J&J’s $85K Chinese “Vertical Monopoly” Lesson

Johnson & Johnson (J&J) just learned an $85, 000 lesson about China’s new monopoly law on behalf of all device companies.

A Shanghai court ordered the company to pay 530, 000 yuan ($85, 000) to a distributor who had sued the company for setting a minimum price the distributor could charge for surgical sutures. The company was found guilty of “vertical monopoly.” The court said the company caused the distributor to lose potential sales and made the award for lost profits.

According to an AP story on August 2, 2013, the ruling was the first of its kind against a Fortune 500 company under the five-year-old anti-monopoly law.

Setting Minimum Prices

Specifically, the company was accused of improperly setting minimum sale prices to maintain its image as a premium brand, according to a court announcement. It said the company has since stopped imposing that condition on distributors.

The Chinese law says companies with a large market share must let market forces set prices. Companies with monopoly power are defined as 1) with 50% of sales in a given market or, 2) that account for a total of two-thirds of sales.

The J&J ruling and price-fixing probes suggest Chinese authorities see all minimum price agreements as illegal, according to Ning Xuanfeng, a lawyer for the firm King & Wood Mallesons.

Companies that continue to use them “will be exposed to a great risk of being investigated or being sued, ” Ning said in an email to the AP. She said a company can be convicted of operating a “vertical monopoly” if a minimum price agreement is found to exist even if its sales are below the legal threshold for monopoly power.

Rainbow Medical Equipment & Supply Co. said it lost its contract with J&J in 2009 after it submitted a bid to supply sutures to a Beijing hospital at a price below the company’s standard. Rainbow Medical had worked for the company for 15 years.

A Shanghai court rejected Rainbow Medical’s lawsuit seeking 14 million yuan ($2.2 million). But a higher court ordered J&J to reimburse it for lost profits. The judge in the case, Ding Wenlian, said the ruling reflected the law’s intention of protecting consumers and “public interests, ” according to the government’s Xinhua News Agency.

Increased Scrutiny

“While we are disappointed with today’s ruling by the Higher People’s Court of Shanghai, we are pleased to have put this matter behind us and look forward to continuing to provide our high quality products and services to healthcare institutions and patients in China, ” said J&J in a statement.

“This case is a warning to companies, including Chinese and foreign ones, that the Chinese government is increasing the intensity of anti-monopoly investigations, ” said Wang Xiang, a lawyer for the firm Orrick, Herrington & Sutcliffe.

The AP report noted that Chinese regulators have cited the law in ordering changes to acquisitions or business practices. In 2009, they blocked Coca-Cola Co. from buying a Chinese fruit juice producer.

Business groups welcomed the 2008 law as a step toward clarifying operating conditions in China. Since then, the AP reported that the groups have said it is enforced more actively against foreign companies than against their Chinese rivals. There have been few court rulings so far on the law. That has fed uncertainty about how it will apply to global companies looking to expand in China.

Last month, two dairies—Nestle SA and FrieslandCampina—announced price cuts after authorities launched an investigation of possible price-fixing by foreign milk suppliers. They also were accused of using vertical monopolies.

Also last month, police detained four employees of GlaxoSmithKline on charges they bribed doctors to prescribe the British pharmaceutical giant’s drugs.

In the big scheme of things, $85, 000 probably wasn’t bad tuition to pay for the lesson.