China: Cartels

Over the course of 2013, antitrust enforcement in China was characterised by a rigorous wave of regulatory enforcement targeting cartel agreements and other ‘monopoly agreements’ prohibited under China’s Anti-Monopoly Law (AML). For the first time since the introduction of the AML in 2008, the National Development and Reform Commission (NDRC) and the State Administration for Industry and Commerce (SAIC), together with their regional offices, have firmly entered the international spotlight with a series of high-profile enforcement actions against domestic and foreign companies covering a broad range of alleged anti-competitive conduct.

This article provides an overview of the key developments in cartel enforcement in China and the significance of these developments for businesses. For these purposes, cartel developments are defined to cover prohibited coordinated conduct, including both horizontal agreements (such as price fixing or market allocation among competitors) and vertical agreements (such as resale price maintenance (RPM)). Both types of agreements are treated as ‘monopoly agreements’ under articles 13 to 16 of the AML and are subject to essentially the same enforcement rules.

Beginning with a summary of the key enforcement actions over the past year, this article outlines some of the agencies’ positions on key substantive issues that are taking shape as these enforcement activities progress. The article will also highlight procedural developments that have allowed regulators to investigate and prosecute violations more effectively, while noting some areas where further development is required. Finally, the article will extrapolate from this review some relevant enforcement trends and discuss the implications for companies operating in China.

Key enforcement actions in 2013

The NDRC and the SAIC’s enforcement decisions in 2013 provide a valuable window into the ongoing development of the enforcement regime in China. The NDRC and the SAIC have distinct but often overlapping enforcement authority over distinct forms of anticompetitive conduct under the AML. More specifically, the NDRC has enforcement authority over price-related anti-competitive agreements such as horizontal price fixing and RPM, while the SAIC is responsible for enforcement related to non-price restraints such as market allocation, output restrictions and vertical restraints other than RPM. In addition to competition enforcement under the AML, the NDRC and the SAIC also have enforcement authority over related statutes like the Unfair Competition Law and the Price Law.

Traditionally the activities of the NDRC and the SAIC were not well understood based on both agencies’ practice of not publishing decisions or announcing the results of many of their investigations. However, both agencies have been taking steps to increase transparency on their enforcement activities by publishing more guidance on their investigation decisions. In 2013, for example, the SAIC launched a new platform for publishing final enforcement decisions and released 13 historical decisions covering the period between 2010 and 2013. Although the NDRC still does not publish all of its investigation decisions as a matter of procedure, it has taken steps over the past year to provide further guidance on its analysis in key enforcement areas to better help companies understand its approach.

Horizontal agreements: still a major enforcement focus

Horizontal agreements – particularly traditional hard core cartel agreements – have been an enforcement priority for both the NDRC and the SAIC since the AML came into effect. So far, these horizontal agreements have accounted for the majority of the agencies’ enforcement actions. Although much of the enforcement of horizontal cartel agreements to date has focused on local violations by domestic companies, enforcement in this area is likely to continue and may become more active in targeting global cartels in 2014.

Price fixing, customer/market allocation, output restrictions and joint boycotting are explicitly prohibited as monopoly agreements under article 13 of the AML. Horizontal agreements do not have to be oral or written contracts, but rather can take various forms: joint announcement, commitments, self-discipline policy or even concerted action. Article 15 contains a non-exhaustive list of circumstances in which a monopoly agreement may be exempted, where the agreement is concluded for:

• improving technology, or researching and developing new products;
• improving product quality, reducing costs, enhancing efficiency, harmonising product specifications and standards, or dividing work based on specialisation;
• enhancing the competitiveness of small and medium-sized enterprises;
• serving social public interests such as energy saving, environmental protection and disaster relief;
• alleviating decreases in sales or cuts in production overcapacity in periods of economic downturn; or
• safeguarding legitimate interests in foreign trade.

Each of the first five conditions additionally requires that the agreement does not significantly restrict competition in the relevant market and allows consumers to share the resulting benefit. As with other jurisdictions, horizontal monopoly agreements are subject to close scrutiny and the NDRC has indicated it would be very difficult for the parties to a traditional hard-core cartel agreement to prove such agreement falls within the exemptions under article 15 of the AML.

