Why Safe Harbor Rule Is Not Applicable To Non-IP Monopoly Agreements In China?
Legal News & Analysis - Asia Pacific - China - Competition & Antitrust - Intellectual Property
15 August, 2019
On July 1, 2019, the State Administration for Market Supervision (hereinafter “SAMR”) officially promulgated three anti-monopoly regulations, namely, (i) the Interim Provisions for Prohibiting Monopoly Agreements, (ii) the Interim Provisions for Prohibiting Abuse of Market Dominance, and (iii) the Interim Provisions for Prohibiting Eliminating and Restricting Competition by Abuse of Administrative Power, all of which will be formally implemented on September 1, 2019. The promulgation of the abovementioned regulations address, among others, the issue of differences and non-uniformed enforcement standards which rose during the days when the Chinese antitrust authorities had been distributed to not one but three different government agencies. These regulations also enhance the operability and transparency of the Anti-monopoly Law (the “AML”) enforcement in China.
Among these three regulations, the Interim Provisions for Prohibiting Monopoly Agreement may have attracted the most attention. Before its announcement, on January 3, 2019，SAMR announced the draft of Interim Provisions for Prohibiting Monopoly Agreement and introduced a “safe harbor” clause for non-IP-related monopoly agreements. This mechanism had resulted in considerable discussions and been expected to bring great implication to the antitrust practice in China. However, this Safe Harbor system was eventually removed in the final version, i.e., the aforementioned Interim Provisions for Prohibiting Monopoly Agreement.
As can be seen from the legislative perspective, such as the amendment of the AML where comments from relevant stakeholders are being solicited, it is still debating whether to introduce Safe Harbor into China, be it now or in future. Therefore, considering that the issue still stands, this article aims to introduce (i) the history and development of Safe Harbor rule under the AML in China, (ii) Safe Harbor regimes in other main jurisdictions, and (iii) the potential reasons why Safe Harbor rule is not fully applicable to the monopoly agreements in China.
I. History and Development of Safe Harbor Rule under the AML in China
1. Safe Harbor rule has been firstly initiated in 2015 in China
On April 7, 2015, Safe Harbor regime was firstly set out by the previous State Administration for Industry and Commerce (the “SAIC”) in the Rules on Prohibition of Eliminating or Restricting Competition by Abuses of Intellectual Property Rights (the “Rules”), which is currently still in full effect. Under the Rules, safe harbor is designed as a protection against certain competition restraints unreasonably leveraging intellectual property rights (“IPR”) in China.
2. How does Safe Harbor benefit to IP-related monopoly agreement?
Till date, as just mentioned, safe harbor in China only applies to IP-related monopoly agreements. Article 5 of the Rules provides that, when the involving undertakings satisfying the following market share threshold exercises its IP right, it is presumed not to be deemed as a violation under the AML, unless there is evidence demonstrating eliminating or restricting effect on market competition:
(1) the aggregate market share of the competing undertakings in the relevant market does not exceed 20%, or there are at least four other independently-controlled substitutable technologies which may be obtained at a reasonable cost in the relevant market (while “substitutable technologies” has not been further elaborated); or
(2) each of the market shares of the undertaking and its trading party(ies) in the relevant markets does not exceed 30%, or there are at least two other independently-controlled substitutable technologies which may be obtained at a reasonable cost in the relevant market.
3. De facto exception of “hard-core” monopoly agreement
Enforcement-wise speaking, the Chinese antitrust authorities had focused their enforcement priorities on the “hard-core” monopoly agreement. As Safe Harbor is generally not applicable to the “hard-core” monopoly agreements, some consider that Safe Harbor in China would not be as meaningful as others expect. In China, for horizontal monopoly agreements, price fixing, output limitation, market allocation, restriction on new technology and boycotting; for vertical monopoly agreements, resale price maintenance could be treated as “hard-core”.
4. Implication of Safe Harbor
The above-mentioned provisions do not imply that agreements by undertakings with exceeding market share would definitely constitute violation of the AML. However, unlike regulations in the EU, when an agreement falls within the scope of the Safe Harbor, the Chinese competition authority still has the authorization to open an antitrust investigation into the agreement on a full scale. Therefore, the Chinese antitrust practice centering around Safe Harbor has not been as vigorous as some might anticipate.
