Going to Market in Asia and Around the World: Differing Competition Rules for Distribution The Association of Southeast Asian Nations (ASEAN) nations (Vietnam, Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore and Thailand) agreed to adopt competition laws by 2015. Half of them have; half have yet to do so. The laws in place, and those that can be anticipated, vary in some important respects from the rules applicable in the U.S., Europe and Latin America1, and can significantly affect the way companies distributing goods to these nations structure their relationships. The panel will examine key vertical competition rules in each region to highlight the differences, and the varying options available to marketers of goods, including: 1. Resale price maintenance (supplier control of reseller’s pricing) a. U.S.: Federal law judges resale price maintenance under the rule of reason, and usually permits it ever since the U.S. Supreme Court’s 2007 decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877, 127 S. Ct. 2705 (2007). But there are circumstances discussed by the Supreme Court where such restrictions could be found unlawful even under Leegin. Moreover, individual States within the U.S. have their own state antitrust laws, and not all follow the new federal rule. Notably, New York, California and Maryland are among the states that continue to apply the per se rule against resale price maintenance. (Thus, a supplier’s establishment of a fixed resale price or a minimum resale price remains a potential problem. Maximum resale price maintenance is generally permitted under the rule of reason under State Oil Co. v. Kahn, 522 U.S. 3, 118 S. Ct. 275 (1997). b. China: Chinese Anti-Monopoly Law (AML) prohibits vertical agreements that fix resale prices or set minimum resale prices. It is, however, not clear whether the AML views resale price maintenance (RPM) as hardcore or per se violation, as the AML provides a set of exemptions for RPM (Art 15 AML), such as technological improvement, research and development, efficiency enhancement and public interest. Given these exemptions, it is likely that China will view RPM in a manner similar to that of the US by applying a US style benefits and harm test (Rule of Reason). In Rainbow v. Johnson & Johnson Medical, the First Intermediate Court dismissed allegations of RPM, requesting from the distributor to be provided with proof that RPM allegations had an effect on competition, which the distributor was unable to provide. It seems from this decision that Courts do not consider RPM illegal per se. Same in Maotai and 1 In the case of Latin America it is important to stress that there is no uniform or harmonized set of rules to regulate competition and distribution. Some countries’ legislation contains no specific law whatsoever on these subject matters, while others are heavily regulated. Nevertheless the tendency is to eliminate protective laws that usually gave disproportionate protection to local distributors or sales agents to the detriment of the interests of the foreign supplier and often times to the detriment of market opening and consumer interests as well. In the area of competition, some countries have adopted very modern laws and have strong regulatory bodies; some have poor or deficient laws or weak regulatory agencies and others have no competition or antitrust laws at all, albeit, most legal systems contain rules preventing monopolistic practices and fostering free competition and free markets. For purposes of this panel the analysis of the situation in Latin America will focus on those countries with a Free Trade Agreement with the United States Wuliangye, where the court demonstrated reluctance to consider RPM illegal per se. An expert group is currently drafting guidelines on vertical agreements and available exemptions and defenses. Until such guidelines are issued the Courts will consider RPM on a case by case basis, and it is thus difficult to provide clear answers. c. Europe: Post-Leegin, there has been debate in the EU on RPM, but little has changed. RPM is generally prohibited virtually per se, in effect, with some potential leeway for new market penetration initiatives. The Vertical Restraints Block Exemption Regulation (“VBER”)2, which provides a safe harbour for certain types of vertical agreements where there is no market power (below 30% market share) offers no protection if RPM is involved. There is no Colgate equivalent in the EU. RPM is regarded as the situation where the supplier directly or indirectly dictates fixed or minimum resale prices of the buyer. Indirect RPM may take a number of forms, but includes agreements fixing the distribution margin, fixing the maximum level of discount the distributor can grant from a prescribed price level, making supplier rebates and reimbursement of promotional costs subject to downstream pricing level, linking price to competitors’ resale prices, or threats, intimidation, warnings, penalties, delay or suspension of deliveries or contract terminations. Monitoring systems or measures reducing incentives to discount can increase the effectiveness of RPM. In theory, the possibility of a defence to RPM exists under Article 101(3) of the TFEU, but it is likely to be available only in a narrow set of circumstances. 