The Shanghai High People's Court recently made available its Aug. 1, 2013 final judgment overruling the Shanghai First Intermediate Court's judgment in a case brought by a domestic medical distributor, Beijing Rainbow Medical Equipment Technology & Trading Company (Rainbow) against Johnson & Johnson's (J&J) China operations. The court ruled that J&J's resale price maintenance (RPM) constitutes a monopolistic agreement, and ordered J&J to indemnify Rainbow's economic losses of RMB 530,000 ($87,500).
On Jan. 2, 2008, J&J and Rainbow signed a distribution agreement, providing that Rainbow had the authorized right to sell J&J's Ethicon surgical sutures in Beijing. According to the agreement, Rainbow could not sell Ethicon surgical sutures at a price lower than that stipulated by J&J. In March 2008, Rainbow won a bid to supply surgical sutures to Peking University People's Hospital by offering a price lower than the one provided in the agreement. On July 1, 2008, J&J issued a letter to Rainbow on deduction of a deposit of RMB 20,000 ($3,245) and cancellation of Rainbow's sales right in two hospitals in Beijing. The key issue in this case was whether the RPM agreement constitutes a monopolistic agreement under the Antimonopoly Law of the People's Republic of China (the AML).
The court considered four factors in deciding whether the RPM agreement has the effect of eliminating or restricting competition, and therefore is a monopolistic agreement prohibited by the AML: (1) the competitiveness of the market in the relevant market; (2) J&J's market position; (3) J&J's motivation for adopting minimum resale prices; and (4) the anticompetitive effects of the minimum resale prices. The court found that competition in the relevant market was insufficient, which is the cornerstone in the evaluation, rendering further analysis of the agreement's effect on competition unnecessary.
The court also held that J&J has a strong market position as well as power in the upstream and downstream markets, increasing the likelihood that the minimum resale prices would have anticompetitive effects. Pursuant to the 2004 J&J Action Plan, the company encouraged its distributors to maintain good customer relationships with doctors to "eliminate negative influence on the price of Ethicon sutures," which indicates that J&J acknowledged that the price of the sutures was not competitive in the market.
Turning to the balancing of anticompetitive and pro-competitive effects, the court determined that it could not find grounds that the RPM agreements had pro-competitive effects. The court ruled that the RPM agreement should be regarded as a monopolistic agreement that had the effect of eliminating or restricting competition.
The court's decision is available here (in Chinese).
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