“Distribution in China – Legal Issues” is a four-part series. Part I discussed the business models and legal structures most commonly used for distribution in China. Part II looked at important issues to consider in the design of a distribution system for China, such as taxation, foreign exchange, antitrust, and specific rules applicable to retail and wholesale distribution activities. Part III dealt with pre-contract matters of which negotiators of distribution agreements for China should be aware. Part IV outlines the main issues parties should take into account when drafting a distribution contract for use in China. These include pricing and payments, exclusivity and territorial restrictions, product liability and intellectual property rights.
Last week one of China’s antitrust regulators, the National Development and Reform Commission (NDRC), imposed fines of RMB419 million (+/- US$72 million) on two of the most famous producers of Chinese liquor, Moutai and WuLiangye. The fines were imposed for restricting the minimum price at which their distributors could resell the liquor. This was found to be illegal resale price maintenance. The fines are unprecedented in China and signal major new antitrust enforcement activity in the distribution of goods and in the alcoholic beverages sector in particular.
The fines imposed are at the lower end of the possible range of fines between 1% and 10% of each company’s annual revenues. It remains to be seen whether any of these companies’ customers or distributors will now start private actions in the Chinese courts to recover damages for breach of the antitrust rules. So far there have been over 60 private cases in Chinese courts against both foreign and domestic corporations for alleged breach of the antitrust rules.
Both the liquor companies are State Owned Enterprises (SOE) unlike the six Korean and Taiwanese companies who were fined by the NDRC in January the equivalent of some US $56 million for a price fixing cartel in the Liquid Crystal Display (LCD) market.
In general, foreign companies have largely ignored China's antitrust rules as enforcement has been weak or non-existent and local subsidiaries of multinationals have down-played the risks. Clearly however, antitrust law in China can no longer be ignored. Many corporations with businesses in China are now scrambling to complete a China antitrust audit and put in place a robust compliance program to address questionable conduct. Those who don’t do so face the now very real risk of significant fines by the Chinese antitrust authorities.
Kansas Supreme Court Decision Declares Resale Price Maintenance Per Se Illegal Under State Antitrust Statute
The Kansas Supreme Court recently determined resale price maintenance is per se illegal under state law, becoming the latest state to reject the rule of reason standard mandated by the Supreme Court of the United States. The decision serves as a reminder that although a supplier’s pricing policies may be permissible under federal law, they may nevertheless be subject to per se condemnation under certain state statutes.
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