Japan: Settlements

In summary

Recent amendments to Japanʼs Anti-Monopoly Act (AMA) gave the Japan Fair Trade Commission (JFTC) powers to formally accept voluntary commitments from companies suspected of having infringed the law. The JFTC has recently been actively investigating foreign entities’ anticompetitive conduct, and all cases have been settled, by either informal settlements or formal commitments.

Discussion points

• Settlement in non-cartel conduct cases;
• settlement in cartel conduct cases;
• options for negotiating commitments and disclosures;
• strategies to manage fines or monetary payments;
• measures to manage non-monetary settlement requirements; and
• special settlement considerations when the settling party is a foreign entity.

Referenced in this article

• The AMA;
• the JFTC;
• the JFTC Commitment Guidelines;
• amendments to the AMA; and
• the Cooperation Guidelines.

Settlement in non-cartel conduct cases

Introduction of commitment procedure

Recent amendments to the AMA, which took effect on 30 December 2018, gave the JFTC powers to formally accept voluntary commitments from companies suspected of having infringed the AMA ^[1]. The amendment will allow the JFTC to terminate its formal investigations, which are typically opened by surprise inspections, without reaching a formal finding of infringement and thus without any risk of being appealed by the companies to judicial courts. The introduction of this formal commitment procedure has brought the JFTCʼs powers into line with those of other competition authorities in the EU and the US.

Japanese antitrust specialists anticipate that the introduction of the formal commitment procedure has made it easier for the JFTC to pursue a broader range of cases than was previously possible, in particular as the JFTC now has a more comprehensive range of choices in concluding its investigations. This flexibility is likely to facilitate the JFTC’s ambition to take on more investigations involving complex theories of harm, including online platform business and digital advertising.

The JFTC published a set of guidelines in 2018 (the Commitment Guidelines). Based on the Commitment Guidelines, the procedure appears to follow almost the same course with the EU and the US.

Commitment negotiation

If the JFTC decides to invite companies under investigation for commitment negotiations, it will notify this intention in a written letter to the companies setting out an overview of the JFTCʼs concerns. Companies then have 60 days from notification to offer commitments.

The JFTC will have sole discretion as to whether it initiates the procedure. In practice, however, companies under investigation can proactively approach the JFTC to explore the possibility of commitment negotiations.

Applicability of commitment procedure

The Commitment Guidelines made clear that the following cases will not be eligible for the commitment Procedure:

• hardcore cartels (ie, bid-rigging and price-fixing);
• a repeated offence (a second anticompetitive conduct within 10 years), or
• an infringement that is malicious and thus should be subject to criminal penalties.

In practice, therefore, the commitment procedure will be applied to the first offender of non-cartel single-firm conduct (eg, abuse of superior bargaining position and resale price maintenance).

Market test

The JFTC may conduct a ‘market test’ and seek comments on proposed commitments from the public to determine whether they are sufficient to address the JFTCʼs concerns and are capable of being implemented in practice. Having said that, a market test is not mandatory as it is in the EU, and the JFTC has not yet provided additional guidance in its Commitment Guidelines on the circumstances in which a market test would be appropriate or necessary. Four investigations have been settled by the commitment procedure to date, but the JFTC did not conduct any market tests in any of these cases.

Requirement for commitment offer

To be accepted by the JFTC, an offer of commitments by companies under investigation must be both sufficient to address the JFTCʼs concerns and feasible enough to be implemented in practice.

The Commitment Guidelines indicate that there are cases where reimbursements of damages to companies affected by an infringement would be appropriate, and abuse of superior position is listed as an example for that. As the JFTC cannot order reimbursement to companies if it has issued a formal cease-and-desist-order, this reimbursement by way of negotiated commitment would be worth noting from the viewpoint of enhancement of victim relief.

Publication of commitment decision

Where the JFTC takes a commitment decision, it announces the decision and provide a concise summary of the commitments. This decision does not amount to a finding of any infringement, which would mean that the JFTCʼs decision would be unlikely to be useful to plaintiffs in follow-on damages litigations.

Settlement in cartel conduct cases

Introduction of cooperation discount system

Recent amendments to the AMA, which took effect on 25 December 2020, introduced a cooperation discount scheme by way of agreement with the JFTC for cartel and bid-rigging cases by amending the JFTC’s leniency regime, which the JFTC initially introduced in 2006.