The NDRC appears to have been particularly active in investigating and prosecuting horizontal price-fixing agreements. Before 2013, the majority of the NDRC’s published enforcement cases under the AML involved price fixing, including investigations related to a cartel by rice noodle suppliers in Guangxi to fix prices and an alliance among sea sand exploitation companies in Guangdong to harmonise prices. In 2013, the NDRC continued this trend with a few more price-fixing decisions announced.

Most significantly for foreign companies, the NDRC joined the international crackdown on cartels in January by sanctioning six multinational liquid crystal display (LCD) panel makers from Korea and Taiwan for price fixing. Part of a global investigation by enforcement agencies around the world, the NDRC found that the six LCD panel manufacturers held monthly ‘crystal meetings’ in Korea and Taiwan between 2001 and 2006 to exchange market information on LCD panels and fix prices. Since the relevant conduct occurred prior to the entry into force of the AML, the NDRC brought the case under the older Price Law and imposed record fines totalling 353 million renminbi. Although the NDRC indicated that the LCD panel investigation had lasted around six years and its findings were consistent with enforcement decisions in other jurisdictions, the NDRC has not stated whether it actively cooperated with any other global enforcement agencies. In 2014, we anticipate that the NDRC will impose fines in China in relation to other active global cartel investigations as well. For example, complaints have reportedly been filed with the NDRC in relation to global price-fixing investigations of Japanese auto parts companies that have pleaded guilty in the US.

In August 2013, the NDRC and the Shanghai Municipal Price Bureau found that the Shanghai Gold and Jewellery Trade Association had facilitated the formation of a price-fixing agreement between five major gold retailers in Shanghai. The agreement stipulated the calculation method for the retail price of gold and platinum jewellery and the floating range of the price. The five gold retailers involved coordinated the sale of their gold and platinum products, setting retail prices in accordance with the floating range set out in the agreement. The agencies levied the maximum fine of 500,000 renminbi as provided under the AML on the trade association for orchestrating the cartel and also imposed a fine of an amount equal to 1 per cent of the previous year’s sale revenues on the five retailers.

Finally, in September, the NDRC announced that its regional offices in Yunnan Province and Hainan Province imposed a total fine of 18 million renminbi on 39 gift shops and travel agencies for their infringements of the AML and the Price Law including, among others, price fixing and market partitioning.

Similarly, all of the completed decisions published by the SAIC this year involved horizontal restraints. Most of the decisions dating back to 2010 related to market allocation, but some of the enforcement covered output restrictions and joint boycotting. A wide range of sectors were represented, including insurance, cement and concrete manufacturing, used automobile distribution, LPG, brick manufacturing and travel agencies. 

Three of the SAIC published cases were closed in 2013. In the Sichuan brick case, four brick manufacturers were found to have agreed to curtail production capacity to restrict output under the auspices of a trade association. In the Zhejiang Cixi construction inspection service case, three companies were found to have divided up the construction energy-saving inspection service market in the Cixi city with the facilitation of the trade association. In the Yunnan travel agency case, two tourism trade associations were found to have engaged in several forms of anti-competitive conduct through organised platforms for hotels, tourism sites, transportation companies and/or the trade associations to centralise business and unify operations for member companies.

RPM agreements: an increasingly important enforcement priority

Beginning in 2013, the NDRC expanded beyond traditional enforcement of horizontal agreements by launching a series of high-profile enforcement actions against RPM agreements. Article 14 of the AML explicitly prohibits fixing resale price and setting minimum resale price. And RPM conduct may also be exempted if such conduct falls within the exemptions under article 15.

In February, the NDRC’s local offices in Guizhou province and Sichuan province imposed substantial sanctions on Maotai and Wuliangye, two state-owned liquor companies, of 247 million renminbi and 202 million renminbi, respectively, for their RPM practices. The Guizhou DRC provided very limited information in the press release, ie, Maotai had engaged in RPM practice and thus infringed the AML. In contrast, the Sichuan DRC’s press release contained some details, explaining that since 2009 Wuliangye had pursued distribution agreements with independent third-party distributors across China which had the effect of restricting the minimum resale price of its products. Those distribution agreements included penalty mechanisms, such as reducing supplies, confiscating marketing support money and imposing fines on the distributors.

