A new era in antitrust enforcement

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Enforcement priority

In the early years following the AML's entry into force, the NDRC and SAIC focused primarily on capacity building and did not pursue a large number of high-profile cases. However, there has been a rapid increase of enforcement by the two agencies over the past two years (particularly in 2013).

Although one may attribute the enhanced AML enforcement as a response to food safety scandals and the restructuring of China's industries, there appears to be a concern that the intensified enforcement is aimed at tightening regulation over foreign firms and that the authorities are singling out multinationals for enforcement. The fear may be reinforced by the Chinese government's recent efforts in other areas of regulatory enforcement. For instance, following the police's investigation into GlaxoSmithKline, the SAIC recently announced launching a nationwide probe into pharmaceutical and medical sectors against bribery and antitrust allegations. However, the facts do not appear to support the assertions that the agencies are targeting foreign companies because domestic Chinese companies have also been targets of these recent cases. For instance, in the Maotai and Wuliangye cases, two national champion liquor producers were each subject to substantial fines. In the milk powder case, both multinational and Chinese manufacturers were sanctioned and the most substantial fine was imposed on the Chinese brand Biostime. In the Shanghai jewellery case, only domestic Chinese companies were penalised. As for the SAIC's enforcement, all of the 12 completed cases recently published have involved only domestic Chinese companies.

Recent enforcement actions may also suggest that some sectors are more likely to come under the enforcement agencies' radar. To date, the agencies have investigated a wide range of consumer-facing sectors, like consumer goods, healthcare, food, construction, insurance and automobiles. In addition, recently, senior officials at the NDRC and the SAIC reportedly have indicated that the two agencies will continue to beef-up enforcement against AML infringements in consumer-related industries, like oil, telecommunications, automobiles and banking.

Substantive issues

Horizontal agreements

To date, horizontal cartel agreements involving price-fixing, market allocation, output restrictions and joint boycotting, which are explicitly prohibited under Article 13 of the AML, have been an enforcement priority for both the NDRC and the SAIC since the AML came into effect. Cases in the initial period (rice noodles, soybeans, paper and medicine) and recent cases (LCD and jewellery) have frequently targeted price-fixing. Similarly, all of the 12 completed decisions published by the SAIC involved horizontal restraints in the form of market allocation, output restrictions and joint boycotting. Given that these horizontal cartel agreements typically have more appreciable anti-competitive effects than other types of horizontal agreements (and are regarded as per se or by object infringements in the US and EU respectively), it can be expected that both agencies will continue robust enforcement efforts in this area.

Vertical agreements

The NDRC's enforcement efforts in recent months have also actively targeted RPM agreements. As noted above, in the liquor and milk powder cases, infringing companies were sanctioned for implementing RPM restrictions on downstream distributors.

While senior officials at the NDRC have explained publicly that the alleged conduct in its RPM cases is subject to a rule of reason analysis, NDRC announcements have not provided details on how the rule of reason approach was applied. In the Wuliangye case, the NDRC identified its strong market position and important position (not dominant position) as factors for the rule of reason analysis but did not disclose Wuliangye's specific market share or address how its RPM practice harmed competition. In addition, the NDRC's announcements have not discussed the potential pro-competitive effects of the companies' RPM agreements or weighed the pro-competitive effects against anti-competitive effects, which are usually necessary under a rule of reason analysis. The lack of detailed reasoning in the announcements could possibly lead to a misperception in the business community that NDRC is leaning towards a per se illegal approach to RPM. Hence, official clarifications from NDRC or the explicit application of a rule of reason approach in future cases will be welcomed to provide clarity.

In the Shanghai High Court ruling in Rainbow v Johnson & Johnson, handed down around the same time as the milk powder case, the court affirmed that RPM should be subject to a rule of reason analysis. Although its application of the analytical framework to the facts in the case is controversial, the court clearly set out four main factors for determining whether the RPM conduct has an anti-competitive effect: (1) sufficiency of competition in the relevant market; (2) the defendant's position in the relevant market; (3) the defendant's motives in imposing RPM; and (4) the RPM's actual impact on competition.

Abuse of market dominance

To date, abuse of a dominant market position has been subject to fewer enforcement activities vis-à-vis anti-competitive agreements. Following the NDRC's investigation of two state-owned telecommunication companies for alleged abuse of dominance in 2011, the SAIC recently opened an investigation into Tetra Pak for allegedly tying the sale of packaging machines to packaging materials. This new enforcement initiative demonstrates that abuse of market dominance is no longer an uncharted territory for antitrust enforcement. As the agencies' experience with abuse of market dominance grows, there are reasonable grounds to expect that enforcement in this area will also gain momentum.

