By May Shen｜Lily Jiang
I. Case Overview
A. Facts of the case
Beijing Ruibang Yonghe Science and Technology Trade Company (“Rainbow”), the plaintiff, was one of the distributors of staplers and suturing products of Johnson & Johnson Medical (Shanghai) Ltd. and Johnson & Johnson Medical (China) Ltd. (collectively “J&J”), the defendants, in Beijing. Rainbow had been a business partner with J&J for 15 years. The distribution contract between each other was concluded every year and the term of the contract was one year. While J&J discovered that Rainbow bade at a price which breached the minimum resale price (the “RPM”) set in the contract agreed with each other in 2008. Consequently, Rainbow was punished by J&J, which withheld deposit of RMB20,000 first and then terminated distributorship in several hospitals and ceased supply entirely.
Rainbow filed a lawsuit against J&J alleging that it was illegal that J&J set a minimum resale price in the distribution contract, punished and terminated the distributorship of Rainbow based on the RPM. So Rainbow considered that the above-mentioned behaviors conducted by J&J have breached Article 14(2) of the China’s Anti-Monopoly Law (the “AML”). Therefore, Rainbow requested the court to order J&J to compensate for its losses of RMB14 million.
B. Opinions of the court
1. The judgment of Shanghai No. 1 Intermediate Court
Shanghai No. 1 Intermediate People’s Court (“Shanghai No. 1 Intermediate Court”) overruled all the claims of Rainbow. As the plaintiff failed to prove that the agreement which contained the PRM had excluded or restricted competition, or to prove its damages were caused by PRM provisions in the context of the AML.
2. The judgment of Shanghai Higher Court
Rainbow refused to accept the judgment of first instance, and then appealed to Shanghai Higher people's court (“Shanghai Higher Court”). On 1 August 2013, the court, after going though three hearings, and especially considering the opinions of experts entrusted by the two parties, made a final judgment, which reversed the judgment of Shanghai No. 1 Intermediate Court. Shanghai Higher Court Ordered J&J, the appellee, to compensate for Rainbow, the appellant, losses of RMB530,000 and dismissed other claims against J&J.
II. Comments on Final Judgment
During the process of appellate hearings, Shanghai Higher Court made final judgment based on six legal disputes between Rainbow and J&J.
A. The application of AML
Shanghai Higher Court ruled that the alleged monopolistic behavior in this case was implemented before the AML came into force, but it still lasted until the AML was promulgated. As a result, the AML should be applied in this case.
B. The qualified plaintiff in civil monopoly cases
Shanghai Higher Court held that there were two kinds of qualified plaintiffs in civil monopoly dispute cases including natural persons, legal persons, and other organizations for disputes over losses caused by monopolistic conduct or violations of the AML by contractual provisions, bylaws of industry associations, and so on. The following factors were taken into account by the court: the legislative purposes of the AML, the relief of the civil right, and Article 1 of Provisions of the Supreme People’s Court on Several Issues concerning the Application of Law in the Trial of Civil Dispute Cases Arising from Monopolistic Conduct (the “Judicial Interpretation of AML”) (the definition of civil dispute cases arising from monopolistic conduct).
C. Anti-competitive effect is an essential element in the finding of vertical monopolistic agreements
Shanghai Higher Court was of the view that not all the agreements which contained fixed resale price and minimum resale price provisions constituted vertical monopolistic agreements, a precondition is that the agreement should have the effect of eliminating or restricting competition. Comparing with the horizontal monopolistic agreements, the vertical monopolistic agreements had less anti-competitive effect. So the principle of per se illegal would not be directly applied to the vertical agreements and only those agreements which had the effect of eliminating or restricting competition were prohibited by the AML.
D. The application of the principle: who claim, who proof
Article 7 of the Judicial Interpretation of AML stipulates that the defendant shall assume the burden to prove that the agreement does not have the effect of excluding or restricting competition regarding horizontal monopolistic agreements (the reversion of burden of proof). While when it comes to the burden of proof regarding vertical monopolistic in this case, neither the AML nor the Judicial Interpretation of AML has provided. Shanghai Higher Court held that the reversion of burden of proof only should be applied in civil procedure when it is clearly stipulated in the law, regulations or judicial interpretations. As a result, Rainbow, the plaintiff, bore the burden to prove that the vertical agreement in this case had the effect of excluding or eliminating competition.
E. Factors to decide whether it constitute a vertical monopolistic agreement
In this case, to decide whether the RPM agreement constituted a vertical monopolistic agreement, Shanghai Higher Court mainly based on the following four factors:
1. Whether there is sufficient competition in the relevant market. Shanghai Higher Court ruled that the relevant market was not fully competed after analyzing the bargaining power of buyers, the degree of the reliance on bands, and defendants’ power in price negotiation, etc.
2. Whether it has a strong position in the relevant market. After comprehensively considering the following elements such as: the defendants’ market share, power in price negotiations, influence of brands and control over distributors, Shanghai Higher Court held that J&J had a strong position in relevant market.
