Introduction

Facial recognition technology (“FRT”), an innovation that has garnered both praise and concern, has become increasingly prevalent in our daily lives, from unlocking smartphones to clocking in at work. While it offers numerous benefits, such as convenience and improved security, it also raises significant concerns about privacy and security. To address these concerns, the Cyberspace Administration of China has recently released the Provisions on the Security Management of FRT Application (Trial) (Draft for Soliciting Opinions) (“Draft”). This article delves into the nuances of the Draft that we found interesting and their potential implications.

Purpose

Article 1 states that the purpose of the Draft is “to regulate the application of facial recognition technology, protect rights and interests in personal information [(“PI”)] and other personal and property rights and interests, maintain social order and public security.” It is notable that the Draft does not mention organisations or businesses within Article 1. Moreover, FRT is not defined anywhere within the Draft.

Territorial Scope

China’s Personal Information Protection Law (“PIPL”) has an extraterritorial effect on PI processing activities outside of China if the purposes of the overseas processing activities are to provide products and services to individuals in China or to assess their behaviours.

Article 1 of the Draft states that its provisions are formulated in accordance with the PIPL and some other laws. However, it seems that the Draft limits its own territorial scope to China only. Article 2 of the Draft states that it applies to the use of facial recognition technology to process facial information and the provision of facial recognition technology products or services within China. We understand that such a limitation will not affect the operation of the PIPL.  

General Obligations

Article 3 of the Draft contains general obligations, including generic legal compliance requirements and prohibitions. However, one notable prohibition is that FRT may not infringe upon organisations’ rights and interests. This is notable because the express purpose of the Draft does not include the protection of organisations, and no details are offered to describe what an organisation’s rights and interests might include in the context.

Purpose and Necessity

Article 4 of the Draft emphasises that the use of FRT should have a specific purpose, sufficient necessity, and strict protection measures. In context, the requirement of sufficient necessity appears to mean the specific purpose cannot be achieved by any means other than FRT. However, the meaning of a specific purpose still requires some further clarification. That being said, as the purpose of the Draft is to protect individuals and maintain social order and public security, specific purpose and sufficient necessity should, arguably, be understood from these perspectives.

Article 4 also highlights the importance of prioritising alternative non-biological feature recognition technologies when feasible that “achieve the same purpose or meet the same business requirements…” As such, it appears that when non-biological feature recognition technologies, such as passwords, 2-factor authentication, keys, etc., can adequately achieve the specific purpose, FRT should not be prioritised.

The Draft also goes as far as to suggest that for personal identity verification, “it is encouraged to give priority to using authoritative channels such as the National Population Basic Information Database and the national network identity authentication public service.”

Data Minimisation

Article 17 of the Draft provides that FRT users may not “retain original facial images, pictures, videos, except for facial information that has undergone anonymisation.” Article 18 of the Draft then states that FRT users should “try to avoid collecting facial information unrelated to the provision of services. If unavoidable, it should be promptly deleted or anonymised.”

Consent and Separate Consent

Due to the wording of Article 29 of the PIPL, whereby separate consent is needed to process any sensitive PI, it is no surprise that Article 5 of the Draft generally requires separate consent to be collected before facial recognition information is processed.

Article 13 provides that, to process the facial information of minors under the age of 14, the separate consent or written consent of the minor’s parents or other guardians needs to be obtained.

Private and Public Places

Article 6 of the Draft provides: “Hotels, public bathrooms, changing rooms, restrooms, and other places that could infringe upon the privacy of others shall not install image capture or personal identity recognition devices.” In places where facial recognition devices may be installed, “it should be necessary to maintain public safety, comply with relevant national regulations, and provide significant warning signs” (Article 7 of the Draft). Any captured images must be kept confidential and used for public safety purposes only unless separate consent is provided for other uses.

Article 8 states the requirements for “Organisations that install image capture and personal identity recognition devices for internal management purposes…” The requirements themselves are relatively generic. However, the implicit acceptance of the legitimacy of organisations using personal identity recognition devices for internal management purposes is interesting per se. While the precise limits of such purposes are unknown, some degree of employee monitoring in the workplace seems acceptable.

Article 9 provides, among other things, that “Operating venues such as hotels, banks, stations, airports, sports venues, exhibition halls, museums, art galleries, and libraries, etc., shall not forcibly, deceive, fraudulently, or coercively require individuals to undergo facial recognition technology verification for the purpose of conducting business or improving service quality…” It should be noted that Article 9 does not prohibit these operating venues from using FRT if the individual voluntarily chooses to use FRT to verify personal identity, the individual is fully informed of the circumstances, and the purpose of identity verification is conveyed to the individual in the verification process.

To conduct remote, non-sensory recognition of specific natural persons in public places or operating venues via FRT, the purpose and necessity of use is limited to that which is “…necessary for the maintenance of national security, public safety or for the protection of the life, health and property of natural persons in emergency situations, and initiated by an individual or interested party” (Article 10 of the Draft). The time, place and scope of such services must also implement the principle of data minimisation.

The Draft does not clearly define public places, though the operating venues listed in Article 9 (See above.) likely fall within this category, while those listed in Article 6 (such as “Hotels, public bathrooms, changing rooms, restrooms, and other places that could infringe upon the privacy of others”), likely fall outside this category.

In the context of access to managed buildings, FRT may not be used as the sole method of entering or exiting (Article 14 of the Draft). Management companies must provide alternative methods of access. In light of Article 4 of the Draft, it seems other access methods should be prioritised.

Profiling

Article 11 restricts but does not prohibit profiling as follows: “Except where required by statutory conditions or obtaining individual consent, users of facial recognition technology shall not analyse sensitive [PI] such as race, ethnicity, religious beliefs, health conditions, and social class using facial recognition technology.”

Matters of Significant Personal Interest

In matters of significant personal interest, such as social assistance and real estate disposal, FRT may not replace manual identity verification but can be used as an auxiliary means to verify personal identity (Article 12 of the Draft). The Draft does not specify what other things would be considered matters of significant personal interest.

Personal Information Protection Impact Assessments

Personal Information Protection Impact Assessments (“PIPIA”) are mandated by the PIPL in certain situations, which includes the use of FRT (See Articles 28 and 55 of the PIPL). The PIPL provides very high-level requirements for conducting PIPIA, which Article 15 of the Draft builds upon in the context of FRT by requiring PIPIA to consider:

“(1) Compliance with the mandatory requirements of laws, administrative regulations, and national standards, and whether it conforms to ethical principles;

(2) Whether the processing of facial information has a specific purpose and sufficient necessity;

(3) Whether the processing is limited to the required accuracy, precision, and distance to achieve the purpose;

(4) Whether the protective measures taken are legal, effective, and commensurate with the level of risk;

(5) Risks of facial information leakage, tampering, loss, damage, illegal acquisition, and illegal use, and potential harm;

(6) Harm and influence on individual rights and measures to reduce adverse effects, as well as whether these measures are effective.”

Consistent with PIPL, the Draft requires a PIPIA to be stored for at least 3 years.

When the purpose and method for processing face recognition information changes or after a major security incident, FRT users must conduct a fresh PIPIA. As the PIPL does not explicitly list triggering conditions for conducting fresh PIPIA, this could be considered a special requirement in the context of FRT.

Government Registration

Article 16 of the Draft requires FRT users who hold the facial information of over 10,000 individuals to make filings with municipal-level and above CAC departments within 30 working days. Such filings should contain:

“(1) Basic information of the user of facial recognition technology and the person responsible for [PI] protection;

(2) Explanation of the necessity of processing facial information;

(3) The purpose, method, and security protection measures for processing facial information;

(4) Rules and operating procedures for processing facial information;

(5) Impact assessment report on [PI] protection;

(6) Other materials the cyberspace administration department deems necessary to provide.”

If there are substantial changes in the filed information or the use of face recognition technology is terminated, FRT users need to go through relevant procedures within a given period of time.

FRT Service Providers

Article 17, Paragraph 2 of the Draft provides that FRT service providers’ relevant technology systems need to meet the requirements of at least Level Three network security protection and use measures, such as data encryption, security auditing, access control, authorisation management, intrusion detection, and defence, to protect the security of facial information.

FRT Service Users

FRT service users need to conduct annual security and risk assessments of image capture equipment and personal identity recognition equipment, improve security strategies based on the assessment results, adjust the confidence threshold, and take effective measures to protect image capture equipment and personal identity recognition equipment from attacks, intrusions, interference, and damage (Article 19 of the Draft).

Reporting

Any organisation or individual may report violations of the Draft to the government. Based on our observations of how other laws and regulations function in practice, such reports will more likely than not be made by disgruntled and former employees.

Violations

The Draft does not explicitly list punishments for violations. Instead, it refers to other laws and regulations in Article 23. Most notable among those laws and regulations is the PIPL, which allows for the confiscation of unlawful gains, fines of up to CNY 50 million of 5% of revenue in the prior year (whichever is higher), fines against the individuals responsible, business suspension and business license termination.

Conclusion

As technology advances, it becomes ever more crucial to establish a clear and comprehensive legal framework to safeguard individual privacy and data security. The Draft makes a significant contribution towards establishing such a framework and allows stakeholders to provide feedback and contribute toward the further refinement of the final regulations, which we hope will harness the potential of technology while respecting the rights and interests of individuals.

We note that readers have until 7 September 2023 to give regulators feedback. The full text of the Draft can be accessed at http://www.cac.gov.cn/2023-08/08/c_1693064670537413.htm.

By Jia WAN

In a recent case published by Beijing Financial Court (the “BFC”), which was represented by AnJie Broad and classified as one of the typical financial cases for the year of 2022, the BFC pierced the veil of “co-insurance”, and confirmed that reinsurance legal relationship was established between two insurers.

The dispute arose out of the “co-insurance agreement” entered by PICC and China Life where the two insurance companies had disagreement as to the amount that PICC should pay after China Life, as the leading insurer, paid the insurance indemnities to the insured. Despite that the two insurers entered into a co-insurance agreement, the BFC pierced the veil of the “co-insurance agreement”, and held that the actual legal relationship formed between the two insurers is reinsurance instead of co-insurance.

In this case, the BFC distinguished the difference between co-insurance and reinsurance under the regime of PRC insurance law from the following aspects:

First, in terms of contractual parties, the parties to co-insurance agreement are policyholder and co-insurers, while the parties to reinsurance agreement are both insurers.   

Second, in terms of contractual relationships, under co-insurance the contractual relationship is established between the policyholder and each co-insurer, while under the reinsurance, there is no direct contractual relationship between the policyholder and the reinsurer.

Third, in terms of insurance premium collection, under the co-insurance, policyholder submits its request for insurance with multiple co-insurers, and each co-insurer assumes the insurance liability and collect the insurance premium respectively. While under reinsurance, the cedant pays the reinsurance premium to the reinsurer after collecting the insurance premium from the policyholder. The reinsurer does not directly collect any premium from the policyholder. 

Lastly, in terms of liability assumption, co-insurance is a type of insurance where more than two insurance companies cover the same subject matter, assume the same insurance liability for the same insurance period with the same limit of liability by using the same insurance contract, which is a horizontal assumption of liability among the co-insurers. In a reinsurance contract, the reinsurer underwrites the liability and risk under the original insurance contract. The cedant transfers part of the liability and risk of the original insurance contract to the reinsurer through reinsurance agreement, which is a vertical assumption of liability.

By applying the above criteria in the case at bar, the BFC eventually concluded that the legal relationship formed between PICC and China Life is reinsurance instead co-insurance.

Apparently, unlike reinsurance which is clearly defined by Article 28 of the PRC Insurance Law, the concept of co-insurance is not defined by law and is rarely found in other sources in China. The above analysis made by the BFC provides a standard interpretation of co-insurance from the judicial perspective, which also echos the Notice on Strengthening the Management of Property Insurance Co-insurance Business published by China Insurance Regulatory Commission, which provides that “[a] standardized co-insurance business should meet the following requirements: 1) the insured agrees to have multiple insurers to underwrite the risk; 2) the co-insurers jointly issues the policy, or the leading insurer issues the policy accompanied by a co-insurance agreement; 3) the commission charged by the leading insurer from other co-insurers should be significantly different from the average level of reinsurance commission.” This Notice provides an important source for the BFC when discerning the difference between reinsurance and co-insurance.

In the recent 20 years, reinsurance has been introduced to China and plays an important role in the financial sector. With the development of reinsurance in China, there are more and more disputes arising out of the reinsurance business and even co-insurance business. The significance of this case published by the BFC lies in its accurate distinguishment between the co-insurance and reinsurance. The court probed into the true intentions between the parties and held that reinsurance legal relationship was found notwithstanding that the parties entered into an ostensible “co-insurance” agreement.

In this case, the BFC further confirmed the principal of utmost of good faith and “follow the fortunes” in reinsurance. It is also worth mentioning that it is one of the rare cases in PRC judicial practice that the principal of “follow the fortunes” in reinsurance was recognized by a PRC court. The principal of “follow the fortunes” has been written in the PRC regulations or guidance in insurance industry, or usually is incorporated as a clause into the reinsurance agreement. However, it is uncommon for a PRC court to recognize the principal of “follow the fortunes” without the express agreement between the parties.

