China: Chinese Antitrust Authorities Imposed Large Fines on Kweichow Moutai and Wuliangye for Resale Price Maintenance

Last Updated: 3 March 2013
Article by Susan Ning, Liu Jia and Hazel Yin

On 22 February, 2013, Guizhou Provincial Pricing Administration ("Guizhou Pricing Administration") released the decision to impose a penalty of RMB 247 million (about USD 39.8 million) on Kweichow Moutai, the most famous Chinese state-owned producer of premium liquor, for administering resale price maintenance ("RPM"). On the same day, Sichuan Provincial Development and Reform Commission ("Sichuan PDRC") released its decision to penalize Wuliangye, another state-owned premium liquor producer, in an amount of RMB 202 million (about USD 32.6 million) for RPM as well. Both agencies are local counterparts of the National Development and Reform Commission ("NDRC"), which is charged with the responsibility to enforce against price-related monopoly agreements, including RPM under the Anti-Monopoly Law ("AML").

The news has made a huge stir, because this is the first time the Chinese AML enforcement agencies penalized RPM under the AML. Besides, the two fines add up to RMB 449 million (about USD 72.4 million) in total, the largest penalty in China's AML enforcement history so far.

Finding of Violation

According to Sichuan PDRC, since 2009, Wuliangye signed agreements with more than 3,200 independent distributors to restrict the minimum resell price of its liquor. For those that did not implement the minimum price, Wuliangye adopted various punitive measures such as limiting their business, reducing supply, confiscating deposit money and marketing support money, and imposing fines. In 2011, Wuliangye stopped supply to a Sichuan supermarket chain in order to force the latter to comply with the RPM agreement. In 2012, Wuliangye punished 14 distributors across 11 provinces and municipalities for "selling below the minimum price, across regions and across channels".

The official statement published by Sichuan PDRC pointed out that Wuliangye used its "market strength" to fix the minimum resale price. Such behaviors violated Article 14 of the AML, eliminated and restricted competition, and damaged the interests of the consumers.

To support this finding, Sichuan PDRC further analyzed the anti-competitive effects arising from such behaviors. Firstly, such behaviors restricted the intra-brand competition among distributors. Secondly, the RPM behaviors of Wuliangye restricted inter-brand competition, considering Wuliangye is a leading company in the industry and other competitors followed its RPM practice, causing greater damages and anti-competitive effects. Finally, its behaviors eventually damaged consumer interests because consumers were stripped of the chances to buy products at a lower price, in particular considering Wuliangye has a strong position in the market for strong aromatic Chinese spirits, and the substitutability of its products is low.

The statement made by Guizhou Pricing Administration is very short. According to the statement, Kweichou Moutai fixed the minimum resale price to third-party distributors since 2012 and punished those selling the products at a lower price. This conduct constituted a vertical monopoly agreement in violation of Article 14 of the AML, eliminated and restricted competition in the market and harmed consumer interests. There is no further elaboration on how Guizhou Pricing Administration reached into this finding.

Investigation and Penalty

Wuliangye was imposed a fine of RMB 202 million, representing 1% of the "related" sales revenue in the previous year. This is at the lower end of the range allowed by the AML (1-10%) and has taken into account Wuliangye's full cooperation during the investigation and the prompt rectification of its behaviors (such as publication of the correction statement and withdrawal of the punishment imposed on the distributors).

Similarly, since Kweichow Moutai fully cooperated during the investigation, returned the confiscated deposit to the distributors, and immediately repealed the illegal policies, Guizhou Pricing Administration issued the ticket of RMB 247 million, which reportedly also represents 1% of Kweichow Moutai's sales revenue in the previous year.

According to news report, the antitrust investigation may have started early January this year. On January 15, 2013, Kweichow Moutai announced that it had been "inspected" by the NDRC and the provincial pricing administration for engaging in distribution activities against the AML. In the press release, Kweichow Moutai committed to comply with the AML and to remove any marketing policies that violate the AML. On January 17, 2013, Wuliangye published a similar announcement. No formal announcement or comment was made by the NDRC or the local regulators at that time.1

An interesting episode is that on February 19, three days before the official release of the penalty decisions, there was already news coverage saying that the two companies would be fined by NDRC in an amount of RMB 449 million in total for administering RPM. It is still a mystery how the information was leaked to the press before official announcement.

Comments

These two cases came only one month after NDRC's penalty decision against the six international LCD companies for price-fixing.2 It is the first time that a vertical monopoly agreement was penalized under the AML and once again showed NDRC's determination to aggressively implement the AML. It also clears earlier doubt that China's AML enforcement agencies may treat state-owned companies in a more lenient way.

There are a few points about the official statements that are noteworthy.

  • Is RPM per se illegal or under the rule of reason analysis under the AML?

Under the US antitrust regime, there are two general approaches for analyzing agreements in restraint of trade, i.e. the "per se" rule and the "rule of reason". For a type of agreements categorized as "per se" illegal, the illegality can be conclusively presumed without having to delve into the effect on competition in the market. Under the "rule of reason" test, the plaintiff must show the anti-competitive effects an agreement has or may have before the burden shifts to the defendant to show the pro-competitive effects of the challenged conducts.

These two concepts have been frequently borrowed in the discussion of how RPM is treated under the AML, i.e. whether it is per se illegal or subject to a "rule of reason" analysis.

