China: Cartels

China continued its enforcement initiatives in 2015, targeting cartel agreements and other monopoly agreements prohibited under China’s Anti-Monopoly Law (AML). Building on several years of active enforcement, the National Development and Reform Commission (NDRC) and the State Administration for Industry and Commerce (SAIC), together with their regional offices, have firmly established their position as important cartel enforcers to be reckoned with worldwide. Notably, the 2015 cases have reaffirmed the authorities’ hard stance on cartel activities and reflected a continued focus on global enforcement. At the same time, the Anti-Monopoly Commission overseeing enforcement in China has instructed the NDRC to take the lead in drafting a series of antitrust guidelines to give more transparency to enforcers and market participants. Some of these guidelines will give more clarity on key procedural aspects of cartel enforcement, including leniency applications, liability exemptions, commitments for suspension of investigations, and calculation of fines and unlawful gains. Other guidelines will provide more guidance on the application of the AML in particular contexts, such as the auto sector and intellectual property area. Once enacted, these new rules will continue to shape the cartel enforcement and compliance landscape in China.

This article reviews the key developments in cartel enforcement in China in 2015 and discusses the significance of these developments for businesses. For these purposes, cartel developments are defined as covering prohibited coordinated conduct, including 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.

The NDRC and the SAIC have distinct but often overlapping enforcement authority over different forms of anticompetitive conduct under the AML. More specifically, the NDRC has enforcement authority over price-related anticompetitive agreements such as horizontal price fixing and RPM. 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 Price Law and the Anti-Unfair Competition Law, respectively.

Building on the key enforcement actions over the past year, this article begins by outlining the agencies’ positions on key substantive issues. The article then highlights 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 extrapolates from the review some relevant enforcement trends and discusses the implications for companies operating in China.

Horizontal agreements

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. While the enforcement of horizontal cartel agreements traditionally focused on local violations by domestic private companies, enforcement in this area is becoming increasingly active in also targeting multinational and state-owned companies.

Price fixing, customer and 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 other 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 authorities have indicated that it would be very difficult for the parties to a traditional hard-core cartel agreement to prove that it falls within the exemptions under article 15 of the AML. To date, there is yet to be a published case where an anticompetitive horizontal or vertical agreement has been exempted of penalties by virtue of article 15. However, the NDRC is expected to release draft guidelines on the application of this provision over the course of 2016.

Continuing the wave of enforcement against global cartels taking shape over recent years, in 2015 the NDRC joined the US Department of Justice and the Japan Fair Trade Commission in global cartel enforcement efforts targeting the ocean-shipping sector. Building on a year-long investigation, the NDRC found that eight multinational roll-on, roll-off shipping companies based in Japan, Korea, Norway and Chile had colluded over at least four years to rig bids and partition customers and markets across major shipping routes, including between China and Europe and the Americas. As a result of the infringements, the companies together were fined a total of 407 million yuan. Notably, Nippon Yusen KK was granted full immunity as the first to self-report to the NDRC. The global ocean shipping case follows prior global cartel cases resulting in record fines of 1.24 billion yuan on multinational auto parts and bearing manufacturers in 2014, and 353 million yuan on global LCD panel manufacturers in 2013.

In addition, the NDRC has been continuing to cooperate with enforcement authorities from other jurisdictions on other global cartel investigations, and has been reported to have several active investigations. For example, the NDRC has reportedly been investigating capacitor manufacturers, after coordinated dawn raids with other global enforcers in 2014. In the broader context, the Chinese authorities have over the past year concluded memoranda of understanding on cooperation with the Japan Fair Trade Commission, the Australian Competition and Consumer Commission, Canada’s Competition Bureau and Russia’s Federal Antimonopoly Service. The authorities have also held meetings with a number of other cartel enforcers worldwide.

In parallel, the NDRC concluded two investigations in 2015 targeting horizontal monopoly agreements among foreign car distributors. In April, the NDRC’s regional office in Jiangsu province fined some Mercedes-Benz distributors for meeting to agree on prices for certain parts. The NDRC also separately found that Mercedes-Benz had organised meetings of the distributors for the purposes of implementing price restrictions. Similarly, in September, the Guangdong provincial office of the NDRC fined 17 Dongfeng-Nissan distributors for agreeing to fix prices for certain car models. These horizontal agreements were identified in the context of a broader industry investigation focused on vertical price restrictions.

