Antitrust Investigations in China: Putting Things in Perspective

by Sheppard Mullin Richter & Hampton LLP

The current press is buzzing with news about the recent increase in antitrust investigations involving foreign companies with operations in China, and reports of foreign companies being told to expect higher fines if they “put up a fight” during investigations. At the same time, the Chinese enforcement agencies have started to make their decisions public. Putting these developments in perspective, the take-away is that antitrust in China should be taken seriously, the enforcement agencies are still in the development stage, and some progress is being made in transparency of decision-making.

China’s Anti-Monopoly Law (“AML”) is a mere five years old. The National Development and Reform Commission (“NDRC”) enforces the AML with regard to price-related anti-competitive conduct such as price-fixing and retail price maintenance while the State Administration for Industry and Commerce (“SAIC”) enforces the AML with regard to non-price related anticompetitive conduct such as market allocation, output restriction and joint boycotting. There are instances where the enforcement will be overlapping and the agencies decide amongst themselves who will take the lead. In general, the penalties for violating the AML include fines that can range from 1% to 10% of the turnover of the preceding year, orders to terminate illegal conduct or confiscation of illegal gains. The AML and relevant rules do not explain what type of turnover—worldwide, China, or solely the business related to the violation—will be the basis for the fines. But so far, the agencies have interpreted turnover as commerce related to the relevant business.

The NDRC has been particularly active, fining infant formula producers as well as the gold jewelry trade association and five stores, in addition to investigating companies in the pharmaceutical and medical equipment industries. The NDRC has also authorized industry associations, such as the Chinese Auto Dealers Association, to solicit from foreign companies information related to contracts and sales structures for purposes of antitrust compliance review. These “private inquiries” may imply government fines and even potentially antitrust action if they are not satisfied. In addition to the NDRC, SAIC is also active. It is currently investigating, for example, Tetrapak, the food-packaging giant, for abuse of market dominance.

According to a Reuters news article, in-house lawyers from foreign companies recently attended a training workshop conducted by officials from the three antitrust enforcement agencies. During the meeting, an official from the NDRC stated that if they “put up a fight” during investigations, “I could double or triple your fines.” According to the article, the NDRC did not respond to follow-up inquire from Reuters. The latest reports indicate that the NDRC is trying to soft-pedal the incident, suggesting its official was “misunderstood”.

Chinese enforcement agencies acknowledge the need for transparency in decision-making. Merger filing decisions for conditional approvals have been published since the AML has come into effect, in 2008. In 2012 the Ministry of Commerce (“MOFCOM”), the agency responsible for reviewing mergers, started to publish a list of all transactions that have been cleared. SAIC, starting this August, implemented its new transparency program by publishing its decisions on antitrust investigations that were concluded between 2010 and 2013. NDRC is contemplating a platform for releasing decisions.

It is important to remember, however, that China’s antitrust enforcement agencies are not independent, and are also advocates of government policies for promoting the development, management and regulation of private investment. For example, the January 22, 2013 policy guidelines issued by 13 agencies (including the agencies responsible for enforcing the AML) contain broad sweeping statements about how consolidations will put Chinese companies on a better footing to compete globally and identify nine key industries dear to China—automobile, steel, cement, shipbuilding, electrolytic aluminum, rare earths, electronic information, pharmaceuticals and agricultural processing. Although the respective antitrust departments of each of the agencies maintain that they are independent of the other departments responsible for promoting domestic industries, it is still a very different structure from other enforcement regimes, particularly in the West.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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