The NDRC campaigns against RPM

The NDRC notice roughly tracks the analytical framework of the AML. The NDRC found that the infant formula suppliers had, in fact, employed various punitive and restrictive practices to enforce minimum resale prices, including direct contractual terms, explicit and covert penalties, withdrawal of rebates and suspension or cessation of supply. The NDRC explicitly found anti-competitive effects, concluding that RPM practices unjustly maintained high prices, severely eliminated and restricted intra-brand competition and weakened inter-brand competition. In addition, it undermined the fair and orderly market competition and prejudiced the interests of consumers. Unlike notices in prior AML enforcement actions, the NDRC notice explicitly acknowledges Article 15 defences. However, it simply states that the companies failed to establish grounds for an exemption without elaborating on the parties' arguments or the NDRC's reasoning.

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Unilateral price guidance

For the Article 14 rule against vertical monopoly agreements to apply, there must be an agreement, decisions or other concerted conduct entered by trading partners. While contractual mechanisms for enforcing minimum resale prices clearly entail agreements between trading partners, a supplier's unilateral recommendation of resale prices to distributors and discontinuation of sales to discounters –without any bilateral threats, warnings, or negotiations – may not. Unilateral pricing and supply decisions by firms with market power might still be actionable as abuse of dominance, but such truly unilateral decisions would not be literally covered by the monopoly agreement rules. Courts and regulators in other jurisdictions have often struggled to distinguish vertical agreements and concerted practices with the buyers' active consent or tacit acquiescence from truly unilateral channel decisions. It is unclear from the NDRC's published notice whether any of the infant formula suppliers had unilaterally suspended supply to low-cost resellers, or whether this issue was addressed in the investigation.

Penitence and penalties

The NDRC enjoys tremendous discretion to penalise AML violators with fines up to 10% of their prior year's sales (widely understood as referring to their sales from the relevant market affected by the misconduct). The NDRC notice suggests that fines were determined by the seriousness of misconduct; relative cooperativeness during the investigation; extent of active remediation; and voluntary disclosure of misconduct. The NDRC calculated fines as a percentage of the prior year's sales, imposing fines: of 6% on one company for serious illegal conduct and failure to take active remediation; of 4% on one company found to have failed to cooperate in the investigation but nevertheless took active remediation; and of 3% on four companies that both cooperated and actively remediated.

No fines were levied on four companies that took the initiative to report the RPM practices to the NDRC, provided key evidence and undertook remediation on their own initiative. The notice does not further explain the relative weight of these factors, the gradations in the seriousness of each company's misconduct or the specific steps deemed failure to cooperate with the investigation. (Indeed, recent foreign media reports have raised concerns that an aggressive legal defence may be viewed as uncooperative).

The NDRC's penalty decisions send a clear message: voluntary disclosure and remediation of anti-competitive conduct may avoid penalties and fuel investigations of competitors. Companies active in China should factor the growing risk of NDRC industry sweeps targeting cartels, RPM, and other anti-competitive pricing policies into their compliance strategies.