Expert group report on exemptions to anticompetitive vertical agreements in China expected by year end, sources

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* Expert group to submit report by year end

* NDRC to base draft guidelines on vertical agreements on report

* Lawyers divided on whether NDRC should issue formal guidance on vertical agreements

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An expert group established by China’s National Development and Reform Commission (NDRC) to carry out a study on exemptions in antitrust enforcement against anticompetitive vertical agreements, is set to issue its report at the end of 2012, two sources familiar with the situation told PaRR.

The group was established in the summer and consists of antitrust and economic experts from Renmin University and other institutes, the sources said. The NDRC is one of China’s three antitrust regulators and oversees price-related antitrust violations.

The NDRC and other Chinese antitrust regulators often commission study groups of academics and/or lawyers, such as this one, to resolve legal issues and prepare preliminary drafts of legislation. But this is the first time an expert group was created to study vertical agreement issues, the sources told PaRR.

The group plans to submit its conclusions and preliminary draft provisions of guidance to the NDRC, the first source said. Based on the report, NDRC will then formulate its own draft legislation and seek public comments sometime next year, the source said.

The sources did not identify the legal form of the contemplated legislative initiative. But, local lawyers expect the legislative initiative to take the form of NDRC guidelines accompanying China’s Antimonopoly Law (AML).

Under Article 14 of the AML, vertical agreements on price-fixing and minimum price maintenance (RPM) are prohibited. However, Article 15 provides that this general prohibition may be inapplicable to certain types of agreements outlined in Article 15. For instance, agreements which contribute to improving technological progress and R&D or enhance operational efficiency and strengthen SME competitiveness, could be exempted.

The expert group is expected to provide guidance on the types of agreements outlined in Article 15 of the AML that could be exempted from the AML, according to the first source.

China’s legal community is not uniformly affirmative on whether guidelines on exemptions to prohibited vertical agreements are even necessary in the country as yet. The question was debated during the EU-China competition week in Xian, China, in October. Chinese and European antitrust regulators, as well as antitrust attorneys, attended the event.

Some in the legal community welcome guidance for more clarity on vertical agreements, noted an attorney who attended the competition week. Others argued that, for a country like China that has not had a competition regime for a long time, such guidelines could be premature, the attorney observed. “If there is no adequate experience, then what are guidelines really going to say other than borrow from the other regulatory regimes?” the attorney asked.

The attorney thought that guidelines could generally be useful, but also argued that they “need to be meaningful in so far as they reflect the current thinking of where the regulator is in terms of enforcement”. The attorney further argued that, given the regulators’ lack of practical experience in dealing with vertical agreement issues, the use of any such guidance in practice was questionable.

A Shanghai-based attorney who represents multinational companies in China did not think the NDRC should issue guidance on vertical agreements. The regulator should allow the court system to develop legal precedent through addressing live cases instead, he said.

Clarity on RPM?

Whether vertical agreements listed in Article 14 of the AML, including RPM, are illegal per se under Chinese competition law needs to be further discussed, one of the sources said. Guidance on the exemptions could add clarity on the types of vertical agreements that are considered illegal as such, the source added.

Yang Ning, a partner at HaoLiWen Partners, also told PaRR that he expects detailed guidelines on vertical agreements to clarify what types of vertical arrangements are considered legal and reasonable and what are not, under the AML.

“RPM is very widely practiced in China”, Yang noted. “If (the NDRC) all of a sudden made it illegal, it will have a huge impact on industries.”

Many foreign companies have sought legal advice on RPM in China, he said. “We usually advise them to assess their market share first,” Yang explained. “Our understanding of the NDRC’s interpretation of the law is that RPM agreements could be deemed anticompetitive if companies reach a certain market share.” Evidence of anticompetitive effects of RPM would also be required, he added.

Mere suggested prices that are not binding on the parties would not be treated as RPM, Yang suggested.

But the market share threshold that would trigger RPM is currently unclear, he said.

“China generally follows the EU, but what is our standard? Do we set it at 10% or 20%, or 50%?,” Yang asked.

Lack of clear definition for vertical agreements

It is also unclear how Chinese regulators define the “binding” nature of vertical agreements, Yang told PaRR.

Vertical agreements, especially those involving RPM, have come to the fore in light of recent legal proceedings against Johnson & Johnson Medical (J&J China).

The NDRC announced last year that it had investigated and punished pharmaceutical companies in Shandong province involving a distribution agreement.

The first private litigation from an RPM case, filed earlier this year, involved J&J China and Beijing Ruibang Yonghe Science and Technology Trade Company (Beijing Rainbow). Beijing Rainbow claimed damages in relation to an RPM clause in the distribution agreement between the claimant and J&J China.

The Shanghai Intermediate Court ruled against Beijing Rainbow because the claimant failed to establish that the RPM agreement had reduced or eliminated competition. Beijing Rainbow has appealed the decision to the Shanghai High Court.

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