Law Times

Page 12 February 3, 2014 • Law Times www.lawtimesnews.com Chinese competition law sharpening its teeth Price maintenance case shows courts, regulator getting more proactive t has taken some five years since China's modern competition regime took effect in August 2008, but by all appearances the country's courts and regulator have only recently started to give the legislation some teeth. Indeed, it was exactly on the fih anni- versary of the anti-monopoly law's enact- ment that a Chinese court rendered its first judgment in favour of a plaintiff in a vertical price-fixing case. e August 2013 decision, which involved resale price maintenance, came less than a month aer the National Development and Reform Commission, the authority respon- sible for price-related matters under the law, fined six baby-formula producers US$107 million for price-fixing and other anticom- petitive practices. "In the last two years, [the commission] has moved in quite aggressively against sup- pliers seeking to enforce [resale price main- tenance] clauses," says Marc Waha of Norton Rose Fulbright's Hong Kong office. Previously in Febru- ary, and perhaps more significantly, the com- mission fined two of the best-known producers of premium liquor, both of them state-owned enter- prises, US$78.7 million for various acts of resale price maintenance. "e fact that [the com- mission] was willing to take action against [state-owned enterprises] speaks to the issue of the regulator's inde- pendence from the govern- ment," says Sandy Walker of Dentons Canada LLP's Toronto office. e judicial ruling on resale price maintenance came in Rainbow v. Johnson & Johnson from no less a force than the Shanghai Higher Peo- ple's Court, which with other regional high courts stands just below the Supreme Court in the country's judicial hierarchy. "e Shanghai high court is very influential because it is the largest regional court in China," says Todd Liao of Dentons' Shanghai office. e case started with a complaint from Rainbow, a company that distrib- uted medical equipment supplied by international conglomerate Johnson & Johnson. e distribu- tion agreement delineated a sales territory and set a contractual minimum re- sale price. Aer working with Johnson & Johnson for 15 years, Rainbow began operation in an unauthor- ized sales territory selling goods at below the con- tractual minimum price. On discovering this, Johnson & Johnson terminated Rain- bow's distributorship. Rainbow sued in the Shanghai No. 1 In- termediate People's Court. It alleged that enforcement of the contractual minimum FOCUS Inside you will find: ȕ BOVQUPEBUFBMQIBCFUJDBMMJTUJOHof more than 78,000 barristers, solicitors and Quebec notaries, corporate counsel, law firms and judges in Canada; ȕ DPOUBDUJOGPSNBUJPO for the Supreme Court of Canada, the Federal Court of Canada, Federal Cabinet Ministers, departments, boards, commissions and Crown corporations; ȕ MFHBMBOEHPWFSONFOUDPOUBDUJOGPSNBUJPOrelated to each province for the Courts of Appeal, Supreme Courts, County and District Courts, Provincial Courts, law societies, law schools, Legal Aid, and other law-related offices of importance. 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Rainbow appealed and won, garnering US$87,000 in dam- ages. e high court set out four factors that judges should take into account when assessing whether resale price mainte- nance clauses had restricted or eliminated competition: wheth- er there was sufficient competi- tion in the market; whether the defendant's market position was strong; what the defendant's motivation was in engaging in resale price maintenance; and what both the pro-competitive and anticompetitive effects of resale price maintenance were on competition in the market. "is is the first time that a Chinese court has laid out rela- tively clear standards for deter- mining the nature of vertical ar- rangements," says Liao. e "relevant market," the court stated, was the one sup- plying medical suture products in mainland China. It found that high entry barriers character- ized this market, which therefore lacked sufficient competition. By contrast, Johnson & John- son's sales accounted for more than 20 per cent of total sales in the market. e fact that the company could sustain mini- mum resale pricing for some 15 years indicated it had the power to preclude price competition. "e judgment is very de- tailed, includes a thorough dis- cussion of facts and economics, and is clearly influenced by the different theories of the parties regarding price maintenance," says Waha. "It's the kind of reasonable analysis that you could see in any respected jurisdiction and it indicates that the high court is a very competent tribunal." Ironically, Rainbow's success will not likely stimulate a flood of similar lawsuits. "In the first three or four years of the law's existence, the government agencies were not very active, so we saw many Chinese companies turning to the courts with about 200 cases filed," says Waha. "But these days, a plaintiff would be much more interested in filing a complaint because the regulators are more active." e authorities, Waha adds, can be much more effective than the courts. "To begin with, [the commis- sion] has a wider jurisdiction because it can look at all sorts of exclusivities, like territorial exclusivities, while the courts' jurisdiction is limited to price maintenance," he says. "e authorities also have in- vestigative tools that the courts lack, as well as the power to en- force fines." LT BY JULIUS MELNITzER For Law Times I The regulator's willingness to take action against state-owned enterprises is a sign of its independence from the government, says Sandy Walker.

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