Notably, the NDRC’s enforcement initiatives in 2015 not only targeted multinational companies and China–foreign joint ventures engaging in horizontal monopoly agreements, but they also included several decisions imposing significant fines on Chinese state-owned and private companies. In the Yunnan Telecoms case, for example, four state-run telecoms operators were sanctioned with fines totalling 13.18 million yuan for agreeing under the coordination of the local telecoms authority on the maximum discount offered to consumers. In the Gansu Auto Repair case, the NDRC’s local counterpart announced that it had fined 22 auto repair and maintenance firms in a total amount of 90,000 yuan for price fixing, the implementation of which was facilitated by the local transport authority.

Separately, the SAIC released several decisions this year involving non-price horizontal monopoly agreements. In Hunan province, 10 shale brick manufacturers were found to have agreed to restrict output and allocate markets under the auspices of a trade association. The infringing suppliers were subject to a fine ranging from 54,000 yuan to 205,000 yuan and the total fine amounted to nearly 1.39 million yuan.

RPM agreements

Beginning in 2013, the NDRC expanded beyond the traditional enforcement of horizontal agreements by launching a series of high-profile enforcement actions against RPM agreements. RPM is of particular importance for multinational companies in China due to the legal and practical reality that many rely heavily on domestic distributors to access these growing markets. The NDRC has also recognised that RPM arrangements can be intertwined with horizontal cartel agreements, as reflected in the overlapping cases involving car distributors.

Article 14 of the AML explicitly prohibits fixing resale price and setting minimum resale price. Beyond explicit contractual terms governing resale price, NDRC officials recognise that RPM can take subtler forms such as:

• linking restrictions on sales into unauthorised territories to the resale price;
• capping 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
• setting the minimum tax burden ratio for downstream distributors.

In addition, the supplier can implement de facto RPM where it strictly monitors the resale price of its distributors or ties rebates to the resale price.

The NDRC is effectively taking a ‘restriction by object’ approach towards RPM analogous to the EU position. Specifically, RPM to be ‘in principle prohibited’ under article 14 of the AML and the NDRC does not need to prove that it will result in actual anticompetitive effects. In turn, it would be up to the companies involved to prove that the RPM in question can be exempted under article 15 of the AML.

In contrast, in Rainbow v Johnson & Johnson in 2013, the Shanghai High Court adapted a US ‘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. However, the evidentiary threshold for finding anticompetitive effects in the defendant’s alleged conduct appears to be fairly low. There have been no further court decisions on RPM since Rainbow v Johnson & Johnson, which is still understood as a valid precedent with strong persuasive effects in private litigations.

Despite the apparent divergence with the court, the NDRC has continued to publish decisions in 2015 that reinforce its close-to ‘restriction by object’ approach to RPM. In April, for example, the NDRC regional office in Jiangsu imposed fines totalling 350 million yuan on Mercedes-Benz for engaging in various forms of RPM. The company allegedly dictated minimum retail prices of certain car models by means of phone calls, oral notices and distributor conferences and enforced compliance with the required retail prices by giving warnings to, cutting supports to, and imposing penalties on disobedient distributors. In September, the NDRC office in Guangdong announced fines of 19.12 million yuan on Dongfeng-Nissan for requiring its dealers to following minimum retail prices. These cases are part of the NDRC’s broader investigation into the passenger car sector. In 2014, the NDRC imposed fines of 248.6 million yuan on Audi and 31.7 million yuan on Chrysler for several forms of RPM, while several manufacturers reportedly resolved the investigation without formal penalties by announcing price cuts for cars or spare parts. These enforcement initiatives are expected to inform its current drafting of guidelines on special rules for the application of the AML to the auto sector.

Calculation of fines

As cartel enforcement becomes more active, more cases involving big companies and significant fines are likely to be seen. Article 46 of the AML provides that the applicable fine should be assessed at between 1 per cent and 10 per cent of the offending company’s relevant sales revenue for the preceding year. The agencies are also entitled to confiscate alleged unlawful gains. There are no clear rules on the calculation of fines or unlawful gains, and as a result several important questions remain unsettled. However, the Anti-Monopoly Commission has instructed the NDRC to draft guidelines that are expected provide more clarity as to how unlawful gains and fines should be properly calculated and imposed.