In August, following a five-month investigation, the NDRC published its decision to fine six milk powder manufacturers a total of 670 million renminbi for imposing an RPM restriction on distributors. Nine Chinese and international milk powder companies (including Wyeth, Mead Johnson, Meiji, Biostime, Beingmate, Abbott, FrieslandCampina and Fonterra) were found to have entered into RPM arrangements with downstream distributors and implemented the agreements by imposing fines, deducting rebates and/or restricting and cutting off supply with non-cooperative distributors. However, the announcement did not include any detailed reasoning of the effects on competition of the milk powder companies’ conduct. The decision instead mentioned, and appears to have relied on, the fact that all milk power companies under investigation had admitted that their RPM arrangements breached the AML and were unable to prove that their actions fell within the exemptions under article 15 of the AML. Notably, the NDRC granted full immunity to three manufacturers (Wyeth, Meiji and Beingmate) on the grounds that they had self-reported their infringements and provided material evidence during the course of the investigation.

In November 2013, two current NDRC officials published an article in a trade association publication setting out the experience gained from the enforcement activity against RPM (the RPM article). The RPM article offers insights into the NDRC’s approaches and techniques when investigating alleged RPM practice. Notably, the RPM article suggests that as with cartel investigation, the regulators should carry out a dawn raid in order to detect secret RPM arrangements. Also, the NDRC should look at the nuances of the case to find RPM in disguised forms. According to the RPM article, RPM can exist not only in explicit contractual terms directly relating to resale price, but also in other subtle forms. A less explicit form of RPM can be:

• linking restrictions on sales into unauthorised territories to the resale price;
• fixing the maximum discount offered by downstream distributors;
• fixing the distribution margin for downstream distributors;
• setting the minimum distribution margin for downstream distributors;
• fixing the minimum operating profit for downstream distributors; and
• fixing the minimum tax burden ratio for downstream distributors.

In addition, the RPM article notes that if a supplier strictly monitors the resale price of its distributors (eg, requiring them to report resale price and pegging such resale price to rebates), the regulators should be mindful of whether the supplier is actually implementing RPM.

While the NDRC’s assessment of the RPM restraints under investigation appears to have suggested that some form of
anti-competitive effect is required, the decisions have not provided details on how the analysis should be applied. A senior NDRC member stated at an international conference in September that it considers RPM to be ‘in principle prohibited’ under article 14 of the AML, and that it would be up to the companies involved to prove that the RPM in question can be exempted under article 15 of the AML. This essentially means that the NDRC is setting a high bar for RPM to be free of enforcement challenge. This in turn may indicate that the NDRC is leaning towards taking a ‘restriction by object’ approach towards RPM analogous to the EU position, ie, RPM is automatically regarded as restricting competition, without the need to prove its effect on competition, and is illegal unless exempted. In contrast, the Chinese court appears to be adapting a ‘rule of reason’ approach for use in private enforcement, where the effect on competition needs to be proven and then balanced against any pro-competitive effects. In the Shanghai High Court ruling in Rainbow v Johnson & Johnson, the court affirmed that RPM should be subject to a standard similar to a rule-of-reason analysis. Further, the Court clearly set out four main factors for determining whether the RPM conduct has an anti-competitive effect:

• sufficiency of competition in the relevant market;
• the defendant’s position in the relevant market;
• the defendant’s motives in imposing RPM; and
• the RPM’s actual impact on competition.

That said, the Court did not appear to require strong evidence to reach the conclusion that the RPM conduct did indeed have the requisite anti-competitive effect.

Ultimately, despite the ongoing uncertainty over the application of the relevant legal standards, the intensifying enforcement activities against RPM convey a message to businesses that the NDRC is taking a tough stance on RPM. In addition to the completed cases, NDRC officials have stated publicly that it is investigating potential RPM practices in other industries as well, including eyeglasses and medical devices.

Key procedural developments in 2013

Calculation of fines

For a breach of behavioural prohibitions, article 46 of the AML provides that the applicable fine should be assessed at 1 per cent to 10 per cent of the offending company’s sales revenue for the preceding year. Two questions arise in relation to the calculation of fines:

• which year is the ‘preceding year’; and
• whether ‘sales revenue’ refers to global and full-product-portfolio revenue or just the revenue generated from the region(s) and product(s)/service(s) affected by the unlawful conduct.

