Making sense of it all

Review relevant clauses in different types of agreements to assess whether there is an actual or potential contravention of the AML and make appropriate revisions.

Prepare strict internal compliance programmes so as to ensure that there are no horizontal agreements, or vertical agreements which infringe the AML, that may be entered into by the company with its competitors and other operators. They should also set up systems to ensure that no person in the company may exceed his or her authority to enter into such kind of agreements on behalf of the company.

Prepare and keep evidence of proof to provide “justifiable reasons” for entering into horizontal or vertical agreements under Articles 13 and 14 of the AML.

Provide internal guidelines and training to relevant staff in the company so that they understand the prohibition and restrictions under Articles 13 and 14 of the AML and the consequences of committing a breach of the Law.

You also need to differentiate whether it's a distribution agreement or a genuine agency agreement – it's not enough to simply call your agreement an agency agreement by name alone. This can be a complex point, so it's recommended that you seek good legal advice.

You mentioned Articles 13 and 14 of the AML in particular. Can you summarise the attitude embodied in those Articles?

It is illegal per se to enter into all horizontal agreements set out in Article 13. According to draft regulations on monopoly agreements issued by the SAIC, this covers all oral and written agreements, concerted actions and common consensus reached by competitors.

According to draft regulations on price monopoly issued by the NDRC, whether it will be deemed as concerted action will depend on a number of factors, including whether there is consistency between acts of operators on pricing, any communication has been made among business operators, the structure of and changes in the market, and so on. Also, the agreements listed out in the draft regulations are more than the agreements listed out in the AML and seem to have a wider coverage of agreements that may be caught.

The scope of horizontal monopoly agreements, the attitude that such kinds of agreement should be illegal per se, and the factors to be considered by the authorities in determining whether it is a horizontal monopoly agreement are all consistent with practices in most jurisdictions.

With regard to what constitutes a concerted action, the draft regulation from NDRC is already an improvement on previous drafts. However, we want to reiterate the point that the focus should not be on whether there is consistency between the acts of the business operators, as such consistency could legitimately arise as a result of parallel yet independent behaviour prompted by market forces (such as in an oligopolistic market). Instead, the focus should be on the existence of co-ordination or communication (direct, indirect or implied) between business operators which leads to practical co-operation instead of independent action.

As for Article 14, which mentions two specifically prohibited types of monopoly agreement with trade counterparties, the AML is silent on whether it is illegal per se, or whether each of the agreements will be reviewed on a case-by-case basis and illegality depends on whether there are any justifiable reasons for the operators to enter into such agreements.

Some senior officials of the relevant authorities, the SAIC and NDRC, have commented that the vertical monopoly agreements should not be illegal per se, but, instead whether such agreement is against the AML shall be reviewed and assessed on a case–by-case basis, depending on the reasonableness or justifications for the operators to enter into this kind of agreements.

Draft regulations issued by the SAIC mentioned that the operators are only prohibited into entering into agreements for allocating specified market regions or restricting operators to enter into transactions with specified operators if there is no “justifiable reasons” for them to do so; however, there is no detailed explanation of what may constitute “justifiable reasons” in the draft regulations. Also, the draft regulations issued by the SAIC and NDRC are silent on whether the operators will be exempted from entering into the agreements listed out in Article 14 of the AML if they have “justifiable reasons” to do so and it is unclear whether “justifiable reasons” refer to only those reasons set out in Article 15 of the AML or could be interpreted more broadly in practice.

The next Article concerns exceptions. Article 15(1) seems particularly interesting – it covers agreements reached “for the purpose of improving technology or researching and developing a new product” (为改进技朮、研究开发新产品的) Can you explain the practical implications?

The practical implications will be that several small to medium-sized operators may enter into monopoly agreements to sell a self-invented new product to market with a minimum resale price or fixed price so that they can generate a higher profit margin. The good side is that it may encourage such operators to co-operate with each other to invent new products, but the negative side is that consumers' interest may be impacted.

What are the most significant points of the rest of the Article?

The most important points of Article 15 are firstly Item 1, as you mentioned – this may relate to the situation that China still regards itself as developing country and needs incentives to encourage technology improvement. Secondly, “improving product quality, reducing costs, increasing efficiency, unifying product specifications and standards or implementing a specialised division of labour” (Item 2) – this seems to imply that efficiency of work and cost reduction may override the importance of ensuring fair competition in the market. Thirdly, “improving the operational efficiency of small and medium-sized business operators or strengthening the competitiveness of small and medium-sized business operators” (Item 3) – this seems that improving competitiveness of small to medium-size companies may be more important that ensuring a general competitive environment in the market.

Article 15(5) may assist companies to sell products jointly to ensure a minimum profit margin will be maintained during extremely poor economic conditions. However, this may be easily abused by the operators. It appears that this should only apply on limited operators and circumstances.

The provisions of Article 15(6) are not commonly found in other jurisdictions; we're not sure how it will be applied and whether the application of such an article may cause unfairness or concern over international trade relationships with other countries.

The provisions in Article 15 seem to be too broad and general. The ambiguities in law expose operators to great uncertainties in justifying their acts based on Article 15, even if one or more items in Article 15 may apply. It is unclear how the operators can enjoy the exemptions under that Article – is it an automatic exemption if any company proves that its act fall within one of the grounds of Article 15? Is there any time limit or other restrictions? Does it apply to all operators?

We feel [the authorities] should establish an exemption system that is simple and efficient, saves time and cost, has high transparency, sets out clear time limits for each type of agreement that is exempted, and must be fair and applied equally to all types of enterprises in China (including SOEs, domestic, and foreign-invested enterprises).

What roles will the NDRC and SAIC have in enforcing this key part of the AML? Those agencies have so far issued very little clarification, so what guidance can you give companies at this stage?

The roles of the NDRC and SAIC remain unclear as it seems that there is duplication of their roles. All monopoly agreements and abuse of dominant market position cases may involve price – whether directly or indirectly – and so it will involve both the NDRC and SAIC in most cases.

It is unclear whether investigations will be conducted by NDRC and SAIC jointly or separately and what will happen if either NDRC or SAIC has conducted investigations and imposed sanctions – whether the other authority will subsequently conduct an investigation and impose sanctions on the same matter.

We suggest that companies should observe all regulations issued by NDRC and SAIC at this stage and seek legal advice in case that they face any allegation or investigation conducted by the agencies.