Impact of ‘safe harbour’ system on brand price control

The 35th Meeting of the Standing Committee of the 13th National People’s Congress adopted the new Anti-Monopoly Law on 24 June 2022, which will come into force on 1 August 2022. Compared with the old Anti-Monopoly Law, which came into force in 2008, the new Anti-Monopoly Law contains many adjustments in respect of merger reviews, enhancement of anti-monopoly administrative penalties, and monopoly agreements. In particular, the new Anti-Monopoly Law introduces a new “safe harbour” system, which is conducive to good channel control by brands in the internet era.

PRICE CONTROL FOR CHANNELS

Zhou Le, Tiantai Law Firm
Zhou Le
Partner
Tiantai Law Firm

Conflicts and low-price competition are inherently prone to occur among various channel operators in conventional commodity distribution. With the development of the internet economy, channel price chaos has become even more prominent. In order to seize market share, offline channels dump goods at low prices to sellers on various platforms, leading to a severe problem of selling beyond the agreed area, which poses a great challenge to brands in channel control, especially in the price system management.

In the past, brands have often taken different kinds of actions to control the channel price, including but not limited to signing resale price restriction agreements directly with channel operators (or signing distributorship agreements containing price control clauses), sending various documents or notices to channel operators stipulating a uniform specific suggested price for goods to sell, and imposing penalties on channel operators for violating the price policies with fines, cancellation of distributorship, refusal to supply, confiscation of deposits, etc.

However, article 14 of the old Anti-Monopoly Law forbade operators to reach monopoly agreements with counterparties to fix or set a minimum resale price of goods. Therefore, the above-mentioned actions of the brand would likely be deemed to have concluded a vertical monopoly agreement with the channel operator, and consequently faced administrative penalties. At the same time, the channel operator may file a lawsuit against the brand in a dispute over the vertical monopoly agreement and claim financial losses from it.

IMPACT OF THE SAFE HARBOUR

Article 18 of the new Anti-Monopoly Law introduces the safe harbour system based on article 14 of the old Anti-Monopoly Law, providing that: “If the operator can prove that its actions do not have an anti-competitive effect, and its market shares in the relevant market are lower than the threshold set by the anti-monopoly enforcement agency of the State Council, as well as it meets the other conditions the agency sets, then it shall not be prohibited.”

In practice, administrative enforcement authorities usually punish operators based on the legitimacy of their actions, which means they will consider the operators and their counterparties violate the law without giving much consideration to the effects of their actions once the investigation reveals that they have reached an agreement to restrict the resale price of goods. In reality, most brands do not have control over the relevant market.

So, if the authorities have zero tolerance for agreements of commodity resale price restriction, this undoubtedly results in a waste of resources for anti-monopoly administrative enforcement. Second, there is also a divergence between the administrative enforcement and judicial sides regarding the applicable law.

For example, in the case of Wuhan Hanyang Guangming Trade Company v Shanghai Hankook Tire Sales Company, the court of first instance, in addition to reviewing whether the brand and the channel had entered into a resale price restriction agreement, also reviewed whether the competition was sufficient and the brand’s market force was strong in the relevant market, and whether the motive of setting a minimum resale price and the effect of resale price restriction were to restrict the competition.

The new safe harbour system gives companies a reasonable expectation of compliance. For brands that do not have a dominant position in the relevant market, with specific goods that are not irreplaceable, the compliance risk of being deemed a vertical monopoly is significantly reduced.

An appropriate tolerance of resale price restriction agreements on goods will not have an anti-competitive effect, and instead may lead to the price increase of the brand’s goods, prompting consumers to switch to other competing goods, thereby increasing the market share of competitors in the relevant market and achieving the effect of healthy competition.

COMPLIANCE ON PRICE CONTROL

Note that when facing a vertical monopoly investigation or judicial proceedings, the brand still bears the burden of providing evidence to prove that it complies with the third paragraph of article 18 of the new Anti-Monopoly Law. Brands should pay attention to assessing whether their market share in the relevant market is below the threshold set by the national anti-monopoly authorities.

Prior to the implementation of the new law, the Anti-Monopoly Committee of the State Council’s Anti-Monopoly Guidelines in the Field of Intellectual Property, the Anti-Monopoly Committee of the State Council’s Anti-Monopoly Guidelines in the Automotive Industry, and the Provisions on Prohibiting the Conduct of Monopoly Agreements (Draft for Public Comment) issued by the General Administration of Market Regulation have all provided guidance on the market shares of specific industries, or areas to which brand parties may refer.

However, the above-mentioned documents are not universally applicable. Specific implementation rules or guidelines for market share standards under the safe harbour system of the new Anti-Monopoly Law are yet to be issued.

Zhou Le is a partner at Tiantai Law Firm

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