Regional Overview: Cartels and Abuse

Introduction: a fast-developing region

This article provides, for the first time in GCR’s The Asia-Pacific Antitrust Review, a regional overview of antitrust regimes and enforcement trends in Asia. Covering this broad topic has become a must for several reasons.

First, the economic stakes involved in this region cannot be overstated. With more than half of the world’s population living in Asia, the region’s GDP now represents 37 per cent of the global GDP, up from less than 10 per cent in 2004. China alone now represents 16 per cent of the world’s GDP.¹ In 2015, Asia attracted one-third of the world’s total foreign direct investments, up 15 per cent from the previous year.²

Second, since the turn of the century, the region has undergone fundamental changes featuring contradicting trends. On the one hand, most Asian economies have engaged in a major liberalisation movement, gradually transitioning from command-and-control regimes to market-driven, consumption-based economies. This trend has led to deregulation and increased economic freedoms, with the double objective of attracting foreign capital and promoting domestic entrepreneurship. On the other hand, Asia has not been immune to the unprecedented global expansion of regulation encompassing areas previously untouched in state-controlled, emerging economies – namely corruption, data protection, intellectual property, labour laws and antitrust. Competition laws have by now been adopted in all but a handful of jurisdictions in Asia.

Third, the region is extremely vast and diversified, and does not lend itself to any generalisation. On the one hand, there is undoubtedly a trend towards a certain convergence: the substantive rules of antitrust are broadly similar across the region. ASEAN, far from providing an institutional framework as unified as the European Union, is on a clear trajectory of increased integration; besides ASEAN, multiple bilateral discussions are taking place across the region, with China launching its own Asia-centric trade network following the recent withdrawal from the Trans-Pacific Partnership by the United States. In the antitrust enforcement space, these exchanges materialise through collaboration networks and discussions among law makers, competition authorities and judges. On the other hand though, in these emerging regimes, enforcement is strongly determined by domestic policies and accountability to local populations. As such, the picture varies dramatically across the region, and a granular understanding of each jurisdiction is necessary.

This introductory article seeks to capture and illustrate these developments, through an overview of key legislative features, recent enforcement trends, and what to expect in the near future. Understanding the forces at play is the first step towards devising effective and sustainable compliance strategies for global businesses operating in Asia.

Competition laws in Asia at a glance

This section provides a high-level overview of the competition regimes as they currently exist throughout Asia.

Legislative frameworks

As a result of various influences, Asian jurisdictions started enacting competition laws as early as the middle of the 20th century, with a marked acceleration in the past 15 years. Today, all but a handful of Asian countries have a regime in place, however, the region displays great disparity in terms of legislative development and sophistication.

Soon after World War II, in 1947, Japan was first to adopt a competition act following a US government directive aimed at dismantling the zaibatsu structures. The next competition law would have to wait until 1974 to see the light of day, with Australia setting a trend in motion, followed by South Korea (1980), New Zealand (1986) and Taiwan (1991).

At the turn of the 21st century, new legislations gradually appeared across the region, under the influence of internal economic transition, World Trade Organization or International Monetary Fund requirements, or pursuant to free trade agreements, notably with the United States, in: Thailand and Indonesia (1999); India (2002); Vietnam and Singapore (2004); China (2008); Malaysia (2010); Hong Kong (2012); and the Philippines, Brunei, Laos and Myanmar (2015). Laws are also working their way through the legislative process in Cambodia and in several Pacific islands. The more recent wave of adoption in South East Asia corresponds to a non-binding commitment of the ASEAN that each country should have a competition law in place by 2015 – a deadline narrowly missed for a few jurisdictions.

Institutional frameworks

Most Asian jurisdictions have adopted an administrative model, where a regulatory agency is tasked with investigating anticompetitive conduct and deciding whether the law has been contravened. This is because in a large number of cases, the adoption of a regime akin to the European model was considered to be the most practicable given the legislative and institutional framework of these jurisdictions. Notable exceptions include Hong Kong, Australia and New Zealand, where specialised or general courts adjudicate cases brought forward by competition authorities and decide on liability and sanctions.