As to the first question, the NDRC appears to be inclined to treat the ‘preceding year’ as the year before the sanctions are imposed by the antitrust enforcement agency. The NDRC believes that this is the generally accepted practice in many other jurisdictions, eg, the EU, UK and Taiwan. In an article on horizontal monopoly agreements published in a trade association periodical (the horizontal agreements article), several NDRC officials point out that the investigation of high-profile and complex cases may take years, during which time the operation of the undertaking(s) under investigation may have changed significantly and the sale revenue in the year proceeding the commencement of investigation may be substantially different than that in the year preceding the imposition of sanctions. On this basis, the horizontal agreements article argues that treating the year prior to the imposition of sanctions as the most recent year is the most reasonable. On the SAIC side, the published enforcement decisions do not appear to reflect a clear position on this issue.

As regards the second question, the agencies have not taken a clear position in enforcement decisions to date. In the Shanghai jewellery cartel case, for example, the offending retailers were fined in an amount equal to 1 per cent of their ‘relevant’ sales revenue in the preceding year, but the NDRC’s press release did not clarify what revenue was considered ‘relevant’. The horizontal agreements article argues that the base revenue should only cover the product(s)/service(s) involved in the unlawful conduct. Similarly, some of the SAIC’s decisions appear to have treated the ‘relevant’ revenue as the turnover from the affected products. However, the horizontal agreements article also recognises the downside of this approach, ie, it tends to lead to an understated amount of fine. This is particularly the case where offending companies have generated a substantial sum of profits from illegal horizontal monopoly agreements which have lasted for years. In this scenario, the article argues that if only the revenue generated from the affected product(s)/service(s) were to be included, the amount of fine would be minimal as compared with the profits achieved by the perpetrators. The article ultimately appears to suggest a middle course by pointing to the European Commission’s approach, ie, the ultimately imposed amount of fine will be between the revenue generated from the affected product(s)/service(s) within EEA and the global and full-product-portfolio revenue.

Leniency guidelines

In China, leniency rules exist under both the AML and the general administrative law. Article 46 of the AML requires ‘reporting of information on an anti-competitive agreement and provision of important evidence’ as a precondition of partial or full leniency. The general administrative law includes a more flexible mechanism allowing infringing companies to qualify for varying degrees of reduced sanctions depending on the level of their cooperation with the investigation and their initiative in taking rectification measures.

In practice, the leniency rules in China are broader than the leniency regimes in mature antitrust jurisdictions such as the EU and the US. For example, multiple companies in a single investigation can obtain full exemption of fine, unlike the US or the EU where only the first company to report to the agency can qualify for full immunity. Similarly, the leniency provisions extend beyond horizontal cartel offences. In the milk powder case, for example, the agencies granted full immunity to three companies engaging in RPM.

The recent enforcement actions demonstrate that a proactive approach and full cooperation are important for companies to take advantage of leniency and reduction of sanction. For example, in the milk powder case, the offending companies were granted full or partial immunity (fines ranging from 3 per cent to 6 per cent of the companies’ most recent annual sales revenue). The differentiating outcome depended on the varying extent to which each company provided important evidence, cooperated with the investigation and carried out active self-rectification. Having said that, the NDRC has not provided details on what would be considered ‘important evidence,’ ‘cooperation with the investigation’, or ‘active rectification measures’. Wyeth and Beingmate (both of which were exempted from fines in the milk powder case) were reportedly the first two companies to announce their commitments to lower prices following the opening of the NDRC’s investigation, which may be indicative of ‘active self-rectification’.

On the SAIC front, enforcement cases also demonstrate the importance of full cooperation and prompt remedial measures in achieving a favourable outcome. In the Zhengjiang Cixi construction inspection service case, the offending companies and trade association ultimately were not subject to any penalty. Zhejiang AIC recognised that the alleged market sharing conduct did not have a significant impact on customers, and the parties had immediately ceased the alleged conduct upon the opening of the investigation and committed not to engage in the alleged conduct. As a result and in response to the application made by the infringing parties pursuant to Article 45 of the AML, Zhejiang AIC decided to suspend the investigation for one year and ordered the parties to report their compliance on a quarterly basis. At the end of the one-year suspension period, Zhejiang AIC decided to terminate the investigation – ultimately no penalties were imposed on the parties.

