By Alan Zhou｜Sean J. Pratt｜Hang Fan
I. Case Overview
On August 12, 2013, the National Development and Reform Commission (the “NDRC”) announced that the Shanghai Gold & Jewelry Trade Association (the “Gold Association”)[Endnote 1] and five individual gold retailers in Shanghai conspired to manipulate the retail price of gold and platinum jewelry in Shanghai’s market in violation of articles 16 and 13 of the Anti-monopoly Law of the People’s Republic of China (“AML”) by conceiving of and implementing an internal Gold Association agreement called the Self-Regulatory Rules Re Pricing of Gold and Platinum Jewelry in Shanghai (the “Price Self-Regulatory Rules”). In accordance with article 46 of AML, the Gold Association was fined RMB 0.5 million, while the five gold retailers were individually fined a total of RMB 10.0937 million, a figure which represents 1% of their respective relevant revenues in 2012.
Gold market analysts had noted for quite some time that retail gold prices posted by Shanghai’s major gold retailers were highly consistent with each other and varied wildly from the actual market price. As a result, the Shanghai Municipal National Development and Reform Commission (also known as the Shanghai price bureau; hereinafter referred to as the “SHDRC”) was authorized by the NDRC to launch an investigation into suspected monopoly behavior. The investigation revealed that the Gold Association invited Lao Feng Xiang (600612. SH) and other notable gold retailers in Shanghai to attend a board meeting to discuss drafting the Price Self-Regulatory Rules, which would ultimately stipulate a calculation method, pricing formula, and marginal fluctuation range for setting the retail price of gold and platinum jewelry. The investigation revealed that Lao Feng Xiang, Lao Miao, First Asia (Ya Yi), Cheng Huang Jewellery, and Tian Bao Long Feng were all found to have consistently priced their gold and platinum jewelry within the given range established in the Price Self-Regulatory Rules.
However, it is worth noting that several other gold retailers who were also members of the Gold Association, including Hong Kong based companies Chaw Tai Fook and Chow Sang Sang, were not given administrative penalties even though it was reported that their activities had also been closely investigated.
The Shanghai Gold Price-fixing Cartel Case (this “Case”) raises some key questions about price related agreements and trade associations in the context of the AML: i) how to judge whether an agreement restraining price concluded among competing business operators is illegal; ii) when are the activities of a trade association susceptible to charges of anti-competitive behavior; and iii) how can members of a trade association distance themselves from activities which could lead to their individual liability for anti-competitive behavior under the AML?
II. Legal Analysis
A. Antitrust Theory and Unreasonable Activities of A Trade Association
Agreements reached between or among competitors such as the members of the Gold Association are called as horizontal agreements in the context of the AML. In contrast to vertical agreements, which are formed between business operators and their upstream and downstream trading counterparts, horizontal agreements are viewed by AML enforcement authorities as particularly suspicious because it is much more likely that agreements between market competitors will harm market competition through unreasonable restraints which ultimately jeopardize consumers’ interests. Antitrust regulators in all jurisdictions consider horizontal agreements to be a classic form of anticompetitive behavior between competitors seeking to manipulate their respective product markets. US and EU anti-trust laws single out horizontal agreements to fix or restrain prices as absolutely devoid of any benefit to the market place, labeling them per se illegal, and the parties to the agreement as members of a hard core cartel. In the end, while some horizontal agreements made between competitors do not have anti-competitive effects, they will always be the subject of close scrutiny by antitrust regulators.