II. Safe Harbor in Other Main Jurisdictions
1. Safe Harbor in the EU
Article 101 of the Treaty on the Functioning of the European Union (TFEU) prohibits agreements that are aimed at or result in appreciable restrictions of competition. The Safe Harbor rule was set up for minor agreements ("De Minimis Notice") in the EU which indicates what the European Commission (the “EC”) considers not to be an appreciable restriction of competition by reference to market share thresholds, which accordingly creates a "safe harbor" for undertakings whose market shares do not exceed 10% for agreements between competitors or 15% for agreements between non-competitors.
The current De Minimis Notice clarifies that agreements aimed at restricting competition cannot benefit from this Safe Harbor and always constitute an appreciable restriction of competition. Unlike the Safe harbor in China, the EC will not open an antitrust investigation into the agreement if the market share thresholds are satisfied. In addition, where the EC has opened antitrust proceedings and the companies are able to demonstrate that they have assumed in good faith that the market share thresholds were not exceeded, the EC will not impose fines. The De Minimis Notice has no binding effect on the member states’ competition authorities and courts, and they are therefore not obliged to apply it. However, the De Minimis Notice is intended to provide guidance to these national authorities and courts on the application of Article 101 TFEU.
2. Safe Harbor in the U.S.
In accordance with the Antitrust Guidelines for the Licensing of Intellectual Property (the "Antitrust Guidelines") revised by the U.S. Federal Trade Commission (“FTC”) and the Antitrust Division of the Department of Justice (“DOJ”) revised in 2017, “... the Agencies will not challenge a restraint in an IP licensing arrangement if (1) the restraint is not facially anticompetitive and (2) the licensor and its licensees collectively account for no more than 20% of each relevant market significantly affected by the restraint.” In the U.S., however, the majority of restraints in intellectual property licensing arrangements are evaluated under the rule of reason.1 Unlike in China and the EU, IP agreements between “competitors” and “non-competitors” are not distinguished in the US.
III.Why Safe Harbor Rule Is Not Fully Applicable to Monopoly Agr eements in China?
Some believe that the Safe Harbor system could enhance the foreseeability for private sector. As it was eventually not maintained in the final version of the Interim Provisions for Prohibiting Monopoly Agreement, this article intends to conjecture the question of why. There are several potential reasons:
1. No specific delegation in upper level statues
The AML does not provide indication, either explicitly or implicitly, of Safe Harbor. Therefore, a way to interpret this lack of upper-level law, be it overly conservative, is to understand it as a congressional denial to such mechanism. Particularly, the AML was enacted by Standing Committee of the National People’s Congress. Accordingly, some believe that in order to include Safe Harbor into the Chinese antitrust system, the AML should specify it first. For example, in IP sector, rather than just in administrative regulations, the safe harbor rule has its root in congressional legislatures, such as Intellectual Property Law, Tort Law, E-commerce Law, etc.
2. Uniqueness in IP-related monopoly agreement
Some argue that Safe Harbor rule was firstly introduced into IP-related antitrust laws due to its unique goal of incentivizing innovation and focusing on providing inventors with a return on their innovations and consumer welfare. This goal closely links and inherently warrants the Safe Harbor rule, which aims to establish a conditional safety zone for promoting technological competition as it is so vital that governments are willing to tip the scale a little bit imbalance. As such, a Safe Harbor rule applicable to IP-related monopoly agreement is more reasonable and justifiable.
3. No exemption for monopoly agreement reflects a stringent law enforcement in China
Over the ten years since the AML was implemented, the enforcement has become increasingly enhanced, and the trend is especially observable in the recent years since the establishment of the SAMR. In practice, based on the publicly sourced information, there has been no exemption for monopoly agreement at all. Given such tendency, many believe that it will be difficult for any initiative for a Safe Harbor to obtain the necessary support from all the hierarchy in the Chinese government. Hence, it would seem to be lack of necessity and urgency to brining the Safe Harbor rule into all monopoly agreements under the AML.
In summary, the author believes that Safe Harbor rule is still of enough value to be included into the Chinese antitrust regime in the future, as it provides more practical indication for private sector and contributes to the efficiency and resource allocation for the enforcement by SAMR. At the current stage, legislative efforts should be firstly conducted at the level of the AML before detailed regulations to be established by the authority. In addition, as some concern that companies with relatively small and medium scale might abuse the safety zone, more research and experimental attempts are still much needed.
For further information, please contact:
Yang Zhan, AnJie law firm
1 Jens Hackl, Wolfgang Schönig and Jeff Jaeckel, United States: IP Licensing And Antitrust Law- What Companies Have To Consider When Doing Business In The U.S. And The EU, see