The perils of resale price maintenance

Johnson & Johnson avoid liability

China's first major judicial decision concerning RPM was the May 18 2012 decision of the Shanghai First Intermediate Court in Beijing Rainbow Medical Equipment Technology & Trading vs. Johnson & Johnson (Shanghai) Medical Equipment and Johnson & Johnson (China) Medical Equipment. The plaintiff, a medical device distributor, alleged that the defendants violated the AML by setting minimum resale prices, monitoring distributor pricing and warning, suspending, or terminating noncompliant distributors. The plaintiff sought Rmb14,399,300 ($2.3 million) in damages plus litigation costs.

The court ruled for the defendants, emphasising that the AML defines monopoly agreements as “agreements, decisions or other concerted conducts that eliminate or restrict competition”. Consequently, “a finding of a monopoly agreement under Article 14 of the AML shall not be merely based on whether an agreement to fix or limit resale prices has been entered into between a business operator and its trade partner.” The court declined to treat RPM as illegal per se, instead requiring the plaintiff to prove actual restriction or elimination of competition. The Court found that “the evidence presented by the plaintiff is only a brief introduction of the suture products of the defendant on the internet which is not able to accurately reflect the market share of the products under the distribution contract in the relevant product market, much less prove the competition landscape of the relevant market, product supply or price change, etc. On the contrary, the evidence provided by the defendant indicates that there are multiple suppliers of like products. Therefore, there is insufficient basis to find a monopoly agreement in this case.”

This brief analysis dwells on inter-brand competition among rival suppliers of different suture brands, but never mentions harm to intra-brand competition – the principal harm of RPM. Although the decision is under appeal, the court's rejection of a per se approach and apparent focus on inter-brand competition favoured the defendants.

Wuliangye and Guizhou Maotai penalised

In contrast, the first enforcement actions targeting RPM by the National Development and Reform Commission (NDRC) imposed substantial penalties based on clear findings of harm to both intra-band and inter-brand competition. On February 22 2013, the Sichuan Development and Reform Commission fined Yibin Wuliangye Liquor Sales Rmb202 million for setting minimum resale prices and imposing vertical monopoly agreements on distributors. The official notice stated that Wuliangye had imposed minimum resale price requirements on over 3,200 independent distributors, and had ceased supplying one supermarket chain in 2011 and penalised 14 distributors for failure to comply in 2012. The court held that this conduct “restricted and eliminated competition and harmed consumers, finding both a restriction of intra-brand competition among Wuliangye's distributors and an indirect restriction of inter-brand competition as competitors followed Wuliangye.” On the same date, the Guizhou Price Bureau fined Guizhou Maotai Sales Rmb247 million for similar conduct.

Both companies' fines were reduced because they actively cooperated with the investigation. Both decisions went beyond the mere finding of RPM practices necessary to establish liability under a per se rule against RPM, explicitly finding that the distilleries' conduct harmed competition.

Key questions about the lawfulness of RPM in China remain unresolved. For example, these cases do not address the possibility of exempting RPM practices under Article 15 of the AML based on pro-competitive benefits, or the extent to which manufacturers might unilaterally (i.e., with no agreement) cease selling through distributors that deviate from recommended pricing. Nevertheless, with regulators and plaintiffs now actively targeting RPM in China, companies should ensure that distribution policies conform to the AML.