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China NDRC v. Medtronic Case
China NDRC v. Medtronic Case

China's NDRC (National Development and Reform Commission) has published the full order in which it fined medical device maker Medtronic 118.5 million yuan ($17.2 million) for its violation of China Anti-monoply Law, including imposing vertical restraints. We provide a English version of the decision for your reference.

Respondent: Medtronic (Shanghai) Management 

Residence: (*)

In accordance with laws and regulations including the Anti-monopoly Law of the People's Republic of China ("AML"), the NDRC launched an investigation in April 2016 into the respondent's behavior of concluding and implementing monopolistic agreements with trading partners during the sale of medical-device products in business areas including cardiovascular treatment, restorative therapy and the treatment of diabetes. During the investigation, the regulator conducted on-site inspections; extracted relevant written evidence and electronic data; inspected the prices quoted during the resale process; and analyzed and demonstrated the impact of the behavior involved on market competition and consumer interests.

The regulator met with the respondent 10 times, conducted inquiries with regard to relevant questions, and fully heard the respondent's statement of opinions.

The investigation showed that the respondent has concluded and implemented monopolistic agreements with trading partners on fixing the resale prices of medical-device products involved to third parties and restricting the minimum resale prices of the products involved to third parties. The regulator delivered the pre-penalty notice to the respondent on Nov. 30, 2016, and informed the respondent of the facts of its suspected violations, planned administrative penalties, reasons and basis, as well as the respondent's legal rights to present a statement, defend itself and require a hearing. The respondent didn't ask for statement, defense or hearing. The details on the regulator's investigation and decision follow.

I. Concluding and implementing monopolistic agreements with trading partners on fixing resale prices, restricting minimum resale prices

The investigation shows that all of the products involved were sold in the Chinese market by way of resale. Its trading partners included platform providers and first-level distributors. The respondent introduced platform providers in May 2015 and so far has (*) platform providers, (*) of which were previous first-level distributors. Platform providers signed distribution agreements with the respondent. The respondent sold the products to platform providers, who would sell the products to second-level distributors. The respondent restricted platform providers from directly selling to end-buyers. Before introducing the platform providers, the respondent's trading partners were first-level distributors. After introducing the platform providers, there are so far (*) first-level distributors. First-level distributors signed distribution agreements with the respondent. The respondent sold the products to first-level distributors, who resold the products to second-level distributors or the end buyers. Evidence shows that the respondent concluded monopolistic agreements with trading partners on fixing the resale prices of the products involved to third parties and restricting resale minimum prices of the products involved to third parties at least from 2014. The agreements were concluded in the form of dealership agreements, distribution agreements, email notices and oral consultations. Content of the agreements include:

i. Directly fixing resale prices

Since 2014, the respondent formulated lists of prices for the products involved and outlined the prices for each sales link. For instance, the respondent set the platform procurement prices, the distributor procurement prices, and the hospital procurement prices of (*) product, which were sent to platform providers and distributors. The respondent set a price list for (*) product, which included the second-level prices for resale from platform providers to second-level distributors and was sent to platform providers for execution. The respondent set detailed price lists for platform providers, distributors and hospitals for (*) products and sent them to platform providers and distributors for execution. 

ii. Fixing the gross margin of platform providers

After the respondent introduced platform providers, second-level distributors started to buy the products involved at unified prices, thus fixing the resale prices to second-level distributors by platform providers. Following consultations between the respondent and the platform providers, an agreement was concluded on the gross margin for resale of the products involved by the platform providers, indirectly fixing the resale prices of the products involved. For instance, the gross margin for (*) product was set at (*). The gross margin that second-level distributors had for (*) product if payment was made before the delivery of the products was set at (*) and at (*) if payment was made after the delivery of the products. The agreed gross margin for (*) product was (*).

iii. Restricting minimum bidding prices of distributors

According to the respondent's 2014 annual "Distribution Agreement," in any bidding activity, distributors shall strictly follow the supplier's instructed bidding prices. A written confirmation shall be acquired before any change is made to the supplier's instructed bidding prices. According to the 2015 annual "Distribution Agreement," in any bidding activity, dealers shall provide to suppliers the information on bidding prices for record. The respondent also imposed restrictions and required approval of distributors' bidding prices in the form of bidding management rules of business departments and email notices.

iv. Restricting minimum prices for sale to hospitals

The respondent formulated the product-price system for each phase of sales, including the minimum prices for sale to hospitals. The system was sent to distributors for execution. For instance, the respondent set the minimum price for (*) product to be sold to hospitals and sent it to distributors. (*) The business department set the minimum price at which the products involved were sold to hospitals for the first time. If the distributors sold at a lower price, a submission to the respondent for approval was required.  