In the negotiations, the applicant explains the contents of the materials and report that it intends to submit under the cooperation discount scheme. The JFTC then assesses the extent to which the applicant would contribute to the investigation (discussed below), suggests a reduction rate range and asks for the applicant’s consent. Upon reaching an agreement, the applicant submits the reports and materials to the JFTC.

As part of its obligation to cooperate with the JFC’s investigations, the applicant needs to respond to the JFTC’s additional requests and submit supplemental materials and reports as requested.

Process for negotiating cooperation discount

To be eligible for the cooperation discount, a company first needs to file a leniency application and then an application for negotiation within 10 days of the receipt of confirmation from the JFTC hat the leniency application has been accepted.

Since an application for negotiation can only be submitted by a company that has filed a leniency application with an adequate amount of report and evidence, the JFTC’s Guidelines on the cooperation discount require a company to submit a sufficient leniency application.

The applicant explains the contents of materials it intends to submit under the cooperation discount and enters into agreement on the range of reduction rate.

As it plans to enter into agreements with companies at a very early stage of its investigations, the JFTC suggests a range of reduction rate rather than offering a specific reduction rate, and asks for the applicant’s continued cooperation with its investigation.

Options for negotiating commitments and disclosures

Non-cartel conduct cases

The Commitment Guidelines provide examples of possible remedies, including:

• commitment to cease suspected conduct;
• notification to customers and users of cessation of the alleged conduct;
• maintenance of competition law compliance programme;
• withdrawal of, or revisions to, terms and conditions with customers;
• divestiture of business; and
• financial restitution for alleged victims.

Companies will typically be required by the JFTC to submit annual reports for three consecutive years setting out the status of implementation of the agreed commitments.

The commitment system can be beneficial for investigated companies in that they can avoid formal declarations by the JFTC of its findings of infringements and accompanying administrative fines, and thus can potentially escape follow-on litigations by alleged victims. Having said that, we should be careful of the risk that the JFTC may endeavour to secure a broader scope of ‘potentially anticompetitive’ conduct even if it does not have sufficient evidence to demonstrate a violation, in which case the companies under investigations would likely end up offering broader and excessive commitments, which may include compensation for damage to victims.

Companies under investigation, therefore, need to carefully consider the pros and cons of entering into commitment negotiations with the JFTC, to minimise financial and reputational damage.

Announcement of commitment decisions by the JFTC would include descriptions of potentially anticompetitive conduct, which may help plaintiffs in follow-on damages litigations to demonstrate infringements in a civil court. Companies will therefore need to proactively discuss with the JFTC before publication, to make sure the publication does not lead to an implicit finding of infringement.

Cartel conduct cases

The Cooperation Guidelines made clear that the JFTC will use the following criteria to assess the extent of an applicant’s contribution and to determine reduction rate:

• the degree of specificity and detail of the report and materials;
• whether the report and materials include all relevant information that would contribute to the investigation; and
• whether the evidence submitted by the company supports the contents of the report.

As to the degree of specificity of the report, the Cooperation Guidelines list various factors, including the following as information that contributes to the JFTC’s investigations:

• goods or services targeted in the violation;
• the manner of the violation;
• participants of the violation;
• the duration of the violation;
• the status of implementation of the violation; and
• the volume of affected commerce, which will be a basis for calculating administrative fines.

Based on these factors, the JFTC will determine the degree of applicant’s contribution to the investigation using three categories: low, medium or high. For example, companies that applied for the cooperation discount after the JFTC’s inspections would receive 5, 10 or 20 per cent discounts based on the degree of contribution. It is therefore necessary for companies to negotiate with the JFTC by offering their plan of cooperation in detail, so that they can secure the maximum reduction rate.

Strategies to manage fines or monetary payments

Non-cartel conduct cases

Under article 709 of the Civil Code, persons who violate the rights of another person must pay the damages resulting from their actions; an article 709 action is available in competition law cases. A plaintiff in an article 709 action must prove the intent or negligence of the defendant, the amount of damages and the reasonable causation between the defendant’s conduct and the damages. In practice, however, the burden of proof for intent or negligence of defendants is not deemed critical: infringements of the AMA are usually associated with neglect by the violators at least.

As a recent example, in the USEN private monopoly case, an article 709 action damage suit was filed by a competitor of USEN Corporation, after the JFTC had issued a cease-and-desist order against USEN. The Tokyo District Court upheld the plaintiff’s claims and the parties finally settled at Tokyo High Court, whereby USEN agreed to pay ¥2 billion to a competitor.

When the JFTC takes a commitment decision, it will be required to announce the decision and provide a general summary of the commitments accepted, according to the Commitment Guidelines.

