Japan: Cartels

The latest amendment of the Japanese Antimonopoly Act (the Act) in 2005 (the 2005 Amendment) was the most comprehensive renewal of the Act in a quarter of a century. The drafting process, which took well over two-and-a-half years, involved a series of difficult debates between the regulator (the Japan Fair Trade Commission, JFTC), the private sector, academics and political communities.

The 2005 Amendment had broad coverage, but its main objective was to strengthen the regulation against cartels, which was previously soft and incomplete in many ways compared with the systems of the United States and the European Union.

Regarding cartel regulation, key aspects of the amendment include:

• introducing leniency programmes (granting immunity and reduced fines);
• significantly increasing the percentage of turnover used in the calculation of fines;
• introducing heavier fines for repeat offenders;
• granting criminal investigative powers to JFTC officials; and
• permitting investigations to go back three years rather than the previous time limitation of one year to retrospectively catch past cartel conduct

The goal of this article is to provide an overview of the enforcement status of the 2005 Amendment, highlighting various emerging issues.

Additionally it will provide a forecast of the future development of the Act, including a brief summary of the expected amendment of the Act this year (the 2008 Amendment), as well as suggestions for improvement in the enforcement.

Enforcement over the last two years

There were many negative predictions about the new Japanese leniency programme. The most outstanding among those pessimistic forecasts was that the social values and corporate culture in Japan would hinder the new system, the foundation of which relied on whistle-blowing and betrayal of other cartel members. Quite the contrary, however, so far it seems that Japanese corporations have embraced this new scheme.

Cartel investigations based on leniency applications

Twenty-seven leniency applications were made in the first three months (January to March 2006) following the coming into force of the 2005 Amendment. The number of applications has shown a steady increase since then, with 105 applications for the first 15 months and, unofficially, 150 for 21 months. This means that on average seven applications have been made every month, which reveals active use of the new rules among companies.

The numbers alone do not tell the whole story - to unveil more, we need to examine the following.

• How many applications were made per cartel case?
• Was the applicant a company with international operation (therefore exposed to intervention by other authorities too) or only with purely domestic operation in Japan?

Since the introduction of the system, the following eight fine payment orders on cartels have been disclosed as cases where leniency applications were accepted:

• 9 September 2006 - bid rigging on tunnel ventilation facilities;
• 8 March 2007 - bid rigging on dams or river water gates;
• 20 March 2007 - bid rigging on Nagoya City Subway (criminal investigation);
• 11 May 2007 - bid rigging on Natural Gas Eco Station;
• 24 May 2007 - price fixing, et cetera, on calcium silicate board;
• 29 June 2007- price fixing, et cetera, on gas polyethylene pipes;
• 4 December 2007 - bid rigging on high and medium-pressure gas pipes; and
• 22 February 2007 - bid rigging, etc, on marine hoses.

In each of these cases, with the exception of the Nagoya City Subway case, all the leniency positions available under the law were filled; in other words, two to three applications were filed in each case. It is also possible that more than three applications might have been filed, driven by the hope that the companies already occupying the leniency positions might be eventually disqualified.

Assuming that the above pattern holds true, the fact that over 150 leniency applications have been filed implies that possibly as many as 50 cases could have been triggered, but there have been only eight cartel cases where leniency positions were actually granted. It would appear that the majority of applications have not so far led to an investigation, or may not be investigated at all due to the lack of significance, having only de minimis impact on the market. Another interpretation would be that the number of leniency applications exceeds the actual capacity of the JFTC to investigate, and has forced it to be selective in starting investigations.

Larger companies, larger cartels

The introduction of the leniency programme has changed the entire landscape of cartel regulation in Japan. One of the most notable changes was that, unlike past investigations, post-2005 Amendment investigations tend to target large corporations. The higher turnover of these larger corporations has resulted in an increase in the average fines paid compared with pre-2005 cases. This is in line with the initial prediction that larger companies would consider leniency applications more seriously.

Before the 2005 Amendment it was rare that large companies became the subject of cartel investigations. The assumption was that large companies took a much more serious approach to complying with competition law and, succeeded in eliminating all cartelistic activity. However, since the introduction of the leniency programme most cartel investigations have involved large companies. This demonstrates that such an assumption was totally wrong. Perhaps, under the old system where leniency information was not available, the JFTC was only able to access cartel information when cartelists failed to keep all the participants happy enough to buy their silence. Such a failure typically happened when too many small to medium-sized companies were trying to collude. In contrast, collusions between large companies tended to be better organised, involving smaller risk of leaks, and maintaining a cartel had a clear appeal offering greater benefit than dropping out of it. Now, after the introduction of a leniency programme, many large companies choose to obtain immunity through a leniency application rather than make efforts to hide secretive collusions the stability of which is never guaranteed. To demonstrate this, the following table of successful leniency applicants include a number of household names of large Japanese companies at both parent and subsidiary levels.