II. Implementing monopolistic agreements on fixing resale prices and restricting minimum resale prices

It is verified that the fixed resale prices and restricted minimum resale prices by the respondent were in practice implemented by the distributors. The respondent further enhanced the implementation of the monopolistic agreements with measures such as internal assessment, canceling products that distributors won in biddings at low prices, and punishing cross-region sales at low prices.

The price lists formulated by the respondent for different phases of sales covered products in business areas of cardiovascular treatment, restorative therapy and the treatment of diabetes. Examination of platform providers and distributors of the products for cardiovascular treatment, restorative therapy and the treatment of diabetes shows that platform providers and distributors all strictly complied with the respondent's fixed resale prices and restricted minimum resale prices.

In the assessment of regional managers in the 2016 fiscal year conducted by (*) business department, the implementation of the minimum bidding prices by distributors was an important part of the assessment. According to the "(*) Bidding Management Procedures and Regulations," an internal management document issued by the above-mentioned department that came into effect in 2015, "the bidding prices and bottom-line price plans should be reported to the manager of (*) greater area for approval" by distributors when bidding for (*) product. "Distributors shall not lower the bidding prices or go below the bottom-line price plans." In an email sent by people in charge of (*) business department in December 2015 to sales managers "about the confirmation of tenders and bidders in biddings in prefectural-level cities and first person in charge," it was emphasized to ensure "control of bidding prices," "protect end prices in joint efforts," and "absolutely prevent the occurrence of any stupid mistakes in price controls and terminate distribution rights of those engaged in inappropriate bidding." During the time period from December 2015 to February 2016, in biddings conducted in (*) prefectural-level city and (*) some hospitals, the respondent imposed restrictions on and conducted pre-review of all distributors' bidding prices. In December 2015, one distributor won the bid for the fixed amount procurement of medical supplies for (*) public medical institutions in the city of (*) by bidding at prices lower than required. The respondent eventually asked the distributor to cancel all products that won the bid.

 (*) business department formulated penalty regulations for cross-regional distribution of (*) products. Once the distributor was found to be engaged in cross-region distribution, the distribution qualification should in general be revoked regardless of the amount of capital involved. The distributor could also be fined a large sum of money and have its distributor discounts and credits cancelled.

For (*) that has a higher retail price, hospitals or certain patients would send price inquires to, and purchase from, the distributors. People in charge of (*) business department required "price protection," asked for joint protection of market prices,  and required distributors to strictly follow the company's resale prices in quoting and sales in multiple group emails sent to the China sales team of (*) in April, September, October and December of 2015, and March 2016.

In addition, the respondent also took measures to restrict the targets and regions of resale by distributors and to prohibit distributors from selling products of other brands that have a competing relationship. Such measures were carried out in line with vertical price measures and further strengthened the effect of fixed resale prices and restricted minimum resale prices.

According to financial statistics provided by the respondent, it is calculated and verified that the respondent's revenue generated from the products affected by the respondent's above behavior in 2015 was 2.963 billion yuan ($429.3 million).

The above facts  are supported by materials and evidence including inquiry records, distribution agreements, dealership agreements, bidding management documents, product price lists, business emails, financial documents, and resale price statistics collected from platform providers and distributors.

III. The respondent concluded and implemented the above monopolistic agreements to eliminate and restrict market competition, and caused harm to consumer interests.

The respondent's trading partners in the case included platform providers and first-level distributors, which are both independent legal persons and have no affiliated relationships with Medtronic such as shareholding and actual control. Through concluding and implementing monopolistic agreements with trading partners, the respondent fixed the resale prices, bidding prices and prices sold to hospitals of the products involved, thus eliminating and restricting market competition, and causing harm to consumer interests. The effect was shown in:

i. Eliminating and restricting price competition among distributors

The markets for high-value supplies and implantable medical equipment have relatively high technological barriers. Manufacturers mainly adopt resale as their sales method. The fair competition among distributors plays an important role in promoting product competition and formulating reasonable market prices. The respondent strictly fixed the prices or minimum prices at different phases of resale, concluded and implemented monopolistic agreements with its trading partners, and further strengthened the effect of fixed resale prices and restricted minimum resale prices by imposing restrictions on the targets and regions of sales, and prohibiting the sales of competing products. Such behavior eliminated and restricted competition among distributors.

