Courts get tough on resale price maintenance

Resale price maintenance (RPM), otherwise known as vertical price fixing, refers to agreements between business operators at different levels in a distribution chain establishing restrictions on the resale price of products or services. On August 1 2013, the Shanghai High Court, in China Rainbow Medical Equipment & Supplies Co (Rainbow Medical) v Johnson & Johnson, held the RPM agreement concerning distribution of Johnson & Johnson's medical suture products violated the PRC Anti-monopoly Law (中华人民共和国反垄断法) (AML). In this case, after Rainbow Medical won a public bid for a medical suture supply contract with a price lower than the floor price established by the RPM agreement, Johnson & Johnson took an aggressive stance by cutting off the supplies and refusing to renew the distribution agreement despite their 15-year relationship. In a well-crafted decision, the Shanghai High Court held that the RPM agreement at issue was anti-competitive without any apparent pro-competitive effects and thus illegal under the AML.

Why manufacturers need an RPM policy

To a layperson, RPM seems counterintuitive for the upstream party (mostly the manufacturer) in a vertical relationship, as it does not bring any direct financial benefit to the upstream party, which can achieve this goal by simply raising the wholesale price. On the contrary, it ensures the downstream party (mostly the reseller) a certain profit margin for resale of the upstream party's products. But in many situtations, the manufacturer is the driving force behind many RPM agreements. This is because, from an economic perspective, while both manufacturer and reseller seek higher profits, their interests are not perfectly aligned. The manufacturer is more concerned about the product quality, image and popularity associated with its long-term profitability, whereas the reseller has more immediate needs, which often can be achieved through increased sale volumes in a short period.