What is the Safe Harbor for Vertical Agreements Under the AML?

One of the most significant developments in China’s competition law framework following the 2022 amendments to the Anti-Monopoly Law (AML) was the introduction of a statutory safe harbor for vertical monopoly agreements. Prior to this amendment, the AML prohibited certain categories of vertical agreements under Article 14 (resale price maintenance and other restrictions) without providing a clear mechanism for parties to demonstrate that their agreements were pro-competitive or lacked the capacity to harm competition. The safe harbor, now codified in Article 18 of the AML and further elaborated in SAMR’s 2023 Guidelines on the Identification of Vertical Monopoly Agreements, represents a major step toward aligning China’s vertical agreement enforcement with international norms, particularly the European Union’s block exemption regulations and the U.S. rule of reason approach. This FAQ provides a comprehensive overview of the safe harbor, its conditions, limitations, and practical implications for foreign companies doing business in China.

The Legal Basis: Article 18 of the AML (as Amended in 2022)

Article 18 of the AML, as amended, contains three key provisions relevant to the safe harbor:

1. Paragraph 1: The prohibition on vertical monopoly agreements under Article 14 of the AML does not apply if the undertaking can prove that the agreements do not have the effect of eliminating or restricting competition. This is a general “rule of reason” defense.
2. Paragraph 2: A vertical monopoly agreement is presumed not to have the effect of eliminating or restricting competition if the undertaking’s market share in the relevant market does not exceed the threshold established by the Anti-Monopoly Enforcement Authority (SAMR). This is the statutory safe harbor.
3. Paragraph 3: The prohibition on vertical monopoly agreements under Article 14 does not apply to agreements in the agricultural and related sectors as well as other areas prescribed by laws and the State Council.

The safe harbor in Paragraph 2 is particularly significant because it creates a rebuttable presumption of legality for vertical agreements entered into by parties with sufficiently low market shares. This shifts the analytical burden: instead of requiring the undertaking to affirmatively prove a lack of anti-competitive effects (as under Paragraph 1), the safe harbor provides a presumption that the agreement is lawful unless the enforcement authority can rebut that presumption.

The 15 Percent Threshold

SAMR’s 2023 Guidelines on the Identification of Vertical Monopoly Agreements (the “Vertical Guidelines”) specify that the market share threshold for the safe harbor is a combined market share of 15 percent in the relevant market for both the upstream party (supplier) and the downstream party (distributor or buyer).

The 15 percent threshold applies to each party individually, not to their combined market share. This means that if the supplier has a 20 percent market share in the upstream market and the distributor has a 10 percent market share in the downstream market, the safe harbor does not apply — even though the combined share of 30 percent might seem to indicate a limited competitive concern. The rationale is that each party independently must lack sufficient market power for the vertical agreement to be presumed competitively benign.

Market share is calculated based on the value of the products or services to which the vertical agreement relates, in the relevant geographic and product market. The market definition must follow SAMR’s general guidelines on relevant market definition, which consider demand-side and supply-side substitution factors. Companies should note that the market definition exercise can be contested — a broad market definition reduces market share and makes safe harbor qualification more likely, while a narrow definition increases it and may disqualify the party.

Agreements Covered by the Safe Harbor

The safe harbor under Article 18 Paragraph 2 applies to vertical monopoly agreements as defined in Article 14 of the AML. Article 14 covers:

• Agreements fixing the resale price to a third party (minimum RPM);
• Agreements restricting the minimum resale price (also a form of RPM); and
• Other vertical monopoly agreements as determined by SAMR.

The safe harbor thus applies to both minimum RPM and non-price vertical restrictions (such as exclusive distribution, exclusive supply, selective distribution, and territorial restrictions) that SAMR may identify under Article 14(3). However, it is important to note that SAMR’s Vertical Guidelines explicitly exclude certain hardcore restrictions from the safe harbor:

• Minimum and fixed RPM: Even if the parties satisfy the 15 percent market share threshold, minimum RPM and fixed resale price agreements are not covered by the safe harbor. The Vertical Guidelines confirm that RPM remains subject to a case-by-case assessment with a rebuttable presumption of illegality, regardless of market share. The safe harbor for RPM only applies if the undertaking can prove that the RPM does not have the effect of eliminating or restricting competition under Paragraph 1 — the market share-based safe harbor under Paragraph 2 does not apply to RPM.
• Hub-and-spoke arrangements: Where a supplier facilitates horizontal coordination among its distributors through the vertical agreement, the arrangement may be assessed as a horizontal monopoly agreement (Article 17), which does not benefit from the vertical safe harbor.

Limitations and Conditions on the Safe Harbor

The safe harbor is not absolute. Even if a party satisfies the market share threshold, SAMR may nevertheless find a violation of the AML in the following circumstances:

• Rebutting the presumption: SAMR retains the authority to rebut the safe harbor presumption by presenting evidence that the vertical agreement has actually eliminated or restricted competition. The Vertical Guidelines indicate that SAMR will consider: (a) whether the agreement has resulted in higher prices for consumers; (b) whether the agreement has reduced output or quality; (c) whether the agreement has foreclosed competitors from a significant share of the market; and (d) whether the agreement has facilitated collusion among suppliers or buyers.
• Cumulative effects: Where parallel vertical agreements covering a significant share of the market have a cumulative foreclosure effect, SAMR may assess the agreements collectively. Even a firm with a market share below 15 percent may be found to violate the AML if its agreement contributes to a broader network of vertical restraints that collectively restrict competition.
• Changing market conditions: The safe harbor assessment is not static. If market conditions change and the parties’ market share increases above 15 percent, the safe harbor ceases to apply. Companies must monitor their market share continuously.

