Civil/Contract Dispute/Supreme People’s Court/2020.05.18/(2020) Supreme People’s Court Civil Petition No. 1730/Re-trial

Introduction

In recent years, the bottled-gas industry has accelerated its consolidation. Multiple liquefied-gas companies have attempted to address disorderly competition by entering into cooperation agreements and contracting-operation agreements, but this model has also created a series of compliance disputes. Why have some “combination of several companies into one” arrangements been heavily penalized by antitrust authorities, while others have been held valid by the courts? In 2018, four liquefied-gas companies in Liupanshui became involved in a dispute over a contracting-operation agreement. After trial at first instance, appeal, and retrial, the Supreme People’s Court ultimately held that the agreements were valid and did not constitute a monopoly agreement. This article analyzes the reasoning in that case and compares it with other representative antitrust cases to provide practical compliance guidance for gas companies.

I. Key Holding

The Cooperation Agreement and Contracting-Operation Agreement did not contain provisions under which the operators abused a dominant market position to raise liquefied petroleum gas prices, restrict production or sales volumes, jointly boycott transactions, or otherwise exclude or restrict competition. They therefore did not constitute a monopoly agreement. In addition to the four parties, more than ten other companies in the city operated liquefied petroleum gas businesses. The retrial applicant’s argument that the agreements were invalid for violating Article 13 of the Anti-Monopoly Law of the People’s Republic of China lacked factual and legal support.

II. Basic Facts

Liupanshui Yumin Liquefied Petroleum Gas Co., Ltd. (“Yumin”), Baiji Xinan Gas Co., Ltd., Shuicheng Gas Depot (“Xinan”), Liupanshui Ruian Liquefied Petroleum Gas Co., Ltd. (“Ruian”), and Liupanshui Chengda Trading Co., Ltd. (“Chengda”) were all legally registered liquefied petroleum gas operators in Liupanshui. On February 16, 2014, the four parties entered into a Cooperation Agreement. To promote the healthy and stable development of the Shuicheng gas industry and address long-standing disorderly competition and the circulation of expired cylinders, they agreed to unify filling, production management, and financial cost accounting, and to distribute profits according to agreed proportions. On July 6, 2015, they entered into a Contracting-Operation Agreement under which the bottled-gas market in Liupanshui, jointly operated and managed by the four parties, would be contracted to Yumin alone for an initial five-year term at an annual contracting fee of RMB 12.4 million. Yumin paid the contracting fees to Xinan and the other parties for seventeen months as agreed.

Beginning on December 26, 2016, Yumin stopped paying the remaining fees, claiming that the other parties lacked complete qualifications and that the agreements constituted a monopoly. Xinan, Ruian, and Chengda brought suit seeking the unpaid contracting fees and liquidated damages. Yumin filed a counterclaim, arguing that the Cooperation Agreement and Contracting-Operation Agreement were invalid because they violated Article 13 of the Anti-Monopoly Law prohibiting monopoly agreements and Article 18 of the Regulations on the Administration of City Gas, which prohibits gas operators from selling, mortgaging, leasing, lending, transferring, or altering gas-operation permits. Yumin also sought restitution of the contracting fees already paid.

III. Case Analysis

(1) Did the Contracting-Operation Agreement signed by the four companies constitute a monopoly agreement?

Yumin argued that it had first entered into the Cooperation Agreement with the other three liquefied-gas companies to unify filling, management, and accounting, and then entered into the Contracting-Operation Agreement to give Yumin the right to operate the entire Liupanshui bottled-gas market. In substance, this was market division and elimination of competition by several major competitors, constituting the monopoly agreement expressly prohibited by Article 17 of the Anti-Monopoly Law. The contract should therefore be invalid.

The courts at first instance, on appeal, and at retrial all rejected this argument. The courts noted that the agreements contained no typical monopoly clauses fixing liquefied-gas prices, restricting sales volumes, or jointly boycotting transactions. Instead, the stated purpose was to “change disorderly competition and the prevalence of expired cylinders,” which reflected cooperation for industry self-regulation and standardized operations. Contracting operation is an adjustment to an internal operating model and does not itself amount to closing a market to outsiders. So long as other competitors remain in the market and the agreement does not forcibly exclude or restrict their competitive conduct, it is not a monopoly agreement in the legal sense. The court found that more than ten other liquefied-gas companies were operating normally in Liupanshui, so the relevant market had not been closed or excluded by the agreement. The Contracting-Operation Agreement was therefore valid and did not constitute a monopoly agreement.