This case is also a good reminder for insurance companies that they should pay more attention to the agreements to be entered and be more careful to follow the standard requirements both written in PRC Insurance Law and industry regulations before the agreements are concluded.

Jia WAN | Partner

Email：wanjia@anjielaw.com

Tel：+86 10 8567 5930

Fax：+86 10 8567 5999

Language：Chinese,English

Practice Areas：Dispute Resolution, General Corporate and Commercial, Asset Management, Cross-border Investment & M&A

Industries：Insurance & Reinsurance, Bank & Finance, Energy

Office：BEIJING

Read More：https://www.anjielaw.com/team/resume.html?id=236

By Jia WAN, Dongqing LIU

Introduction

International sanctions, imposed by governments and international organizations, are a powerful tool used to influence and punish countries, entities or individuals. The international sanctions may be imposed for various reasons, such as human rights violations, nuclear proliferation, or terrorism. The economic sectors are the primary target by these sanctions, including the insurance industry. This article explores the legal complexities surrounding the interaction between international sanctions and insurance policies, examining examples to shed light on the challenges and potential solutions for affected parties.

Challenges and issues

When a country or entity becomes subject to international sanctions, its economic activities are severely restricted, including its ability to conduct financial transactions and engage in international trade. These restrictions can create significant challenges for insurers and insureds if the insurance policies involve sanctioned territories or sanctioned entities/individuals. Key aspects of this complex issue include:

1. Underwriting and Coverage Restrictions

The first legal issue arises from the inability of the (re)insurers to provide insurance policies in sanctioned territories. Sanction measures can limit the ability of (re)insurers to underwrite risks or provide coverage for certain types of risk. For example, sanctions against Iran have restricted the ability of insurers to provide coverage for oil tankers sailing to and from Iran, resulting in a shortage of available insurance coverage and increased costs for shippers. Another example would be the sanctions packages imposed by the European Union (EU) and UK against Russia and Russian entities. These sanctions include, among other things, the closure of UK and EU airspace to Russian-operated aircraft and the prohibition to provide insurance or reinsurance services to Russian entities or for use in Russia.

With the above sanctions in place, insurers have to assess whether they can underwrite the risks in sanctioned territories at all or assess the impact of the sanctions on existing policies and decide whether they could continue providing coverage. For instance, Aviation policies normally include the AVN 111 Sanctions and Embargo Clause which provides “if, by virtue of any law or regulation …applicable to an Insurer… providing coverage to the Insured is or would be unlawful because it breaches an embargo or sanction, that Insurer shall provide no coverage…“If an insured event occurs under the Aviation policies which involve Russia, the (re)insurers might have a defence against providing coverage by virtue of AVN111 Sanctions and Embargo Clause.


It is crucial for insurers to gain a comprehensive understanding of these sanction programs to ensure informed decision-making on underwriting and compliance. For policyholders or insured parties, a thorough review of policy terms is imperative, especially those that may encompass exclusions associated with sanctions. Understanding the scope and implications of such exclusions is of paramount importance to ensure full awareness of the limitations inherent in the policy.

2. Claims Processing and Payment

The impact of sanctions on claims processing and payment within the insurance industry is significant. Sanctions often lead to policy exclusions that can result in claim denials for activities involving sanctioned entities or jurisdictions. Additionally, restrictions on funds movement, currency limitations, and the operational burden of compliance measures can lead to delays in claim settlements. Insurers must navigate these legal and logistical challenges while fulfilling their obligations to policyholders and insureds.

If the relevant insurance policies contain Sanctions Limitation and Exclusion Clause, the insurer might seek to rely on this clause to delay claims process or even decline insurance payment. The implementation of this exclusion clause should be conducted on a case-specific basis, involving a thorough assessment of the exclusion clause’s validity and the legal interpretation of its language within the framework of the relevant jurisdiction.

3. Regulatory Compliance

Insurers must ensure compliance with international sanction laws to avoid legal repercussions. Failing to adhere to sanction regulations could lead to severe penalties. According to the data published on the official website of the U.S. Office of Foreign Assets Control (OFAC), a total of sixteen U.S. entities were reported to have infringed upon OFAC sanctions programs in 2022, resulting in fines totalling approximately 42 million USD. The figures for 2023 indicate that nine U.S. entities faced claims of violating OFAC sanctions programs, with aggregate fines amounting to approximately 556 million USD. 

Considering the non-compliance risks, insurers bear a critical responsibility to meticulously adhere to international sanctions laws to safeguard against potential legal ramifications. Any failure to diligently comply with sanctions regulations exposes insurers to the risk of significant penalties.

Conclusion

The intersection of international sanctions and insurance policies creates a complex legal landscape, impacting policy validity, coverage, claims processing, and regulatory compliance. As geopolitical tensions continue to evolve, insurers and insureds must remain vigilant, understanding the implications of sanctions on their operations and seeking legal counsel to navigate these challenges. The lessons from previous cases underscore the necessity for proactive measures to mitigate potential risks and ensure a smooth resolution of disputes in this intricate area of law.

A recent ruling rendered by Beijing Higher People’s Court of China, on granting the enforcement of the arbitral awards, has attracted much attention and discussion of the competition law circle. Specifically, this remarkable judicial decision suggests that Chinese courts will not consider the fact of ongoing merger review procedure when determining whether to grant the enforcement of arbitral awards. Also, a very special fact involved in this case is, the key role, Simcere Pharmaceutical Group Limited (“Simcere”), filed a voluntary concentration notification in spite that the filing threshold is not reached, instead of under the mandatory filing obligation. Details of this case together with the views of the parties and the courts on the antitrust aspect, are worthy of further ponderation.

Key Fact of the Case

To simply put, a Hong Kong company, Burich Limited (“Burich”), has dishonestly committed to sell 65% equities it holds in Beijing Tobishi Pharmaceutical Co.,Ltd (“Tobishi”), simultaneously to two purchasers in 2016 and 2017 respectively, Jiangxi Puyuan Health Industry Co., Ltd.(“Puyuan”) and Simcere. As Burich failed to fulfill its contractual obligation to deliver the equities, Simcere filed an arbitration application to Shanghai International Economic and Trade Arbitration Commission (Shanghai International Arbitration Center, “SHIAC”), which supported the arbitration claims of Sincere on ordering Burich to deliver the concerned shares. Afterwards, Simcere applied to Beijing First Intermediate People’s Court to enforce the award, and during the proceeding Puyuan raised the objection as the third party. Beijng First Intermediate People’s Court rejected Puyuan’s objection and adjudicated to enforce the arbitral award. Puyuan then appealed to Beijing Higher People’s Court, which maintained the first instance ruling in the end.

The Parties’ Views on Antitrust Factor

When objecting the enforcement of arbitral award, there is one key ground that Puyuan put forward is related to the Anti-Monopoly Law of China. Puyuan asserted, enforcing the arbitral award, is virtually helping Simecre circumvent China’s merger control regulation. This is because when the merger filing obligation is triggered, the equity transfer should not be implemented before obtaining SAMR’s antitrust approval. However, Simcere did not submit the antitrust filing to and obtain the approval from SAMR yet, when Simcere applied the arbitral award enforcement to the court and even when the court implemented the enforcement. As a matter of fact, SAMR officially put on Simcere’s filing on record on November 23, 2022. Puyuan alleged that granting the enforcement will violate the mandatory provision of the Anti-Monopoly Law, to the effect of violating public interests. Consequently, Puyuan maintained that the court should reject the enforcement application of Simcere.

In response to Puyuan’s allegations, Simcere stressed that the equity acquisition of Tobishi by Simcere does not reach the filing threshold; as such, Simcere does not have the filing obligation but filed with SAMR only on a voluntary basis. In such a circumstance, the enforcement of arbitral award will not violate public interests. In addition, Simcere emphasized that the suspected antitrust violation does not in any way fall into the scope of rejecting enforcement of arbitral award in the judicial review pursuant to relevant laws.

The Court’s Stance

Beijng First Intermediate People’s Court in the first instance decided to reject Puyuan’s objection and supported Simcere’s enforcement application. The first instance court elaborated, where the third party applies to not enforce the arbitral award, it should meet three procedural conditions and four substantive conditions simultaneously. The procedural conditions include: (1) there exists evidence proving the arbitration is malicious or fake with infringement of the third party’s interests; (2) the enforcement has not been completed yet; and (3) the objection should be raised within 30 days after being or should be aware that the court adopts enforcement measures. The substantive conditions contain: (1) the third party is the subject of concerned rights or interests; (2) the rights or interests claimed by the third party are legitimate and genuine; (3) there is a fictitious legal relationship between the arbitration parties and the facts of the case are fabricated; and (4) there are partial or total errors in the main text of the arbitration award or the arbitration mediation agreement in handling the civil rights and obligations of the parties, which damages the legitimate interests of the third party. Considering the grounds that Puyuan relied on in its objection, the antitrust ground included, do not make the above-mentioned conditions be met, the first instance court declined Puyuan’s objection.

In the appeal procedure, interestingly, Puyuan applied to stay the proceeding until SAMR renders its merger review decision. Beijing Higher People’s court rejected Puyuan’s application again, on the reason that the merger review procedure and civil enforcement proceeding do not restrict each other, thereby there is no need to stay the instance proceeding. The appellate court in the end maintained the first instance ruling by recognizing the reasons illustrated in the first instance adjudication. Notably, the appellate court further pointed, the arbitration award involved in the case only has legal effect between its parties and cannot be legally binding on third parties. The fulfillment or enforcement of the obligations determined by the award does not affect the substantive rights enjoyed by the third party. It is the legal duty of the enforcement court to implement the content of the effective award through the enforcement procedure, but the enforcement court does not guarantee that the applicant for enforcement can permanently retain the enforcement benefits they have obtained. The rejection of the third party’s application for not enforcing the arbitration award in this case does not prevent them from filing a lawsuit against the relevant civil subject in accordance with the law.

Key Takeaways and Comments

Obviously, the ongoing SAMR merger review will not stop the enforcement of the arbitral awards. However, where gun-jumping is found by SAMR, SAMR theoretically has the discretion to still slap the violating party with penalties, because there is no exemption clause for the enforcement of arbitral awards. Assuming the extreme situation occurs, namely if SAMR finds competition concerns in its review, SAMR may also order the party to give back the shares it acquired through the enforcement of awards for restitution on top of the monetary fine. As the appellate court stressed in this case, the enforcement court does not guarantee that the applicant for enforcement can permanently retain the enforcement benefits they have obtained.

Of course, the favorable fact in the instant case is, assuming Simcere’s allegation is tenable, the filing was made on a voluntary basis because the equity acquisition does not reach the filing threshold. In this scenario, Simcere in principle will not receive a fine. Nonetheless, the disadvantages fact is Simcere is not an insignificant market play, but rather enjoys the dominant market position in certain active pharmaceutical ingredients (API) market. Particularly, Simcere has been fined by SAMR in 2021 due to engaged in abusing the dominant market position to refuse to supply.

Consequently, before applying for the enforcement of arbitral awards, companies are highly recommended to make a thorough and cautious assessment on the merger filing obligation in China, especially for those having a high market share in some markets, and then to decide whether to apply the enforcement and the appropriate application timing.

In dealing with PRC related insurance disputes, one question is often raised by Chinese court or arbitration institute: what is the insurance agent or the insurance broker? The relationship between the insurance agent, broker, insurer, policyholder, insured and beneficiary always confused the judge and arbitrator. This article will elaborate the concept, function, difference of these two parties in the framework of PRC insurance law.

Definition and Characteristics of the Insurance Agent and the Insurance Broker under the PRC Law

i. Definition and Characteristics of the Insurance Agent

Article 117 of the PRC Insurance Law stipulates that “an insurance agent means an entity or individual that has been authorized by an insurer to conduct insurance business on its behalf within the scope authorized by the insurer and collects commissions from the insurer. Insurance agencies include professional insurance agencies specializing in the insurance agency business and agencies concurrently engaged in insurance business.”

Article 2 of the Provisions on the Supervision of Insurance Agents stipulates: “For the purpose of these Provisions, ‘insurance agents’ refer to institutions or individuals that are entrusted by and receive commissions from insurance companies to handle insurance business on behalf of the insurance companies within the scope authorized by the insurance companies, including professional insurance agencies, agencies concurrently engaged in insurance business and individual insurance business.”

Based on the above definition and relevant provisions under the PRC laws, insurance agents under the PRC laws have the following characteristics:

Firstly, an insurance agent shall conduct insurance agency activities on behalf of the insurer. The tasks of an insurance agent include to sell insurance products and collect insurance premiums on behalf of the insurer, to conduct damage survey and claim settlement for the relevant insurance business in accordance with the authorization of the insurance company, etc.. The legal effect of the representation made by the insurance agent in the name of the insurer (principal) shall be directly assumed by the insurer.

