Chinese Authorities Fine LCD Cartel Members in NDRC’s First Global Cartel Decision

by Orrick, Herrington & Sutcliffe LLP

China’s National Development and Reform Commission (NDRC) has fined six liquid crystal display (LCD) manufacturers a total of RMB 353 million (USD 56 million) for their participation in a cartel to fix the price of LCD panels on the Chinese mainland between 2001 and 2006. These are by far the highest penalties ever imposed by the NDRC, though they are much less severe than those imposed by the United States and the European Commission, not to mention the prison sentences handed down to executives of the cartel members by U.S. courts.

The case also marks the first time the Chinese authorities have imposed such penalties on foreign companies following investigations in the U.S. and Europe. It sends a clear message that the NDRC now feels ready to take on international cartels.

Background on the NDRC Decision

According to the NDRC, the investigation was triggered by complaints about price-fixing from Chinese customers of the companies involved; Korean companies Samsung and LG; and Taiwanese companies AU Optronics, Chunghwa Picture Tubes, Chimei InnoLux and HannStar. During the period between 2001 and 2006, LCD panels accounted for about 80 percent of the production cost of color televisions. According to the NDRC report, the companies confessed that during this period they held 53 meetings to fix the price of panels supplied to the mainland Chinese market. The NDRC says that the companies sold more than 5 million LCD panels in mainland China during the period in which the cartel operated, making an illegal gain of RMB 208 million (USD 33 million). The authority ordered the LCD manufacturers to pay back RMB 172 million (USD 27.7 million) to Chinese television makers damaged by the cartel, and fined the companies RMB 144 million (USD 22.9 million). The government also confiscated RMB 36.75 million (USD 5.8 million) of the illegal gains. Samsung and LG received the highest fines of RMB 101 million (USD 16 million) and RMB 118 million (USD 8.8 million), respectively. The NDRC says that LCD manufacturers “have been given lenient punishment” according to their degree of cooperation with the investigation because they “voluntarily confessed their illegal activities.”

In addition to financial penalties, the NDRC imposed a set of commitments on the LCD manufacturers. The companies have promised to “strictly observe Chinese laws,” to “fairly supply” Chinese television makers with new technologies, and to extend LCD warranties in China from 18 to 36 months, which could save manufacturers RMB 395 million (USD 62.7 million) a year in maintenance costs.

Implications of the NDRC’s Actions

Although the financial penalties imposed by the NDRC are dwarfed by those imposed by the authorities in the EU and the U.S. for similar activities, the NDRC's action is a significant milestone in the development of antitrust enforcement in China and is important for a number of reasons.

First, it confirms recent indications that the Chinese authorities intend to expand the scope of their enforcement activities. Until this action, China’s activities in the field of antitrust enforcement, particularly those which affected foreign companies, mainly focused on merger control. An investigation into proposed price increases by Unilever early last year, which resulted in a RMB 2 million fine (USD 318,100) for Unilever, had previously been China’s only investigation of a multinational company related to pricing issues, and this investigation did not involve price-fixing. This is the first time the Chinese authorities have acted against a multinational cartel following similar investigations in other jurisdictions. In light of the recent bilateral cooperation arrangements the Chinese authorities have entered into with their counterparts in the EU and the U.S., in particular, it is likely we will see similar investigations in future.

Second, the use of the leniency principle is notable. Although China’s Anti-Monopoly Law includes the concept of leniency, companies so far have been reluctant to make leniency applications because the procedures are unclear, there is no guarantee, and, until recently, no precedent. The use of the leniency principle in fixing the level of fines imposed in this case comes shortly after the same principle was applied by the NDRC in order to uncover evidence of a domestic price-fixing cartel reported by the NDRC last month. The message is clear:  Companies can and should make use of the leniency principle.

Finally, it is noteworthy that the LCD cartel was investigated under China’s Price Law because the behavior in question took place before the Anti-Monopoly Law came into force. The Price Law fixes fines for such behavior at five times the illegal gains. Had the activities been handled under the Anti-Monopoly Law, the fines would have been much higher.

Overall, this decision highlights the fact that companies need to consider carefully their approach to regulatory compliance and, in particular, competition law compliance in China. The two recent cartel decisions by the NDRC, one concerning domestic companies and one concerning multinationals, show clearly that the Chinese authorities are ready to tackle global cartels and are willing to impose high penalties on companies found to have participated in them.

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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