Regulation of the distribution relationship

Competing products

Are restrictions on the distribution of competing products in distribution agreements enforceable, either during the term of the relationship or afterwards?

So far the judicial precedents have not shown a very systematic approach towards the determination of enforceability of non-compete provisions. Non-compete provisions are generally enforceable during the term of the distribution relationship. It is generally agreed that non-compete provisions are enforceable if the restricted period is not excessively long (eg, after two years for the original distribution territory is generally acceptable). In determination of the reasonableness of certain restrictions, the general ‘fair and reasonable’ test, which is relatively vague, is adopted.

Prices

May a supplier control the prices at which its distribution partner resells its products? If not, how are these restrictions enforced?

Generally, distributors can be required to follow the supplier’s pricing policy. However, under the Anti-Monopoly Law of the PRC, price-fixing arrangements, to monopolise the market, between the supplier and distributors are prohibited, and there are other restrictions mentioned below.

May a supplier influence resale prices in other ways, such as suggesting resale prices, establishing a minimum advertised price policy, announcing it will not deal with customers who do not follow its pricing policy, or otherwise?

Minimum advertised price policies that only regulate the advertised resale prices without restricting the actual resale prices to be negotiated by the distributors and the customers are common nowadays, but such provisions remain relatively untested. It is necessary to mention that a supplier may violate the Anti-Monopoly Law of the PRC if it enters into an arrangement with a distributor to fix resale prices or set minimum resale prices to achieve market monopoly. It is advisable to make the termination provisions related to violation of the pricing policy and minimum advertised price policy more detailed.

May a distribution contract specify that the supplier’s price to the distributor will be no higher than its lowest price to other customers?

The general belief is that this type of ‘most-favoured customer’ provision is enforceable. However, the Anti-Monopoly Law of the PRC prohibits a distributor from abusing its dominant position in the market to secure certain trading conditions that restrict market entry by other parties.

Are there restrictions on a seller’s ability to charge different prices to different customers, based on location, type of customer, quantities purchased, or otherwise?

The law generally does not intervene in the freedom of dealings between the parties on pricing issues. The exception is that under the Anti-Monopoly Law of the PRC, a supplier who is in a dominant position in the market is not allowed to offer different transactional terms and conditions (eg, sale prices) to customers (which means the distributor in the present context) with the same background without proper reason. There is no statutory definition of ‘customers who are of the same background’, and the court has wide discretion to determine who may be in breach of this law.

Geographic and customer restrictions

May a supplier restrict the geographic areas or categories of customers to which its distribution partner resells? Are exclusive territories permitted? May a supplier reserve certain customers to itself? If not, how are the limitations on such conduct enforced? Is there a distinction between active sales efforts and passive sales that are not actively solicited, and how are those terms defined?

It is common to agree on exclusive territory for a particular distributor, and the contractual provisions remain decisive in determining how to define the territories and markets. The law so far has not provided sufficient guidance on construing the contractual provisions of active sales and passive sales that are not actively solicited, but which are heavily litigated in other jurisdictions.

Online sales

May a supplier restrict or prohibit e-commerce sales by its distribution partners?

It is common that a supplier restricts or prohibits e-commerce sales by its distribution partners in China, as e-commerce distribution rights are normally separately granted. Whether restrictions as to the use of e-commerce intermediaries exist is a matter of negotiation between the parties but the engagement of e-commerce intermediaries is a growing phenomenon in the past few years. The provisions on territorial limitation as to distribution activities with enhanced technological requirements are seen in most of the distribution agreements. A supplier may require that its distribution partners, or e-commerce intermediaries, do not sell products outside the assigned territory. Under the highly computerised environment of e-commerce, it is usual for suppliers to request their distribution partners to provide more reports as to sales by territory, and some distribution systems have a specific fee or ‘invasion fee’ for sales out of its authorised territory.

Refusal to deal

Under what circumstances may a supplier refuse to deal with particular customers? May a supplier restrict its distributor’s ability to deal with particular customers?

The Anti-Monopoly Law of the PRC prohibits businesses that are in a dominant position in the market from refusing to deal with particular customers, or from restricting their distributors from dealing with certain parties, without proper reason. There is no statutory definition for ‘proper reason’, which is subject to the determination by the courts at their discretion on a case-by-case basis. However, if there is no abuse of a dominant position, the prohibition should not be relevant, and the supplier is free to devise a policy on selection of customers.

Competition concerns

Under which circumstances might a distribution or agency agreement be deemed a reportable transaction under merger control rules and require clearance by the competition authority? What standards would be used to evaluate such a transaction?

Under the Anti-Monopoly Law of the PRC, a merger or common control of shareholdings of different competitors, entering into arrangements for control of different competitors, may lead to a concentration situation, and such a situation is subject to reporting and approval requirements. There are further rules defining what reportable situations are, some examples of which are as follows:

  • if the annual global sales figure for the concentration is more than 10 billion yuan, when annual sales figures of two operators in China exceed 400 million yuan; or
  • if the annual Chinese sales figure for the concentration is more than 2 billion yuan, when annual sales figures of two operators in China exceed 400 million yuan.

There are a number of relevant standards to be examined, such as:

  • the market share and the relative power of control by the operators in such an environment;
  • the level of concentration of the market;
  • the level of influence of the operator on the entry by others into the market and on technological development;
  • the level of influence of the operator on customers and other competitors; and
  • the level of influence of the operator on national economic development.

The above is not an exhaustive list.

Do your jurisdiction’s antitrust or competition laws constrain the relationship between suppliers and their distribution partners in any other ways? How are any such laws enforced and by which agencies? Can private parties bring actions under antitrust or competition laws? What remedies are available?

The Anti-Unfair Competition Law of the PRC and the Anti-Monopoly Law of the PRC are the primary relevant legislation in this respect. Apart from the points discussed in other questions, under the Anti-Monopoly Law, a supplier abusing its dominant position in the market and requiring its distributors to purchase products from the suppliers designated by it for the purpose of excluding fair competition is prohibited.

The regulatory authority under the Anti-Unfair Competition Law is the administration for industry and commerce and the regulatory authority under the Anti-Monopoly Law is the Anti-Monopoly Commission. Both authorities have the necessary powers to investigate and impose administrative penalties.

Affected parties are entitled to bring actions under the Anti-Unfair Competition Law or the Anti-Monopoly Law for damages, loss of profits and reasonable investigation costs.