China: China's second resale price maintenance investigation this year

Last Updated: 16 July 2013
Article by Susan Ning, Kate Peng, Huang Jing and Li Rui

In May 2013, the National Development and Reform Commission ("NDRC") initiated the investigation against several infant formula companies for the alleged violation of Article 14 of the Antimonopoly Law ("AML").

This is the second investigation by NDRC against resale price maintenance ("RPM"). Early this year, NDRC fined China's famous producers of premium liquor, Kweichow Moutai Co Ltd. (Maotai) and Wuliangye Group Co., Ltd. (Wuliangye) in the amount of RMB 247 million (about USD 39.8 million) for RPM behaviors (Maotai/Wuliangye Case)i . The current investigation is still ongoing and no penalty against any companies has been made.

In both RPM investigations of this year, more than one company was investigated and the investigated companies are competitors with each other. This is an interesting phenomenon because, unlike horizontal monopoly agreements, vertical monopoly agreements do not usually involve collusion among competitors. The media reported that it was the high consumer price for infant formula that triggered the current NDRC investigation. As NDRC is responsible for supervising the price in different industries, the reports likely attracted NDRC's attention in the first place. This may explain why competitors are being investigated at the same time for vertical monopoly agreement in the absence of collusion.

It remains an open question the outcomes of the investigation. Although it is widely conjectured that NDRC would impose large fines on the investigated companies, the AML does provide great latitude as to how the regulators can deal with this type of cases. In the following we will briefly review the various mechanisms set forth in the AML with regard to monopoly agreements investigation.

1. Leniency Program

Paragraph 2 of Article 46 of the AML provides for the general rules of the leniency program. According to this Article, the regulatory authority can, at its discretion, reduce or waive the sanctions imposed on a business operator for its participation in a monopoly agreement if the operator has voluntarily reported the relevant facts of entering into a monopoly arrangement and provided important evidence to the regulatory authority.1

Judging from the structure of the AML, Article 46 generally covers the penalties arising from all monopoly agreements. Article 46 does not distinguish between horizontal and vertical agreements, and thus technically speaking the leniency program provided therein should apply to both horizontal and vertical agreements. To the best of our knowledge, leniency was granted in horizontal agreement investigation and has not been tried in vertical horizontal agreement investigation. However, considering that the purpose behind leniency is to encourage voluntary reports of violation and that there are jurisdictions where leniency program applies to vertical agreement investigation, the regulatory authorities may give the leniency program a broad interpretation to allow it to be applicable to all monopoly agreements. It remains to be seen whether and how the regulatory authorities shall apply the leniency program to vertical monopoly agreements.

Needless to say, to obtain immunity or leniency, the infant formula companies must satisfy the requirements under the AML by providing both the relevant facts of the monopoly agreement and important evidence to NDRC.

2. Suspension of Investigation

AML Article 45 provides a mechanism to suspend investigation. If a company under antitrust investigation undertakes to take timely measures to eliminate the consequences of its alleged monopolistic practices, the AML regulatory authorities may decide to suspend the investigation upon application. The regulatory authorities may exercise its discretion in deciding whether to grant the application. Even if the application is granted, the regulatory authorities shall oversee the fulfillment of the commitments and may nevertheless resume the investigation under certain circumstances.

According to media reports, Dumex, Wyeth, Beingmate, Biostime, Abbott and other companies have lowered their prices or given discount to consumers. It remains to be seen whether the price cut is sufficient to move the NDRC to suspend the investigation.

3. Exemption

AML Article 15 provides exemption for those monopoly agreements that have legitimate purpose. For example, Article 15 (2) exempts monopoly agreements that unify product specifications or standards, or carry out professional labor division for the purpose of upgrading product quality, reducing costs and improving efficiency.2

Theoretically, a company may invoke the exemptions under Article 15 to justify RPM. However, we do notice that NDRC adopts a relatively stringent attitude towards RPM. Based on the publicized decisions of NDRC and SAIC, no exemption has been given to companies under Article 15 up to the present. It can be seen that the regulatory authorities are very prudent in granting exemption under Article 15.