Leniency applicants and granted immunity or reduction margin of fines

Shortened investigation period

The leniency programme seems to have contributed to the shortening of investigation period. Thanks to the information disclosed by leniency applicants, the JFTC has extensive access to the key underlying evidence to prove cartel activities without having to spend too much time in inspecting company premises or interviewing managers.

Normally, the JFTC tries to observe its internal guidelines and reach an order within one year after the commencement of formal investigation, but in the case of investigation triggered by cartel applications, the entire period of investigation is sometimes far shorter. In addition, with the JFTC holding solid evidence provided by leniency applicants, fewer addressees of fine payment orders turn to the appeal process (hearing proceedings conducted by the JFTC) not having much prospect of winning against the regulator.

Cooperation with the JFTC

Cartel investigations prior to the 2005 Amendment were conducted with little cooperative interaction between the regulator and target companies. Before the introduction of leniency programme, companies had no incentive to contribute to the JFTC investigations, on the one hand, and fines were imposed on companies with little regard to their response to the investigations, on the other. After the 2005 Amendment, in contrast, companies have been granted an option to cooperate with the JFTC for their benefit even after investigation has started provided that the leniency positions are still available (if three companies have already secured leniency positions for the particular case by then, such hope lapses). Clearly, close cooperation by three target companies motivated by leniency positions enables the regulator to collect underlying evidence more easily and deal with investigations more speedily.

Criminal indictment

Another change was the granting of criminal investigative powers to the JFTC. Before the 2005 Amendment, as soon as it became clear that the cartel was criminal in nature, upon the filing of JFTC complaint, the Public Prosecutors Office (the PPO) was brought in to conduct criminal investigations. Under the new system the JFTC is empowered to engage in criminal investigations directly, and once the investigation is concluded, bring the case to the PPO for prosecution. The exclusive jurisdiction formerly granted to the Tokyo High Court with respect to criminally indicted antitrust cases was also eliminated by the 2005 Amendment, and now the district courts have jurisdiction, with each District PPO having the power to prosecute cartel cases.

The leniency programme provides a new dimension to criminal investigations on antitrust cases too, by grating immunity positions for leniency applicants, both at company and employee levels, on condition of consistent cooperation to that particular JFTC investigation. It is in fact very exceptional in Japan for a government agency to be able to authorise immunity from criminal liability, in light of the conventional principle whereby the power of criminal indictment exclusively belonged to prosecutors.

The only post-2005 criminal indictment triggered as a result of a leniency application was the Nagoya City Subway bid-rigging case. The case shed light on disciplined cartelistic behaviour of large 'general' construction companies. The Nagoya District Court ruling revealed that the top four or five construction companies agreed to stop bid rigging activities as the entry into force of the 2005 Amendment approached, but this agreement excluded the bids already agreed upon but not yet implemented, including the one regarding the Nagoya City Subway. The finding stated that the construction companies had maintained a network of senior employees whose job was solely to manage cartel arrangements with other companies, including participating in meetings or exchanging information regularly, and deciding champions on a particular bid.

Organisational expansion of the JFTC

Equally important is the commitment of the government to the organisational expansion of the JFTC in view of its more stringent cartel regulations. Under the mandate of the former Koizumi administration, the number of JFTC officials increased steadily with an annual growth of 30 officials every year. As at the time of writing this article (March 2008), the number of officials is 765, and is expected to rise to 795 this year after the endorsement of the national budget for 2008, which almost ties with the scale of the US Department of Justice.

An antitrust regulator being sufficiently staffed is generally a critical precondition to the effective enforcement of cartel regulation. This is particularly the case for the JFTC, since it relies heavily on evidence collected via a 'dawn raid' to initiate investigations in the absence of systems available in other jurisdictions that allow more mobile use of police forces. On the day of a raid, the JFTC must simultaneously dispatch teams of investigators to all the major offices of the target companies across Japan. The total number of staff in charge of cartel investigations is roughly 400 combining both its main department in Tokyo and its seven regional offices.

Post-implementation issues

Generally speaking, two years would normally be an appropriate period to review a newly introduced system. In the case of the leniency programme too, various issues requiring further improvement have emerged.

