China: NDRC Say No to Resale Price Maintenance – Companies should be Cautious on Pricing Strategy

Last Updated: 2 February 2013
Article by Susan Ning, Liu Jia and Kate Peng

China's famous producers of premium liquor, Kweichow Moutai Co Ltd. (Maotai) and Wuliangye Group Co., Ltd. (Wuliangye) recently announced that they would correct their behaviors suspicious of AML violation. The corrections were said to be made after the companies being "inspected" by the National Development and Reform Commission ("NDRC") and the relevant provincial pricing administration. It has been the hottest topic on China's Anti-Monopoly Law (the "AML") after the resounding LCD panel case closed by NDRC in early this month.

Maotai and Wuliangye are both famous Chinese premium liquor brands and the price of their products is relatively high in tradition. In early January, the companies issued notices respectively announcing punishments on the distributors who sold their products at a price below the lowest resale price set by the companies. Maotai also punished the distributors who made cross-regional sales. It is reported that the chairman of Maotai even stated in a recent countrywide distributor meeting that the retail price of Feitian Maotai can not be less than 1,519 yuan and the price of group-purchase can not be less than 1,400 yuan, and that Moutai would sternly punish those who breach the price "fortress".

Yet only a week or so after taking the above stand, Maotai published two statements on 15 January and 16 January 2013, declaring its decision to withdraw the punishments on distributors, reimburse the distributors, and immediately repeal any policies in violation of the AML. In the declaration Maotai disclosed that it was inspected by the pricing and anti-trust departments of NDRC and Guizhou Provincial Pricing Administration.

Similarly, on 17 January 2014, Wuliangye also published a statement stating that, according to the inspections by pricing and anti-trust department of NDRC and Sichuan Provincial Development and Reform Commission, it would immediately withdraw its notices concerning the punishments on the distributors.

Both companies said they would study the AML and the relevant rules seriously and rectify improper commercial behaviors in accordance with the AML.

Comments

RPM in AML – Per se Illegal or Rule of Reason?

Fixing price and limiting the lowest price for resale to a third party are commonly referred to as "resale price Maintenance (RPM)". RPM is a vertical monopoly agreement strictly prohibited under Article 14 of the AML1 . What Maotai and Wuliangye did on its face has fallen into the scope of Article 14, and it would be very hard for the companies to justify the arrangement with the exemptions provided by Article 15 of the AML2.

However, there has been a controversy whether a RPM arrangement should be deemed violating the AML regardless of whether it has an impact on competition. In Rainbow Medical Equipment & Supplies Co. vs. Johnson & Johnson Medical case, the Shanghai No.1 Intermediate People's Court ("Shanghai Court") found that for RPM to constitute a violation it must have an adverse impact on competition. In that case, the Shanghai Court held that a RPM arrangement alone cannot result in the determination of a vertical monopolistic agreement; rather, a comprehensive assessment should be conducted on whether such arrangement has an anti-competitive effect3. Judging from its reasoning, the court seems to have applied the rule of reason instead of the per se rule to RPM. This approach is echoed by the Provisions of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Civil Dispute Cases Arising from Monopolistic Conduct (the "Anti-Monopoly Judicial Interpretation"), where anti-competitive effects seem to have been presumed in the context of horizontal agreements, yet no such presumption is made for vertical agreements4.

However, it is highly doubted if NDRC will also adopt the rule of reason analysis or will hold a stricter attitude towards RPM. To date there has not been any vertical agreement case (at least not among the disclosed cases) which can test NDRC's stance on this issue. From the compliance perspective, companies are advised to avoid RPM arrangements in their daily operation to be on the safe side.

Does Vertical Territorial Allocation Violate the AML?

Besides the RPM arrangement, it is reported that Maotai also undertakes to withdraw its punishment on those distributors who made cross-regional sales. Does it mean NDRC also views vertical territorial allocation as a violation under the AML?

The AML does not make specific stipulation about vertical territorial allocation. However, the catch-all provision of Article 14 may open a door for the anti-monopoly authorities to review business operators' practice in this regard. To date there has not been a case where the anti-monopoly authorities impose penalty on an arrangement involving vertical territorial allocation. An interpretation of this is that the authorities are cautious about challenging vertical territorial allocation due to the lack of explicitly provision under the AML.

Investigation or Inspection?

Unlike the China Telecom and China Unicom case 5, no investigation seemed to have been launched by NDRC. As disclosed by Maotai and Wuliangye, NDRC and its relevant provincial branches conducted "inspections" on the companies. NDRC, on the other hand, has not made any announcement about its actions.

In practice, instead of conducting formal antitrust investigation, NDRC may directly contact the business operators who are suspicious of the AML violation and request them to put their wrong doings right. Although this approach may be more timely and efficient, it is questioned for leading to an underdeterrence problem, as the offenders may be relieved from the punishment under Article 46 of the AML, in particularly the fines of 1% to 10% of the company's sales amounts of the preceding year. Nevertheless, no matter it being an investigation or an inspection, the latest cases send a signal that NDRC has been active in it enforcement activities.

Footnotes

1Article 14 of the AML provides, "[t]he following monopoly agreements between business operators and trading counterparts shall be prohibited: (1) fixing the price of commodities for resale to third party; (2) fixing the lowest price for resale of commodities to third party; and (3) any other monopoly agreements as defined by the anti-monopoly enforcement agency of the State Council."

2According to Article 15 of the AML that, where the company is able to prove that RPM it has entered into falls under any of the following descriptions, RPM would be exempted if (1) where the objective is technological improvement or research and development of new products;(2) where the objective is to raise product quality, lower costs, improve efficiency, standardise product specifications and standards or implement specialisation;(3) where the objective is to raise business efficiency of small and medium business operators and to strengthen the competitiveness of small and medium business operators;(4) where the objective is to fulfill public interest such as energy conservation, environmental protection and disaster relief etc;(5) where the objective is to alleviate serious drop in sale quantity or obvious over-production in times of recession;(6) where the objective is to protect the legitimate interests in foreign trade and economic cooperation.

Besides, the company must also be able to prove that the agreement it has entered into will not severely restrict competition in the relevant market and that it will allow consumers to benefit from the interests arising therefrom.

3Rainbow has appealed the decision, and it has proceeded to the Shanghai Higher People's Court. The final decision has not been made yet.

4The Anti-Monopoly Judicial Interpretation came into effect on 1 July 2012. For more information, please refer to our article named " Supreme Court of China Issues Judicial Interpretation Governing Private Antitrust Litigations".

5In 2011, NDRC announced that it conducted antitrust investigation against China Telecom and China Unicom for its susceptible abuse of dominance in the broadband market. In that case, China Telecom and China Unicom had the investigation suspended by making rectification commitments. For more information, please refer to our article named " China Telecom and China Unicom Seek to settle Probe".

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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