China and Vertical Monopoly
Agreements
In 2013, China-based businesses paid attention to vertical monopoly agreements – especially those with
vertical monopoly agreements containing such clauses as resale price maintenance or minimum resale
pricing – after China’s National Development and Reform Commission (“NDRC”) fined several businesses
in the sector of both liquor and infant formula: Premium liquor producers Kweichow Moutai Co., Ltd
(“Maotai”) and Wuliangye Group Co., Ltd. (“Wuliangye”)1 were fined a total of RMB 449 million and six
international milk powder giants2 were fined a total of RMB 668 million.
Here we examine vertical monopoly agreements containing clauses on
resale price maintenance or minimum resale pricing (“RPM”) through
the lenses of:
•China’s Anti-Monopoly Law (“AML”) and its implementing rules
•China’s enforcement system, including actions of the law
enforcement agencies3 and the Courts’ verdicts; and
•Relevant EU competition law provisions that deal with vertical
agreements between suppliers and distributors.
1. Definition of Monopoly Agreement
1.1Under China’s AML, a Monopoly Agreement means “Agreements,
decisions or other concerted behaviours that eliminate or restrict
competition”.
1.1.1 Horizontal Monopoly Agreements: Article 13 of the AML
prohibits “monopoly agreements” between competitors
containing restrictions on, among others: (a) price fixing; (b)
output restrictions; (c) market sharing and customer
allocation; (d) agreements restricting the purchase/
development of new technologies, facilities or products; and
(e) boycotts.
1.1.2 Vertical Monopoly Agreements: Article 14 of AML prohibits
any “monopoly agreement” that fixes or sets minimum
resale prices, such as: (a) resale price maintenance; (b)
minimum resale pricing; and (c) a catch-all clause: any type
of agreements which have anticompetitive effects
1.2Industry associations are prohibited from imposing rules that
restrict competition or encourage their members to enter into
monopoly agreements.
2. Legal Provisions on RPM
2.1RPM is expressly prohibited under China’s AML.
Also, Article 8 of Provisions against Price Fixing published by NDRC
(effective 1 February 2011) provides that agreements containing
RPM are a prohibited category of vertical monopoly agreement.
2.2Exemptions
2.2.1To exempt horizontal and vertical monopoly agreements
from the AML’s prohibition the parties must prove that:
(a)Precompetitive benefits of the monopoly agreement
outweigh the anticompetitive benefits listed in
paragraph one of Article 15 of China’s AML; and
(b)Monopoly agreement will not substantially restrict
competition in the relevant market and that consumers
will be able to share the benefits created by the monopoly
agreements (Paragraph 2, Article 15).
2.2.2The exemptions are applicable to the monopoly agreements
only if Article 15’s conditions are met.
2.2.3As China’s competition regime offers no block or individual
exemptions, to enjoy an Article 15 exemption, the parties
must bear the burden of proof4.
2.3 RPM under China’s AML
From the context of China’s AML, it in theory relies on the principle
of ‘illegal per se’. This is because:
2.3.1Chinese competition law draws heavily on EU Competition
Law. Unless extreme circumstances exist, RPM on the
“hard-core list” is regarded as prohibited per se under EU
Competition Law and cannot benefit from the EU Vertical
Agreements Block Exemption.
1
Sichuan DRC disclosed that Wuliangye was imposed a fine of 1% the turnover in the previous fiscal year because of its active cooperation and immediate rectification measures.
2
Biostime, Mead Johnson, Dumex (Danone), Abbott, Friesl and Campina and upstream supplier Fonterra. Three milk powder companies including Wyeth (Nestle), Beingmate and Meiji Diary
were completely exempted.
In China, National Development and Reform Commission is in charge of price-related monopoly conducts, whilst Sate Administration of Industry and Commerce is charge of other monopoly
conducts (except for price-related monopoly conducts). In this article, we would like to focus on the law enforcement by NDRC accordingly.
This differs from EU Competition Law, from which Chinese competition law draws heavily, which exempts, under the EU Vertical Agreements Block Exemption, certain types of vertical
restrictions from the scope of EU Competition Law where the market shares of the supplier and buyer are both below 30% (but this should be read in connection with Item 2.3.1 below).
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China and Vertical Monopoly
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2.3.2Although Article 15 of the AML offers an exemption by
providing a list of precompetitive justifications, the
justification list is different from the principle of rule of
reason. And it is reported in practice that no parties have
ever been granted an Article 15 exemption.
2.4Leniency Programme
There is a leniency programme that parties can enjoy for both
vertical and horizontal monopoly agreements. The terms of this
programme are set out in:
2.4.1 Paragraph 2 of Article 46 of China’s AML
2.4.2Article 13 of Provisions on the Administrative Procedures for
Law Enforcement against Price Fixing (NDRC, effective 1
February 2011); and
2.4.3Article 11 of Provisions on the Prohibition of Monopoly
Agreements for Administration for the Industry and
Commerce (State Administration for Industry and
Commerce, effective 1 February 2011).
