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 monopolistic agreement.
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 vertical agreements.
The Supreme People’s Court released Provisions clarifying 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 Law (中华人民共和国反不正当竞争法) - to justify its claims as this focuses on trade secrets and fails to cover the specific terms found in the Anti-monopoly Law.
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 guidance.
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 & Practice
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)
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