The NDRC clarifies monopoly agreement exemptions

Defense or approval?

Sweeping prohibitions with broad exceptions present a critical procedural question: should Article 15 exemptions be granted as prospective approvals of specific commercial practices or only be recognized retrospectively as a defense? Competition regulators in other jurisdictions with similar exemption rules grappled with the same issue. The European Commission formerly allowed companies to apply for “individual exemptions” for specific commercial practices, but later abandoned the practice as being too burdensome. Instead, companies must determine whether restrictive agreements satisfy the general principles for exemption or qualify for a “block exemption” covering certain commercial practices.

Under the draft Guidelines, Article 15 chiefly operates as a defense rather than an approval. Parties are expressly admonished to conduct their own “self-assessments” to determine whether their conduct qualifies for exemption; AMEAs generally will not advise parties on the exemption of a proposed conduct. If an agreement or concerted practice is already implemented, AMEAs will not consider the possibility of exemption without beginning an investigation. Parties may only apply for exemption between the initiation and conclusion of an investigation. AMEAs may solicit comments from relevant businesses, consumers, industry regulators, trade associations, social organizations and experts, as well as from the public on proposed exemptions involving public interests.

However, the draft Guidelines do allow prospective consultations regarding possible exemptions where a monopoly agreement has not been finalized and is not subject to any pending investigation, and where current regulations, rules, and precedents provide no guidance. Such consultations are only available either (a) where parties to agreements with cross-border effects also plan to seek exemptions in other jurisdictions; or (b) where a Chinese national trade association requests consultation on behalf of the industry for a practice with significant sector-wide impact. These exceptions target scenarios where prospective guidance promotes administrative efficiency by enabling international collaboration or addressing industry-wide concerns. In most cases, Article 15 will only provide a defense to monopoly agreement allegations—not a blessing for future restraints.

Revocation of exemptions

Critically, an AMEA may revoke exemptions if the conditions of Article 15 are no longer satisfied due to a change in relevant factual circumstances, laws or regulations (impacting a public interest exemption), or if further investigation based on complaints or reports leads the AMEA to conclude that the agreement violates the AML. Although affected parties are to be given notice and allowed to respond, this risk of revocation may undermine companies' reliance on exemptions.

Substantive decisions

The draft Guidelines add little to the multi-factor analysis of Article 15. In determining whether an agreement advances an exemptible purpose, AMEAs are to consider the causal link between the agreement and the objective and relative importance to its realization. AMEAs are to determine whether an agreement substantially restricts competition using the same factors used to gauge anti-competitive effects under Articles 13 and 14. When determining whether an agreement benefits consumers, AMEAs are to consider factors such as the extent to which the agreement results in innovation, new products, increased production volume, reduced prices, enhanced quality and safety, and consumer convenience. Where the parties assert that consumer benefits may only be realized after “a certain period of time”, the corresponding benefits may be “discounted.”

Block exemptions

The draft Guidelines also provide that the “Anti-Monopoly Commission of the State Council may promulgate guidelines on exempting certain types of monopoly agreements or monopoly agreements in certain industries, when the relevant conditions are met, based on the needs of enforcement.” Issuing block exemptions may provide greater guidance on common commercial practices in specific sectors without bogging down the AMEAs in individual consultation or exemption requests. After finalizing the general principles of the draft Guidelines, the development of block exemptions may be the next step to clearly distinguishing lawful and unlawful restrictive practices under the AML.

Nate Bush and Lining Shan
[email protected] and [email protected]

On May 12, 2016, China's National Development and Reform Commission (NDRC) released for public comment the Guidelines on the General Conditions and Procedures for the Exemption of Monopolistic Agreements (Draft for Comments) (Guidelines). If enacted, these new draft Guidelines will provide principles and procedures for Anti-Monopoly Enforcement Authorities (AMEAs) to exempt certain restrictive practices from prohibition under the PRC Anti-Monopoly Law (AML).

