Anti-monopoly regulations on resale price maintenance

By Ryan Fang and Simon Shi, Jingtian & Gongcheng
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Resale price maintenance is a type of vertical restraint regulated by the Anti-Monopoly Law, which is set for revision with clarified guidance this year for the first time since it came into force in 2008.

CURRENT LEGISLATION

Based on article 14 of the current law and administrative enforcement and judicial practice, resale price maintenance mainly refers to conclusion and implementation of agreements between undertakings and downstream distributors to “fix the prices for selling commodities to third parties” and “restrict minimum prices for reselling commodities to third parties”.

Article 14 specifically prohibits such price fixing and restricting minimum prices of re-sales.

However, it is not clear whether agreement falling within such prohibitions necessarily also has the effect of “excluding or restricting competition”, as determined unlawful in article 13(2). Besides, it is not clarified whether “excluding or restricting competition” implies a subjective motive or an objective consequence, or both.

From observations of the authors of this article, such legislative ambiguity may lead to different law application and analysis approaches by courts and administrations, which in turn may lead to different penalties or judgments.

ADMINISTRATIVE ENFORCEMENT

Ryan Fang, Jingtian & Gongcheng, Anti-monopoly regulations on resale price maintenance
Ryan Fang
Partner
Jingtian & Gongcheng

Taking anti-monopoly enforcement practice in the automobile industry as an example, the authors searched penalty decisions by national and provincial anti-monopoly enforcement authorities since 2014 on resale price maintenance cases of seven automobile brands and one auto parts manufacturer (Shanghai Hankook Tire Sales) – and found more or less the same logic in administrative penalty decisions for the eight cases.

In the Hankook Tire case, the former Shanghai Price Bureau first held that the agreement concluded and implemented between Hankook Tire and its distributor constituted monopolistic conduct of setting a minimum price for reselling commodities to a third party, as listed in article 14, directly concluding that this led to exclusion and restriction of market competition – but neither conducted specific analysis on the consequence itself or the causal relationship between the conduct and consequence, nor recognised the consequence as a constitutive element of the illegal act.

These decisions basically adopted the analytical method and principle of “Illegal per se”, which is also the main principle currently adopted by anti-monopoly enforcement authorities in determining illegal conduct of resale price maintenance.

ADMINISTRATIVE LITIGATION

Simon Shi, Jingtian & Gongcheng, Anti-monopoly regulations on resale price maintenance
Simon Shi
Counsel
Jingtian & Gongcheng

Administrative litigation practice against resale price maintenance is different, as can be glimpsed from China’s first, highly contentious administrative litigation case of resale price maintenance in 2017. Initially, the Hainan Provincial Price Bureau determined that Hainan Yutai Technology Feed violated the provision of article 14(1) of the Anti-Monopoly Law based on the principle of illegal per se, and subjected it to administrative penalty. The complex case proceeded to Haikou Intermediate People’s Court which, based on the principle of rule of reason, held that for determination of resale price maintenance, it was necessary to consider whether Hainan Yutai’s conduct had led to exclusion and restriction of competition – and revoked the price bureau’s decision.

In the second instance, the Hainan High People’s Court next held that determination of a vertical monopoly agreement by an anti-monopoly enforcement authority did not require causing “excluding and restricting competition” as the constitutive element – and thus revoked the first-instance judgment.

In the retrial, the Supreme People’s Court (SPC) finally corrected Hainan High People’s Court’s determination and reasoning, holding that the constitutive element of exclusion or restriction of competition was not the same as “the effect of excluding or restricting competition”, let alone “causing actual loss”. The SPC also held that a resale price maintenance agreement was a typical vertical monopoly agreement, which often had a double-sided effect of both restricting and promoting competition.

At the current stage, if anti-monopoly enforcement authorities were required to conduct comprehensive investigation and complex economic analysis of vertical monopoly agreements, in practice it would greatly increase the cost and reduce efficiency of law enforcement, while still falling short of their current needs.

Upon confirming resale price maintenance in their investigation, law enforcement authorities may conclude on the monopolistic nature of agreements – without the burden to prove the “the effect of excluding or restricting competition”. Undertakings may, however, overturn the presumption of “excluding or restricting competition” by presenting evidence.

The SPC pointed out that the criteria for judging a law enforcer’s determination of vertical restraint is different from determining vertical restraint in civil proceedings. This is because in a civil lawsuit, support for the plaintiff’s claim must be premised by certain losses suffered as a result of the undertaking’s monopolistic conduct; a direct embodiment of its effect of excluding or restricting competition.

The ruling clarified for the first time the different criteria for determining resale price maintenance in administrative law enforcement and civil litigation, as well as its reasons and policy considerations, which is of great referential value before amendment of the Anti-Monopoly Law.

NEW AMENDMENT

The amendment draft of the Anti-Monopoly Law was officially promulgated on 23 October 2021, with the addition of article 17(2) (article 14 of the current law) that “for agreements provided for in subparagraphs 1 and 2 of the preceding paragraph, if undertakings can prove that the agreements do not have the effect of excluding or restricting competition, they shall not be prohibited”. Under the amendment draft, in addition to exemptions provided for in article 15 of the current law, undertakings can also be exempted by proving that resale price maintenance agreements do not have the effect of excluding or restricting competition.

However, specific criteria for judging the effect of excluding and restricting competition, as well as the standard of proof for undertakings to present evidence and whether this principle is equally applicable to administrative law enforcement and judicature, are still to be refined and explained.

The Anti-Monopoly Law amendment is in the 2022 legislative work plan of the Standing Committee of the National People’s Congress. The author believes the newly amended law and related regulations will further refine and improve regulations on resale price maintenance – providing a clearer and more explicit basis and guidance for law enforcement and judicial practice.

Ryan Fang is a partner and Simon Shi is a counsel at Jingtian & Gongcheng

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