Price Floor in Distribution Agreement May be Deemed as Monopoly

From the beginning of 2013, several Vertical Monopoly (“VM”) cases have caught the attention of the public. After the National Development and Reform Commission (“NDRC”) investigated “Mao-tai” and “Wuliangye” on their fixed resale price at the beginning of this year, NDRC carried on another investigation on milk manufactures about the same issue in the middle of the year. Recently, Shanghai Higher People’s Court (“Shanghai Higher Court”) made a final judgment on the Rainbow v. Johnson & Johnson case, which evokes the attention of enterprises on VM, especially brings worries to those influential big enterprises on the risks of such articles in the distribution agreement.

Speaking of Monopoly, the first impression for the public maybe the agreements eliminating competition between manufacturers of same products, or the inner agreement of an industry association, which is so-called Horizontal Monopoly (“HM”). In contrast to this, VM is formed between business operators and their upstream and downstream trading counterparts on the agreements excluding or restricting competition.

In fact, “Anti-monopoly Law” implemented in 2008, Article 14 has already stipulated the forbidden provision on the VM by fixing resale price, fixing the floor price to exclude or restrict competition. However, being deemed as either HM or VM, the precondition shall be eliminating or restricting competition. Then the criteria on identifying eliminating or restricting competition, and the allocation of the burden of proof become the aporia in the field of anti-monopoly. The judicial interpretation of the Supreme People’s Court (“Interpretation”) implemented in June 2012, which has stipulated that the defendant shall assume the burden to prove that the agreement does not have the effect of eliminating or restricting competition in a case related to HM, however, this Interpretation has not regulated the burden of proof of the defendant in a case related to VM.

In the Rainbow v. Johnson & Johnson case, Shanghai Higher Court holds that the Interpretation regulating HM agreements shall not apply to VM agreements, the general principle that “the burden of proof is upon the party who claims” under the Civil Procedural Law shall be applied. In view of the asymmetric information of both parties, it requires Rainbow to prove that the agreement has eliminated or restricted competition, and after Rainbow has provided evidence on the insufficient competition in the relevant market, the strong market power of the defendant, the motivation of the defendant and the anti-competitive effects of such agreement on floor price, it also requires Johnson & Johnson to provide evidence to rebut. It tells that the judicial authorities have not agreed on a clear and unified regulation on the allocation of burden of proof in monopolistic cases.

In consideration of the current laws and regulations, and Rainbow v. Johnson & Johnson case, the enterprises can take the following precautions on preventing to be deemed as VM:

Firstly, for the commercial need, before stipulating the resale price, the enterprise shall evaluate the following factors: (1) whether the articles on the resale price belong to 7 circumstances stipulated in Article 15 of Anti-monopoly Law. In addition, the enterprise shall prove that the agreement would not eliminate or restrict competition, and share the consequent benefits with consumers under such circumstances, except for special occasions.(2) if the articles on the resale price do not belong to circumstances stipulated in the previous Article 15, the enterprise shall analyze the risks of being identified as monopoly in advance on the following 4 aspects, ① whether competition is sufficient in the relevant market; ②whether its market power is strong;③the motivation of such agreement;④ the effect of such agreement on competition.

Secondly, in view of a series of administrative investigation of such VM affairs, AND the Rainbow v. Johnson & Johnson case, it shows that the administration on floor price becomes stricter. Because the criteria on identifying eliminating or restricting competition, and the allocation of the burden of proof are uncertain, other methods on non-price competition shall be applied, such as make good use of bonus.