China: China's Supreme People's Court Rules RPM Is Illegal Per Se

Last Updated: 17 July 2019
Article by Lester Ross and Tingting Liu

In a ruling issued on December 18, 2018 but not published until June 24, 2019, China's Supreme People's Court (SPC) ruled in favor of the Hainan Provincial Price Bureau in an administrative proceeding regarding a vertical price agreement with respect to products for resale to third parties (so-called Resale Price Maintenance or RPM). This is the first judicial review of a vertical price monopoly agreement dispute between a private party and an anti-monopoly enforcement agency (AMEA) by the nation's highest court which for now resolves the conflict between the different approaches adopted by the AMEA and the judiciary with respect to vertical agreements, making it a landmark case in Anti-Monopoly Law (AML) enforcement. 

Before consolidation into a single AMEA known as the State Administration of Market Regulation (SAMR) in March 2018, the AMEA in change of conducting investigations and imposing penalties under the AML and the Provisions on Anti-Price Monopoly was the National Development and Reform Commission (NDRC). Since 2013, NDRC has fined companies for concluding RPM agreements in industries including infant formula, optical lenses and automobiles.1  

In February 2017, the Hainan Provincial Price Bureau fined Hainan Yutai Scientific Feed Company (Yutai), a fish feed company, RMB 200,000 for concluding RPM agreements with its distributors in 2014 and 2015, in violation of Article 14(1) of the AML,2 even though the agreements were apparently never implemented. Yutai filed for judicial review with the Haikou Intermediate People's Court which ruled against the penalty in March 2017, citing incorrect application of the AML.3 This is the first and only instance where an AMEA lost a case in a people's court since the AML took effect in August 2008.

The Price Bureau appealed the ruling to the Hainan Higher People's Court which overturned the decision of the lower court and upheld the penalty in December 2017. Yutai then appealed to the SPC in July 2018.

The SPC affirmed the decision of the higher people's court to reject Yutai's appeal and ruled in favor of the Price Bureau. In its ruling the SPC acknowledged and reaffirmed the obviously different review criteria adopted by AMEA and the courts with respect to the legality of "vertical" agreements under Article 14 of the AML, i.e., agreements between businesses and their distributors, wholesalers or retailers, as opposed to agreements between competitors ("horizontal" agreements under Article 13 of the AML).4 The SPC ruled that it is not improper for courts to employ a "rule-of-reason" approach to determine if a vertical agreement eliminates or restricts competition.5 But the AMEA by contrast should treat vertical agreements including RPM as monopoly agreements and per se AML violations without the burden of proof for anticompetitive effects. 

In its ruling, the SPC stated that RPM agreements under Article 14 of the AML are typical vertical monopoly agreements which often have a double-edged effect that both limits and promotes competition. However, because market conditions at present are relatively immature and the capacity of markets for self-correction is relatively weak, AMEAs should emphasize prevention of the anticompetitive effects of such vertical monopoly agreements, and make the regulation and punishment of such agreements a focus of their AML enforcement activity. 

From a comparative perspective the SPC does not appear to fundamentally reject the holding in Leegin by the Supreme Court of the United States (SCOTUS) which reversed a century of antitrust law in the US by finding that such agreements may or may not be unlawful because they may have procompetitive as well as anticompetitive effects and therefore need to be reviewed subject to the rule of reason rather than deemed per se illegal.6 The SPC instead appears to have ruled that China's economy has yet to mature sufficiently to allow the AMEA to apply the rule of reason. The SPC implied, however, that its view is subject to change as the economy matures and AMEA capability increases. 

Respect for the views of the US antitrust agencies also influenced the SCOTUS majority in Leegin. As Justice Kennedy wrote for the majority: "It is also significant that both the Department of Justice and the Federal Trade Commission – the antitrust enforcement agencies with the ability to assess the long-term impacts of resale price maintenance – have recommended that this Court replace the per se rules with the traditional rule of reason."7 

The SPC further stated that in the early stage of the development of both the economy and AML enforcement, requiring AMEAs to conduct comprehensive investigations and complicated economic analysis on vertical monopoly agreements in order to determine their impact on market competition would substantially raise enforcement costs and impact enforcement efficiency, which would be incompatible with the present need for AML enforcement activity. 