(2) Did contracting operation of the liquefied-gas market amount to an unlawful transfer of a gas-operation permit?

Yumin argued that some of the respondents held only cylinder-filling permits and not gas-operation permits, and that transferring the entire market to Yumin through contracting operation was in substance a disguised lease, loan, or transfer of gas-operation permits. This violated the mandatory provision in Item 2 of Paragraph 1 of Article 18 of the Regulations on the Administration of City Gas, making the contract invalid.

The Supreme People’s Court rejected this argument. Xinan and Chengda held gas-operation permits, Ruian held a cylinder-filling permit, and Yumin itself held both a gas-operation permit and a cylinder-filling permit. Each party operated within the scope of its permit. The subject matter of the Contracting-Operation Agreement was “the right to operate and the management and use of related assets,” not the gas-operation permit itself. During the contracting period, the permits remained registered in the names of the original companies and no registration change occurred. The actual operations therefore remained within the qualification framework of the licensed companies. Contracting operation is a common form of commercial cooperation, and the law does not prohibit gas companies from integrating operating resources in this manner. Unless the arrangement results in unqualified operation or a loss of qualification control, it should not be treated as unlawful. The court therefore held that the arrangement did not violate the Regulations on the Administration of City Gas and that the contract was valid.

IV. Comparison with Similar Cases

(1) Antitrust case involving three bottled-liquefied-petroleum-gas companies in Inner Mongolia (Inner Mongolia Administration for Industry and Commerce Competition Division Decision No. 4 [2016])

1. Case summary

Three competing bottled-liquefied-petroleum-gas operators in Inner Mongolia sought to eliminate competition among themselves. They entered into subleasing contracts under which all three companies’ bottled-gas operations were contracted to the same individual for unified operation, and the individual paid fixed contracting fees to the three companies. During performance, the companies stopped operating independently and no longer carried out competitive activities such as sales and delivery. Instead, the individual unified management, procurement, filling, and delivery, and unilaterally raised bottled-gas prices and compelled customers to replace their cylinders, creating joint control and exclusive operation of the local bottled-gas market. The operators used contracting operation as the outward form but in substance reached an agreement to jointly restrict competition and eliminate normal market competition in the region.

2. Penalty and legal basis

After investigation, the market-regulation authority held that the three operators had formed a horizontal monopoly agreement prohibited by the Anti-Monopoly Law. It ordered them to stop the unlawful conduct immediately and imposed fines on the companies. The main legal basis was the Anti-Monopoly Law’s prohibition on agreements among competing operators, including fixing or changing prices, restricting production or sales volumes, and dividing sales markets. By achieving unified operation, the agreement controlled prices and closed the market, producing clear effects of excluding or restricting competition and satisfying the statutory elements of a monopoly agreement.

(2) Oral monopoly agreement involving bottled liquefied gas in Luchuan, Guangxi (Guangxi Market Regulation Administration Antitrust Division Decision No. 5 [2021])

1. Case summary

Five major bottled-liquefied-petroleum-gas operators in Luchuan, Guangxi sought to avoid price competition and stabilize their operating profits. Through repeated oral consultations and meetings, they reached a coordinated arrangement to unify bottled-gas prices, divide their operating areas by township, refrain from operating across areas, and avoid low-price competition. Although they did not sign a written monopoly agreement, their communications and coordinated conduct formed a stable concerted practice. They implemented unified prices and geographic divisions over a long period, eliminated competition among themselves, and jointly controlled the local bottled-gas market, constituting a typical horizontal monopoly.

2. Penalty and legal basis

The market-regulation authority held that the five operators had reached and implemented an oral monopoly agreement. It ordered them to stop the unlawful conduct and imposed fines. The legal basis was the Anti-Monopoly Law’s prohibition on horizontal monopoly agreements among competing operators, focusing on the typical conduct of fixing or changing prices and dividing sales markets. Although the oral agreement had no written form, the operators had a clear meeting of minds and coordinated conduct, and had actually implemented unified pricing and market division. This was sufficient to establish the monopoly agreement.

(3) Comparison

In the Liupanshui case, the Inner Mongolia case, and the Luchuan case, the operators all entered into arrangements, but differences in the specific terms led to completely different results. The cases can be compared by contract form, relevant clauses, market structure, and the conclusions of the courts or regulators.

