Anti-monopoly Law under scrutiny as key case goes to Higher Court

During the first instance at the Shanghai Intermediate People's Court, the judge ruled against Rainbow for failing to meet the burden of proof that the agreement had restricted or eliminated competition, therefore the contract did not guarantee it was part of a monopolistic agreement.

While the judge ruled that Rainbow failed to provide sufficient evidence, the Court did not elaborate on how much evidence is sufficient. On appeal, Rainbow has maintained its argument that it is not necessary for them to first prove that the contractual provision had restricted or eliminated competition.

“This leaves the door open for companies to challenge agreements with naked vertical restraints on price but without sufficient evidence about the agreements' negative impact on market competition,” said anti-monopoly expert Qi Fang of Fangda Partners in Beijing.

According to the Policy and Regulatory Report (PaRR), Ding Wenlian, Chief Judge of the Shanghai High Court, put 22 questions to Johnson & Johnson and Rainbow during the first hearing, in an attempt to identify whether the RPM agreement set up by J&J hurt competition or not.

The questions focus on five aspects of the situation: distribution arrangements, the relevant product, the definition of the relevant market, the appellant's behaviour and the minimum price set by the RPM. Answers are due at the October 30 hearing, according to PaRR.

“The question before the Shanghai Court is: Does a complainant need to prove (a) both that there is an RPM agreement and that it restricts competition, or (b) only that there is an RPM agreement,” noted Schoneveld.

Many practitioners are confused despite the Supreme People's Court issuing the Provisions on Several Issues Concerning the Application of the Law in Trials of Civil Dispute Cases Arising from Monopolistic Acts (关于审理因垄断行为引发的民事纠纷案件应用法律若干问题的规定) in May this year.

“After the Provisions came out, it turned out that most of the provisions related to procedural issues, including the allocation of burden of proof. There are still hopes that the Supreme People's Court will clarify the application of the Law in terms of what types of agreements intrinsically carry anti-trust concerns in the future,” commented Qi.

Practitioners see the appeal as a positive sign given that the Shanghai Intermediate Court's decision did not provide any guidance on the issue. The Court clearly stated in its opinion that the plaintiff carries the burden to prove the agreement's effect of eliminating and restricting competition, though the standard of burden is unclear.

“It is not clear in the Law whether it must be proven that the agreement to fix the resale price in fact restricts competition, or whether a court can presume (without any evidence) there is a restriction of competition because the agreement fixes the resale price,” said Schoneveld.

Companies looking at this case as guidance should not assume that all vertical RPM's are legal at this point, suggested Zhaofeng Zhou from Chance & Bridge Partners. Companies should look at the standards set in Europe, which is regarded as a persuasive authority.

Under EU anti-competition law, most vertical agreements will not be regarded as anti-competitive if either the involved companies' individual market share on the relevant market does not exceed 15% (for non-hardcore vertical restrictions).

Zhou warns that, “right now when you talk about an agreement being a monopoly agreement, some companies don't see it. These companies don't see their actions are illegal, and many agreements have been of this nature for a long time before the Law.”

By Nickie Yeung

Further reading:

Johnson & Johnson's monopoly dispute

PRC Anti-monopoly Law

Provisions on Several Issues Concerning the Application of the Law in Trials of Civil Dispute Cases Arising from Monopolistic Acts

SPC releases first Interpretation on anti-monopoly disputes