Chinese regulators celebrated the six-year anniversary of its landmark anti-monopoly law last month by levying a record fine against a group of infant formula producers for anti-competitive practices. The move was just the latest antitrust enforcement action in what is starting to look like a crackdown by Chinese officials.
Not until the last few months has China pursued many cases under its anti-monopoly law, adopted in August 2007, and now it would appear no industry is out of its reach. Along with recent corruption enforcement, it looks like China is getting more serious about enforcing its regulations.
“It seems that the antitrust regulators have switched gears in recent months,” says Sébastien Evrard, a partner with law firm Jones Day in Beijing. “They have become very aggressive and have taken on very visible cases.” Foreign companies doing business in China can expect to face “more enforcement across the board,” he adds.
In early August, China's central economic planning agency, the National Development and Reform Commission (NDRC), fined six infant formula producers a combined record total of $110 million. The fines marked the culmination of a widespread probe launched by the NDRC in July over alleged price-fixing and anti-competitive practices in violation of Article 14 of China's Anti-Monopoly Law (AML).
Article 14 prohibits companies from entering into monopoly agreements with trading partners that fix the price of commodities for resale to a third party or restricts the minimum price of commodities for resale to a third party. Companies that are found in violation of Article 14 may face fines ranging from 1 to 10 percent of global revenue for the preceding year.
Among the infant formula companies to face fines are U.S.-based Mead Johnson and Abbott Laboratories; Hong Kong-based Biostime; France-based Dumex; Netherlands-based FrieslandCampina; and New Zealand-based dairy company Fonterra. Wyeth Nutrition, which as acquired by Nestle last year, was able to avoid penalties by providing “important evidence and [carrying] out active self-rectification,” according to the NDRC.
"Following this investigation, Wyeth Nutrition assessed its pricing practices and decided to improve certain sales and marketing practices," says Meike Schmidt, a corporate spokesman for Nestle. "Nestle Nutrition was not investigated.
"Wyeth Nutrition respects the NDRC's decision and will continue to implement the price reductions as communicated on July 8," adds Schmidt.
Also in August, Shanghai's highest court ordered two Chinese subsidiaries of medical giant Johnson & Johnson (J&J Medical China and J&J Medical Shanghai) to pay one of its former distributors $86,577 for violations of the AML. It was the first time that a Chinese court ruled against a Fortune 500 company in an AML case.
The case stemmed from a 2010 lawsuit, alleging that J&J set a minimum price on surgical instruments for resale in its distributions contract with Rainbow Medical Equipment & Supply in violation of Article 14.
Under the distributions contract, Rainbow Medical was to sell certain J&J products at a minimum resale price to hospitals in specifically designated districts. When J&J discovered that Rainbow Medical acquired distributorship in an unauthorized district by bidding below the minimum resale price, J&J ultimately terminated its contract.
“Given the increasing enforcement activity in China and its growing relevance to multinationals … we can expect greater transparency, consistency, and sophistication in future decisions, and hopefully a continued move toward international best practice.”
—Hannah Ha,
Partner,
Mayer Brown
China's lower court, Shanghai No. 1 Intermediate People's Court, agreed with J&J that the contract did not violate AML. Shanghai's highest court, however, overturned that ruling.
Any industry that touches consumers should be on guard, Evrard says. He cites the consumer goods, telecommunications, oil, and automobile industries as particularly vulnerable.
Xu Kunlin, head of the NDRC's Anti-Monopoly Bureau, recently indicated on Chinese national television that the petroleum, telecommunications, banking, and auto sectors are next on Chinese regulators' radar screen for potential antitrust violations.
“Regulators tend to concentrate their enforcement efforts on sectors where the result of their efforts can be directly felt by consumers,” says Evrard. Another area of enforcement focus is “practices that harm the interest of the state—for example, collusion in public bidding,” he says.
More Probes
The NDRC is not the only Chinese regulator to intensify enforcement of antitrust laws. The State Administration of Industry and Commerce is investigating Tetra Pak for possible anti-monopoly violations, making it the SAIC's first publicly announced investigation into abuse of anti-competitive practices.
That doesn't mean it is the only one. The SAIC has indicated that it's willing to be more transparent about the case it investigates. On July 29, the SAIC launched an antitrust information portal in which all cases that the agency investigates and closes will be made public through the new system, according to Ren Airong, SAIC's director of the Anti-Monopoly and Anti-Unfair Competition Bureau.
To date, the SAIC has published 12 anti-monopoly decisions. Of those cases, nine involved collusion between industry associations and business operators across a broad range of industries, including insurance, construction materials, liquefied petroleum gas, and others.
