By Hai Huang｜Ying Cui
I. Case Overview
It is reported that in December, 2012, Mao Tai (the maker of the Chinese high-end liquor), was in an attempt to stabilize prices and maintain its brand image, issued to its distributors strict minimum retail price requirement and imposed harsh penalties on six distributors for violating this requirement or making sales outside their designated areas. Similarly, at the end of 2012, Wu Liang Ye (another high-end Chinese liquor maker) made selective inspections on its distributors and specified and criticized 15 distributors for selling liquors at lower than the set prices.
Soon after the two Chinese liquor makers’ restrictive orders to their distributors, the National Development and Reform Commission (the “NDRC”) launched anti-trust investigation into the conducts of Mao Tai and Wu Liang Ye. On January 15, 2013, Mao Tai announced that, due to the NDRC investigation, it would cancel the “Price-fixing Notice”. As the NDRC’s anti-monopoly investigation continues, Wu Liang Ye also revoked its restrictive orders to the distributors. On February 22, 2013, it was reported that that Mao Tai and Wu Liang Ye were imposed fines in the amount of RMB247 million and RMB202 million, respectively, accounting for 1% of its annual sales in 2012.
II. Legal Analysis
The above case is associated with vertical monopoly agreements. Vertical monopoly agreements are agreements, decisions or concerted practices setting the conditions for purchase, sale or resale of specific goods or services concluded by two or more parties operating in upstream and downstream of production or distribution chains. Generally speaking, vertical monopoly agreements, depending on whether the price is a key factor, can be divided into (i) vertical price restraints and (ii) vertical non-price restraints. In vertical price restraints, manufacturers require their wholesale or retail distributors to observe certain price conditions; while in vertical non-price restraints, wholesale or retail distributors are required to abide by the conditions which are not related to prices.
Imposing minimum resale prices on the distributors by the two Chinese liquor makers has the price restraining features.
A. The Current PRC Regulations on Vertical Monopoly Agreements under the AML
1. Vertical Price Restraints under the AML
The first 2 sections of Article 14 of the PRC Anti-Monopoly Law (the “AML”) prohibit the practices of (i) fixing resale price and (ii) imposing minimum resale price.
2. Vertical Non-price Restraints under the AML
Vertical non-price restraints have not been specifically provided for under the AML. Section 3 of Article 14 provides that “any other monopoly agreements deemed by the anti-monopoly enforcement authorities designated by the State Council” shall be prohibited, which is a “catch all” provision to prohibit, inter alia, the non-price forms of vertical restraints.
3. Legal Liability
Article 46 of the AML provides that where an undertaking concludes and implements a monopoly agreement, the anti-monopoly enforcement authorities shall instruct it to discontinue the violation, confiscate its unlawful gains, and, in addition, impose a fine of 1% to 10% of its sales in the previous year; if such monopoly agreement has not been actually implemented, it may be fined no more than RMB500,000 (approximately US$80,000).
B. The Enforcement Agencies With Respect to Vertical Agreements Restraining the Competition
Under the current enforcement framework, the NDRC and the State Administration for Industry and Commerce (the “SAIC”) are tasked with responsibilities for price monopoly agreements and non-price monopoly agreements. The specific enforcement agencies are the Price Supervisory and Anti-Monopoly Bureau in the NDRC and the Anti-Monopoly and Anti-Unfair Competition Bureau in the SAIC.
C. The Enforcement Practice by the Anti-Monopoly Enforcement Authorities
1. Principle for analysis of the vertical price monopoly agreement
Currently, a uniform analysis framework applying to vertical agreements has not been established in China. With respect to the principles applied to the vertical price monopoly agreement, there has been a debate between “Per se illegal” and “Rule of reason”. “Per se illegal” is an important principle emerged from anti-monopoly practice restraining vertical restraints in the U.S. Per se illegal means that certain anti-competition behaviors, once confirmed, will be deemed to be illegal, needless to analyze if such behaviors promote or restrict competition. “Rule of reason” is another important principle emerged from anti-monopoly practice restraining vertical restraints in the U.S, which means that the agreement will only be prohibited by the law after it is deemed to have restricted competition.
In the case that Wu Liang Ye required its distributors not to sell products below a fixed price, the Administrative Penalty Decision issued by the Sichuan Provincial NDRC (the “Decision”) claimed that “in accordance with the AML, it is held by this administration that your company has fixed the distributors’ minimum resale price of the liquor products through a system of price control, inspection and rewards and punishments, which has had a negative impacts on the competition of the market and undermined the interests of the customers. This administration holds the view that the abovementioned conducts of your company have violated Article 14 of the AML. … Therefore, this administration decides to impose a fine of RMB202 million (1% of the 2012 annual sales) on your company”.
The announcement issued on the same day by Guizhou Province Price Bureau (the “Announcement”) claimed that “since the year 2012, Guizhou Province Mao Tai Liquor Sales Co., Ltd. has set forth the minimum price in the contracts at which the retailers shall sell to the customers, imposed penalties on the retailers, concluded and executed the vertical monopoly agreement, which is in violation of Article 14 of the AML, and has eliminated and restricted the competition within the market, as well as compromised the interest of the customers.”
By looking into the Decision, it seems that the Sichuan Provincial NDRC has analyzed the anti-competition results which caused by Wu Liang Ye. Nevertheless, from the logical perspective, some people held the view that the Sichuan Provincial NDRC did not make such decision on the grounds that the anti-competition effects has been resulted from the conduct of Wu Liang Ye, the analysis is provided only for legitimacy of its decision; regarding the decision made by Guizhou Province Price Bureau, the majority of the practitioners reckon that the Announcement deems that the resale price maintenance by Mao Tai is a per se violation the AML. As whether Mao Tai’s conduct has had an impact of eliminating or restricting competition, the Announcement seemed to have assumed such effect if the price maintenance exists.