Secondly, an insurance agent shall conduct insurance activities within the scope authorized by the insurers. In accordance with Paragraph 2, Article 127 of the PRC Insurance Law, if an insurance agent without authorization, beyond authorization, or whose authorization has expired enters into a contract on behalf of the insurer, and the policyholder has a reasonable reason to believe that the insurance agent has authorization, such agency act of the insurance agent shall be valid. The insurer may pursue the responsibility of the insurance agent who exceeds his authority according to the law, but until then, the insurer must still perform and bear the corresponding contractual obligations according to the contract.

Thirdly, the legal consequences of an insurance agent’s agency activities are borne by the insurer. The expression of intent received or made in the name of the insurer has direct legal effect on the insurer. This is embodied in the following aspects:

(a) Information about the subject matter of the insurance that is known to the insurance agent shall be deemed to be known to the insurer. After the insured has informed the insurance agent of the circumstances relating to the subject matter of the insurance, even if the insurance agent fails to convey or accurately convey the information to the insurer, the insurer shall not later claim the cancellation of the insurance contract or deny the insurance liability on the grounds that the insured has violated the obligation of truthful notification. The information known by agent could be deemed as the input information of insurer.

(b) If an insurance agent gives an incorrect explanation or answer as to whether a matter is material enough to influence the insurer’s decision whether to agree to underwrite the insurance or to increase the premium rate, the insurer may not later claim cancellation of the insurance contract on the grounds that the policyholder failed to fulfill its duty to inform of the aforementioned matter.

(c) After the insured has paid the premium to the insurance agent, the premium is legally deemed to have been received by the insurer even if the insurance agent has not yet forwarded it to the insurer or does not want to forward it to the insurer.

(d) In practice, there are often cases where the insurance agent fills in the proposal form instead of the insured. If the insurance agent fails to accurately record the insured’s information, or if the insurance agent intentionally makes a wrong record in order to obtain commission, the insurer cannot claim exemption from insurance liability on this ground unless the insured knows or should know that the aforementioned circumstances exist.

Fourth, individuals can act as insurance agents. But now in practice, all individual agents should register within the insurance agency company, and we hope individuals can practise business by themselves in the future.

ii. Definition And Characteristics of the Insurance Broker

Article 118 of the PRC Insurance Law stipulates that “An insurance broker is an entity that, based on the interests of the insurance applicant, provides intermediary services between the applicant and the insurer for the conclusion of an insurance contract and receives a commission therefore in accordance with the law.”

Article 2 of the Provisions on the Supervision of Insurance Brokers provides that: “Insurance brokers as used in these Provisions refer to institutions that provide intermediary services for the conclusion of insurance contracts between the policyholder and the insurance company based on the interests of the policyholder, and collect commissions according to law, including insurance brokerage companies and their branches.”

Based on the above definition and relevant regulations under the PRC laws, an insurance broker under the PRC laws has the following characteristics:

Firstly, the insurance broker works for the benefit of the policyholder. The task of an insurance broker is to provide the policyholder with the conditions for the conclusion of an insurance contract or to act as an introducer for the conclusion of an insurance contract. Providing the conditions for the conclusion of an insurance contract means that the insurance broker creates the opportunity for the conclusion of an insurance contract by finding a suitable insurer or type of insurance for the policyholder in accordance with the policyholder’s instructions.

Secondlyly, a percentage of the premiums collected by the insurer is taken as a commission for the insurance broker. For certain specific engagements (such as making insurance claims), the insured normally pays the insurance broker a mutually agreed remuneration. But generally speaking, Chinese policyholders seldom pay any service fee to broker.

Thirdly, an insurance broker’s range of business is wide. It is not limited to the insurance selling process, but involves participation in negotiations with the insurer during concluding the insurance contract, assistance with making insurance claims, insurance products consulting, risk management consulting, among others.

Fourthly, an insurance broker can only be an institution, not an individual.

iii. Differences Between The Two Insurance Intermediaries

Comparing the concepts of an insurance agent and an insurance broker under PRC law, the main differences between the two intermediaries are as follows:

(a) Different forms of organization. Insurance agents can exist as companies or individuals (in practice, now China regulator only permit agency companies to process agency business), while insurance brokers can only exist as “limited liability companies” or “joint stock companies”.

(b) Different legal status. An insurance agent is the agent of the insurer, and represents the interests of the insurance company by introducing insurance coverage and underwriting business for the latter; an insurance broker is the agent of the policyholder, insured and beneficiary (currently, there are different opinions in judicial practice; some courts consider it as intermediary services, while other courts deem it as the agent of the policyholder, insured and beneficiary).

(c) Different functions. The main functions of an insurance agent are to promote insurance products for insurance companies, collect premiums, and act as an agent for loss investigation and claim settlement of relevant insurance business according to the authorization of insurance companies, etc. The main functions of an insurance broker are to conduct insurance business consultation and solicitation, risk management and arrangement, market inquiry and quotation, loss claim and recovery, etc.

(d) Different ways of payment of commission. The insurance agent receives the commission directly from the insurer; the insurance broker normally accepts the insured’s commission to handle the insurance procedures, and receive the brokerage commission from the insurance company as agreed with the insurance company. But in PRC practice, both agent and broker receive their commission or fee from insurer, and this phenomenon confused outsiders sometimes.

In summary, an insurance agent is usually “taking the product to the customer”, while an insurance broker is generally “selecting the product for the customer.”

Reasons for Distinguishing theInsurance Agent and the Insurance Broker under the PRC Law

There may be several underlying reasons for distinguishing the insurance agent and the insurance broker under the PRC Law:

Firstly, following the established tradition of civil law systems may be one of the reasons. Insurance laws in Taiwan area and Germany both make a distinction between the concepts of insurance agent and insurance broker.

Secondly, another reason may be for the purpose of maintaining the balance of contracting and performance capacity between the parties to the insurance contract. While the insurer expands its business capacity through the participation of the third party — the insurance agent, in order not to cause further negative impact on the insured who are already in a disadvantaged position, the legislator urgently needs to introduce another kind of subject opposite to the insurance agent, expecting this kind of intermediary to use their insurance expertise to provide some kind of support to the insured, so as to correct the imbalance of interests between the parties to the insurance contract.  

Thirdly, it is a natural product of the development of the insurance market. On the one hand, the insurer needs the help of an intermediary to promote its own insurance products. Therefore the insurance agents on behalf of the insurance company emerged. On the other hand, as the insurance market continues to develop, insurance products become more abundant and the demand for insurance continues to increase. The insurance applicants need to use the power of insurance professionals to help them find the most favourable and appropriate insurance products, so insurance brokers representing the interests of policyholders emerge. As a result, two distinct roles have emerged.

Judgment Criteria for the Distinction between Insurance Broker and Insurance Agent in PRC judicial practice

The criteria for the People’s Court to determine whether an insurance intermediary constitutes an insurance agent or an insurance broker mainly include whether a corresponding written contract has been signed, the organizational form of the party, the characteristics of the past transaction pattern, the payment method of commission, etc., which ultimately often requires a specific analysis in conjunction with the circumstances of each case. For example:

The Zhejiang High People’s Court in Case (2020) Zhejiang Civil Final 1291 found that “Chen Xiao and He Xinyun, as individual persons, met the requirements of the Insurance Law regarding the subject of insurance agents. According to the facts identified, the business model of Chen Xiao and He Xinyun applying for insurance business from PICC Taizhou Branch in the form of WeChat group already existed before the insurance business involved in the case, and PICC Taizhou Branch did not review the identity and authority of Chen Xiao and He Xinyun in each business, but directly conducted quotation and information entry for the insurance business submitted by Chen Xiao and He Xinyun. According to Xu’s statement, PICC Taizhou Branch may pay commissions to Chen Xiao and He Xinyun for the successful business. In this case, although there was no written commission contract between Chen Xiao, He Xinyun and PICC Taizhou Branch, the insured He Hong completed the insurance and payment directly to them, and PICC Taizhou Branch also approved the establishment of the employer’s liability insurance contract with He Hong afterwards, which is the recognition of the legal effect of the behavior of Chen Xiao and He Xinyun by PICC Taizhou Branch. In summary, Chen Xiao and He Xinyun should be found to be the insurance agents of PICC Taizhou Branch and not the insurance brokers of He Hong.”

The Weihai Intermediate People’s Court in Case (2021) Lu 10 Min Final 1603 found that “the business scope of Xinshan Insurance Agency Company mainly includes the agent sales of insurance products, etc., and at the same time, combined with the description of the witness Qiao, the company is to obtain the sales channels of insurance products provided by different insurance companies, and then sign on behalf of individuals or enterprises who have the intention to purchase insurance product, so it should be regarded as the insurance agent. Although there are relevant inquiries in the inquiry list set by Huatai, the agent of the insurance company did not actually make inquiries to the policyholder, and the consequences of the act cannot be attributed to the policyholder, but should be borne by the insurer, i.e. Huatai.”

In summary, there is a distinction between the concepts of insurance agent and insurance broker under PRC law, and this distinction will have a direct impact on the policyholder’s obligation to truthfully disclose the relevant information to the insurer, the specific performance of the insurer’s obligation to indicate and explain the exclusion clause, and the implementation of the principle of prudent underwriting by insurance companies, among others.

I. Purposes for setting up a non-insurance subsidiary

An obvious fact for foreign insurers is that they are not allowed to conduct insurance business within the territory of China (excluding jurisdiction as Hong Kong, Macau and Taiwan for the purpose of this article), nor can their Chinese non-insurance subsidiaries which do not possess any insurance licenses. Additionally, the establishment of a Chinese insurance company will be subject to strict review and must be approved by the Chinese insurance regulator (i.e. the Chinese Banking and Insurance Regulatory Commission).

However we observed that more and more foreign insurers (esp. reinsurers) are setting up or exploring the opportunity to set up non-insurance subsidiaries in China. Why is that? Based on our experience, the following may offer stimuli for foreign insurers to take such steps:

First, some foreign reinsurers often need a Chinese subsidiary to provide technical support for their  business when conducting reinsurance cooperation with Chinese direct insurance companies. Specifically, these subsidiaries will be responsible for bordereau reconciliation, statement of account verification, actuarial analysis, verifying claims information, etc.

Second, some foreign insurers view their non-licensed subsidiaries as  platforms for providing value-added services to Chinese insurance clients (i.e. policyholders, insureds).

Last but not least, allowing their Chinese subsidiaries to assist in processing data related to insurance business physically in China to some extent eliminates the need for data outbound transfer procedures while the data outbound transfer is highly regulated by the Chinese authority.

Additionally, for achieving the above purposes, having a representative office in China may not be an appropriate alternative compared to the subsidiary, in that the scope of business of the representative office is strictly limited to non-profiting activities.

Since establishing a Chinese non-insurance subsidiary seems a good attempt for a foreign insurer, the next question which this article aims to explore is: How to set up a non-insurance subsidiary in China and what should such company pay attention to during its business operation.

II.  Procedures for the set-up of a non-insurance subsidiary

Generally, as a foreign invested company, the establishment procedures of a non-insurance subsidiary mainly involve the registration procedure of the local Administration for Market Regulation (“AMR procedure”), and the foreign investment information reporting procedure of the Ministry of Commerce (“MOFCOM procedure”).

For the AMR procedure, the procedures for foreign-invested enterprises and domestic enterprises are quite similar and convenient, but the following aspects need to be noted:

a. The company name. Some foreign insurance groups have trade names associated with geographical locations, which carry profound brand cultural influence and international recognition. Therefore, they hope that their non-insurance subsidiaries in China can also use such unified trade names. However the use of such trade names in China may not be feasible——according to Article 11 of the Administrative Provisions on the Registration of Enterprise Names, an enterprise name shall not adopt the name of any foreign country (region), or any abbreviation or special title thereof. In practice, some cities in China have adopted online systems for preliminary check of company names. It is suggested that foreign insurers check whether the proposed names for their subsidiaries can be adopted on these systems before formally submitting application materials to the local AMR.

b. The business scope. As a foreign invested company, there are some fields which are not open to them (e.g. internet-based news services, online publishing services), and some fields in which foreign insurers need to satisfy more conditions compared to domestic companies (e.g. the proportion of foreign investment in value-added telecommunications services (except for e-commerce, domestic multi-party communications, store-and-forward, and call center services) shall not exceed 50%). While the general consulting business which the non-insurance subsidiaries normally intend to conduct would not involve such “negative list”, it is suggested that foreign insurers make detailed plans for the business scope of their subsidiaries during the establishment procedure, to avoid touching the areas on the negative list.

c. The registered capital. While banks, asset management companies, insurance companies and other financial institutions normally are subject to requirements as paid-up capital and minimum capital, there is no such requirement on a non-insurance subsidiary which mainly conducts consulting business. However it is common practice for such companies to have a registered capital of RMB1million to 1.5million. Foreign insurers may consult local AMRs to check if there is any local requirement on registered capital that need to obey.

The currency of the capital is another issue. According to relevant Chinese laws, foreign investors are allowed to use freely convertible foreign currency as the registered capital. Where the currency of the registered capital of a non-insurance subsidiary changes, an application for amendment of its registered particulars should be filed with the local AMR.

