Originally published January 2018
Resale price maintenance in China is a matter easily (and frequently) overlooked by our clients when drafting contracts with distributors and third parties, which can leave you either broke or completely unscathed. Enforcement with respect to resale price maintenance by the courts and administrative bodies has been a hot topic since the promulgation of the Anti-Monopoly Law of the PRC [AML] in 2008, which encompasses almost all of the PRC's anti-competition related issues (with the exception of Hong Kong and Macau).
As by the nature of the Chinese legal system, there are significant differences in the legislation and to what is applied in practice. To muddy the waters even further, both the courts and regulatory body, the National Development and Reform Committee [NDRC], take different approaches in enforcing decisions regarding resale price maintenance in China. It's clear from these differing attitudes there still is not an accepted method to resale price maintenance.
The Anti-Monopoly Law of the PRC
While not directly referencing the term 'resale price maintenance', the AML defines such anti-competitive agreements as monopoly agreements, meaning "protocols, decisions, or other coordinated behavior for eliminating or restricting competition" – and in simpler terms, potentially anything your business does that can be construed to be unfair to your competitors in your market.
Article 14 provides a list of the prohibited vertical monopoly agreements, arrangements where foreign businesses have exclusive control over their trading counterparts, which address the circumstances in which resale price maintenance occurs in China. More specifically, article 14 (2) of the AML, prohibiting the restriction on setting minimum prices for resale to third parties has lately came into question with several of our clients. Typically a clause in one or several of their standard agreement with a third party seems to do the exact thing article 14 (2) prohibits, along with the threat to terminate the contract if the third party were to set a price lower than this business wanted. Despite the clause appearing to be in direct conflict with the AML's provision, the difficulty lies however in determining the potential legal recourse regarding the enforcement or validity of such a clause.
Enforcement of Resale Price Maintenance in China
The courts have tended to focus on the "eliminating or restricting competition" aspect of the monopoly agreement definition outlined above. The burden of proof is on the plaintiff to demonstrate that the business conducting resale price maintenance has a clear and negative impact on the market's competition. In the landmark case of Rainbow vs. Johnson & Johnson in 2013, the Shanghai Higher People's Court ruled in favour of Rainbow (a distributor of Johnson & Johnson) due to strong market influence of Johnson & Johnson. They had placed restrictions in their distribution agreements for medical devices, which the courts decided restricted competition in that particular market and constituted a monopoly agreement. The courts showed their teeth and Johnson & Johnson were fined RMB 530,000 to Rainbow in compensation for its economic losses.
On the other hand, the NDRC's approach towards resale price maintenance in China has been much proactive in imposing restrictions and fines. Throughout a number of different decisions, the NDRC has been much more indiscriminate on who it finds to be in violation of article 14 and resale price maintenance than the courts in China. As of 2016, the NDRC fined a medical tech company, Medtronic over RMB 118 million for its internal resale price maintenance, while completely ignoring their argument that their agreements did not restrict or eliminate competition.
Exemptions? An Unlikely Outcome
Although leniency exemptions exist under article 15 of the AML if you find yourself practicing resale price maintenance in China, these exceptions are only applicable in select circumstances such as benefitting the public interest or promoting market efficiency as a whole. Despite the (very) occasional case where these are applied, the clients we deal with on fairly regular basis will almost never qualify for such exemptions. The fact of the matter is that it is better to be safe than sorry as article 15's exemptions are all too often ignored by the NDRC.
Resale price maintenance in China is an issue too important to gloss over when structuring your agreements with distributors and third parties. Given the hefty fines and conflicting attitudes from both the courts and the NDRC towards enforcing resale price maintenance in China, seeking an experienced and qualified Chinese legal practitioner to help guide you will always be your best option.
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.