In sum, the SPC ruled that RPM generally constitutes a monopoly agreement under Article 14 of the AML which meets the criteria of eliminating or restricting competition as stipulated under Article 13 of the AML.8 When RPM is uncovered by the relevant AMEA during its investigation, a monopoly agreement may be deemed to have been reached without the AMEA shouldering the burden of proof of showing anticompetitive effects. A business operator may rebut such allegation by proving that the agreement does not eliminate or restrict competition, or by invoking an exemption under Article 15 of the AML.9 The AMEA is required to determine whether an exemption applies. 

The SPC's ruling is now also in accordance with the Interim Provisions on the Prohibition of Monopoly Agreements (Interim Provisions) issued by SAMR on July 1. The Interim Provisions enumerate several types of monopoly agreements including RPM10 and specify that the enumerated monopoly agreements are to be deemed per se illegal, while applying the rule of reason to other types of anticompetitive agreements not specifically enumerated.11 Now that SAMR's regulatory posture has both been endorsed by the SPC, at least for the time being, and formalized in the Interim Provisions, business operators need to be cautious about imposing pricing requirements on their distributors and/or retailers to avoid administrative and civil litigation under the AML.

Footnotes

1 For more information, see, e.g., https://www.uschamber.com/sites/default/files/aml_final_090814_final_locked.pdf.

2 See AML, Article 14(1): A business operator is prohibited from concluding the following monopoly agreements with its trading partners: (i) fixing the prices of commodities resold to a third party; (ii) restricting the lowest prices for commodities resold to a third party; and (iii) and other monopoly agreements determined as such by the relevant AMEA.

3 The Haikou Intermediate People's Court believed that in order for Article 14(1) of the AML to apply, the agreement at issue needed to meet the conditions set forth in Article 13(2), i.e., the agreement should have the effect of eliminating or restricting competition. However, evidence showed that given the sales volume and market share of Yutai, there were no anticompetitive effects, and therefore Article 14(1) of the AML should not apply to the case.

4 See AML, Article 13(1). Horizontal agreements include monopoly agreements on fixing or changing commodity prices, restricting the quantity of commodities manufactured or marketed, dividing a sales market or a procurement market for raw and semi-finished materials, restricting the purchase of new technologies or equipment or the development of new technologies or products, joint boycott of transactions, and other monopoly agreements as determined by the AMEA. 

5 The SPC, in its ruling, commented on Shanghai Higher People's Count's decision on Rainbow v. Johnson & Johnson and stated that in civil litigations, it is not improper for the court to determine whether to uphold the plaintiff's claims based on whether the monopoly agreement eliminates or restricts competition.

6 See Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007) (overturning Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 313 (1911)).

7 See Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 899 (2007). 

8 See AML, Article 13(2): For the purposes of this Law, a monopoly agreement is an agreement, decision or other concerted practice which eliminates or restricts competition. 

9 See AML, Article 15: Articles 13 and 14 shall not apply If the business operators can prove that the concluded agreements fall into any of the following circumstances: (i) improving technology, or researching and developing new product; (ii) improving product quality, reducing costs, enhancing efficiency, harmonizing product specifications and standards, or dividing work based on specification; (iii) improving the operational efficiency and enhancing competitiveness of small and medium-sized enterprises; (iv) serving public interests such as energy saving, environmental protection and disaster relief and aid; (v) alleviating serious decreases in sales volumes or significant production overcapacities during economic recession; (vi) safeguarding legitimate interests in foreign trade and foreign economic cooperation; (vii) other circumstances determined by the law and by the State Council. For agreements falling under indents (i) to (v), the business operators are further required to prove that the concluded agreement does not significantly restrict competition in the relevant market and allows consumers a share of the resulting benefit in order for Articles 13 and 14 not to apply. 

10 See Interim Provisions, Articles 7-11 enumerate specific types of horizontal agreements, and Article 12 enumerates three types of vertical agreements as listed in Article 14 of the AML.  

11 See Interim Provisions, Article 13 provides that other agreements not listed in Articles 7-12 of the Interim Provisions shall be treated as monopoly agreements if they are proved to eliminate or restrict competition. To determine whether an agreement is monopolistic, SAMR shall consider factors including (i) the fact that the business operators have entered into and implemented the agreement, (ii) competition condition of the market, (iii) market share of the business operators, (iv) the agreement's impact on commodities' price, volume and quality, (v) the agreement's impact on market entry and technology improvement, (vi) the agreement's impact on customers and other business operators and (vii) other factors. 

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
Similar Articles
Relevancy Powered by MondaqAI
 
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
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please 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