3 d. Latin America: In most Latin American jurisdictions setting a Resale Price is not illegal per se. However, if: a) the party presumed responsible of the conduct has a substantial power over the relevant market, and b) the conduct refers to goods or services related to the relevant market, the situation is subject to analysis as a “Relative monopolistic practice” (“vertical agreement”) under the rule of reason. Resale prices are not regulated different than vertical price fixing, a practice that is allowed, provided that said actions do not harm the competition between the different economic agents in the same relevant market or does not affect consumers interests. 2. Alternative pricing constraints (e.g., suggested pricing, minimum advertised price (MAP) programs) a. U.S.: It is perfectly lawful in the U.S. for a supplier to suggest resale prices, so long as there is no enforcement mechanism and the customer remains truly free to set its own prices. In addition, a supplier may establish a unilateral policy against sales below the supplier’s stated resale price levels and unilaterally choose not to business with those that do not follow that policy, because it is only agreements on resale pricing that may be per se unlawful. United States v. Colgate & Co., 250 U.S. 300, 307 (1919). But care must be taken not to take steps that would convert such a unilateral policy into an agreement. Minimum Advertised Price policies that control the prices a supplier advertises, but not the actual sales price, are also generally permitted, although the issue of what constitutes an advertised price for online sales can have almost metaphysical dimensions 2 Commission Regulation (EU) No 330/2010 on the application of Article 101(3) of the Treaty on the Functioning. of the European Union to categories of vertical agreements and concerted practices. 3 Where RPM is used during the introductory period of expanding demand; RPM is required for a coordinated short term low price campaign (2-6 weeks) in a franchise system (a distribution system applying a uniform distribution format); or in relation to complex/experience products, where the extra margin would allow distributors to provide additional pre-sales services and free- riding is a problem. b.. China: Suggested pricing is in compliance with Chinese AML, for as long as it remains a suggestion. Article 14 of China’s Price Law requires that undertakings must not “work collaboratively to control market prices to the detriment of the lawful rights of other undertakings or consumers”. Consequently mandatory pricing violates Chinese AML. Minimum Advertised Price Policies are not regulated under PRC laws, but seem permissible, as long as they are not mandatory for the final price. c. Europe: In principle, recommended or maximum resale prices set by the supplier are permissible. However, they should be operated carefully to ensure they do not, in effect, constitute indirect resale price maintenance. It is notable that there is no mention in EU guidance of Minimum Advertised Pricing programmes, a common practice in the US. It is likely that such a practice in the EU would be viewed as an indirect means of RPM and would not benefit from the VBER. Reliance on economic benefits arguments would entail risk in the absence of guidance a case law on the issue. d. Latin America: Suggested pricing policies are not forbidden, provided such policy remains at the level of suggestion or recommendation. When the suggestion becomes mandatory or an imposition of the price, that conduct normally violates antitrust laws in most Latin American countries. Some countries put restrictions to suggested pricing policies such as, if the suggested pricing policy is made public, this suffices to render the policy null and void. In some jurisdictions MAPs are allowed, others explicitly prohibit such practice and others analyze such situation under rule of reason parameters. Substantial power of the market, impact on access to competitors and other conditions are normally examined by the regulatory authorities to determine whether a MAP policy is legal or not. 3. Exclusive territories and customer allocation a. U.S.: Exclusive territories are judged by the rule of reason in the U.S. and are generally permitted, in the absence of market power. Customer allocation by competitors, however, is a horizontal arrangement rather than a vertical one and is per se illegal. It is thus critical that the impetus for exclusive territories come from the supplier in a vertical arrangement and not from dealers or distributors making a horizontal allocation of territories.