For the MOFCOM procedure, according to Article 9 of the Measures for Reporting of Information on Foreign Investments, a foreign investor shall submit the initial report on foreign investment information through the enterprise registration system when it applies for the registration of the foreign-invested enterprise. Therefore, the non-insurance subsidiary needs to file such initial report during the establishment process.

III. Main issues on the operation of the non-insurance subsidiary

As discussed above, Chinese non-insurance subsidiaries mainly provide technical support related to insurance business to foreign insurers or other insurance related clients. Therefore, the Chinese insurance regulation is one thing they can not ignore. While only insurance companies and other insurance organizations (e.g. insurance agents, insurance brokers, etc.) established in accordance with the Insurance Law of China are permitted to conduct insurance business in China, there is no clear definition of “insurance business” by law. Furthermore, related sanction cases in this regard are also limited from public information, which makes the boundary between assisting and conducting insurance business remain unexplicit.

In practice, underwriting, policy issuance, premium collection, claims payment are deemed as typical insurance business, thus non-insurance subsidiaries are strictly prohibited from conducting such activities. For other activities that do not appear to belong to the typical insurance business mentioned above, analysis needs to be conducted on a case-by-case basis. Based on our experience, the bottom line would be refraining from making any decision on insurance activities, where such decisions should be ultimately made by insurance institutions.

Besides, marketing and fee collection are two sensitive areas for non-insurance subsidiaries during their business operation. At the level of promotion or marketing, the non-insurance subsidiary should not use marketing terms as insurance intermediary or conduct marketing activities under such names, in order to avoid misleading the public or partners into believing that it is an insurance institution. In terms of fee collection, the non-insurance subsidiary may collect service fees but not in the name of commissions which is exclusive to insurance intermediaries. Furthermore, the service fee may be calculated such as per solution, per solution package or on working hours basis. On the contrary, it should not be calculated in proportion to insurance premiums, or in connection with the success of the insurance transactions.

IV. In summary

Although the negative impact of the current global economic situation cannot be avoided, many people still believe that the InsurTech market will continue to empower the traditional insurance industry to cope with constantly changing market challenges, which means the role of non-insurance subsidiaries will become increasingly important for the insurers. As setting up Chinese non-insurance subsidiaries has become a trend to facilitate their business in China, foreign insurers also need to get prepared because in practice, many problems may occur in the process of establishing non-insurance subsidiaries in China; Even after the establishment of the company, it is still necessary to pay attention that the business carried out cannot enter the minefield of insurance business.

  1. Regulatory Framework
    • When it comes to overseas investment, Chinese enterprises are required to comply with the rules of the National Development and Reform Commission (“NDRC”) and the Ministry of Commerce (“MOFCOM”) governing overseas investment, however, insurance companies which are subject to separate industry regulation shall also comply with the rules of the China Banking and Insurance Regulatory Commission (“CBIRC”, previously known as China Insurance Regulatory Commission or “CIRC”).
    • In general, the regulatory framework for overseas investment of insurance companies in the People’s Republic of China (“the PRC”, for the purpose of this article, excluding jurisdictions as Hong Kong SAR, Macao SAR and Taiwan) mainly consists of the following three regulations: the Interim Measures for the Administration of Overseas Investment of Insurance Funds (2007) (“Interim Measures”), the Implementation Rules for the Interim Measures for the Administration of Overseas Investment of Insurance Funds (2012) (“Implementation Rules”) and the Notice on Adjustment of Relevant Policies for Overseas Investment of Insurance Funds (2015), which have undergone significant changes in the qualification conditions of insurance companies as investors, investable varieties, investment ratios and investable countries and regions compared with the Interim Measures for the Administration of Overseas Application of Insurance Foreign Exchange Funds promulgated in 2004.
    • In August 2014, the CIRC issued the Several Opinions on Accelerating the Development of Modern Insurance Service Industry (“New Ten Rules”), proposing to improve the efficiency of insurance assets allocation, support insurance companies to “go abroad”, and expand the scope of overseas investment correspondingly.
    • From the 2019 Full Picture Report on Overseas Investment by Insurance Institutions released by the Insurance Asset Management Association, it can be observed that as of the end of 2019, the balance of overseas investment of PRC insurance companies was about 470 billion yuan, equivalent to about 70 billion dollars, accounting for 2.75% of the total assets of the insurance industry at the end of the last quarter of 2019. Currently, the proportion of overseas investments is capped at 15% of total assets last quarter, which means there is plenty of room for future growth in overseas investments of PRC insurance companies.
    • However, not all overseas varieties can be invested by PRC insurance companies.  Similar to domestic investment, PRC insurance companies are also faced with compliance complexities such as allocating assets and sifting overseas varieties. Therefore, this article aims to discuss the investable varieties for overseas investment of PRC insurance companies under the regulatory framework of the CBIRC, which are mainly subject to asset category restrictions and regional restrictions.
  2. Asset Category Restrictions
    • The 2019 Full Picture Report on Overseas Investment by Insurance Institutions released by the Insurance Asset Management Association indicates that in terms of asset allocation, insurance institutions’ overseas investments were mainly in equity assets, supplemented by monetary market assets, fixed-income assets, real estate, among other categories.
    • According to Article 31 of the Interim Measures and Articles 11 and 12 of the Implementation Rules, the types of assets for overseas investments include monetary market, fixed-income, equity, real estate, equity investment funds, securities investment funds and REITs.
    • It is worth noting that in addition to classifying the types of assets for overseas investment, the regulator has also specifically listed the investable varieties under various types of assets, such list is not limited to Article 31 of the Interim Measures and Articles 11 and 12 of the Implementation Rules, but also involves the regulation on classification of investment assets, which is named the Notice of China Insurance Regulatory Commission on Strengthening and Improving Regulation of Insurance Proceeds Investment Ratios (2014), its appendix “Investable Products under Major Categories of Assets” has also explicitly listed investable varieties for overseas investments.
    • In practice, in terms of investments of insurance companies, CBIRC adopts an “allowlist” mechanism, in other words, insurance companies are only allowed to invest in those products expressly permitted by the CBIRC. However, given the wide range and the evolving characteristic of financial products under various types of assets as well as the fact that some overseas financial products do not have exact counterparts in the PRC market, thus, uncertainty exists as to whether certain financial products fall within the investable category.
    • To our knowledge, such uncertainty is particularly common in monetary market and fixed-income products. For instance, certificates of deposit are not expressly permitted by the CBIRC and there is no clear definition of certificates of deposit under PRC laws and regulations, therefore, PRC insurance companies may have some concerns when considering whether to invest in certificates of deposit. This may need a case-by-case assessment.
    • When encountering such issues, considering that there may be differences in financial products with the same name issued in different countries and regions, we suggest starting with the terms and conditions of financial products to analyse whether the characteristics of the product are in line with the definition of investable varieties under PRC laws and regulations and seeking further support from law firms where the financial product is issued if necessary.
  3. Regional Restrictions
    • Annex I of the Implementation Rules list 46 countries and regions in which PRC insurance companies are permitted to invest, consisting of developed markets and emerging markets. As for the regulatory practice, according to Supervision Letters issued by the CIRC in February 2018, two life insurance companies and one insurance asset management company were required to rectify their unlawful overseas investments within one month due to violation of the regional restrictions on overseas investment.
    • For different categories of assets, the Implementation Rules set out the following restrictions on investable regions:
    • If the type of the proposed investment falls into monetary market, fixed-income and equity assets, then the aforementioned assets must be issued or circulated in the financial markets in the countries or regions listed in Annex 1. Furthermore, when it comes to convertible bonds, stocks and depository receipts, they must be listed for trading on the main broad of the stock exchange of the countries or regions listed in Annex 1.
    • If insurance companies intend to invest directly in the equity of an unlisted enterprise, such unlisted enterprise must be located in the countries or regions listed in Annex 1.
    • If insurance companies intend to invest directly in overseas real estate, such real estate must be located in the core areas of the major cities in the developed markets listed in Annex I.
    • If insurance companies intend to invest in overseas securities investment fund, the securities investment fund itself must be approved or registered by the security regulatory authority of the country or region listed in Annex I. Moreover, the underlying assets of the securities investment fund must also be issued or circulated in the financial market of the country or region listed in Annex I.
    • If insurance companies intend to invest in overseas equity fund, they can be exempted from the regional restrictions, provided that the portfolio companies of the equity investment fund are at the growth or maturity stage or with a high acquisition value.
    • If insurance companies intend to invest in overseas REITs, such REITs must be listed on the stock exchange of the countries or regions listed in Annex 1.
  4. Conclusion
    • For PRC insurance companies, “going abroad” is an inevitable trend, however, as discussed above, the regulator has set restrictions on both varieties and regions for overseas investments, which requires PRC insurance companies to assess prudently before making overseas investments so as to avoid compliance risks on the one hand, and also requires PRC insurance companies to allocate assets reasonably and diversify investment risks to obtain stable investment returns on the other.

Ⅰ.INTRODUCTION

Over the past decade, China’s insurance industry has grown rapidly and held the second-largest premium market share worldwide for many years, contributing steadily to the global insurance market. In 2022, despite the repeated impact of the pandemic and the turbulent capital markets, China’s insurance industry has been put to the test and has seen new developments with the introduction of various favorable policies, such as the start of pension insurance and green insurance and the continued “popularity” of D&O liability insurance.

Based on data released by China Banking and Insurance Regulatory Commission (CBIRC) on its official website on 11 January 2023, as of November 2022, the insurance companies’ original insurance premium income reached 635 billion USD with an increase of 4.95% year-on-year; the claims and benefits paid out were 192 billion USD with a decrease of 0.60% year-on-year; the total assets of the insurance industry reached 3.9 trillion USD; the net assets of the insurance industry reached 398 billion USD.

Ⅱ.THE LAUNCH OF THE PERSONAL PENSION SYSTEM

As China’s ageing process accelerates, new countermeasures to address the issue of elderly support are being introduced. 2022 is the starting year for the development of China’s personal pension system. In April, the General Office of the State Council released The Opinions on Promoting the Development of Personal Pensions, announcing for the first time a complete institutional framework. Subsequently, the State Administration of Taxation, the CBIRC and other government agencies have issued supporting pilot rules to aid the personal pension system from the perspective of personal tax incentives and pension insurance products.

For example, the CBIRC issued The Notice on the Launch of Pilot Commercial Pension Business of Pension Insurance Companies in December, allowing four pension insurance companies to launch pilot business in ten provinces (cities), including Beijing, where pension insurance companies can provide one-stop services such as account management, pension planning, fund management and risk management to their clients.

In the meantime, the insurance industry has an inherent advantage in the personal pension track. Insurance funds have the characteristics of large scale, long term and stability. Insurance companies usually manage the incremental funds generated by pension products through their asset management subsidiaries. The insurance asset management companies can overcome market volatility to a certain extent and achieve investment returns in terms of liability-side demand and absolute returns, which are well compatible with the features of long-term funds like pensions. Therefore, insurance asset management products are an indispensable support for improving the personal pension financial system.

 Ⅲ.THE DEVELOPMENT OF GREEN INSURANCE

In 2022, the CBIRC issued The Guidelines on Green Finance for the Banking and Insurance Industry and The Notice on the Statistical System of Green Insurance Business, defining “green insurance” for the first time at the institutional level. It requires the insurance institutions to focus on Environmental, Social, and Governance (ESG) risks in the areas of organizational management, system building, internal control management and information disclosure. Moreover, insurance institutions should use the results of ESG assessment as an important basis for cost management and investment decisions, and apply differential rates according to the risk profile of their clients.

While green insurance in China is still in the primary stage of development from the current perspective, along with the implementation of China’s green development concept and the “double carbon” target, green insurance will have a unique opportunity for development.

Ⅳ. CONTINUED POPULARITY OF D&O LIABILITY INSURANCE

In the past three years, D&O liability insurance in the A-share market continues to be popular. According to the incomplete statistics from a China Securities Journal reporter, a total of 337 A-share listed companies announced the purchase of D&O liability insurance in 2022, and the number of insured companies rose 36% year-on-year.

The high increase in the insured rate is partly due to the representative litigation system created by the revised PRC Securities Law, which opened the door to A-share securities class actions and significantly increased the litigation risk for A-share listed companies and their directors and officers. The judicial practice of class action litigations such as the Kangmei Pharmaceuticals case, Luckin Coffee case, the Feilo Acoustics case and the Huifeng Joint Stock case, has taken the liability risks of directors and officers to reality.

On the other hand, as the regulatory authorities continue to increase their efforts to investigate and punish information disclosure irregularities, In the first 11 months of 2022, 56 listed companies have been investigated by the China Securities Regulatory Commission (CSRC) for alleged information disclosure violations, a number that is 65% higher than the same period last year. Furthermore, the revised PRC Securities Law also strengthens the regulatory constraints on the “controlling minority” by expanding the scope of people who have disclosure obligations and strengthening the directors’ and officers’ disclosure obligations. There has been a steep increase in civil litigation cases involving misrepresentation or illegal information disclosure, and there is a positive correlation between litigation risk and demand for D&O liability insurance.

