China’s cartel enforcement had another busy year in 2016. The National Development and Reform Commission (NDRC) and the State Administration for Industry and Commerce (SAIC), together with their regional offices, have now firmly established their position as important cartel enforcers to be reckoned with worldwide. The NDRC and the SAIC have distinct but often overlapping enforcement authority over different forms of anticompetitive conduct under China’s Anti-Monopoly Law (AML). More specifically, the NDRC has enforcement authority over price-related anticompetitive agreements such as horizontal price fixing. The SAIC is responsible for enforcement related to non-price restraints such as market allocation and output restrictions.
Over the past year, these authorities have reaffirmed their hard stance in targeting both domestic and global cartels. These cases have allowed the authorities to further define and establish their investigative practices and precedents on key issues facing companies doing business in China. At the same time, under the oversight of the Anti-Monopoly Commission, they have published several draft antitrust guidelines intended to give more transparency to enforcers and market participants. These guidelines clarify key aspects of cartel enforcement procedure, including leniency applications, liability exemptions and calculation of fines and illegal gains. Once enacted, these new rules will continue to shape the cartel enforcement and compliance landscape in China.
This article reviews these key developments in cartel enforcement in China and discusses the significance of these developments for businesses. The article begins by outlining the agencies’ positions on key substantive issues in the context of important enforcement cases and the draft enforcement guidelines. 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 – 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 a majority of the agencies’ enforcement actions. While the enforcement of horizontal 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 announcements, commitments, self-discipline policies or other concerted action (as detailed in the Estazolam and Cipher Device cases below).
Article 15 contains a non-exhaustive list of circumstances in which a monopoly agreement may be exempted, specifically where the challenged 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 place a substantial burden on the parties to a traditional hard-core cartel agreement to prove such agreement falls within these exemptions. In fact, there is yet to be a published case to date where an anticompetitive horizontal or vertical agreement has been exempted of penalties by virtue of article 15. In May 2016, the NDRC released draft guidelines on the application of this provision for public comments. The draft guidelines propose a procedure for applying for an exemption ex post (ie, after the authorities have launched an investigation), but do not provide more clarity on circumstances under which a cartel could potentially be exempted.
It is noteworthy that in practice cartel agreements are often intertwined with vertical restraints under article 14 of the AML, particularly resale price maintenance arrangements. For example, in the Mercedes-Benz case, the car maker was found to have organised dealers to fix resale prices for Mercedes-Benz parts as part of a hub-and-spoke conspiracy. The NDRC considered that while the dealers undoubtedly had participated in a cartel, Mercedes Benz should be more appropriately considered to have engaged in resale price maintenance practices because it had organised the conspiracy as a means to achieve vertical price control.
Key enforcement cases in 2016
The wave of enforcement against global cartels has continued to take shape over recent years, with the NDRC increasing cooperation with enforcement authorities from other jurisdictions on international investigations. In the most significant recent case, the NDRC announced the results of its investigation into the global Roll-on/Roll-off Shipping cartel case at the end of December 2015. Following 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 the span of 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. In addition, the NDRC’s investigation into global capacitor manufacturers is also still understood to be proceeding, after coordinated dawn raids with other global enforcers in 2014. In the broader context, the Chinese authorities have over the past year concluded a memorandum of understanding on cooperation with other BRICS countries. The authorities have also held meetings with a number of other cartel enforcers worldwide.
Notably, cartel jurisprudence and theories of liability also continued to evolve in the enforcement cases in 2016 with new concerted action cases finding tacit collusion involving information sharing and parallel conduct. For example, the NDRC sanctioned three Chinese pharmaceutical companies (Huazhong, Xinyi and Changsi) for agreeing to cease supply of estazolam active pharmaceutical ingredients (APIs) to third-party manufacturers and to raise downstream prices for estazolam tablets. One manufacturer argued that it had not engaged in coordinated conduct because it independently decided to cut supply of APIs to third parties and to raise tablet prices. The NDRC issued a detailed decision outlining the evidence from its investigation and finding that (i) the upstream API market was an oligopoly market and the competition in the downstream tablet market was limited; (ii) the company attended a meeting with competitors where it did not object to the decision to engage in the challenged conduct, or report it to the authorities; and (iii) the company had in fact shifted to a captive supply model and raised prices in parallel with its competitors. Accordingly, the NDRC found that this conduct was sufficient to establish at least a tacit agreement between the parties to reduce output and fix prices.
