Authored by Michael Gu (email@example.com)
Just one and half months following the breakthrough LCD cartel case, the Chinese price-monopoly watchdog, two provincial branches of National Development and Reform Commission of the People’s Republic of China (“NDRC”), rendered another harsh punishment against two luxury Chinese Liquor producers.
On 22 February 2013, the NDRC’s provincial branches (i.e. Guizhou Provincial Price Bureau and Sichuan Development and Reform Commission) officially announced that two most famous Chinese liquor producers were respectively fined RMB 247 million and RMB 202 million for their monopoly behaviors. The total penalties combined amount to RMB 449 million, overtaking the total penalty of RMB 353 million imposed on six internal LCD manufacturers early last months, reach a new record high since the China’s Anti-monopoly Law came into force in 2008.
Both Kweichow Moutai Co Ltd. (“Moutai”) and Yibin Wuliangye Group Co., Ltd. (“Wuliangye”) are well-know liquor producers, and in particular their respective luxury Chinese liquor brands Moutai and Wuliangye are among the most expensive in China. Last month, the two companies issued notices respectively disclosing that they were inspected by NDRC and local price administrations, and they would take measures to rectify any behaviors which breach the AML. Shortly after Chinese New Year, rumors about the heavy penalty decisions against the two companies suddenly attracted wide media coverage and spread rapidly on internet before official announcements.
According to the official announcements, both Moutai and Wuliangye requested the distributors to sell their products at a price no less than the minimum price set by the two companies. The distributors who sold their products lower than the fixed minimum price were punished by Moutai and Wuliangye respectively. The local provincial price administrations determined that the two companies’ behaviors constituted vertical monopoly and violated Article 14 of the AML, and such resale price maintenance (“PRM”) practice excluded and restricted competition in the relevant market, harmed the interests of consumers.
During the investigation, both Moutai and Wuliangye actively cooperated with the competition authorities by returning previously deducted guarantee deposits from distributors penalized for selling at lowered prices, taking further rectification measures in a timely manner in accordance with the legal requirements. In view of the above facts, each of the two companies was imposed with relatively light fine under the AML in the sense that the fine is equivalent to 1% of the company’s sales in 2012. According to the AML, the fine could be as higher as 10% of the violator’s annual sales under certain sever circumstance. It is also worth to note that the penalty tickets were issued to the sales subsidiaries controlled by Moutai and Wuliangye rather than Moutai and Wuliangye themselves. This also explains that the calculation of the fines is based on the annual turnover of the relevant sales subsidiary which directly engaged in the vertical restrains.
Just as demonstrated in the LCD cartel case, this case again indicates that NDRC is taking more aggressive approach to crack down the activities breaching the AML.
Unlike the LCD cartel case which was decided in accordance with the Price Law, this case was investigated and penalized under the AML.
In particular, this is the first penalty decision against vertical monopoly made by Chinese antitrust regulators. RPM is a typical vertical restrictive agreement and generally prohibited under Article 14 of the AML. However, it has been long debated as to whether the RRM practice shall be deemed as illegal and presumed to restrict market competition since neither the AML nor the relevant implementing rules provide any clear guidance. Prior to this decision, Shanghai No.1 Intermediate People’s Court (“Shanghai Court”) heard a case involving vertical monopoly behaviors which is the first civil litigation case of this type has ever been trialed in the PRC court. The plaintiff is an independent distributor of Johnson & Johnson Medical Equipment Company (“Johnson”). The plaintiff claims that Johnson restricted its sales price to third parties and thus breached the AML. In August 2010, the plaintiff filed a lawsuit against Johnson with the Shanghai Court claiming damages in an amount of RMB 14 million. Although the Shanghai Court determined the distribution agreement between the plaintiff and Johnson contains provisions restricting the resale price to the third parties, the Shanghai Court concluded that the plaintiff shall prove Johnson’s RPM practice has restricted or eliminated competition, and otherwise the PRM practice shall not be regarded as vertical monopoly. The Shanghai Court dismissed the case on the grounds of the failure of plaintiff in providing with efficient evidence showing that Johnson’s activity had significant negative impact on the market competition. The court judgment might imply that the Shanghai Court has adopted a “rule of reason” approach. This decision is highly controversial and the plaintiff appealed to the higher court. So far no decision has been made by the second instance court.
However, in the Moutai and Wuliangye case, the NDRC seems adopted a “per se illegal” approach. A further question might be how to deal with such conflict between administrative enforcement and judicial enforcement? For example, if the distributors of the two liquors or the consumers bring follow-on civil ligations against these liquor companies, shall the court be bound to NDRC’s decision?
It’s also notable that the whole process of investigation in this case is relatively short (less than 2 months) compared with other reported AML enforcement decisions (e.g. the investigation on the recent LCD cartel case lasted for more than 6 years). The two liquors’ public statements to fix lowest resale price and punish non-observed distributors are probably regarded as self-explanatory evidence of vertical price-monopoly and therefore led to NDRC’s quick decision. This might also suggest that this case is mainly rendered on the basis of “per-se illegal” rather than the “rule of reason” analysis. It would need to take significant longer time to analyze RPM’s impact on the market competition if the case was decided under the “rule of reason” approach, such analysis would usually involve complicated market definition, economic assessment of competition status and efficiency, market share of each company, etc.
Nevertheless, the penalty decisions on two famous liquor brands clearly reflect Chinese competition authority’s strong determination of strengthening the antitrust enforcement. Any AML infringement could be caught and severely penalized, vertical restrains shall be no exception. All companies operating in China or having business/sales in China are advised to prudently review distribution policy in particular and antitrust compliance in general in order to avoid antitrust risks.