Vertical agreements - a hot topic in Asian competition law enforcement

On 22 February 2013, two provincial branches of National Development and Reform Commission of the People's Republic of China ("NDRC") (Guizhou Price Bureau and Sichuan NDRC) officially announced that two well-known manufacturers of premium Chinese liquor were fined RMB 247 million (~£26 million) and RMB 202 million (~£21 million) respectively for resale price maintenance ("RPM").  The total fine imposed is the highest since China's Anti-Monopoly Law (the "AML") came into force in 2008, overtaking the total fine of RMB 353 million (~£37 million) imposed on six international LCD manufacturers last month. These cases set a milestone in Chinese antitrust enforcement as this is the first time the Chinese antitrust authorities have applied the AML fining provisions to penalize RPM, shedding some light on important issues relating to calculation of fines and the treatment of "vertical agreements" (agreements between parties at different levels of the supply chain) under the AML.  Our competition law experts Karen Ip, Mark Jephcott and James Quinney provide detail on the background and decisions. 

The treatment of vertical agreements by competition authorities is currently a hot topic across Asia, with the Malaysian competition authority also dealing with an RPM case recently and the Singaporean authority investigating potentially restrictive provisions in supply agreements.  Companies with activities in Asia would therefore do well to review their distribution practices across Asia and ensure that these are in compliance with the applicable competition rules.

Background

In January 2013, Kweichow Moutai Co. Ltd. ("Moutai") and Yibin Wuliangye Group Co., Ltd. ("Wuliangye"), two leading premium liquor producers in China (which own such well-known brands as Moutai and Wuliangye), announced that they had been investigated by NDRC and the local authorities for RPM.  According to the announcements, both Moutai and Wuliangye requested their distributors sell their products at a price no lower than a specified minimum price.  Distributors who discounted lower than the minimum price were penalised by Moutai and Wuliangye.  During the investigation, both Moutai and Wuliangye actively cooperated with the authorities and committed to immediately ceasing their anti-competitive conduct.

Decisions

The announcements published by Guizhou Price Bureau and Sichuan NDRC are both very brief.  Both authorities held that the two companies' behaviour constituted RPM and that this violated Article 14 of the AML (the prohibition against anti‑competitive vertical agreements).  In light of the companies' cooperation, the fines ultimately imposed were set at 1% of the turnover of the entities involved in the previous financial year (not of the turnover of the entire corporate group of the relevant entity).  According to the AML, the Chinese antitrust authorities have discretion to impose fines of up to 10% of the turnover of the infringing company.  However, the AML is ambiguous on how to calculate this turnover, and no official guidelines have been published clarifying this issue.  If these decisions are followed, it appears that the authorities will calculate turnover on the basis of the revenues of the entity directly involved in the infringement, rather than of its entire corporate group.

The decision by Sichuan NDRC also sheds light on its analysis of RPM.  According to Sichuan NDRC, Wuliangye's RPM practice has: (1) eliminated intra-brand price competition among its distributors and harmed economic efficiency; (2) limited inter-brand competition between manufacturers and provided a bad example to other liquor manufacturers, as other brands are starting to conduct RPM, which further harms competition; and (3) harmed the interests of consumers, as it eliminated the opportunities for consumers to purchase lower priced goods.  Moreover, because Wuliangye is a leading liquor brand and there are few substitutes in the market, Sichuan NDRC found that its conduct has severely limited consumer choice. It is interesting to note that the decision did not explore the issue of why Wuliangye was imposing RPM and whether there were any efficiency considerations which might justify the RPM.  It thus appears that Sichuan NDRC has adopted an "object" or "per se" approach to analysing RPM rather than an economic "effects" based approach.

Implications

While the Chinese public have generally welcomed these two decisions, some commentators have expressed doubts about the agencies' strict approach towards RPM.

