, according to the plaintiff’s claims and the specific circumstances of the case, handle the case as follows: (1) where there is a competitive relationship between the undertaking operating internet platform and the undertaking using the internet platform, the people’s court shall review the case in accordance with Article 17 of the Anti-monopoly Law; (2) where there is no competitive relationship between the undertaking operating internet platform and the undertaking using the internet platform, the people’s court shall review the case in accordance with Article 18 of the Anti-monopoly Law; (3) where the plaintiff claims that the undertaking operating internet platform abuses the dominant market position, the people’s court shall review the case in accordance with Article 22 of the Anti-monopoly Law and Article 22 of the E-commerce Law; and (4) where the plaintiff claims that the undertaking operating internet platform violates Article 35 of the E-commerce Law, the people’s court shall review the case in accordance with the provision of this article.”
The above new provisions of the Draft set forth how to determine whether the Most-Favored-Nation Clause (the “MFN Clause”) in the field of platform economy constitutes illegal monopolistic conduct. MFN Clause is originally a term used in international economic trade which means the “best available terms”. With the development of the digital economy, the MFN Clause has been used more widely in digital publishing, e-commerce, online travel, online insurance and other sectors. On the one hand, the MFN Clause helps to reduce transaction costs and buyer risks, but on the other hand, it may also have a foreclosure effect and facilitate the collusion between undertakings. Therefore, the MFN Clause falls under the scope of antitrust regulations in lots of key antitrust jurisdictions such as the United States and the European Union. Before the issuance of the Draft, Paragraph 2 of Article 7 of the Guideline for Platform Economy also set forth provisions on the MFN Clause: “If an undertaking operating internet platform requires the undertaking using the internet platform to provide the platform with transaction conditions equal to or more favorable than those provided to other competitive platforms in terms of price, quantity, or other aspects of the product, it may constitute a monopoly agreement or abuse of the dominant market position.”
So far, China’s antitrust enforcement authorities and people’s courts have not determined whether the MFN Clause constitutes monopolistic conduct in any published precedents. In the penalty decision against Eastman (China) for abuse of dominance imposed by the Shanghai Administration for Market Regulation (the “Shanghai AMR”), the Shanghai AMR identified that the MFN Clause concerned as a method to impose transaction restriction but did not mention whether the MFN Clause itself constituted monopolistic conduct.
According to the above new provisions of the Draft and the relevant provisions of the E-commerce Law, when determining whether the MFN Clause in the field of platform economy constitute illegal monopolistic conduct, the people’s court shall, according to the plaintiff’s claims and the specific circumstances of case, conduct the following analysis methods:
• Based on whether there is a competitive relationship between the undertaking operating internet platform and the undertaking using the internet platform, the people’s court shall review the case in accordance with the relevant provisions on horizontal monopoly agreements or vertical monopoly agreements under the Anti-monopoly Law.
• If the plaintiff claims that the undertaking operating internet platform abuses its market dominance, the people’s court shall review the case in accordance with the relevant provisions on the abuse of dominance under the Anti-monopoly Law, and also Article 22 of the E-commerce Law which provides that “The E-commerce undertaking which owns market dominance due to its technical advantages, number of users, ability to control related industries, and other undertakings’ dependence on such E-commerce undertaking in terms of transactions, it is not allowed to abuse its market dominance to exclude or restrict competition.”
• If the plaintiff claims that the undertaking operating internet platform violates Article 35 of the E-commerce Law which provides that “The undertaking operating E-commerce platform shall not use the service agreement, transaction rules, technology or other means to impose unreasonable restrictions or conditions on the transactions, the transaction price and transactions with other undertakings of the undertakings who use the platform, or to charge unreasonable fees from the undertakings using the platform”, the people’s court shall review the case in accordance with the provision of this article.
(2) Introducing provisions on interconnection issues in the field of platform economy.