In addition, the number of A-share D&O liability insurance claims and potential claims has increased noticeably in 2022. Given the long-tail nature of D&O liability insurance claims, it is expected that more potential claims may be converted into actual claims in 2023. With the rise in litigation risk faced by listed companies and the increase in D&O liability insurance claims, the increase in D&O liability insurance premiums is an inevitable trend.

In the meantime, due to Covid-19 pandemic and geopolitical turmoil, Chinese insurance market also felt the unprecedented pressure during the past year, and those factors brought more insurance disputes, in the sectors such as business interruption insurance, credit and warranty insurance, profession liability insurance, even co-insurance and reinsurance.

Ⅴ. Conclusion

Generally speaking, Chinese insurance market and regulation are undergoing the tremendous changes. With the slackening of China’s epidemic prevention policy and the recovery of the national economy at the end of 2022, it is anticipated that China’s insurance and legal service market will face more opportunities and challenges in 2023.

Reinsurance contracts, like insurance contracts, follow the doctrine of utmost good faith. Since the reinsurance contract is a contract concluded between commercial entities such as insurance companies, who are endowed with professional insurance knowledge and insurance business experience, it is generally not easy to generate reinsurance disputes. Even when there are disputes, they are often settled by negotiation between insurance companies in order to maintain commercial cooperation. However, with the rapid development of the Chinese reinsurance industry, various types of complex disputes have arisen in recent years. Accompanied by the economic downturn caused by the superposition of various factors including the spread of COVID-19, insurance companies no longer seem to be willing to settle reinsurance contract disputes through amicable negotiation. In China, reinsurance contract disputes are increasingly on display to the public and industry players.

The most influential reinsurance contract dispute in China’s insurance market was the facultative reinsurance dispute between two insurance companies concerning the SK Hynix conflagration case from 2014 to 2015. Due to the huge discrepancies between the parties with regard to the issue of whether the reinsurance contract was concluded, this case promoted the former China Insurance Regulatory Commission (CIRC) to issue regulatory guidelines and standards on facultative reinsurance and treaty reinsurance in the market. In general, compared to the European and American insurance markets, China’s insurance market, especially the reinsurance market, is relatively new and thus has few classic reinsurance dispute cases publicly available on China Judgments Online, a website publishing effective judgments in China. Of course, one possible reason is that some reinsurance contract disputes are resolved confidentially through arbitration. In 2020, however, one of the eight typical financial cases involving foreign affairs published by the Shanghai Financial Court was related to an application for confirmation of the validity of an arbitration agreement between two insurance companies, which was the first time the Chinese court interpreted the “Incorporated Clauses on jurisdiction” in the reinsurance contract.

The main facts of the case were that on 1 May 2009, Company A, as the insurer, issued an Open Contract of Inland Transportation Cargo Insurance (Water and Overland) with policy No. 09SH002 (SHA) to the insured (the “Open Contract”). Article 10 of the Open Contract stipulates that if any dispute arises between the Assurer and the Assured, both parties should resolve disputes through negotiation. If the dispute cannot be settled through negotiation, either party or both parties can apply for arbitration at the China Maritime Arbitration Commission (CMAC) Shanghai Sub-Commission in accordance with its Arbitration Rules. Company A subsequently issued Policy No. PB0215011416 to the insured, which stipulates that to cover the declaration under the Open Contract No. 09SH002 (SHA) from 0:00 on 1 May 2015 to 24:00 on 31 May 2015 and that the conveyance, port of departure, port of destination, insured interest and other special terms and conditions are as per the provisions of the Open Contract. If any dispute between the Company and the insured, the parties shall resolve it through negotiation. If it cannot be resolved through negotiation, both parties can apply for arbitration at the CMAC Shanghai Sub-Commission in accordance with its Arbitration Rules.

On August 13, 2015, Company B, as the reinsurer, and Company A, as the insurer, entered into a reinsurance slip with policy No. SH00150075, which stipulates that the interest, period of insurance, sum insured, premium, jurisdiction, etc. are as per the original policy (No. PB0215011416). After performing its indemnity obligations to the insured, Company A applied for arbitration with the CMAC Shanghai Sub-Commission on July 17, 2019, requesting that Company B perform its indemnity obligation as the reinsurer. Company B thereafter applied with the Shanghai Financial Court in China for a declaration that there was no arbitration clause in the reinsurance contract entered between Company A and B on August 13, 2015. Company B alleged that no arbitration clause was agreed upon in the reinsurance contract with Company A, and the arbitration clause cited by Company A was an arbitration clause under the Open Contract between Company A and its insured, which was not binding on Company B. Company A argued that the reinsurance contract signed between Company A and Company B expressly agreed that the jurisdiction would be following the original policy, and the arbitration clause was clearly stipulated in the original policy between Company A and the insured. Before the execution of the reinsurance contract involved, Company A provided the original policy to Company B, and Company B was also willing to be bound by the arbitration clause, therefore, the arbitration clause in the original policy was binding on Company B.

Shanghai Financial Court held that whether the original policy agreed in the reinsurance contract referred to policy No. PB0215011416 or the Open Contract No. 09SH002 (SHA), both of which contained an arbitration clause. The parties’ intention to arbitrate, arbitration matters and the institution for arbitration are clearly stated and legally valid. The reinsurance contract listed “Jurisdiction” and interest, period of insurance, etc. separately, and stipulated that these items are as per the original policy. Company A and Company B had discrepancies in the meaning of the term “Jurisdiction”. Both parties are foreign insurance companies and the contract was drafted in English. In the event of a dispute between the parties over the meaning of “Jurisdiction”, it should be interpreted in accordance with the common understanding of the term. In English, “Jurisdiction” does not only refer to the jurisdiction of the court specifically, but it can also be referred to litigation, arbitration and other dispute resolution methods. In this case, there is no agreement on the jurisdiction of a court in the original policy. From the purpose of the clause in the reinsurance policy, it can also be concluded that the parties’ intention is to incorporate the arbitration agreement into the reinsurance policy. The expression of intent to incorporate the arbitration clause into the reinsurance contract between Company A and Company B is clear and legally binding on both parties. Ultimately, the Shanghai Financial Court ruled to reject the application of Company B.

In the late 19th and early 20th centuries, non-professional insurers would refer to the insurance policy with the same subject matter and risks to underwrite policies. These contracts are written in typical terms such as “as per the same rates, terms and interests …”. The English courts interpreted that the subsequent policy is conditional on the original policy, i.e., the policy containing such clause maintains the same terms as the original policy. In the reinsurance market, it is common for a facultative reinsurance contract to use the term “as original” to keep its consistency with the original policy. The majority view is that the expression “as original” makes the terms of the original policy incorporated into the reinsurance contract, thus making the reinsurance contract consistent with the original policy in terms of subject matter, risks covered, insurance period, liability, exclusion of liability, etc., resulting in the legal effect of “back to back cover”.

“As original” clauses are more commonly found in proportional facultative reinsurance contracts, especially quota share reinsurance. Since the contracts of facultative reinsurance are very simple, the court can only interpret the reinsurance contract in the same way as the original insurance contract through the clause “as original”. In the case of non-proportional reinsurance treaties, the original insurer and the reinsurer usually reach a reinsurance contract before two parties agree to cede certain types of business. Reinsurance treaties are often well-drafted and differ significantly from the terms of the original insurance contract, usually without the application of “as original” clause or “back to back cover” presumptions.

Where a reinsurance contract contains the term “as original”, it is highly controversial which specific provisions of the original insurance contract can be incorporated into the reinsurance contract and bind reinsurers. For example, the often-disputed clauses include the warranty clause, insurance period clause, claims clause, choice of law or dispute resolution clause, etc.

In England, there is a judicial view that a clause should be tested from a practical point of view as to whether it can or should be incorporated into the reinsurance contract, i.e., each term of the original insurance contract should be placed in the context of reinsurance contract to consider its practicality. For example, the insured in the original insurance contract is analogous to the reinsured in the reinsurance contract, and the insurer is analogous to the reinsurer in the reinsurance contract. In this way, the court test whether the incorporation of a clause is reasonable and practical. A majority of the English courts would consider the commercial purpose of reinsurance (especially the proportional facultative reinsurance contracts) and apply the presumption of “back to back cover” as far as possible to incorporate the terms of the original insurance contract into the reinsurance contract. The judges believe that the purpose of reinsurance is to spread the risk for the original insurer, so the terms of the reinsurance contract and the original insurance contract should be consistent as far as possible in terms of their business purposes. The reinsurer, in consideration of the reinsurance premium received, should bear the same risks and liabilities as the original insurer, which is also a reflection of the principle of “follow the fortunes” in the reinsurance business. However, it is generally believed that the incorporated clause shall not contradict the express terms in the reinsurance contract, no matter whether such contradiction is literal or substantive.

The above-mentioned typical case published by the Shanghai Financial Court is the first time that a Chinese court interpreted the incorporated clause of a reinsurance contract. In this case, the scope of “as original” agreed in the reinsurance contract included interest, insurance period, sum insured, insurance premium and jurisdiction. Although there was a dispute between the parties as to whether the term “jurisdiction” specifically referred to litigation (rather than arbitration), the Shanghai Financial Court, by applying the semantic and teleological interpretation, defined the term “jurisdiction” in the English contract and found that the arbitration clause was clearly and specifically incorporated into the reinsurance agreement, taking into account the fact that the incorporation of the arbitration clause was a specific and not a general agreement. 

However, if the scope of the “as original” clause stipulated in the reinsurance contract is not as specific as the one in the above case, it may be more controversial whether the jurisdiction clause in the original insurance contract can be incorporated into the reinsurance contract. It is usually believed that the jurisdiction clause in the original insurance contract cannot be incorporated into the reinsurance contract, because whether the terms of the original insurance contract can be incorporated into the reinsurance contract depends crucially on whether there is a close connection with the risks connecting the two contracts. Generally speaking, the jurisdiction clause is not closely related to the risks covered. EU law considers that jurisdiction clauses are auxiliary clauses to the substantive clauses of the contract and that the expression of incorporation can only express the incorporation of clauses linked to the subject matter of the contract and does not have the legal effect of incorporating auxiliary clauses. In the absence of a specific expression, the court has no right to infer that the parties have expressly agreed on the incorporation of the auxiliary clauses.

If the jurisdiction clause of the original insurance contract cannot be incorporated into the reinsurance contract, it is highly likely that the dispute over the original insurance contract and the dispute over the reinsurance contract will be heard by two different dispute resolution institutions. For example, one will be tried by the court and the other will be arbitrated by an arbitration institution. If the parties of a reinsurance contract have disputes over the extent of liability of the reinsurance contract and go to a court or arbitration institution, it will be inevitable that the panel or tribunal will review the content, terms, scope of liability and performance of the original insurance contract. If there was a prior final and binding judgment or arbitral award with respect to the original insurance contract, such review is relatively straightforward. However, if the parties to the original insurance contract have no dispute and there is no prior judgment or arbitral award, it is very likely for the court or arbitration institution hearing the reinsurance dispute to go beyond its jurisdiction and review the original insurance contract which does not fall within its jurisdiction. Chinese arbitration institutions are particularly cautious about such issue and try not to “cross the red line”. This situation is also likely to occur where the jurisdiction clauses in the reinsurance contract and the original insurance contract are explicitly contradictory.

If the reinsurance contract is unclear as to jurisdiction and the jurisdiction clause of the original insurance contract is not incorporated into the reinsurance contract, then how to determine the court of jurisdiction of the reinsurance contract under the frame of PRC law? According to Article 24 of the Civil Procedure Law of the People’s Republic of China (hereinafter referred to as the “Civil Procedure Law”), a lawsuit brought on an insurance contract dispute shall be under the jurisdiction of the people’s court where the defendant is domiciled or where the object of insurance is located. According to the research on the cases published by Chinese courts, most courts hold that the subject matter of the reinsurance contract is the risks ceded from the original policy, instead of physical properties and related interests, There is no object under the reinsurance contract, which makes the place where the object of insurance is located inapplicable. The court of jurisdiction of the reinsurance contract can only be determined in accordance with the place where the defendant is domiciled.

It can be concluded from the above-mentioned cases that: first, the Chinese courts consider a reinsurance contract a type of insurance contract, and the general jurisdictional provisions of law on insurance contracts can also be applied in the context of reinsurance contracts; second, the Chinese courts hold that the reinsurance contract has subject matter, but there is no “object” under the Civil Procedure Law, thus, only the court of the defendant’s domicile can have jurisdiction.

It is also noteworthy that Article 24 of the Civil Procedure Law only provides jurisdiction rules for domestic disputes. If the insurance/reinsurance contract dispute is a foreign-related case, such as one or more parties are foreign entities or the business is underwritten outside China (reinsurance contracts usually have foreign-related elements), Chinese courts also hold different views on whether the provisions of Article 24 of the Civil Procedure Law should be applied, or the provisions of Article 272[1], Chapter 4 “Special Provisions on Foreign-Related Civil Procedures” of the Civil Procedure Law should be applied.

