By Jinrong Liu｜Alex Liu｜Xiang Wang｜Lynn Chen
I. Case Overview
Since March 2013, the Price Supervision and Anti-Trust Bureau under the National Development and Reform Commission (”NDRC”) had implemented an anti-price monopoly investigation against the following nine infant milk powder manufacturers: Guangzhou Biostime Biological Products Co., Ltd. (“Biostime”), Mead Johnson Nutrition China Co., Ltd. (“Mead Johnson”), Dumex Infant Food Co., Ltd. (“Dumex”), Abbott Laboratories Trading (Shanghai) Co., Ltd. (“Abbott”), Friesland Food Trading (Shanghai) Co., Ltd. (“Friesland”), Fonterra Trading (Shanghai) Co., Ltd., Wyeth Nutrition (China) Co., Ltd. and Wyeth (Shanghai) Trading Co., Ltd. (collectively, “Wyeth”), Zhejiang Beingmate Scientific-Industrial- Trade Company Limited by Shares (“Beingmate”) and Meiji Dairies Trading (Shanghai) Co., Ltd. (“Meiji Dairies”).
On August 12, 2013, the NDRC released a piece of news - Certain Milk Powder Manufacturers Like Biostime Had Violated the PRC Anti-monopoly Law (“AML”) by Conducting Competition-Restrictive Activities and thus having been Penalized for RMB 668.73 Million (“News”). As indicated by the News, the NDRC found that (i) the accused manufacturers used various methods to maintain the resale prices against retailers, including fixing a price for resale and restricting the minimum price for resale; (ii) these actions, as a matter of fact, were treated as reaching and implementing a monopoly agreement and thus violated Article 14 of AML; and (iii) during the investigation, all accused manufacturers acknowledged that they had violated AML and failed to prove that they could be qualified for exemption under Article 15 of AML.[Endnote 1]
Pursuant to Article 46 of AML, the NDRC made its decision to punish six of these nine involved manufacturers (collectively, the “Punished Manufacturers”) in a form of fine totaling RMB 668.73 million (approximately, US$[110] million) for their illegal activities. Meanwhile, Wyeth, Bingmate and Meiji Dairies were exempted from punishment because they proactively (i) informed the NDRC of the relevant information about the monopoly agreement, (ii) provided critical evidences and (iii) implemented rectifications.
Following the penalties, all the Punished Manufacturers have put forward their specific rectification measures, which included (i) ceasing all illegal activities immediately; (ii) amending the distribution contract, sales policy and business policy immediately to make them comply with Chinese laws and regulations; (iii) rectifying the sales system and providing antitrust training to all employees to ensure each employee’s behavior will conform to Chinese laws and regulations; and (iv) taking specific measures to eliminate the adverse effects so as to ensure consumers’ benefits.
As of the latest practical date, the above mentioned rectification measures are being implemented in progress.
II. Comments
A. Violating AML by Reaching and Implementing Vertical Monopoly Agreement
After investigation, the NDRC has found that the accused milk powder manufacturers had implemented punitive and binding measures against distributors and retailers, including but not limited to contract, direct and covert fines, rebates, cutting and ceasing supply. Once distributors and retailers did not resell the infant milk products as per the price or minimum price set by the accused milk powder manufacturers, they would be penalized and sustain losses. The NDRC has determined that these restrictions and punitive measures would effectively exclude competition among distributors and retailers for the products of the same brand, which had actually established a vertical price monopoly agreement, fixing the price of products or restricting the minimum price of them.
Generally, there are two principles applied in determining whether a vertical monopoly agreement is legal, (1) per se illegal and (2) rule of reason. Per se illegal principle refers to some competition restrictive behaviors are illegal once confirmed, no matter whether they are pro-competitive or anti-competitive. In legal practice, the per se illegal principle should apply to the following monopolistic agreements, including but not limited to the horizontal price-fixing monopoly agreement (i.e. price cartels or hard core cartels), dividing sales market, allocating sales targets/customers, boycotting agreements and resale price restriction agreement. The above-mentioned agreements could be considered as violating AML and should be punished once the conclusion of such agreements is confirmed.
