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Vertical Restraints versus Horizontal Agreements in the Manufacture-Distributor Relationship

John Jiong Gong, Vanessa Yanhua Zhang, Antitrust Chronicle, March, Volume 3, Winter 2017

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Since the enforcement of the Anti-Monopoly Law (“AML”) in China on August 1, 2008, there have been several high-profile antitrust litigations involving vertical restraints in the manufacturer-distributor relationship. In China vertical restraints are also called vertical monopoly agreements in the context of the AML. In the first and foremost case ruled in 2013, Beijing Rainbow v. Johnson & Johnson, the Shanghai Higher Court set precedence of applying the “rule of reason” doctrine in the cases involving vertical monopoly agreements, as opposed to the more common “per se illegal” doctrine that is widely applied in situations of vertical monopoly agreements in China. The Shanghai Higher Court emphasized the need for the plaintiff to bear the burden of proof in providing not only evidence of the existence of the agreement behavior (resale price maintenance in this case), but more importantly, also analysis and corresponding evidence that such conduct precludes and limits competition as per Article 14 of the AML.

The seventy-one page final verdict from the Shanghai Higher Court specifically mentioned four aspects in the analysis that the plaintiff needs to demonstrate in discerning the legality of a vertical agreement: (1) the relevant market lacks adequate competition; (2) the defendant holds significant market power in the relevant market; (3) the defendant has clear motivation to preclude and restrict competition in maintaining the resale price; and (4) the defendant has indeed achieved its objective of precluding and restricting competition from the perspective of actual outcome.

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