Minimum Resale Price Maintenance- a lesson China may learn from US and EU practice

Transcription

1 Article August CHANCE & BRIDGE PARTNERS Minimum Resale Price Maintenance- a lesson China may learn from US and EU practice Dr. Zhaofeng Zhou and Pipsa Paakkonen March 2013

2 Resale price maintenance ( RPM ) on vertical agreements refers to a type of agreements between undertakings on the different levels of the distribution chain, namely upstream undertakings and downstream undertakings. In an RPM agreement, the upstream undertaking, mostly manufactories, are able to limit the actions of the downstream undertakings and distributors abilities to set their own prices for final consumers are excluded. RPM can have three different forms: minimum retail price maintenance, fixed retail price and maximum retail price restriction. The emphasis in this article will be mainly on the minimum RPM. Through examining the relevant practices in US and EU and current cases in China, this article intends to draw some lessons for dealing with minimum RPM. US approach US has taken the position that minimum RPM is not automatically considered as per se illegal but must be analysed under the rule of reason after Leegin Creative Leather Products, inc. v. PSKS, inc. (Leegin case). 1 Before Leegin case, US take the position that minimum PRM is automatically considered as per se illegal under 1 of the Sherman Act which was established in Dr Miles Medical Co v John D Park & Sons Co. (Dr. Miles case) in Leegin case shows the leading way towards recognition of possible pro-competitive effects of minimum RPM. The petitioner, Leegin terminated the contract with one of its retailers, PSKS, due to PSKS s (the Respondent) actions not to follow the recommended price conditions set by Leegin. Leegin s RPM policy contained two separate reasons. Firstly, it adopted the policy in order to give its distributors margins to maintain the services related to the products. Secondly, Leegin wanted to maintain the brand image and good reputation by imposing minimum RPM for its retailers. In the Supreme Court s decision, the opinion of the majority written by Justice Kennedy stated that the economic evidence did not support the following of per se prohibitions of minimum RPM. It was held that there could be pro-competitive reasons of introducing minimum RPM at least in some situations. According to Justice Kennedy, modern economic analysis was calling for the change from per se prohibition into rule of reason analysis. As one of the main purposes of competition law is to promote the inter-brand competition in the benefit of consumers, introduction of minimum RPM may enhance inter-brand competition between different manufactures of same kind of product. In addition, minimum RPM may encourage new competitors into market by shifting the focus from 1 Leegin Creative Leather Products, inc. v. PSKS, inc. 551 U.S. 877 (2007). 2 Leegin Creative Leather Products, inc. v. PSKS, inc., dba Kay s Kloset... Kay s Shoes (2007) No

3 price-competition to non-price competition, which will lead to dynamic economics, a wider variety of products and better services for the benefit of consumers. Wide discussion and attendance occurred in both the economic and legal sector after the famous Leegin decision. Potential anti-competitive effects of minimum RPM must be analysed carefully by the courts. The structure of the market is an important indicator in determining whether minimum RPM may have anti-competitive effects. If the number of market actors is very low and the market shares very high, the possibility of anti-competitive effects are very likely. Depending on what kind of competition is dominant in the market, minimum RPM will have different effects to the effective competition. When there is an effective non-price competition, minimum RPM does not necessarily harm competition like in the situations where there is only price competition on the manufacturer level. 3 After Leegin case, minimum RPM in US will be subject to the rule of reason approach. EU approach The approach adopted in the EU has long established grounds for treating minimum RPM as a hardcore restriction of competition under Art. 101 (1) of the Treaty on the Functioning of the European Union ( TFEU ). The approach treats minimum RPM far stricter than the rule of reason approach adopted in the US. In fact, the EU s hardcore treatment to minimum RPM is close to the per se illegal previously approach adopted in the US. According to the TFEU, Art. 101(1) section a: 1. The following shall be prohibited as incompatible with the internal market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market, and in particular those which: (a) directly or indirectly fix purchase or selling prices or any other trading condition... Exceptions for this rule are provided under Art. 101 (3) TFEU. The provisions of paragraph 1 may, however, be declared inapplicable in the case of: - any agreement or category of agreements between undertakings, - any decision or category of decisions by associations of undertakings, 3 Bruce, C.,2008. Leegin Creative leather Products, Inc. v. PSKS, inc. Ohio northern university law review, 34(2), pp

