Navigating through the Judicial Interpretation on Civil Antitrust Litigation (PRC)

Since the PRC Anti-Monopoly Law (“AML”) became a new benchmark for all sorts of business activities in China in 2008, domestic and foreign operators have become used to the public administrative side of competition law compliance. This includes the awareness of potential administrative investigations and non-compliance consequences, such as fines. What has never been fully on the radar of business operators is the civil law side of competition law compliance.

This may now be bound to change.   Based on the considerable experiences gained from judicial practices over 16 years since the implementation of the AML, the Supreme People’s Court (“SPC”) issued the Interpretation on Several Issues Concerning the Application of Law in the Trial of Civil Monopoly Disputes (“New Judicial Interpretation”), effective as of 1 July 2024. The New Judicial Interpretation responds to public concerns not only from a civil procedural perspective but also from a substantive perspective. It also keeps pace with the times by providing relevant rules and detailed guidance for adjudication on certain hot-spot issues in the fields of digital economy, medicine, and intellectual property rights.

The New Judicial Interpretation covers six aspects, i.e. procedural provisions, definition of relevant market, monopoly agreements, abuse of dominant market position, civil liability, and supplementary provisions. This article analyses the key points and highlights of the New Judicial Interpretation based on our relevant practical experiences.

1. Procedural Provisions 

1) Arbitration clauses cannot exclude court’s jurisdiction (Article 3)

The New Judicial Interpretation makes it clear that even if an arbitration clause is contained in a contract between the parties, the arbitration clause cannot exclude court’s jurisdiction over civil monopoly disputes. The SPC took this position in the judgment of 2019 on the civil dispute between Shell (China) Limited and Hohhot Huili Materials Co., Ltd. over horizontal monopoly, holding that “anti-monopoly is clearly of public law nature, and whether [it] constitutes a monopoly is beyond the relationship of rights and obligations of the parties to a contract … which no longer falls within the arbitrable scope under the Arbitration Law”^[1].

2) The plaintiff is no longer required to bear the burden of proof regarding the basic facts that are determined by AML enforcement authorities as monopolistic behaviour. If necessary, the people’s court may request the AML enforcement authorities making the decision to explain the relevant circumstances (Article 10).

This provision significantly reduces the burden and difficulty of proof, which may facilitate the civil litigation following administrative penalty arising from monopolistic behaviour and increase the cost of breaking the law by the defendant.

3) The PRC courts’ jurisdiction over monopolistic behaviour outside China (Article 6)

Article 2 of the AML provides that “where any monopolistic behaviour outside the People’s Republic of China have the effect of eliminating or restricting competition in a domestic market, the AML shall apply”. The New Judicial Interpretation also clarifies that the PRC courts shall have jurisdiction over a civil lawsuit where the plaintiff files against the defendant having no domicile in China, claiming that the defendant’s monopolistic behaviour outside China have the effect of eliminating or restricting competition in the domestic market.

2. Definition of Relevant Market

1) In principle, the plaintiff shall bear the burden to prove the definition of relevant market (“burden of proof borne by claimant”), but the plaintiff is not required to do so in the case of horizontal monopoly agreements or vertical price monopoly agreements (Article 14).

If the plaintiff claims that the alleged monopolistic behaviour constitutes a horizontal monopoly agreement (i.e., any circumstance as described under Articles 17.1 to 17.5 of the AML) or a vertical price monopoly agreement (i.e., any circumstance as described under Articles 18.1 to 18.2 of the AML), the plaintiff will not be required to produce proof of the definition of relevant market.

2) In addition to the abovementioned, in certain specified circumstances, the plaintiff is not required to bear the burden to prove the definition of relevant market (Article 14)

The plaintiff will not bear the burden of proof regarding the definition of relevant market if it can prove one of the following three circumstances: (i) the defendant has significant market power; (ii) the defendant has a dominant market position; or (iii) the alleged monopolistic behaviour have the effect of eliminating or restricting competition. This provision is conducive to lawsuits against large platform companies because in the past judicial practice, it is generally very complicated to define the relevant market for those large platform companies and the plaintiff is usually not capable of collecting evidence and doing sophisticated economic analysis to define the relevant market.

With regard to (ii) above, the people’s court may preliminarily determine that the defendant has a dominant position in the relevant market if the plaintiff can prove with evidence that the defendant falls under one of the following two circumstances: (i) the defendant has maintained the price significantly higher than the competition market level for a long time, or the quality of the defendant’s goods significantly reduced for a long time without a substantial loss of users, and the relevant market is clearly lack of competition, innovation and new entrants; or (ii) the defendant has maintained a market share significantly higher than that of other business operators for a long time, and the relevant market is clearly lack of competition, innovation and new entrants (Article 29). The New Judicial Interpretation clarifies that the information released by the defendant can be used as the prima facie evidence to prove that the defendant has a dominant market position. Therefore, businesses shall be cautious when releasing information about product price, market occupancy, market share, etc.