“Given the increasing enforcement activity in China and its growing relevance to multinationals … we can expect greater transparency, consistency, and sophistication in future decisions, and hopefully a continued move toward international best practice,” says Hannah Ha, a partner with law firm Mayer Brown in Hong Kong.
U.S. and Chinese regulators alike continue to work toward that approach. In the same week the SAIC launched the new portal, Maureen Ohlhausen, a commissioner with the U.S. Federal Trade Commission, encouraged Chinese agencies to continue to provide more details on antitrust investigations.
“We at the FTC find that these discussions with parties are very helpful to make our decisions more efficient and provide parties with more predictability in the outcomes,” Ohlhausen said during a July 31 speech in Beijing.
Chinese competition authorities should also “show consistent movement away from considering non-competition factors in their decisions,” Ohlhausen added. “To promote predictability, fairness, and transparency, non-competition factors must fall outside the domain of a competition agency.”
Aggressive Tactics
A recent closed-door meeting organized by Chinese regulators and attended by several companies doing business in China—including General Electric, Siemens, Microsoft, IBM, and many more—highlights the aggressive enforcement tactics that are being employed against companies that potentially come under investigation, especially western companies. During that meeting, Chinese regulators reportedly warned companies not to enlist the help of external counsel to challenge the authorities on accusations of antitrust violations, according to a Reuters report.
For the most part, companies that were in attendance are choosing to remain tight-lipped about the conversations that took place. “I can only confirm that we attended a meeting organized by the Ministry of Commerce for representatives of foreign companies on July 24 and July 25 in Beijing,” says Christopher Huntley, senior vice president of communications for food packaging company Tetra Pak. “I am not able to provide any details regarding the agenda or what was discussed.”
MONOPOLY PRACTICE VIOLATIONS
The following excerpt from China's Anti-Monopoly Law explains violations around prohibited monopoly practices and abuse of market dominance.
Chapter II Monopoly Agreement
Article 14: Any of the following agreements among business operators and their trading parties are prohibited:
Fixing the price of commodities for resale to a third party;
Restricting the minimum price of commodities for resale to a third party; or
Other monopoly agreements as determined by the Anti-monopoly Authority under the State Council.
Chapter III Abuse of Market Dominance
Article 17: A business operator with a dominant market position shall not abuse its dominant market position to conduct following acts:
Selling commodities at unfairly high prices or buying commodities at unfairly low prices;
Selling products at prices below cost without any justifiable cause;
Refusing to trade with a trading party without any justifiable cause;
Requiring a trading party to trade exclusively with itself or trade exclusively with a designated business operator(s) without any justifiable cause;
Tying products or imposing unreasonable trading conditions at the time of trading without any justifiable cause;
Applying dissimilar prices or other transaction terms to counterparties with equal standing;
Other conducts determined as abuse of a dominant position by the Anti-monopoly Authority under the State Council.
For the purposes of this Law, “dominant market position” refers to a market position held by a business operator having the capacity to control the price, quantity or other trading conditions of commodities in relevant market, or to hinder or affect any other business operator to enter the relevant market.
Source: China.org.cn.
Craig Hodges, director of external communication for Michelin North America, says the company has “no information or insights to share.” Spokespeople for Arris Group and Microsoft also declined comment.
While companies aren't saying much about the meeting on anti-competitive practices, it's clear that China is increasingly on the look-out for violations. Companies “need to undertake appropriate planning and training in anticipation of an investigation, especially if they have substantial operations in China since, under the AML, enforcement officials are authorized to conduct ‘on-site' investigations without providing any prior notice,” says Ha. “It would also be helpful to have already identified experienced external legal advisors who can immediately be engaged to attend the relevant premises in the event of an on-site investigation.”
“In the event a company becomes the target of an AML investigation, steps should be taken to immediately cease any conduct likely to be the cause of the regulator's suspicions or concerns,” says Ha. “Where the conduct was clearly unlawful, steps should also be taken to remedy any damage the conduct may have caused to other parties as soon as possible, in consultation with legal advisors. Such steps should be recorded, for potential use in any subsequent attempts to secure leniency.”
To be sure, the increased enforcement action by Chinese regulators on anti-competitive practices appears to be just getting started. “We can expect China's antitrust regime to continue evolving at a faster pace. The enforcement push toward foreign firms,” Ha concludes, “suggests that Chinese antitrust regulators are becoming increasingly surefooted and confident in their enforcement of the AML.”
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