China Antitrust Column – September 2021

Hogan Lovells
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Hogan Lovells

On 27 September 2021, just a few days before the week-long National Day break, the State Administration for Market Regulation (SAMR) issued its decision against Bull, a supplier of power connection and extension products from Ningbo in East China.

In its decision, SAMR fined Bull for resale price maintenance (RPM). In particular, the authority found Bull to have fixed the resale prices of its independent distributors, around 3,000 offline shops and a number of online stores on e-commerce platforms (such as Taobao or JD). Bull was also found to have enforced notionally recommended resale prices. The company had required distributors to sign commitment letters not to price below the fixed or recommended resale prices, monitored itself or through third parties the distributors’ actual pricing behaviour, and sanctioned distributors for going below the fixed or recommended prices.

The Bull decision is a “classic” RPM case. “Classic” in the sense that China’s antitrust code – the Anti-Monopoly Law (AML) – explicitly prohibits that a supplier set the resale price or minimum resale price of its distributors. There have been numerous enforcement cases in China in the past penalizing this kind of conduct.

However, a closer look into past RPM enforcement cases reveals that almost three fourths of them were brought between 2013 and 2016, and were handled by one of SAMR’s predecessor authorities. After the consolidation of antitrust agencies into SAMR in 2018, SAMR’s enforcement against RPM started very slowly.

So much that, at the beginning of its antitrust mandate, one could have thought that SAMR isn’t interested in bringing RPM cases. SAMR had fewer RPM cases, and didn’t always impose fines in its RPM decisions. Indeed, in its first two RPM cases, SAMR settled with the companies, instead of fining them.

And then, there was the landmark judgment by the Supreme People’s Court (SPC) – China’s highest tribunal – in the Yutai case, made public in early 2019. The key question before the SPC was whether or not the antitrust agency, now SAMR, needs to prove that the specific RPM conduct has anti-competitive effects in the market, for example because the company has a very strong market position.

Authority decisions before Yutai basically hadn’t looked at the actual effects, but merely checked whether distributors were obliged to follow fixed resale prices.

In Yutai, if the SPC had found that SAMR has the burden to prove anti-competitive effects, this would have required SAMR to examine each case in much more detail and SAMR would have needed to dedicate more resources to each investigation. Conversely, for some companies – for example those with low market shares – this would have meant that RPM necessarily isn’t illegal.

The SPC made a sort of compromise. It found that, yes, anti-competitive effects need to be proven but, hold on, SAMR can presume these effects exist. In other words, the Yutai judgment made life relatively simple for SAMR, but given the SPC’s nuanced judgment, SAMR’s ‘moral mandate’ to bring RPM cases wasn’t very strong.

Fast forward to September 2021, the Bull decision makes it clear that SAMR doesn’t seek to prove anti-competitive effects, at least not to a high standard. True, in its decision, SAMR mentioned that Bull’s converters and wall switches/sockets ranked number 1 on Tmall, one of China’s top e-commerce platforms, and that Bull had an “advantageous position” for these products. Other than that, however, the decision limits itself to generalities such as that the RPM practice would restrict competition among distributors and among retailers and that consumers legal interests and the public interest would be harmed, without any detailed analysis.

Given the relatively high fine imposed on Bull – 3% of its total Chinese turnover (close to RMB 295 million, around US 46 million) – and the fact that this is already the second high-profile RPM case in 2021, the Bull decision may be an indication that RPM continues to be an enforcement focus for SAMR.

In essence, the message which the Bull decision may convey is that no company – whether big or small – should set the resale price of distributors. This is unfortunate, as RPM can sometimes increase total output in the market and thereby have pro-competitive effects, as the SPC itself recognized in Yutai. Indeed many companies, which seek some degree of control over their distribution channels, view uniform pricing by distributors as something positive for everyone including for end consumers. For these companies – and in principle for all other market players – the Bull decision may end up increasing compliance.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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