In recent years, China’s authority has been greatly promoting the interconnection between the platforms due to its importance for the development of national economy and the protection of consumer welfare. The Provisions on Abuse of Dominant Market Position and the Guideline for Platform Economy stipulate that refusing other undertakings to use essential facilities may constitute abuse of dominance and provide the considerations for determining essential facilities.
The Draft also set forth provisions regarding the interconnection between the platforms, which provides that the refusal to make one’s products, platforms or software systems compatible, and the refusal to share one’s technologies, data or platform interface may be deemed as monopolistic conducts. Paragraph 2 of Article 39 of the Draft provides: “Where an undertaking having a market dominance refuses to make its products, platforms or software systems, etc. compatible with other certain products, platforms or software systems, etc. provided by other undertakings without justified reasons, or refuses to share its technologies, data or platform interface, the people’s court may comprehensively consider the following factors and make the determination in accordance with Item (3) of Paragraph 1 of Article 22 of the Anti-monopoly Law: (1) the economic, technical and legal feasibility of the undertaking to implement compatibility or share its technologies, data or platform interface; (2) the substitutability of the products, platforms or software systems and the reconstruction costs of platforms or software systems; (3) the degree of dependence of other undertakings on the products, platforms or software systems of the undertaking concerned to carry out effective competition in the upstream market or downstream market; (4) the impact of refusal of compatibility or sharing on the innovation and introduction of new products; (5) whether refusal of compatibility or sharing substantially excludes or restricts the effective competition in the relevant market; and (6) the impact of implementation of compatibility or sharing on the business activities, legitimate rights and interests of the undertaking concerned.”
6. Introducing provisions on the key issues in the field of intellectual property.
The Draft provides specified provisions on the key issues in the field of intellectual property which draw on the content of the Provisions on the Abuse of Intellectual Property Rights, the Guideline for Intellectual Property Rights, and the opinions formed in administrative enforcement. Limited to the length of the article, we will not elaborate on this section of the content, but only introduce the provisions on the Reverse Payment Agreements.
Article 23 of the Draft provides: “Where the agreement reached and implemented by the drug patent right holder and the generic drug applicant meets all the following conditions, the people’s court may preliminarily determine that it constitutes a monopoly agreement as provided in Article 17 of the Anti-monopoly Law: (1) the drug patent right holder gives or promises to give the generic drug applicant a large amount of benefits compensation in monetary or other forms; and (2) the generic drug applicant promises not to challenge the validity of the patent right of the generic drug or delay to enter the relevant market of the generic drug. Where there is evidence that the benefits compensation referred to in the preceding paragraph is only made up for the cost of resolving the dispute relating to the patent of the generic drug or there are other legitimate reasons, the people’s court may determine that it does not constitute a monopoly agreement as provided in Article 17 of the Anti-monopoly Law.”
The above-mentioned provision specifies how to determine whether the Reverse Payment Agreements, also known as the “Pay-for-delay Agreements”, constitute illegal monopolistic conducts in judicial practice. Prior to the insurance of the Draft, people’s courts have clarified in precedents that the Reverse Payment Agreements may have the effect of excluding or restricting competition and constitute the monopoly agreement regulated by the AML.
On December 17, 2021, the SPC ruled on the application for withdrawal of appeal in AstraZeneca v. Jiangsu Aosaikang Pharmaceutical[5] and for the first time made a preliminary antitrust review on the “reverse payment agreement of pharmaceutical patents”. In the process of reviewing the withdrawal of the appeal application, the SPC found that the settlement agreement in question was in line with the appearance of a “reverse payment agreement of pharmaceutical patents”, i.e. the drug patent right holder promises to compensate the generic applicant for direct or indirect benefits (including disguised compensation such as reducing the generic applicant’s non-benefits), and the generic applicant promises not to challenge the validity of the drug-related patent rights or delay entering the market of the patented drug. The applicant promises not to challenge the validity of the patent right of the drug or delay the entry into the market of the patented drug. The SPC pointed out that such agreements may have the effect of excluding or restricting competition and thus constitute the monopoly agreement prohibited by the AML. In this case, the SPC specified the method of conducting an antitrust review on the “reverse payment agreement of pharmaceutical patents”: by comparing the actual situation where the agreement was signed and fulfilled with the hypothetical situation where the agreement was not signed or fulfilled, the people’s court may focus on the possibility that drug-related patent rights are invalid due to the request for invalidation where the generic drug applicant does not withdraw that, and then, based on this possibility, analyze whether and to what extent relevant agreement causes harm to competition on the relevant market.