4 any concerted practice or category of concerted practices,which contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not: (a) impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives; (b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question. 4 Agreements having their direct or indirect object of restricting competition by introducing fixed or minimum resale price levels are considered as hard-core restrictions under Art. 4 of the Commission Regulation 330/2010 on the application of Article 101(3) of the TFEU to categories of vertical agreements and concerted practice and are unable to be block exempted under it. Additionally, agreements containing minimum-resale price are hardly ever able to fulfil the conditions of 101 (3), since it is very unlikely minimum RPM will satisfy all four conditions listed under Art. 101 (3). RPM agreements should contribute to improve production or distribution of goods or promote technical or economic progress and at the same time, sharing the benefits gained with the consumers. Additionally, introduction of minimum RPM must be indispensable and cannot limit the competition of the products in question in a substantial way.. After all, balancing negative and positive effects of RPM, the EU approach still consider s that the negative effects caused by RPM exceed the potential positive effects. The EU Commission has considered only a couple of examples where anti-competitive effects are very unlikely or impossible. These rare situations cover the manufacture s willingness to promote a product when entering to the market and also, when RPM clauses are not the primary purpose of the agreement and no unilateral market power exists. 5 In the EU, after changes in the US approach were made, the thinking tended to shift from a formbased into an effects-based approach. This can be seen in the formulation of new guidelines on vertical restraints. Nevertheless, the EU Commission has left further clarification about the exact terms when minimum RPM can have pro-competitive effects very unclear. For example, short-term minimum RPM campaigns have been declared as generally pro-competitive but there is no explanation as to what is considered to fall under this short-term category. 4 Consolidated Verison of the Treaty on the functioning of the European Union, Article 101 (ex Article 81 TEC) 5 Velez, M., The tenuous evolution of resale price maintenance, European Competition Law Review, 32(6), p. 300

5 China approach AML, which was adopted in 2007 by the National People s Congress and took effect on August , was a milestone for creating a coherent system instead of complexity of laws, regulations, administrative rules. 6 However, what can be seen in the later case law examples is that applying the law has been far from clear. Currently, there is no sufficient legal certainty how minimum RPM cases will be handled in the future. There is a high degree of confusion about what kind of approach can be adopted because of the diverse approaches and lack of certainty of courts and AML enforcement authorities. Under Article 14(2) of AML, undertakings are prohibited from restricting the minimal resale price of products with respect to third parties. This may be exempted according to Article 15 of AML under the conditions: (1) For the purpose of improving technologies, researching, and developing new products; (2) For the purpose of upgrading product quality, reducing costs, improving efficiency, unifying product specifications or standards, or carrying out professional labor division; (3) For the purpose of enhancing operational efficiency and reinforcing the competitiveness of small and medium-sized business operators; (4) For the purpose of realizing public interests such as conserving energy, protecting the environment and providing disaster relief, etc.; (5) For the purpose of mitigating the severe decrease of sales volume or obviously excessive production during economic recessions; (6) For the purpose of protecting the justifiable interests of the foreign trade or foreign economic cooperation. 7 Still ongoing case, Johnson & Johnson medical (JJ) v. Rainbow Medical Equipment & Supplies Co.(Rainbow) ( JJ v. Rainbow ) can be held as a landmark step since AML became effective in The Shanghai No. 1 Intermediate People s Court ( Shanghai Court ) judged there should be proof demonstrated about the monopolistic conduct and indication that competition is distorted. Only providing evidence of a RPM clause shall be not sufficient to prove monopolistic conduct. The distribution agreement between J&J and its Beijing region distributor Rainbow contained a 6 Eichner, A.W., Battling Cartels in the New Era of Chinese Antitrust Enforcement, Texas International Law Journal, , p Anti-Monopoly Law of the People s Republic of China (promulgated by the Standing Commitee of the National People s Congress on Aug. 30, 2007 and effective Aug. 1, 2008)

