Summary of Major Issues of the First Civil Action in China Concerning a Vertical Monopoly Agreement

The Anti-monopoly Law of the People’s Republic of China (the “AML”) has been in force for approximately four years.  The trial of first instance as to the first civil action in China concerning a vertical monopoly agreement (the “Case”) lasted approximately one and a half years from filing of the action to the delivery of judgment and has recently been concluded.  Jun He Law Firm (“Jun He”) acted as the attorneys for the Defendant (a wholly foreign-owned enterprise in China of a multi-national company) in the Case.  The court of first instance (the “Court”) accepted the arguments made by Jun He on behalf of the Defendant as to the key issues of the Case (as analyzed below) and rejected all litigation claims of the Plaintiff.

I. Litigation Claims of the Plaintiff

The Plaintiff, a distributor of the Defendant, alleged that (i) the Defendant included certain clauses in the Distribution Contract dated January 2008 between the Plaintiff and the Defendant pertaining to restricting the minimum prices at which the Plaintiff as the distributor might resell the goods to third parties (the “RPM Clause”) and that the RPM Clause constituted a monopolistic act of restricting minimum resale price as prohibited under Article 14(2) of the AML¹ ; and (ii) the Defendant confiscated a partial deposit of the Plaintiff, ceased supplying to the Plaintiff, and terminated the distribution rights of the Plaintiff on the grounds that the Plaintiff breached the RPM Clauses and that such actions of the Defendant caused huge losses to the Plaintiff, and as a result of these actions the Plaintiff requested the Court to order the Defendant to compensate it for these damages.

II. Key Issues

There are two key issues in the Case.  The first is whether the RPM Clause necessarily constitutes a vertical monopoly agreement under Article 14(2) of the AML² , and consequently whether the inclusion of the RPM Clause necessarily constitutes a monopolistic act, or in another word, whether the RPM Clause is a monopoly agreement per se; the second issue is whether the losses alleged by the Plaintiff are losses arising out of such alleged monopolistic act (the “Monopoly Losses”), assuming that such monopolistic act occurred, in another word, how to define the Monopoly Losses.

The Case is the first civil action in China concerning a vertical monopoly agreement and there has been no precedential case for reference.  Therefore, in the Case, analyzing and making determinations pertaining to such key issues from the AML perspective were completely new to both the Court and to the attorneys of the parties.

1. Whether the RPM Clause is a monopoly agreement per se.

A key issue of the Case is whether the RPM Clause constitutes a monopoly agreement per se or if it is only an essential factor of all the elements for the determination of a monopoly agreement and could only be determined as a monopoly agreement if it causes an eliminative or restrictive effect on competition.  Regrettably, however, the AML provides no explicit answer to this issue.  As a result, Jun He and the attorney for the Plaintiff debated and expressed wholly opposite views on this issue during the trial.

(1)The attorney for the Plaintiff argued that the RPM Clause constituted a monopoly agreement per se prohibited under the AML and that it was not just an essential factor of the elements for the determination of a monopoly agreement. The attorney argued that because Article 14(2) of the AML expressly prohibits operators from entering into agreements on restricting minimum resale prices with their counterparties, and that entering into such agreements would inevitably eliminate or restrict competition among those operators dealing in different brands and those operators dealing in the same one brand and result in a monopoly, such agreements were monopoly agreements per se, and there was no need to prove whether such agreements had eliminated or restricted competition.

(2)Jun He argued that for the following reasons the RPM Clause was not necessarily a monopoly agreement per se prohibited under Article 14 of the AML rather that it was simply an essential factor of the elements for the determination of a monopoly agreement, and that the RPM Clause could be determined as a monopoly agreement only unless and until it caused “an eliminative or restrictive effect on competition” (i.e., the other essential factor):

(a)Article 14 of the AML prohibits operators from entering into “monopoly agreements” with their counterparties that restrict minimum resale prices with their counterparties, but the AML does not prohibit the operators from entering into “agreements” that restrict minimum resale prices with their counterparties.  In addition, the AML does not state that agreements between operators and their counterparties that restrict minimum resale prices are necessarily monopoly agreements.  Therefore, the argument that the RPM Clause is a monopoly agreement per se is obviously does not comply with the meaning and logic of the foregoing provision of law.

(b)In order for clauses on restricting minimum resale prices entered into between operators and their counterparties to be deemed as monopoly agreements, such clauses restricting minimum resale price must satisfy the conditions for being a monopoly agreement.  Article 13.2 of the AML expressly defines monopoly agreements as “agreements, decisions or other concerted actions that eliminate or restrict competition”, and thus monopoly agreements must “eliminate or restrict competition”.  Therefore, one essential factor for a clause restricting minimum resale price to be determined as a monopoly agreement is that such a clause causes “an eliminative or restrictive effect on competition”, and if it does not cause such an effect, or such an element is missing, it should not be determined as such.

(c)A clause restricting minimum resale price entered into between an undertaking and its counterparties will not necessarily eliminate or restrict the competition among different brands, because the pricing of the other brands will not necessarily be restricted by the aforesaid clause.  Such a clause restricting minimum resale price will not necessarily eliminate or restrict the competition among operators dealing in the same brand either. Such competition is not simply limited to price competition, but instead is carried out in multiple aspects and at multiple levels, including but not limited to sales volume, after-sales services, customer awareness, brand promotion and maintenance, maintenance of customer relationship, business integrity, and timeliness of payment.  Therefore, the entry into of a clause restricting minimum resale price does not necessarily result in monopoly per se.

