China’s Supreme People’s Court (“SPC”) issued its Provisions on Several Issues concerning the Application of Law in the Trial of Civil Dispute Cases Arising from Monopolistic Conduct (“SPC rules”) on May 3, 2012, effective on June 1, 2012.  Article 7 of the SPC rules differentiates between horizontal and vertical monopolistic agreements with regard to the plaintiff’s burden of proof on the element of anti-competitive effect.  Horizontal monopolistic agreements falling within Article 13 of the AM are presumed to have the effect of eliminating or restricting competition, unless the defendants can demonstrate otherwise.  For vertical monopolistic agreements under Article 14 of the AML, no such presumption will be made. 

By implication, the above differentiation would mean that the plaintiff in a vertical monopolistic claim must prove (1) the monopolistic agreement falls within Article 14 of the AML; (2) the agreement has anti-competitive effects; (3) it suffered damages because of the monopolistic conduct.  Whereas the plaintiff in a horizontal monopolistic claim only needs to prove item (1) and (3) abovementioned, and the defendant has the rebuttal burden to prove that the agreement would not eliminate or restrict competition.

Rainbow v. Johnson & Johnson is the first case on vertical agreements. Rainbow Medical Equipment & Supplies Co. (“Rainbow”) acted as a distributor of surgical products for Johnson & Johnson (“J&J”). The agreement between Rainbow and J&J restricted Rainbow from selling J&J products below certain prices.  In July 2008, J&J penalized Rainbow and invalidated Rainbow’s sales with two Beijing hospitals, because Rainbow had charged lower prices in contravention of the RPM provision in the distribution agreement.

In its judgment on 18 May 2012, the Shanghai Intermediate People’s Court found that imposing a fixed distribution price itself was not enough to establish a violation of the AML; the parties’ market power in the relevant upstream and downstream markets and the impact of the fixed price on price and supply quantities must also be considered.  Due to Rainbow’s failure in providing sufficient evidence to prove J&J’s market power in the relevant markets, the court rendered the judgment in favor of J&J.  

The Rainbow v. Johnson & Johnson case shows the barriers a plaintiff needs to overcome in satisfying its burden of proof in a vertical monopolistic agreement claim.  Would it be easier for the plaintiff to prove against a horizontal monopolistic agreement, given that it only needs to demonstrate the existence of a cartel agreement and its own damages suffered therefrom? 

 On December 5, 2012, the Guangdong Higher People’s Court issued a judgment on Shenzhen Huierxun Technology Co. Ltd. (“Huierxun”) v. Shenzhen Pest Control Association.  This is one of the rare horizontal agreement cases up to date, which provides insight into the judicial practice concerning the allocation of burden of proof between the parties.

Huierxun is a company engaging in pest control business in Shenzhen city.  Huierxun filed an action with the Shenzhen Intermediate People’s Court, complaining that the defendant conducted price-fixing behavior by signing agreements with its competitors (i.e. members in the pest control association) to set restrictions on the price of pest control services, which caused damages to the company.  The defendant, in response, argued that its conduct was to prevent adverse competition and protect public interest and that the alleged agreement did not severely restrict competition in the relevant market; and therefore the conduct was justifiable under Article 15(4) of the AML (which provides exemption to the application of Article 13 of the AML). The Shenzhen Intermediate Court accepted the defendant’s contention of Article 15, and supported the price-fixing agreement at issue.  Huierxun then appealed to Guangdong Higher People’s Court, and yet the court dismissed its appeal on December 5, 2012.  One of the grounds for the dismissal was that Huierxun as the plaintiff failed to prove any anti-competitive effects as a result of the alleged agreement.

When the appeal court issued its decision, the SPC rules were already in effect.   The court’s ruling that the plaintiff needed to prove the anti-competitive effect of a cartel is seemingly in contrast to Article 7 of the SPC rules.   The ruling has provoked questions among commenters: shouldn’t the burden on the defendant to rebut a presumption?

This is a fair question to ask.  Our observation, however, is that the appeal court might have taken into account Article 15(4) of the AML in its reasoning process: (1) the appeal court accepted the lower court’s judgment that the defendant’s conduct was to prevent adverse competition and protect public interest (in other words, the conduct has given rise to economic efficiencies); (2) the burden should accordingly be shifted back to the plaintiff to show that the anti-competitive effects of the alleged agreement outweigh the public interest and efficiency factors for the price restriction agreement; (3) failing to show such anti-competitive effects, the plaintiff failed to satisfy its burden of proof.

It is uncertain whether Article 15 is in fact the reason for the shift of burden back to the plaintiff.   After all, no guidance has been given under the SPC rules on the plaintiff’s burden of proof where Article 15 comes into play. The court’s future consideration in this area would therefore be crucial in providing guidance in relation to claims involving an Article 15 exemption.

Another interesting observation is that, unlike some other jurisdictions such as the US, there has surprisingly been very little antitrust private litigation in relation to horizontal monopolistic agreement,  despite a more lenient burden of proof for the plaintiff and the robust administrative penalties by the relevant regulators (for instance, according to SAIC’s announcement in December 2012, 16 out of 17 cases that SAIC has investigated involve cartel and only 1 involves abuse of dominance).   A plausible explanation of the temporary peace in this field is that cartel as a form of monopoly has not been fully comprehended by the public.