Multiple applications within the same group

This problem might appear rather odd to lawyers in other jurisdictions, but under the Act the concept of a 'company group' does not exist and instead all the procedures and decisions are to be made on an entity-by-entity basis. This entity-level approach is applied consistently in all branches of Japanese commercial and civil law. The consequence of this is: if a company group intends to apply for leniency where more than two entities within the same group were involved, only one entity within the group can be awarded an immunity position; and other entities can obtain only the remaining leniency positions, namely, a 50 per cent reduction and a 30 per cent reduction. Actual availability of those positions is, of course, subject to specific situations of the case. It also means that more than one entity within the same company group are able to preoccupy all of the leniency positions because only three leniency positions available per cartel allegation under the current Act. This approach did not cause any problem at all in Japan in the past, when only limited set of tools for corporate reorganisation were available. Over the last decade or so, Japanese companies have been provided with a broader variety of reorganisation tools thanks to a series of amendments to the former Company Law and the introduction of the new Companies Act. One example of such new tools for reorganisation is demerger. Suppose a division of a company is demerged to become a subsidiary of the original company while the division is engaging in a cartel activity and subsequently the parent company, after finding suspicious conducts within the company group, decides to file leniency applications for the cartel allegation. Now, the problem the parent company faces here is that it cannot easily tell for sure which of the two companies should take a higher leniency position. Clearly, whichever has the largest turnover should be named for a higher position in order to minimise the gross amount of fines to be imposed to the company group, but not knowing beforehand how the JFTC will define the cartel, it is very difficult to make an accurate assessment of this.

Such a conundrum actually materialised in the case of bid rigging on high and medium-pressure gas pipes. One of the addressees of the JFTC fine payment order demerged and created a new entity to deal with the very business under the cartel allegation in the middle of the suspected period for the cartel allegation. Consequently, both the original parent company and the newly created subsidiary applied for and granted leniency positions, occupying the second (50 per cent fine reduction) and the third (30 per cent fine reduction) positions in the same case (see the above table).

Lack of harmonisation with other jurisdictions

One of the obvious problems with the current system expected to emerge sooner or later is the lack of harmonisation with the rules of other jurisdictions. The JFTC's unique entity-based approach is one example of this. As the JFTC increasingly turns its attention to international cartels and inevitably to foreign companies, a number of foreign companies would seek leniency positions for both a parent company (non-Japanese entity or entities) and a Japanese subsidiary, because, especially in a cartel allegation with complex market structures, both overseas parent company and Japanese subsidiary are likely to hold a cartel status with significant turnover in Japan to become subject of a fine payment order in the same cartel allegation. The most problematic scenario would be when such multinational company group seeks leniency positions after the top two leniency positions (full immunity and 50 per cent reduction) have been already filled. It would not make much sense for such multinational company group to apply for a leniency application unless both its overseas entity and Japanese subsidiary are able to obtain leniency positions, and as a result such company group will probably abort the idea of applying for leniency at all. This is clearly not what the original philosophy of leniency programme intended to pursue, ie, to collect as much evidence as possible. Granting leniency positions on a company group basis will create larger benefits for the regulator.

Another aspect that is obviously in disharmony with other jurisdictions is the lack of due process. The approach used in cartel investigations in Japan was originally shaped under a strong influence of criminal procedures. Prosecutors transferred or seconded from the PPO to the JFTC in 1950s and 1960s had great influence at this early time of forming the regulatory framework. Even now, one of the fair trade commissioners is almost always appointed from among prosecutors holding senior positions in the PPO. This explains the unique system maintained by the JFTC in connection with cartel investigations. For example, unlike other jurisdictions, access to attorneys during interviews by the JFTC investigators is denied. Likewise, target companies of a cartel investigation do not have full access to the underlying evidence prior to a fine payment order or cease-and-desist order by the JFTC. Under the current practice of the JFTC, the addressees are only allowed to take very brief 'glances' of patches of evidence, normally the relevant 'lines' of one e-mail or document, literally held in the hands of JFTC officials during a 'explanation meeting' of no longer than a couple of hours.

Theoretically, note-taking is allowed, but it is impossible to bring back sufficient notes as each piece of evidence is only displayed on the desk for a minute or so and immediately withdrawn back into the JFTC files. This is quite startling in the eyes of companies and lawyers who are used to EU procedures where the entire evidence files, with all the sensitive business information blacked out or omitted, are accessible by the addresses. The evidence is eventually disclosed during the hearing proceedings within the JFTC on a request basis, but sufficient access to the evidence prior to a JFTC order should be secured as sine qua non for due process. There is clearly much room for improvement in this regard. One suggestion would be to introduce a clear separation between administrative cartel investigations and criminal cartel investigations, and to use procedures less influenced by criminal procedures for the former.