However, under the rule of reason, some anti-competitive behaviors are not necessarily illegal. It depends on the specific situation. In detail, AML enforcement authorities and courts should investigate the purpose/ways/results of the actions of the operators carefully, in order to determine the reasonableness of the restriction. If the restriction is unreasonable, it should be prohibited for violation of AML; if not, then it shall be permitted.
In this case, the NDRC stated in the News that the monopolistic behaviors of the involved manufactures have violated Article 14 of AML, by “unfairly maintaining the high price of selling milk powder, severely precluding and restricting the price competition under same brand, weakening the price competition under different brands, destroying the fair and ordered market competition and infringing the interest of consumers.” Therefore, we can see the NDRC has considered the effects of the acts of the involved manufactures on competition order and consumers interest. These words stressed on the perniciousness of those behaviors and provided the justification of punishment. However, according to the publicized facts, we cannot see whether the NDRC has taken the harmful consequence as an essential requirement of imposing punishment. Therefore, it is unclear which principle the NDRC applied in this case and requires the NDRC to clarify.
B. The NDRC Exercising Its Right of Discretion to Determine the Penalty
As stated in the News, the NDRC has imposed a fine of RMB 162.9 million on Biostime, about 6% of its previous year’s sales, due to its severity and no active rectification. Mead Johnson who did not proactively cooperated with the investigation but proactively rectified was fined RMB 203.76 million, about 4% of its previous year’s sales. Dumex Abbott, Friesland and Fonterra were fined about 3% of their previous year’s sales, RMB 171.99 million, RMB 77.34 million, RMB 48.27 million and RMB 4.47 million, respectively. This is the most serious penalty imposed by the NDRC so far.[Endnote 2]
According to Article 46 of AML, AML enforcement authorities are empowered to impose a fine of between 1 and 10 percent of the previous year's sales. As one of AML enforcement authorities, the NDRC has the discretion to penalize the business operators failing to conform to the legislation. In this case, the NDRC focused on the severity of violation and attitude of the violating business operators，i.e. proactively cooperating in the investigation and rectifying their illegality, to determine the amount of penalty on the milk powder manufacturers. The NDRC exercised its discretion in this case.
C. Application of the Leniency Policy
The paragraph 2 of Article 46 of AML provides the Leniency Policy. The Leniency Policy under AML is also called voluntary surrender in exchange for a lighter or mitigated punishment policy. It means that if the business operators involved in cartels confess to AML enforcement authorities before being discovered or investigated, the penalty on them could be mitigated or exempted. This policy effectively facilitates uncovering of some deeply hided cartels, disintegrates them from inside， therefore, mitigates the difficulties in detecting and investigating this kind of cartels.
As mentioned above, the NDRC has taken into consideration the factors such as cooperation and rectification provided by the manufacturers when making the penalty decisions and exempted some manufacturers due to their rectification efforts. This is a case of the application of the Leniency Policy.
III. Legal Implications
A. The Illegality of Vertical Monopoly Agreement
Vertical monopoly agreements under AML are reached by and among the manufacturers and distributors, wholesalers and retailers or other business operators with a vertical relationship in the chain of production and distribution. These entities are complementary rather than competitive with each other from economic perspective[Endnote 3]. Although these vertical monopoly agreements are not reached among competitors, they could also negatively affect the competition, mainly by creating price cartels, i.e. forming monopolistic high price and seizing monopolistic profit, which would damage consumers’ interest in hence.
Vertical monopoly agreements on price-fixing and restricting minimum price, for their obvious effect on competition, are main cartels regulated by AML. In practice, corporations might be involved into a price cartel without realizing its illegality and thus violated AML. Therefore, corporations should pay more attention to the vertical monopoly agreements during the course of business operation, in order to identify the legal risk in advance and take preventive measures.
