Vertical agreements

Special rules and exemptions

Do any special rules or exemptions apply to the assessment of anticompetitive agreements between undertakings active at different levels of the supply chain in digital markets in your jurisdiction?

As a general rule, article 14 of the Anti-Monopoly Law (AML) provides that business operators are prohibited from reaching any of the following monopoly agreements with their trading counterparties:

  • fixing the price of commodities for resale to a third party;
  • restricting the minimum price of commodities for resale to a third party; or
  • other monopoly agreements as determined by the State Council anti-monopoly law enforcement authorities.

 

To date, the competition authority only probed and punished resale price maintenance (RPM) practices. In some cases where the companies imposed certain territorial restrictions or exclusive dealing restrictions, such non-pricing restrictions were treated by the competition authority as the measures to enhance the RPM.

The Anti-monopoly Guidelines in Automotive Industry promulgated by the Antitrust Commission of State Council on 4 January 2019 (Automotive Guidelines) further flagged certain non-pricing arrangements (including territorial or customer restrictions on passive sales, tie-in, single branding and imposing unreasonable conditions) may constitute vertical monopoly agreements. But so far, there is no precedent that the authority ever imposed any sanctions solely due to any non-pricing vertical restrictions.

With respect to special rules applied to business operators in digital market, article 7 of the Platform Guidelines provide that business operators in the field of platform economy and active at different levels of the supply chain shall not reach vertical monopoly agreement such as fixing resale prices, restricting minimum resale prices, in any of the following ways:

  • using technical means to set price automatically;
  • using platform rules to unify prices;
  • directly or indirectly limiting prices by using data and algorithms; or
  • restricting other trading conditions by technical means, platform rules, data and algorithms or otherwise to exclude or restrict market competition.

 

When determining whether the above practices constitute vertical monopoly agreements provided by article 14 of the AML, factors such as market power of the business operator of the platform, the status of competition in the relevant market, the barriers of market entry, the impact on consumers’ interests and innovation, should be considered. 

In terms of exemption, there are no special exemptions applied to the assessment of anti-competitive agreements between business operators active at different levels of the supply chain in digital markets in China and thus the assessment of such anticompetitive agreements in the digital market needs to follow the general rules.

A vertical arrangement can be exempted from sanctions if it satisfies the conditions provided in article 15 of the AML, which applies the same standard and requirement for cartels.

In addition to article 15 of the AML, the IP Guidelines and the Automotive Guidelines provide the following ‘safe harbours’ for vertical agreements in the fields of intellectual property rights (IPR) and the automotive sector:

  • the IP Guidelines provide that IPR related vertical monopoly agreements which are not RPM may presumably apply the exemption, if both the business operator and its trade counterparty hold a market share of less than 30 per cent in each of the relevant markets, or in the case that it is difficult to calculate the market share or the market share cannot accurately reflect the competition structure, there are four or more attainable alternative independent technologies in the relevant market at reasonable costs; and
  • the Automotive Guidelines generally recognise that vertical territorial restrictions and customer restrictions imposed by companies without significant market power can usually improve service quality and distribution efficiency, and do not have the effect of seriously restricting market competition, and thus can be presumed to be exempt. The Automotive Guidelines further clarify that if the market share of the supplier is ‘30 per cent or less’, it can be deemed as not having significant market power.

 

In addition to the above, the Automotive Guidelines further provide that companies could apply for individual exemptions if the RPM practices are imposed:

  • during the promotion period of new energy vehicles;
  • on a distributor who only acts as an intermediary party;
  • during government procurement where the auto suppliers agree on a price for a public bid with the specific intermediary distributor; or
  • in online sales where the auto suppliers sell automobiles at a unified price through an online platform for a certain period with unspecified users, and the distributor is only in charge of the transaction proceedings such as vehicle delivery, payment collection, invoicing.
Online sales bans

How has the competition authority in your jurisdiction addressed absolute bans on online sales in digital markets?

The competition authority has not addressed or decided any case in relation to absolute bans on online sales in digital markets.

Nevertheless, based on the Automotive Guidelines, we understand that absolute bans on online sales would be regarded as having an anticompetitive effect of restricting competition. For online sales (e-commerce sales), the Automotive Guidelines explicitly provide that, compared with the traditional sales model, sales online are aimed at a more broad and diverse client base. If a client browses the website of the dealer and the contact leads to a sales transaction, such a sale will be deemed as a passive sale. The Automotive Guidelines adopt the attitude that a restriction on passive sales usually has an anticompetitive effect, resulting in high prices and reduction of the choices of consumers.

In addition, if the supplier has a dominant market position, imposing bans on online sales could be in violation of article 17 of the AML (ie, being regarded as abuse of dominant market position).

Resale price maintenance

How has the competition authority in your jurisdiction addressed online resale price maintenance?

Article 7 of the Platform Guidelines sets out some typical ways the platform company may engage to fix resale price or to restrict the minimum resale price of its trading counterparty, such as using technical means to set price automatically, using platform rules to unify prices, and directly or indirectly limiting prices by using data and algorithms.

