U.S. and EU cartel risks to Chinese companies

1. A product is exported to the U.S. or the EU

If a Chinese company exports products to the U.S. or the EU for sale to those consumers, it must abide by the antitrust laws in those jurisdictions.

A Chinese company that fails to comply with U.S. or EU antitrust laws – by entering into illicit price fixing, bid rigging or allocation agreements with competitor companies – will be at risk for potential prosecution by the DOJ or European Commission, even when the illicit agreements are struck in China, all of the companies involved in the cartel conduct are located in China, and all of the employees engaged in the conduct are located entirely in China. Both the U.S. and the EU routinely prosecute foreign companies (and, in the U.S., individuals) for exactly this type of conduct. The recent auto parts and LCD panels investigations are prime examples of cases where companies not located in these areas were punished for conduct that took place mostly or even entirely outside of, but which had an effect on, both the U.S. and the EU.

It is important to note that it is not just Chinese companies that run the risk of prosecution for entering into illicit agreements, but also their employees that engage in the cartel conduct. This is especially true in the U.S., where the DOJ regularly prosecutes not only companies (corporate defendants) for cartel conduct, but also the employees (individual defendants). The DOJ often prosecutes individual defendants who have never conducted business in, or even traveled to, the US.

A Chinese company that sells in the U.S. or the EU must ensure that its practices are compliant with these jurisdictions' antitrust laws. Failure to do so could result in significant fines and imprisonment.

Furthermore, the extensive investigations by the DOJ and the European Commission lead to years of uncertainty and large legal bills for the companies. In addition, private firms and customers can, and often do, sue companies for cartel conduct (which is possible even in the absence of public enforcement). These civil lawsuits often drag on for many years, and can result in the recovery of substantial damages. In the U.S., private parties can recover triple damages. For example, in 2005, several American companies sued a number of Chinese makers of Vitamin C in a class action before U.S. courts for price fixing. A few years later, some of the Chinese companies were ordered by the court of the first instance to pay significant damages (pending appellate decision), while others settled the case by agreeing to pay monetary damages.

2. A component is sold in China for a product exported to the U.S. or EU

If a Chinese company that manufactures and sells a component part in China for a product which is ultimately exported to the U.S. or the EU to sell to their consumers, reaches illicit agreements with competitors, it – along with its employees – could potentially be prosecuted by the DOJ or the European Commission.

In the U.S., the extraterritorial application of the Sherman Act is limited by the terms of the Foreign Trade Antitrust Improvements Act (FTAIA). That statute precludes implementing the Sherman Act to conduct involving non-import foreign commerce unless the behavior produces a “direct, substantial and reasonably foreseeable effect” on the U.S. market, though this definition has been interpreted differently among courts in the country. Thus, if U.S. prosecutors believe that the illicit agreements reached by the Chinese component company have had such an effect on U.S. consumers, that conduct could be prosecuted. It is important to note that the DOJ will first investigate the alleged cartel conduct, sometimes for years, before determining whether to ultimately prosecute the conduct due to FTAIA concerns. Companies and employees caught up in these probes encounter mounting legal costs and great uncertainty for a long time, even if never prosecuted. Moreover, the company will likely confront civil litigation regardless of whether the DOJ decides to proceed with prosecution.

The European Commission takes an increasingly expansionist approach that has largely been supported by the courts. On this basis, it can investigate and punish behavior outside the EU which has an “immediate, substantial and foreseeable effect” in the EU. In this context, recent case law of the European courts confirms that, when determining the fine, the European Commission can take into account the value of sales of a component which is sold outside of the EU by one subsidiary of a group to another subsidiary if the latter installs the component in a finished product which is exported to the EU for sale. The European Commission has so far excluded turnovers from the sale of a component outside the EU to a company that is not part of the same group from its fine calculation. However, it has made it clear that it did so because the fine was already very significant and it reserved the right to change its practice in the future. Although this position could be contested in the courts, it would require a legal battle of several years and could only occur after paying the fine (in the hope of being reimbursed). The risks involved, therefore, are very great.

3. A component is sold to a wholly-owned U.S. subsidiary in China

Specifically for the U.S., if a Chinese company engaging in cartel conduct manufactures and sells a component to a wholly-owned subsidiary of a U.S. company, it could be investigated by the DOJ, which will determine whether the U.S. subsidiary was victimized by the criminal conduct.

In evaluating whether to prosecute a case under these facts, there are certain factors that the DOJ will likely evaluate:

(1) Who negotiated the business contract for the U.S. subsidiary?

(2) Was the U.S. parent company a party to the contract for supply of the components?

(3) Did any contractual negotiations or discussions take place between the U.S. parent company and the Chinese component manufacturer?

(4) Did any of the contractual negotiations take place on U.S. soil?

(5) Were invoices sent to or from the U.S.?

(6) Were payments sent to, from or through the U.S.?

If any conduct relating to the sale of the components took place in the U.S., including meetings, billing, payments or contractual negotiations, there is a greater likelihood of investigation. Moreover, if any of the finished products were exported for sale to U.S. consumers, the DOJ will likely account for sales, such as by increasing the fine under the U.S. Sentencing Guidelines.

Just an investigation – even if the DOJ never ultimately prosecutes the conduct – can last years and cost millions of dollars. Moreover, there is a tremendous likelihood that the Chinese component company will face costly civil litigation. So while this is the most difficult and least likely case to be prosecuted by the DOJ, the risk for Chinese companies still exists.

In the EU, the European Commission has not yet fined companies on this ground alone, but its tendency to apply a broad jurisdictional approach to cases means such a situation may arise. If the products ultimately end up in the EU, the risk is significantly increased.

4. A Chinese company acquires an entity that has engaged in any of the above

If a Chinese company acquires a company with U.S. or EU antitrust problems, the issues also become those of the Chinese company.

It is therefore essential to conduct an in-depth due diligence prior to acquiring a company that is exposed to U.S. or EU antitrust rules for any of the three reasons above, i.e. (1) because it sells into the U.S. or the EU; (2) because it sells components which are incorporated in finished products that are sold in the U.S. the EU; or (3) because it sells to a wholly-owned subsidiary of a US company located in China (or elsewhere). Not doing so exposes the buyer to heavy risks associated with the wide reach of these jurisdictions' cartel rules.

Cross-border compliance

In addition to the exposure to U.S. and EU enforcement, companies are subject to investigations under the rules of other jurisdictions, including those by the NDRC in China itself. There have been cases where the NDRC followed in the footsteps of its international counterparts and penalized cartel-type conduct, such as in the LCD panels and auto parts cases. Different agencies worldwide are increasingly cooperating on cartel enforcement. In recent years, the NDRC especially has worked with authorities like the U.S. DOJ and the European Commission to uncover and punish cartel conduct impacting multiple jurisdictions. Non-compliance abroad may therefore result in punishment at home as well.

It is more important than ever that Chinese companies (1) understand the risks associated with cartel conduct; (2) develop a compliance program that will help prevent and detect cartel conduct; and (3) when cartel conduct is identified, carefully assess with counsel the risk attached to the conduct and develop a plan to address this risk.

Kathryn Hellings, Washington DC, and Jan Blockx, Brussels, Hogan Lovells