Investigation procedure

In terms of procedure, officials from both agencies have relatively broad investigatory powers under the relevant regulations and the agencies' general enforcement practice. Namely, officials can: (1) enter into companies' business premises for investigation; (2) inquire of companies' employees and interested parties; (3) review and copy companies' books and records; (4) seal and detain evidence; and (5) check companies' bank accounts. Further, the SAIC's implementing regulation expressly empowers the SAIC to order companies and individuals under investigation to present documents such as: (1) corporate information; (2) information on the company's production and operations, annual sales revenue, business dealings and cooperation with transacting parties, investment activity and other aspects of their business over the past three years; and (3) articles of association, meeting minutes and other relevant documents from any related trade association.

The NDRC's announcements of enforcement decisions do not offer details as to how it or local DRCs conducted their investigations in the cases. The NDRC only briefly suggested in the complex LCD panel case that it deployed considerable resources and adopted various investigation methods, without mentioning the specific evidence gathered for decision-making. The SAIC appears to have been relatively more transparent in this regard. The SAIC's published decisions have briefly disclosed the main investigation process. Further information, such as whether a dawn raid was conducted, is lacking. What is encouraging with the SAIC's decisions is that they lay out in detail the evidence on which the local AICs established infringement.

In addition, recent enforcement actions show that the agencies' investigative skills have become increasingly sophisticated. Notably, the NDRC reportedly indicated that in the milk powder case, the investigation team found some evidence from deleted emails from the milk powder companies' computers. Similarly, in the on-going investigation of Tetra Pak, SAIC officials reportedly have recovered electronic evidence that had already been deleted.

Parties being investigated have a right of defence, meaning a right to present their explanations and arguments during the course of an investigation. However, it is unclear from 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. By comparison, in some of the SAIC's cases (for example, the Liaoning cement case), some companies put forward arguments during an investigation that their conduct had not breached the AML and the local AICs analysed why the arguments failed to rebut the AICs' findings.

Calculation of fines

For breaches of behavioural prohibitions, the AML provide that fines should be assessed at 1% to 10% of the infringing company's sales revenue for the previous year. In the early stages after the introduction of the AML, the NDRC appeared to be more comfortable imposing fines based on other laws, such as the PRC Pricing Law (中华人民共和国价格法), and levied relatively light fines in those cases. For example, in the rice noodle case in 2010, infringing companies were subject to less substantial fines ranging from Rmb30,000 to Rmb100,000.

More recently, the NDRC has made clear its willingness to use revenue as a base for determining fines. In recent cases like the milk powder and jewellery cases, for example, the NDRC imposed substantial or even record fines based on the infringing companies' annual revenue as provided by the AML. In the LCD panel case, the AML did not apply and the sanctions were imposed pursuant to the Pricing Law because the alleged price-fixing conduct occurred prior to the promulgation of the AML. The NDRC noted that the fines would have been calculated based on the relevant AML provisions if the price-fixing arrangement had continued to operate when the AML came into force and thus the fines would have been much higher.

There has been uncertainty as to whether the fines under the AML should be calculated on the basis of the infringing party's turnover globally or just in China. In the recent Shanghai jewellery case, the retailers were fined based on 1% of their relevant sales revenue, but the announcement did not clarify what revenue was been considered relevant.

Leniency and reduction of sanction

In China, leniency rules exist under both the AML and the general administrative law. While the former requires “reporting of information on an anti-competitive agreement and provision of important evidence” as a pre-condition, the application of the latter is more flexible. Under the general administrative law, infringing companies can be entitled to varying degree of reduced sanctions depending on the level of their cooperation with the investigation and initiative to take rectification measures.

In practice, the leniency rules in China are broader than the leniency regimes in mature antitrust jurisdictions like the EU and US. For example, multiple companies in a single investigation can obtain full exemption of a 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 offenses. In the milk powder case, for example, the agencies granted full immunity to four 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 infringing companies were granted full immunity or imposed fines ranging from 3% to 6% of their sales turnover in the previous year. The result 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 on investigation, or active rectification measures. Wyeth and Beingmate (both of which were exempted from fines in the milk powder case) reportedly were 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.

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Implications for companies

The recent cases may suggest that as the NDRC and the SAIC gradually build up their enforcement capacity, behavioural enforcement is set to increase and vigorous enforcement 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 (even international cartels) are likely to remain an enforcement priority. Enforcement actions against RPM will also remain robust. While abuse of market dominance is currently not scrutinised as closely as anti-competitive agreements, companies with a relatively strong market position should pay attention to the development of the Tetra Pak investigation and the authorities' growing readiness for heightened enforcement. Against this changing environment of AML enforcement, companies are advised to adopt a play safe approach, i.e., to closely examine their business practices, carefully assess the associated risks, and take necessary action to address any non-compliance.

In terms of procedure, there is still a lack of clarity as to how the two authorities (including their local counterparts) will conduct their investigations, including the dawn raids and how they will react if the companies under investigation try to put forward their arguments or seek legal assistance during the investigation. In addition, although both the NDRC and the SAIC delegated provincial or municipal counterparts to investigate cases and sanction violators in some cases, they oversaw and coordinated with local offices' case handling during the process. It remains to be seen how the agencies will shape the cooperation between central and local agencies.

Fay Zhou and Cheng Yuan, Linklaters, Beijing