Importantly, the level of independence of the authorities in charge of enforcing the law varies widely across the region. While in some jurisdictions the authority is independent by law (India, Taiwan, South Korea, Australia and Hong Kong), other jurisdictions formally lack such independence as they are part of the government or answer to it (China and Singapore), while others struggle with effective independence despite their independent status (Indonesia). Besides, in many (notably young) regimes, the authority’s actual ability to take on politically controversial or state-related matters remains questionable, irrespective of the agency’s independence in law.

Substantive rules

A common feature of competition law is the enforcement against ‘undertakings’ or ‘business operators’, generally defined as entities or persons engaged in commercial activity. In most countries, the law applies to state-owned enterprises, with the notable exception of Hong Kong, where most statutory bodies, although they engage in commercial activities, are exempt from the law.

Merger control is not featured in all systems, some jurisdictions having excluded it outright as a result of various political influences during the legislative process (Hong Kong), and others having a system that remains dormant (Thailand). In mature jurisdictions, merger control enforcement is robust and increasingly reliable from a procedural standpoint (Japan, South Korea, Taiwan and even China). Finally, some newcomers adopt particularly ambitious and far-reaching merger control regimes, for instance, the Philippines.

By contrast, all competition law regimes across the region feature prohibition against anticompetitive behaviour and against abuse of dominance or market power, with local variations that are worth exploring when devising new business practices. Vertical restraints, in particular resale price maintenance and exclusive arrangements, attract a lot of attention because of their commercial significance to the business. While they generally fall foul of the prohibition against anticompetitive agreements, sometimes in the strictest terms (Taiwan and the Philippines), there are notable exceptions, such as Singapore, where most vertical agreements are exempted; in other jurisdictions, such as Indonesia, South Korea and Hong Kong, these agreements are analysed on their effects.

Regarding the prohibition against abusive practices, present in all countries, the difference lies in the threshold used to determine which companies are concerned. This varies from a relatively high threshold (60 per cent in Singapore and Malaysia) to a potentially very low bar (possibly as low as 25 per cent in Hong Kong). Unsurprisingly, the rules on abuse of dominance are often unsettled, and it is expected that they will develop as regulators mature and address more cases of unilateral conduct.

Efficiency defences and other grounds for exemptions (eg, service of general economic interest or compliance with legal requirements) are available in nearly every country, though a majority of jurisdictions promote self-assessment and do not provide for the possibility to apply for an exemption. This is not the case in Hong Kong, where undertakings can apply for individual or ‘block’ exemptions.

While in Europe the list of block exemptions has narrowed down over recent years, the more recent Asian jurisdictions have followed the temptation to grant wide-ranging exemptions. Vertical dealings are exempt in Singapore,³ and shipping agreements (VDAs and VSAs) continue to enjoy extensive immunity across the Asia-Pacific. The picture is evolving though, and may lack overall coherence, with the Australian government recently announcing its support to repealing the shipping exemption, while on the same day Singapore extended it for five more years.⁴ In Hong Kong, the newly appointed Competition Commission has proposed a limited exemption (extending only to VSAs), which has been subject to public consultation and is currently being finalised.⁵

Sanctions

In most Asian jurisdictions, pecuniary penalties are the default sanction and increasingly used as a deterrent tool. Most regimes tend to converge toward assigning to the fine a cap at 10 per cent of the business’s turnover, though there are variations across regimes depending on the entities covered (group or mere infringing company), the geographical base of the turnover (worldwide or in the jurisdiction alone) and years of infringement considered. One common feature of nascent regimes is the restraint competition authorities apply in determining the level of the fine; however, another common feature is the growing level of confidence competition authorities develop over time, leading to ever high fines: the top penalties handed down in recent years in Asia include US$975 million in China (Qualcomm, 2015); US$854 million in South Korea (Qualcomm, 2016); US$176 million in Taiwan (capacitor manufacturers, 2015); and US$147 million in Japan (separation gases, 2011).

This not being enough, a number of jurisdictions are currently reforming their law with a view to either increase the level of the cap (Indonesia, where the current cap is set at US$1.8 million) or increase the authority’s discretion to apply a fine at the level of their choosing (Japan).

In a similar vein, criminal sanctions, although they are not the norm yet, are also on the rise, with more regimes having adopted (the Philippines and Vietnam), or considering to adopt, criminal sanctions (New Zealand recently considered this but ultimately decided against it).