This article only draws on the interpretation of the Chinese courts in relation to the incorporation of the jurisdiction clause. The incorporation of substantive clauses of the original insurance contract will be even more complicated in practice. From the point of view of a legal practitioner, it is suggested that the parties to the reinsurance contracts should at least make an unambiguous agreement on the jurisdiction and choice of law, and also make an enumerated agreement on the scope of “as original” clause to avoid unnecessary disputes and reduce the cost of dispute resolution for all parties as far as possible.

    [1]Article 272 of the Civil Procedure Law of the People’s Republic: Where an action is instituted against a defendant which has no domicile within the territory of the People’s Republic of China for a contract dispute or any other property right or interest dispute, if the contract is signed or performed within the territory of the People’s Republic of China, the subject matter of the action is located within the territory of the People’s Republic of China, the defendant has any impoundable property within the territory of the People’s Republic of China, or the defendant has any representative office within the territory of the People’s Republic of China, the people’s court at the place where the contract is signed or performed, where the subject matter of the action is located, where the impoundable property is located, where the tort occurs or where the domicile of the representative office is located may have jurisdiction over the action.

    Preamble

    On November 18, 2022, the Supreme People’s Court of the People’s Republic of China (the “SPC”) published an announcement soliciting public comments on the draft of Provisions of the Supreme People’s Court of the People’s Republic of China on Several Issues concerning the Application of Law in the Trial of Monopoly-related Civil Dispute Cases (the “Draft”). Compared with the Provisions of the Supreme People’s Court of the People’s Republic of China on Several Issues concerning the Application of Law in the Trial of Civil Dispute Cases Arising from Monopolistic Conduct (the “2012 Interpretation”) issued by the SPC in 2012, which is the first judicial interpretation on China’s antitrust law, the Draft encompasses 52 articles and provides much more detailed interpretations on lots of procedural and substantive matters involved in antitrust civil litigation. When the Draft is formally adopted and comes into effect in the future, the 2012 Interpretation will be voided.

    The key changes in the Draft can be divided into four categories: (1) provisions introduced or amended for being in alignment with the amendment to the Anti-monopoly Law of the People’s Republic of China (the “AML”) in 2022; (2) provisions reflecting the judicial opinions held by the people’s court in the antitrust jurisprudence; (3) provisions drawing on the provisions issued by China’s antitrust law enforcement authority; (4) provisions with groundbreaking content to some extent. The Draft includes responses to multiple complex and controversial issues in judicial practice. This article intends to introduce the key changes in the Draft with two parts, the procedural matters (Part I: Changes to Procedural Matters) and the substantive matters (Part II: Changes to Substantive Matters).

    Brief regarding the changes to substantive matters: Articles 16 to 19, Articles 20 to 29, and Articles 30 to 43 of the Draft separately set out the provisions on the definition of the relevant market, the determination of monopoly agreement, and the determination of abuse of dominance, which include specified provisions on key issues in the fields of platform economy and intellectual property. In addition, the Draft introduces detailed provisions on civil liability from Articles 44 to 50.

    1. Specifying the methods of defining the relevant market in monopoly civil dispute case.

    Articles 17 to 19 of the Draft provide on how to define the relevant market in monopoly civil dispute case, and the provisions drawing on the content of the Guidelines on the Definition of Relevant Market issued by the Anti-monopoly Commission of the State Council and the Anti-monopoly Guidelines of the Anti-monopoly Commission of the State Council in the Field of Platform Economy (the “Guideline for Platform Economy”). The key provisions include the following:

    Paragraph 1 of Article 17 of the Draft provides: “When defining the relevant product market and the relevant geographic market in which the undertaking compete with each other with respect to specific products or services (hereinafter collectively referred to as the “Products”) during a certain period, the people’s court may, on the basis of the specific products directly involved in the alleged monopolistic conduct, conduct a demand substitution analysis from the perspective of the demanders; if the competitive constraint caused by supply substitution on undertakings is similar to that of demand substitution, the people’s court may also conduct a supply substitution analysis from the perspective of the suppliers.” This article clarifies the principle and basic method of defining the relevant market in a monopoly civil dispute case, i.e., a demand substitution analysis and/or supply substitution analysis may be conducted on the specific products directly involved in the alleged monopolistic conduct.

    Paragraph 2 of Article 17 of the Draft provides: “The people’s court may adopt the analysis method of the hypothetical monopolist test when defining the relevant product market and the relevant geographic market, and generally choose the hypothetical monopolist test method of price rising; and if the competition between undertakings is mainly shown in terms of quality, diversity, innovation and other non-price competition, the hypothetical monopolist test method of quality declining and cost rising may be adopted.” This article provides for different hypothetical monopolist test methods based on whether the competition between undertakings concerned is mainly shown in terms of price.

    Before the issuance of the Draft, the people’s courts have already applied the hypothetical monopolist test (the “HMT”) in the context of non-price competition. For example, In Qihoo v. Tencent, the SPC held that the HMT, as a kind of analysis method to define the relevant market, is generally applicable, but the choice of HMT method needs to be determined on a case-by-case basis. In the fields where product differentiation is very obvious, and quality, service, innovation, consumer experience, and other non-price competition have become the important methods of competition, it is inappropriate to adopt the test of “small but significant and non-transitory increase in price” (the “SSNIP”). Under such circumstances, alternative methods of HMT shall be adopted, such as the test of “small but significant non-transitory decrease in quality” (the “SSNDQ”).

    2. Introducing provisions on the determination of competitive relationship and the theory of “Single Economic Entity”.

    (1) Specifying how to determine the competitive relationship between undertakings.

    Article 17 of the Anti-monopoly Law of the People’s Republic of China (the “AML”) sets forth the provisions regarding horizontal monopoly agreement, that is, the undertakings with competitive relationship reaching an agreement, decision or other concerted practice to exclude or restrict competition. Therefore, to determine whether undertakings have reached or implemented a horizontal monopoly agreement, the first thing is to determine whether they have a “competitive relationship”. For undertakings with no “competitive relationship”, even if the agreement reached by them may have the effect of excluding or restricting competition, it shall not fall within the scope of horizontal monopoly agreements prohibited by Article 17 of the AML.

    Paragraph 1 of Article 21 of the Draft provides: “Undertakings with a competitive relationship as provided for in Article 17 of the Anti-monopoly Law refer to two or more actual or potential undertakings that are at the same stage of production and operation, provide products with close substitution relationship, make independent business decisions, and assume legal liability.”

    This new provision of the Draft specifies how the people’s courts determine the competitive relationship between undertakings. Actually, before the issuance of the Draft, the people’s courts have already adopted the above methods and principles in precedents. For example, in Shanghai Huaming v. Wuhan Taipu, the SPC held that, the competitive relationship under the Anti-monopoly Law is defined as two or more undertakings at the same operation stage of production or distribution of products, that provide substitutable products or have a realistic possibility of entering into the same relevant market. (Note: For a detailed introduction, please see, Why Settlement Agreements in Patent Litigation were Deemed as Monopoly Agreements? — — Analysis Of the Judgement and Criteria for Determining Monopoly Agreement by the Supreme People’s Court)

    (2) Introducing the theory of “Single Economic Entity”.

    Paragraph 2 of Article 21 of the Draft provides: “Two or more undertakings that shall be deemed as a single economic entity do not constitute an undertaking with a competitive relationship as mentioned in the preceding paragraph. To make a judgment, the people’s court shall take into account the specific situation and consider factors such as whether the undertaking has control over other undertakings concerned or can exert a decisive influence on them, whether such two or more undertakings are controlled by the same third party or have decisive influence thereon.”

    This is the first time that the SPC explicitly indicates that the theory of “Single Economic Entity” can be applied to determine whether undertakings have a competitive relationship in an anti-monopoly dispute case. The Draft does not specify how to identify “control” or “decisive influence”, but based on the anti-monopoly law enforcement practice, especially in the merger control review cases, the determining factors are not limited to the factors for the identification of control under the company law, the security law or the financial audit regulation. All of the relevant factors such as the equity structure, the appointment of senior management, and the control of business and financial arrangements may be identified as determining factors of “control” or “decisive influence”.

    For example, in the penalty decision against three calcium gluconate active pharmaceutical ingredient (“API”) suppliers — Shandong Kanghui Medicine (“Kanghui”), Weifang Puyunhui Pharmaceutical (“Puyunhui”) and Weifang Taiyangshen Pharmaceutical (“Taiyangshen”) — for abuse of dominance imposed by the State Administration for Market Regulation (the “SAMR”) on 9 April 2020, the SAMR identified a de facto controlling relationship among the three API suppliers even if they have no equity relationship, with each registered as an independent legal entity. The SAMR held that both Puyunhui and Taiyangshen were controlled by Kanghui and carried out their business under the instructions of Kanghui: (1) Kanghui regarded Puyunhui and Taiyangshen as its departments and coordinated relevant matters through work contact forms; (2) when Kanghui took the inventory of API products, the inventories of Puyunhui and Taiyangshen were also counted; (3) Kanghui carried out its business by sending instructions to Puyunhui and Taiyangshen and exerted a full control of the transactions of API products distributed by Puyunhui and Taiyangshen.

    Where two or more undertakings are deemed as a single economic entity, it may not only affect the judgment on whether the agreement reached by them constitutes a horizontal monopoly agreement, but also affect the judgment on whether they have dominant position in the relevant market considering that their market share will be aggregated as that of one single economic entity. For example, in the above-mentioned penalty decision against the three API suppliers, when the SAMR determined the dominance of the three API, their market share in the relevant market were aggregated as a single economic entity.

    3. Amending the provisions on the determination of monopoly agreement.

    (1) Specifying the determining factors of “other concerted practices”.

    Article 16 of the AML provides: “For the purposes of this Law, monopoly agreement refers to agreement, decision or other concerted practice that excludes or restricts competition.” According to Article 5 of the Interim Provisions on Prohibition of Monopoly Agreements (the “Provisions on Monopoly Agreements”) issued by the SAMR, “… other concerted practice refers to a practice carried out by undertakings in the absence of a definite agreement or decision between undertakings which nevertheless has been coordinated in substance.”

    Paragraph 1 of Article 20 of the Draft provides: “The people’s court shall consider the following factors when determining other concerted practice under Article 16 of the AML: (1) whether there is consistency or relative consistency in the market conducts of undertakings; (2) whether there has been communication or exchange of information between undertakings; (3) market structure, competition status, market changes and other situations in the relevant market; and (4) whether the undertakings can provide reasonable explanations on the consistency or relative consistency of their conducts.” Paragraphs 2 and 3 of Article 20 of the Draft introduce the provisions on the burden of proof. (Note: For more details, please see, Part I: Changes to Procedural Matters)

    The factors for determining “other concerted conducts” listed in the Draft are basically the same as the provisions in Article 6 of the Provisions on Monopoly Agreements. Actually, before the issuance of the Draft, the people’s courts have already determined whether the defendants have carried out “other concerted conduct” based on the above-mentioned factors in precedents. For example, in Li Bingquan v. Xiang Pin Tang, the SPC determined whether the five defendants had carried out “other concerted conduct” from the following aspects: (1) the purchase records submitted by the plaintiff could prove that the five defendants had sold the same water product at the same price; (2) a preliminary assumption that the undertakings concerned had exchanged information or intentions could not be made only based on the fact that the similarity of prices of the same water product in the limited area; (3) the plaintiff failed to provide evidence regarding the market structure, competition status, market change and other circumstance of the relevant market. Considering the factors such as the similarity of the water product concerned, the limited area where the undertakings concerned sold the products, the transparency of product price, and the limited number of undertakings, the SPC determined that the existing evidence submitted by the plaintiff is insufficient to exclude the possibility of independent pricing by the five defendants.

    (2) Specifying how to determine whether the vertical monopoly agreements have the effect of excluding or restricting competition.

    Paragraph 1 of Article 18 of the AML provides: “Conclusion of any of the following monopoly agreements between undertakings and their trading counterparts is prohibited: (1) fixing the price of products for resale to a third party; (2) restricting the minimum price of products for resale to a third party; and (3) any other monopoly agreement as determined by the anti-monopoly law enforcement authority of the State Council.” In practice, the first two monopoly agreements are generally referred to as “Price-related Vertical Monopoly Agreements” or “Resale Price Maintenance Agreements” (the “RPM agreement”), while the third circumstance is generally referred to as “Non-price Vertical Monopoly Agreements”.

    The amendment to the AML adds a new provision as Paragraph 2 on the determination of the RPM agreement: “An agreement specified in Item (1) or (2) of the preceding Paragraph shall not be prohibited if the undertakings concerned can prove that such agreements do not have effects of excluding or restricting competition.” Based on the amendment to the AML, the undertakings can argue that the agreement with the content specified either in Item (1) or Item (2) of Paragraph 1 of Article 18 of the AML does not constitute the RPM agreement prohibited by the AML if they can prove that such agreement does not have effects of excluding or restricting competition.

