Could Milk Powder Manufacturers Win the Lawsuits Against NDRC’ s Vertical Monopoly Penalty?

(By You Yunting) According to Chinese National Development and Reform Commission’s (“NDRC”) announcement, recently NDRC carried out anti-monopoly investigations into milk powder manufacturers and imposed fines on multiple offenders. When combined this announcement with the second instance court’s decision on Beijing Rui Bang Co., Ltd that was released last week by Shanghai Higher People’s Court, we have seen a sharp difference between NDRC and Chinese courts’ understanding of Article 14 of the Anti Monopoly Law. Therefore, if the punished milk powder manufacturers file an administrative lawsuit against NDRC’s fines, the Chinese court may not necessarily agree with the commission’s decision nor hold the punishment to be legal.

According to the NDRC’s announcement, starting from March 2013, NDRC carried out an investigation of price-fixing for infant milk powder manufacturer. The investigated companies included Biostime, Mead Johnson, Dumex, Abbott, Friesland, Fonterra, Wyeth, Beingmate and Meiji Dairies based on a tip-off. The commission discovered that the accused milk powder manufacturers used various methods to maintain the resale prices for aftermarket dealers, including fixing a price for resale to a third party or restricting the minimum price for resale to a third party. What this meant was that the accused manufacturers achieved and implemented a monopoly agreement selling infant milk products, violating Article 14 of the Anti Monopoly Law. During the investigation, all milk manufacturers involved acknowledged that their action of controlling the resale price was in violation of the law, and could not demonstrate that such action may be exempted under Article 15 of the Anti Monopoly Law.

Pursuant to Article 45 of the Anti-Monopoly Law, the NDRC fined the six manufacturers a total of RMB 668.73 million yuan for their pricing monopoly. Afterwards, all punished companies put out a detailed rectification plan that has since been implemented step by step.

In author’s opinion, the NDRC imposed fines on the accused milk powder manufacturers pursuant to vertical monopoly provision in Article 14 of the Anti Monopoly Law. However, with regards to the understanding of Article 14 of the Anti Monopoly Law, we found there are two different understandings between NDRC and Chinese courts. According to the NDRC’s interpretation, a company is in violation of Article 14 of the Anti Monopoly Law once the company implemented policies to limit the lowest resale price.

On the other hand, as explained in the Shanghai Higher People’s Court’s second instance ruling released last week on Johnson Co., Ltd with regards to restricting the minimum resale prices to a third party, contract of limitation on aftermarket dealers’ resale prices itself is not necessarily illegal. Only when the contract of fixing minimum resale prices eliminate or restrict competition, would such action constitute as a violation of the Anti Monopoly Law. Furthermore, Shanghai Higher People’s Court demanded the plaintiff to demonstrate the following four factors: insufficient competition in the relevant market, 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 Shanghai higher court have taken into consideration.

From the above-mentioned four factors, the court’s holding may be summarized as follow: if different brands of products are competitive, a manufacturers’ conduct in limiting the minimum resale price to dealers does not damage consumers’ interests nor harm market order and competition. Only under the circumstances of weaken competition and low substitution rates can a manufacturer’s conduct such as the one described above, which weakens competition between internal brand dealers and subsequently damage consumers’ interests, would thus effectively constitute as a monopoly agreement.

Theoretically speaking, pursuant to Administrative Procedure Law, anti-monopoly punishment is an administrative penalty. If milk powder manufacturers are dissatisfied with the decision made by the authority for enforcement of the Anti-monopoly Law, it may file for administrative lawsuit according to law. However, as NDRC announced, “During the investigation, all milk manufacturers involved acknowledged that their arrangement in the pricing had violated the law and could not prove their arrangement applicable to the exemption conditions in Article 15 of the Anti Monopoly Law”, meaning that these companies may very likely accept this punishment and won’t file an administrative lawsuit.

In author’s opinion, when facing with this punishment, companies registered in Shanghai such as Abbott, Friso and Fonterra may still try to file an administrative lawsuit. Although the companies have already confessed to violating the law, the Shanghai courts have made it clear that contract of limitation on dealers’ resale prices itself is not necessarily considered as illegal, and would only constitute as vertical monopoly under circumstances of insufficient competition and low supply of relevant substitution in the relevant market. If the punishment was imposed by the local NDRC, just as the same as the administrative punishment ordered against Mao Tai Company and Wu Liang Ye Company, if the companies registered in Shanghai applied for an administrative lawsuit, the Shanghai courts may not necessarily support NDRC’s decision.

Lawyer Contacts

You Yunting86-21-52134918

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