Johnson & Johnson Medical China and Johnson & Johnson Medical Shanghai have been ordered to pay compensation to former dealer. [File photo]

Medical giant Johnson & Johnson has become the first Fortune 500 company to be ruled by a Chinese court as holding a monopoly, in a landmark lawsuit that experts say signals the country's tougher stance toward price-fixing.

In a final verdict on Thursday, Shanghai High People's Court ordered Johnson & Johnson Medical China Ltd and Johnson & Johnson Medical Shanghai Ltd to pay 530,000 yuan ($86,456) in compensation to a former dealer.

The court said the Chinese subsidiaries of the US giant adopted a monopolistic practice by setting a price floor for its Chinese dealer Rainbow Medical.

Ding Wenlian, chief judge of the case, said, "The practice of placing a minimum resale price made Johnson & Johnson avoid price competition and confined the market competition of similar products, which kept the price of the equipment at a high level and damaged consumer interests."

Ding added, "The market for medical instruments in China faced a lack of competition."

The case, the first vertical monopoly lawsuit and also the first ruling in favor of the plaintiff in an antitrust case in China, comes on the fifth anniversary of the country's anti-monopoly law.

A vertical monopoly refers to a company that controls all aspects of production, distribution and sales of a product. A horizontal monopoly, another common monopolistic practice, refers to a company that owns or controls an entire stage in the supply process.

The Supreme People's Court, the nation's top court, said in a statement to China Daily that the ruling will be used as a reference in similar disputes and to help distinguish legal business practices from illegal resale price maintenance that hurts competition.

Resale price maintenance is where a manufacturer and its distributors agree that the distributors will sell the manufacturer's product at certain prices at or above a price floor or at or below a price ceiling.

Rainbow Medical had been a distributor for Johnson & Johnson for 15 years by 2008. In their annual contract, Johnson & Johnson placed a resale price floor on Rainbow.

In March 2008, the Chinese dealer agreed to sell Johnson & Johnson products below the price floor to a hospital, in a deal that triggered a warning from the US multinational, which later suspended Rainbow from selling its products.

Johnson & Johnson didn't renew its contract with Rainbow in 2009, but abandoned the price limit that year when it signed contracts with other dealers.

Rainbow sued Johnson & Johnson in August 2010, demanding compensation of more than 14 million yuan.

Johnson & Johnson had said earlier that it set the price floor to prevent damage to its business reputation.

As a Fortune 500 company with more than 15 years of business in China, Johnson & Johnson has a market share of more than 50 percent, according to the court verdict.

Dai Bin, Rainbow's attorney from Beijing Zhanda Law Firm, described the Shanghai court's ruling as a landmark decision.

"It indicates that the plaintiff, who is usually in a relatively weak position in a monopoly dispute, can be protected by law as long as it adduces sufficient evidence," he said.

Ji Guangming, an attorney for Johnson & Johnson, declined interview requests, while China Daily's request for comments from Johnson & Johnson went unanswered.

Huang Yong, a professor from the University of International Business and Economics' School of Law, said the court ruling will serve as a good example of how to analyze the legality of a vertical monopoly and how to judge business actions that limit competition, such as resale price maintenance.

Sebastien Evrard, a partner in the Beijing office of Jones Day, a global law firm specializing in antitrust cases, said this case will hopefully give some guidance to businesses on how the prohibition of resale price maintenance will be applied in China — in particular whether resale price maintenance can be legal under certain circumstances.

He added that antitrust cases are increasing in China, but there is no need to fear that they will mainly focus on foreign companies.

"If we look back to the past five years, instead of the past three months, you'll see that most of the law enforcement (applied to) Chinese companies."

He said foreign companies are usually more aware of the anti-competition principles, as much of their business is carried out in countries with years of antitrust practice. But since China's anti-monopoly law has its own terms, they should also know what is legal and illegal in the country.

Most, if not all, competition laws around the world prohibit resale price maintenance, Evrard added. China's anti-monopoly law follows the same principle, if it has an anti-competitive effect.

"Most of the court decisions in other countries have found that resale price maintenance is a violation of competition law, because the obligation has the effect of keeping the price up and can potentially result in consumers paying higher prices."

However, Zhu Dan, presiding judge of the intellectual property court of Shanghai High People's Court, said not all impositions of resale price maintenance by suppliers contravene the law.

"Some agreements requiring resellers not to sell products below a certain price have positive effects, such as improving the quality of products in the market and allowing new brands to enter the market," he said.