When we look into Sichuan PDRC's statement, it appears that a "rule of reason" analysis was adopted, as it addressed the anti-competitive effects of Wuliangye's RPM behaviors, although the analysis is quite simple and straightforward. In addition, the statement also repeatedly mentioned Wuliangye's strong market position although there is no indication if there is any market share threshold for RPM to be held illegal.

On the other hand, if we look at the AML provisions, it is fair to say that like the EU law, no agreements are per se illegal in the sense that the exemption clause of Article 15 applies to all types of monopoly agreements, even horizontal ones such as price-fixing. Therefore, the debate about whether RPM is "per se" illegal or subject to the rule of reason may not be exactly relevant in the AML context.

The more relevant question is: to what extent, the burden on the plaintiff or the enforcement agencies of proving the anti-competitive effects of the monopoly agreement will be considered sufficient for a shift of the burden to the defendant, and to what extent the pro-competitive effects or other social benefits fostered by Article 15 will be sufficient to outweigh the anti-competitive effects.

The Chinese court appears to have already given its answer to the above question in the Rainbow v.s. Johnson & Johnson case, in which the Shanghai Intermediate People's Court placed a high burden on the plaintiff to prove the anti-competitive effects of the RPM agreement at dispute and ruled against the plaintiff on the ground that it failed to pass this test. The case is being appealed before Shanghai Higher People's Court and the decision is yet to be rendered.

Judging from Sichuan PDRC's statement on its face, it seems that the regulator might not consider the burden on its part to be that high. As mentioned above, the decision only adopted some simple qualitative analysis of the anti-competitive effects of Wuliangye's conduct and its market power. On the other hand, the decision is silent on whether Wuliangye invoked any exemptions under Article 15 during the investigation. Therefore, it is hard to predict to what extent the NDRC is open to justifications for RPM.

Due to the lack of details in the two statements, it is still unclear what exactly is the approach adopted by the NDRC towards RPM. Nevertheless, these two cases have sent a strong signal to the market that vertical monopoly agreement has become a focus of NDRC's AML enforcement activities. It will be vital for companies doing business in China to review their marketing activities and assess the legal exposure under the AML if they maintain any vertical restraints such as RPM.

In addition, it will be interesting to see how Shanghai Higher People's Court will rule on the Rainbow case in particular considering the administrative authorities have shown a somewhat divergent approach. If the courts and the antitrust enforcement agencies are not aligned with respect to their approaches to RPM, companies will find them in a dilemma when making business decisions in their daily operations.

  • Is vertical territorial allocation prohibited under the AML?

The Sichuan PDRC's statement also mentioned that Wuliangye banned cross-regional sales and cross-channel sales in addition to restricting the minimum resale price. However, market allocation was not explicitly found to be illegal, and instead appears to be considered as measures used by Wuliangye to achieve the purpose of restricting the resale price.

Currently, the AML only provides for two types of vertical monopoly agreements, namely fixing resale price and restricting the minimum resale price. The State Administration for Industry and Commerce ("SAIC"), which is responsible for non-price related violations, has not promulgated any rules on non-price-related vertical agreements. Given the absence of the specific provisions, it seems that the SAIC has taken a cautious approach with respect to non-price-related vertical agreements, such as vertical territorial allocation.

  • How is antitrust fine calculated?

According to Article 46 of the AML, for companies that enter into a monopoly agreement, the AML enforcement agencies are entitled to impose a fine ranging from 1–10% of their sales revenues for the previous year. There is no rule setting out the basis for calculation of the sales revenues. Therefore, it is not clear whether the basis for calculating the fine will be the group revenue or the revenue of the single company investigated, the worldwide revenue or the China revenue, or the revenue of the whole business or the revenue of the affected business.

In the present case, the two statements do not offer any additional clarification except that the fine on Wuliangye was said to represent 1% of its "related" sales revenue for the previous year. The wording seems to suggest that it is the revenue of the business that is affected or investigated, instead of the entire business that was used as the basis for calculating the fine.

In addition, according to some news report, Wuliangy's sales revenue in 2012 may hit more than RMB 60,000 million 3, and Kweichow Moutai's sales revenue in 2012 may hit around RMB 35,200 million.4 If this is the case, it would appear that the fine was not calculated on the basis of the sales revenues of the entire group in the previous year. To reduce legal uncertainty, legislative interpretation on this issue would be highly welcome.

Footnotes

1For more information on the earlier news about the incident, please refer to our article entitled NDRC Say No to Resale Price Maintenance – Company should be Cautious on Pricing Strategy
2For more information on the LCD case, please refer to our article entitled NDRC Imposed Stiff Fines on Multinational LCD Manufacturers in China's First Antitrust Enforcement Action against International Cartels
3The source of the data is found here: http://info.tjkx.com/detail/956370.htm. Wuliangye's 2012 audited financial report is not publicly available yet. However, according to its 2011 audited financial report, its sales revenue in 2011 is only around RMB 20,350 million.
4The source of the data is found here: http://www.566168.com/info/detail/18-7183.html. Kweichow Moutai's 2012 audited financial report is not publicly available yet. However, according to its 2011 audited financial report, its sales revenue in 2011 is only around RMB 18,402 million.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions