Manufacturer Loses Landmark Chinese Antitrust Lawsuit

In the first vertical monopoly ruling in favor of a plaintiff in an antitrust case in China, a manufacturer has been ordered to pay 530,000 Yuan (roughly ($86,000) for setting an artificial price floor.  In the case, the manufacturer was accused of harming consumers by requiring its Chinese distributor to agree to a price floor.  The manufacturer was accused of exercising unlawful control over the medical device market by imposing a required price floor on its dealer.

In its annual renewal contract with its distributor, the manufacturer included a minimum resale requirement with which the distributor was required to comply.  The dispute giving rise to the lawsuit arose when the distributor offered to sell the manufacturer medical products to a hospital for less than the minimum price floor.  After becoming aware of the price proposal, the manufacturer warned its distributor about the price floor, started to refuse to fulfill distributor's orders, and ultimately chose not renew its distributor's contract for the resale of the manufacturer products.

The distributor then sued the manufacturer alleging violation of the antitrust laws and the establishment of an unlawful resale price maintenance scheme.  The Shanghai People's Court found in favor of the distributor and ordered the manufacturer to pay the distributor's damages.  To determine whether the manufacturer violated antitrust laws by unlawfully restricting its resale prices, the court examined the facts under four criteria including market presence, market share, motive, and the landscape of the market.  The manufacturer controlled a significant market share and had a significant market presence and, despite the manufacturer's assertion that the minimum resale price maintenance was necessary to ensure its product quality, the court found the other factors outweighed its concerns and harmed consumers.  Nevertheless, the 530,000 Yuan was only a fraction of the 14,000,000 Yuan requested by the plaintiff.

Although this case is a landmark antitrust decision in China, it is difficult to predict how China and its courts will enforce antitrust laws against companies that utilize resale price maintenance agreements to ensure the quality of its products.  If you have any questions about the legality of terms contained in vertical distributor agreements or supplier integration agreements, we are happy to discuss your questions and any potential legal issues that may arise.