Trade associations tend to attract the attention of antitrust regulators since they typically consist of competitors in the same industry, and are a natural environment for horizontal agreements to be formed. Trade associations can play a legitimate role in promoting competition by unifying product specifications or standardizing business operations through the organized and free exchange of market information,. However, they can just as easily be a platform for unscrupulous operators to manipulate the market for their own benefit. As Adam Smith wrote more than two hundred years ago, “[p]eople of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” It’s clear that an outright trade association scheme to fix prices such as the one internally formed by the Gold Association in this Case can serve no other purpose than to restrain competition to the advantage of the member companies who have joined the scheme. Indeed, some trade association activities could be just as harmful to the market as those obvious price fixing monopoly agreements. It is important to remember that a trade association, which is a well-organized congregation of competitors, could be just a few small steps away from being deemed a hard core cartel at any moment. Because it is such a tricky platform for its members, it would be wise to clearly identify when the activities of a trade association cross the line from a reasonable exchange of information and ideas into a conspiracy to restrain the market competition to the advantage of its members.
B. Comparison Study with US Judicial Practice Regarding Unreasonable Activities of A Trade Association
Two US Supreme Court decisions which contrast anti-competitive and legitimate trade association activities may give some insight into what the NDRC may deem as reasonable trade association activities in future cases.
1. American Column & Lumber Co. v. United States, 257 U.S. 377 (1921) (the “Lumber Trade Association Case”)
The Lumber Trade Association was a trade association consisting of 400 members and controlled 33% of the relevant market. The association promoted an Open Competition Plan (the “Plan”) which requested every member to report regularly to the association details on past and current sales of lumber, names of purchasers, members’ rates of production and inventory on hand, and estimates on future production. Upon collection such information, the association provided organized information to the members. Even though the Plan was not compulsory, there were 365 members of the 400 member joined the Plan when the Lumber Trade Association Case started.
In the Lumber Trade Association Case, the US Supreme Court regarded ordinary business operators would not disclose such detailed report on their market activities regularly or made such frequent and comprehensive information exchange. Even though a specific monopoly agreement was not formed, the Plan was quite clear for the purpose of restraining trade. Just as the members’ own words, “knowledge regarding prices actually made is all that is necessary to keep prices at reasonably stable and normal levels.” In addition, relevant investigation found enforcement of the Plan had caused raise of lumber price. Therefore, the court held that the Plan amounted to a conspiracy to raise prices in violation of US anti-trust laws.
The court also distinguished the Plan and public market information: the Plan was only available for sellers while public market information shall also be available for purchasers at same time; and there shall be no contents in public market information such as advices of conducting concerted activity to obtain profits.
2. Maple Flooring Manufacturers' Assn. v. United States - 268 U.S. 563 (1925) (the “Maple Flooring Manufacturers Association Case”)
In contrast, the US Supreme Court held in the Maple Flooring Manufacturers Association Case that a similarly well documented and thoroughly detailed ongoing exchange of market information among operators in command of 70% of their product market was not an unreasonable restraint on trade under US antitrust laws.
The issues for the association in organizing information sharing among these competitors consisted primarily of four main topics: i) gathering and disseminating the average cost of their products; ii) compilation and dissemination of freight rates; iii) individual reporting and subsequent anonymous dissemination of recent sales and inventories; and iv) meetings in which members met to exchange views on the industry and its problems.
The court noted that i) it was impossible to identify any effect on prices of the products caused by the current factors complained of, and any evidence of adverse impact on consumers (in fact, comparatively lower prices were generally reported during the alleged conspiratorial period); ii) all the reports regarding sales revenue and prices were from already completed transaction, instead of any current situation. All the data collected by the association were published on relevant magazines and reported to FTC and other pertinent authorities which means nature of those data is not different from those public posted one; iii) No price related issues had been discussed among members during internal conference. Although members made similar decisions based on those data provided by the association which may be a cause of long-term stable price, it was not sufficient to find any collusion led by the association. Antitrust law does not simply prohibit data collecting and releasing.
In the end, the court concluded that the conduct of the trade association in this case was simply the conduct of intelligent operators and that the specific activities listed in the complaint were not evidence of an unlawful restraint of commerce in the absence of actual or attempted agreement to fix prices or output.
