The National Development and Reform Commission ("NDRC") has once again shown that it is an antitrust enforcer to be reckoned with. Less than two months after it imposed record fines on several foreign LCD makers, two of NDRC's local offices broke new ground by imposing significant sanctions upon two leading Chinese traditional alcoholic beverage producers for their resale price maintenance ("RPM") practices. On 22 February 2013, NDRC's Guizhou and Sichuan offices announced that they had imposed a fine of RMB 247 million (around USD 40 million) and RMB 202 million (approximately USD 32 million) on famous Chinese white liquor ('baijiu') makers Maotai and Wuliangye, respectively.
Yet again, the combined fines imposed on the liquor companies set a new record for antitrust violations in China. Another significant feature of this case is that the two offenders are 'national champions' in the 'baijiu' industry.
Unlike in the LCD panels case which was handled at the national level, the investigation into the RPM offenses were driven by the Guizhou Price Bureau and the Sichuan Development and Reform Commission ("Sichuan DRC").
The Guizhou Price Bureau published a very short announcement which contains only one paragraph. The announcement states that, from 2012 onwards, Maotai had agreements with its distributors which set minimum resale prices for Maotai liquor products and penalized distributors selling below those prices. The announcement barely contains any legal reasoning. It simply notes that Maotai's RPM arrangement excluded and restricted competition in the marketplace and harmed the interests of consumers, but does not explain how such a finding was reached or the evidence on which the finding was based.
By contrast, the press release published by the Sichuan DRC contains more in the way of detail. It provides some underlying facts relating to Wuliangye's unlawful acts and analyses the purported anti-competitive effects of the RPM agreements between Wuliangye and its distributors.
The press release mentions that Wuliangye entered into RPM agreements with over 3,200 distributors. In order to monitor the implementation of the agreements, Wuliangye punished disobedient distributors by curtailing its business dealings with them and reducing the level of financial incentives such as rebates given to 'non-compliant' distributors. For instance, in 2011, Wuliangye stopped supplying to a large supermarket chain store in Sichuan, forcing the store to commit to not selling Wuliangye products at below the agreed minimum price. As another example, the Sichuan DRC found that in 2012 the company penalized 14 distributors nationwide for their "low sale prices."
The press release further discusses the alleged anti-competitive effects of Wuliangye's RPM policy. According to the press release, the effects were threefold:
- Wuliangye's RPM policy eliminates intra-brand price competition (competition between distributors of the same brand).
- The policy also restricts inter-brand competition (competition between different white liquor brands). In that regard, the Sichuan DRC held that Wuliangye's conduct had set a 'bad example' for the entire white liquor industry, and – possibly referring to Maotai – other white liquor brands had indeed adopted similar policies.
- The press release found that consumer interests were harmed. It pointed out that consumer choice was severely affected particularly because of Wuliangye's strong market position in the white liquor market and the low degree of substitutability of Wuliangye products.
The decisions against Maotai and Wuliangye are significant because they set a new record for antitrust fines in China. Nonetheless, due to the lack of detailed reasoning, the press releases do not provide much helpful guidance for the business community when assessing what contributes illegal RPM going forward.
In short, the benchmark for where RPM practices cross over the line is left unclear in the two decisions. Although the press release in the Wuliangye case mentions the company's "strong market position" and "important position" in the market, it does not use the word "dominance" or point to a specific market share level as reference. In fact, the press release does not even explicitly state that the supplier's market position was a key factor in assessing the legality of the RPM arrangements. This contrasts with the judgment by the Shanghai intermediate court in the Johnson & Johnson case in 2012 which did put forward a few benchmarks, namely: (1) the supplier's market share, (2) the extent of upstream and downstream competition and (3) the impact of the RPM practices on the quantity and price of the products in the market.
The Johnson & Johnson case is on appeal now, and market participants are looking to the final outcome for further guidance. In the meantime, companies may wish to 'play safe' and take a hard look at their distribution agreements and the context of their distribution structure.