China Hands Milk Producers the Largest Anti-Monopoly Violation Fine

by Sheppard Mullin Richter & Hampton LLP

On August 7, 2013, the National Development and Reform Commission (“NDRC”) fined six powdered milk companies – five foreign and one Hong Kong-based – RMB668 million (approximately US$109 million) for engaging in anti-competitive practices and illegal price-fixing, the largest fine ever for an Anti-Monopoly Law (“AML”) violation in China.

This historic ruling comes on the heels of a four-month investigation conducted by the antitrust division of the National Development and Reform Commission (“NDRC”). During the investigation, the companies eventually admitted to fixing the prices of powdered milk sold in China. Specifically, per public information, they admitted entering into contracts with distributors to agree to a minimum sales price, practically known as a type of “vertical monopoly.” Some companies, like FrieslandCampina, confirmed they fixed prices, but initially believed it was permissible.

The AML was drafted to prevent unfair and anti-competitive pricing practices. Article 14 addresses the practice commonly referred as “resale price maintenance,” and forbids a vertical monopoly with anti-competitive effect, such as stipulating a specific or minimum resale price for goods provided to downstream parties like distributors or retailers. This is distinct from the practice of providing a “suggested” retail price, which is a genuine suggested price and not a required price. While there are exemptions from the law, if a company is unsure of whether its agreements may potentially violate the law, it is required to apply to the government for approval.

The fine for an AML violation, assessed at the discretion of the NDRC, may range from 1 to 10 percent of a company’s total annual sales revenue. U.S. based Mead Johnson was hit hardest, fined RMB204 million (US$33 million), representing 4 percent of its total revenue in 2012. Biostime of Hong Kong was fined RMB163 million (US$26.6 million), representing 6 percent of its revenue last year. Dumex of France, U.S.-based Abbott Labs, FrieslandCampina of the Netherlands, and Fonterra of New Zealand each received a fine equal to 3 percent of their 2012 revenue. The fines represented RMB172 million (US$28 million), RMB77 Million (US$12.6 million), RMB48 million ($7.8 million) and RMB4 million (US$650,000), respectively.

However, not all powdered milk companies admitting price-fixing were fined. Early on during the investigation, Nestle-owned Wyeth, Japan’s Meiji Holding, and Zhejiang Beignmate, admitted to price-fixing, but fully cooperated with the NDRC under the “leniency program” under Article 46 of the AML. By doing this, and making corrective price adjustments, these companies avoided punishment by the NDRC.

According to a statement from the NDRC, the six companies that were found guilty and fined, must also comply with the following corrective measures: stop the illegal practice, modify the distribution agreements, sales terms, and business policies to comply with Chinese Law, provide AML compliance training to all company staff, and make significant reparative price adjustments for the benefit of consumers. The six companies stated they would not contest the penalties and carry out the corrective measures.

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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