Introduction

Vertical monopoly agreements generally refer to agreements, decisions, or other concerted practices between an operator and its counterparties (such as distributors and suppliers) that have or may have the effect of eliminating or restricting competition. Typical vertical monopoly agreements include resale price maintenance, restricted sales territories and customers, and exclusive arrangements. Vertical monopoly agreements are regulated by competition laws in numerous jurisdictions around the world, including China's Anti-Monopoly Law. Violations of regulations regarding vertical monopoly agreements can not only result in economic losses but also damage a company's image, undermining investor confidence and partnerships.

Unlike other monopolistic practices, such as cartels, which are generally strictly prohibited, determining the illegality of vertical monopoly agreements presents significant complexity. Different countries vary significantly in their regulatory approaches to vertical monopoly agreements. Some countries adopt a per se (or presumptive) illegality principle, prohibiting certain types of vertical restraints (such as resale price maintenance and certain vertical non-price restraints) regardless of whether they actually have anticompetitive effects. Other countries adopt a "reasonableness principle," requiring a case-by-case analysis based on the specific market environment to determine whether an agreement will have anticompetitive effects on the relevant market. Furthermore, different countries have established different safe harbor principles or other exemptions for vertical monopoly agreements.

Vertical monopoly agreements, which affect the relationship between a company and its counterparties, have significant practical significance in the current international economic landscape and China's market development trends. When Chinese companies plan global sales and procurement, they should pay particular attention to the boundaries of their counterparty management and restrictions, and rationally design their distribution systems, pricing mechanisms, and supply chain collaboration within a compliance framework. Against this backdrop, JunHe has launched a series of articles titled "Global Vertical Monopoly Agreement Compliance Overview," which introduces the legal systems and enforcement developments related to vertical monopoly agreements in jurisdictions such as Southeast Asia and South America, aiming to help Chinese companies avoid crossing the red line of monopoly while enhancing their international competitiveness. As the first article in this series, this article will explore Indonesia's legal system and enforcement developments regarding vertical monopoly agreements.

Indonesia's Regulatory System for Vertical Monopoly Agreements

In 1999, Indonesia enacted the Law on Prohibition of Monopolistic Practices and Unfair Commercial Competition1 ("Indonesian Competition Law") and established the Indonesian Competition Commission (Komisi Pengawas Persaingan Usaha), an independent enforcement agency. Since then, Indonesia has successively promulgated relevant regulations and guidelines, establishing the legal framework for regulating vertical monopoly agreements. Key regulations include Regulation No. 44 of 2021, "Regulations on the Implementation of the Prohibition of Monopolistic Practices and Unfair Commercial Competition Practices," Regulation No. 5 of 2010, "Guidelines on the Application of Article 14 (Vertical Integration) of the Indonesian Competition Law," Regulation No. 3 of 2011, "Guidelines on the Application of Article 19(d) (Discrimination) of the Indonesian Competition Law," Regulation No. 5 of 2011, "Guidelines on the Application of Article 15 (Exclusive Agreements)," and Regulation No. 8 of 2011, "Guidelines on Resale Price Maintenance."

1 Regulatory Framework for Vertical Restraints

According to Regulation No. 8 of 2011, "Guidelines on Resale Price Maintenance," vertical restraints are defined as "restrictive agreements between enterprises at different levels of the production chain during the course of economic transactions." The types of vertical restraints explicitly prohibited by the Indonesian Competition Law include resale price maintenance, exclusive agreements, price discrimination, and tying. Among them,

resale price maintenance refers to an operator requiring the counterparty not to sell or resell the goods and/or services it has received at a price lower than the contract price.

An exclusive agreement refers to an operator stipulating that the recipient of goods and/or services may only resell to specific parties, or may not resell to specific parties, or may not resell such goods and/or services at specific locations.

Price discrimination refers to an operator requiring one buyer to pay a different price than other buyers for the same goods and/or services.

Tying refers to an operator stipulating that the recipient of specific goods and/or services must agree to purchase other goods and/or services from the supplier.