Comparison point	Liupanshui case	Inner Mongolia case	Luchuan case
Form	Contracting-operation agreement	Contracting and subleasing agreement	Oral agreement
Price/territory clauses	No express terms	Price increase	Unified pricing and geographic division
Market structure	More than ten companies remained	Three companies monopolized the city	Five companies monopolized the county
Result	No monopoly; contract valid	Monopoly; fines imposed	Monopoly; fines imposed

V. Compliance Guidance

The contract dispute involving Liupanshui Yumin Liquefied Petroleum Gas Co., Ltd. is a representative case in the large-scale and integrated development of the bottled-gas industry. It illustrates the relationship among civil-contract validity, antitrust analysis, and gas-qualification regulation, and provides clear and practical compliance guidance for bottled-gas companies conducting contracting operation, coordinated integration, and unified management.

(1) Do not cross the red line of horizontal monopolies

The case makes clear that unified management and contracting operation among bottled-gas companies are not unlawful in themselves, but a horizontal monopoly agreement that excludes or restricts competition is unlawful. In cooperation and integration, companies must completely avoid agreeing with competitors to fix prices, divide sales markets, or jointly boycott transactions. They must not use safety integration or administrative guidance as a pretext for antitrust collusion. Pricing should be based on costs, market supply and demand, and other relevant factors, without participating in any form of price alliance. Market expansion should rely on service quality, delivery efficiency, and safety assurances, not territorial division or deposits used as penalties to restrict competition. Concentrations such as mergers, newly established joint ventures, and equity acquisitions should be assessed for antitrust risk in advance. If the filing thresholds are reached, the transaction should be filed as required; even when the thresholds are not reached, the company should communicate with the authorities if the transaction may weaken competition.

In the Liupanshui case, the companies’ agreement to integrate resources and unify management would generally be lawful commercial cooperation so long as they did not collude externally to raise prices or jointly exclude other competitors. Conversely, clauses such as “unified prices,” “no cross-territory operations,” or “limits on each company’s sales” could readily be characterized as a monopoly agreement, exposing the parties to both contract invalidity and substantial administrative penalties.

(2) Pay attention to the validity of contracting-operation agreements

The case confirms that a contracting-operation agreement between qualified businesses in the same industry may be valid. When entering into such an agreement, companies should define the subject matter precisely as the right to use assets and the right to operate and manage. The agreement must not involve the transfer, lease, or lending of a gas-operation permit or cylinder-filling permit. The parties’ qualification certificates should be attached to confirm that they are valid. The agreement should clearly define the contracting fee, term, and consequences of late payment, and should set liquidated damages at a reasonable level to avoid judicial adjustment. It may provide for liquidated damages based on the unpaid amount and a reasonable interest rate. Safety responsibilities and operating risks during the contracting period should be assigned clearly to the contracting operator. The parties should perform in good faith and must not maliciously refuse payment by later asserting that the contract is invalid or constitutes a monopoly; otherwise, they may be liable for unpaid fees and liquidated damages.

(3) Comply with qualification and permit requirements

Gas operations in China are subject to a strict permit system, and qualification compliance is the foundation of lawful operations. Before entering into contracting or cooperation arrangements, a company must verify the counterparty’s gas-operation permit and cylinder-filling permit and ensure that each is genuine, valid, and within its term. It must not cooperate with an unqualified entity or disguise the lease or lending of qualifications as contracting or affiliation. Contracting operation and qualification leasing are fundamentally different:

Distinction	Lawful contracting operation	Leasing/transfer of qualifications
Qualifications	Both parties hold lawful gas-operation qualifications	The contracting party lacks qualifications, or the assigning party gives up its qualifications entirely
Subject matter	Use of assets and operating and management rights	The gas-operation permit itself
Responsibility	The contracting operator independently bears safety and operating responsibilities	The assigning party avoids responsibility and transfers risk to an unqualified entity
Regulatory compliance	Subject to regulatory supervision and safety standards	Outside supervision and presenting significant safety risks

Companies must also operate only in the areas stated on their permits. They may not directly supply users across territorial boundaries. Before signing a supply contract, they should strictly verify the user’s address and reject cross-territory delivery requests to prevent unlawful conduct at the source.

The Liupanshui Yumin case draws a clear line for competition and operating compliance in the bottled-gas industry. It recognizes the validity of lawful contracting and compliant integration while maintaining the boundaries of antitrust and qualification regulation. Gas companies can achieve a balance between business efficiency and the public interest only by adhering to antitrust, qualification, and safety requirements throughout the consolidation of the industry.