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Retail Legal Update - China marks fifth anniversary of its anti-monopoly law with landmark vertical price fixing decision

  • United Kingdom
  • Competition, EU and Trade
  • Retail

11-11-2013

The 1st August 2013 was a landmark day for the Chinese competition regime. Not only did it mark the fifth anniversary of China’s Anti-Monopoly Law (“AML”), it also saw, after three years, a final decision passed in the first ever case concerning a vertical price fixing agreement.

Background

Two Chinese entities of medical supplies giant Johnson & Johnson and one of its medical equipment distributors (“Rainbow”) entered into a distribution agreement appointing Rainbow as a distributor for various medical equipment, including staplers and suturing products, in several districts of Beijing.  As well as specifying a sales territory, the distribution agreement also stated that Rainbow must not sell the products below a contractual minimum resale price.

The dispute between the two parties arose when Rainbow acquired a distributorship in an unauthorised district of Beijing by entering a bid that was lower than the minimum resale price allowed by the distribution agreement.  In response to this, Rainbow’s appointment as distributor was terminated.

The Original Lawsuit…

Rainbow filed a lawsuit in the Shanghai No. 1 Intermediate People’s Court (“Shanghai Intermediate Court”) alleging that the contractual minimum resale price amounted to resale price maintenance (“RPM”) and had been conducted in breach of Article 14(2) of the AML and demanded RMB14.4 million (approximately USD2.2 million) in damages. 

In response, it was argued that Rainbow’s lawsuit was groundless as: (1) the distribution agreement was entered into before the AML came into force; (2) the distribution agreement did not restrict competition; and (3) Rainbow was a counterparty to the original distribution agreement and was therefore not entitled to bring such a claim.

On 18 May 2012, the Shanghai Intermediate Court found that Rainbow had failed to prove that the RPM agreement had restrained or excluded competition.

…and the Appeal

On 1 August 2013, the Shanghai Higher Court (the “Higher Court”) ruled that the RPM clauses in the distribution agreement had infringed the provisions of the AML and ordered RMB530,000 (approx USD87,000) be paid to Rainbow in compensation.

The Higher Court stated that in order to find an agreement anti-competitive under Article 13 of the AML, it must eliminate or restrict competition.  It also stated that in a dispute relating to a vertical agreement there is no reverse burden of proof and that the claimant is responsible for proving that there has been an effect on competition.

The Higher Court set out the following four factors which it would take into account when  assessing whether RPM agreements have an effect on competition:

  • is there sufficient competition in the relevant market?;
  • does the defendant hold a strong market position?;
  • what is the motivation of the defendant to conduct RPM?; and
  • what are the effects of the RPM on competition (both anti-competitive and pro-competitive effects)?.

The Higher Court defined the "relevant market" as that for the supply of medical suture  products in mainland China and determined that new business operators cannot easily enter this market due to high entry barriers.  Therefore, the Higher Court held that there was insufficient competition in this market.

In addition, the Higher Court found that Rainbow was acting for a leading business operator, with transactions representing more than one-fifth of total sales in the Chinese  market.  The Higher Court pointed to the ability of the company to retain the same minimum resale price for a period as long as 15 years as being symptomatic of its power to preclude price competition and maintain high sales prices.

Conclusion

The ruling by the Higher Court comes on the back of two other recent high-profile decisions on RPM taken by the National Development and Reform Commission (the “NDRC” - the Chinese body responsible for price related actions under the AML).  In February 2013, two of the most famous Chinese state-owned producers of premium liquor were fined an aggregated amount of RMB449 million (USD78.7 million) for RPM1. In July, the NDRC fined six producers of baby milk formula RMB668 million (USD107.6 million) following an investigation into price fixing and anti-competitive practices2.

In light of this, regardless of the industry sector, multi-national corporations are advised to revisit the terms of their distribution arrangements in China.

1 See our earlier briefing here:
https://www.eversheds.com/global/en/what/articles/index.page?ArticleID=en/Food/Toast_of_the_Town_Chinese_Competition_Agencies#!

2 See our earlier briefing here:  https://www.eversheds.com/global/en/what/articles/index.page?ArticleID=en/Competition/China-s-NDRC-launches-investigation-into-the-pricing-of-baby-milk-formula#!

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