China: Resale price maintenance: Crackdown in East Asia

The authorities in the People's Republic of China, and in Taiwan, show they are serious about resale price maintenance

As discussed in another article ("Technology: Lessons from the ebooks case"), resale price maintenance – sometimes called vertical price-fixing – involves a supplier or manufacturer of a product specifying the price, or the minimum price, at which a downstream distributor or retailer of its products can resell those products. Resale price maintenance is regarded as a serious infringement of competition law in most countries of the world (subject to exceptions in certain sectors, such as pharmaceuticals, where some limits on retail price competition are seen as desirable); as the UK's Office of Fair Trading noted in September 2013, formally accusing a clothes manufacturer and three department stores of unlawful resale price maintenance, it is a practice that

"limits competition between retailers and can lead to consumers paying higher prices"46

Mere recommendation of resale prices is generally acceptable, but if the recommendation is underpinned by financial inducements or penalties that will be treated as equivalent to an obligatory resale price.

The past few months have made clear that even relatively new competition regimes, in East Asia, take resale price maintenance very seriously.

People's Republic of China

Article 14 of China's Antimonopoly Law prohibits agreements between suppliers and distributors to set a fixed or minimum resale price. A competition authority decision and a court judgment have made clear the serious costs that companies engaged in resale price maintenance in China can now face – in terms both of fines and of damages.

Fines

In August 2013, the National Development and Reform Commission (NDRC) announced that it had imposed fines totalling 668 million Chinese yuan renminbi (about £70 million, or €82 million, or US $108 million) on six milk powder producers - Mead Johnson, Danone's Dumex subsidiary, Biostime, Friesland Campina, Abbott, and Fonterra - for violations of Article 14 of the Antimonopoly Law. The producers were found to have engaged in different types of resale price maintenance practices, resulting in high price levels for milk powder and substantially restricting or eliminating intrabrand and interbrand price competition and adversely affecting consumer interests.47

The announcement followed developments in previous months in which the National Development and Reform Commission in Guizhou and Sichuan provinces had imposed significant fines for infringements of Article 14.

Damages

Also in August 2013, the Shanghai Higher People's Court, overruling a lower court's judgment, ordered the medical products manufacturer Johnson & Johnson to pay damages to a Chines distributor of its surgical suturing products, Ruibang Yonghe, in respect of Johnson & Johnson having terminated the distribution contract because the distributor had not observed the resale price maintenance obligations in the distribution contract. Enforcing such resale price maintenance obligations was an infringement of Article 14 of China's Antimonopoly Law, according to the detailed judgment of the Shanghai Higher People's Court48.

The Shanghai Higher People's Court accordingly found that the termination of the distributor's contract had been wrongful, and awarded the distributor damages of 530,000 Chinese yuan renminbi (about £55,000, or €65,000, or US $86,000) in compensation for its losses.

The lower court had rejected the damages claim, on the grounds that, among other reasons, the distributor had failed to adduce evidence of the restrictive effects of the minimum resale price clause on market competition.

But on appeal, the Shanghai Higher People's Court found that the minimum resale price clause had anticompetitive effects and was thus prohibited under Article 14 of the Antimonopoly Law. Referring to the guidance in the Supreme People's Court's Regulation on Issues concerning the Application of the Law in the Adjudication of Civil Cases caused by Monopolistic Conduct regarding the prohibition on horizontal restrictive agreements among competitors, the Shanghai Higher People's Court noted that such agreements would be caught under the prohibition only if it can be demonstrated they have restrictive effects. Although there is no express guidance from the Supreme People's Court on whether the same requirement applies to vertical agreements between suppliers and distributors, the Shanghai Higher People's Court considered that, since the relevant provisions in the Antimonopoly Law that deal with horizontal and vertical restrictions (Articles 13 and 14) share the same definition of the notion of restrictive agreement, the same requirement applies to both. However, whereas the Supreme People's Court's Regulation expressly reverses the burden of proof for certain horizontal agreements, there is no such reversal for vertical agreements. Accordingly, the Court applied the general civil law principle of "he who claims must prove".

In assessing whether a minimum resale price agreement has restrictive effects on market competition, the Court invited evidence on the following:

  1. the general degree of competition on the relevant market,
  2. whether the defendant has a "strong market position",
  3. the defendant's motive in inserting a minimum resale price clause in the distribution contract, and
  4. the competitive effects arising from the clause.

The Court found anti-competitive effects in that the minimum resale price restriction not only eliminated intra-brand competition, but also reduced inter-brand competition given that Johnson & Johnson had maintained high resale prices which other competitors used as a benchmark.

As regards the supposed benefits of resale price maintenance which had been put forward by Johnson & Johnson, the Court saw no causal link between resale price maintenance and increased product quality and safety, and no necessity to use vertical price restrictions to strengthen what was already a tightly-controlled distribution system.

Taiwan

In June 2013, Taiwan's competition authority, the Fair Trade Commission ordered Timer 3C, an authorised dealer of HOCO mobile holsters, to cease resale price maintenance practices, and imposed on Timer 3C a fine of 50,000 new Taiwan dollars (about £1,100 or US $1,650 or €1,250). This was a case where the resale price maintenance consisted of the imposition of financial penalties for deviation from the suggested resale price so that, in effect, it was an obligation. The authorised dealer issued its local distributors with "distribution management rules", providing for termination of all distribution rights and the imposition of penalties in the event of non-compliance with the relevant pricing policies.49

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Footnotes

46UK Office of Fair Trading press release 64/13, "OFT issues Statement of Objections to sports bra supplier and three UK department stores", September 20, 2013.
47Chinese National Development and Reform Commission press release, August 7, 2013. See also announcement by Biostime to the Hong Kong Stock Exchange, June 27, 2013.
48Judgment of Shanghai Higher People's Court, Ruibang Yonghe v Johnson & Johnson, August 1, 2013.
49Taiwan Fair Trade Commission press release, June 5, 2013.

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