Cartel conduct cases

To manage and minimise administrative fines, it is necessary for companies under investigation to proactively discuss with the JFC the scope of investigations and finding of infringement. Although applicants for the cooperation discount are required to cooperate with the JFC’s investigations, as stated above, this does not necessarily mean that the applicants will be required to admit all infringements that the JFTC claims to exist. The applicants therefore should maintain communication with the JFTC’s investigators to better understand what the JFTC’s fact-finding will be and also raise issues promptly to avoid excessively broad findings of infringements and increased administrative fines.

In addition to administrative fines, parties found by the JFTC to be engaged in cartels and bid-rigging are liable to indemnify those injured by such parties under article 25 of the AMA, after a cease-and-desist order or an order to pay an administrative fine has been finalised. Although plaintiffs can also file damage suits under article 709 of the Civil Code before the JFTC’s orders become final, the plaintiff needs to prove the defendant’s infringements; the courts will rely on the JFTC’s findings in the order under article 25 of the AMA, and the defendant cannot challenge these fact-findings. Discussions with the JFTC as to the scope of infringement will therefore be necessary to minimise monetary payments arising from civil damage claims.

Measures to manage non-monetary settlement requirements

Non-cartel conduct cases

Companies that have settled with the JFTC by commitments will in practice be required to annually report the status of implementation of the commitments for three consecutive years from the date of the decision.

The Commitment Guidelines do not specify monitoring trustees, and there has been no case to date where monitoring trustees have been appointed, which contrasts sharply with a practice in the EU where monitoring trustees play a crucial role in the enforcement of commitments.

In the case of failure to comply with commitment decisions, the JFTC is unable to penalise companies that have failed to comply with their commitments and instead can only revoke its commitment decision and resume its earlier investigation.

Cartel conduct case

Companies that have received a cease-and-desist order from the JFTC will in practice be required to annually report the status of implementation of the commitments for three consecutive years from the date of the commitment decisions.

The AMA does not specify monitoring trustees, and there has been no case to date where monitoring trustees was appointed pursuant to the JFTC’s commitment decisions.

Failure to comply with a cease-and-desist order is subject to criminal sanctions, although there has been no such case to date.

Special settlement considerations when the settling party is a foreign entity

The JFTC has recently been actively investigating foreign entities’ anticompetitive conduct, and all cases have been settled, either by informal settlements or, after the introduction of formal commitment procedure at the end of 2018, by formal commitments. Illustrative examples include the Airbnb case in 2018 and Amazon Japan (Amazon) case in 2020.

Amazon Japan

In the Amazon case, the JFTC inspected Amazon’s offices located in Tokyo in March 2018, with a suspicion that Amazon had been abusing its superior position over suppliers of goods sold by Amazon to consumers on Amazon’s website.

According to the JFTC’s announcement of the commitment decision, dated 10 September 2020, Amazon Japan had made various requests to suppliers whose business position was inferior to that of Amazon. Suppliers had been asked to reduce the sales price to Amazon without any reason other than to improve Amazon’s profitability. Notwithstanding that there were no reasons attributable to the suppliers, Amazon had been returning excess goods to the suppliers without justification.

Amazon offered a proposal for commitments, which included cessation of the above-mentioned demands and payment of ¥2 billion to 1,400 suppliers, and the JFTC accepted this commitment offer as sufficient.

Airbnb

In the Airbnb case, the JFTC inspected Airbnb Japan’s offices located in Tokyo in November 2017, with a suspicion that Airbnb had been unduly foreclosing competing operators of accommodation and vacation rental platforms, and the conduct may amount to private monopolisation or unfair trade practices, both of which are prohibited under the AMA.

According to the JFTC’s announcement of termination of its investigation, dated 10 October 2018, Airbnb had concluded contracts with operators of booking management services concerning the use of application programming interface software (an intermediary that enables data coordination among software via the internet) and access to Airbnb’s booking data, which actually included restriction on the booking management services operators’ sharing of data with operators of accommodation and vacation rental platforms that had been competing with Airbnb.

Airbnb informally offered voluntary measures, which included cessation of the above-mentioned restrictions, and the JFTC accepted this offer as sufficient. As this investigation was closed before the formal commitment procedure became effective, a commitment decision was not available to the JFTC.

These cases are a clear indication of the JFTC’s appetite for investigating foreign entities and their local subsidiaries, which foreign companies should take note of in operating businesses in Japan.

Notes