6 clause of RPM. JJ terminated the distribution rights of Rainbow after it found out Rainbow distributed goods outside of its authorized district and below the price set out in RPM clause. Consequently, Rainbow filed a suit against J&J alleging RPM clause in the contract violated Art. 14(2) of the AML. 8 The plaintiff, Rainbow, was placed under an enormous burden of proof. The Shanghai Court stated three different conditions the plaintiff must prove in order to assess the illegality of minimum RPM. Firstly, the plaintiff has to prove the existence of monopolistic conduct. Secondly, proof of the loss caused by the monopolistic conduct. When analyzing the Courts application towards proper treatment of minimum RPM, we must consider the weak position of the plaintiff and weigh the most appropriate way to apply the rule of reason; how heavy of a burden of proof should be placed on plaintiff? The Shanghai Court ruling demonstrates the conditions must be satisfied in order to find minimum RPM as anticompetitive. The case is controversial on the undertakings point of view. As the first minimum RPM case after the adoption of AML, the case does not reveal any clear guidance or legal certainty for the undertakings. The issues of how much evidence the plaintiff should provide, how much loss must be incurred and the causation between these were left quite vague. After the JJ v. Rainbow case, some of the issues related to vertical restraints are still left unclear. Although, it was made clear by the Court that breach of Article 14 of the AML may only exist in very obvious market restrictions. According to the Johnson & Johnson judgment, minimum RPM will not be held per se illegal under Article 14 of the AML and the Court seemed to rather adopt US style Rule of Reason than per se prohibition. In Kweichow Moutai Distribution Co. Ltd. (Maotai) and Yibin Wuliangye Distribution Co., Ltd (Wuliangye) cases, National Development Reform and Commission (NDRC) and its local branches have demonstrate different approach compared to the rule of reason approach adopted in J&J v. Rainbow case. Moutai and Wuliangye are Chinese manufacturers of premium liquor. Moutai and Wuliangye required their distributors to follow the minimum RPM policy. In January, NDRC and its local branches in Guizhou and Sichuan had investigated Moutai s and Wuliangye s minimum RPM. Both companies had taken back the minimum RPM requirements they had previously set on 8 Cheng, L., et al, Resale Price Maintenance- Not per se illegal under the AML, King and Wood Mallesons < pdf> accessed 10 February 2013

7 their distributors. In late February, Moutai and Wuliangye were fined RMB 247 million and 202 million respectively. 9 The Moutai & Wuliangye case represents a completely new change after the case of JJ v. Rainbow where the approach tended to favour US style rule of reason analysis and a relaxed approach towards minimum RPM. NDRC s approach to minimum RPM in Moutai and Wuliangye cases is similar to EU s approach and stricter than the rule of reason approach. Although NDRC demonstrated few reasons behind its decisions in Moutai and Wuliangye cases, these reasons are far from detailed and persuasive. According to NDRC s approach in Moutai and Wuliangye cases, NDRC prefers to adopt a strict approach to minimum RPM and consider minimum RPM as by object restricting the competition. Conclusion: which direction will China choose when dealing with RPM cases? Currently, no guidelines in relation to minimum RPM have been adopted. In practice, NDRC and Shanghai court have demonstrated different approached to minimum RPM. Although China s approach to minimum RPM must be integrated into the special needs of China in order to support the aims of competition law in the most efficient way, experiences gained in the US and EU can provide great examples. Like EU competition rules (Art. 101(3)), there is an escape provision provided for undertakings under the Art. 15 of AML, while the section 1 of the Sherman Act does not have a similar exemption clause. Consequently, there is high demand of rule of reason analysis when no escape clauses for undertakings conduct are provided at all in the US. Although the approach towards minimum RPM remains controversial in China and no further clarification or guidance is provided currently, undertakings should be advised to avoid minimum RPM. An effective competition compliance program shall be adopted by undertakings in order to avoid competition risks. 9 Chinese Liquor makers fined for price fixing, Shanghai Daily, < accessed 20 February 2013