In addition, various regimes have other sanctions available, such as disqualification of directors, liability and fines against individuals (Hong Kong and the Philippines), and disgorgement of profits (Japan and South Korea). Private actions, available in most regimes (with the notable exception of Hong Kong, which offers no stand-alone rights of action), are also a strong contributor to the effectiveness of enforcement, particularly in regimes where authorities can be under-resourced and inexperienced.

Investigation powers and due process

Although they vary across the region, investigation powers tend to be quite far-reaching, with most authorities being capable of conducting dawn raids (with or without the need to secure a warrant first). Authorities who lack this investigation tool (Indonesia and Taiwan) actively pursue legislative reforms to obtain these powers.

In addition to dawn raids, authorities are usually empowered to conduct interviews of executives and employees, and the right to counsel during questioning may not be recognised. It is also increasingly common for authorities to seize personal devices (including personal messaging content such as SMS or WhatsApp) as long as business is conducted on the said devices, despite privacy concerns.

Professional legal privilege is not the norm in Asia. Notably, communications with outside counsel are not privileged in Japan, South Korea, China and Vietnam. The status of communications with in-house counsel can also be unclear under the law (Malaysia, Thailand and Taiwan).

Due process, fairness and transparency remain, by and large, improvement areas in Asia. In the developing regimes in particular, it is the exception to have access to the file and to be told the authority’s theory of harm. This hampers dramatically the ability of undertakings to prepare an effective defence strategy. Furthermore, the option to appeal the authority’s decision may either not be available, or simply be impracticable. In China, a series of recent decisions suggests there is a path to appeal and for courts to play a role; however, this may be limited for now to domestic companies appealing decisions at a very local level. Finally, in jurisdictions where private actions are possible, the level of confidence in the courts may be relatively low, here again limiting the effectiveness of the tool.

On the leniency side, several regimes have recently either adopted or overhauled their leniency mechanisms and policies. China is preparing guidelines on leniency; Japan has adopted an ‘Amnesty Plus’ programme; and Taiwan and South Korea now reward whistle-blowers.

Enforcement trends

Besides the black letter of the law, the reality of enforcement practices across the region must be considered very carefully. In jurisdictions where the law is new, or where the ability of competition authorities is heavily influenced by their limited independence, the domestic political agenda or simply a history of strong state interventionism, there might be a disconnect between the status of the law and the way it is implemented.

This has a direct bearing on the level of risk for businesses active in the region. Therefore, a granular understanding of the most vulnerable practices and the most at-risk sectors in Asia is nowadays an important component of any global business’s compliance efforts.

Cartels

Across the region, and particularly in developing jurisdictions, the fight against cartels (ie, price fixing, bid rigging, market allocation and output restriction) is clearly at the top of the agenda for antitrust authorities.

The explanation is twofold. First, in economies where the mere concept of free competition is new, and perhaps also for cultural and historical reasons, competitors may consider each other ‘business partners’. There may even be no awareness that anticompetitive agreements are damaging in some way. As a result, cartels – and most prominently, bid rigging – can be widespread. Second, it is generally accepted that cartels must be banned, and from an evidentiary standpoint, they remain easier to prove than more complex offences. This is a critical factor for young agencies with little enforcement experience and sometimes very limited resources.

Across the region, therefore, we note a strong emphasis on enforcement against cartels, with fines growing in size as the agencies accumulate more experience and confidence.

Price fixing

Price-fixing cartels in Asia can be divided into two categories. On the one hand, enforcement against local companies and trade associations in consumer-facing markets helps young competition authorities raise their profile, sharpen their skills and establish useful precedents. In Singapore and Malaysia, both competition authorities have hit relatively small companies with price-fixing fines in the early days of enforcement: bus operators in Singapore (US$1.2 million in 2009), and ice manufacturers in Malaysia (US$63,000 in 2015). In China, the Guangdong provincial regulator has hit courier companies (US$95,000 in 2015) for price fixing. These relatively straightforward cases have helped authorities acquire the confidence, public support and skillset necessary to tackle larger cases.

On the other hand, mature competition authorities are chasing larger and more complex targets, often imposing very substantial fines on multinational companies. As such, competition authorities no longer hesitate to take on large international cartel cases (capacitors in Taiwan and Japan; auto parts in China) as well as cases that are increasingly challenging from a substantive analysis or a procedural standpoint (eg, Australia’s fine in 2016 against two banks for attempted manipulation of Malaysian ringgit-denominated products by Singapore-based traders).

