International Law

China Distributorship Contracts: What You Need To Know About Resale Price Maintenance.

By Dan

Excellent post on King & Wood's China Law Insight Blog on resale price maintenance in China, entitled, "Rules Governing Resale Price Maintenance in China." Now before you just up and run away from this post, 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 nicely explainsresale price maintenance:

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

We have had American companies come to us wanting to "do something" about its Chinese distributor pricing its goods below the allowed contractual amount and the problem is that, in most instances, there is little to nothing the American company can do other than watch its Chinese company continue to undercut until their contract expires. At least one American company told us that it would never have entered into the distributorship agreement 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 or not you want to take the risk of having a Chinese company free to price "your" goods.   

China's prohibition on resale price maintenance is, however, 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 how beyond that set forth above, there is little China law guidance as to how the Chinese courts and governmental authorities will analyze these 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....

I would add that 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 that your reason(s) track one or more explicitly permitted exceptions.  

Full post as published by China Law Blog on October 03, 2010 (boomark / email).