Competition Law Developments in East Asia - May 2012

This month’s editors: Maxime Vanhollebeke, Julienne Chang, Zhao Jingjing and Lydia Fung.

Below is an excerpt from our monthly Competition Report. More detailed commentary on these issues and other recent competition law developments in the Asian region is to be found in this month’s edition of our report available on a free subscription basis (see further below).

Foreign precedent is often referred to as guidance to construe newly introduced competition legislations. In these early stages of enforcement of China’s Antimonopoly Law, the absence of foreign consensus on the treatment of vertical restrictions makes it more challenging for companies to determine their supply and distribution policies in China.

The question is made complex by the apparent tension between the text of the Antimonopoly Law and the guidance issued by the enforcement authorities with regard to vertical restraints. On the one hand, contrary to what is the case in many foreign competition laws, the Antimonopoly Law contains a distinct prohibition on restrictive supply or distribution agreements, with an express prohibition on resale price maintenance. On the other hand, the Chinese administrative authorities have provided ample guidance on horizontal restrictions, but very limited discussion of vertical restraints, which might be a sign that vertical issues are not an enforcement priority.

Two developments this month may help bring some clarity to the issue.

In the first reported resale price maintenance judgment under the Antimonopoly Law, a court in Shanghai held that the plaintiff’s action could not succeed as there was no evidence of restrictive effects arising from the restriction on resale prices, in a case where the defendant had adduced evidence that it has no market power.

This comparatively lenient treatment of resale price maintenance is consistent with the final version of the Supreme People’s Court’s judicial guidance on private antitrust enforcement, which was released this month. Contrary to the Court’s proposed approach in its consultation draft last year, the final document does not institute a presumption that resale price restrictions have anticompetitive effects.

The above two developments only relate to vertical pricing restrictions, but they may foreshadow a pragmatic enforcement by the courts for all types of supply and distribution restrictions. Under this approach that relies on the economic effects of vertical restraints, restrictive effects are unlikely absent market power on the part of the supplier or the reseller.

The courts have not yet had the opportunity to rule on supply restrictions involving a party with market power. However, if they were to follow the approach adopted by the Ministry of Commerce’s Antimonopoly Bureau in its merger control decisions, one would expect a very stringent assessment of vertical restraints involving dominant players. As part of its prospective analysis of future competition conditions when reviewing merger transactions, the Ministry of Commerce has shown very significant concerns with foreclosure effects arising from vertical mergers involving dominant companies. The Ministry’s decision this month to subject its approval of the Google / Motorola Mobility transaction to conditions provides yet another illustration of this approach. The Antimonopoly Bureau’s concerns arise from Google’s position on the market for operating systems for smart mobile devices: due to its dominance on the market, any exclusivity or preferential treatment in Google’s supply of Android to Motorola Mobility is susceptible to restrict competition, according to the Ministry’s decision.

On 18 May, the Chinese legal press reported that Shanghai’s No. 1 Intermediate People’s Court had handed down its judgment in the Johnson & Johnson case. The case involves a dispute with a former distributor of suturing products, Rainbow Medical Equipment. The Court ruled in favour of Johnson & Johnson.

Rainbow was terminated as a distributor in Beijing in 2008, apparently for breaching a minimum resale price clause in its distribution agreement. Rainbow sued its contractual counterparts - Johnson & Johnson’s two wholly-owned subsidiaries in China - for wrongful enforcement of a clause which allegedly violated the prohibition of resale price maintenance under the Antimonopoly Law.

Johnson & Johnson raised three defences: first, the Law which came into force in August 2008 should not apply retrospectively to an agreement entered into before that date; second, even if the Law applies, it would only prohibit resale price maintenance if it restricts or eliminates competition, and Johnson & Johnson is not in a position of market power; third, Rainbow’s alleged loss of RMB14 million ($2.2 million) was not caused by any monopolistic conduct on its part, and as such Rainbow should not be eligible to claim damages under the Law.

The Court agreed with the last two defences and dismissed Rainbow’s case. In its reasoning, the Court reportedly stated that three circumstances must be established before an undertaking can be held liable for any civil damages under the Law, namely, a monopolistic conduct, losses, and a causal link between the loss and the monopolistic conduct. The Court reportedly held that the validity of a minimum resale price clause under the Antimonopoly Law must be appreciated based on the clause’s restrictive effects. The Court thus apparently rejected the view that resale price maintenance should always be illegal, irrespective of its effects. The Court’s approach appears consistent with the judicial interpretation on antimonopoly civil cases which was recently released by the Supreme People’s Court. Whereas the consultation draft released last year included a presumption that resale price maintenance was anticompetitive, the final Regulation omits such presumption.

The Court rejected Rainbow’s claims on the ground that it had failed to adduce any evidence (such as the share of the contractual products in the relevant markets, the competition conditions, supply conditions and price variations in the relevant markets) to prove the restrictive effect of the minimum resale price clause, and that its alleged loss was caused by the disputed termination of the distribution agreement.