2.5Settlement
Article 45 of China’s AML provides a settlement mechanism. If a
company under investigation commits to concrete measures to
eliminate the consequences of the alleged monopolistic practices,
upon application the competition law enforcement agencies may
decide to suspend the investigation.
3. Decisional Practices on Vertical Agreements
Since China’s AML took effect, opinions about the legality of
vertical monopoly agreements have been different from opinions
on horizontal monopoly agreements i.e., whether RPM is illegal
per se or rule of reason should be conducted in advance.
Accordingly, decisional practice seems to differ on vertical cases.
3.1Law Enforcement Practices – National Development and Reform
Commission
The National Development and Reform Commission (i.e., NDRC)
and its local counterparts are in charge of price-related monopoly
agreements and abuse of dominance. The State Administration for
Industry and Commerce (“SAIC”) and its local counterparts are
responsible for all other monopoly agreements and non-price
related abuse of dominance.
China has no authority that examines, approves, and grants
approval to “monopoly agreements”. The parties and their legal
advisors must make their own decisions on whether “monopoly
agreements” are “exempted” under Article 15 of China’s AML. But
if China’s authorities investigate and are not convinced that an
executed agreement is exempted under Article 15, they might fine
the parties between 1% and 10% of the infringed parties’
annual turnover.
Despite the fact that there is no express vertical guideline,
compared to the rule of reason adopted in respect of vertical
agreements by China’s people’s Courts, the NDRC’s approach
seems to be inconsistent in practice.
3.1.1 Maotai and Wulianye cases
The analysis of the NDRC’s public announcement, seems to
show that the NDRC has adopted the rule of reason
approach as it analyzed a bit anticompetitive effect arising
from those distribution agreements containing RPM clauses
between the liquor suppliers and distributors.
3.1.2 International infant formula producers cases
(a)The NDRC’s publicly available press releases show that
the NDRC did not conduct a rule of reason analysis. It
imposed fines on infant formula producers that might
have a small market share.
(b)The NDRC’s application of the leniency programme for
milk powder companies’ RPM practices reportedly
drew criticism. One important reason is that even
though leniency is not prohibited in RPM cases under
China’s AML, it is not designed for these cases because
it is much easier to collect evidence in vertical
agreement cases than in horizontal agreement cases.
Therefore, it seems that NDRC has taken an inconsistent approach
towards vertical agreements containing RPM. Furthermore, its
great discretion to investigate and impose fines on parties to
vertical agreements seems to exist due to China lacking detailed
guidelines on vertical agreements.
3.2Private Litigation
In addition to the NDRC’s and SAIC’s administrative law
enforcement against monopoly agreements, a market participant
can also claim damages directly from the Peoples’ Court, or after
NDRC/SAIC administrative decisions are made.
Interpreting the AML, the People’s Supreme Court published
Relevant Issues Concerning the Application of Law in Trial of Civil
Monopoly Dispute Cases (“Judicial Interpretation”), Article 7 of
which shifts the burden of proof to the defendant if the monopoly
agreement contains a clause restricted under Article 13 of AML.
This means that before a defendant can prove that an agreement
falls under Article 15 of the AML, it must overcome the
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China and Vertical Monopoly
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presumption that a horizontal monopoly agreement is illegal.
There is no express provision to this effect covering vertical
agreements under the Judicial Interpretation though.
The case of Johnson & Johnson v Beijing Rainbow Medical
Equipment dealt with this issue and was the first anti-monopoly
lawsuit in which a plaintiff won the case. On 1 August 2013, the
Shanghai Higher People’s Court overruled the verdict by Shanghai
No.1 Intermediate People’s Court on the distribution agreement
containing a RPM clause.
In analysing the agreement between Johnson & Johnson and its
distributor, Beijing Rainbow Medical Equipment Technology &
Trading Co. Ltd (“Rainbow”), both Shanghai Higher People’s Court
and Shanghai No.1 Intermediate People’s Court adopted and used
the rule of reason.
3.2.1Shanghai No.1 Intermediate People’s Court concluded that
an agreement containing RPM was not necessarily a vertical
monopoly agreement unless the agreement restricted or
eliminated competition.
(a)To determine if the distribution agreement is a
monopoly agreement or not, consider whether the
RPM restricts or eliminates competition.
(b)Rainbow bore the burden of proof, and was unable to
meet the evidential requirements on market share of
the product, level of competition, supply, and price
changes in the relevant market.
3.2.2Shanghai Higher People’s Court also thought that a vertical
agreement was not in essence a monopoly agreement
unless it restricted or eliminated competition.
(a)In vertical agreement cases, the burden of proof is borne
by the plaintiff, unlike in horizontal agreements cases.
