China Rules on First Vertical Monopoly Agreement Dispute over Resale Price Maintenance
On 1 August 2013 coinciding the fifth anniversary of the Anti-monopoly Law of China, a ruling of the first vertical monopoly case in China involving a civil dispute over resale price maintenance (RPM) was issued by the Shanghai Higher People's Court. The case had a final ruling which revoked the lower court decision and requested Johnson & Johnson Medical China Ltd. and Johnson & Johnson Medical Shanghai Ltd. (collectively "Johnson & Johnson") to pay damages of RMB0.53 million to the appellant Beijing Ruibang Yonghe Technology and Trade Co., Ltd. ("Rainbow").
Rainbow was a former distributor of Johnson & Johnson's surgical sutures. The two parties had maintained business partnership on annual contract basis for 15 years, with a minimum resale price fixed at the same level throughout the years, until Johnson & Johnson terminated the distribution rights and supplies of the suture products to Rainbow in September 2008. Johnson & Johnson alleged that Rainbow had breached the distribution agreement entered into between them in January 2008 by selling the sutures at a price below the set price and in Beijing, an area outside the designated area according to the distribution agreement.
Since 2009 Johnson & Johnson no longer carried RPM provisions in its distribution agreements. In August 2010, Rainbow filed a lawsuit with Shanghai First Intermediate People's Court, accusing Johnson & Johnson of violating the Anti-monopoly Law for its engagement in RPM to eliminate competition, and claimed for compensation of RMB14 million.
In May 2012 Shanghai First Intermediate People's Court dismissed Rainbow's claims, on the grounds that Rainbow as the plaintiff failed to provide sufficient market and product-related information to prove that the RPM practices had caused unreasonable restriction or elimination of market competition.
Dissatisfied with the judgment of the first-instance trial, Rainbow launched an appeal with the Shanghai Higher People's Court, which after three hearings and detailed deliberation reversed the earlier court decision and ascertained that the Anti-monopoly Law was applicable to the distribution agreement at issue. In evaluating the RPM of the case, the court defined the surgical sutures market in the mainland China as the relevant market, established that the market was insufficiently competitive, held that Johnson & Johnson had a strong market position, and determined that the RPM had the effect of restricting competition in the relevant market, thereby violating Article 14 of the Anti-Monopoly Law.
The court also highlighted in its judgment that while Johnson & Johnson should compensate Rainbow with damages of RMB0.53 million, the amount was calculated on the basis of the loss of profit by reference to the normal profit in the relevant market, to reflect the effect of the implementation of the RPM on the appellant's profit, as opposed to the profits available if the RPM had been implemented, for this would deviate the compensation from the realm of Anti-monopoly Law to that of the Contract Law.
As to other claims by Rainbow, such as those related to reputation damage, staff redundancy costs, loss in marketing expenses and overstocked goods, they were not supported by the court on account of lacking factual and legal basis for the assertion.