NDRC officials have provided some informal guidance in a trade publication article that fine levels should correspond to the seriousness of the offence and the degree of cooperation. In particular, the article suggests that fines of 8 per cent or more are appropriate for the most serious offences; 5 per cent to 8 per cent for moderate offences; and less than 5 per cent for minor offences. In practice, the highest fine percentages during 2015 were set at 9 per cent of affected commerce for EUKOR in the Ocean Shipping case. As cartel enforcement becomes more established, significant fines for the most serious cartel offences are expected to become increasingly common.

Enforcement cases to date have not been entirely clear on which sales were the basis for fine calculations, including any limitations by geography or relevant business lines. Several NDRC officials have suggested that the NDRC may ultimately calculate the fine on some level between the revenue generated from the affected products within China and the global revenue for the full product portfolio. In the Gansu Auto Repair case, the base revenues were those generated from the local auto repair and maintenance services involved in the infringement. There is also some ongoing ambiguity as to the relevant year’s turnover for calculation of fines. The NDRC’s Mercedes-Benz and Gansu Auto Repair cases and the SAIC’s Mayang Shale Bricks case suggest that the authorities may be inclined to treat the ‘preceding year’ as the year before discovery of the alleged conduct and initiation of investigation, rather than the year before conclusion of investigation and imposition of sanctions.

Leniency guidelines

At present, leniency rules exist under both the AML and the general administrative law. Article 46 of the AML requires ‘reporting of information on an anticompetitive 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. Furthermore, the NDRC and the SAIC have discretion to suspend an investigation without penalties under article 45 of the AML where the parties undertake specific measures to rectify the anticompetitive conduct.

In practice, the agencies have been taking a flexible but unconventional approach to leniency that is broader in practice than in mature regimes like Europe and the United States. While the AML requires self-reporting as a condition of leniency, the general administrative law includes a more flexible mechanism allowing companies to qualify for varying degrees of leniency depending on their level of cooperation and initiative in taking rectification measures. The leniency provisions extend beyond horizontal cartel offences to also cover RPM cases, where multiple companies have obtained full exemption of fines in a single investigation.

The enforcement actions to date demonstrate that proactive cooperation can result in full leniency or a significant reduction in fines. For example, Mercedes-Benz was subject to fines of 7 per cent, reportedly due to the lack of genuine cooperation during the process. By contrast, Dongfeng-Nissan received fines on the low end (3 per cent) because the manufacturer actively cooperated with the investigation and immediately ceased infringements by amending the problematic distribution agreements and business policies. Some dealers were given full immunity from or substantial reductions in fines as the first or subsequent companies to self-report and provide important evidence in the case. Generally, the effect of a leniency application can depend largely on the varying extent to which each company provided important evidence, cooperated with the investigation and carried out active self-rectification. As noted above, the leniency guidelines the NDRC is currently working on will probably provide detailed rules on how each factor would affect the outcome of an investigation.

A notable feature of the recent enforcement cases by the NDRC is that many companies under investigation have offered price cuts to obtain favourable treatment or to bring the investigation to an early end. For instance, a number of foreign car manufacturers have publicly committed to cut their prices for cars, spare parts and repair or maintenance services as a gesture of willingness to cooperate. NDRC’s willingness to negotiate price-related commitments in the form of price reductions appears to echo its traditional role as a price regulator.

Investigative procedures

As with many other jurisdictions, investigations may originate from various sources at both the provincial and national levels. Complaints from competitors, customers or suppliers tend to be the most important sources of investigations. In addition, if an ongoing investigation by other administrative agencies reveals indications of antitrust law violations, relevant leads may be transferred to the NDRC or the SAIC and an antitrust investigation may ensue.

The NDRC has also conducted broader sector inquiries swiftly followed by investigations into infringements by individual companies. In such inquiries, the authority first sends generic questionnaires to a variety of market players and subsequently targets certain companies for follow-up inquiries or even formal investigation. In its probe of the automotive sector, the NDRC reportedly began with an ‘industry sweep’ sending requests for information to many major multinational car manufacturers. The NDRC has also reportedly circulated questionnaires in other industries that are a high enforcement priority, including the health-care sector.

