Misunderstandings about vertical monopoly agreements

By Ye Han, Merits & Tree Law Offices
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Vertical monopoly agreement (or vertical restraint agreement, vertical agreement, etc.) means an express or implied agreement entered into between two or more companies in the same industry, which have buyer-seller relationships but do not directly compete with each other, for eliminating or restricting competition.

In accordance with article 14 of the Anti-Monopoly Law (AML), forms of vertical monopoly agreements mainly include fixing resale prices or setting minimum resale prices. In practice, vertical agreements between upstream manufacturing enterprises and sales enterprises for controlling resale prices are the most common. In this article, the author analyzes several common misunderstandings about vertical agreements.

Suggested resale price

monopoly
Ye Han
Partner
Merits & Tree Law Offices

(1) Misunderstanding: The risks of vertical agreements can be avoided as long as an agreement between an upstream enterprise and a downstream enterprise specifies the replacement of suggested resale prices with minimum resale prices.

(2) Analysis: From the perspective of law enforcement practice, if a suggested retail price in actual operation is fixed for setting the minimum resale price, such action will be deemed a vertical monopoly agreement. In a resale price maintenance case in which a spectacle lens manufacturer was published by the Shanghai Price Bureau, the spectacle lens manufacturer specified a “suggested retail price” for its downstream dealers, and at the same time took punitive measures against dealers who failed to sell at the price – including deduction from the security deposit, cancellation of sales rebates, penalties, supply suspensions and oral warnings – in order to ensure that the price could be forcibly adopted. Finally, the law enforcement agency held that its action constituted a vertical monopoly agreement.

Unilateral notification or non-written form

(1) Misunderstanding: The risks of vertical agreements can be avoided if an upstream enterprise sends a unilateral announcement, notice and otherwise to a downstream enterprise, or communicates with the downstream enterprise orally or through meetings and otherwise, without an agreement between the upstream enterprise and the downstream enterprise.

(2) Analysis: In law enforcement practice, monopoly agreements are not limited to written agreements that come into force upon signature by the parties, in a narrow sense. Any action having the effect of fixing resale prices or setting minimum resale prices may be deemed a vertical monopoly agreement, regardless of the form of the action.

In a price fixing case in which a famous automobile manufacturer was investigated and punished by the Jiangsu Price Bureau, employees of the automobile manufacturer set minimum sale prices of certain vehicle models in different areas in the province via telephone, verbal notifications or dealer meetings. Such action is considered a vertical monopoly agreement.

Action under the guise of market order maintenance

(1) Misunderstanding: Relevant risks can be avoided as long as a relevant agreement specifies that resale price maintenance aims to maintain the market order and prevent price chaos.

(2) Analysis: Firstly, from the perspective of current law enforcement practice, law enforcement agencies have a tendency to adopt the illegal per se rule, other than the rule of reason, to identify resale price maintenance. Secondly, an enterprise should also be aware that a reasonable cause is not determined according to the contents of an agreement, even with the hope of avoiding or reducing the risk of being considered a vertical monopoly agreement through the existence of a “reasonable cause”. Law enforcement agencies will determine whether relevant agreements are reasonable, according to the actual conditions.

In a monopoly case involving famous mobile phone companies in 2016, a relevant agreement specifies that “Party B shall not disrupt the market by selling the products of Party A at a low price”. Although the contents of the agreement indicate the intention to prevent market disruption, such agreement was considered a vertical monopoly agreement.

Monitoring through a third party

(1) Misunderstanding: Price monitoring of downstream enterprises by third parties other than manufacturing enterprises may help avoid actions being considered as vertical monopoly agreements.

(2) Analysis: In spite of price monitoring by a third party, a punishment for violation of price controls is normally carried out by the manufacturing enterprise instead of a third party, which make it difficult to clear the manufacturing enterprise from suspicion of involvement in a vertical monopoly.

In a monopoly case involving a famous enterprise engaged in selling branded cars, the enterprise monitored the selling prices of dealers via sneak visits by a third party, online monitoring and other methods, and punished dealers who violated price controls, according to the monitoring results. Such action was finally considered a price fixing agreement.

Reduction in rewards in lieu of punishment

(1) Misunderstanding: Imposing punishment will be deemed as controlling resale prices, but reducing awards may help avoid being considered as a vertical monopoly agreement.

(2) Analysis: In practice, reward reduction and punishment have the same effect of controlling resale prices. In a monopoly agreement case involving a fodder company in Hainan, the enterprise and dealers signed the Fodder Product Sales Contract, pursuant to which dealers would not be entitled to a discount if they failed to sell the products at the specified suggested price. Such provision was finally considered as “fixing prices of commodities resold to a third party”.

In consideration of the severity of punishment for monopoly, control of risks of vertical monopoly agreements should be the focus of compliance in all industries. The author suggests that compliance employees of an enterprise should properly train high-risk departments and employees, by reference to the above-mentioned misunderstandings. Meanwhile, they should pay close attention to law enforcement and the trend of legislation, and prepare a compliance plan for the industry in which the enterprise operates, so as to ensure its legal operation.

Ye Han is a partner at Merits & Tree Law Offices

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