How to deal with an NDRC investigation

During an investigation Han argues that companies need to have a proper assessment to see to what extent the business has been affected and based on their internal assessment and review, work out the right strategies in handling the investigation. For this, in-house teams and external counsel need to work together to review and investigate.

“Companies have to be extra careful in China, because the Law is vague and it is hard to appeal decisions. The burden of proof is likely to be on the company to show they have done nothing wrong,” said Sébastien Evrard, a partner with Jones Day who specialises in competition law.

Lowering prices

The NDRC is clearly expanding its reach. At the beginning of July, Mead Johnson, Wyeth, Dumex, Abbott Labs, Frisco and Biostime became targets of an investigation into baby formula pricing. The NDRC said the companies had raised their prices by 30% since 2008.

Two of those businesses seem to have acted decisively to reduce their risk. Within a week of the investigation into baby formula, it emerged that Mead Johnson and Abbott said they would cut their prices in response to the investigation. It is thought that these price drops are part of a settlement agreement with the NDRC.

“It is unclear from the relevant press reports if the voluntary price reduction is part of the settlement deal reached with NDRC. If yes, this is kind of unique compared to other jurisdictions as competition authorities in other countries would be hesitant to accept such remedies, as they would not be perceived as price regulators by intervening in pricing directly,” said Han.

But for the NDRC, this is less of a problem, given its dual role as an antitrust enforcer and price regulator.

It is unclear if the NDRC is initiating these price drops or the companies. The NDRC may be taking an educative approach by allowing alleged violators to avoid investigation by lowering prices, as the Law is relatively new and businesses may not have been aware that they were breaking the rules.

“The NDRC is still in education mode but they are moving more towards a regulatory mode, when corrective measures will lessen,” said Evrard.

Practitioners are curious to see if those companies who lowered their prices will still be subject to fines in the future.

“There is nothing to suggest under law that if a company voluntarily lowers its prices, that act can be exchanged for reduced or no fines at all. Given the lack of legal basis for exchanging price reduction for no fines, it will not be surprising if the NDRC still imposes fines on companies involved in this investigation".

Multiple investigations

It is not only makers of baby formula that have come under the spotlight. In January, NDRC imposed Rmb353 million ($57 million) in fines against Samsung, LG and four Taiwanese companies for engaging in price fixing practices between 2001 and 2006. This was the first warning sign to foreign and domestic companies of a new trend.

In February, two of China's premium liquor producers, Kweichow and Wuliangye, became the NDRC's next target. They hit both with fines of Rmb449 million for engaging in resale price maintenance (RPM) by punishing distributors who sold below a set price. RPM is strictly prohibited under Article 14 of the PRC Anti-monopoly Law (中华人民共和国反垄断法).

Two weeks after the baby formula investigation, drug companies came under the NDRC's spotlight. A comprehensive investigation was launched into 60 domestic and international drug makers such as Merck, GlaxoSmithKline, Astellas and Baxter Healthcare.

“There is an increase in enforcement as a result of the Law being more mature and the NDRC having greater resources. However, I am not sure that the four cases are connected except by this trend,” said Evrard.

For example, the Beijing-based partner noted that the drug investigation is about ensuring the government does not feel it is overspending. The liquor case came at a time when the government did not want officials spending on luxury items.

As for the LCD cartel, this was a continuation of the investigations in other countries and the fact that so many people were affected. Lastly, baby formula has a direct impact on consumers and is a good way to get public opinion behind the Anti-Monopoly Law, because the investigation will lead to a drop in prices.

By David Tring

Further reading:

NDRC penalises global LCD price cartel

NDRC imposes a second record anti-monopoly fine

PRC Anti-monopoly Law (中华人民共和国反垄断法)