7. Specifying that plaintiff may bring lawsuit against the undertaking who benefits from the administrative monopolistic conducts.
Article 4 of the Draft provides: “Where the plaintiff files a civil lawsuit with a people’s court in accordance with the Anti-monopoly Law against the undertaking that benefits from the suspected abuse of administrative power to exclude or restrict competition by an administrative authority or an organization authorized by laws or regulations to administer public affairs, and requests the undertaking to bear civil liability, if the administrative conduct concerned has been legally identified as the abuse of administrative power to exclude or restrict competition, the people’s court shall accept the case.”
Chapter V of the AML sets forth the provisions on the conduct of abuse of administrative power to exclude or restrict competition (“administrative monopolistic conduct”), and Paragraph 1 of Article 61 of the AML provides that “Where administrative authorities and organizations authorized by laws and regulations to administer public affairs abuse their administrative powers to exclude or restrict competition, the superior authorities shall order them to make corrections; the directly liable persons in charge and other directly liable persons shall be punished.” However, the above provisions do not clarify whether an undertaking benefiting from an administrative monopolistic conduct (e.g., where the administrative authorities abuse their administrative power to request all the entities to buy the relevant products from certain undertaking) shall be held liable for any liabilities.
According to Article 4 of the Draft, where there is effective ruling that the administrative conduct concerned constitute an abuse of administrative power to exclude or restrict competition, the plaintiff may file a lawsuit against the undertakings who have benefited from the administrative monopolistic conduct. It remains to be further clarified in relevant regulations and judicial practices regarding how to determine the civil liability of the undertaking who benefit from the administrative monopolistic conduct.
8. Specifying that the people’s court may request the defendant to conduct certain acts to restore the market competition status.
Article 44 of Paragraph 2 of the Draft provides: “Where ruling that the defendant ceases the alleged monopolistic conduct is not sufficient to eliminate the effect of excluding or restricting competition, the people’s court may, based on the plaintiff’s claims and the specific circumstances of the case, order the defendant to take the legal liabilities of making specific acts to restore competition.”
According to the above provisions, in addition to legal liabilities such as compensating the plaintiff for the economic damages, if the defendant is found to have conducted illegal monopolistic conducts, the people’s court may rule that the defendant needs to take certain actions to restore competition, which will improve the effectiveness of judicial remedies. According to China’s antitrust law enforcement practice, we understand that the conducts ordered by the people’s court to restore competition in judicial practice may include terminating the exclusive agreement, terminating the additional unreasonable transaction conditions, terminating the discriminative transaction clauses, and guaranteeing the supply of products to the downstream enterprises, etc.
9. Specifying how to calculate the damages suffered by the plaintiff from the alleged monopolistic conduct.
Article 45 and 47 of the Draft introduce provisions on how to calculate the damages suffered by the plaintiff from the alleged monopolistic conduct, the main contents of which are as follows:
Firstly, the damages suffered by the plaintiff due to the alleged monopolistic conduct include direct damages and reduced acquirable benefits. The following factors may be referred to in determining the damages suffered by the plaintiff due to the alleged monopolistic conduct: (1) product prices, operating costs, profits, market shares, etc. in the relevant market before, after and in the course of implementation of the alleged monopolistic conduct; (2) product prices, operating costs, profits, etc. in comparable markets that are not affected by the monopolistic conduct; (3) product prices, operating costs, profits, market shares, etc. of comparable undertakings that are not affected by the monopolistic conduct; and (4) other factors that can reasonably prove the damages suffered by the plaintiff due to the alleged monopolistic conduct.
