(By You Yunting) Yesterday, we posted on our blog an article titled, Why Did the Court Not Rule in Accordance With Article 14 of the Anti Monopoly Law in order to introduce the first legal issue in Johnson’s limitation on resale prices litigation. Today, we will continue our introduction regarding why the Shanghai court determined that Johnson’s limitation on resale prices constituted a monopoly agreement, as well as commentary on an extract from court’s decision.
In this post, the “appellant” and “plaintiff” both refer to the “Beijing Rui Bang Yong He Science and Trading Co., Ltd” while “appellee” and “defendant” refers to “Johnson & Johnson Medical Ltd”.
Beijing Rui Bang Yong He Science and Trading Co., Ltd’s opinion:
Johnson & Johnson Medical Ltd’s (“Johnson”) conduct in limiting resale prices, effective aiming to eliminate competition, has actually negatively influenced competition in the market. Johnson not only directly restricted the appellant’s resale prices to a third party in its distribution contract, but also enforced on-the-spot penalties to those who didn’t abide by the contractual restrictions. Such conduct clearly demonstrated Johnson’s purpose in eliminating the competition. In addition, such conduct is not entirely aimed at promoting market competition, including new product promotion and technology advances. On the contrary, Johnson’s conduct in limiting resale prices distorted competition mechanisms in the market. Its conduct restricted not only internal competition but also external competition, and caused products in the Beijing area to continue to be sold at an artificially higher price, thus injuring the consumers’ interests.
Johnson & Johnson Medical Ltd’s opinion：
This accused agreement on the limitation of resale prices in fact improves competition between internal dealers rather than eliminating or restricting competition to those internal parties. The accused products in Mainland China are readily available and priced competitively, not only among competitors’ brands of medical suture products, but also by participating in market competition with new brands and their dealers. Since hospitals as institutions have strong influence as buyers, and have the power of final decision on whether to purchase different brand products and at what prices, price terms set by Johnson do not impact that of other brands; furthermore, any attempt to actually do so would be quite difficult to execute due to fierce competition. On the other hand, contracts on the limitation of resale prices entered into by Johnson and its dealers simply aims to promote non-price competition within Johnson’s brand among different dealers, meaning they are encouraged to compete for business based on other aspects, such as product promotion, after-sales service, brand sustainability, integrity compliance, etc.
Courts’ holding:
With regard to the court’s understanding of the limitation of resale prices, sufficient competition in relevant markets, the defendant’s leading position in market, the original intention implemented by the defendant for its limitation of resale prices, and the actual competitive consequences of such restrictions are four key factors we have taken into consideration, as well as a basic method for the court’s analysis upon the limitation of resale prices. In terms of the facts in this case, our analysis is as follows:
(i). Insufficient competition in relevant markets：
(1) The medical suture products’ market lacked sufficient price competition driven by buyers.
(2) Great dependence upon this brand’s products decreased price competition raised by sellers.
(3) The medical suture products’ market has a relatively high entry barrier, followed by market access, brand dependence and consumer relationships.
(4) Johnson has had strong pricing power in the medical suture products’ market for a long term. Johnson could ensure such products’ prices remained unchanged for 15 years, evidence that the medical suture products’ market lacked competition.
(ii). Johnson has a leading position in the relevant markets. Those who implement the limitation of resale prices must as a matter of course have a strong presence in market’s competition, a foundation for identifying the limitation of resale prices by eliminating or restricting competition. The following undertakings prove Johnson’s strong presence in the relevant markets:
(1) Johnson products’ share leads the market.
(2) Johnson’s pricing power corresponded to its market position.
(3) Johnson’s medical suture products have a strong brand influence.
(4) Johnson has strong control over its dealers.
(iii). Original intention implemented by defendant for limiting resale prices is to avoid price competition.
(iv). Actual competitive consequence of such agreement upon limitation of resale price wars to eliminate or restrict competition, rather than promote competition.
(1) Such contracts as those presented in this case clearly eliminate or restrict competition, including excluding internal brand competition, maintaining high prices over a long term, evading extrabrand price competition, reducing price competition in the relevant market, limiting dealers’ pricing, and squashing productive dealers.
(2) Such contracts as those in this case did not obviously promote competition. Limitation of resale prices neither improves product quality and safety nor improves dealers’ services. Furthermore, it doesn’t necessarily prove the necessity of promoting new brand products in the relevant markets or the effects of other promotional competition.