    Article 26 of the Draft provides: “When reviewing and determining whether an alleged monopolistic conduct has the effect of excluding or restricting competition in accordance with Paragraph 1 of Article 18 of the Anti-monopoly Law, the people’s court may comprehensively consider the following factors: (1) whether the defendant has significant market power in the relevant market; (2) whether the agreement has adverse competition effects such as raising the entry barrier to market, hindering more efficient distributors or distribution models, or restricting inter-brand competition; and (3) whether the agreement has favorable competition effects such as preventing free-riding, promoting inter-brand or intra-brand competition, safeguarding brand image, improving pre-sale or after-sale service levels, or promoting innovation. Where the defendant has significant market power in the relevant market, the favorable competition effects that can be proved by the documented evidence are insufficient to outweigh the adverse competition effects, the people’s court shall rule that the agreement has the effect of excluding or restricting competition.”

    This provision specifies how to determine whether the vertical monopoly agreements have the effect of excluding or restricting competition. The theoretical bases of the determining factors such as preventing free-riding and the promotion of inter-brand competition are the same as those set out in the Anti-monopoly Guidelines of the Anti-monopoly Commission of the State Council for the Automobile Industry (the “Guideline for Automobile Industry”).

    (3) Circumstances where the people’s court may preliminarily determine that the agreement concerned does not constitute a vertical monopoly agreement.

    Article 27 of the Draft provides: “If the defendant can prove any of the following circumstances, the people’s court may preliminarily determine that agreement concerned does not constitute a monopoly agreement stipulated in Paragraph 1 of Article 18 of the Anti-monopoly Law: (1) the transaction counterparty of the agreement is an agent of the undertaking, and does not bear any substantive commercial or operational risks; (2) the defendant’s market share in the relevant market is lower than the standard established by the anti-monopoly law enforcement authority of the State Council, and it also satisfies the other conditions specified by the anti-monopoly law enforcement authority of the State Council; or (3) the agreement is implemented within a reasonable period to incentivize the transaction counterparty to promote new products.”

    In addition to specifying the application of the “Safe Harbor” rule in vertical monopoly agreement disputes (Note: For more details, please see, Part I: Changes to Procedural Matters), the Draft also involves two other circumstances where the people’s court may preliminarily determine that the relevant agreement does not constitute a vertical monopoly agreement. These circumstances are also included in the Guideline for Automobile Industry. Specifically, Part (2) of Article 6 of the Guideline for Automobile Industry lists the common situations where undertakings in the automobile industry may apply for exemption of resale price restrictions on a case-by-case basis pursuant to the AML, including:

    • Short-term restrictions on sub-sale price of new energy vehicles. In order to conserve energy, protect the environment and avoid “service free rider”, the short-term fixing of sub-sale price and specifying the minimum sub-sale price of new energy vehicles are necessary for encouraging the dealers to strive to promote the new energy products, make greater sales efforts, and expand the market demands for the new products, which may promote the successful release of new products into the market and give the consumers more choices.
    • Sub-sale price restrictions in sales by a dealer that only plays the role of an intermediary party. Sale by a dealer that only plays the role of an intermediary party refers to the sales where the auto supplier and a particular third party or a particular end customer directly agree on the sales price, and only have the dealer to complete the vehicle delivery, funds collection, invoice issuing or other parts of selling steps. In such transactions, the dealer assists in completing the transaction by playing the role of the intermediary party only, different from the dealer in the general sense.

    Article 18 of the AML stipulates that the vertical monopoly agreement is a monopoly agreement concluded between the undertaking and its counterparty, but it does not provide for the definition of the “counterparty”. In practice, vertical monopoly agreements are usually concluded either between the manufacturer and the wholesaler/retailer or the wholesaler and the retailer. Item (1) of Article 27 of the Draft specifies that the people’s courts may preliminarily determine that the agreement concerned does not constitute a vertical monopolistic agreement if the counterparty is an agent and does not bear any substantive commercial or operational risks. In determining whether the counterparty shall be deemed such an agent, the key considerations may include whether the counterparty is responsible for the costs of the supply of goods, the storage of goods, the damages caused to third parties, and certain investments for selling the goods.

    (4) Introducing provision on the determination of the organizer and facilitator of monopoly agreement, and the joint and several liability borne by them.

    The amendment to the AML introduces new provision under Article 19 stating that “An undertaking shall not organize other undertakings to reach a monopoly agreement or provide substantive assistance for other undertakings to reach a monopoly agreement.” In addition to the provisions on horizontal monopoly agreements (i.e., monopoly agreements concluded between competitive undertakings) and vertical monopoly agreements (i.e., monopoly agreements concluded between undertaking and its trading counterparty), the amendment introduces the above provisions on circumstance theoretically referred to as “Hub and Spoke Conspiracy”. In addition, the amendment to AML keeps the provisions on the prohibition against the industry associations from organizing undertakings to conduct monopolistic conducts.

    Paragraph 1 and 2 of Article 28 of the Draft introduces provisions that the plaintiff has the rights to claim that the undertaking or organization of undertakings which conduct organization or provide substantive assistance for other undertakings to conclude or implement a monopoly agreement bear the joint and several liability for the damages caused by the monopoly agreement concerned. Paragraph 3 and 4 of Article 28 of the Draft separately provides how to determine “organize other undertakings to reach a monopoly agreement” and “provide substantive assistance for other undertakings to reach a monopoly agreement” stipulated in Article 19 of the AML.

    According to Paragraph 3 and 4 of Article 28 of the Draft, (1) “organize” refers to conducts such as forming, leading, planning, manipulating, directing and initiating that play a decisive or dominant role in concluding or implementing a monopoly agreement; (2) “provide substantive assistance” refer to conducts such as guiding the occurrence of illegal intent, providing convenience, serving as an information channel and assisting in imposing punishments, which play a direct and important role in promoting the conclusion or implementation of a monopoly agreement. The Provisions on Prohibition of Monopoly Agreements (Draft for Comments) published by the SAMR on June 27, 2022, also sets forth provisions on how to determine “organize” and “provide substantive assistance”. The key factors and theoretical basis of the provisions under this document are basically the same as that of the Draft, but this document has not been formally adopted either.

    4. Amending the provisions on the determination of market dominance and abuse of dominance.

    (1) Introducing provision on the determination of market dominance which includes rebutting the assumption of collective dominance.

    The Draft introduces provisions on the determination of market dominance of the undertakings concerned in monopoly dispute cases under Article 30, Article 32, Article 34, Article 35 and Article 36. The provisions are basically consistent with the relevant content of the Interim Provisions on the Prohibition of Abuse of Dominant Market Position (the “Provisions on Abuse of Dominant Market Position”), the Provisions of the State Administration for Market Regulation on the Prohibition of Abuse of Intellectual Property Rights to Exclude or Eliminate Competition (the “Provisions on the Abuse of Intellectual Property Rights”) and the Guideline for Platform Economy and the opinions formed in administrative enforcement. These new and amended provisions reflect the connection between administrative enforcement and judicial practice. Limited to the length of this article, we will not elaborate on this section, but only introduce the provisions on rebutting the assumption of collective dominance.

    Article 36 of the Draft provides: “Where the people’s court presumes that two or more undertakings collectively have dominant market position in accordance with Item (2) and (3) of Paragraph 1 of Article 24 of the Anti-monopoly Law, such presumption may be rebutted if the undertaking has evidence to prove either of the following circumstances: (1) there is substantial competition between such two or more undertakings; or (2) such two or more undertakings, as a whole, are subject to effective competitive constraints from other undertakings in the relevant market.” These are detailed interpretations of the provisions under Paragraph 3 of Article 24 of the AML, which stipulates that “Where an undertaking presumed to hold a dominant market position is able to provide evidence that it does not hold such a dominant market position, it shall not be deemed to hold the dominant market position.” Although “substantial competition” and “effective competitive constraints” are yet to be further clarified by the people’s court, the opinions held by the people’s court in precedents can be used for reference.

    In Ma Lijie v. China Mobile Communications Group Henan, the SPC for the first time mentioned the factors and standards for determining the collective market dominance. The SPC held that “Based on the common sense regarding the market operation, if multiple undertakings in the relevant market adopt different behaviors in respect of the same business, this is usually a normal result of market competition among the undertakings, and thus it is unnecessary to consider determining the collective market dominance. Therefore, only when multiple undertakings in the relevant market adopt the same behaviors in respect of the same business which reflects the consistency of behavior, it is necessary to consider determining the collective market dominance. For this reason, to determine whether multiple undertakings have formed a collective market dominance, in addition to examination of their market shares, factors such as the consistency of their behaviors also need be considered.”

    (2) Introducing provision on the determination of abuse of dominance.

    The Draft introduces provisions on the determination of abuse of dominance conducted by the undertakings concerned in monopoly dispute case under Article 37 to 43. The provisions draw on the content of with the relevant content of the Provisions on Abuse of Dominant Market Position, the Guideline for Platform Economy, the Provisions on the Abuse of Intellectual Property Rights, the Anti-Monopoly Guidelines of the Anti-Monopoly Commission of the State Council in the Field of Intellectual Property Rights (the “Guideline for Intellectual Property Rights”), and the opinions formed in administrative enforcement. These new and amended provisions reflect the connection between administrative enforcement and judicial practice. Limited to the length of this article, we will not elaborate on this section.

    5. Introducing provisions on the key issues in the field of platform economy.

    The Draft provides specified provisions on the key issues in the field of platform economy which draw on the content of the Guideline for Platform Economy, and the opinions formed in administrative enforcement. In addition, the Draft introduces reference provisions to the relevant provisions of the E-commerce Law of the People’s Republic of China (the “E-commerce Law”). Limited to the length of the article, we will not elaborate on this section of the content, but only introduce the provisions on the Most-Favored-Nation Clause and interconnection issues in the field of platform economy.

    (1) Introducing provisions on Most-Favored-Nation Clause.

    Article 24 of the Draft provides: “Where the agreement between an undertaking operating internet platform and an undertaking using the internet platform requires that the undertaking using the internet platform provides the same or more preferential transaction conditions on the internet platform as other transaction channels, the people’s court may, according to the plaintiff’s claims and the specific circumstances of the case, handle the case as follows: (1) where there is a competitive relationship between the undertaking operating internet platform and the undertaking using the internet platform, the people’s court shall review the case in accordance with Article 17 of the Anti-monopoly Law; (2) where there is no competitive relationship between the undertaking operating internet platform and the undertaking using the internet platform, the people’s court shall review the case in accordance with Article 18 of the Anti-monopoly Law; (3) where the plaintiff claims that the undertaking operating internet platform abuses the dominant market position, the people’s court shall review the case in accordance with Article 22 of the Anti-monopoly Law and Article 22 of the E-commerce Law; and (4) where the plaintiff claims that the undertaking operating internet platform violates Article 35 of the E-commerce Law, the people’s court shall review the case in accordance with the provision of this article.”

    The above new provisions of the Draft set forth how to determine whether the Most-Favored-Nation Clause (the “MFN Clause”) in the field of platform economy constitutes illegal monopolistic conduct. MFN Clause is originally a term used in international economic trade which means the “best available terms”. With the development of the digital economy, the MFN Clause has been used more widely in digital publishing, e-commerce, online travel, online insurance and other sectors. On the one hand, the MFN Clause helps to reduce transaction costs and buyer risks, but on the other hand, it may also have a foreclosure effect and facilitate the collusion between undertakings. Therefore, the MFN Clause falls under the scope of antitrust regulations in lots of key antitrust jurisdictions such as the United States and the European Union. Before the issuance of the Draft, Paragraph 2 of Article 7 of the Guideline for Platform Economy also set forth provisions on the MFN Clause: “If an undertaking operating internet platform requires the undertaking using the internet platform to provide the platform with transaction conditions equal to or more favorable than those provided to other competitive platforms in terms of price, quantity, or other aspects of the product, it may constitute a monopoly agreement or abuse of the dominant market position.”

    So far, China’s antitrust enforcement authorities and people’s courts have not determined whether the MFN Clause constitutes monopolistic conduct in any published precedents. In the penalty decision against Eastman (China) for abuse of dominance imposed by the Shanghai Administration for Market Regulation (the “Shanghai AMR”), the Shanghai AMR identified that the MFN Clause concerned as a method to impose transaction restriction but did not mention whether the MFN Clause itself constituted monopolistic conduct.

    According to the above new provisions of the Draft and the relevant provisions of the E-commerce Law, when determining whether the MFN Clause in the field of platform economy constitute illegal monopolistic conduct, the people’s court shall, according to the plaintiff’s claims and the specific circumstances of case, conduct the following analysis methods:

    • Based on whether there is a competitive relationship between the undertaking operating internet platform and the undertaking using the internet platform, the people’s court shall review the case in accordance with the relevant provisions on horizontal monopoly agreements or vertical monopoly agreements under the Anti-monopoly Law.
    • If the plaintiff claims that the undertaking operating internet platform abuses its market dominance, the people’s court shall review the case in accordance with the relevant provisions on the abuse of dominance under the Anti-monopoly Law, and also Article 22 of the E-commerce Law which provides that “The E-commerce undertaking which owns market dominance due to its technical advantages, number of users, ability to control related industries, and other undertakings’ dependence on such E-commerce undertaking in terms of transactions, it is not allowed to abuse its market dominance to exclude or restrict competition.”
    • If the plaintiff claims that the undertaking operating internet platform violates Article 35 of the E-commerce Law which provides that “The undertaking operating E-commerce platform shall not use the service agreement, transaction rules, technology or other means to impose unreasonable restrictions or conditions on the transactions, the transaction price and transactions with other undertakings of the undertakings who use the platform, or to charge unreasonable fees from the undertakings using the platform”, the people’s court shall review the case in accordance with the provision of this article.

