China: China Takes First Action Against Price Cartel Under New Anti-Monopoly Law

China's competition law enforcement authorities published their first decision against a price cartel on March 30, 2010, more than one and a half years after the Anti-Monopoly Law (AML) came into effect. This action against domestic rice noodle producers was reported by the National Development and Reform Commission (NDRC), one of two agencies responsible for nonmerger enforcement. The decision – which suggests the possibility of criminal liability for cartel conduct – indicates that anti-cartel enforcement activity is gathering steam in China.

The Guangxi Rice Noodle Cartel

As reported by NDRC, the rice noodle cartel involved 33 producers in 2 cities in the Guangxi Autonomous Region of China. In November 2009, one producer in Nanning City organized meetings and telephone conferences with local competitors, seeking to increase prices. After those meetings, 18 producers in Nanning agreed to raise rice noodle prices by RMB 0.2 (approximately USD 3 cents) per half kilogram starting January 2010, causing retail prices to rise by RMB 0.5 per half kilogram. After learning of the price increases in Nanning, 15 producers in neighboring Liuzhou City contacted the Nanning organizer to discuss participation in the cartel, eventually signing a written agreement on cooperation and profit-sharing. The organizers reportedly "coerced" several of the Liuzhou rice noodle producers to participate in the cartel.

The Enforcement Authorities

The NDRC is a PRC government agency with broad authority over industrial policy and economic planning. Under the AML, it also serves as the enforcement agency with jurisdiction over price-related anticompetitive conduct, including price-fixing, predatory pricing, and price discrimination. NDRC also has enforcement responsibility for the Price Law, which prohibits unfair pricing behavior, among other things.

The investigation team was led by local price authorities (counterparts to the national-level NDRC) in Nanning City and Liuzhou City, with involvement from the local Public Security Bureau, Quality Supervision and Inspection Bureau, Food Bureau, Administration of Industry and Commerce, Food and Drug Supervision Bureau and Market Order Supervision Office.

Penalties and Leniency

After their investigation, the Nanning and Liuzhou price authorities found that the price increases resulting from the cartel members' collusion constituted "unfair price behavior" in violation of the Price Law, the AML and related regulations. The local price authorities imposed fines of RMB 100,000 (approximately USD 15,000) on each of the three "organizers" of the cartel, and fines of RMB 30,000 to 80,000 (approximately USD 4,500 to 12,000) for 18 "participants" in the cartel.

The authorities allowed another 12 participants in the cartel to go free with only "warning orders" and no fines because they had "cooperated with the investigation, provided important evidence and taken corrective measures on their own initiatives."

Finally, for several companies who were "followers" to the price increase but were not participants in the cartel, the local price authorities issued caution letters requesting that they "enhance self-discipline" on pricing.

Observations

The AML does not require the enforcement agencies to publish details of enforcement actions (except for negative or conditional merger control decisions). Therefore, this published decision provides some valuable insights into the early stages of anti-cartel enforcement in China, although many issues remain to be clarified.

Overlaps between the Price Law and the AML. The NDRC report appears to state that liability for the cartel members was based both on the Price Law and the AML. Although no specific statutory provisions are quoted in the NDRC report, price-fixing activities would violate both article 14(1) of the Price Law (which prohibits collusion in manipulating prices as "unfair price behavior") and article 13(1) of the AML (which prohibits price fixing as an illegal "monopoly agreement").

The two laws provide for different penalties. Article 46 of the AML states that an illegal monopoly agreement such as price-fixing will be punished by confiscation of any illegal gains and fines of 1-10% of the violator's annual turnover. The penalty under article 40 of the Price Law is a fine of up to five times the amount of any illegal gains plus confiscation of those gains; if there is no illegal gain, then a fine of RMB 100,000 to 1,000,000 (approximately USD 15,000 to 150,000) can be imposed.

Leniency. The granting of warning-only penalties to some cartel participants in this case indicates that it was at least part based on the AML. Unlike the Price Law, the AML contains a "leniency" provision. Specifically, article 46 of the AML allows for the possibility of reduced punishment or complete exemption from punishment for companies that voluntarily report and provide important evidence of violations. The NDRC report indicates that a substantial number of cartel participants cooperated with the investigation and provided important evidence to enforcers and thus were exempted from penalty, although it does not say whether or not those exempted participants voluntarily reported themselves.

Potential criminal liability. Finally, the rice noodle case suggests that criminal liability for cartel behavior may be available in China. It has been reported that executives of the cartel organizer were arrested for the criminal offense of "coercing" participation in the cartel. The AML itself does not prescribe criminal liability for violations, although article 52 states that liability may exist under the PRC criminal laws for obstruction. Article 226 of the PRC Criminal Law makes it a violation to buy or sell products through violence or intimidation or "compel" another person to provide or receive a service; if the circumstances are "serious," the offender can be sentenced to up to 3 years' imprisonment and fines.

Enforcement in China. It is also worth noting that all the entities penalized under this decision were domestic Chinese entities. Concerns have been expressed that the AML to date has been applied more aggressively in matters involving foreign companies, in part because the only transactions that have been prohibited or approved subject to conditions under the merger review provisions of the AML have involved foreign companies. However, in the Guangxi rice noodle cartel case, all of the companies fined or given warnings were domestic Chinese entities.

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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