“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 deals with pre-contract matters of which negotiators of distribution agreements for China should be aware. Part IV will outline 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.
“Distribution in China – Legal Issues” is a four-part series. Part I discusses the business models and legal structures most commonly used for distribution in China. Part II will look 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 will deal with pre-contract matters of which negotiators of distribution agreements for China should be aware. Part IV will outline 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.
A recent New York state appeals court decision highlights the need for suppliers to continue exercising caution when adopting and implementing a resale price maintenance policy.
Some recent developments in the European antitrust legal arena demonstrate that the enforcement of antitrust rules in the distribution sector is clearly one of the main priorities on the agenda of the European antitrust authorities. As such, compliance with antitrust legislation is also a priority for alcohol beverage companies reliant on distribution systems.
McDermott Will & Emery’s International News, Issue 2, 2010, covers a range of legal developments of interest to those operating internationally. This issue focuses on Antitrust and Competition.
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