Therefore, regarding the principle taken by the NDRC during the course of enforcement, an opinion held by certain people that the NDRC adopts the principle of “Per se illegal”, which is exactly the logic of the AML. Vertical monopoly agreement includes not only the agreements restricting the price, but also other various types of the agreements, for instance, exclusive purchase agreement, exclusive sales agreement and conditional sale. Therefore, the reason why the Article 14 of the AML explicitly listed the “maintaining the minimum resale price to the third party” and “restricting the minimum resale price to the third party” is these conducts are typical conducts which shall be deemed as monopoly agreements. In other words, provided that the agreement concluded by the undertakings in written or by oral providing “restricting the minimum price at which sold to the third party” is confirmed and such agreement binds upon both parties, it seems that the agreement shall be deemed to have the effect of “restricting the competition” under the Section 2, Article 13 of the AML.
However, there is an another opinion that antitrust judicial interpretation sets forth that with respect to the horizontal monopoly agreement providing in Article 13 of the AML, the horizontal monopoly agreement is presumed to have the effect of eliminating, restricting the competition, thus unlike the principle of “the burden of proof lies with the person who lays charges”, the defendant shall prove that its conducts did not have the anti-competition effects, otherwise the award might not in favor of the defendant. However, regarding the vertical monopoly agreements, there is no such provision, which evidences the vertical monopoly agreements are not necessary have the anti-competition effects, and an analysis shall be carried out before an conclusion is made. On August 1, 2013, Shanghai High Court held such opinion in Rainbow vs. Johnson & Johnson.
Comparing with the “Rule of reason” determined by the judgment made by Shanghai High Court in Rainbow vs. Johnson & Johnson, the decision made by the NDRC did not provide an in-depth analysis into the vertical price monopoly agreement which can enlighten the practitioners. The principle adopted regarding the restricting the minimum resale price by the law enforcement agency is not definite.
2. Burden of Proof
If the Rule of reason applies, the law enforcement agency shall prove the conduct concerned restricts or eliminates the competition; if Per se illegal applies, then the law enforcement agency shall only need to prove the existence of the conduct, the burden of proof would be fall on the side of undertakings, unless the undertakings can satisfy the requirement of any item of Section 1 of Article 15 and the Section 2 of Article 15 in accordance with Article 15 of the AML, the law enforcement agency is empowered to deem the vertical monopoly conduct has been performed by the undertaking which is prohibited by the AML.
On one hand, since the principle is not clear and definite, we do not know for sure that at which level the law enforcement agency shall be burdened to prove its allegations when it comes to the investigation of vertical price monopoly agreement; on the other hand, the Sichuan Provincial NDRC and Guizhou Province Price Bureau do not give extensive explanation on this in the Decision and the Announcement. Therefore, it is unclear when the penalty is imposed, whether the Sichuan Provincial NDRC and Guizhou Province Price Bureau has examined the anti-competitive effects upon the relevant markets resulting from the conducts of the two liquor producer or at which level the anti-competitive effects have been analyzed.
3. Fines levied for violations of Article 14 of the AML
In terms of this case, the fines levied on Wu Liang Ye and Mao Tai are RMB202 million and RMB247 million, respectively, accounting for 1% of their respective annual sales in 2012. The legal consequence provided by the AML for violations of articles regarding the monopoly agreement shall be, among which, imposing a fine of 1% to 10% of the sales of the undertaking concerned in the previous year. However, it is not definite as to the way to ascertain the “sales in the previous year”, for instance, whether the sales in the global markets or in the domestic market, whether the sales of all the products produced by such undertaking or the sales of the specific product produced by such undertaking. The above issues outlined call on the relevant guidance issued by the NDRC.
III. Legal Implications
A. Companies shall deal with resale price maintenance clauses cautiously
The NDRC, as one of the enforcement agencies, has the power to take actions against resale price maintenance that is deemed to be violations of the AML and impose heavy fines.
Given the possibility that different approaches might be taken by the NDRC and the court with respect to the same conduct, therefore, when entering into distribution agreements, companies shall deal with price maintenance clauses cautiously. Also, if companies are the plaintiff in a lawsuit concerning the vertical monopoly agreement, .sufficient evidences shall be collected in order to obtain a judgment in favor of the companies.
B. Prudent companies should consider implementing precautionary measures for compliance with AML
In light of the penalty may be up to 10% of the sales in the previous year resulting from a violation of the AML, it is advisable for companies to adopt the following approaches to establish, review and improve internal rules to ensure full compliance with the AML: (1) analyze marketing occupancy periodically; (2) search relevant market information; and (3) review agreements that might be deemed to have clauses which restrict competition vertically.
Mr. Hai Huang is a Beijing-based partner with Global Law Office who specializes in advising both foreign and domestic clients on the cross-border mergers & acquisitions, foreign direct investment, venture capital/private equity investment and equity offering on overseas capital markets. (E-mail: hh@glo.com.cn)
Ms. Elaine Cui is a Beijing-based legal assistant with Global Law Office who specializes in advising both foreign and domestic clients on the cross-border mergers & acquisitions, foreign direct investment, venture capital/private equity investment and equity offering on overseas capital markets. (E-mail: cuiying@glo.com.cn)
