CN09 - Beijing AMR fines pharmaceutical company CNY 9 million for RPM conduct

On 9 February 2022, China's Beijing Municipal Administration for Market Regulation ("Beijing AMR") fined Geistlich Pharma CNY 9.12 million (c. USD 1.45 million) for engaging in resale price maintenance ("RPM") in breach of China's Anti-Monopoly Law ("AML").

Key takeaways

• Article 14 of the AML prohibits "monopoly agreements" that fix or restrict the resale price of goods (ie, RPM conduct). Under Article 15 of the AML, RPM conduct is not prohibited if it can be proven that the re-sale price arrangement is for one or more exempted purposes (eg, to improve technology or product quality) and will not substantially restrict competition in a relevant market.
• A violation of Article 14 could attract penalties of up 10% of annual turnover. In this case, the penalty amounted to 3% of Geistlich Trading (Beijing)'s annual domestic sales in 2020. When deciding the applicable penalty, the Beijing AMR took into account Geistlich Trading's proactive cooperation during its investigation into the conduct, active steps taken by Geistlich to rectify the conduct, including by amending the terms of its distribution contracts, and steps to improve its anti-monopoly compliance system.
• The Geistlich decision follows a string of similar actions by China's State Administration for Market Regulation against other pharmaceutical companies penalised for RPM conduct. These earlier decisions highlighted difficulties faced in defending RPM practices under the AML, notwithstanding the availability of exemptions under Article 15.

Background 

On 9 February 2022, the Beijing AMR fined Geistlich CNY 9.12 million (c. USD 1.45 million) for engaging in resale price maintenance in breach of China's AML. The Beijing AMR has delegated authority from the State Administration for Market Regulation to enforce the AML.  

Geistlich Pharma is a Swiss-owned pharmaceutical company specialising in regenerative medical devices. 

The Beijing AMR commenced an investigation into conduct undertaken by Geistlich in November 2020 and a formal case was filed in July 2021. The investigation revealed that between 2008 and 2020, Geistlich had entered into agreements with its distributors to restrict the resale price of its Bio-Oss and Bio-Gide products.  Bio-Oss and Bio-Gide are "benchmark products" in the field of regenerative dentistry used to enhance bone and tissue regeneration. They are "Class III" medical devices imported by Geistlich into China. Geistlich's distributor network in China re-sells the products to hospitals or secondary distributors.  

Geistlich implemented the agreements by imposing rules and regulations for its distributors to adhere to. Geistlich monitored resale prices closely and rewarded distributors which complied with the resale price policy, and punished those that chose to disregard the policy by temporarily raising the purchase price. 

According to the Beijing AMR, Geistlich's conduct restricted competition in a market with already high entry barriers (including rigorous approvals required to sell Class III medical devices). The Beijing AMR noted there was an imbalance of bargaining power with distributors ultimately being dependant on Geistlich (a leader in the industry). The Beijing AMR found that the conduct had also harmed the interests of end-users by causing the prices of high-value medical consumables to remain high for a significant period of time. 

Geistlich's defence 

In its defence, Geistlich argued:

• that the relevant price-restricting clauses had been included in distribution contracts prior to the introduction of China's AML in 2008; and
• the agreements were not actually being implemented because there were occasions where resale prices were in fact lower than the recommended resale price policy. 

The Beijing AMR rejected Geistlich's arguments, noting that: 

• the company had signed a number of contracts between 2008 and 2018 containing the price-restricting terms. It considered the contentious conduct to be continuous and not outside the retroactive statute of limitations; and 
• occasional cases of lower resale prices referred to by the company did not dissuade the agency from its determination that Geistlich had entered into and implemented monopoly agreements.

Penalty

The Beijing AMR concluded that Geistlich had violated Article 14(2) of the AML by engaging in RPM. It imposed a penalty of CNY 9,123,598 (c. USD 1.45 million) and ordered the company to cease its infringing conduct. 

The penalty was reported to represent approximately 3% of Geistlich's China revenue in 2020. Geistlich's active cooperation with the investigation and its commitment to revise its distribution contracts and anti-monopoly compliance systems were all mitigating factors considered by the Beijing AMR in determining the final penalty.

Concluding remarks

The Geistlich RPM decision follows a string of similar actions by China's State Administration for Market Regulation against other pharmaceutical companies including Yangtze River Pharmaceutical Group and Simcere Pharmaceutical Group - each fined CNY 764 million (c. USD 120 million) and CNY 100.7 million (c. USD 15.8 million), respectively for RPM conduct in 2021. 

The Geistlich decision, along with the earlier decisions highlight, amongst other things, the difficulty of defending RPM practices under the AML and the strong presumption that any form of RPM conduct will likely be considered illegal by authorities in China. 

Companies active in China should be mindful of any policies or contract terms that encourage direct or indirect RPM in their distribution networks, and take steps to actively audit sales and distribution practices to ensure this conduct does not take place in day-to-day distributor network relationships.  

With thanks to Chelsea Toner of Ashurst for her contribution.