In contrast to NDRC's approach, in a recent judicial decision issued by the Shanghai Intermediate People's Court, the court did not consider RPM as "per se" illegal and dismissed the plaintiff's claim against alleged RPM by Johnson & Johnson's subsidiaries in Shanghai.  The court reasoned that three conditions must be met for undertakings to be found liable under the AML: anti-competitive behaviour; injury; and causality between the two.  The court further found that to determine whether an undertaking has violated the AML prohibition against anti-competitive vertical agreements, both the existence of a vertical agreement and that the agreement has the effect of eliminating or restricting competition must be established.  The court stressed that in order to carry out this assessment other factors must be taken into account, including the market shares of the products concerned, the competitive strength of the upstream and downstream markets, and the impact of the RPM on the quantity and the price of the products.  The court held that the plaintiff had failed to provide relevant evidence on these factors, whereas the defendant was able to show that there were several competing suppliers of the same products.  However, the decision by the Shanghai Intermediate People's Court has been appealed to the Shanghai People's High Court and so the final position of the People's Courts towards RPM remains to be seen.

While at least one Chinese court has taken a less strict approach towards RPM, NDRC has made it clear that it regards RPM as illegal and justifying large fines.  This serves as a reminder for businesses operating in China that they should closely review their distribution activities to identify any conduct that may amount to RPM.  More generally, the fact that these two decisions followed NDRC's recent tough sanctions in the global LCD panel cartel case (see here) sends a clear signal that Chinese antitrust authorities have stepped up their enforcement efforts against behavioural antitrust infringements. 

Malaysia and Singapore developments

Antitrust scrutiny of vertical agreements in Asia is not confined to China.  On 10 January 2013, the Competition Commission of Singapore ("CCS") announced that it closed an investigation into Coca Cola's supply agreements, and on 25 February 2013 the Malaysian competition authority ("MyCC") issued an announcement concerning the potential anti-competitive effect of Nestlé's price parity policy.

In March 2012, the CCS commenced an investigation in the local soft drinks market after receiving a complaint that Coca Cola Singapore Beverages ("CCSB") had included restrictive provisions in its supply agreements with on-premise retailers, such as exclusivity restrictions and loyalty-inducing rebates. It has been reported that the CCS investigation included considering the practices from a potential abuse of dominance perspective, rather than purely from a vertical agreements perspective. In January 2013, the CCS ceased its investigation after CCSB voluntarily amended its supply agreements to remove the potentially anti-competitive provisions and gave undertakings to CCS.  This development is interesting as a distinct feature of Singaporean competition law is the existence of a broadly worded exemption from the prohibition on anti-competitive agreements for vertical arrangements, and the application/limits of the exemption has rarely been examined by the CCS (at least in the public domain). The CCS announcement serves as an important reminder that all vertical agreements are not always exempted from competition law scrutiny in Singapore.

Singapore's neighbouring jurisdiction, Malaysia, is also active in competition law enforcement. According to Malaysian media, in May 2012, the Federation of Malaysian Consumer Associations ("FOMCA") made a complaint to MyCC against Nestlé Malaysia for fixing retail prices.  According to the FOMCA, under its "Brand Equity Protection Policy" ("BEPP") Nestlé determined the prices that retailers must charge for its products such as Milo, Nescafe and Maggi.

Nestlé Malaysia has reportedly issued a statement that the resale price restrictions under the BEPP were limited to "loss leader selling" / "promotional loss" activities by some retailers, i.e. selling products at a loss to attract customers to buy other products at regular prices.  Nestlé also reportedly applied for an individual exemption to exclude its BEPP from the application of the Malaysian Competition Act.

On 25 February 2013, MyCC announced that the BEPP pricing policy was likely to infringe Section 4 of the Malaysian Competition Act (i.e. the prohibition against anticompetitive agreements) as it essentially constitutes RPM preventing resellers from setting their prices independently, potentially leading to increased prices for consumers.  MyCC has requested Nestlé to dismantle its pricing policy contained in the BEPP.  After a series of discussions with the MyCC, Nestlé agreed to do so.  Nestlé has also reportedly withdrawn its exemption application, although, according to the press, it intends to raise its concerns with the Ministry of Domestic Trade, Cooperatives and Consumerism.

Conclusion

The above developments appear to signal changes in the focus of Asian competition law enforcement, from the traditional view that merger control is the leading enforcement focus to more emphasis on antitrust behavioural enforcement, and from the "classic" antitrust focus on cartels and other horizontal agreements to vertical agreements.  Companies with activities in Asia should therefore review their practices, especially distribution practices, across Asia to be better prepared for these new enforcement trends.

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