Greater China & Japan Competition Currents July 2021
On April 15, 2021, Yangtze River Pharmaceutical Group (Yangtze River), one of China’s largest pharmaceutical manufacturers, was fined RMB 764 million, representing 3% of the Jiangsu-based company’s 2018 revenue, by the State Administration for Market Regulation (SAMR), China’s antitrust regulator. According to the SAMR, the company was accused of fixing drug prices with retailers to restrict market competition, i.e., engaging in retail price maintenance (RPM), and squeezing out competitors. The decision highlights the SAMR’s renewed focus in RPM enforcement in the life sciences industry and offers important insights on how the SAMR approaches RPM practices in the enforcement context.
Key insights from the Yangtze River decision include the following.
A Presumption of Illegality in Analyzing RPM. In the course of the SAMR’s investigation, Yangtze River argued that in order to establish a violation under the Anti-Monopoly Law (AML), SAMR had the burden of showing that the alleged RPM had the effect of restricting or eliminating competition in the relevant market. Further, Yangtze River argued that because its market share in the relevant market was low, the alleged RPM agreements did not affect pricing within the relevant market. SAMR, however, rejected these arguments, indicating that RPM is prohibited in principle unless a legally recognized exception applies.
Difficulty in Establishing Legally Recognized Exceptions. RPM is prohibited by Article 13 of the AML. Article 15 of the AML, however, recognizes certain exceptions to Article 13. In responding to the SAMR investigation, Yangtze River argued that short-term RPM involving new products should be exempted, as such measures may (i) improve technology and research for new products; and (ii) realize public interests, both recognized exceptions under Article 15. The SAMR, however, found that the relevant circumstances contemplated by Article 15 were not met and that Yangtze River failed to show that its RPM activities would not seriously restrict competition.
Formation of a Monopoly Agreement. In the Yangtze River case, the SAMR found that in addition to written agreements such as “cooperation agreements” and the issuance of “price adjustment letter,” the illegal monopoly agreements were formed through oral communications, through the use of instant messaging apps, and through other, non-contractual means. Consequently, the Yangtze River case reaffirms the principle that the substance, rather than the form of the agreement, determines the nature of the agreement.
The Yangtze River case highlights the SAMR’s position that RPM is presumptively illegal, and the difficulties companies face in arguing that a legally recognized exception applies. In light of the Yangtze River case, companies should pay close attention to antitrust compliance issues in managing relationships with retailers and distributors.
A. The JFTC publishes a collection of consultation cases on the Antimonopoly Act (FY 2020 edition).
On June 9, 2021, the Japan Fair Trade Commission (JFTC) released a collection of consultation cases on the Antimonopoly Act in the fiscal year 2020 (from April 2020 to March 2021). The JFTC routinely responds, from the Antimonopoly Law perspective, to prior consultations on specific actions that business operators intend to take. And based on the consultations, the JFTC annually publishes a collection of cases that provide business operators with instructions for preventing violations of the Antimonopoly Law and conducting appropriate business activities.
This collection includes 11 cases:
(i) Consultation on activities related to new COVID-19 infections (three cases),
(ii) Consultation on activities of business operators (four cases) and
(iii) Consultation on activities of business organizations (four cases).
The JFTC provides commentaries and interpretations for every case from the Antimonopoly Law perspective, and pointed out that there are problems under the Antimonopoly Law in some cases.
B. JFTC’s Decision on the Antimonopoly Act (Unfair Trade Practices).
In the above-referenced collection of cases, a guideline was announced regarding whether making someone purchase other products in conjunction with the supply of products (known as “tying arrangements”) constitutes an unfair trade practice illegal under the Antitrust Law. The following two cases were judged: (a) to use the analysis equipment manufactured and sold by Company X, the IC chip, a product manufactured and sold by Company X, must be used, and make it impossible to use a non-genuine product; and (b) when using analytical instruments manufactured by Company X, if genuine Company X products are used, the quality and performance shall be guaranteed, whereas if non-genuine Company X products are used, the guarantee shall not apply.
It is considered illegal under the Antitrust Law when a customer is forced to use a specific product in using the analysis equipment manufactured and sold by Company X, which eliminates or reduces the opportunity to trade a product other than the specific product in the market.
In the case of (a), it was judged that there was a potential problem under the Antitrust Law. The reason given was that by making non-genuine products uniformly unavailable, all non-genuine products not manufactured by Company X would be excluded from the market. This effect of restricting competition would be enormous.
In the case of (b), the fact that the guarantee only covers the case where a genuine product of Company X is used to ensure the safety and analytical accuracy of analytical instruments manufactured by Company X, and this basis is reasonable. Even if a non-genuine product is indicated as not being covered by the guarantee when used, it is possible to use the non-genuine product in Company X’s analytical instruments. Therefore, the effect of excluding the non-genuine product in the market of the product is small, and it was judged that there is no problem under the Antitrust Law.
Edoardo Gambaro, Pamela J. Marple, Yuji Ogiwara, Stephen M. Pepper, Gillian Sproul, Hans Urlus, Dawn (Dan) Zhang, Mari Arakawa, Filip Drgas, Marta Kownacka, Pietro Missanelli, Massimiliano Pizzonia, Anna Celejewska-Rajchert, Jose Abel Rivera-Pedroza, Ippei Suzuki, Rebecca Tracy Rotem, and Alan W. Hersh contributed to this article.