From an enforcement perspective, the competition authority has not penalised any internet platform regarding online resale price maintenance practice. Nevertheless, we noted that the competition authority has taken online RPM as evidence of RPM practices in several decisions, including Shanghai AMR’s punishment to a global leading medical instrument company in relation to its RPM practice.

The competition authority is inclined to treat RPM as per se illegal. But in private litigations, the courts apply a standard similar to ‘rule of reason’, and plaintiffs shall bear the burden to prove the anticompetitive effects of the RPM practices. In Hainan Yutai Technology Feed Co, Ltd v Hainan Provincial Price Bureau, the Chinese Supreme People’s Court decided that RPM could be analysed under ‘per se illegal’ approach by the administrative regulators in their investigations, but should be analysed under the ‘rule of reason’ in civil litigations.

Geoblocking and territorial restrictions

How has the competition authority in your jurisdiction addressed geoblocking and other territorial restrictions?

The competition authority has not addressed or decided any case in relation to geoblocking concerning restrictions on sales to customers in other countries outside PRC so far. This is because the AML enforcement is mainly concerned with effects of the alleged conducts on the domestic market, therefore in practice the competition authority is less likely to penalise those restrictions on sales to customers in other countries.

Regarding territorial restrictions, in some cases where the companies imposed certain territorial restrictions, the territorial restrictions were treated by the authority as measures to enhance the RPM. The Automotive Guidelines further flag that territorial restrictions may constitute vertical monopoly agreement, but where the supplier does not have significant market power, territorial restrictions imposed by such supplier would generally be regarded as not having the effect of seriously restricting competition.

Platform bans

How has the competition authority in your jurisdiction addressed supplier-imposed restrictions on distributors’ use of online platforms or marketplaces and restrictions on online platform operators themselves?

The competition authority has not addressed or decided any case in relation to supplier-imposed restrictions on distributors’ use of online platforms so far.

That being said, the Automotive Guidelines provide that to maintain the brand image, the auto supplier would generally specify the quality standards for the design, decoration and office facilities of the business premise of the dealer and repair service provider by means of agreement or business policy. However, it is unclear whether restrictions on distributors’ use of online platforms imposed by suppliers would constitute vertical monopoly agreements under the framework of the Automotive Guidelines due to no enforcement precedents so far.

Furthermore, if the supplier has dominant market position, such restrictions could be in violation of article 17 of the AML (ie, being regarded as abuse of dominant market position by imposing unreasonable trading terms).

Targeted online advertising

How has the competition authority in your jurisdiction addressed restrictions on using or bidding for a manufacturer’s brand name for the purposes of targeted online advertising?

The competition authority has not addressed or decided any case in relation to restrictions on using or bidding for a manufacturer’s brand name for the purposes of targeted online advertising so far.

Based on our understanding of the AML, such restriction may constitute a vertical monopoly agreement if competition in the relevant market (eg, sales market of the product) is eliminated or adversely restricted. Furthermore, if the supplier has a dominant market position, such restrictions could be in violation of article 17 of the AML (ie, being regarded as abuse of dominant market position by imposing unreasonable trading terms).

Most-favoured-nation clauses

How has the competition authority in your jurisdiction addressed most-favoured-nation clauses?

Pursuant to article 7 of the Platform Guidelines, a platform company requiring counterparties operating on the platform to provide it with trading conditions equal or better than another competing platform in terms of price or quantity of products may constitute a monopoly agreement. If the platform concerned has a dominant market position, such practice may also constitute abuse of the dominant position.

Article 7 of the Platform Guidelines further sets out factors to be considered to decide if the above-mentioned practice constitutes a vertical monopoly agreement. Such factors include market power of the platform company, competition status in the relevant market, market entrance by other business operators and impact on consumers and innovation.

In practice, the attitude of the Shanghai Municipal Administration for Market Regulation (Shanghai AMR) towards the MFN clauses in the Eastman case (concerning abuse of dominant market position) was noteworthy. In this case, Shanghai AMR found that Eastman’s entering into and implementation of two types of agreements – agreements containing the minimum purchase quantity clause and ‘take-or-pay’ clause, and agreements containing the MFN clause conditioned on minimum purchase quantity, had the effect of exclusive dealing and thus violated the AML.

Multisided digital markets

How has the competition authority in your jurisdiction addressed vertical restraints imposed in multisided digital markets? How have potential efficiency arguments been addressed?

The competition authority has not addressed or decided any case in relation to vertical restraints imposed in multisided digital markets, nor any efficiency arguments in this regard have been tested before.

Having said that, the State Administration for Market Regulation has punished several online platforms that have dominant market positions regarding their ‘either-or choice’ (or exclusive dealing) practices.

Other issues

Have any other key issues emerged in your jurisdiction in relation to the application of competition law to vertical agreements in digital markets?

There are no other key issues we are aware of.

Law stated date

Correct on

Give the date on which the information above is accurate.

21 August 2020