B. Under the Leniency Policy, Proactively Reporting to and Cooperating with AML Enforcement Authorities Could Get Liability Mitigated or Exempted
Article 14 of the Regulations on Procedures for Enforcement of Administrative Law on Anti-Price Monopoly (“Regulation”) issued by NDRC in 2010 provided that it would mitigate or exempt the liabilities of business operators in accordance with the order of the relevance of the information reported and the importance of the evidence provided:
“[w]here the operator takes its initiative to report to the price control authority the relevant information on conclusion of price monopoly agreements and provide important evidence, the price control authority may reduce or exempt punishment on the operator, as the case maybe. For the first operator to report the relevant information on conclusion of the price monopoly agreement and to provide important evidence, the punishment may be exempted; for the second operator to report the relevant information on conclusion of the price monopoly agreement and to provide important evidence, the punishment may be reduced by no less than 50 percent; for others that take the initiative to report the relevant information on conclusion of the price monopoly agreement and provide important evidence, the punishment may be reduced by no more than 50%. The “important evidence” refers to the evidence that is critical for the price control authority to determine a price monopoly agreement.”
This regulation provides detailed rules for the application of the Leniency Policy, which further restricts the discretion of the NDRC in enforcing the law and clarifies the relationship between the proactive attitude of business operators and their legal liabilities.
C. Abuse of the Leniency Policy.
The Leniency Policy could be used to attack competitors by organizing cartels, i.e. a corporation takes the lead in organizing its competitors to reach and implement a monopoly agreement and later reports to AML enforcement authorities proactively to get exemption under the Leniency Policy while its competitors get punished. This is an abuse of the Leniency Policy. It is a direct stroke to competitors and is harmful to the fair competition. Therefore, it is necessary to distinguish this kind of corporations in practice.
To tackle this problem, the State Administration for Industry and Commerce has stated in the Provisions on the Procedures for the Administrative Organs for Industry and Commerce to Investigate Cases Concerning Monopoly Agreement and Abuses of Dominant Market Positions that the Leniency Policy is not applicable to the organizers of monopoly agreements. However, as indicated by Article 14 of the Regulation, the NDRC have not clarified as to how to deal with it when the exempted operator(s) is the organizer of core cartels. In this case, the NDRC have not clarified as to whether it had taken this situation into consideration when deciding as to whether to exempt these three milk powder manufacturers. This problem requires a further clarification by the NDRC.
Therefore, corporations should protect themselves from being involved into such maliciously organized cartels. If being investigated, they could disclose this malicious behavior to AML enforcement authorities.
Mr. Jinrong Liu is the managing partner of Global Law Office and a member of Beijing Municipal Committee of Chinese People’s Political Consultative Conference. Mr. Liu specializes in capital markets, M&A, PE/VC and taxation. (E-mail: liu@glo.com.cn)
Mr. Alex Liu is a Beijing-based partner with Global Law Office who specializes in takeover and restructuring of listed companies, cross-border M&A, onshore and offshore IPOs, debts financing, PE/VC investment, FDI and overseas investment, antitrust and transaction tax. (E-mail: alliu@glo.com.cn)
Ms. Lynn Chen is Beijing-based legal assistant with Global Law Office who specializes in corporate, Anti-monopoly Law, M&A and PE/VC. (E-mail: chenlinlin@glo.com.cn)
Endnote 1: Certain Milk Powder Manufacturers Like Biostime Had Violated the PRC Anti-monopoly Law (the “AML”) by Conducting Competition-Restrictive Activities and thus Be Penalized for RMB 668.73 million (approximately, US$[110] million), The Policy Research Office of National Development and Reform Commission, see http://www.sdpc.gov.cn/xwfb/t20130807_552991.htm (last visited on August 23, 2013).
Endnote 2: On Dec. 14, 2011, two pharmaceutical companies of Shandong were fined of RMB 7 million. On Jan. 4, 2013, six manufactures were fined of RMB 0.353 billion for conspiring to manipulate the price of LED panels. On Feb. 22, 2013, Maotai and Wuliangye were fined of RMB 0.447 billion for monopolizing the prices. On Aug. 12, 2013, Shanghai gold companies were fined of RMB 10.0937 million.
Endnote 3: WANG Xiaoye, Detailed Annotation to Anti-Monopoly Law of PRC, Beijing, Intellectual Property Press, Page 101 (2008).