3. Monopoly agreement

1) “Transmit” of information is added as one means of communicating the concerted practices under monopoly agreements (Article 18)

In accordance with Article 16 of the AML, monopoly agreements include not only the resolutions and decisions adopted to eliminate or restrict competition but also other concerted practices. The New Judicial Interpretation reiterates the four considerations for determining “other concerted practices” under the Provisions on Prohibiting Monopoly Agreements and also adds “information transmission” as one means of communicating the concerted practices. According to the past judicial practice, it is often difficult for the plaintiff to collect relevant evidence to prove any intent communication and information exchange that are conducted by business operators in private.  However, “information transmission” could be the unilateral release of competition-sensitive information, such as business operating costs, holiday promotions/prices, price increase announcements, etc. Therefore, in terms of corporate compliance, it is recommended that businesses properly keep materials or records that can prove the independence of their business decisions, for example, price increase due to the rising costs of labour or material procurement, so as to reduce any potential risks of civil monopoly lawsuit.

2) Determination of competitive relationship under horizontal monopoly agreements and introduction of the concept of “single economic entity” (Article 19)

Competitive relationship is one of the important criteria for determining a horizontal monopoly agreement.  That is, a horizontal monopoly agreement should be concluded between business operators having competitive relationship. “Single economic entity”, a concept originated from the EU Competition Law, means that when one business exercises its decisive influence over another, the two businesses constitute a single economic entity that will not be regarded as competitors with each other. The concept of “single economic entity” had not been explicitly specified under the PRC anti-monopoly laws and regulations before the official promulgation of the New Judicial Interpretation. Article 19 of the New Judicial Interpretation reads that: “Where a specific business operator acquires control over another business operator or is able to exert its decisive influence over another business operator, or where two or more business operators are controlled or decisively influenced by the same third party, they shall be deemed as one economic entity, rather than the business operators having competitive relationship.”  However, it remains unclear that whether the control relationship determined under Article 19 includes joint control and whether the establishment of such control relationship depends on the design of control structure or the actual exercise of control right. Therefore, whether there is a single economic entity has great significance in determining the breaching party, determining the liability of the parent company, and calculating the amount of fine.

3) Assessment of vertical monopoly agreements’ effect of eliminating or restricting competition (Article 22 and Article 23)

Article 18 of the AML provides that where a business operator can prove that an agreement setting prices or restricting minimum prices for resale to third parties does not eliminate or restrict competition, the agreement will not be prohibited. In practice, however, no specific guidance was in place on how to prove the absence of the effect of eliminating or restricting competition. The New Judicial Interpretation clarifies that the people’s court should rule that the agreement does not have an effect of eliminating or restricting competition when the evidence is sufficient to prove that the pro-competitive effect of the agreement significantly outweighs the anti-competitive effect. Article 22 of the New Judicial Interpretation sets out both the anti-competitive effects (e.g. raising barriers to market entry, hindering more efficient business operators or business models) and pro-competitive effects (e.g. preventing free riding, promoting inter-brand competition, improving the quality of pre-sale and/or after-sale services).

In addition to the provision of Article 18 of the AML, the New Judicial Interpretation also introduces the exemption rule for vertical monopoly agreements, that is, an agency agreement under which the distributor does not take any material commercial or operational risks is not subject to Article 18.1 of the AML regarding the maintenance of resale prices.  However, such an agency agreement should be determined in light of its essence, instead of the agreement name. Take the complex and changeable distribution model in the automotive industry as an example, there are various types of arrangements, such as authorized distribution, general agency, distribution agency, channel agency and so forth.  Whether the distributors under any of these arrangements have taken material commercial or operational risk shall be considered from multiple aspects (such as the ownership of goods, assumption of the risk of damage or loss of goods, assumption of the storage fee and risk, liabilities to third parties for loss or damage, etc.), so as to distinguish an authentic agency agreement and avoid the risks of constitute vertical monopoly agreements.

Furthermore, according to the New Judicial Interpretation, the safe harbour rule under Article 18 of the AML still applies to the argument of resale price maintenance.  However, it is unclear how the law enforcement authorities will enforce the safe harbour rule, which remains to be observed.

4) Clarification on the determination of anti-monopoly regarding the MFN clause (Article 25)

The digital economy sector (a.k.a., the platform economy sector) has been a hot topic in recent years. The New Judicial Interpretation incorporates the detailed rules for determining the most favoured nation (MFN) treatment for platform operators. Considering the business relationship between a platform operator and a business using the platform, for example, whether they are competitors or not, or whether the plaintiff claims that the platform operator abuses its dominant market position), the people’s court may rule the legality of the MFN clause based on the rules of prohibiting horizontal monopoly agreements, vertical monopoly agreements, and abuse of dominant market position.

