In recent weeks, there have been a number of high-profile enforcement actions against resale price maintenance practices in China. Despite this increased level of enforcement activity, the position of resale price maintenance under China’s competition law is uncertain. This briefing examines this controversial and important area.
Resale price maintenance (RPM) agreements have been under increased scrutiny in China in recent months. The National Development and Reform Commission (NDRC), the Chinese antitrust agency in charge of enforcement against price-related infringements, has launched several high-profile enforcement actions against RPM practices, involving both domestic and multi-national companies. Concerns have been raised amongst the business community in China, as RPM is common practice in many sectors in China and the position of RPM under the Anti-Monopoly Law (AML) is uncertain.
The NDRC has recently engaged in high-profile inspections of two State-owned alcoholic beverage producers – Kweichou Moutai (Moutai) and Yibin Wuliangye (Wuliangye) – for certain business practices which allegedly constitute RPM. Automotive manufacturer Beijing Benz was also reported to be the subject of an NDRC investigation into suspected anticompetitive behaviour for engaging in RPM.
Following the NDRC investigation, Moutai and Wuliangye have issued public statements stating their intention to repeal all policies alleged to have infringed the AML and to adopt rectification measures. Press reports indicate that Beijing Benz has also agreed to revise its dealership contracts to remove RPM provisions. The NDRC has not, however, published statements or reports concerning any of these inspections or investigations.
This follows a case last year, where the Shanghai Intermediate People’s Court considered a challenge to an agreement imposing resale price maintenance by Beijing Ruibang Yonghe Technology and Trade Co., Ltd (Ruibang) against two Chinese entities of Johnson & Johnson (J&J). The case, which is now on appeal to the Shanghai High People’s Court, is the first in which an agreement imposing RPM has been challenged in a court in China.
Despite these developments, there is a question mark over whether RPM is ‘per se’ illegal or subject to an ‘effects based’ analysis in China. The distinction has a significant impact on businesses attempting to assess compliance with the AML.
The position of RPM under China’s Anti-monopoly Law
Vertical agreements, entered into between businesses operating at different levels of the market (eg distributor and reseller, manufacturer and supplier), are the most frequently encountered type of commercial agreement.
The AML prohibits undertakings from reaching agreements, decisions or concerted actions (oral or written) that eliminate or restrict competition, and contains an express prohibition on vertical agreements that fix the resale price or restrict the minimum resale price of goods (ie RPM). However, if an agreement which potentially is anti-competitive can be proven to have a pro-competitive purpose (eg for the purpose of technological improvement) and not significantly restrict the competition in the relevant market while allowing consumers to share the benefits derived from the agreement, it will be exempt from the general prohibition.
Is RPM ‘per se’ illegal under the Anti-monopoly Law?
It is unclear whether RPM is prohibited under the AML as ‘per se’ illegal or whether an additional ‘effects based’ analysis is required before conduct can be deemed to be illegal. The AML defines a “Monopoly Agreement” as an “agreement, decision or other concerted action that eliminates or restricts competition”. The AML prohibits “Monopoly Agreements” that fix the resale price of products or restrict the minimum resale price of products (ie RPM).
A similar position is adopted by the NDRC in its Measures on Anti-Price Monopoly, issued on 4 January 2011. The Measures on Anti-Price Monopoly define a “Price Monopoly Agreement” as an “agreement or decision or other concerted action that eliminates or restricts competition in respect of price”. The NDRC’s measures similarly prohibit “Price Monopoly Agreements” that fix the resale price of products or set minimum resale prices or RPM.
As such, it is unclear whether an RPM agreement is automatically prohibited as a “Monopoly Agreement”, by virtue of it being an agreement to restrict the minimum resale price of products to third parties or fix the resale price of products, or whether it is also necessary to establish that the agreement constitutes a “Monopoly Agreement”, ie that it eliminates or restricts competition. A literal interpretation of the AML would suggest that an ‘effects based’ analysis is necessary, ie to demonstrate that the agreement had the effect of eliminating or restricting competition, in order to determine whether an RPM agreement is prohibited (aside from demonstrating any pro-competitive purpose such that the agreement would be exempt from the prohibition).
RPM in Europe and the US
More widely, the treatment of RPM in competition law is a controversial topic as, in recent years, there has been a divergence in the approach to RPM taken by the authorities and courts in Europe and the US.
In the US, RPM is, since Leegin in 2007, subject to an ‘effects based’ or ‘rule of reason’ analysis. The Courts in Leegin felt that it could not be stated that RPM “always or almost always” tends to restrict competition and decrease output (the standard required for a ‘per se’ prohibition) and consequently it must be demonstrated that the agreement on resale price unreasonably injures competition (ie has an injurious effect on competition).
In contrast, in Europe the imposition of fixed or minimum resale prices (ie RPM) is in general considered to be a restriction ‘by object’ and therefore presumed to infringe EU competition law, regardless of the actual effect on competition. It is not therefore necessary to examine its effects on competition in order to determine that the RPM agreement is in breach of competition law. To avoid the prohibition, the parties to the RPM agreement must demonstrate that there are sufficient pro-competitive efficiencies to satisfy the criteria for an exemption. In practice, however, it is difficult to obtain such an exemption.
NDRC RPM Enforcement Activity
On 15 January 2012 Moutai, China’s most famous liquor brand and a State-owned company listed on the Shanghai Stock Exchange, released a brief statement that, as a result of an inspection by the NDRC and Guizhou Price Bureau, it had rescinded certain “marketing policies” which infringed the AML. Moutai also took steps to reimburse distributors who had been penalised by these “marketing policies”.
