China Issues Judicial Interpretation on Civil Antitrust Cases

On June 24, 2024, China’s Supreme People’s Court published its Interpretation of Certain Issues Relating to the Application of the Law in the Trial of Monopoly-Related Civil Disputes (the “Interpretation”).¹

The Interpretation—which runs to some 51 articles—addresses a range of issues including procedural matters, market definition, the concept of a monopoly agreement, conduct amounting to abuse of dominance and questions of liability in civil antitrust cases. The Interpretation, which became effective on July 1, 2024, supersedes an earlier interpretation published by the Supreme People’s Court in 2012.

Key aspects of the Interpretation are discussed below.

1. Procedural issues

a) No applications for declaratory judgment

The Interpretation instructs Chinese courts to reject applications which merely seek a declaratory judgement on the legality of the challenged conduct without other relief (i.e., damages, an injunction or specific performance). This is presumably aimed at making the most efficient use of court time and resources.

b) Antitrust claims not subject to arbitration

The Interpretation confirms that Chinese courts retain jurisdiction over private antitrust disputes notwithstanding the inclusion of an arbitration clause in the parties’ contract. This view reflects the 2019 ruling of the Supreme People’s Court’s in Shell (China) Limited v. Hohhot Huili Material Co., Ltd where the Court concluded that the Anti-Monopoly Law (AML) requires that either an administrative agency of the State or a court must evaluate allegations of anticompetitive conduct, leaving no room for arbitration in private antitrust disputes.

The Supreme People’s Court explained that the AML is a public enactment aimed at preventing anticompetitive conduct, ensuring fair competition, and protecting consumers at large. Claims of anticompetitive conduct implicate interests going beyond those of the parties to a private action. As a result, only a body charged with public functions, such as a court or competition authority, is competent to consider broader public interests when ruling on a competition dispute.

c) Interplay between administrative and judicial enforcement

In the case of “follow-on actions,” the Interpretation provides that where a breach of the AML has been established in a decision taken by an administrative enforcer and the administrative enforcer’s decision has not been challenged in court or has been confirmed by a court if so challenged, the plaintiff can rely on the administrative enforcer’s findings of fact, unless there is sufficient evidence to contradict these findings. The Interpretation is silent on whether or to what extent the plaintiff can rely on the administrative enforcer’s legal findings. This suggests that the court will have the last word on the legality of the conduct and is not bound by the agency’s characterization.

The Interpretation further specifies that the court may suspend its proceedings pending the conclusion of an administrative enforcement action, if the challenged conduct is concurrently under investigation by an administrative body.

2. Market definition

The Interpretation provides for some exceptions to the general rule that the plaintiff bears the burden of defining the relevant market within which the effects of the defendant’s alleged anticompetitive actions occur. The plaintiff is not required to define the relevant market if they can otherwise establish that the defendant has “significant market power” in a case involving a monopoly agreement, has a dominant market position in an abuse case, or that the conduct has the effect of excluding or limiting competition.

The Interpretation also states that the plaintiff may not need to define the relevant market where the defendant’s conduct amounts to hardcore cartel conduct (i.e., price fixing, an output restraint, market division, restraints on innovation and/or a joint boycott) or resale price maintenance (“RPM”).

3. Monopoly agreements

a) RPM vs. Non-price vertical restraints: Burden of proof

The recent amendments to the AML establish a rebuttable presumption of illegality in the case of RPM. This means that the plaintiff does not need to show that RPM harms competition. Rather, the burden is on the defendant to rebut the presumption of illegality by demonstrating that its RPM is not anticompetitive. Unsurprisingly, the Interpretation endorses this approach.

The Interpretation is silent on the allocation of the burden of proof in cases involving non-price vertical restraints (such as territorial restrictions, customer restrictions, etc.), which suggests the general rule—“he who asserts must prove”—applies to these cases. Therefore, the plaintiff bears the burden of proving harm to competition in cases involving non-price vertical restraints. This reflects the general consensus that non-price restraints should not be presumed illegal and that a “rule of reason” standard should be applied.

b) Vertical restraints

The Interpretation lists factors to be considered when assessing vertical restraints. The court is mandated to deem the conduct legal if its pro-competitive effects substantially outweigh the anticompetitive effects. The factors to be considered include, on the one hand, (i) whether the defendant has “market power” (the term is not defined), (ii) the cumulative effects of similar vertical arrangements in the market, (iii) whether the vertical restraints raise barriers to entry for more efficient firms or business models, and (iv) whether they restrict intra-brand or inter-brand competition, and on the other hand, whether the vertical restraints serve to and are indispensable to prevent free-riding, promote inter-brand competition, protect brand image, raise service levels, or promote innovation.

