(By You Yunting) In the post, “The Legal Sense of the Punishment over the Vertical Monopoly of Mao Tai and Wu Liang Ye By NDRC,” which was posted several days ago, we described China’s first case on vertical pricing agreements (a vertical monopoly contract refers to a contract a monopolistic business signs with its business partner, which limits pricing or contains other monopolistic content). The application of Article 14 of the Anti Monopoly Law adopted by the court in that case was different from the application adopted by the China National Development and Reform Committee. We have found and studied the written judgment for that case, which is now in its second instance. Although according to the Civil Procedure Law, the judgment of the first instance has not yet come into effect due to the appeal, some of the main points of the decision are worth looking at. Therefore, we would like to share our opinions on it with our subscribers.
Summary of the judgment:
The plaintiff, Beijing Rui Bang Yong He Science and Trading Co., Ltd. (the “plaintiff”) used to be the dealer of Johnson & Johnson Medical (Shanghai) Ltd. and Johnson & Johnson Medical (China) Ltd. (the “defendants”). Cooperation between the parties lasted for nearly fifteen years, and the distribution contract was renewed each year. On January 2, 2008, the defendants entered into a distribution contract with the plaintiff that stipulated that the plaintiff could not sell the product below the price set by the defendants. On July 1, 2008, the defendants sent a letter to the plaintiff, saying that they would deduct the RMB 20,000 yuan deposit paid by the plaintiff due to the plaintiff’s unlicensed markdown sale. In the meantime, the defendants ordered plaintiff to stop its lower priced sales and stated that the plaintiff’s product supply would be cancelled and that the plaintiff would no longer be the defendant’s dealer. The plaintiff believed that the defendants’ actions constituted the “limit on the minimum sales price” prohibited in Article 14, Paragraph 2 of the Anti Monopoly Law because the defendants limited the plaintiff over the pricing in sales to the third parties in order to limit competition. This agreement damaged plaintiff’s interests; therefore, the defendant must make civil compensation. Based on these reasons, the plaintiff filed a lawsuit in the court and demanded the compensation for its losses.
The defendants raised the following defense: they did not conduct a monopoly banned by the Anti Monopoly Law. The pricing clauses concerned in the dispute were made before the implementation of the Anti Monopoly Law. Considering the legal principle that law is not retroactive, the pricing clauses cannot be regulated by the existing law. Furthermore, even if the Anti Monopoly Law could be applied, it still could not be applied to the agreement in the dispute. The product under the contract was subject to full competition in the market in China, so the defendant received no dominant status thereby. Therefore, it is unlikely to lead to any restriction or limit on competition due to the clauses agreed in the contract.
After the hearing, the Shanghai No.1 Intermediate People’s Court held that, according to Article 14 of Anti Monopoly Law, undertakings and their trading counterparts are prohibited from entering into the following monopolistic contracts:
(1) fixing the prices of commodities resold to a third party;
(2) 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.
According to Article 13, Paragraph 2, monopoly agreement means agreements, decisions, and other concerted conduct designed to eliminate or restrict competition. For this reason, decisions on the existence of monopoly agreements as regulated by Article 14 of the Anti Monopoly Law not only consider whether the undertakings have concluded a monopoly agreement with their trading counterparts that would fix or limit sales prices but also consider Article 13, Paragraph 2. This means it is necessary to further check whether the agreement excludes or limits competition.
In this case, the distribution contract between the plaintiff and the defendants contained clauses restricting the plaintiff to sell the product at a minimum price. Additionally, as noted in aforesaid analysis, the judgment on whether the clauses constituted a monopoly agreement demands further examination of whether they would lead to restriction or limit on competition. To go into more detail, the court must further consider the market options for the products agreed on in the contracts, the level of competition between the upstream and downstream markets, the influence of the clause over the supply amount and pricing. After considering all of these factors, the right judgment can be made. In this case, however, the judge confirmed that the evidence submitted by the plaintiff could not prove the above issues. For this reason, it could not find adequate evidence in the case to prove the issues. Second, the plaintiff could not make detailed specifications of the damages resulting from the clauses that could be judged by the Anti Monopoly Law. Damages resulting from the monopoly are mainly of damages from exclusion and restriction of competition. But, the damages claimed by the plaintiff in the case could all be claimed in normal contract disputes and had no connection with the pricing restriction clauses.
By Article 2 of the Several Regulations on Evidence in the Civil Procedure Law by the Supreme People’s Court, each party is liable for submitting evidence to demonstrate the facts of what it has claimed or disprove what the opposite party has argued. When no evidence or no adequate evidence is provided to support what the party has claimed, then the party must accept the negative consequence of the failure to demonstrate. Based on this article, the court refused all the claims made by the plaintiff.
The dispute is currently in its second instance, and we will continue our focus on the case.
Lawyer’s comments:
The judgment made by the Shanghai No.1 Intermediate People’s Court provides guidance and opinions for judicial organs to consider concerning the application of Article 14 of the Anti Monopoly law. But, it also has some conflicts, the most important of which is whether pricing restrictions are inherently illegal.
The monopoly agreements banned between the undertaking and their counterparts by Article 14 of the Anti Monopoly Law include:
(1) fixing the prices of commodities resold to a third party;
(2) 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.
Judging from the wording, it seems that once a pricing limitation has been agreed to, the existence of a monopoly can thereby be confirmed as violating the Anti Monopoly Law. But, we also have found opinions in real life where pricing limits by undertakings are not for monopolistic purposes. Some of them are to preserve the “top status” of the company’s brand, and the rest are for the pricing layout among different regions. To conclude that all of these agreements are monopolies would be damaging to freedom of commerce.
Although the Shanghai No.1 Intermediate People’s Court confirmed the above opinions: whether restrictions over the retail price constitute monopolies depends on whether they exclude or restrict competition. But, the writer believes that this violates the regulations of the Anti Monopoly Law for the reasons clearly stated in the post “Would the Pricing Monopoly of Mao Tai and Wu Liang Ye Influence the Normal Commercial Order?”:
“Once a pricing agreement is concluded and then implemented by a supplier and dealer, it could ultimately lead to a pricing cartel, as different dealers sell the same product at the same price to consumers. It could also lead to market segmentation among the competing manufacturers through the price fixing; when a dealer act for different factories’ product, the pricing monopoly agreement could the transfer to the restriction on competition to the manufacturers. In brief, if the manufacturer jointly works with the dealers, it will be unfair to consumers, who will undoubtedly pay more money to purchase the same product. At the same time, it will be extremely unfair to new competitors entering the market.”
For this reason, once NDRC makes its final decision to fine Mao Tai and Wu Liang Ye, it would be of no question to influence the second instance of the dispute involving Johnson & Johnson, even though the court is not a subsidiary of NDRC.
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You Yunting：86-21-52134918 youyunting@debund.com/yytbest@gmail.com
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