By Competition Department of Global Law Office
I. Case Overview
On January 5, 2013, the National Development and Reform Commission (“NDRC”) announced that it would penalize six international LCD manufacturers (collectively, the “Group”), including (i) the Korean manufacturers Samsung and LG, and (ii) the Taiwanese manufacturers - Chi Mei Optoelectronics Corp., AU Optronics, Chunghwa Picture Tubes, Ltd. and HannStar Display Corporation, for illegal price-fixing activities occurred between 2001 and 2006. This penalty includes compelled restitution, confiscation and fines in the total amount up to RMB 353 million.
The NDRC has, since December 2006, received multiple complaints alleging that the Group had colluded to manipulate the price of LCDs and committed price-related monopolistic conducts within mainland China. The NDRC accepted this case and launched an investigation in accordance with the relevant PRC laws.
During the investigation, the relevant companies of the Group voluntarily reported the facts regarding the price-fixing of the LCDs to the NDRC. Upon the investigation, the NDRC found that the Group held a series of 53 so-called “Crystal Meetings” approximately once a month either in Taiwan or in Korea hosted in turn by the companies in the Group. LCD market information was exchanged and the LCD price was discussed during these meetings. It was determined that when selling the LCDs in mainland China, the Group fixed the market price according to the agreed upon price or the information exchanged at the meetings, which harmed the interests of the other LCD suppliers and the consumers.
The Group sold a total of 5,146,200 units of LCD panels, among which, Samsung accounted for 826,500 units, LG accounted for 1,927,000 units, Chi Mei Optoelectronics Corp. accounted for 1,568,900 units, AU Optronics accounted for 549,400 units, Chunghwa Picture Tubes, Ltd. accounted for 270,600 units and HannStar Display Corporation accounted for 3,800 units. The illegal gain amounted to RMB 208 million. The NDRC ordered the Group to refund the RMB 172 million overcharge to the PRC TV manufacturers, confiscated RMB 36.75 million illegal gains and imposed a RMB 144 million fine. The total amount of the economic sanction is RMB 353 million, among which, Samsung is liable for RMB 101 million, LG is liable for RMB 118 million, Chi Mei Optoelectronics Corp. is liable for RMB 94.41 million, AU Optronics is liable for RMB 21.89 million, Chunghwa Picture Tubes, Ltd. is liable for RMB 16.2 million and HannStar Display Corporation is liable for RMB 240,000.
Presently, the Group has refunded the RMB 172 million overcharge to the PRC TV manufacturers and made the following undertakings: (i) they will strictly abide by the PRC laws, actively maintain the market competition order, and protect the legal interests of other business operators and customers; (ii) they will use their best efforts to supply the products to the PRC TV manufacturers fairly, and provide all customers with the same opportunity of purchasing high-end and new technology products; (iii) they will extend the quality warranty period for the LCDs contained in the TVs sold domestically by the PRC TV manufacturers from 18 months to 36 months.
II. Legal Analysis
A. The PRC Price Law instead of the PRC Anti-Monopoly Law shall apply
The illegal price-fixing occurred between 2001 and 2006. As the PRC Anti-Monopoly Law (the “AML”) was not in effect during that time, the NDRC determined to apply the PRC Price Law (the “Price Law”) rather than the AML.
The Group violated Section 1 of Article 14 of the Price Law by information exchanging and price fixing at the “Crystal Meetings” during the period between 2001 and 2006, which were later implemented in mainland China. Such conducts fell within “colluding with others to manipulate the market price, thus harming the legal interests of other business operators or consumers”, which are prohibited by the Price Law. The quality guarantee period of LCD products provided by the Group is only 18 months which is less than the 36 months of quality guarantee period of television sets installed with LCDs. As a result, the relevant TV manufacturers have to bear the RMB 395 million maintenance costs relating to the LCD problems. The NDRC cited Articles 40 and 41 of the Price Law to order the compelled restitution, confiscation and fines which amounted to RMB 353 million.
B. The fines imposed by NDRC are much less severe than those imposed in other jurisdictions
The setting of price through collective consultation by the Group is a very typical, monopolistic price-fixing conduct. Many jurisdictions have already severely penalized this conduct. In the United States (the “US”), the relevant LCD manufacturers settled consumer and regulatory claims for price-fixing cartel for US$ 553 million in 2010. The European Commission (“EC”) imposed a fine up to € 648 million on the Group for price-fixing cartel in 2011. In sharp contrast, the total amount of the economic sanction imposed by the NDRC on the Group is RMB 353 million.
