In March 2008, Johnson & Johnson found Rainbow
Medical Equipment & Supplies, which had been distributing
J&J’s suturing products for 15 years under
annually-renewed distribution agreements, was selling the
products below the minimum contracted price and winning
business outside its allocated region of Beijing. J&J
terminated Rainbow’s distribution rights in July
that year and ceased delivery in August 2008.
Rainbow subsequently filed a lawsuit alleging that
J&J engaged in resale price maintenance, violating Article
14 of the Law, which prohibits setting a minimum price and
claimed damages of Rmb14.4 million ($2.3 million).
Price maintenance is just one type of restriction
placed on distributors. It is common in manufacturer and
distributor agreements. From the manufacturer’s
perspective, they need to protect a minimum price for products,
ensuring its correct place in the market.
The case was heard before Shanghai No 1 Intermediate
People’s Court in February this year. The court
rendered their judgement on May 21 in favour of Johnson &
Johnson. The Court said Rainbow failed to meet the burden of
proof and the contract did not guarantee it was part of a
Qi Fang of Fangda partners in Beijing, who specialises
in anti-monopoly disputes, said the case was the first
anti-monopoly case involving a manufacturer and a distributor
since China’s Anti-Monopoly Law came into effect.
"It highlights several important issues over market dominance,
vertical agreements and burden of proof," he said.
Companies need to consider how important these
provisions are and gage their position in the relevant market,
he said. "This gives them an idea of potential risk to
anti-monopoly disputes," he explained. "If they can prove that
such a provision is essential to maintaining goodwill, courts
may rule in their favour."
Additionally, proving market dominance is a problem
when it comes to vertical monopoly disputes. Under article 13
of the Law, plaintiffs do not have to prove dominance for
horizontal agreements, but Article 14 is silent on the issue of
The Supreme People’s Court
Provisionsclarifying many areas of the
Anti-monopoly Law on May 4. These will come into effect on June
1. It failed to touch on vertical agreements, however. "The SPC
will wait to gather ideas and allow cases to develop before
clarifying this issue," said Qi.
J&J has argued the Anti-monopoly Law did not apply
to this case, as the contract was signed before it came into
effect in August 2008 This is typical of China’s
laws, as they do not have retrospective effects.
Even so, Rainbow is unlikely to use the law preceding
the Anti-monopoly Law - the
PRC Anti-unfair Competition
) - to justify its claims as this focuses on trade secrets and
fails to cover the specific terms found in the Anti-monopoly
Qi clarifies the issue: "If Rainbow can argue the
alleged monopolistic conducts continued after the Law became
effective, then their claim should still be valid."
An interesting aspect of the case is that the Court
did not hold the damages claim valid because it comes from a
contract dispute not an anti-monopoly dispute. According to Qi,
contract disputes are anti-monopoly claims but this all depends
on how Rainbow argued the case. This issue will become clearer
once the judgement is released in the coming months.
If Rainbow appeals the decision it will go to Shanghai
Higher People’s Court and become only the second
anti-monopoly case to be heard by a Higher Court. With so many
grey areas in anti-monopoly disputes, practitioners hope
Rainbow does appeal, as decisions from Higher
Court’s will provide clarity and
A full text translation of the Provisions from the
Supreme People’s Court and a feature analysing
them will appear in the June issue of China Law &
By David Tring
Making sense of the PRC Anti-monopoly Law
PRC Anti-monopoly Law (中华人民共和国反垄断法)
The PRC Anti-monopoly Law: one year on