From the archive. This article first appeared on China Law Insider in January 2018. Enforcement responsibilities formerly held by the NDRC now sit with the State Administration for Market Regulation (SAMR); the underlying analysis under the Anti-Monopoly Law remains instructive.
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 issues, with the exception of Hong Kong and Macau.
As is the nature of the Chinese legal system, there are significant differences between the legislation and what is applied in practice. To muddy the waters further, the courts and the regulator, the National Development and Reform Commission (NDRC), take different approaches to enforcing decisions on resale price maintenance. From these differing attitudes it is clear there is still no settled method.
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." 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 prohibited vertical monopoly agreements, arrangements where businesses have control over their trading counterparts, which address the circumstances in which resale price maintenance occurs in China. More specifically, Article 14(2), prohibiting restrictions that set minimum resale prices to third parties, has lately come into question with several of our clients. Typically a clause in a standard agreement with a third party does exactly what Article 14(2) prohibits, accompanied by a threat to terminate the contract if the third party sets a price lower than the business wanted. Despite such a clause appearing to be in direct conflict with the AML, the difficulty lies in determining the legal recourse regarding the enforcement or validity of the clause.
Enforcement: the courts and the NDRC diverge
The courts have tended to focus on the "eliminating or restricting competition" element of the monopoly agreement definition. The burden of proof is on the plaintiff to demonstrate that the business conducting resale price maintenance has a clear and negative impact on competition in the market. In the landmark case of Rainbow v. Johnson & Johnson in 2013, the Shanghai Higher People's Court ruled in favour of Rainbow, a distributor of Johnson & Johnson, due to Johnson & Johnson's strong market influence. Restrictions placed in its medical-device distribution agreements were found to restrict competition in that market and to constitute a monopoly agreement. The court showed its teeth: Johnson & Johnson was ordered to pay RMB 530,000 in compensation for Rainbow's economic losses.
The NDRC's approach has been far more proactive in imposing restrictions and fines. Across a number of decisions, the NDRC has been much less discriminating than the courts about who it finds in violation of Article 14. In 2016, the NDRC fined the medical technology company Medtronic over RMB 118 million for its internal resale price maintenance, while disregarding the company's argument that its agreements did not restrict or eliminate competition.
The courts demand proof that competition was restricted; the regulator fines first and asks later.
Exemptions: an unlikely outcome
Leniency exemptions exist under Article 15 of the AML, but they apply only in select circumstances, such as benefiting 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 a regular basis will almost never qualify. 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 regulator.
Resale price maintenance in China is an issue too important to gloss over when structuring agreements with distributors and third parties. Given the hefty fines and the conflicting attitudes of the courts and the regulator, seeking an experienced and qualified Chinese legal practitioner to guide you will always be your best option.