Secondly, if the defendant can prove that the plaintiff has transferred all or part of the damages to others, the people’s court may deduct the transferred damages when determining the amount of compensation. The newly added provisions of Paragraph 4 of Article 45 of the Draft are based on the “Passing-on” theory for the compensation in anti-monopoly civil dispute, that is, a circumstance where an undertaking suffering from monopolistic conducts transfers its damage to other entities. Based on the anti-monopoly practices and theories, a buyer (e.g., being forced to purchase a product at an unfairly high price) suffering damages from monopolistic conducts can “pass on” the damages to its downstream undertakings or consumers by resale of the products, raising prices or other means. In such a case, if such a buyer brings an action to claim against the undertaking who conducts the monopolistic conducts, the damages already passed on to other undertakings shall be deducted from compensation claimed for by the buyer. As for the “passed on” damages, the downstream undertakings or consumers may file a lawsuit against the monopolistic conducts concerned claiming for compensation.
Third, where the plaintiff has evidence to prove that the alleged monopolistic conduct has caused damages to it, but the amount is difficult to be determined, the people’s court may determine a reasonable compensation amount based on the plaintiff’s claim and evidence, and taking into account the nature, extent, duration and benefits obtained of the alleged monopolistic conduct. It is often very difficult to determine what specific effect of excluding or restricting competition is caused by monopolistic conducts on the relevant market (for example, what proportion of rise in the price of the products is due to the monopolistic conducts). In light of that, the Draft provides that if the plaintiff has proved that it has suffered from the alleged monopolistic conduct, the people’s court may determine a reasonable compensation amount based on the specific circumstances.
Fourth, where multiple alleged monopolistic conducts are combined with each other and cause indivisible overall damages to the plaintiff in the same relevant market, the people’s court shall take into account the overall damages when determining the damages. Where multiple alleged monopolistic conducts are independent from each other and cause damages to the plaintiff in different relevant markets, the people’s court may take into account such conducts separately when determining the damages.
10. The participants of a horizontal monopoly agreement are not entitled to claim for damages caused by that but can still claim for compensation of “reasonable expenses spent for the investigation and stopping of monopolistic conduct”.
Article 48 of the Draft provides: “Where an undertaking of a horizontal monopoly agreement files a claim against the other undertakings who have reached or implemented the agreement for compensation of damages incurred during the period of participating in the agreement in accordance with Article 60 of the Anti-monopoly Law, the people’s court shall not uphold the claim.”
The provisions added here in the Draft set forth the opinion held by people’s court in judicial practice, that is, the participants of horizontal monopoly agreement are not entitled to claim for damages caused by the implementation of such agreement. However, it should be noted that, according to the opinion held by people’s court in precedents, participants of horizontal monopoly agreement can still claim for the damages of the reasonable expenses for investigating and stopping the monopolistic conduct. For example, in Shanghai Huaming v. Wuhan Taipu, the SPC rejected the appellant’s claim for economic damages but upheld the appellant’s claim for compensation of reasonable expenses incurred due to bring the lawsuit. In this case, the SPC held that upholding the reasonable expenses claimed for by the plaintiff for bringing the lawsuit against horizontal monopoly agreement are conducive to disclosing and stopping monopolistic conduct, which shall be taken into consideration. (Note: For a detailed introduction, please see, Why Settlement Agreements in Patent Litigation were Deemed as Monopoly Agreements? — — Analysis Of the Judgement and Criteria for Determining Monopoly Agreement by the Supreme People’s Court)
*Thanks Liu YAN and Yuanyuan LIU for their contributions in this article.
[1]Case Number: (2013) Min San Zhong Zi No.4
[2] Case Number: (2021) Zui Gao Fa Zhi Min Zhong No. 1298.
[3]Case Number: (2021) Zui Gao Fa Zhi Min Zhong No. 1020.
[4]Case Number: (2021) Zui Gao Fa Zhi Min Zhong No. 1977.
[5]Case Number: (2021) Zui Gao Fa Zhi Min Zhong No. 388.