What we can see from these two cases is that explicit activities by members of a trade association which seek to set or stabilize future prices or production are most likely to have the real effect of restraining trade without any benefit to the consumer; whereas gathering and analyzing past prices and production in generalized and nonspecific terms, are simply intelligent business practices.
C. The Current PRC Regulations on Price Related Monopoly Agreements and Monopoly Promoted by Trade Association
1. Price Related Monopoly Agreements under the AML
The AML prohibits competing business operators from concluding agreements, decisions and other concerted conduct designed to eliminate or restrict competition, describing all of these behaviors collectively as monopoly agreements. Article 13 of the AML identifies five typical monopoly agreements, including monopoly agreement for “fixing or changing commodity prices.”
As the authority supervising price related monopoly, the NDRC has promulgated the Provisions of Prohibiting Price Related Monopoly (the “Provisions”) as part of their regulatory framework for maintaining a competitive market. Article 7 further lists typical horizontal monopoly agreements related with price: (1) fixing or changing the price of commodities and services (hereinafter, "commodities"); (2) fixing or changing the range of price changes; (3)…; (4) adopting the agreed prices as the basis for transactions with a third party; and (5) agreeing to adopt standard formulas in calculating prices.
2. Monopoly Promoted by Trade Association under the AML
Regulations regarding trade association related monopolies are also located under the same chapter as monopoly agreement regulations in the AML. Article 16 of the AML stipulates that trade associations may not organize business operators in their respective trades to engage in any monopolistic practices related to monopoly agreements. Article 9 of the Provisions explicitly prohibit trade associations from engaging in (1) formulating rules, decisions or notices to eliminate or limit price competition; (2) organizing business operators to conclude price monopoly agreements forbidden by these Provisions; and (3) any other acts related to organizing business operators to conclude or implement price monopoly agreements.
3. Legal Liability
Article 46 of the AML provides that where a business operator concludes and implements a monopoly agreement, the anti-monopoly enforcement authorities shall instruct it to discontinue the violation, confiscate its unlawful gains, and, in addition, impose a fine of 1% to 10% of its sales in the previous year; if such monopoly agreement has not been actually implemented, it may be fined no more than RMB500, 000.
Where a trade association has organized business operators in the trade to reach a monopoly agreement in violation of the provisions of the AML, the AML enforcement authority may impose on it a fine of not more than RMB 500,000. If the circumstances are serious, the administrative department for the registration of public organizations may cancel the registration of the trade association in accordance with law.
D. Analysis on the Shanghai Gold Price Fixing Case
The SHDRC had sufficient legal grounds and evidence in this case to identify the Gold Association agreement as an impermissible restraint on trade under the AML. But, the fines and the manner of enforcement show that the enforcer of the AML has great discretion in penalizing the violator.
Although administrative documents which give specific details on the grounds for the decision and the penalty determinations of the SHDRC are not accessible to the public, the public notifications on the case made by two listed companies, Lao Feng Xiang and Yu Yuan Tourist Mart (shareholder of Lao Miao and First Asia), disclosed certain contents abstracted from the Administrative Penalty Decisions issued by SHDRC. We learn from those notifications that the SHDRC had concluded that the companies involved in this case violated article 13 of the AML and article 7 of the Regulation mentioned above.
According to the NDRC’s public announcement and relevant media reports, the Gold Association organized major member gold retailers to discuss and conclude the Price Self-regulatory Rules on several occasions, during which time they agreed to benchmarks and ranges of gold and platinum’s retail price by agreeing to a price calculating method and formula. Moreover, the Price Self-regulatory Rules, which were decided upon and issued by the Gold Association, were circulated to all the Gold Association member gold retail stores, many of which may have complied with these rules. It was determined that this behavior may have significantly increased the possibility of restraining competition in Shanghai’s gold and platinum retail market, and which essentially amount to agreements to fix the prices. In the end, it was determined that the Price Self-regulatory Rules were classic horizontal monopoly agreements, and thus the Gold Association and relevant gold retailers were deemed to have breached the AML by agreeing to and implementing the Rules.
