On 22 February 2013, two local agencies of China’s National Development and Reform Commission (NDRC), the body responsible for enforcing price related infringements of the Antimonopoly Law (AML), imposed fines on two Chinese state owned alcohol manufacturers for including resale price maintenance clauses in their distribution agreements with resellers.
Kweichow Moutai (Moutai) and Wuliangye, the two most famous Chinese producers of rice wine and other premium liquors (both state owned enterprises), were fined RMB 247 million (approximately €31 million) and RMB 202 million (approximately €25 million) respectively. Both companies were found to have used their market strength to include clauses in their distribution contracts which inter alia restricted the ability of their resellers to determine the resale prices of their products.
Moutai and Wuliangye issued statements in early January stating that investigations by local affiliates of the NDRC were underway. The companies stated that the activities which led to investigations had ceased and both companies showed willingness to co-operate with the authorities.
The NDRC has stated that the investigation into Wuliangye found that the company had sought to impose minimum resale prices in its agreements with around 3,200 of its distributors through the use of various punitive measures such as imposing fines and withdrawing supply from those distributors that refused to charge the minimum price. Similarly, Moutai was found to have included clauses which required distributors not to sell at a price below RMB 1519 per single bottle, RMB 1400 for bulk orders, and took punitive action against those distributors that did not implement these prices.
The activities of both Wuliangye and Moutai were found to be in direct violation of Article 14 of the AML which prohibits business operators from imposing a minimum resale price for commodities sold by third parties. According to the NDRC, the clauses had the effect of restricting competition leading to damaging effects for consumers and were also found to damage inter-brand competition, as the relative market power of the companies involved may have encouraged other competitors to follow suit and employ similar provisions within their agreements.
The decisions are notable for three reasons:
- this is the first time that an action for resale price maintenance has been brought by the NDRC under the AML;
- the total fines amount to RMB 449 million (€56 million) and represent the largest punishment imposed under the AML to date; and
- Moutai and Wuliangye are major state owned enterprises. It has previously been questioned as to how seriously Chinese enforcement agencies would take breaches of the AML by state owned companies. This is a warning to many state-owned operators in industries where competition is restricted.
The fines represent less than 1% of the companies’ turnover for the previous year, as compared with a maximum possible fine of 10% of turnover. Given the nature of the acts involved, the fines imposed by the regulator may seem extremely low. However, the NDRC has stated that the level of co-operation from the parties and the immediate action taken by both to remedy the infringing behaviour were to be taken into account when setting the level of the fines.
Whilst this case represents a milestone in China’s antitrust enforcement, the fines imposed are small compared to those imposed by other more established jurisdictions (this was also the case for the recent LCD cartel decision). The NDRC is willing to show some leniency to companies that cooperate in investigations and it will also take into account steps already taken by the companies to bring the anticompetitive behaviour to an end. However, companies should not assume that this will always be the case and should be mindful of the ability of the regulator to impose fines of up to 10% of a company’s worldwide turnover.
The Moutai/Wuliangye case will be a warning sign to both foreign and domestic business operators. It is clear that no company or business operator (state owned or otherwise) is above the rule of Chinese Competition Law.