Antitrust or competition law rules governing vertical restraints (such as resale price maintenance) are significant in China because as a manufacturing “hub”, vertical contracts or agreements such as manufacturer-distributor agreements are very common.
This article outlines the rules governing resale price maintenance (RPM), pursuant to the Anti-Monopoly Law (AML); and compares these rules to the rules governing RPM pursuant to the European competition law.
Article 14 of the Anti-Monopoly Law (AML) prohibits the fixing of resale prices (and in particular minimum resale prices) to third parties. In other words, Manufacturer A is prohibited from stipulating that Distributor B must resell Manufacturer A’s goods at a certain price to Retailer C.
However, there are exceptions to this strict prohibition.
If an entity can prove that it fixed resale prices to fulfill the following objectives (stated below), then this conduct may be exempt from Article 14.
The objectives are:
• RPM was undertaken with the objective of undertaking technological improvement or research and development of new products;
• RPM was undertaken to raise product quality, lower costs, improve efficiency, standardize product specifications and standards or implement specialization;
• RPM was undertaken to raise the business efficiency of small and medium business operators and to strengthen the competitiveness of small and medium business operators;
• RPM was undertaken to fulfil matters involving the public interest, including energy conservation, environmental protection and disaster relief;
• RPM was undertaken to alleviate a serious drop in sale quantity or obvious over-production in times of recession; or
• RPM was undertaken to protect legitimate interests in relation to foreign trade and economic cooperation.
China is not alone in possessing a strict prohibition against RPM – other more experienced antitrust or competition law jurisdictions such as Australia and Europe have similar prohibitions.
In Europe, there is no express prohibition against RPM between entities in a vertical relationship within the European competition law. However, Article 101(1)(a) of the European competition law prohibits price-fixing between entities. Article 101(1)(a) may be applied to entities in a horizontal (i.e. competing entities) or vertical relationship (i.e. entities in a supply chain relationship). In this regard, agreements amounting to RPM may be caught by Article 101(1)(a).
Further, RPM is listed as a “hardcore” prohibition pursuant to the European Commission’s Vertical Restraints Block Exemption (the most recent version of the Block Exemption and its accompanying Guidelines came into effect on 1 June 2010 and will stay in force till 31 May 2022. It is, thus, likely that conduct amounting to RPM will breach Article 101 of the European competition law.
Like in the AML, the European competition law also contains exceptions to the strict prohibition against RPM. Article 101(3) of the European competition law outlines a broad “efficiency” exception – and, that is, that agreements which contribute to improving the production or distribution of goods or which promote technical or economic progress may be exempt from Article 101. In other words, if an entity can prove that conduct amounting to RPM results in efficiencies, this conduct may be exempt.
The new Guidelines accompanying the Vertical Restraints Block Exemption shed more light on the types of conduct that may exempt RPM from Article 101(1). The Guidelines concede that there may be instances that RPM may lead to efficiencies, including:
• RPM may be necessary in the instance where a manufacturer wishes to introduce a new product (to induce distributors to better take into account the manufacturer’s interest to promote the product; if the distributors are under competitive pressure, this may induce them to expand overall demand for the product to make the product launch a success – for the benefit of consumers);
• RPM may be necessary to organize a franchise system or similar distribution system by applying a uniform distribution format across a coordinated short tem low price campaign (2 to 6 weeks in most cases);
• Extra margins provided by RPM may allow retailers to provide (additional) pre-sales services; and
• RPM may be necessary to avoid free-riding between distributors.
Thus far, the antitrust or competition authorities have yet to issue more detailed guidance as to how the exceptions in Article 15 of the AML. In this regard, the examples (of instances where RPM may be “efficient” for the benefit of consumers) listed above by the Guidelines are useful references in the China-RPM context. While the Chinese antitrust or competition authorities are not obliged to consider overseas guidelines or jurisprudence; often such references may be persuasive.
Businesses should be aware of and take note of the strict RPM prohibition in China, when formulating their distribution agreements. In the event where it is commercially imperative to impose vertical restraints (including RPM) in distribution agreements, businesses may wish to consider if their agreements could fall under the exceptions listed pursuant to Article 15 of the AML.