The fines imposed in the US and the EC were calculated based on the turnover under their respective antitrust legal regimes, while the NDRC-imposed fine was based on the “illegal gains” pursuant to the Price Law. Illegal gains are generally much lower than the turnover amount, so the fines imposed by the NDRC are much less than those imposed by the US and EC.
III. Legal Implications
A. The penalties for post-AML price-fixing conducts are expected to be more severe
Although both the Price Law and the AML require the confiscation of the illegal gains for business operators engaged in monopolistic price-fixing conducts, they are different with respect to the amount of fines which may be imposed. The Price Law requires a fine up to five times of the illegal gains, and the fines under the AML may be equivalent to 1% to 10% of the violator’s sales turnover in the previous year. This is why the NDRC indicated that the penalty would have been more severe had the NDRC enforced the AML instead of the Price Law. In other words, if the monopolistic conducts occur after the AML came into effect, the NDRC and its local counterparts would probably rely on the AML rather than the Price Law when determining the amount of fines.
B. Full cooperation with the PRC antitrust enforcement agencies during the investigation appears to be the best strategy to avoid significant fines
The NDRC implemented a leniency program that has been widely used in the developed countries. Under a leniency program, if a company engaged in the monopolistic conduct voluntarily whistle blows to the antitrust enforcement agencies and provides valuable evidence, it may be granted full or partial relief from the punishment.
In this case, although AU Optronics’ illegal gains were RMB 21.89 million, it received a full relief from being fined because it is the first company that brought the price-fixing scheme to the NDRC’s attention. The other five companies received partial relief for their participation in the price-fixing cartel due to their cooperation. The NDRC granted a total exemption in return for AU Optronics’ full cooperation to enhance the efficiency of evidence collection, which expedited the investigation process.
Therefore, whistle blowing to, and full cooperation with, the antitrust enforcement agencies appears to be the best strategy to avoid significant penalties.
C. Multinational corporations in China may face legal actions initiated by the PRC government
In recent years, the NDRC and its local counterparts enforced the Price Law and AML against domestic enterprises in a series of price-fixing cartel cases, such as paper manufacturing cartel organized by the trade association in Fuyang, Zhejiang Province, rice noodle manufacturing cartel in Guangxi Province, the mung bean distributor cartel in Jilin and Inner Mongolia. As of the end of 2010, there have been a total of 192 cases which were identified as price fixing, but none of them had the involvement of any multinational corporations in China. Prior to the LCD case, the largest penalty imposed was RMB 15 million on 12 cement producers in Liaoning Province, which were found to engage in price fixing, limiting output and dividing the market into different specific territories. In the LCD case, however, by imposing a RMB 353 million penalty, it appears that the NDRC intends to send a message to the multinational corporations that there will be no exemption for multinationals from now on.
D. Prudent corporations should consider implementing precautionary measures for compliance with competition laws
In light of the strengthened enforcement against price-fixing by the NDRC and the local authorities in charge of price administration, it is advisable for companies to consider adopting the following internal procedures to establish, review and improve internal rules to ensure full compliance with the competition laws.
1. Risk identification: identifying the primary risks confronted by the companies related to the competition laws.
2. Ascertaining the level of the identified risks. Risks are usually categorized at high, medium and low levels. Special attention shall be paid to evaluate the degree of the risks confronted by the employees working in the high-risk fields. Such employees include those connected to the competitors and the employees engaged in the marketing activities. In the PRC, price-fixing cartels by horizontal competitors are strictly prohibited. Therefore, a prudent company shall avoid attending any meeting aiming at price-fixing held by the other companies in the same industry or the trade associations.
3. Formulating policies and procedures to ensure the non-occurrence of the identified risks and to respond to the possible emergencies if certain risks materialize.
4. Review: periodically reviewing the above three steps, in order to create an environment for effective compliance of the competition laws. Companies are advised to conduct an annual compliance review. Under some special circumstances, such as when being investigated for failure to comply with the competition laws or when acquiring another company, company should consider additional compliance check outside the regular review.