In addition to participating in the discussion and concluding the Price Self-regulatory Rules, it was revealed in the investigation that five gold retailers (Lao Feng Xiang, Lao Miao, First Asia, Cheng Huang Jewellery, and Tian Bao Long Feng) actually implemented the Rules. The retail price of gold and platinum in those stores kept falling within the scope arranged according to the Price Self-regulatory Rules, and the timing and fluctuation in the change of the retail gold price in each of these competitor stores was shown to be nearly identical.
In terms of fines, SHDRC only imposed on Lao Feng Xiang, Lao Miao and First Asia administrative fines equivalent to 1% of their respective relevant revenues in 2012, in the amount of RMB 3.2329 million, 3.6013 and 1.4183.
It’s worth noting that there was no confiscation of illegal gains, and that the fines were also much lower than corresponding fines in other recent anti-monopoly cases. In this case, the SHDRC fined the violators merely one percent of their relevant annual revenue for 2012, the lowest rate under the Regulations. The AML and the Regulation do not provide accurate definitions of the base amount in calculating fines. In this Case, the fines were calculated on the basis of violators’ relevant revenues from the previous year, instead of their total revenue. As it is reported, relevant revenues hereof are the revenues in Shanghai. The reasons provided by the SHDRC for imposing those rather lenient punishments are that those violators terminated the monopoly agreements, cooperated in investigation and made rectification actively.
E. The Enforcement Practice against Price Related Monopoly Agreements by the Anti-Monopoly Administrative Authorities
NDRC and its authorized counterparts at the provincial (direct-controlled municipality) level are in charge of administrative enforcement against price related monopoly agreements under the current enforcement system of the AML. Even though horizontal monopoly agreements are distinguished from vertical monopoly agreements under the AML, such difference is not indicated in the enforcement practices of NDRC according to relevant case briefs on its official webpage. The NDRC simply tends to describe the effect of monopoly agreements on restricting or eliminating competition without in-depth economic analysis or corresponding evidence collection. Administrative penalties may not be lighter for a price related vertical monopoly agreement because of their complex effect on competition; on the contrary, the penalties can even be more severe than those price related horizontal monopoly agreements which have an even more significant likelihood of restricting competition.
F. The Judicial Practice against Price Related Monopoly Agreements by PRC Courts
It is true that the AML strictly forbids and penalizes price related monopoly agreements as classic monopolistic behavior, but a recent court case has stirred up some debate on what burden of proof a plaintiff in a civil case must meet to demonstrate that they have a case. Specifically, the issue is whether a plaintiff must show that price related monopoly agreements complained of actually do have the effect of “eliminating or restricting competition.”
On August 1st, in Ruibang’s appeal against Johnson & Johnson’s resale price maintenance program (“RPM”), Shanghai’s high court held that the appellant (plaintiff) bears the burden of proving that the RPM agreement has a demonstrable effect of eliminating or restricting competition.
According to the AML’s definition of monopoly agreements, “eliminating or restricting competition” is an essential condition to identifying agreements, decisions or other concerted conduct as monopoly agreements. Since certain behaviors including price fixing are enumerated by article 13 and article 14 of the AML as explicit forms of monopoly agreements, there is a legal presumption that they have the effect of eliminating or restricting competition. Based on such presumption, the AML enforcer or plaintiff in anti-trust civil action only needs to prove existence of monopoly agreements instead of demonstrating further proof of their contents or effect of eliminating or restricting competition. This inner logic hereof shall apply to both horizontal and vertical monopoly agreements.
