A Quick Legal Guideline of Fixing or Controlling Resale Price from Anti-Trust Law Enforcement Perspective: General Position and Basic Concept

 

Given the robust anti-trust enforcement and the astonished penalties by reference to the total revenue once violation is committed in China in the last couple of years, anti-trust compliance has certainly climbed to the top of the priority list of most multiple national companies in China. Unfortunately, anti-trust law may be the least intuitive legal subject matter as it in most cases appear to conflict with our natural sense of contract autonomy. In this very complex legal area, it basically cover 4 areas: (1) collusion between competitors horizontally; (2) fixing price between upstream and downstream manufacturers or distributors; (3) abusing dominance market position; and (4) M&A clearance.

 

M&A clearance is significant one-off legal issue and should normally draw sufficient attention. Horizontal collusion and abusing dominance at least has some room for arguments. However, fixing resale price is in general illegal per se in most jurisdictions and should be strictly managed during ordinary course of business. In that sense, we set out the general position and some basic concepts in this regard and in the following article a more detailed do-and-don’t kind of practical guide dance for the purpose of helping you to achieve full compliance with Chinese anti-trust laws.

 

First all, the basic rational of this area of laws is not rocket science. It is as simple as it is: once the title of the goods leave the manufacturer, the manufacturer should leave their distributors, retailer, reseller, wholesaler, etc to fully compete with each other, even though such competition may inevitably drive down the prevailing market price. Any attempted effort for manufacturer to “manage” the prevailing market price by reducing competition is exactly what anti-trust laws are fighting against.

 

The basic concept “Resale Price” means the price based upon which distributors resell to their own customers. Their customers may be consumers, second tier distributors or wholesalers. The manufacturer shall not decide, control, coerce, collude or in any way enter into any monopoly agreement with the distributors about their resale price (“Agreement”). Rather, the resale price shall thus be subject to sole discretion of the downstream distributors. Kindly note that “Agreements” are widely construed to include not only written contract, but also informal memorandum, meetings, telephone calls, WeChat conversation, emails, verbal arrangements and “gentlemen’s agreements” in any other form from the perspective of enforcement.

 

The specific scope of the “Resale Price” include without limitation the resale price itself, minimum resale price, level and range of resale price, range of resale price fluctuation, handling fees, discounts or any other expenses payable to distributors or customers that will affect the resale price, and the standard and formula based upon which the resale price is calculated.

 

It is still fine to offer manufacturer’s suggestion to distributors about resale price, including suggested retail price, suggested promotion price and suggested wholesale price, provided that all are offered are indeed merely “suggestion” without any other forms of coercion or penalties. In that sense, the definition of “Coercion” and “Penalties” will serve as a critical dividing line between legitimate pricing strategies and illegal price fixing activities.

 

In terms of formality, “Coercion” include written forms such as contract, agreement, company policy, guideline, letters, emails, WeChat, SMS etc and verbal forms such as telephone calls, meetings or notice, etc. The foregoing formalities enumerated above come from various major real and published precedent cases with substantial penalties and basically include all the external communication channels a company can possibly have. However, formality itself will not mitigate the illegality of the act itself. A notice requesting for control of resale price imposed verbally during a meeting may be recorded or be complained subsequently.

 

Penalties” include forfeiture of deposit, circulate a notice of criticism, warning, record a demerit, fines, suspension of supplies, reduce business support, reduce supply quotation, termination of cooperation, termination of distribution authorization, etc. In most cases, the purpose of “Penalties” is to better compel the counter party or other party to abide by one’s request.

 

We certainly cannot exhaust the list of all specific forms of “Coercion” and “Penalties”. Please, however, note that in real anti-trust precedent cases, almost all acts deemed as illegal “Coercion” and “Penalties” are to achieve legally prohibited purpose, such as imposing a fine to control resale price. Therefore, we need to bear in mind that, with or without “Coercion” and “Penalties”, if the “Purpose” is illegal per se, any act to achieve such Purpose has a high chance to be deemed as illegal, regardless of how such Purpose is achieved. Therefore, in the event that the “Purpose” is illegal per se, it will carry NO weight of legally permitted defence to argue whether the act itself is illegal, whether the fact itself constitute “Coercion” and “Penalties” or not, or the degree of such “Coercion” and “Penalties”, etc.

 

In sum, the rule of thumb principle to remember is that

(1) Distributors shall always remain free to determine their own resale price; and

(2) Manufacturers shall NOT assist distributors to collude the price between themselves.

 

*********

Please note that this article is not contemplated to exhaustive or be relied upon as formal legal advice. Should you wish to know more about the details of this particular area of law, please send an email to j.cao@pricecao.comand we would be more than happy to hear from you.

 

Leave a Reply

Your email address will not be published. Required fields are marked *

*