2. Definition of the Monopoly Losses

It is stipulated in Article 50 of the AML that “operators that cause losses to others as a result of their monopolistic acts shall bear civil liabilities in accordance with the laws”.  However, the AML does not further define such losses (i.e., the Monopoly Losses).  Therefore, this issue is another key issue in this Case.

(1)The attorney of the Plaintiff argued that the Defendant confiscated a partial deposit, narrowed down the authorized distribution areas, ceased the supply and eventually terminated the distribution rights of the Plaintiff on grounds of the alleged failure of the Plaintiff to conform to the RPM Clauses, which were a monopoly agreement in nature, and that such acts caused substantial losses to the Plaintiff, including but not limited to the loss of performance rebates, loss of benefits from performance of the contract, severance pay, loss of goodwill, loss from unsold stock, and the excess of the price of the goods purchased from third parties to satisfy unperformed contracts over the price at which the Plaintiff would have otherwise purchased the goods from the Defendant had the Distribution Contract not been terminated, and that all such losses arose out of Defendant’s monopolistic acts and constituted Monopoly Losses within the meaning of Article 50 of the AML.

(2)Jun He strongly argued that (i) the Plaintiff produced no evidence that could prove the incurrence or existence of such losses, and (ii) assuming that such losses alleged by the Plaintiff did occur or exist, such losses were by nature just the contractual losses arising in connection with the entry into and performance of the Distribution Contract involved in the Case and did not arise out of the elimination or restriction of competition resulting from monopolistic acts and thus were not Monopoly Losses.  In fact, the “monopolistic acts” alleged by the Plaintiff, i.e., the entry into and performance of the RPM Clauses, did not cause any eliminative or restrictive effect on competition and were not monopolistic acts at all, let alone the reason for the incurrence of any alleged Monopoly Losses.

III. Court Analysis and Determination

In the Judgment of First Instance, the Court analyzed and made its determinations as to the above two key issues involved in the Case. The Court’s determinations were essentially consistent with the arguments made by Jun He.

1. The Court held that the determination of a monopoly agreement referred to in Article 14 of the AML³ should not be made solely based on whether any restricting minimum resale price clause was entered into between an operator and its counterparty.  Instead the Court found that Article 13.2 of the AML  should be taken into consideration as well, i.e., whether the clause restricting minimum resale price causes “an eliminative or restrictive effect on competition” should also be assessed.  Based on the findings of fact, the Court held that the evidence produced by the Plaintiff could not prove that the RPM Clauses in the Case had “an eliminative or restrictive effect on competition” and there was no adequate basis for the Court to determine the existence of any monopolistic act in the Case.

2. The Court defined Monopoly Losses to be those losses mainly arising out of the elimination or restriction of competition.  Therefore, regarding the losses alleged by the Plaintiff, the Court held that all such losses were in nature the losses arising out of contractual disputes and were not directly relevant to the monopolistic act alleged by the Plaintiff, i.e., the RPM Clauses.  This ruling indicates that the Court did not accept the losses alleged by the Plaintiff were Monopoly Losses .⁴

3. Consequently, the Court rejected in its judgment all litigation claims made by the Plaintiff.

IV. Summary 

1. Many distribution or sales contracts contain clauses restricting minimum resale price.  Whether such clauses are monopoly agreements per see prohibited under the AML has been the subject of debate after the AML took effect, since (i) the relevant provisions of the AML are not explicitly worded; and (ii) no further explanation or interpretation has subsequently been made in the administrative rules regarding anti-monopoly in terms of price.  In this Case, the Court analyzed the foregoing issue and made it clear that the RPM Clause did not constitute a monopoly agreement per se and that the RPM Clause should be determined as such only if it had caused “eliminative or restrictive effects on competition”.

2. The AML does not clearly define Monopoly Losses either.  In the Case, the Court made it clear that the criterion for determining whether the relevant losses were Monopoly Losses is that the determination should be made based on whether the relevant losses arose out of the elimination or restriction of competition, and that such losses would be Monopoly Losses if they arose out of the elimination or restriction of competition and would be other losses (such as contractual losses) if not。

1. prohibits operators from entering into the monopoly agreements on restricting the minimum prices for resale to third parties with their counterparties.

2. The monopoly agreements under Article 14 of the AML are entered into between or among two or more operators at different levels of the supply chain in the same one industry that are not direct competitors but are buyers on one side and sellers on the other side, and are often termed “vertical monopoly agreements”.

3. It is stipulated in Article 13.2 of the AML that “the term “monopoly agreements” referred to herein refers to the agreements, decisions or other concerted actions that eliminate or restrict competition”.

4. The Court also pointed out that the evidence produced by the Plaintiff in the Case could not prove that the Defendant early terminated the Distribution Contract and refused to enter into further contracts with the Plaintiff due to its implementation of the RPM Clauses and thus there would also be lack of basis for the Plaintiff to claim against the Defendant for compensation for such contractual losses.