The Provisions of the Supreme People's Court on Certain Issues Relating to the Application of Law in Hearing Cases Involving Civil Disputes Arising out of Monopolistic Acts （the “AML Judicial Interpretation”）take the opposite position on the question of who bears the burden of proof for horizontal monopoly agreements enumerated by the AML. For those types of agreements, the AML Judicial Interpretation states that the plaintiff does not need to prove that the accused agreement is eliminating or restricting competition; and conversely, the defendant must prove that the problematic agreement does not eliminate or restrict competition. This tends to confirm from a judicial perspective that those enumerated monopoly agreements are presumed by law to restrict competition. Yet, the Shanghai court did not extend this concept to price related vertical monopoly agreements on the theory that the AML Judicial Interpretation only provides this reversed burden requirement for enumerated horizontal monopoly agreements, but not for price related vertical monopoly agreements even though they are also enumerated in the AML.
Based on the current judicial practice of the AML, the AML Judicial Interpretation seems to indicate that courts are in the position of adopting rules similar to the “rule of reason” as applied in U.S anti-trust law decisions when they evaluate potentially monopolistic agreements. While their approach to hard core cartel activities such as horizontal price related monopoly agreements is to shift burden of proof to the defendant to demonstrate that there has been no restraint on trade, vertical price related monopoly agreements, will involve the same burden of proof as proving any ordinary agreement creates a restraint on trade.
III. Legal Implications
A. Trade associations are not shields against the AML
It was merely the recent twenty decades witnessed China’s extensive and intensive market economy reforms. In this round reform, the market gradually discovered prices of most commodities which were formerly mandated by the government. At the same time period, a few trade associations emerged as quasi governmental organizations in those market fields where government exited. As a result, “authoritative price” for certain commodities are still accepted or even believed by the public, which is evidenced by those “guide prices” displayed openly in a few gold retailers’ store or on their webpage.
Although there are aforesaid circumstances, monopolistic conducts arranged by trade associations have been explicitly forbidden by the AML since 2008. Moreover, through this Case, we may find NDRC’s position towards trade association and its member companies in price related monopolistic activity: while certain price related concerted activities appear to be initiated by trade association, antitrust regulators will still hold individual members responsible for their role in the concerted activities of the trade association.
No doubt, trade association activities will always be a focus of an investigation on potential monopolistic agreements among competitors in future. The investigation of these activities will involve a significant amount of fact gathering and interviews with various members of the trade association, so it’s not likely that the parties who have been most direct, vocal and instrumental in the creation of any unlawful price related decisions for the trade association will be able to avoid individual liability for the concerted actions of the trade association.
B. Distinguish your trade association activities from activities of those who may be involved in an unreasonable restraint of trade.
In each of the cases, it must be noted that although each trade association was composed of a certain number of members, not all of them were found to have engaged in antitrust activities. As with most monopoly agreement cases processed by NDRC, the evidence used to prove the violation is almost always some form of written record demonstrating the participants’ willingness to restrain competition. Therefore, it is wise for the key members of an enterprise who attend trade association functions to have a fundamental understanding of what constitutes an unreasonable restraint on trade, and to never comment or participate in discussions or plans for activities which lead or likely to lead to restraint of competition, for instance, not to engage in conduct where future price or input is predicted and be more cautious for inter-association dissemination of specifics on price, output, or consumers in past transaction information being shared. And when they find themselves already encumbered in such a discussion or plan, to explicitly make statements which object to or renounce such activities.
Mr. Alan Zhou is a Shanghai-based partner with Global Law Office who specializes in corporate and M&A. (E-mail: alanzhou@glo.com.cn)
Mr. Sean J. PRATT is a Shanghai-based foreign counsel with Global Law Office who specializes in corporate, anti-trust and compliance (FCPA). (E-mail: sean@glo.com.cn)
Mr. Hang Fan is a Shanghai-based associate with Global Law Office who specializes in corporate and anti-trust. (E-mail: fan@glo.com.cn)
Endnote 1: The Gold Association was established in December 1996 and currently consists of 226 members accounting for approximately 85% of the total market players. All the five gold retailers being fined in this case are key members of the association.