In short, as a result of their public accountability, many regulators remain complaints-driven, taking on cases based on their chance of a successful outcome. As a result, investigations against price fixing by local businesses continue to form a large proportion of these authorities’ caseloads, particularly in consumer-facing industries. At the same time, mature jurisdictions are increasingly

willing and capable to take on international cartel cases where they can demonstrate their muscle and determination.

Bid rigging

The fight against bid rigging occupies centre stage in a number of Asian jurisdictions, primarily because of its widespread nature, but also because of the significant overlap between competition law and corruption law, which facilitates prosecution against these practices. In recent years, the number of cases against bid rigging across the region (eg, Japan and Korea) has been on the rise, and the fines have increased dramatically (eg, US$307 million in South Korea in the LNG terminal construction case in 2016).

Competition authorities are also vocal on the policy front and on their ambition to crack down on bid rigging: for instance, one of the first actions undertaken by the new Hong Kong Competition Commission was a market study targeting practices in the building maintenance sector. Construction and sectors where public procurement is common practice are among the most exposed sectors.

A number of cases across the region feature findings of market sharing and output restriction, but a detailed analysis would go beyond the scope of this article.

Vertical restraints

Resale price maintenance (RPM) and other forms of vertical restraints have recently been the focus of attention within Asia, possibly more than they have in Europe (and more so, the United States). The emergence of RPM as a point of focus and debate in the region coincides with a tendency of regulators in developed economies across Asia to concentrate their attention on consumer-facing sectors such as retail.

During the public consultations on draft enforcement guidelines in Hong Kong, many called for an exemption for vertical restraints. A key argument for this was that Singapore had granted an exemption to vertical restraints (including RPM). However, some recent clarifications by the Competition Commission of Singapore (CCS) have left the door open to enforcement against RPM in the future, including a series of recent investigations into vertical restraints, using rules against abuse of dominance.⁶

In Korea, enforcement of competition rules against RPM came into the spotlight when the Supreme Court ordered the Korea Fair Trade Commission (KFTC) to adopt a rule of reason when faced with vertical price restrictions, as opposed to the per se view that the law dictated.⁷ This approach, very similar to the shift in US law 10 years ago towards a rule of reason in vertical enforcement (Leegin Leather case),⁸ has not deterred the KFTC from taking on vertical cases, adopting openly a contrarian view after the Supreme Court decision. In other jurisdictions, such as in Taiwan, RPM remains a per se offence, although a reform is being considered.

Because of their analytical challenge, vertical restraints tend to be more enforced in developed regimes than in emerging systems. That said, some new regimes tend to adopt a stringent approach to vertical restraints, with a view precisely to facilitate enforcement. Possibly the most active regulator in the region against RPM has been China’s National Development Reform Commission. In a particularly visible case, Mercedes was fined approximately US$57 million for practices involving RPM. This created a momentum for enforcement against the auto sector as a whole in China, as well as an effort to draft specific policies addressing the intrinsic competition concerns of the auto sector in China. In another recent and widely reported case, medical manufacturer Medtronic was fined over US$17.2 million for engaging in RPM.

Abuse of dominance and market power

As in other parts of the world, abuse of dominance cases may be highly visible, but they do not constitute the majority of cases undertaken by regulators. Competition authorities in the new regimes are often ill-equipped to tackle these kinds of cases, which can be challenging from an analytical and evidentiary point of view. Even in more mature regimes, rules against abuse can be left unexploited; it is the case in Australia, where the government recently tabled a legislative proposal to facilitate enforcement by the ACCC against unilateral behaviour.⁹

Notable recent examples of enforcement against abuse include decisions in: China (Qualcomm, US$975 million for excessive pricing; Tetra Pak, US$100 million for practices including rebates); in Korea (Qualcomm, US$854 million for refusal to license and unfair licensing conditions); and in Malaysia in the first abuse of dominance case (US$550,000 against an insurance agent for discrimination).¹⁰ These examples show the determination of Asian authorities to increase their reach and to tackle a greater variety of practices. In that sense, 2016 has been a turning point, with public enforcement more boldly pursuing abuse cases.