Investigative procedures

Enforcement actions during 2013 show that the agencies’ investigative skills have become increasingly sophisticated. Officials from both agencies have relatively broad investigatory powers under the relevant regulations and the agencies’ general enforcement practice. Namely, officials can:

• enter into companies’ business premises for investigation;
• inquire into companies’ employees and interested parties;
• review and copy companies’ books and records;
• seal and detain evidence; and
• check companies’ bank accounts.

While the SAIC adopted procedural provisions for anti-competitive agreements and abuse of dominance in 2009, the NDRC did not adopt a procedural regulation through its Provisions on the Administrative Law Enforcement Procedure for Anti-price Monopoly until 2011. In 2013, the NDRC amended several regulations in terms of enforcement procedure. The regulations govern not only investigation of alleged AML offences, but more broadly investigation of alleged violations of the Price Law and other laws falling under the NDRC’s realm. The amended regulations cover evidence, case file management and internal decision-making procedures.

While the NDRC’s announcements of enforcement decisions do not offer details as to how it or local DRCs conducted their investigations, the articles written by NDRC officials have described in detail the tactics and skills utilised during the course of investigations. For instance, in terms of preparatory work plans, the horizontal agreements article argues that dawn raids generally should be used in investigations of horizontal agreements, and the first round of investigation generally should be completed within one week. The NDRC has also become increasingly experienced in calling up a task force to carry out the investigation. The horizontal agreements article suggests that the size of the investigation team should depend on the number and size of targets and that the team members should be specialised in areas of conducting interrogation, taking notes, legal knowledge, accounting, IT, etc. Moreover, an investigation team normally should consist of four to five agents, including:

• a local guide responsible for introduction, coordination and mediation;
• a person to conduct interrogations with another person to take notes; and
• one to two persons to gather documentary evidence from files, financial materials, office software and computers.

Under article 43 of the AML, parties under investigation have a right of defence, meaning a right to present their explanations and arguments during the course of an investigation. It is unclear from the NDRC’s announcements whether any company has made arguments in its defence during an investigation and how the NDRC or local DRCs responded to the arguments. However, in actual investigations, the NDRC is known for seeking a confession from the parties within days of a dawn raid. As a result, they have succeeded in closing some of the recent RPM cases very quickly and have received significant publicity. In contrast, in some of the SAIC’s cases, companies under investigation put forward arguments that their conduct had not breached the AML and the local AICs analysed why the arguments were unable to rebut the agency’s findings. For example, in the Liaoning cement case where cement manufacturers were found to have colluded to restrict output, they argued that they shut down some production operation for maintenance and upgrading purposes, not because they were implementing the alleged self-discipline agreement. However, according to Liaoning AIC, the facts that the companies shutdown operation at the same time and that the companies had paid deposits to guarantee their performance of the self-discipline agreement can establish concerted action between the companies. Moreover, it found that the maintenance and upgrading claimed by the manufacturers actually took place after the performance of the self-discipline agreement.

Conclusion

The active enforcement against cartels and RPM in 2013 may suggest that, as the NDRC and the SAIC gradually build up enforcement capacity and accumulate experience, behavioural enforcement is set to increase and vigorous enforcement against cartels and RPM will likely become the norm in China going forward. Companies doing business in and with China cannot afford to overlook China in their global competition compliance programmes.

On the substantive side, cartels (including international cartels) are likely to continue to be an enforcement priority. While the NDRC’s attitude towards RPM is yet to be crystal clear, enforcement actions against RPM will likely remain robust. In the absence of further precedents or guidance, companies may want to steer clear of RPM requirements when dealing with distributors in China. In terms of procedure, the authorities have developed skills and gained experience in relation to conducting investigations including dawn raids.

Companies should pay attention to the development of the China-specific features of the AML enforcement and the authorities’ growing readiness for continued vigorous enforcement. Against this rapidly developing environment of AML enforcement, companies are advised to closely examine their business practices, carefully assess the associated risks and take necessary actions to address any non-compliance.