AML framework

Articles 13 and 14 of the AML broadly prohibit any horizontal and vertical agreements, decisions and other concerted practices that restrict or eliminate competition as “monopoly agreements.” Article 15 allows the “exemption” of beneficial restrictive practices that would otherwise be barred as monopoly agreements. To qualify for exemption, the restrictive practice must: advance an exemptible objective, benefit consumers, and not substantially restrict competition in the relevant market. Exemptible objectives include advancing technological research and development, promoting efficiency and competitiveness of small and medium enterprises, supporting public interests such as environmental protection or disaster relief, responding to economic crises, advancing foreign trade interests, or “improving product quality, reducing costs, increasing efficiency, unifying product specifications and standards or implementing a specialized division of labor.” Under the AML and relevant implementing rules, parties asserting an Article 15 exemption bear the burden of proof.

Defense or approval?

Sweeping prohibitions with broad exceptions present a critical procedural question: should Article 15 exemptions be granted as prospective approvals of specific commercial practices or only be recognized retrospectively as a defense? Competition regulators in other jurisdictions with similar exemption rules grappled with the same issue. The European Commission formerly allowed companies to apply for “individual exemptions” for specific commercial practices, but later abandoned the practice as being too burdensome. Instead, companies must determine whether restrictive agreements satisfy the general principles for exemption or qualify for a “block exemption” covering certain commercial practices.

Under the draft Guidelines, Article 15 chiefly operates as a defense rather than an approval. Parties are expressly admonished to conduct their own “self-assessments” to determine whether their conduct qualifies for exemption; AMEAs generally will not advise parties on the exemption of a proposed conduct. If an agreement or concerted practice is already implemented, AMEAs will not consider the possibility of exemption without beginning an investigation. Parties may only apply for exemption between the initiation and conclusion of an investigation. AMEAs may solicit comments from relevant businesses, consumers, industry regulators, trade associations, social organizations and experts, as well as from the public on proposed exemptions involving public interests.

However, the draft Guidelines do allow prospective consultations regarding possible exemptions where a monopoly agreement has not been finalized and is not subject to any pending investigation, and where current regulations, rules, and precedents provide no guidance. Such consultations are only available either (a) where parties to agreements with cross-border effects also plan to seek exemptions in other jurisdictions; or (b) where a Chinese national trade association requests consultation on behalf of the industry for a practice with significant sector-wide impact. These exceptions target scenarios where prospective guidance promotes administrative efficiency by enabling international collaboration or addressing industry-wide concerns. In most cases, Article 15 will only provide a defense to monopoly agreement allegations—not a blessing for future restraints.

Revocation of exemptions

Critically, an AMEA may revoke exemptions if the conditions of Article 15 are no longer satisfied due to a change in relevant factual circumstances, laws or regulations (impacting a public interest exemption), or if further investigation based on complaints or reports leads the AMEA to conclude that the agreement violates the AML. Although affected parties are to be given notice and allowed to respond, this risk of revocation may undermine companies' reliance on exemptions.

Substantive decisions

The draft Guidelines add little to the multi-factor analysis of Article 15. In determining whether an agreement advances an exemptible purpose, AMEAs are to consider the causal link between the agreement and the objective and relative importance to its realization. AMEAs are to determine whether an agreement substantially restricts competition using the same factors used to gauge anti-competitive effects under Articles 13 and 14. When determining whether an agreement benefits consumers, AMEAs are to consider factors such as the extent to which the agreement results in innovation, new products, increased production volume, reduced prices, enhanced quality and safety, and consumer convenience. Where the parties assert that consumer benefits may only be realized after “a certain period of time”, the corresponding benefits may be “discounted.”

Block exemptions

The draft Guidelines also provide that the “Anti-Monopoly Commission of the State Council may promulgate guidelines on exempting certain types of monopoly agreements or monopoly agreements in certain industries, when the relevant conditions are met, based on the needs of enforcement.” Issuing block exemptions may provide greater guidance on common commercial practices in specific sectors without bogging down the AMEAs in individual consultation or exemption requests. After finalizing the general principles of the draft Guidelines, the development of block exemptions may be the next step to clearly distinguishing lawful and unlawful restrictive practices under the AML.