Price Maintenance & Vertical Restraints. KING & WOOD MALLESONS

Transcription

1 Price Maintenance & Vertical Restraints KING & WOOD MALLESONS

2 Overview of the Legal Basis and the Regulators Anti-monopoly Law ( AML ) Monopoly agreements Abuse of dominance Concentrations with anti-competitive effects Abuse of administrative power Price Law Pricing activities of companies Pricing activities of the government Price control by the government Anti-Unfair Competition Law Unfair competition activities Where there is an overlap of articles of the three laws, the anti-trust enforcement authorities tend to apply the AML, a more recent law enacted in Enforcement Authorities: Price related violation Non-price related violation NDRC SAIC 2

3 Regulations on Price Maintenance: RPM (1/2) Legal Basis AML Article 14 of the AML provides for vertical monopoly agreements. Under Article 14, there are two types of RPM violation: (1) fixing the resale prices, and (2) setting the lowest resale prices. AML also provides for certain exemptions. Technological improvements Efficiency Protection of SMEs Public interest Economic recessions International trade interest Other circumstances prescribed by the law or the State Council To be exempted from Articles 14 by reference to the listed exceptions, a company shall also prove that such an agreement (1) does not substantially restrict competition in the relevant market, and (2) enables the consumers to share the benefits of the agreement. 3

4 Regulations on Price Maintenance: RPM (2/2) Examples NDRC Investigations In the past two years, NDRC has investigated RMP violations in industries including liquor, infant formula, eye glasses, and automobile. NDRC takes the view that RPM is per se illegal. NDRC applies leniency program to RPM violations, where the first applicant providing significant evidence of the violation may get 100% exemption of fine. Rainbow v. Johnson & Johnson The Shanghai Higher People s Court reversed the lower court s decision and ruled that J&J had violated the AML by entering into RPM agreements with Rainbow. The court takes a rule of reason approach, ruling that to apply Article 14 of the AML, anti-competitive effects must be proved. The plaintiff bears the burden to prove. Factors considered by the court in evaluating anti-competitive effects include: (1) whether there is sufficient competition in the relevant market; (2) whether the defendant has a strong market position; (3) motivation of the defendant to conduct RPM; and (4) effects of RPM on competition. 4

5 Regulations on Price Maintenance: Excessive Pricing Legal Basis AML Article 17: Companies with dominant market position are prohibited from selling products at unfairly high prices or buying products at unfairly low prices. Dominant market position: a company with over 50% market share in the relevant market can be presumed to hold dominant market position, unless otherwise proved by such compay. Provisions on Anti-Price Monopoly, NDRC s implementing rules of the AML, further provide for factors to be considered in determining whether the price is excessive, including: (1) prices offered by other companies; (2) change of cost vs. price increase; and (3) other factors. Examples Huawei vs. IDC: The court found that IDC, as a dominant player in the relevant market, engaged in excessive pricing during the negotiation with Huawei over license of SEPs, which is a violation under Article 17 of the AML. In the anti-trust investigation against Qualcomm, NDRC found that Qualcomm imposed unfairly high patent license royalties, which is a violation under Article 17 of the AML. 5

6 Regulations on Price Maintenance: Sale Below Cost Legal Basis AML Article 17: Companies with dominant market position are prohibited from selling products at prices below cost without justifiable causes. Provisions on Anti-Price Monopoly further specify exceptions: (1) selling perishable, seasonal and overstocked commodities at reduced prices, or (2) selling commodities at a reduced price for the purpose of clearing off debts, change of business, suspension of operation, or promoting new products. Price Law Article 14: Companies shall not sell products at prices below cost to drive out rivals or monopolize the market. Exception: selling perishable, seasonal and overstocked commodities at reduced prices. Anti-Unfair Competition Law Article 11: Companies shall not sell products at prices below cost to drive out rivals. Exception: (1) selling perishable, seasonal and overstocked commodities at reduced prices, or (2) selling commodities at a reduced price for the purpose of clearing off debts, change of business or suspension of operation. 6

7 Regulations on Price Maintenance: Discriminatory Pricing Legal Basis AML Article 17: Companies with dominant market position are prohibited from applying discriminatory trading prices or other trading conditions to their trading parties with equal standing without justifiable causes. Price Law Article 14: Companies are prohibited from applying discriminatory trading prices to their trading parties with equal standing. Example Huawei vs. IDC: The court found that IDC, as a dominant player in the relevant market, engaged in discriminatory pricing in the negotiation with Huawei over license of SEPs, which is a violation of Article 17 of the AML. 7

8 Regulations on Non-Price Vertical Restraints Vertical Agreements Article 14 (3) of the AML is a catch-all clause, granting anti-trust enforcement authorities the power to determine vertical monopoly agreements which are not explicitly specified by the AML. In practice, however, anti-trust enforcement authorities have not expressly identify any non-price vertical agreements to be monopolistic. It should be noted that, if a vertical agreement is found with a purpose of facilitating RPM, such agreement may still be subject to the rules of RPM. Abusive Conducts Article 17 of the AML: Companies with dominant market position are prohibited from (1) requiring their trading counter parties to trade exclusively with designated companies without justifiable causes, and (2) imposing unreasonable trading conditions without justifiable causes. Measures on Fair Transactions between Retailers and Suppliers Retailers shall not abuse their dominant position by imposing unreasonable trading conditions (e.g. unconditional rebate) to suppliers. Retailers shall not restrict suppliers from dealing with other retailers. The Measures are enacted earlier than the AML, and they are not considered part of the AML system. Examples In the anti-trust investigation against Qualcomm, NDRC found that Qualcomm threatened to refuse selling baseband chips to Chinese companies if they did not sign patent license agreements containing unreasonable terms, and it prohibited the licensees from challenging such license agreements. Such practice violates Article 17 of the AML. 8

9 Regulations on Non-Price Vertical Restraints: Automobile Industry In 2014, local authorities of NDRC investigated several major automobile manufacturers and their distributors for antitrust violations. To encourage the competition in automobile distribution and maintenance market, the government has issued industry-specific rules and policies. Guidance on Promotion of Transformation of Automobile Maintenance Service and Service Quality Authorized spare parts distributors and authorized maintenance enterprises shall be allowed to resell genuine spare parts to unauthorized maintenance enterprises. Ensure all maintenance enterprises and consumers have the same right to get access to high quality spare parts. It is more of a guidance and provides no legal consequence for violation. Draft Measures for the Administration of Automobile Sales Automobile manufacturers shall not restrict cross-selling between distributors. Automobile manufacturers shall not designate suppliers of spare parts to consumers. Automobile manufacturers shall not require distributors to select consumers on territorial basis. The draft is still being amending. Legislators and authorities have observed the anti-competition effect caused by vertical restraints. It can be expected that more competition rules governing vertical restraints, both industry-specific and general applicable, would be issued in the future. 9

10 Thank you! Susan Ning Website: KING & WOOD MALLESONS