According to media reports, an example of the alleged anti-competitive behaviour occurred in December 2012 when Yuan Renguo, the Chairman of Moutai, announced to distributors of Moutai products that Moutai’s 53% volume spirit must not be sold for less than RMB1519 per single bottle or RMB1400 for bulk orders and that Moutai would punish those who breached the set minimum price.
On 17 January 2013, another well-known State-owned liquor brand, Wuliangye, announced that it too had been inspected by the NDRC and had repealed its own marketing policies to ensure compliance with the AML. Press reports indicate that Wuliangye’s marketing policies had stipulated minimum resale prices for its products and penalised distributors who breached the policy.
The NDRC has not, however, published its reasoning in these cases (or in the reported automotive distribution investigation). Consequently, it is unclear whether the NDRC, in enforcing the AML, has treated RPM as ‘per se illegal’, or whether it has also considered the effect, ie whether the agreement eliminated or restricted competition.
Judicial interpretation of the RPM prohibition?
In May 2012, the Supreme People’s Court promulgated a judicial interpretation regarding private litigation under the AML (the Regulations on Several Issues Concerning the Application of Law in Trials of Monopoly Civil Disputes Arising from Monopolistic Conduct) which came into effect in June 2012. The Supreme People’s Court interpretation, which was designed to encourage private stand alone damages actions under the AML, has hinted at the courts adopting a more ‘per se’ illegal approach in the case of horizontal agreements, in order to facilitate antitrust claims. The Supreme People’s Court interpretation provides that, for a claimant seeking damages resulting from the existence of a cartel agreement, the burden of proof, once the claimant has proven that an agreement exists, falls on the defendant to prove that the agreement does not have the effect of eliminating or restricting competition.
However, the judicial interpretation of the Supreme People’s Court provides no guidance on how vertical agreements (in particular RPM) should be treated. One could argue the fact that the Supreme People’s Court did not introduce the same kind of burden of proof requirement for claimants in vertical cases suggests that vertical agreements should be treated differently from horizontal agreements.
Private AML litigation
Ruibang v J&J is the first case in which a vertical agreement imposing resale price maintenance has been challenged in a PRC court. In this case, Ruibang had been a distributor of surgical products for J&J in the Beijing area for around 15 years. The agreement between Ruibang and J&J restricted Ruibang from selling the J&J products below certain prices, ie RPM. In July 2008, J&J penalised Ruibang and cancelled Ruibang’s sales with two Beijing hospitals, because Ruibang had charged lower prices in contravention of the RPM provision in the distribution agreement.
Ruibang alleged that J&J had violated the prohibition on monopoly agreements under the AML by unlawfully restricting Ruibang’s ability to sell J&J products to its customers at a price below that stipulated in the distribution agreement. However, in May 2012, the Shanghai Intermediate People's Court found that Ruibang had failed to provide sufficient evidence demonstrating the anticompetitive effects of the RPM agreement.
In determining the case, the People’s Court considered whether J&J had concluded a “Monopoly Agreement” under the AML which caused harm to Ruibang.
The People’s Court noted that “Monopoly Agreements” were defined under the AML as “agreements, decisions or other concerted actions which eliminate or restrict competition” and found that this requirement should apply to vertical agreements prohibited under the AML. As such, in order to assess whether the agreement eliminated or restricted competition, the People’s Court considered it necessary to investigate factors such as the market share of the relevant products in the relevant market, the state of competition in the upstream and downstream markets and the extent to which the restrictions would affect the supply volume and price of the product.
The People’s Court found that Ruibang had not produced any evidence that there had been an adverse impact on competition, beyond a statement on J&J’s website referring to its market share in the surgical product market. In contrast, the People’s Court found that evidence furnished by J&J had demonstrated that there are various suppliers of similar products, which suggested that J&J did not have monopoly power in the market. Given the lack of evidence, the People’s Court could not determine whether the distribution agreement constituted a Monopoly Agreement and dismissed the case.
The Shanghai Intermediate People’s Court judgment appears to have adopted a literal interpretation of the AML – an agreement to maintain minimum resale prices will not be prohibited unless it can be demonstrated that it is a “Monopoly Agreement”, ie that it “eliminates or restricts competition”. However, as the judgment is currently under appeal it cannot be taken to be a final statement of the People's Courts' position towards RPM.
Where to now?
Currently, it is still unclear whether an agreement stipulating minimum resale prices will be automatically prohibited, or whether it is necessary to consider whether that agreement has the “effect of eliminating or restricting competition”. Given the uncertainty surrounding the position of resale price maintenance or RPM in China and its prevalence across the business community, clarification from the NDRC on the position of RPM under the AML would be welcome.
Nevertheless, the recent high profile inspections and investigations into RPM by the NDRC seem to suggest RPM is now, along with cartels, becoming a significant focus of the NDRC’s enforcement activities. Therefore, even before the NDRC takes a formal stance on RPM, it is important that businesses review their agreements and business practices vis-à-vis counter-parties (such as distributors) to identify any conduct which may constitute RPM and properly assess its risk. To minimize any exposure, companies may consider seeking further advice or consulting with NDRC, should companies wish to maintain any business conduct which may potentially amount to RPM.
We may also see further guidance from the Shanghai Higher People’s Court in Ruibang v J&J. Although it is possible that the People’s Courts will take an independent view on this issue, it is likely that the court would give weight to the NDRC’s views, due to the agency's expertise in this area. It will be critical for the courts and the antitrust enforcement agencies to be aligned on this issue.