ii. Eliminating and restricting price competition among brands of medical devices

Medical devices are a special type of product. The number of brands of the same kind of medical devices sold in one hospital is relatively limited. For a majority of medical devices, consumers can only buy and use them at hospitals. The choice that consumers have among different brands is also extremely limited. Therefore, the competition among brands of medical devices is not sufficient. After comprehensively analyzing elements including the respondent's market share of the products involved and the respondent's financial power and technological conditions, the respondent is in a leading position in the industry in the fields of medical devices for cardiovascular treatment, restorative therapy and the treatment of diabetes. The respondent further expanded its restriction on competition and hindered the market price mechanism from normal functioning by restricting distributors from competing with distributors of other brands by cutting prices and by prohibiting distributors from selling products of competing brands. 

iii. Causing harm to the legal rights and consumer interests of the end buyers

The respondent restricted the minimum resale prices, bidding prices and prices sold to hospitals of relevant products, and prohibited price cuts at different phases of resale. The respondent maintained the high prices of medical-device products through various means, and therefore caused harm to the legal rights of end-buyers such as hospitals and increased the burden on patients. When consumers directly sent price inquires to, and purchased from, distributors some of the products involved, the respondent required distributors to have "price protection," thus eliminating the opportunities for consumers to buy the product at prices lower than restricted prices and causing harm to consumer interests.

IV. The NDRC's decision

The regulator is of the opinion that by concluding and implementing monopolistic agreements to fix resale price and restrict minimum resale prices for the products involved, the respondent violated Article 14 (1) and (2) of the AML, eliminated and restricted market competition, and caused harm to consumer interests. Furthermore, the respondent during multiple statements of opinions didn't hold the opinion or prove that the above behavior complied with circumstances and conditions for exemption in Article 15 of the AML and therefore should be penalized.

During the investigation, the respondent presented its opinions on multiple occasions and admitted that its behavior had violated the AML. The respondent took the initiative to formulate corrective measures to diminish the harm of its illegal behavior and appealed for mitigated punishment. The respondent's corrective measures include: entirely remove restrictions on resale prices, allow platform providers to directly sell to end-buyers, no longer restrict distributors from selling to cross-region consumers, remove exclusive sales restrictions in distribution of products that have market power, revise distribution agreements and regulations including bidding management systems and distributor management policies, enhance antitrust compliance among employees and improve the company's antitrust compliance mechanism.

The illegal behavior of the respondent involved different phases of sales that included platform providers, distributors and end buyers and the violation was relatively great in its extent. The respondent's restrictive measures were relatively full-rounded in that they imposed vertical constraints on sales targets and regions and prohibited the sales of products of competing brands while strictly fixing resale prices and restricting minimum resale prices. The respondent cooperated with the investigation quite well in the later part of the investigation and took the initiative to make corrections. In consideration of previous facts and in accordance with Article 46 and 49 of the AML, and Article 27 of the Administrative Punishment Law of the People's Republic of China, the regulator decided to make the following decision:

i. To order the respondent to immediately stop the illegal behavior of concluding and implementing monopolistic agreements on fixing resale prices of medical-device products to third parties and restricting minimum resale prices of medical-device products to third parties.

ii. To fine the respondent 4 percent of the respondent's revenue generated from the products involved in the Chinese market in 2015, amounting to 118,520,000 yuan.

In accordance with Article 46 (3) of the Administrative Punishment Law, the respondent should, within 15 days after receipt of the administrative punishment order, deposit the fine in the state treasury. Full name of the payee: (*). Account number: (*). Branch of bank where the account is opened: (*).

In accordance with Article 51 (1) and (2) of the Administrative Punishment Law, if the respondent fails to pay the fine in due time, a daily surcharge of 3 percent will be imposed on the fine and the regulator can make a request to a people's court for compulsory execution.

If the respondent refuses to accept the decision, the respondent can apply for an administrative review from the National Development and Reform Commission within 60 days after receipt of the order, or file an administrative lawsuit at a people's court within six months after receipt of the order. The execution of the punishment won't be affected during administrative review or lawsuit. 

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