Separately, the SAIC and its local branches released several key decisions in the past year involving non-price horizontal monopoly agreements. For example, three payment cipher device suppliers in Anhui Province were found to have agreed to allocate local customers. Similar to the Estazolam case, there was no evidence of explicit written or oral agreements reached directly between the parties. Instead, the local branch of the People’s Bank of China set up different customer groups and arranged for each supplier to serve a designated group. While the suppliers argued that they were simply following the banking authority’s instructions, the SAIC found nevertheless that the companies had taken advantage of the regulatory authority of the bank and that companies’ concerted conduct essentially amounted to market allocation. As a result, the Anhui AIC imposed a total of approximately 30 million yuan in both fines and confiscation of illegal gains on the three infringing companies.
With more enforcement experience, the investigative practices and procedures are becoming more defined. In the process, the authorities and their provincial offices have been developing internal procedural guidelines and there have been some notable improvements in relation to due process. They have also improved transparency during the course of the investigation and established the customary practice of publishing more reasoned decisions.
Investigations may originate from various sources at both the provincial and national levels. As in other jurisdictions, 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 AML violations, relevant leads may be transferred to the NDRC or the SAIC and an AML 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.
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. 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 measures, including forensic IT techniques to quickly recover deleted emails.
Following the initial dawn raid or meeting with a target, the investigation will typically continue through engagement 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. In many cases, the NDRC will also direct the company to conduct an internal audit or compliance review as a basis for reporting on its conduct.
After the case team completes the investigation, they are directed to prepare an internal 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 respond 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.
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. There is also no formal mechanism for limiting the scope of the investigation. 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. Both the NDRC and the SAIC have also confirmed that the parties under investigation have a formal right to external counsel and the authorities generally accept that foreign lawyers participate in antitrust investigations. Since attorney–client privilege protections do not apply in China, however, communications with counsel are not protected from disclosure to the same extent as in other jurisdictions.
The AML provides substantial penalties for non-compliance with investigations. Specifically, article 52 provides for fines of up to 1 million yuan for the obstruction of an investigation, including concealing, destroying or falsifying documents. The agencies are also entitled to impose fines against individuals, as well as criminal penalties of up to three years’ imprisonment. In the Cipher Device case, for example, one of the companies was separately fined an additional 20,000 yuan for failure to cooperate with the investigation, by refusing to supply the requested documents and records despite two written requests and two telephone calls. Failure to cooperate can also damage a company’s credibility and exacerbate potential fines.
Calculation of fines
As cartel enforcement becomes more active, more cases involving big companies and significant penalties are likely to be seen. 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 relevant sales revenue for the preceding year. The agencies are also entitled to confiscate alleged illegal gains, which can be significant and even exceed the amount of the fine. The NDRC published for consultation in 2016 the Draft Guidelines on the Calculation of Fines and Illegal Gains (the Draft Fine Guidelines) to provide more clarity as to how fines and illegal gains should be set properly. While the Draft Fine Guidelines are subject to revision before they are adopted, they give some insight into the current framework applied by the NDRC.
The first step for fine calculation is to determine the amount of the relevant sales for calculating the fine. The Draft Fine Guidelines provide that this would usually be the annual turnover generated by the sales of the relevant products in the year before the investigation started. The relevant geographic scope is all areas where the cartel took place. If it is an international cartel, the authorities will limit the basic amount to Chinese domestic markets. The Draft Fine Guidelines would also give officials discretion to use a larger base amount up to the company’s total turnover, if the turnover of the relevant product is not an objective reflection of the harm to competition and consumer interests. Such adjustments may be made, for instance, if the infringing conduct is severe and has caused serious harm, or a company has engaged in a global anticompetitive agreement but achieved no or limited turnover for the relevant product within China.
The authorities will then set the level of the fine based on the nature and duration of the conduct. The guidance states that the base fine should start at 3 per cent for price fixing, market allocation and output restrictions, and 2 per cent for other types of horizontal anticompetitive agreements (including restrictions on R&D and joint boycotts). The percentage would then be increased or decreased depending on the duration and seriousness of the relevant cartel conduct, and whether there are any aggravating or mitigating factors. According to the Draft Fine Guidelines, aggravating factors include situations where a company plays a major role or coerces or tricks other companies into the cartel, prevents other companies from ceasing cartel activities, or engages in multiple conspiracies. Mitigating factors include situations where a company is coerced into joining or remaining in the cartel, has provided significant cooperation with the authorities during the investigation, or has proactively eliminated or mitigated the anticompetitive effect of the conduct.