Meanwhile, a number of abuse of dominance cases in China were dealt with by the courts in private litigation. The likely landmark case in this space was the Shenzhen Intermediate People’s Court ruling in Huawei v InterDigital concerning royalties paid by Huawei for InterDigital’s standard-essential patents (SEPs), in which the Court mandated, for the first time, the specific level at which SEP licensing royalty rate would be permitted.¹¹

Even with increased public enforcement against abusive practices, it is expected that the use of private litigation to pursue claims against abuse of dominance will continue to be on the rise, especially as courts become more sophisticated and experienced.

The way forward

The antitrust risk and the enforcement intensity will only continue to be on the rise in the region. The next couple of years will doubtlessly bring about more coverage across the region, higher fines, larger targets, more complex cases and increased international cooperation between regulators enjoying new powers and more sophisticated enforcement skills.

The challenges to tackle the risk in this fast-evolving, innovative and often bold legal environment should not be underestimated. They involve rapid change in rules and practices, enforcement priorities deeply influenced by the local political and economic landscape, relative weakness of the rule of law, and, all too often, poor communication and a gap in expectations between the business’s head office and its local operations.

The very first step towards mitigation is for top management to take the risk seriously. All too often, complacency pervades the organisation because, for instance, the fines are perceived as non-threatening. But this is missing the real point, which is the unpredictability of the authorities’ enforcement agenda, and their ability to deploy massive resources if they think the case warrants it (eg, the Qualcomm cases).

Second, companies must appreciate that ‘one-size-fits-all’ compliance frameworks will either hamper the business unnecessarily or leave it unduly exposed. A granular review is, therefore, increasingly necessary, and the roadmap provided in this article (looking through the lens by country, practices and sectors) should prove a useful tool.

Assessment is key, and it is recommended to articulate a strategy involving both prevention (based on compliance efforts) and pro-active engagement at the local level with competition authorities and lawmakers. In many Asian jurisdictions, the regulatory landscape is still in its infancy, and may still be heavily influenced if the right approach is pursued. In Asia, businesses have much to gain in engaging positively rather than being on the defensive.

Notes

1. Source: Quandl, China share of World GDP based on PPP, %. Available at: www.quandl.com/data/ODA/CHN_PPPSH-China-Share-of-World-GDP-based-on-PPP.
2. UNCTAD, World Investment Report 2016, available at: http://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=1555.
3. Singapore Competition Act, Chapter 50B, Schedule III.
4. Competition Commission of Singapore, Competition (Block Exemption for Liner Shipping Agreements) Order, 25 November 2015, available at: www.ccs.gov.sg/legislation/block-exemption-order.
5. Hong Kong Competition Commission, ‘Competition Commission publishes proposed block exemption order for certain liner-shipping agreements’, Press Release, 14 September 2016, available at: www.compcomm.hk/en/enforcement/registers/block_exemption/files/20160914_Competition_Commission_publishes_proposed_block_exemption_order_e.pdf.
6. Linklaters, APAC Bulletin, ‘CCS continues to closely scrutinise vertical restraints’, February 2017, available at: www.linklaters.com/pdfs/mkt/hongkong/170214_APAC_Bulletin_February_single%20doc.pdf.
7. Conventus Law, Competition Law Developments In Asia Pacific, 23 June 2015, available at: www.conventuslaw.com/report/competition-law-developments-in-asia-pacific/.
8. Leegin Creative Leather Products Inc v PSKS Inc, 551 US 877 (2007).
9. Linklaters, APAC Bulletin, ‘Bill introduced to Parliament to broaden the misuse of market power prohibition’, February 2017, available at: www.linklaters.com/pdfs/mkt/hongkong/170214_APAC_Bulletin_February_single%20doc.pdf.
10. Malaysia Competition Commission, ‘Infringement of section 10 of the Competition Act 2010 by My E.G. Services Berhad’ 24 June 2016 (case number: MyCC (ED) 700-1/1/2/2015), available at: www.mycc.gov.my/sites/default/files/Section-40-Notice-of-Finding-of-an-Infringement-by-My-Services-Berhad.pdf.
11. Michael Han and Kevin Li, Competition Policy International, ‘Huawei v. InterDigital: China at the Crossroads of Antitrust and Intellectual Property, Competition and Innovation’.