The second of our two-part blog on the draft implementing rules (see part one on merger control here), published by the State Administration for Market Regulation (SAMR) for public consultation, discusses SAMR’s proposals for anti-competitive agreements, abusive conduct and abuse of intellectual property rights (together, the Draft Conduct Rules). These rules follow the adoption of China’s new Anti-Monopoly Law (New AML), which entered into force on 1 August 2022 (see, our briefing on the New AML here).
The Draft Conduct Rules’ key proposals include:
- introduction of a market share-based safe harbour threshold for vertical agreements;
- tightened scrutiny of use of data, algorithms and platform rules;
- clarification of the scope of ‘hub-and-spoke’ conspiracies;
- inclusion of self-preferencing as a stand-alone form of abusive conduct;
- introduction of the concept of ‘innovation markets’;
- call for heightened antitrust compliance in standard-setting processes; and
- prohibiting standard essential patent (SEP) holders with a dominant market position from abusing that position by forcing licensees to accept unfairly high rates or other unreasonable terms through injunctive or other relief.
The Draft Conduct Rules seek to provide greater clarity to companies on the application of the New AML, although several issues remain to be settled.
Safe harbour for vertical agreements
The Draft Conduct Rules propose a safe harbour threshold for vertical agreements where: (i) the parties’ market share in both upstream and downstream markets is less than 15 per cent; and (ii) the relevant agreement does not eliminate or restrict competition. The introduction of a safe harbour is welcome since it offers legal certainty to companies assessing the legality of a vertical agreement and when SAMR is likely to intervene. The proposal also allows SAMR to focus on potentially more problematic agreements. However, the proposal as formulated raises issues:
- The market share threshold is very low meaning that many agreements that do not harm competition will not be eligible. In context, the proposed threshold is much lower than the 30 per cent threshold adopted in other jurisdictions such as the EU and those adopted in SAMR’s Anti-Monopoly Guidelines in the Automobile Industry and Anti-Monopoly Guidelines in the Intellectual Property Industry which to date have provided helpful reference for companies conducting self-assessments in different scenarios.
- The inconsistency in approach to existing safe harbours creates uncertainty. This raises the question whether parties with a 15-30 per cent market share could face higher antitrust risks if their agreement includes clauses covered by safe harbours under the Auto or IP Guidelines (eg customer/territorial restrictions or exclusivity). In addition, unlike the IP Guidelines, which apply to both horizontal and vertical agreements, the Draft Conduct Rules do not include a safe harbour for horizontal agreements. Moreover, there is no parallel IP-specific safe harbour in the Draft Conduct Rules as under the IP Guidelines and, therefore, it is unclear whether the IP-specific safe harbour will remain effective once the Draft Conduct Rules are adopted.
- The requirement to show that the vertical agreement has no anti-competitive effects for the safe harbour to apply seems to run counter to a safe harbour’s objective ie an otherwise restrictive agreement may not give rise significant competition issues warranting intervention.
- It is unclear whether the safe harbour applies to resale price maintenance (RPM). This is not expressly excluded from the Draft Conduct Rules. However, it is reasonable to assume that RPM may not easily be covered by the safe harbour given the New AML presumes RPM is unlawful and companies will need to show that their agreement has no anti-competitive effects for the safe harbour to apply. The standard of proof for rebutting the RPM presumption of illegality is likely to continue to be very high. Notably, only days before the New AML came into effect, the Beijing Administration for Market Regulation fined a franchise operator, an exclusive licensee and operator of Sesame Street English learning programmes in China, for engaging in RPM. There is no suggestion in the decision that the franchise operator had market power, let alone market shares approaching the proposed market share safe harbour threshold.
Tightened scrutiny of use of data, algorithms and platform rules
The New AML and the Antitrust Guidelines on the Platform Economy prohibit companies from engaging in anti-competitive practices utilising data, algorithms, technology, capital strength and platform rules. The Draft Conduct Rules build on this and recognise, amongst others, that:
- Data can be a form of ‘raw material’ and agreements between competitors on allocation of data resources can amount to market sharing.
- Price-related agreements utilising algorithms or platform rules can be a form of price fixing.