The Supreme People’s Court further notes that in certain scenarios, vertical restraints are not be illegal. Such scenarios include where vertical restraints are imposed by a principal on its genuine agent or where the defendant’s market share falls within a safe harbor set by the SAMR. SAMR proposed a 15% cross-sector market share for the safe harbor in 2022, but this was not adopted when SAMR updated its regulations on monopoly agreements in 2023.

4. Abuse of dominance

a) Dominance

To assist courts with establishing dominance, the Interpretation proposes that they may make a prime facia finding of dominance in a market lacking competition, innovation, and/or new entrants if (1) there is evidence that the defendant has maintained prices substantially above the competitive level for a sustained period of time or has substantially lowered product quality for a sustained period without losing a large number of customers, or (2) there is evidence that the defendant has maintained a market share substantially higher than those of other players in the market for a sustained period.

b) Collective dominance

The AML provides that firms may violate the law by abusing a position of collective dominance. The AML establishes a rebuttable presumption of collective dominance when either two firms have a combined share of 66.6 percent or more, or when three firms collectively control 75 percent or more of the market. The Interpretation provides that the presumption of collective dominance can be rebutted (1) if there is evidence of substantial competition and an absence of “consistent” (parallel) conduct between the firms presumed dominant or (2) if these firms as a group face effective competitive pressures imposed by other firms in the market, thus constraining their ability to act anticompetitively.

c) Abusive conduct

The Interpretation also offers some practical guidance on the different types of abusive conduct prohibited by the AML.

Unfairly High or Low Pricing: The Interpretation provides that the courts may find a breach of the AML based on a consideration of a number of factors, including (1) whether the dominant firm’s rate of return substantially deviates from the reasonable rate of turn in a competitive market, (2) whether its prices are substantially in excess of the sum of its cost and deviate from what might be considered a reasonable profit, (3) whether it has sold or purchased products at prices that are above or below (as applicable) the prices at which it sells or purchases the same or comparable products in the market, (4) whether its pricing substantially squeezes equally efficient trading partners’ profit margins such that they cannot compete effectively, and (5) the duration of the relevant pricing conduct.

Selling Below Cost: The Interpretation states that selling products below cost by a dominant firm may violate the AML. This occurs when the dominate firm (1) sells a product below its average variable cost or average avoidable cost for an extended period, or (2) sells its products above average variable cost or average avoidable cost but below average total costs for an extended period with the intent to exclude or restrict other equally efficient firms from competing.

Refusal to deal, Exclusive Dealing, Tying, Bundling and Discrimination: Regarding these types of arrangements, the Interpretation specifies that anticompetitive effects are a necessary precondition for the conduct to be abusive. It also lists factors to be considered in assessing these effects. For example, in the case of exclusive dealing, the courts may consider the duration of the conduct and the extent of the market impacted, whether the alleged conduct raises barriers to entry, raises rival’s costs or results in market foreclosure. In the case of discriminatory treatment, the courts may consider whether the alleged conduct restricts a trading partner from competing with rivals, harms consumers’ interests or the public interest. The Interpretation clarifies that preferential treatment afforded to a new user for a reasonable period, or resulting from reasonable and non-discriminatory platform rules may be justifiable.

5. Remedies

In addition to injunctions and damages available to the plaintiff in a private action, the Interpretation contemplates a court ordering the defendant to take particular positive action to restore competition to the market.

The Interpretation also confirms that the party harmed by anticompetitive conduct is entitled to compensation for both direct losses and any loss of profit. Damages awarded can include reasonable expenses (including fees for economic analysis and legal fees) incurred by a plaintiff during litigation.

¹ https://ipc.court.gov.cn/zh-cn/news/view-3112.html

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Philip Monaghan, an O’Melveny partner licensed to practice law in Hong Kong, England and Wales, and Ireland; Lining Shan, an O’Melveny senior legal consultant in the firm’s Beijing office; and Vivian Wang, an O’Melveny associate licensed to practice law in New York and the District of Columbia, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

© 2024 O’Melveny & Myers LLP. All Rights Reserved. Portions of this communication may contain attorney advertising. Prior results do not guarantee a similar outcome. Please direct all inquiries regarding New York’s Rules of Professional Conduct to O’Melveny & Myers LLP, 1301 Avenue of the Americas, Suite 1700, New York, NY, 10019, T: +1 212 326 2000.