Competition law developments in East Asia - October 2016

This month’s editors: Maxime Vanhollebeke, Emir Pohan, Pearl Yeung, Michael Kim, Sophie Chen, Yui Ota and Lydia Fung.

Below is an excerpt from our monthly Competition Report. More detailed commentary on these issues and other recent competition law developments in the Asian region is to be found in this month’s edition of our report available on a free subscription basis (see further below).

Most competition law regimes in East Asia provide for a mandatory merger control regime, whereby parties must seek approval if they meet the notification thresholds, irrespective of whether the transaction raises any substantive issues. The overwhelming majority of transactions notified under these regimes do not raise any competition concerns and are cleared unconditionally. Earlier this year, new rules were introduced in Korea with a view to speed up clearance of unproblematic transactions. In China too, simplification measures introduced two years ago are bearing fruit. Data released this month shows that three quarters of all cases cleared during the last quarter were promptly decided under the simple case procedure.

Even with these improvements, notification requirements relating to purely extraterritorial transactions remain an area of concern. In China, a notable proportion of cases dealt with under the simple procedure involve entirely extraterritorial transactions. Similarly, in Korea extraterritorial joint ventures may be subject to notification requirements. This month, the Taiwanese authorities proposed to revise the notification test to limit clearance requirements for transactions that have little nexus with Taiwan, following proposals in the EU that would obviate clearance requirements for many extraterritorial joint ventures. Similar policy changes would also be welcomed in China and Korea.

Simpler procedures for unproblematic cases and a narrower territorial scope of application do not detract from the effectiveness of merger control mechanisms. As shown by the decision earlier this month by KLA-Tencor and LAM Research to abandon their proposed merger in the face of opposition from competition authorities (including in China, Japan and Korea), transactions that raise substantive concerns on global markets can be properly dealt with by Asian authorities, even where the parties are headquartered elsewhere.

In a judgment that was recently made public, the Guangzhou Intellectual Property Court dealt with a claim that a distributorship agreement infringed the prohibition on resale price maintenance under Article 14(2) of the Antimonopoly Law. The judgment, made on 30 August 2016, involved a damages claim brought by Hengli Guochang, a sub-distributor of GREE-branded appliances in the city of Dongguan.

The Court found that, pursuant to two agreements concluded in 2012 and 2013, Heshi and Hengli were appointed as wholesale distributor and sub-distributor, respectively, of GREE-branded products in Dongguan. Thereunder, all sales policies and channel development strategies in respect of GREE-branded products were determined solely by GREE and implemented accordingly by Heshi. Eligibility as distributors was conditioned upon specific obligations, including the payment of a commitment deposit and strict compliance with the requirements of GREE in terms of pricing policy, customer relations management and after-sales services. More specifically, any deviation from the pre-determined pricing policy would subject a distributor to a penalty payment equivalent to a portion of the commitment deposit. In early 2015, Hengli sought to terminate its relationship with GREE and Heshi on the basis that the latter had refused to make due repayment of the commitment deposit following Hengli’s failure to comply with the minimum resale price fixed by GREE in 2013.

Having regard to the absence of restrictive effects on competition, the Court was of the view that the two agreements did not involve infringements of Article 14(2) of the Law. Noting that players active in the air-conditioning appliances market in the city of Dongguan continued to face competition from both international brands and strong domestic brands, it was accepted that GREE did not enjoy a dominant market position such that its policy of imposing minimum resale prices could not result in a loss of inter-brand competition. Further, despite a possible loss of intra-brand price competition, market players may continue to compete on other parameters, including pre-sales advertising, sales promotions and after-sales services.

Consistent with the approach adopted by the Shanghai courts in dealing with resale pricing restrictions imposed by Johnson & Johnson in 2013, this case confirms that courts will not readily assume contravention of Article 14(2) of the Antimonopoly Law in respect of agreements containing minimum resale price restrictions. Instead, a more detailed analysis of their effects will be warranted.