Dominic Hui
Ribeiro Hui, Shanghai
d.hui@ribeirohui.com

Danny Tsui
Ribeiro Hui, Hong Kong
d.tsui@ribeirohui.com

Introduction

In Europe, although the block exemption for vertical agreements may enable franchisors to protect their legitimate interests, fixing resale prices is usually considered as a ‘no go’ zone. A recent case in China demonstrates a similar administrative approach towards the issue in the context of franchising.

In July 2022, Beijing Administration for Market Regulation (‘Beijing AMR’) imposed an administrative penalty on Beijing Kairui Union Education Technology Co Ltd, the local sub-franchisor of English learning centres under the brand of a famous United States’ educational, children’s, television series (‘Sub-Franchisor’). As a provider of English learning services, the Sub-Franchisor’s conduct of fixing resale prices was deemed as vertical monopoly under Article 14 of the PRC Anti-Monopoly Law (CAML) 2007 Amendment.

It is probably one of the first decisions recognising that educational franchises are also covered by the ‘resale price fixing’, as the Chinese wording appears to refer to resale of goods rather than services. Our focus here is to understand what the administrative authority examined and how the authority reached its rulings.

In early 2021, Beijing AMR started an investigation against the Sub-Franchisor. Beijing AMR visited Sub-Franchisor’s office and interviewed the staff, and further arranged several meetings with experts and other market players in the area. The factual findings were:

1. There were 455 unit franchise agreements with the Sub-Franchisor since 2014.
2. In those franchise agreements, there are provisions on:

   (a) unit franchisee shall not adjust various fees payable by the students as regulated by the Sub-Franchisor;

   (b) there should be no increment, discount, or concessions to these fees without approval of the Sub-Franchisor, and

   (c) the Sub-Franchisor may demand a penalty of RMB 200,000 (in certain cases RMB 500,000) or suspend business and all supports to unit franchisee in case of violation.

3. In one of the internal regulations to the unit franchisees, the Sub-Franchisor shall be entitled to suspend the operation and even revoke the licence to the unit franchisee if there are adjustments or changes to the prices without the approval of the Sub-Franchisor.
4. It appears that certain telephone conversations with the customer hotline of the Sub-Franchisor were recorded. In one of those conversations, the staff answering the call said all prices were determined by the Sub-Franchisor, while the unit franchisees were not allowed to change them.
5. There were also decisions of penalising certain unit franchisees due to change of prices without approval. On some occasions, when certain unit franchisees decreased the prices, other unit franchisees would report to the Sub-Franchisor, who would take the initiative to stop such reduction.

Obviously, there is vertical relationship between the Sub-Franchisor and the unit franchisees, which is a classic example of resale price fixing as one can see a clear system of price fixing. Under Article 14 of the CAML 2007 Amendment, fixing resale prices or restricting the minimum prices are both considered as monopolistic agreement. Although the Sub-Franchisor made an application to terminate the investigation of the authority pursuant to Article 21(3) of the Interim Measures of Prohibiting Monopoly Agreements, such request was refused because Beijing AMR took the view that there was a blatant violation and that the franchisor should be penalised.

The Sub-Franchisor also attempted to argue that franchising should fall within the general exception under Article 15(7) of the CAML 2007 Amendment. However, from the ruling of the Beijing AMR, in the context of private educational business at the very least, it appears that the Sub-Franchisor did not provide convincing evidence on the proposition that price control is crucial to the uniformity within the franchise system, or the customers would benefit from such uniformity. Beijing AMR ruled that from the economic perspective, the operating costs of different locations should be different and, therefore, fixing the prices would deprive the unit franchisees’ autonomy of determining the prices and would damage the interests of the customers.

Under Article 46 of the CAML 2007 Amendment, the party with the monopolistic agreement in default shall be subject to a fine from one to ten per cent of the sales figure of the previous year. Based on the above factual and legal rulings, Beijing AMR imposed an administrative penalty of RMB 943,386 (approximately 133,654€), which is three per cent of the audited sales figure of the previous year.

It is considered a relatively low figure because Beijing AMR indicated that the violation was serious and covered an extended period of time (over six years) but the Sub-Franchisor was cooperative at the later stage of investigation.

In August 2022, CAML made meaningful amendment which sets out specific exemptions under Articles 18 and 20. If an entity can prove that its market share is lower than the regulated standard and meets the conditions set by the anti-monopoly enforcement authority under Article 18, or it belongs to the specific circumstances under Article 20, it may be exempted from monopoly determination. This may bring a glimmer of light to the franchisors, yet it is prudent to monitor the situation for the time being.