Comparison with the EU Block Exemption Framework

China’s safe harbor for vertical agreements draws significant inspiration from the European Union’s Vertical Block Exemption Regulation (VBER), but there are notable differences:

The lower 15 percent threshold (compared to the EU’s 30 percent) reflects China’s more cautious approach to vertical agreements and the perception that Chinese markets may be more concentrated in many sectors. Foreign companies accustomed to the EU’s 30 percent threshold should not assume that comparable market positions in China qualify for the safe harbor.

Practical Implications for Foreign Companies

Qualifying for the Safe Harbor

To maximize the likelihood of qualifying for the safe harbor, foreign companies should:

• Conduct robust market definition and share analysis: Before implementing any distribution agreement that contains vertical restrictions, the supplier should define the relevant product and geographic markets and calculate its market share as well as that of each significant distributor. This analysis should be documented and updated annually.
• Maintain market share below 15 percent. If the company’s market share in the relevant upstream or downstream market approaches 15 percent, it should consider adjusting its distribution model to avoid potential safe harbor exclusion. This may include using non-exclusive distribution arrangements or limiting the scope of vertical restraints to specific products or territories where market share is lower.
• Document pro-competitive justifications even within the safe harbor. Although the safe harbor creates a presumption of legality, companies should still maintain documentation of the business rationale and pro-competitive effects of their vertical agreements. This documentation is valuable if SAMR seeks to rebut the presumption.

When the Safe Harbor Does Not Apply

If the company’s market share exceeds 15 percent in either the upstream or downstream market, the safe harbor is unavailable. In such cases, the company must rely on the Paragraph 1 defense, which requires affirmatively proving that the vertical agreement does not have the effect of eliminating or restricting competition. This is a more burdensome standard and typically requires economic evidence, including:

• Empirical analysis of the agreement’s actual or likely effects on prices, output, quality, and innovation;
• Evidence that the agreement generates efficiencies that are passed on to consumers;
• Evidence that any anti-competitive effects are outweighed by pro-competitive benefits; and
• Evidence that the restrictions imposed are the least restrictive means of achieving the claimed efficiencies.

Companies in this position should engage experienced competition economists and legal counsel to prepare a robust defense strategy. The Vertical Guidelines provide some guidance on the types of evidence that SAMR considers persuasive, including quantitative economic analysis, empirical studies, and industry evidence.

Safe Harbor for Non-Price Vertical Restrictions

For non-price vertical restrictions such as exclusive distribution, selective distribution, and exclusive supply, the safe harbor provides greater certainty. If both parties have market shares below 15 percent and the agreement does not involve RPM or hardcore restrictions, the agreement is presumed lawful. This is a significant improvement over the pre-2022 framework, under which all vertical restrictions were subject to the same categorical prohibition without a clear safe harbor mechanism. Foreign companies using non-price vertical distribution models in China should confirm that their agreements qualify for the safe harbor and structure their distribution arrangements accordingly.

Safe Harbor and the Leniency Program Interaction

An important subtlety is that the safe harbor does not protect a company from being investigated or from being used as a source of information by SAMR. SAMR may investigate an industry or a specific company regardless of market share, particularly if the vertical agreement involves RPM or falls within an enforcement priority sector. Furthermore, in horizontal monopoly agreement investigations involving hub-and-spoke arrangements, SAMR may investigate all parties regardless of market share. Companies should not assume that having a market share below 15 percent provides blanket immunity from investigation.

Compliance Roadmap

1. Audit existing distribution agreements. Review all distribution, supply, and franchise agreements to identify any vertical restrictions, with particular focus on RPM clauses.
2. Calculate market shares. Conduct a rigorous market definition exercise for each relevant product and geographic market in which the company operates, and calculate market shares for both the company and its significant distributors.
3. Determine safe harbor eligibility. For each agreement that contains vertical restrictions, determine whether both parties have market shares at or below 15 percent. If RPM is present, the safe harbor does not apply regardless of market share.
4. Segment the analysis by product and territory. A company may qualify for the safe harbor for some products or territories but not others. Tailor the analysis accordingly.
5. Document and monitor. Maintain documentation of the safe harbor analysis, including market definition methodology, data sources, and market share calculations. Monitor market share changes and update the analysis at least annually.
6. Prepare fallback arguments. For agreements that do not qualify for the safe harbor, prepare the Paragraph 1 defense with supporting economic evidence, even if the agreement is considered low-risk.

Conclusion

The safe harbor for vertical agreements under Article 18 of the AML represents a meaningful improvement in China’s competition law framework, providing greater legal certainty for companies with limited market power. The 15 percent per-party market share threshold offers a clear compliance benchmark, although RPM remains excluded from its coverage. Foreign companies should conduct thorough market share analyses to determine whether their vertical agreements qualify for the safe harbor and should document their analyses carefully. For companies that exceed the threshold or whose agreements involve RPM, the Paragraph 1 defense remains available but requires substantially greater evidentiary support. As SAMR continues to refine its enforcement approach through the Vertical Guidelines and future cases, the safe harbor will likely play an increasingly important role in guiding distribution strategy and compliance in China.