By Adding Safe Harbor in Anti-Monopoly Law, Do Small and Medium Sized Businesses Regain the Right to Set Resale Prices?

(By You YuntingCan brand holders cap wholesale and retail prices of their products? Many people believe brand holders have the discretion to set prices. However, the Anti-Monopoly Law 2007 imposes such strict restrictions that almost ban this practice, causing controversies. The safe harbor clauses added to the new Anti-Monopoly Law adopted by the Standing Committee of the National Congress conditionally allows small and medium sized businesses with small market shares to cap resale prices. Now let’s look at where the safe harbor comes from.

Article 14 of the Anti-Monopoly Law 2007 prohikits the seller and the purchaser set a fixed resale price or a lower limit on the resale price or arefound to have made a monopoly agreement by the anti-monopoly law enforcement body of thestate council (“resale price limits”). The key issue in dispute is whether an economic analysis cof how resale price limits eliminate or restrict competition is needed for administrative authoriities to enforce law and courts to make decisions. The National Development and Reform Commission and the State Administration for Market Regulation believe all resale price limits as illegal regardless of whether they eliminate or restrict competition. Courts hold that resale price limits is a legal practice within the ambit of business autonomy unless it eliminates or restricts competition.

This disparity results in a great difference in howa case should be decided. Here is an example. A toothpaste manufacturer and a supermarket enter into a contract stipulating that the supermarket should sell the toothpaste at the unit price of at least 5 RMB and a selling price less than 5 RMB would constitute a breach of contract, in which case the toothpaste manufacturer is entitled to stop delivering goods to the supermarket. Decisions made by a court and an administration for market regulation concerning the clauses may be different.

I.Administrative punishment

The administration for market regulation of theplace of the supermarket may decide to give the toothpaste manufacturer administrative punishment by finding that the clauses concerning resale price limits violate the Anti-Monopoly Law and should be deemed as a monopoly agreement to set a fixed resale price or a lower limit on a resale price. In this case the toothpaste manufacturer could be ordered to immediately stop illegal activities and pay a penalty of less than 500,000 RMB. In practice, in most cases administrative punishment is given without considering whether resale price limits could eliminate or restrict competition.

II. Civil proceedings

The supermarket may bring an action by claimirg that the clauses concerning resale price limits under the contract violate the Anti-Monopoly Law. The court will ask the supermarket to present evidence and analyze how the clauses eliminate or restrict competition. Specifically, the supermarket needs to prove and analyze the full competition in the related market, the toothpaste manufacturer’s strong market position, its motive for resale price limits and the effect of resale price limits on competition. Otherwise, the supermarket’s claims would be rejected.

Based on my experience, in case of the toothpaste market with full competition, the court is very likely to find resale price limits could not eliminate or restrict competition. Reasons are simple. The market adjusts itself. If a business imposesresale price limits, its rivals may lower prices to increase their market shares. When the marketshare decreases, the business will have to lift the resale price limits. Therefore, the supermarket is likely to lose the anti-monopoly action. In addition, to get fully prepared for the action,it needs to do market researches and get an economic analysis by an economist, which should cost at least millions of money.

III. Administrative proceedings

If the toothpaste manufacturer rejects the pulnishment given by the administration for market regulation and brings an administrative action by claiming that the administrative punishment is illegal, how will the court handle such a case? A fish feed supplier in Hainan Province actually did so. After being punished for resale price limits, they claimed that the administrative authority made the decision without giving reasons forthe resale price limits eliminating or restricting competition and therefore the punishment was wrongful. The case was submitted to the Supreme People’s Court and ended with a compromise judgement.

On one hand, the Supreme People’s Court affirmed that the anti-monopoly law enforcement authority could find based on investigation ressults clauses concerning resale price limits as a monopoly agreement with no need to present proof of the agreement “eliminating or restricting competition”. The reasons are that requiring anti-monopoly law enforcement authorities to perform comprehensive investigation and complicated economic analyzes of vertical monopoly agreements to decide their effect on competitioln would cause sharp increase in law enforcement costs and decrease of law enforcement efficiency, failing to meet needs for anti-monopoly law enforcement at present in China.

On the other hand, in the judgement the Supreme People’s Court affirmed the court’s decision made on the basis of investigating whether the monopoly agreement eliminates or restricts competition. The reasons are that in a civil action the plaintiff’s claims are supported on the premise of damages suffered by the plaintiff resulting from monopolistic conducts of the business, a direct sign of the monopolistic conducts eliminating or restricting competition.

At the end of the judgment, the supreme court admitted that there were obvious differences between the criteria for anti-monopoly law enforcement authorities to decide whether a vertical monopoly agreement is legal in administrative proceedings and the criteria to decide a vertical monopoly agreement in civil proceedings. I wrote an article on why the two sets of criteria existed at the same time. I guessed that if in anti-monopoly civil actions, no analysis of whether monopolistic conducts eliminate or restrict competition is required, the number of cases brought to courts would surge.

You can see from the above that administrative and legal authorities now use different sets of criteria to decide whether resale price limits are illegal. The main reason, I think, is that the right to set prices of business brands is part of thebusiness autonomy. Considering all resale price limits as monopolistic conducts does not comply with principles of the market economy. The amendment of the Anti-Monopoly Law is intended to return the right to set resale prices to small and medium sized businesses in part.

The new Anti-Monopoly Law adds that resale price limits are allowed if the business can prove they do not eliminate or restrict competition or the business has a smaller share in the related market than the standard provided by and meets other conditions as required by the anti-monopoly law enforcement body of the State Council.

Related to the above, the State Administrationfor Market Regulation recently promulgated the Regulations of Ban on Monopoly Agreements(Exposure), in which Article 15 a provision on resale price limits, stating that agreements betvveen a business and the other party are allowed if the business can prove (1) each of the parties has less than 15% share in the related market unless otherwise stipulated by the anti-monopoly law enforcement body of the State Council.

When the Regulations of Ban on Monopoly Agreements (Exposure) is finalized, businesses with a market share of less than 15% may partially regain the right to set prices. The related market under the Anti-Monopoly Law is difficult to identify. Take Moutai Liquor for example. The related market may include alcoholic drinks, strong alcolholic drinks and upmarket strong alcoholic drinks, which are listed according to the market size. Strong alcoholic drinks and upmarket strong alcoholic drinks can be further segmented by alcohol content and price respectively. Geographically, it can be divided into the world, Asia-Pacific, East Asia, Greater China (including Hong Kong, Macao and Taiwan) and Chinese Mainland. The mainland market may be segmented into provinces, regions, areas or even counties. A slight change in segmentation rules will significantly affect the related product and regional market. Nevertheless, it is certain that for small and medium sized businesses lawmakers are relaxing restrictions on resale price limits.

Finally, the restrictions on resale price limits under the old Anti-Monopoly Law are intended to protect trading counterparts, especially consumers’ legitimate rights and interest. Although certain restrictions are lifted for small and medium sized businesses, I suggest businesses with the intention to take the chance to gain unreasonable profits by unreasonably limiting resale prices for purposes of eliminating or restrictingg competition reading new provisions on higher penalties for monopolistic conducts, responsibilities of heads of businesses in violation of law and criminal responsibilities for monopolistic conducts in the amended Anti-Monopoly Law.


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