There you are Monday morning in the Shanghai office, and a squad of police and lawyers from China’s antitrust regulators burst through the door looking to seize, well, just about everything in the room.
You know, just another day in the life in China.
Scenarios as described above have become a new reality for many businesses operating in China, as Chinese authorities continue to carry out so-called “dawn raids” in their crackdown on anti-competitive practices. From pharmaceuticals to technology companies to consumer products, no industry seems beyond the reach of China’s aggressive antitrust regime right now.
“Foreign companies doing business in China need to know that Chinese antitrust authorities have far-reaching enforcement powers and that the procedural safeguards are not the same as those that may apply in the United States or other established competition law regimes,” says Maxime Vanhollebeke, an antitrust lawyer with law firm Norton Rose in Hong Kong.
Seven years after China’s Anti-Monopoly Law entered into force in 2008, “Chinese authorities are now showing a more confident approach in enforcing the law,” Vanhollebeke says. The two primary enforcement agencies are the National Development and Reform Commission (NDRC) and the State Administration of Industry and Commerce (SAIC).
The clearest indication that Chinese regulators are serious about enforcement occurred this month, when chipmaker giant Qualcomm was slapped with a $975 million fine—the highest penalty levied against a single company for violating Chinese antitrust law.
Antitrust experts offer several reasons for China’s aggressive antitrust campaign. One likely motivation is to “demonstrate that the Chinese authorities are willing to take positions independent from the decisions of competition authorities in the United States and the European Union,” says Daniel Roules, a partner with law firm Squire Patton Boggs in Shanghai.
Although some critics say the NDRC and SAIC are using China’s antitrust regulations to target Western companies unfairly, other antitrust experts question how much evidence exists for that argument.
Vanhollebeke says Chinese antitrust authorities tend to focus their enforcement efforts on those sectors that may harm the Chinese economy. “Foreign companies are active in some of these industries and, therefore, their conduct is more likely to be subject to antitrust scrutiny than in other less prominent sectors,” he says.
Given China’s aggressive antitrust enforcement regime, companies in China today should adopt an antitrust compliance program that includes training local management on how to respond to a dawn raid, Roules says. “Then review periodically with the management to confirm that they remain familiar with the program in case the need ever arises,” he says.
During these raids, authorities usually demand wide-ranging access to offices, computers, and documents they believe may contain evidence relevant to their investigation. “In China, authorities have been known to seize entire laptops,” says Mark Jephcott, head of the antitrust practice at law firm Herbert Smith Freehills in Hong Kong. “In short, any document that falls within the ambit of the authorities’ investigation is fair game.”
“Foreign companies doing business in China need to know that Chinese antitrust authorities have far-reaching enforcement powers, and that the procedural safeguards are not the same as those which may apply in the United States.”
Maxime Vanhollebeke, Antitrust Lawyer, Norton Rose
“A company under investigation in China should generally extend to the Chinese authorities respectful but managed cooperation, without volunteering commentary or confessions or offering documentation that has not been requested,” Roules says.
Jephcott even urges executives to remember the simple things: exchanging business cards and offering tea or coffee and lunch are important gestures of cooperation, he says. Plus you get the investigators’ contact information, which can often be hard to track down otherwise, he adds.
“A dawn raid can be a stressful event for a company and its employees,” says Vanhollebeke. “If the company is not adequately prepared, it may be a rather chaotic event.”
Some companies even carry out mock raids, where a third party—usually a law firm—simulates an on-site investigation to train employees on what to do if they ever face a real investigation. These mock raids can cover everything from specific protocols to be followed by the reception staff to how to deal with interviews, Jephcott says.
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.
Dawn raid guidelines should include dos and don’ts, Vanhollebeke says. For example, in most jurisdictions, including China, tampering with evidence—such as deleting potentially relevant e-mails—may lead to sanctions being imposed on the company and the employees involved.
In addition to rolling out training and antitrust compliance programs, Vanhollebeke advises having access to experienced in-house or external legal resources, who can quickly be on the ground to assist and advise the company during a dawn raid.
United States Versus China
Antitrust investigations under China’s enforcement regime are less transparent than those in the United States, and fewer procedural safeguards exist, Vanhollebeke says. In particular, China has no detailed written procedural guidelines on how to conduct investigations, he says.
“In practice, Chinese authorities enjoy a wider discretion in the conduct of these investigations compared with their foreign counterparts,” Vanhollebeke says. From a practical standpoint, it’s difficult for companies to resist the production of a particular document on the basis that it is irrelevant to the investigation, he says.
When faced with an investigation by Chinese authorities, most Western companies choose to cooperate fully with the Chinese government, says Ronan Diot, a senior associate with law firm Norton Rose in Beijing. Few complain about the lack of transparency, for fear of facing retaliation, he says.
Furthermore, unlike the United States, China does not recognize attorney-client privilege. Therefore, documents that would be protected from discovery in the United States could still be seized by Chinese antitrust authorities, says Vanhollebeke.
Lack of transparency in enforcement also is an issue. Chinese authorities have no obligation to publish their enforcement decisions, and the underlying investigation records remain non-public, which complicates the defense strategy of companies under investigation, Vanhollebeke says.
Despite differences between the U.S. and Chinese legal systems, companies should handle Chinese investigations the same way they would handle an investigation led by U.S. or EU regulators. “For example, ask to see any search warrant, and if there is no warrant, don’t consent to an investigation,” Roules says. “Ask the lead investigator to identify the scope of the investigation, do not allow investigators to wander and search at random, and keep a record of any items removed.”