(3) Such contracts pertaining to monopoly agreements are regulated by the Anti Monopoly Law,
In conclusion, this court determines that the term of limitation of resale prices in the distribution contract constitutes a monopoly agreement as prohibited by the Anti Monopoly Law, and Johnson’s conduct in making its limitation contract and punishing the appellant is illegal in China.
Lawyers’ Comments:
The theoretical basis behind this court’s decision can be summarized as the following: if different brands of products are competitive, a manufacturers’ conduct in limiting the minimum resale price to dealers doesn’t damage consumers’ interests and harm market order and competition. Only under the circumstances of less competition and low substitution rates can a manufacturer’s conduct like that described above weaken competition between internal brand dealers and subsequently damage consumers’ interests, thus effectively constituting a monopoly agreement.
The first two bases behind the Shanghai Higher People’s Court’s review are the embodiment of this theoretical basis. That means, under the circumstances of insufficient competition and Johnson’s leading presence in the relevant markets, if Johnson still enforced price limitations on dealers, such conduct performed by Johnson would constitute a vertical monopoly agreement prohibited by Article 14 of the Anti Monopoly Law.
At this point, the exemption in the application of Article 15 of the Anti Monopoly Lawshall be taken into consideration. In regard to this exemption, the analysis for the last two behind the higher court’s decision is of great significance. Examination upon the original intention implemented by the defendant for limiting resale prices is actually to review whether this limitation applies to Paragraph 1, Article 15. Similarly, examination of the actual consequences for eliminating or restricting competition is to review whether this limitation applies to Paragraph 2, Article 15.
As for this theoretical basis, I still keep my view. I believe, pursuant to Article 14 of the Anti Monopoly Law, once the limitation of resale price to dealers not applied to the exemptions in Article 15 has violated the laws, there is no need to demonstrate the first two legal issues made by the higher court. In fact, legal issues for the first two bases behind the higher court’s decision should be those found in Paragraph 2, Article 13 of the Anti Monopoly Law, but this is not always consistent. That means those two bases lack sufficient legal grounds.
Meanwhile, if demonstrations of a vertical monopoly in the Anti Monopoly Law are too difficult to find and its completion requires high investigation charges and attorney’s fees, 530,000 Yuan compensation for appellant’s loss behind the higher court’s decision obviously appeared to be too low. If this compensation were routine, no one would file an anti-monopoly lawsuit because facing such loss may prove to be too great.
Lawyer Contacts
You Yunting：86-21-52134918 youyunting@debund.com/yytbest@gmail.com
Disclaimer of Bridge IP Law Commentary
Relevant provisions of the Anti Monopoly Law are listed below for reference:
Ø Paragraph 2, Article 13: For the purposes of this Law, monopoly agreements include agreements, decisions and other concerted conducts designed to eliminate or restrict competition.
Ø Article 14: Undertakings are prohibited from concluding the following monopoly agreements with their trading counterparts：
(1) on fixing the prices of commodities resold to a third party；
(2) on restricting the lowest prices for commodities resold to a third party； and
(3) Other monopoly agreements confirmed as such by the authority for enforcement of the Anti-monopoly Law under the State Council.
Ø Paragraph 1, Article 15: The provisions of Article 13 and 14 of this Law shall not be applicable to the agreements between undertakings which they can prove to be concluded for one of the following purposes：
(1) improving technologies, or engaging in research and development of new products； or
(2) improving product quality, reducing cost, and enhancing efficiency, unifying specifications and standards of products, or implementing specialized division of production；
(3) increasing the efficiency and competitiveness of small and medium-sized undertakings；
(4) serving public interests in energy conservation, environmental protection and disaster relief；
(5) mitigating sharp decrease in sales volumes or obvious overproduction caused by economic depression；
(6) safeguarding legitimate interests in foreign trade and in economic cooperation with foreign counterparts； or
(7) other purposes as prescribed by law or the State Council.
Ø Paragraph 2, Article 15 In the cases as specified in Subparagraphs （1） through （5） of the preceding paragraph, where the provisions of Articles 13 and 14 of this Law are not applicable, the undertakings shall, in addition, prove that the agreements reached will not substantially restrict competition in the relevant market and that they can enable the consumers to share the benefits derived therefrom.
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