At the start of an investigation, the NDRC and the SAIC will typically conduct a dawn raid of the target businesses. 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.

As the agencies gradually accumulate experience, their investigative skills are becoming increasingly sophisticated. The NDRC in particular has developed task forces to carry out the dawn raids and follow-up investigations, including a range of specialised experts in law, technology and accounting. They have also been using increasingly high-tech investigative techniques, including forensic IT techniques to recover deleted emails. A senior office at the NDRC recently said that ‘cutting-edge technology’ allows them to extract data from a computer in two minutes, without having to impound the computer.

Following the initial dawn raid or meeting with a target, the investigation will typically continue through a series of engagements with the company. Investigations may entail a series of information requests and site visits supported by interviews with relevant employees and collection of a significant amount of documentary evidence. The authorities will also typically engage with the target of the investigation on potential settlements or remedies from an early stage, reportedly seeking admissions and cooperation under the leniency rules to support the settlement.

After the case team completes the initial investigation, they are directed to prepare an internal report for central decision making. This report includes a recommendation based on the relevant evidence and any explanations or defences raised by the parties. The authority issues an advance penalty notice to the target if it concludes there is a violation of the AML, setting out the basis for their findings and the proposed penalty. The target then has the formal right to make submissions in response to this notice and request a hearing on the merits. Finally, the parties have a formal right to seek administrative reconsideration or judicial review of an unfavourable final penalty decision.

While a company under investigation is entitled to the aforesaid procedural protections, it also has to perform its obligations during the investigation. Specifically, article 52 of the AML provides for sanctions for the obstruction of an investigation and concealing, destroying or falsifying documents. In serious cases, fines against companies can be up to 1 million yuan. The agencies are also entitled to impose fines against individuals for obstructing the investigation. Criminal penalties with imprisonment of up to three years can be imposed in extreme cases. In September, a company under investigation for suspected anticompetitive conduct was fined 20,000 yuan for repeated failure to supply documents and records requested by the SAIC. This is the second published case where a company has been penalised for procedural non-compliance. In 2013, two companies in Hainan province were fined for transferring and destroying financial data requested by the investigating agency.

The pace of the investigations can vary dramatically. While some cases have had final decisions announced only a few months from the launch of the formal investigation, other cases have reportedly lasted several years. Although article 43 of the AML provides that parties under investigation have a formal right of defence, in practice, defendants may only be given a limited window to present defences. There is also no formal mechanism for limiting the scope of the investigation. Moreover, since attorney–client privilege protections do not apply in China, communications with counsel are not protected from disclosure to the same extent in China as in other jurisdictions.

In the meantime, there have been some notable improvements in relation to due process and transparency. Both the NDRC and the SAIC have confirmed that the parties under investigation have a formal right to external counsel and the authorities recently reiterated that foreign lawyers are encouraged to participate in antitrust investigations. The authorities and their provincial offices have also started publishing more reasoned decisions in their websites.

Conclusion

The active enforcement against monopoly agreements in 2015 continues to strengthen the Chinese enforcement regime that has been taking shape over the past few years. The NDRC and the SAIC have been actively drafting new rules, expanding enforcement capacity, working more closely with foreign regulators and accumulating experience. On the substantive side, cartels (including international cartels) are likely to continue to be an enforcement priority. The NDRC is also clearly taking a hard line on RPM, and enforcement will likely remain robust. In the meantime, further guidance on a number of important substantial issues is expected to provide more clarity and predictability to the business community. In terms of procedure, the authorities have developed skills and gained experience in relation to conducting investigations, including dawn raids. Against this background, robust cartel enforcement is expected to continue.

As vigorous antitrust enforcement against monopoly agreements becomes the new normal in China, companies doing business in and with China cannot afford to overlook this jurisdiction in their global competition compliance programmes. Companies should pay careful attention to the development of the China-specific features of the AML enforcement. In the meantime, they are advised to closely examine their business practices, carefully assess the associated risks and take necessary actions to address any non-compliance.