4. Penalties

Article 46 of the AML provides the calculation method for fines regarding monopoly agreement. Where the business operators violate the AML by entering into and implementing monopoly agreements, regulatory authorities shall order them to stop the illegal conduct, confiscate the illegal proceeds and impose a fine of 1% to 10% of the turnover for the previous year.

Based on the turnover of the infant formula companies in the previous year, the amount of the fines could be considerable if NDRC decides to impose fines.

Article 27 of Administrative Penalty Law provides that a party shall be given a lighter or mitigated administrative penalty if the party has taken the initiative to eliminate or lessen the harmful consequences occasioned by its illegal act or has performed meritorious deeds when working in coordination with administrative organs to investigate violations of law. In the Maotai/Wuliangye Case, Sichuan PDRC announced in its public statement that Wuliangye willingly and actively cooperated with the investigators by declaring its commitment to rectify the illegal practices, withdrawing penalties against the distributors, returning the confiscated marketing support fees and changed its practice to comply with AML. Based on the forgoing, Sichuan NDRC imposed a penalty at the lowest end of the applicable penalty range in the amount of 1% of Wuliangye's turnover.

In light of the above, the price-cut and the discounts undertaken by the investigated infant formula companies may be a factor that leads to a lighter administrative penalty. However, NDRC has the discretion to consider a variety of factors before giving any credit to the mitigating actions.

No matter how NDRC decides on the case, the fact that NDRC has conducted two investigations related to RPM conduct shows NDRC's determination to strictly and actively enforce the AML. In an interview regarding the current RPM investigation, an NDRC official said to the media that companies can not claim that they did not know the relevant regulations because the Maotai/Wuliangye Case has been published for more than 6 months.

Furthermore, recent news showed that NDRC extended its ongoing investigation into the infant formula companies to their upstream supplier. Fonterra confirmed it has been approached by the NDRC as part of a series of ongoing investigations launched against infant formula makers. In addition, news said that NDRC will keep probing other industries such as the pharmaceutical companies.

In light of the potential antitrust risks, companies without an antitrust compliance program should take adequate steps to set up and implement an anti-monopoly compliance program with a view to ensuring their compliance with AML rules. Companies with an existing program should review their AML compliance policy and reinforce their programs by strengthening the antitrust-concerns monitoring and handling systems.

Footnotes

1Paragraph 2 of Article 46 provides, "where a business operator who is engaged in a monopoly agreement voluntarily confesses the information about the monopoly agreement and provides the important evidence to the Anti-monopoly Law Enforcement Agency, the operator may be given a mitigated punishment or be exempt from punishment at the discretion of the Anti-monopoly Law Enforcement Agency."
2Article 15 Where the business operators can prove that a monopoly agreement reached by them falls under any of the following circumstances, the monopoly agreement shall be exempt from Articles 13 and 14 of this Law:
1. For the purpose of improving technologies, researching, and developing new products;
2. For the purpose of upgrading product quality, reducing costs, improving efficiency, unifying product specifications or standards, or carrying out professional labor division;
3. For the purpose of enhancing operational efficiency and reinforcing the competitiveness of small and medium-sized business operators;
4. For the purpose of realizing public interests such as conserving energy, protecting the environment and providing disaster relief, etc.;
5. For the purpose of mitigating the severe decrease of sales volume or obviously excessive production during economic recessions;
6. For the purpose of protecting the justifiable interests of the foreign trade or foreign economic cooperation; or
7. Other circumstances prescribed by the law or the State Council. iSee our previous article: NDRC say no resale price maintenance company should be cautious on pricing strategy ( http://www.chinalawinsight.com/2013/01/articles/corporate/antitrust-competition/ndrc-say-no-to-resale-price-maintenance-company-should-be-cautious-on-pricing-strategy//).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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