    (2) Introducing provisions on interconnection issues in the field of platform economy.

    In recent years, China’s authority has been greatly promoting the interconnection between the platforms due to its importance for the development of national economy and the protection of consumer welfare. The Provisions on Abuse of Dominant Market Position and the Guideline for Platform Economy stipulate that refusing other undertakings to use essential facilities may constitute abuse of dominance and provide the considerations for determining essential facilities.

    The Draft also set forth provisions regarding the interconnection between the platforms, which provides that the refusal to make one’s products, platforms or software systems compatible, and the refusal to share one’s technologies, data or platform interface may be deemed as monopolistic conducts. Paragraph 2 of Article 39 of the Draft provides: “Where an undertaking having a market dominance refuses to make its products, platforms or software systems, etc. compatible with other certain products, platforms or software systems, etc. provided by other undertakings without justified reasons, or refuses to share its technologies, data or platform interface, the people’s court may comprehensively consider the following factors and make the determination in accordance with Item (3) of Paragraph 1 of Article 22 of the Anti-monopoly Law: (1) the economic, technical and legal feasibility of the undertaking to implement compatibility or share its technologies, data or platform interface; (2) the substitutability of the products, platforms or software systems and the reconstruction costs of platforms or software systems; (3) the degree of dependence of other undertakings on the products, platforms or software systems of the undertaking concerned to carry out effective competition in the upstream market or downstream market; (4) the impact of refusal of compatibility or sharing on the innovation and introduction of new products; (5) whether refusal of compatibility or sharing substantially excludes or restricts the effective competition in the relevant market; and (6) the impact of implementation of compatibility or sharing on the business activities, legitimate rights and interests of the undertaking concerned.”

    6. Introducing provisions on the key issues in the field of intellectual property.

    The Draft provides specified provisions on the key issues in the field of intellectual property which draw on the content of the Provisions on the Abuse of Intellectual Property Rights, the Guideline for Intellectual Property Rights, and the opinions formed in administrative enforcement. Limited to the length of the article, we will not elaborate on this section of the content, but only introduce the provisions on the Reverse Payment Agreements.

    Article 23 of the Draft provides: “Where the agreement reached and implemented by the drug patent right holder and the generic drug applicant meets all the following conditions, the people’s court may preliminarily determine that it constitutes a monopoly agreement as provided in Article 17 of the Anti-monopoly Law: (1) the drug patent right holder gives or promises to give the generic drug applicant a large amount of benefits compensation in monetary or other forms; and (2) the generic drug applicant promises not to challenge the validity of the patent right of the generic drug or delay to enter the relevant market of the generic drug. Where there is evidence that the benefits compensation referred to in the preceding paragraph is only made up for the cost of resolving the dispute relating to the patent of the generic drug or there are other legitimate reasons, the people’s court may determine that it does not constitute a monopoly agreement as provided in Article 17 of the Anti-monopoly Law.”

    The above-mentioned provision specifies how to determine whether the Reverse Payment Agreements, also known as the “Pay-for-delay Agreements”, constitute illegal monopolistic conducts in judicial practice. Prior to the insurance of the Draft, people’s courts have clarified in precedents that the Reverse Payment Agreements may have the effect of excluding or restricting competition and constitute the monopoly agreement regulated by the AML.

    On December 17, 2021, the SPC ruled on the application for withdrawal of appeal in AstraZeneca v. Jiangsu Aosaikang Pharmaceutical and for the first time made a preliminary antitrust review on the “reverse payment agreement of pharmaceutical patents”. In the process of reviewing the withdrawal of the appeal application, the SPC found that the settlement agreement in question was in line with the appearance of a “reverse payment agreement of pharmaceutical patents”, i.e. the drug patent right holder promises to compensate the generic applicant for direct or indirect benefits (including disguised compensation such as reducing the generic applicant’s non-benefits), and the generic applicant promises not to challenge the validity of the drug-related patent rights or delay entering the market of the patented drug. The applicant promises not to challenge the validity of the patent right of the drug or delay the entry into the market of the patented drug. The SPC pointed out that such agreements may have the effect of excluding or restricting competition and thus constitute the monopoly agreement prohibited by the AML. In this case, the SPC specified the method of conducting an antitrust review on the “reverse payment agreement of pharmaceutical patents”: by comparing the actual situation where the agreement was signed and fulfilled with the hypothetical situation where the agreement was not signed or fulfilled, the people’s court may focus on the possibility that drug-related patent rights are invalid due to the request for invalidation where the generic drug applicant does not withdraw that, and then, based on this possibility, analyze whether and to what extent relevant agreement causes harm to competition on the relevant market.

    7. Specifying that plaintiff may bring lawsuit against the undertaking who benefits from the administrative monopolistic conducts.

    Article 4 of the Draft provides: “Where the plaintiff files a civil lawsuit with a people’s court in accordance with the Anti-monopoly Law against the undertaking that benefits from the suspected abuse of administrative power to exclude or restrict competition by an administrative authority or an organization authorized by laws or regulations to administer public affairs, and requests the undertaking to bear civil liability, if the administrative conduct concerned has been legally identified as the abuse of administrative power to exclude or restrict competition, the people’s court shall accept the case.”

    Chapter V of the AML sets forth the provisions on the conduct of abuse of administrative power to exclude or restrict competition (“administrative monopolistic conduct”), and Paragraph 1 of Article 61 of the AML provides that “Where administrative authorities and organizations authorized by laws and regulations to administer public affairs abuse their administrative powers to exclude or restrict competition, the superior authorities shall order them to make corrections; the directly liable persons in charge and other directly liable persons shall be punished.” However, the above provisions do not clarify whether an undertaking benefiting from an administrative monopolistic conduct (e.g., where the administrative authorities abuse their administrative power to request all the entities to buy the relevant products from certain undertaking) shall be held liable for any liabilities.

    According to Article 4 of the Draft, where there is effective ruling that the administrative conduct concerned constitute an abuse of administrative power to exclude or restrict competition, the plaintiff may file a lawsuit against the undertakings who have benefited from the administrative monopolistic conduct. It remains to be further clarified in relevant regulations and judicial practices regarding how to determine the civil liability of the undertaking who benefit from the administrative monopolistic conduct.

    8. Specifying that the people’s court may request the defendant to conduct certain acts to restore the market competition status.

    Article 44 of Paragraph 2 of the Draft provides: “Where ruling that the defendant ceases the alleged monopolistic conduct is not sufficient to eliminate the effect of excluding or restricting competition, the people’s court may, based on the plaintiff’s claims and the specific circumstances of the case, order the defendant to take the legal liabilities of making specific acts to restore competition.”

    According to the above provisions, in addition to legal liabilities such as compensating the plaintiff for the economic damages, if the defendant is found to have conducted illegal monopolistic conducts, the people’s court may rule that the defendant needs to take certain actions to restore competition, which will improve the effectiveness of judicial remedies. According to China’s antitrust law enforcement practice, we understand that the conducts ordered by the people’s court to restore competition in judicial practice may include terminating the exclusive agreement, terminating the additional unreasonable transaction conditions, terminating the discriminative transaction clauses, and guaranteeing the supply of products to the downstream enterprises, etc.

    9. Specifying how to calculate the damages suffered by the plaintiff from the alleged monopolistic conduct.

    Article 45 and 47 of the Draft introduce provisions on how to calculate the damages suffered by the plaintiff from the alleged monopolistic conduct, the main contents of which are as follows:

    Firstly, the damages suffered by the plaintiff due to the alleged monopolistic conduct include direct damages and reduced acquirable benefits. The following factors may be referred to in determining the damages suffered by the plaintiff due to the alleged monopolistic conduct: (1) product prices, operating costs, profits, market shares, etc. in the relevant market before, after and in the course of implementation of the alleged monopolistic conduct; (2) product prices, operating costs, profits, etc. in comparable markets that are not affected by the monopolistic conduct; (3) product prices, operating costs, profits, market shares, etc. of comparable undertakings that are not affected by the monopolistic conduct; and (4) other factors that can reasonably prove the damages suffered by the plaintiff due to the alleged monopolistic conduct.

    Secondly, if the defendant can prove that the plaintiff has transferred all or part of the damages to others, the people’s court may deduct the transferred damages when determining the amount of compensation. The newly added provisions of Paragraph 4 of Article 45 of the Draft are based on the “Passing-on” theory for the compensation in anti-monopoly civil dispute, that is, a circumstance where an undertaking suffering from monopolistic conducts transfers its damage to other entities. Based on the anti-monopoly practices and theories, a buyer (e.g., being forced to purchase a product at an unfairly high price) suffering damages from monopolistic conducts can “pass on” the damages to its downstream undertakings or consumers by resale of the products, raising prices or other means. In such a case, if such a buyer brings an action to claim against the undertaking who conducts the monopolistic conducts, the damages already passed on to other undertakings shall be deducted from compensation claimed for by the buyer. As for the “passed on” damages, the downstream undertakings or consumers may file a lawsuit against the monopolistic conducts concerned claiming for compensation.

    Third, where the plaintiff has evidence to prove that the alleged monopolistic conduct has caused damages to it, but the amount is difficult to be determined, the people’s court may determine a reasonable compensation amount based on the plaintiff’s claim and evidence, and taking into account the nature, extent, duration and benefits obtained of the alleged monopolistic conduct. It is often very difficult to determine what specific effect of excluding or restricting competition is caused by monopolistic conducts on the relevant market (for example, what proportion of rise in the price of the products is due to the monopolistic conducts). In light of that, the Draft provides that if the plaintiff has proved that it has suffered from the alleged monopolistic conduct, the people’s court may determine a reasonable compensation amount based on the specific circumstances.

    Fourth, where multiple alleged monopolistic conducts are combined with each other and cause indivisible overall damages to the plaintiff in the same relevant market, the people’s court shall take into account the overall damages when determining the damages. Where multiple alleged monopolistic conducts are independent from each other and cause damages to the plaintiff in different relevant markets, the people’s court may take into account such conducts separately when determining the damages.

    10. The participants of a horizontal monopoly agreement are not entitled to claim for damages caused by that but can still claim for compensation of “reasonable expenses spent for the investigation and stopping of monopolistic conduct”.

    Article 48 of the Draft provides: “Where an undertaking of a horizontal monopoly agreement files a claim against the other undertakings who have reached or implemented the agreement for compensation of damages incurred during the period of participating in the agreement in accordance with Article 60 of the Anti-monopoly Law, the people’s court shall not uphold the claim.”

    The provisions added here in the Draft set forth the opinion held by people’s court in judicial practice, that is, the participants of horizontal monopoly agreement are not entitled to claim for damages caused by the implementation of such agreement. However, it should be noted that, according to the opinion held by people’s court in precedents, participants of horizontal monopoly agreement can still claim for the damages of the reasonable expenses for investigating and stopping the monopolistic conduct. For example, in Shanghai Huaming v. Wuhan Taipu, the SPC rejected the appellant’s claim for economic damages but upheld the appellant’s claim for compensation of reasonable expenses incurred due to bring the lawsuit. In this case, the SPC held that upholding the reasonable expenses claimed for by the plaintiff for bringing the lawsuit against horizontal monopoly agreement are conducive to disclosing and stopping monopolistic conduct, which shall be taken into consideration. (Note: For a detailed introduction, please see, Why Settlement Agreements in Patent Litigation were Deemed as Monopoly Agreements? — — Analysis Of the Judgement and Criteria for Determining Monopoly Agreement by the Supreme People’s Court)

    *Thanks Liu YAN and Yuanyuan LIU for their contributions in this article.

    [1]Case Number: (2013) Min San Zhong Zi No.4
    [2] Case Number: (2021) Zui Gao Fa Zhi Min Zhong No. 1298.
    [3]Case Number: (2021) Zui Gao Fa Zhi Min Zhong No. 1020.
    [4]Case Number: (2021) Zui Gao Fa Zhi Min Zhong No. 1977.
    [5]Case Number: (2021) Zui Gao Fa Zhi Min Zhong No. 388.
    [6][1]Case Number: (2013) Min San Zhong Zi No.4
    [2] Case Number: (2021) Zui Gao Fa Zhi Min Zhong No. 1298.
    [3]Case Number: (2021) Zui Gao Fa Zhi Min Zhong No. 1020.
    [4]Case Number: (2021) Zui Gao Fa Zhi Min Zhong No. 1977.
    [5]Case Number: (2021) Zui Gao Fa Zhi Min Zhong No. 388.
    [6]Case Number: (2021) Zui Gao Fa Zhi Min Zhong No. 1298.