In the previous issue, we compared illegal per se and the rule of reason, and pointed out that cases where illegal per se applies turn out to be favourable to the enforcement agencies and the plaintiff in an anti-trust litigation. Judged from the regulations on the burden of evidence in applicable judicial interpretation, it seems that the rule of reason will apply when determining the legality of a vertical agreement (mainly resale price maintenance under the AML), because the draft provisions of the Supreme Court once provided that the victim of vertical and horizontal agreements need not prove that such agreement restricts or eliminates competition. But such content of vertical agreement was eventually deleted. The change indicates that the Supreme Court sees vertical agreement different from horizontal agreement in that the former’s existence is not self-incriminating.
We should notice that one clause directly related to the above judicial interpretation is the definition of monopolistic agreement in the AML. Article 13 and Article 14 of the AML prohibit companies from reaching “the following monopolistic agreement” rather than reaching “the following agreement” with other competing companies (horizontal agreement) or trading parties (vertical agreement). Huge difference lies in the wording. Paragraph 2 of Article 13 of the AML defines “monopolistic agreement” as “agreement, decision or other concerted activities that eliminate or restrict competition”. In the famous Rainbow Medical v. Johnson & Johnson case, Shanghai High Court required the plaintiff Rainbow Medical (distributor of Johnson & Johnson) to prove that the distribution agreement which restricted resale price signed with Johnson & Johnson had eliminated or restricted competition in the relevant market pursuant to the definition and judicial interpretation discussed above, and then reviewed the agreement in question from four perspectives, i.e., whether the competition in the relevant market is sufficient, whether the implementing company possesses powerful market position in the relevant market, whether the implementing company possessed the intent to restrict competition, and the impact of the monopolistic conduct on the competition. This is an obvious application of the rule of reason.
Following the above logic, horizontal agreement should certainly be reviewed from the above four perspectives as well. Apparently this is inconsistent with the theories and practice of the antitrust law. Horizontal agreements (mainly refers to price control, output restriction, market division, and bid rigging here), also called hard core cartels, are always the target of strict scrutiny in any major antirust jurisdiction, and are almost without exception judged by illegal per se (in some countries where illegal per se does not exist, there would be a similar concept). It is so difficult to even imagine that a typical monopolistic agreement like price cartel between competitors cannot be confirmed as an antitrust violation until being analyzed from different perspectives such as whether the competition in the relevant market is sufficient. Furthermore, it is totally unnecessary to provide a safe harbor clause when the plaintiff has to first assume the burden of evidence and the corresponding risk of failure to produce evidence. When the court analyzes the plaintiff’s evidence by applying the rule of reason, it will review those legitimate causes, whether described in the safe harbor clause or not. There is relatively little difference between listing such causes as safe harbor and not listing them. Only when a defendant is put in an unfavorable position of being assumed to have implemented monopolistic conduct, a remedy to defeat such assumption is necessary. Therefore, the legislators have provided horizontal and vertical agreements with the same remedy, and set the same conditions to apply such remedy, which implicates that the legislators treat the two with equal importance. Taking all these contradictory clues into consideration, the discussion of vertical agreement and the rule of reason will continue to drag on.
Martin Hu & Partners
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