These Draft Fine Guidelines generally reflect the NDRC’s current practice. In the Roll-on/Roll-off Shipping cartel case, the NDRC determined that the base amount for all infringing companies was their respective turnover generated from the roll-on/roll-off shipping services in relation to the Chinese market in 2014. With respect to three companies (Nippon Yusen, Kawasaki and Mitsui OSK Lines), the NDRC further reasoned that the fining percentage should be at the top of the spectrum (ie, 10 per cent) because of their leading role in the collusion and the long duration and wide geographic coverage of their infringing conducts. The agency then gave Nippon Yusen full immunity and the other two partial immunity for proactively reporting important evidence. Kawasaki and Mitsui OSK Lines received fine reductions of 60 per cent and 30 per cent (ie, final fines of 4 per cent and 7 per cent) respectively. Fines for the remaining five companies ranged from 4 per cent to 9 per cent of this base turnover, taking into account each company’s respective role in the cartel and the duration of the infringement.
In addition to fines, the potential penalties imposed through the confiscation of illegal gains can be significant. This is particularly seen in the SAIC investigations. Illegal gains sometimes can be significantly larger than fines. Illegal gains can include the entire benefits an infringing company has obtained for the whole duration of the infringements, while fines only reflect a certain proportion of the company’s turnover in the preceding year. In the Cipher Device case, for example, one of the infringing companies received a relatively light fine of 76,000 yuan, but the illegal gains confiscated by the SAIC were more than 250 times higher, at approximately 20 million yuan. Such disparity is primarily because the market division scheme had operated for five years and the parties had generated large profits during these years, which the SAIC found they would not have made absent the market allocation conspiracy.
The Draft Fine Guidelines also propose rules on other important new issues. For example, the authorities will normally impose sanctions on the entity that engaged in the anticompetitive conduct; if, however, the parent company exerted decisive influence over such entity’s conduct, the parent company can be subject to penalties instead. When determining whether the parent company has exerted decisive influence, the authorities will evaluate the parent’s control over the subsidiary’s operations, taking into account the shareholding, composition of the board of directors, governance arrangements, management system, resolution protocol, as well as the investment relationship, agreement or other arrangements that can prove the existence of actual influence. If the authorities seek to impose parental liability, the basic amount of the fine could increase significantly.
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 consultation draft of the Guidelines on Application of Leniency Regime in Horizontal Monopolistic Agreement Cases (the Draft Leniency Guidelines) published by the NDRC in February 2016 provides detailed guidelines on a number of key issues.
According to the Draft Leniency Guidelines, a leniency application can be made to the authorities before or after an investigation is officially launched. The applicant should submit a report with details about the cartel arrangements and provide important evidence in the case. ‘Important evidence’ refers to evidence that is not yet known to the public but is sufficient for the authorities to launch an investigation, or, if an investigation has already been launched, evidence that can add significant value to the determination of the cartel conduct. To be eligible for leniency, an applicant should (i) cease the alleged cartel activities, unless permitted by the authorities to continue for the purpose of protecting secrecy of the investigation; (ii) fully cooperate with the investigation; (iii) safeguard and provide evidence and information and refrain from concealing, destroying or transferring materials; and (iv) not disclose the fact that it has applied for leniency.
The Draft Leniency Guidelines provide that only a maximum of three firms can be granted leniency in the same case. However, in complicated cases where a large number of undertakings are involved and the applicants provide different but important evidence, the authorities have the discretion to grant leniency to additional applicants. The authorities will determine the chronological order of multiple leniency applications and inform each applicant of its position. When an applicant fails to fulfil its obligations mentioned above, it can be moved down in the queue or even disqualified altogether.
The first applicant is entitled to full immunity if the application is made before the investigation is launched, and will otherwise receive a fine reduction of at least 80 per cent. The second applicant will receive a partial immunity with credit for a reduction of 30–50 per cent of the fine. The third and subsequent applicants (if any) will receive reductions of no more than 30 per cent of the fine. The authorities have the discretion to decide whether to also apply these discounts to confiscation of unlawful gains. In the global Roll-on/Roll-off Shipping case, for example, the first company to report to the NDRC (Nippon Yusen KK) was granted full immunity. The second and the third leniency applicants were entitled to a fine reduction of 60 per cent and 30 per cent, respectively.
The active enforcement and rule-making relating to cartel investigations in 2016 continues to strengthen the 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. In the meantime, further guidance on a number of important substantive 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. Companies doing business in and with China cannot afford to overlook this jurisdiction in their global competition compliance programmes. They are advised to follow the developments, closely examine their business practices, carefully assess the associated risks and take necessary actions to address any non-compliance.