China: Resale Price Maintenance - Not Per Se Illegal Under the AML

Last Updated: 27 June 2012
Article by Liu Cheng, Martyn Huckerby and Chenchen Yu

Whether a resale price maintenance ("RPM") provision is deemed to infringe the Anti-Monopoly Law ("AML")1 regardless of whether it has an impact on competition has been one of the most cloudy issues under the AML since the law came into effect in 2008. A recent decision by the Shanghai No.1 Intermediate People's Court ("Shanghai Court") has found that for RPM to infringe the AML it must have an adverse impact on competition. While it is still too early to say if this court decision will be followed by other Chinese courts, the decision provides valuable guidance for companies when considering how the AML will apply to their distribution agreements in China.

Facts and Decision

The case relates to a dispute between Johnson & Johnson Medical ("J&J") and one of its distributors, Rainbow Medical Equipment & Supplies Co. ("Rainbow"), regarding a minimum RPM clause in J&J's distribution agreement. Rainbow had been a distributor of J&J's suturing products for 15 years. Pursuant to their distribution agreement, Rainbow was authorized to sell J&J's products to hospitals in the allocated region in Beijing with a price above the minimum resale prices set by J&J. After J&J found that Rainbow had quoted prices below the minimum prices in a bid and won business in a hospital outside its authorized region, J&J claimed Rainbow's deposit, terminated its distribution rights in relation to several hospitals and interrupted the supply of products to Rainbow. Rainbow then filed a lawsuit against J&J in the Shanghai Court alleging that J&J had engaged in RPM in violation of Article 14(2) of the AML and claimed damages of about RMB 14.4 million.

The Shanghai Court held that in order to establish a claim under Article 14, the plaintiff must prove (i) the existence of monopolistic conduct; (ii) loss incurred by the plaintiff; and (iii) causation between the monopolistic conduct and the loss. In its decision, the Shanghai Court rejected Rainbow's claim on several bases.

  1. Insufficient evidence to prove the existence of monopolistic conduct. The Shanghai Court held that the determination of whether there is a monopolistic agreement cannot be based alone on whether there is a RPM provision; instead, a comprehensive assessment on whether such provision has an anti-competitive effect should be conducted. Information regarding market share, competition in upstream and downstream markets, product supply and price changes should be taken into consideration. Rainbow only provided a brief introduction from the J&J website and failed to submit evidence to prove the relevant information on market share, competition status, product supply and price changes. On the contrary, the evidence provided by J&J indicated that there are several like-product competitors in the market of suturing products.
  2. Rainbow failed to demonstrate that it suffered loss under the AML because of the RPM provision. The Shanghai Court held that the loss suffered by Rainbow should be claimed in a contractual dispute and had no direct relationship with the RPM provision. In addition, the evidence could not establish that it was the result of implementing the RPM provision that J&J terminated the distribution agreement with Rainbow.

Comments

The Shanghai Court's decision has provided some helpful guidance to companies in relation to how the AML will apply to distribution arrangements, but has also left some important questions unanswered.

  1. RPM provision not a per se violation. According to the Shanghai Court, a RPM provision is not per se illegal under the AML. Its legality depends on whether it has the effect of eliminating or restricting competition. Specifically, the following factors should be reviewed before reaching a conclusion: the principal's market share in the relevant product market, the competition level of the downstream and upstream of the relevant market, and the impact of the RPM provision on the quantity and price of supply, among other factors. The court's interpretation of Article 14 echoes the view of some government officials on this issue. It seems that the Shanghai Court is trying to take a similar approach as its peers in the U.S. and EU. In the U.S., the Supreme Court's decision in the Leegin case overruled a longstanding precedent in the Dr. Miles case, and held that it would no longer be a per se violation of the Sherman Anti-Trust Act for a manufacturer to have minimum resale price maintenance agreement with a retailer. The U.S. Supreme Court now holds that the legality of a minimum RPM agreement is to be judged according to the rule of reason, which requires a review of all the evidence and circumstances to see if the practice has an anti-competitive effect. In the EU, for most vertical agreements, competition concerns can only arise if there is insufficient competition at one or more levels of trade, that is, if there is some degree of market power at the level of the supplier or the buyer or at both levels. Generally, if the supplier's and the buyer's market share are each no more than 30%, the vertical agreement between them is unlikely to be deemed as having an anti-competitive effect.
  2. Allocation of the burden of proof In this case, the Shanghai Court imposed on Rainbow the burden to prove that the RPM provision has an effect of eliminating or restricting competition as part of its Article 14 claim. It is unclear from the AML whether in an Article 14 case the burden is on the plaintiff to prove the anti-competition effect of the vertical agreement. Pursuant to Article 7 of the Provisions Regarding Law Application in Adjudicating Anti-Monopoly Law Civil Disputes ("Provisions") issued by the PRC Supreme People's Court on May 3, 2012 and effective as of June 1, 2012, the defendant bears the burden of proving that the 5 categories of horizontal agreements do not have the effect of eliminating or restricting market competition. However, the application of the AML to vertical arrangements has remained unclear. The decision of the Shanghai Court has made it clear that the plaintiff bears the burden of proving the anti-competitive impact for AML disputes arising from vertical agreements.
  3. Legal basis of the damages claim The Shanghai Court also ruled that the losses claimed by Rainbow were not the direct result of the RPM provision, but derived from the contractual dispute with J&J, and Rainbow should seek these damages through a breach-of-contract claim. The damages that can be claimed in an AML case should be those arising out of the exclusion or restriction of competition. It is thus important for future AML litigants to carefully consider upon what legal basis they should claim damages to best protect their clients' interests. The ruling of the Shanghai Court is a first-trial decision. If Rainbow appeals the decision, it will proceed to the Shanghai Higher People's Court ("Higher Court"). With so many grey areas existing in AML disputes, we expect the decision of Higher Court to provide more clarity and guidance if Rainbow does appeal.

Footnote

1 The Anti-Monopoly Law of the People's Republic of China was adopted by the 29th session of the Standing Committee of the Tenth National People's Congress on August 30, 2007 and became effect as of August 1, 2008.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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