Scope of turnover to become the basis of fine calculation

The current Japanese law provides that cartel fines are calculated based on turnovers directly generated by the relevant cartel activities. In the marine hose case the JFTC only imposed fines on companies with turnover in Japan, and only issued a cease-and-desist order to companies with no turnover in Japan. As clarified by this case, at least the current understanding of the JFTC is that the 'turnover' used as the basis for fine calculation only includes turnover inside Japan. Such position of the JFTC has important implications for the leniency programme, in particular for foreign companies. A leniency position is only granted only when the applicant is subject to a fine payment order by the JFTC, and as a result, even if the JFTC has accepted the leniency application initially, leniency positions will not be available for foreign companies that have zero turnover in Japan generated by the relevant cartel activities. However, such a foreign company could nevertheless be subject to a criminal penalty, being unable to obtain an immunity position which also grants exemption from criminal prosecution. As a result the foreign company ends up with greater potential exposure to the risk of criminal sanctions, compared with

Japanese competitors in the same cartel allegation.

Another criticism often raised against the approach taken by the JFTC is the significant disparity compared with the United States and EU in imposing cartel fines. Such disparity becomes most evident in the case of a market sharing cartel with a global coverage. Japanese companies are likely to face fines in the United States, the EU and Japan if they participated in a market sharing global cartel, but the foreign companies participating in the same cartel may escape from JFTC cartel fines. Further harmonisation of cartel regulation may resolve this issue.

Development expected in the 2008 Amendment

The JFTC is now preparing another amendment to be approved by parliament this year. The draft amendment was submitted to parliament on 11 March. The following items are those related to cartel regulation and those of particular interest for non-Japanese companies.

• To treat all the entities within a company group as a single party for the purpose of leniency applications.
• To increase the number of available leniency positions from the current three to five (in terms of leniency positions applied after the commencement of an investigation, the number of available positions remains three).
• To extend the time limitation to retrospectively catch past cartel activities from the current three years to five years. Under the current time limitation of three years, the JFTC faces difficulty in cooperating with other overseas authorities to investigate international cartel allegations, as at the moment the JFTC is obliged to drop out of such international collaboration unless it holds solid evidence that the cartel activities existed at least until two-and-half years prior to the date of the JFTC order.
• To specify the rules whereby the JFTC exchanges information necessary for cartel investigations with other overseas antitrust authorities.
• To introduce provisions clarifying that business secrets are excluded from the scope of disclosure and copying of evidence submitted to the JFTC appeals process (hearing proceedings within the JFTC).
• In relation to the first item, though not directly related to cartel investigations, the amendment is expected to introduce a new rule whereby merger filing is also dealt with on a company group basis rather than entity basis. As a result, a number of share acquisitions (especially those using acquisition vehicles) that currently would not trigger any filing obligation and therefore passing without catching the scrutinising eyes of the JFTC will in turn fall under the filing obligation. Also, under the new rule, filing obligation of share acquisition is imposed prior to the closing of acquisition rather than the current rule of post-closing filing. Parties of share acquisition are likely to be subject to a waiting period before closing.

Stricter compliance among corporate communities

The 2005 Amendment has had certain impact on the antitrust compliance among companies, both Japanese and non-Japanese.

Japanese companies

As described above, managers of large companies are now actively looking out for potential or actual cartel activities which the company might be or might have been involved in. In addition to the overall upgrading of their internal compliance strategies for prevention purposes, some companies spontaneously conduct internal investigations in view of the possibility of applying for leniency positions. As the percentage of fines in proportion to the relevant turnover has increased, business practice based on cartelistic collusions makes less and less sense.

Japanese subsidiaries of multinationals

Another slow but apparently determined change is that the JFTC's is now paying equal attention to both international and purely domestic cartels. The marine hose cartel allegation on which the JFTC issued an order on 20 February 2008 is effectively the first substantial cartel case where JFTC reached out for non-Japanese companies. In response to such new policy development, non-Japanese companies, especially those with a significant presence in Japan, are strongly advised to take sufficient precautions and increase the level of compliance also from the perspective of Japanese antitrust legislation.

The Act, as well as the JFTC practices pertaining to it, is now going through the greatest evolutionary change in the history of Japanese antitrust law. Even beyond the expected amendments in 2008, a backlog of issues will remain to be further addressed, such as the abolition of the current appeals system presided over by the JFTC and the introduction of an appeals system handled by the courts, the serious problem of underdeveloped rules for evidence disclosure to the addressees, and the demand for further clarification on client-attorney privilege.

It is for us and international antitrust forums to contribute to creating better rules, achieving more harmony and consistency among antitrust regimes in different jurisdictions across the globe.