3. Motivation to conduct minimum resale price. According to the judgment of Shanghai Higher Court, the motivation of J&J to conduct minimum resale price was to avoid price competition and to maintain the price.
4. The effect of minimum resale price on competition. Shanghai Higher Court held that the minimum resale price conducted by J&J obviously had the anticompetitive effect, and there were no sufficient evidences in this case could prove that the RPM agreement had pro-competitive effects.
F. Calculation of damages
Although Rainbow claimed for a number of damages, Shanghai Higher Court ordered J&J to compensate for rainbow the losses of profits of the relevant product in 2008. Because only this item of losses was directly caused by implementing the PRM agreement.
As for how to calculate the damages, Shanghai Higher Court analyzed that the damages should not be calculated according to the profits available in the PRM agreement which had been regarded as a vertical monopolistic agreement. Instead, the loss of profits in this case should be calculated according to normal profit in the relevant market.
III. Implications and Advice
The final judgment of Shanghai Higher Court reversed the judgment of Shanghai No.1 Intermediate Court which ruled that J&J did not implement the antitrust agreement restricted the lowest prices. On the contrary, Shanghai Higher Court ruled that the minimum resale price agreement concluded between J&J and downstream distributors breached Article 14(2) of the ALM, and therefore ordered J&J to compensate for the distributor’s losses of RMB 500,000.
As a final judgment regarding the first case of vertical monopolistic agreement in China, Shanghai Higher Court’s judgment has attracted wide attention from the public and brought extensive discussion. Different with the opinions of the academia circle in China about Article 14(2) of the ALM, the judgment reflects that the courts having competent jurisdiction in Shanghai hold cautious attitude to the application of the Article 14(2) of the ALM in the relevant cases, with self-control not to intervene in commercial parties’ setting minimum resale price agreements, a kind of economic monopoly agreements. The negative judicial policy can be seen from the legal reasoning, the legal analysis in the judgment and the Shanghai courts’ allocating the burden of proof in this case.
The negative intervention policy implied in the judgment can be speculated as follows: the court held that the distributor should bear heavy burden of proof to establish a minimum price monopoly agreement litigation case and ask for the court’s relief to convict whether the minimum resale price has breached the Article 14(2) of the AML. The court not only asked for the distributor to prove that there was an agreement which restricted the lowest resale prices for commodities had concluded between J&J and distributor, but also demanded the distributor to prove that there existed result caused by the agreement which had eliminated or restricted competition.
This judicial opinion is different from the understanding of the minimum resale price among the researchers at the preliminary stage after the promulgation of the AML (i.e. the AML strictly prohibited this kind of monopolistic behavior, and the corresponding agreement itself shall be construed as per se illegal). The judgment reflects a tendency of Shanghai Higher Court not to easily intervene in the vertical monopoly agreement dispute by interpreting the related statutory law in a narrow way.
Even though the above-mentioned judicial decision of Shanghai Higher Court might express that the judges adopt judicial restraint in vertical antitrust agreement disputes, it may still trigger downstream distributors or some law offices to initiate similar proceedings in the future, coming up with the enthusiastic understanding and interpretation of this case by the news and the social public. Therefore, with regard to the minimum resale price terms, we suggest company to strengthen the compliance review and management of the relevant terms in sales contract and pay some attention to prepare for and prevent potential disputes in the following aspects:
1. When entering into agreements with downstream distributors, company had better not expressly force the dealers to sign terms in which resale of commodities be restricted with a price no less than a certain amount, especially pay attention not to sign such terms in sales contract in a written form.
2. In practice, company usually recommends its dealers to label the “Suggested Retail Price” on the relevant goods. This way of recommendation has no obvious legal risks. In this way, company can replaces the minimum resale price terms which may be construed as one of the vertical monopoly agreement, and there’s less likely that the government enforcement divisions would investigate and fine the company according to it.
However, if the upstream company unilaterally requires or suggests its dealers to resale the goods with a certain price, company had better pay attention to avoid substantially forcing the downstream distributors to comply with its minimum price policy by monitoring, punishing, rewarding or threatening to impose sanction and/or using other compulsive measures.
3. If company meets with a sudden investigation from the government divisions, antitrust litigation filed by business partner or other inevitable antitrust dispute, we suggest company collect and prepare evidence timely and comprehensively, so as to effectively respond to malicious litigation harassment and so on. Specifically, preparation jobs may be done in the following ways: i) from the perspective of procedural law, company may try to influence the process of the antitrust litigation or antitrust investigation proceedings, and try to win sufficient time and condition from the court or government enforcement divisions to collect and provide evidence in favor of company; ii) from the perspective of substantive law, company may try to strongly fight back against the counterparty’s accusation or enforcement investigation actions by presenting such defenses as company groups defense, agent sales defense, vertical price recommendation defense, and exemption from monopoly agreement defense etc.
Ms. May Shen is a Shanghai-based partner with Global Law Office who specializes in Antitrust &Competition, Intellectual Property, and litigation. (E-mail: shendongmei@glo.com.cn)
