China distributor price control: a clause that held

Put a traceable code on every unit and a fixed penalty for channel breaches in your China distribution contract. In June 2025 a Shanghai court held a cosmetics distributor to that kind of clause after its stock turned up online with the codes scratched off. Fourteen similar disputes, over 6 million RMB at stake, then closed through mediation. Leave the resale price itself out of the contract.

Court releases and regulator rules checked September 24, 2026. This is not legal advice.

Chinese brand managers have a word for gray-market or parallel sales inside China: 窜货, stock that leaks out of the channel or region it was sold into. It usually lands online, below the price your other partners charge. The result is 乱价, price chaos. A shop that paid full price watches a stranger undercut it on a marketplace and stops reordering.

Here’s what worked for one brand that sued, and the line a price policy must not cross.

The Fengxian case: a scratched code and a 200,000 RMB clause

Fengxian, in the south of Shanghai, calls itself China’s cosmetics industry capital. Its district court got the test case.

In February 2024 a well-known domestic cosmetics company gave an internet company exclusive regional sales rights, limited it and its retailers to specified offline stores and set a 200,000 RMB penalty for cross-channel diversion. The products soon turned up in online shops, the brand’s traceability code scratched off every bottle. Source: People’s Court Daily (人民法院报), carried by the Supreme People’s Court website, August 2026. https://www.court.gov.cn/zixun/xiangqing/507751.html

Brands rarely sue their own signed distributor over scratched codes, the judge noted. This one did. In June 2025 the court read the contract’s purpose and wording together and held that buying the brand from other channels and selling it online was diversion, as the contract defined it.

That ruling became the model case for 15 suits against the brand’s own dealers. The other 14 went to commercial mediation and were settled or withdrawn on the strength of it, with over 6 million RMB at stake in total. (That’s the sum in dispute. The release doesn’t say what was paid.)

The judge, Ren Dan, found that vague wording on what counts as diversion was one reason the series happened at all. The brand rewrote its standard contract on the court’s suggestion.

What 窜货 and 乱价 cost a brand

The first cost is the price ladder. Every partner below you prices off the cheapest listing a shopper can find, so one leaking account can reset the whole channel.

We’ve seen it from inside. When we took over DaVinci Gourmet’s China e-commerce, the brand’s Tmall store and its distributors were working against each other on price. Once the channels were aligned, pricing disputes across them were resolved within three months, as the DaVinci Gourmet case records.

The second cost is who you can sue. The shop selling scratched stock often bought it legally, a few steps down your own chain. Courts give you little against it.

A Jinan court found a Taobao shop selling genuine shampoo with its codes scratched off did not infringe the trademark, because the goods were genuine and the packaging showed the brand. It ruled the scratching unfair competition and awarded the brand 6,000 RMB. Source: People’s Court Daily (人民法院报), carried by People’s Daily Online (人民网), April 2025. http://society.people.com.cn/n1/2025/0422/c1008-40465310.html

So 6,000 RMB from the reseller, next to a 200,000 RMB clause with the distributor. Most of your power sits in the contract.

Five controls against diversion, checked against the case

What price control is still legal in China

You can control where your stock goes. The price it resells at is another matter: agreeing that price with a distributor, or setting a floor under it, can itself breach China’s Anti-Monopoly Law.

Article 18 bars an operator from agreeing with a trading partner to fix the resale price or set a minimum resale price. An implemented monopoly agreement draws a fine of 1% to 10% of the prior year’s sales. Source: Anti-Monopoly Law (反垄断法, 2022 amendment), Ministry of Commerce (商务部) policy database, June 2022. https://policy.mofcom.gov.cn/claw/clawContent.shtml?id=97047

The market regulator’s rules go further.

The ban extends to fixed margins, discounts and fees, a floor set “by other means” and resale prices unified or set automatically through data, algorithms or platform rules. Source: State Administration for Market Regulation (市场监管总局), Provisions on Prohibiting Monopoly Agreements, articles 14 and 15, March 2023. https://www.gov.cn/gongbao/content/2023/content_5754538.htm

Software that sets your dealers’ prices for them counts.

SAMR fined Yangtze River Pharmaceutical 764 million RMB, 3% of its 2018 sales, for fixing and setting minimum resale prices, enforced by punishing distributors that sold low and paying an intermediary to watch online prices. Source: State Administration for Market Regulation (市场监管总局), carried by the Shanghai Medical Products Administration, April 2021. https://yjj.sh.gov.cn/scjgyw/20210419/a2af0d4d5fae4bbc94e9105b8edc60c1.html

There’s now a safe harbor, and it’s small.

From February 1, 2026, a vertical agreement fixing or setting a minimum resale price is not prohibited where each party’s market share is under 5% and the goods covered turn over less than 100 million RMB a year. Other vertical agreements get a 15% share threshold with no turnover test. Source: State Administration for Market Regulation (市场监管总局), December 2025. https://www.samr.gov.cn/xw/zj/art/2025/art_5e1b65f4ee074f348ab246a1ca35ead4.html

The burden of proof is yours, for every year of the agreement. A brand big enough to be worth diverting will often fail the turnover test.

Channel and territory clauses sit outside the banned price list, and the Fengxian court enforced one as plain contract law. SAMR can still act against any agreement that evidence shows restricts competition. A recommended retail price isn’t on the list either. Enforce it with penalties and you’ve turned it into a floor.

The clauses to copy

• A definition of diversion that names the channels and the territory, and says stock may come only from you. The Fengxian judge blamed loose wording.
• A code on every unit. Make removing or covering one a breach on its own.
• A fixed penalty per incident, sized to a loss you can explain.
• An audit right over stock and sales records, on notice.
• The forum. After the case, the Fengxian brand wrote commercial mediation, confirmed by the district court, into its standard contract.

Leave out any minimum price, and any penalty for selling low.

Courts can also trim a penalty they think is out of line.

A penalty more than 30% above the actual loss may generally be treated as excessive. A party in malicious breach asking for a reduction is generally not supported. Source: Supreme People’s Court (最高人民法院), interpretation of the Civil Code contract provisions (法释〔2023〕13号), December 2023. https://www.court.gov.cn/zixun/xiangqing/419382.html

The other terms to settle before signature are in our guide to finding a distributor in China. Not sure you want a distributor at all? Our distributor or own store comparison prices both roads. Every distributor in Compass has been met in person, and our distribution team manages the relationship after signature.

FAQ

Is gray-market diversion illegal in China?

Not in itself. Courts differ on scratched codes, and in Jinan a shop reselling genuine goods it bought legally broke no trademark law. An unfair competition claim against it paid 6,000 RMB. Your real remedy is the contract with the distributor that leaked the stock.

Can I set a minimum online price for my distributor?

Not by agreement, unless you can prove you sit inside SAMR’s safe harbor: under 5% market share each and under 100 million RMB a year of turnover on the goods. Control the channel instead.

How big should the penalty be?

Big enough to hurt, small enough to defend. Chinese courts can cut a penalty that runs more than 30% above your provable loss, so keep records of what a leak costs you, lost reorders above all.

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