Is resale price maintenance illegal in China? The Gree case

In competition law, vertical resale price maintenance (“RPM”) agreements between upstream and downstream firms are generally seen as not so severely harmful to competition as horizontal price-fixing agreements among direct competitors. Therefore, whether and to what extent RPM should be prohibited is a question having been answered differently in different jurisdictions. A peculiar situation exists in China, where even in the same country the standard for assessing legality of RPM diverges between administrative and judicial enforcement. While, in administrative enforcement, the responsible enforcement body, the National Development and Reform Committee (“NDRC”) considers RPM illegal “per se”, the Chinese courts have established a more moderate  approach based on the “rule of reason” to assess the legality of such agreements. The latter approach is well exemplified in the Gree case, for which the Guangdong Higher People’s Court has issued a second instance decision earlier this month.

Facts

Yushi company and Heshi company are respectively the general distributors and suppliers of well-known Gree household air conditioners in Dongguan City. Together with the two companies, the retail company Guochang Electrical Appliances Store (“Guochang Store”) signed a tripartite agreement, containing a minimum RPM clause for selling Gree air conditioners. Later, in violation of the clause, Guochang Store sold a certain model of Gree air conditioners below the minimum resale price and was forced to pay a penalty for the breach of agreement. Thus, Guochang Store sued Yushi and Heshi before the Guangdong IP Court, arguing that the RPM clause constitutes a vertical monopoly agreement, prohibited by Article 14 of the Chinese Anti-monopoly Law (“AML”).

The Guangdong IP Court dismissed the claim of Guochang Store, and held that the agreement at issue was not a monopoly agreement under the AML for its lacking of object or effect of eliminating and restricting competition. The plaintiff appealed this decision to the Guangdong Higher People’s Court.

Issues

Is the effect of eliminating and restricting competition a requirement for constituting a vertical monopoly agreement?

The second instance court affirmed a positive answer, referring to Article 13 of the AML which deals with horizontal monopoly agreements and defines monopoly agreements as “agreements, decisions, or other concerted conducts that eliminate or restrict competition”. The court concluded that, a fortiori, the requirement of eliminating and restricting competition must apply to the less severe vertical monopoly agreement as well.

Allocation of the burden of proof of the effect

The court held that the burden of proof was on the plaintiff, stating that the reversal of burden of proof which, pursuant to the established practice, applies to horizontal agreements does not nevertheless apply to vertical agreements. However, as public interests are concerned, the court can actively obtain evidence based on the needs of a specific case.

Factors for assessing the effect

The court held that in the analysis of the nature of the RPM, the factors such as i) whether competition in the relevant market was sufficient, ii) whether the market position of supplier and distributor was strong, and iii) object and consequences of the RPM should be considered.

Specific to the present case, the relevant market was defined as the domestic air conditioner market in mainland China. According to evidence, although Gree’s products had a comparative advantage in the relevant market, the competition in the relevant market was relatively sufficient, and Gree’s products hadn’t reached the level of indispensability for consumers. Thus, it could not be assumed that the defendants had implemented the RPM to achieve the goal of obtaining high monopoly profits, and the RPM did not have the consequences of eliminating and restricting competition.

In fact, the defendants claimed that the purpose of the RPM was not to avoid price competition, but to optimize internal management, improve product quality, reputation, and user experience, while vicious price competition could cause damage to store investment, after-sales service and distribution management system, which was not conducive to brand protection. In other words, the defendant decided to run a commercial risk by imposing a minimum reselling-price to its retailers, namely that end-consumers switch to other manufacturers’ products.

Accordingly, the court held that the RPM clause stipulated in the tripartite agreement in the present case did not have the effect of excluding and restricting competition, and therefore was not a monopoly agreement prohibited by the AML. The first instance decision was upheld.

Conclusion

The Gree case has been decided in line with the previous landmark case of Rainbow vs. Johnson & Johnson in 2013, which addressed RPM for the very first time in a civil case in China. It demonstrates a certain degree of legal certainty before the courts. However, one should not forget that the same case could have been decided very differently by the administrative enforcement body NDRC, which could have deemed the RPM to be a monopoly agreement without closely assessing the effect of eliminating and restricting competition. It is to be seen whether the NDRC will adjust its approach based on the evolution of the civil case law in the future.

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