There is no judicial precedent in China for determining the MFN clause as monopoly agreements or abuse of dominant market position, but there have been relevant cases in extraterritorial practice. In the Amazon Marketplace case (2012-2013), the German Federal Cartel Office (Bundeskartellamt) initiated an administrative lawsuit against Amazon, claiming that Amazon asked the retailers on its Marketplace online retailing platform to sign the price parity clause, which required the retailers not to offer lower prices on other platforms than the Marketplace. Given that Amazon itself also provides retailing services, Amazon is competitive with the retailers in the retailing market. The German Federal Cartel Office ruled that the price parity clause constituted a horizontal monopoly agreement.^[2] In the Amazon e-book case, the agreements between Amazon and publishers required publishers to notify and provide Amazon with the same or equivalent terms as they offer to Amazon's competitors. Given Amazon’s large market share in the e-book market, the European Commission preliminarily determined that Amazon may have abused its dominant market position.^[3]

4. Abuse of Dominant Market Position

1) Identification of the Abuse of Dominant Market Position

Compared with the Provisions on Prohibiting the Abuse of Dominant Market Positions, the New Judicial Interpretation reflects more explicit attitudes and details of the law enforcement authorities regarding identification of the abuse of dominant market positions and at the same time provides more refined or different justified reasons (Articles 36-41), mainly including:

• “Selling goods at an unfairly high price or buying goods at an unfairly low price”: for assessing whether the price constitutes an unfair price, the New Judicial Interpretation adds the standards such as rate of return, reasonable profit, duration of high/low price, etc., so as to avoid excessive intervention in business operators’ independent pricing based on simple assessment standards. In addition, incorporating the rate of return into the analysis of “excessively high price” may be conducive to the businesses that heavily invest into R&D and innovation and make it more reasonable for these businesses to justify higher prices.

   

• “Refusing to deal with the counterparty”: the New Judicial Interpretation does not adopt “refusing to provide necessary facilities (which can be the platform itself or data)” as one of the elements described in the Provisions on Prohibiting the Abuse of Dominant Market Positions for identifying refusal of transaction. Meanwhile, the New Judicial Interpretation pays special attention to the more covert behaviour of refusing transactions, such as refusing to be compatible with certain goods, platforms or software systems provided by other business operators, or refusing to provide technologies, data or platform interfaces.

   

• “Imposing unreasonable terms of transaction”: the New Judicial Interpretation explicitly includes “compulsorily collecting unnecessary user information or data” and “imposing non-competition obligations such as restricting the counterparty to improve technology or develop new products, etc.” as the circumstances of imposing unreasonable terms of transaction, which reflects the current data compliance trends of protecting personal information security and protecting R&D and innovation.

   

• “Differential treatment”: the New Judicial Interpretation introduces the concept of “profit squeeze” as one of the circumstances of differential treatment. To identify profit squeeze, it requires to consider whether the price discriminatory behaviour will exclude or restrict the counterparty with “equal efficiency” (i.e., in terms of transaction security, transaction costs, scale and capabilities, credit status, transaction phases, duration of transaction, etc.) from participating in competition. Profit squeeze generally refers to the behaviour that the vertically integrated manufacturer with a dominant market position prevents its downstream competitors from achieving reasonably sustainable profit margins. In current law enforcement and judicial practice, there are scarcely any case that a business operator with a dominant market position excludes or restricts the counterparty with equal efficiency from conducting effective competition by means of profit squeeze, thereby constituting differential treatment. Therefore, we should pay more attention to such cases.

5. Civil Liabilities

1) Courts may order to restore competition (Article 43)

The New Judicial Interpretation does not specify the “actions” necessary to restore competition, but it is our understanding that the actions may include terminating sole or exclusive agreements, granting licences of patents, know-how and other intellectual property rights, and modifying platform rules or algorithms and so forth.

2) Clarification of the scope of losses claimable by the plaintiff (Articles 44-45)

The New Judicial Interpretation clarifies that the plaintiff’s claimable losses include direct losses, anticipated interests and reasonable expenses. If it is difficult to assess the specific amount of losses, the court may at its discretion set a reasonable amount of compensation to relieve the plaintiff’s pressure of providing an accurate amount of damages. Meanwhile, the New Judicial Interpretation incorporates reasonable market research fees and economic analysis fees into the calculation of losses, which is more conducive to reducing the plaintiff’s litigation costs. However, the “deduction of pass-through losses”, which was originally mentioned in the Draft for Comments but later deleted in the New Judicial Interpretation, remains to be defined in future judicial practice. “Deduction of pass-through losses” means that when the plaintiff claims compensation for losses, the people’s court may deduct the pass-through losses when determining the amount of compensation if the defendant can prove that the plaintiff has passed on part or all of its losses to others.