Therefore, Rainbow bore the burden of proof on the
restriction or elimination of competition by the
concerned distribution agreement.
(b)The scope of compensation arising out of the
concerned distribution agreement was limited to the
amount by which profit fell as a result of reduced
product turnover.
By adopting the rule of reason approach, both Shanghai No.1
Intermediate People’s Court and Shanghai Higher People’s Court
opined that the vertical agreement in Johnson & Johnson v Beijing
Rainbow Medical Equipment was not illegal per se. It was therefore
legal unless the Plaintiff could show that the agreement restricted
or eliminated competition.
Rainbow lost the case at first instance because it could not
produce evidence that the distribution agreement restricted or
eliminated competition. But on appeal, Rainbow produced
evidence that the Resale Pricing Clauses restricted or eliminated
competition and it won the case.
3.2.3 Clarifications still to be made?
Though Johnson & Johnson v Beijing Rainbow Medical
Equipment case is a “landmark” case in the interpretation of
the AML in respect of vertical agreements, there are
ambiguities that must be cleared. Here are a few of them:
(a)If the distribution agreement containing RPM is a
vertical monopoly agreement between Rainbow and
Johnson & Johnson, why was the verdict in favour of
Rainbow, a party to the distribution agreement?
(b)By adopting the rule of reason approach, the appellate
Court focused on Johnson & Johnson’s market power
(among others). Would the verdict by the appeal Court
be different if Johnson & Johnson did not have “market
power”? Note also that the AML does not require a party
to have “market power” to be caught by the vertical
agreement framework.
(c)In Johnson & Johnson v Beijing Rainbow Medical
Equipment, one of the reasons that Rainbow won —
reportedly – was because as the distributor held a weaker
position than the supplier, Johnson & Johnson. If so, would
the verdict have been different for a different distribution
agreement, where the distributor supermarket had a
much stronger position?
(d)It seems that the NDRC has adopted varied approaches
towards vertical agreements containing RPM. Moreover,
China’s law is codified and precedents are not legally
binding on other Courts. What if the NDRC is the
defendant before the Court in relation to its decisions in
relation to vertical cases?
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China and Vertical Monopoly
Agreements
4.Conclusions
4.1Given China’s lack of guidelines and varied decisional practices in
relation to vertical agreements, businesses in China would benefit
from a clear explanation of the standards that apply to vertical
agreements and in particular to the vertical agreements containing
RPM. Here are the questions that we would pose.
4.1.1Are vertical agreements that contain severe restrictions
(such as RPM) illegal per se, unless extreme conditions are
present?
4.1.2Where both supplier and distributor hold below a certain
percentage of market share, are vertical agreements then
presumed to be legal?
4.1.3Must the rule of reason approach be used for all vertical
agreements (with or without containing RPM) except for the
two situations in the questions above?
4.2So far, it is said that Article 15 of China’s AML has not been
successfully applied to monopoly agreements. It would be useful
for parties to monopoly agreements to have guidelines on the
implementation of Article 15 of China’s AML, or a block exemption
guideline or safe harbour system.
4.3The term “turnover” is an important concept under China’s
competition regime. For fines that relate to monopoly agreements
though, it is unclear how to calculate the turnover of the parties to a
monopoly agreement5. It should be different from the concept of
“turnover” for merger control filing transactions.
4.4Considering the huge potential fines by the NDRC and other law
enforcement agencies, the parties should make efforts to ensure
that the distribution agreements between them do not contain
restrictions such as RPM.
4.4.1We advise that companies overhaul existing distribution
agreements to avoid RPM wording. To be safe, before China
publishes its assessment standards on vertical agreements
– and especially on RPM – we advise clients to eliminate all
potentials for the authorities to conclude that a vertical
agreement directly or indirectly leads to resale price
maintenance or minimum resale pricing.
4.4.2It is necessary to prepare compliance handbooks and Dawn
Raid manuals. And it is equally important to conduct regular
training on how to be familiar with the compliance handbook,
and to be prepared for the appropriate actions before, during,
and after a Dawn Raid.
4.5Looking at the international infant formula producer cases, three
companies enjoyed the leniency programme and received no
penalties from the NDRC. But, there is no transparency on how to
implement this mechanism and how to determine who and how
many will enjoy the leniency programme under China’s AML. We
therefore advise that AML’s implementing rules should be
published so that parties under the monopoly agreements
(whether horizontal or vertical) can benefit from this
leniency programme.
For more information, please contact
Stucken Dr. Bernd-Uwe
Partner
Corporate
Shanghai
T: +86 21 6138 2521
M: +86 138 0183 7601
E: [email protected]
5
Bao Ai Ping
Legal Director
Corporate
Beijing
T: +86 10 8519 0122
M: +86 138 0 127 6218
E: [email protected]
In Maotai case, it is said the turnover was calculated based on the company involved in the vertical agreement.
This note does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered.
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