China Distribution and Resale Price Maintenance

Excellent China Law Insight post on resale price maintenance in China, entitled, Rules Governing Resale Price Maintenance in China. Now before you just run away, believing there is no way an antitrust concept can be relevant to your business in China, let me tell you that you may well be wrong. If you are selling your product in China through a third company, you need at least a passing familiarity with China’s resale price maintenance laws.

Wikipedia explains resale price maintenance as follows:

Resale price maintenance is the practice whereby a manufacturer and its distributors agree that the latter will sell the former’s product at certain prices (resale price maintenance), at or above a price floor (minimum resale price maintenance) or at or below a price ceiling (maximum resale price maintenance). If a reseller refuses to maintain prices, either openly or covertly (see grey market), the manufacturer may stop doing business with it.

China Law Insight points out that China prohibits resale price maintenance:

Article 14 of the Anti-Monopoly Law (AML) prohibits the fixing of resale prices (and in particular minimum resale prices) to third parties. In other words, Manufacturer A is prohibited from stipulating that Distributor B must resell Manufacturer A’s goods at a certain price to Retailer C.

I have seen a number of foreign companies get tripped up on China’s resale price maintenance laws and when my law firm’s China contract lawyers write contracts with China distributors, we are always mindful of it. We typically see problems when the foreign company’s agreement with the Chinese company requires the Chinese company sell the foreign company’s product at a certain minimum amount so as to prevent the Chinese company from undercutting either the foreign company (which too is selling its product in China) or the foreign company’s other China distributors.

We have had foreign companies wanting us to “do something” about its Chinese distributor pricing goods below the allowed contractual amount. In most instances, however, there is little the foreign company can do other than watch its Chinese company  undercut until its contract expires. At least one foreign company told us that it would not have entered into the distributorship relationship had it known that its Chinese distributor would be free to engage in its own pricing.

The benefit of knowing China’s resale price maintenance laws is that you can then decide for yourself whether you want to take the risk of having a Chinese company free to price “your” goods.

China’s prohibition on resale price maintenance is not absolute, and as China Law Insight points out, if “an entity can prove that it fixed resale prices to fulfill the following objectives,” its conduct “may be exempt” from the prohibition against resale price fixing:

• RPM was undertaken with the objective of undertaking technological improvement or research and development of new products;

• RPM was undertaken to raise product quality, lower costs, improve efficiency, standardize product specifications and standards or implement specialization;

• RPM was undertaken to raise the business efficiency of small and medium business operators and to strengthen the competitiveness of small and medium business operators;

• RPM was undertaken to fulfil matters involving the public interest, including energy conservation, environmental protection and disaster relief;

• RPM was undertaken to alleviate a serious drop in sale quantity or obvious over-production in times of recession; or

• RPM was undertaken to protect legitimate interests in relation to foreign trade and economic cooperation.

China Law Insight goes on to correctly note that there is little China law guidance as to how the Chinese courts and governmental authorities will analyze the above exceptions and it then concludes with this salient advice:

Businesses should be aware of and take note of the strict RPM [resale price maintenance] prohibition in China, when formulating their distribution agreements. In the event where it is commercially imperative to impose vertical restraints (including RPM) in distribution agreements, businesses may wish to consider if their agreements could fall under the exceptions listed….

If you find it essential to engage in resale price maintenance in China, you should explicitly set out in your distributorship agreement why you are mandating price requirements and you should make sure your reason(s) track one or more explicitly permitted exceptions.

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