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Focus: Chinese competition law sharpening its teeth

Price maintenance case shows courts, regulator getting more proactive
|Written By Julius Melnitzer

It has taken some five years since China’s modern competition regime took effect in August 2008, but by all appearances the country’s courts and regulator have only recently started to give the legislation some teeth.

The regulator’s willingness to take action against state-owned enterprises is a sign of its independence from the government, says Sandy Walker.

Indeed, it was exactly on the fifth anniversary of the anti-monopoly law’s enactment that a Chinese court rendered its first judgment in favour of a plaintiff in a vertical price-fixing case.

The August 2013 decision, which involved resale price maintenance, came less than a month after the National Development and Reform Commission, the authority responsible for price-related matters under the law, fined six baby-formula producers US$107 million for price-fixing and other anticompetitive practices.

“In the last two years, [the commission] has moved in quite aggressively against suppliers seeking to enforce [resale price maintenance] clauses,” says Marc Waha of Norton Rose Fulbright’s Hong Kong office.

Previously in February, and perhaps more significantly, the commission fined two of the best-known producers of premium liquor, both of them state-owned enterprises, US$78.7 million for various acts of resale price maintenance.

“The fact that [the commission] was willing to take action against [state-owned enterprises] speaks to the issue of the regulator’s independence from the government,” says Sandy Walker of Dentons Canada LLP’s Toronto office.

The judicial ruling on resale price maintenance came in Rainbow v. Johnson & Johnson from no less a force than the Shanghai Higher People’s Court, which with other regional high courts stands just below the Supreme Court in the country’s judicial hierarchy.

“The Shanghai high court is very influential because it is the largest regional court in China,” says Todd Liao of Dentons’ Shanghai office.

The case started with a complaint from Rainbow, a company that distributed medical equipment supplied by international conglomerate Johnson & Johnson.

The distribution agreement delineated a sales territory and set a contractual minimum resale price.

After working with Johnson & Johnson for 15 years, Rainbow began operation in an unauthorized sales territory selling goods at below the contractual minimum price. On discovering this, Johnson & Johnson terminated Rainbow’s distributorship.

Rainbow sued in the Shanghai No. 1 Intermediate People’s Court. It alleged that enforcement of the contractual minimum constituted resale price maintenance. The court found that Rainbow had failed to prove that the clause had restrained or excluded competition.

Rainbow appealed and won, garnering US$87,000 in damages.

The high court set out four factors that judges should take into account when assessing whether resale price maintenance clauses had restricted or eliminated competition: whether there was sufficient competition in the market; whether the defendant’s market position was strong; what the defendant’s motivation was in engaging in resale price maintenance; and what both the pro-competitive and anticompetitive effects of resale price maintenance were on competition in the market.

“This is the first time that a Chinese court has laid out relatively clear standards for determining the nature of vertical arrangements,” says Liao.

The “relevant market,” the court stated, was the one supplying medical suture products in mainland China. It found that high entry barriers characterized this market, which therefore lacked sufficient competition.

By contrast, Johnson & Johnson’s sales accounted for more than 20 per cent of total sales in the market. The fact that the company could sustain minimum resale pricing for some 15 years indicated it had the power to preclude price competition.

“The judgment is very detailed, includes a thorough discussion of facts and economics, and is clearly influenced by the different theories of the parties regarding price maintenance,” says Waha.

“It’s the kind of reasonable analysis that you could see in any respected jurisdiction and it indicates that the high court is a very competent tribunal.”

Ironically, Rainbow’s success will not likely stimulate a flood of similar lawsuits.

“In the first three or four years of the law’s existence, the government agencies were not very active, so we saw many Chinese companies turning to the courts with about 200 cases filed,” says Waha.

“But these days, a plaintiff would be much more interested in filing a complaint because the regulators are more active.”

The authorities, Waha adds, can be much more effective than the courts.

“To begin with, [the commission] has a wider jurisdiction because it can look at all sorts of exclusivities, like territorial exclusivities, while the courts’ jurisdiction is limited to price maintenance,” he says.

“The authorities also have investigative tools that the courts lack, as well as the power to enforce fines.”


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