The Indonesian Competition Law currently primarily applies the rule of reason to assess vertical restraints. For example, in Indonesia, agreements between operators containing resale price maintenance clauses are permitted as long as the agreement does not lead to unfair commercial competition. Various factors are considered in assessing whether a vertical restraint may lead to unfair commercial competition, such as whether the operator has an incentive to use its market power to engage in anticompetitive behavior and whether such anticompetitive behavior has a negative impact on consumer welfare. The Indonesian Competition Law's regulatory approach to vertical restraints has evolved from a per se illegality principle to a rationale principle. In 2006, the Indonesian Competition Commission (ICP) launched an investigation into a large Indonesian cement producer, finding it had violated the prohibitions on exclusive agreements by forming a dealer cartel, prohibiting distributors from selling competitors' cement products and requiring them to sell only to designated customers and regions. The cement producer subsequently appealed to the Supreme Court, which applied the per se illegality principle to interpret the relevant provisions, ultimately dismissing the appeal. This case subsequently sparked considerable controversy in Indonesia, with some legal experts arguing that the ICP should apply the rationale principle to analyze the actual market impact of the exclusive agreement, particularly when multiple distributors are involved, where an exclusive distribution agreement may have reasonable commercial logic. Consequently, as Indonesia's competition law system continues to evolve, the ICP issued guidelines on exclusive agreements in Regulation No. 5 of 2011, indicating a greater tendency to apply the rationale principle in future cases. In current practice, exclusive agreement-related conduct is consistently evaluated using the rationale principle. 3

2 Indonesian Competition Law Exemption Rules

Except for resale price maintenance, agency relationships can be exempted from the Indonesian Competition Law's prohibition on vertical monopoly agreements. According to Article 50 of the Indonesian Competition Law, "agency agreements that do not contain resale price maintenance clauses" are not subject to the Indonesian Competition Law. The Indonesian Competition Commission clarified the criteria for identifying agency agreements in Regulation No. 7 of 2010, "Guidelines on the Application of Article 50(d) of the Indonesian Competition Law":

(1) The agent acts on behalf of the principal;

(2) The prices of goods and services are determined by the principal;

(3) The principal bears the risks of the agreement between the agent and the third party;

(4) Although the agent is not an employee, the relationship between the principal and the agent is primarily a subordinate relationship, and the principal controls the actions taken by the agent in performing its tasks;

(5) The agent, as a general service provider, receives commissions or wages (fees) from the principal. Therefore, if an agency agreement does not meet the above criteria, or although it is an agency agreement, it contains a resale price maintenance clause, it is still not exempted from the Indonesian Competition Law.

3 Indonesian Vertical Restriction Enforcement Updates

In recent years, the Indonesian Competition Commission (ICP) has stepped up its enforcement efforts in the area of vertical restraints, focusing particularly on exclusive agreements and resale price maintenance. On September 14, 2023, the ICP held its first hearing regarding alleged violations of competition law in agreements between Indonesian food company PT Kobe Boga Utama ("PT Kobe") and its distributors, including resale price maintenance, exclusive dealing agreements, restrictive trade clauses, and restrictions on the distribution of goods. PT Kobe, a major producer of seasoned flour, stipulated in its distribution agreements that distributors must sell products at prices set by the company and are prohibited from adjusting prices without authorization; they are prohibited from selling products of PT Kobe's competitors; and distributors are restricted to sales within PT Kobe's designated distribution channels, including modern supermarkets and traditional retail stores, and must not exceed its designated distribution areas. The case entered the preliminary review phase on September 26, 2023. PT Kobe acknowledged that its distribution agreements may contain illegal clauses. On October 10, 2023, PT Kobe formally signed a Behavior Change Integrity Pact, committing to remove illegal clauses and adjust relevant agreements. After a 45-day oversight, the Indonesian Competition Commission (ICP) concluded that PT Kobe had completed its rectification and announced the termination of its review of the case on December 5, 2023.

Summary

Indonesia has a relatively comprehensive regulatory system for vertical monopoly agreements, and enforcement is relatively active. Compared to Chinese law, the vertical monopoly agreements covered by Indonesian competition law exhibit significant diversity in type and conduct. For example, Chinese law only prohibits tie-in sales by operators with a dominant market position, while Indonesia includes this practice within the scope of vertical monopoly agreements. Operators without a dominant market position may also be found to have violated the law by engaging in tie-in sales. Furthermore, vertical monopoly agreements in Indonesia are primarily analyzed under the principle of reason, which makes the boundaries of compliance in corporate behavior blurry and dynamic. Overseas branches of Chinese companies, under the guidance of professional lawyers, need to carefully analyze and effectively utilize relevant provisions, such as the exemption principle, to meet their business needs while avoiding the risk of vertical monopoly agreements.

Reprinted from Junhe's "Compliance Business Monthly Report"