- There can be a meeting of minds via algorithms and this concept has been added to the forms of anti-competitive agreements alongside written and oral agreements.
Clarification of the scope of ‘hub-and-spoke’ violations
The New AML makes it illegal for parties to either ‘organise’ or ‘provide substantial assistance’ to the members of horizontal agreements. The Draft Conduct Rules clarify that ‘organising’ a cartel includes the scenario where a party enters into agreements with trading parties (eg distributors) that compete with each other and intentionally facilitates a ‘meeting of minds’ or information exchange between the trading parties.
A prime example of this could be where a supplier organises or facilitates a cartel (eg price fixing or market sharing) between its distributors. Companies will need to ensure that their distribution agreements do not include mechanisms that could act as a means for distributors to exchange competitively sensitive information. Antitrust compliance measures will also need to be stepped up, for example, where a supplier organises events or hosts social media platforms for its distributors.
It is noteworthy that anti-competitive agreements facilitated by trade associations are regulated separately and trade associations are subject to different legal liabilities vis-à-vis their members.
Self-preferencing as a type of abusive conduct
The Draft Conduct Rules include a new provision prohibiting platform operators from engaging in self-preferencing (ie favouring their own products in terms of display or ranking over other products) or using non-public information of competitors selling on their platforms to develop or push their own products.
This change follows the global scrutiny of the self-preferencing practices of tech companies. The questions being explored in China include whether ‘self-preferencing’ constitutes a novel and stand-alone type of violation and, if so, the requisite standard of proof. SAMR’s draft implementing rules answers the first question, but the second question ie the legal test SAMR will adopt will need to be clarified in future guidance or decisions. Given self-preferencing is widely adopted (albert in different forms) in China’s internet sector, for companies active in the sector the proposal heightens the need for self-assessment and adoption of additional compliance measures – and potentially a re-think of platform vertical integration arrangements.
Introduction of the concept of ‘innovation market’
The Draft Conduct Rules make clear that ‘innovation market’ can be analysed as a distinct relevant market. This is arguably the first time that SAMR has formally recognised the concept of innovation markets, although SAMR and its predecessor have considered this from time to time (e.g., pipeline products in pharma transactions). However, the Draft Conduct Rules leave several issues open including how the relevant innovation market should be defined in a case, how impact on competition should be assessed including the timeframe and other factors to consider when analysing innovation markets. Guidance from SAMR will be needed in this area to provide meaningful proxies for identifying or measuring market power and effects in ‘innovation markets’.
Call for heightened antitrust compliance in standard-setting processes
The Draft Conduct Rules call for increased antitrust compliance in the standard-setting arena in China. They prohibit competitors from using the stand-setting process as a cover to exclude or disadvantage competitors or suppliers of downstream products. Building on existing guidance, the Draft Conduct Rules remind companies that participate in standard setting organisations (SSO) to implement antitrust compliance programmes to ensure that their employees are aware of the antitrust risk. Specifically, before joining an SSO, companies are encouraged to consider whether the SSO’s standard-selection process includes adequate industry representation (eg the SSO does not restrict certain competitors from participating in the selection process). In addition, employees participating in SSO meetings should be cautioned to avoid discussing or sharing competitively sensitive information at meetings. Companies will also need to analyse whether the SSO is developing standards that cover more than what is strictly necessary (eg if the standard is not narrowly tailored, this may signal intent to either exclude competitors or discriminate against certain technology or products).
Prohibiting SEP holders with a dominant market position from abusing that position by forcing licensees to accept unfairly high rates or other unreasonable terms through injunctive or other relief
The Draft Conduct Rules prohibit the holder of an SEP from forcing licensees to accept unfairly high licensing rates or other unreasonable terms by seeking or enforcing a court injunction or other relief. They also prohibit SEP holders from preventing implementers from implementing SEPs while good faith licensing negotiations continue. In practice, extensive fact-finding is required to determine whether parties remain in good faith negotiations when injunctive relief is pursued. The Chinese courts usually examine the negotiation process and licensing terms extensively to assess whether injunctive relief is an appropriate remedy to prevent irrevocable harm to SEP holder or constitutes abusive conduct.