Japan: Amendments to Japanese Anti Monopoly Act: Japan Significantly Strengthens Its Antitrust Laws

A bill to amend Japan’s Anti Monopoly Act (the "AMA"), which had been long pending at the Japanese Diet, was finally passed on April 20, 2005.

The amendments significantly expand the antitrust investigation and enforcement authority of the Fair Trade Commission of Japan ("JFTC") by effecting four significant changes in Japanese competition law:

  • The amendments increase by as much as 100% the applicable administrative fines (kachokin) for certain types of unreasonable restraints of trade (futo na torihiki seigen), such as price fixing, bid rigging or conspiracy to limit supply.
  • The amendments introduce a "leniency" or "amnesty" program somewhat similar to the successful programs in place in the United States and European Union. The proposed Japanese program exempts from administrative fines the first member of a cartel who voluntarily, independently reports its violation and provides relevant information to the JFTC. The second and the third reporting companies will be exempt from 50% and 30%, respectively, of the relevant fines.
  • The amendments abolish the JFTC’s current shimpan hearing process that permits companies to challenge, in an adversarial hearing before a JFTC examiner, allegations of unlawful conduct. The amendments permit the JFTC to issue cease-and-desist orders to alleged offenders after a much simpler hearing process, and affected companies will be permitted to challenge the allegations only after issuance of the cease-and-desist order.
  • The amendments expand significantly the JFTC’s criminal investigative powers by authorizing the JFTC to seize documents, with a court-issued warrant, directly from corporate offices or even from the homes of company executives, just as the police do in criminal investigations.

Background

The amendments represent a significantly scaled-back version of the JFTC’s original proposal. The JFTC originally considered revisions that also would have included new restrictions on monopoly/oligopoly conduct. The JFTC dropped those proposed amendments in the face of tremendous criticism and opposition from private industry. In return, however, the opposition groups agreed to revisit the law in two years to determine whether further restrictions are warranted. The amendments, therefore, reflect only the first step in the ongoing reform of Japan’s competition law regime.

Discussion of Amendments

Increase of Administrative Fines (Kachokin)

The AMA permits imposition of administrative fines called surcharges (kachokin) for certain types of unreasonable restraints of trade (futo na torihiki seigen), such as price fixing, bid rigging or conspiracy to limit supply if such a conspiracy affects price. The fines are calculated based on sales of the relevant product(s) during the term of violation (up to three years). The following table provides a comparison of the current and amended fine structures:

 

Current

Amendment

Business other than wholesale and retail (e.g., manufacturing or service)

6% (3%)

10% (4%)

Retail

2% (1%)

3% (1.2%)

Wholesale

1% (1%)

2% (1%)

Note: Figures in parentheses indicate the rates for small and mid-sized firms.

The amendments permit a 50% increase in fines for additional violations within a ten-year period, and a 20% reduction in fines for conduct that is unilaterally terminated before a JFTC investigation. In addition, in response to criticism that levying administrative fines and criminal fines on the same conduct constitutes double jeopardy, the JFTC has added adjustment clauses providing that if a criminal fine is imposed for a violation, the administrative fine to be imposed on the same activity will be reduced by half of the amount of the criminal fine.

Reduction and Exemption of Fines (Leniency Program)

Under the amendments, the first member of a cartel who voluntarily, independently reports its violation and provides the relevant information to the JFTC prior to the commencement of the JFTC’s investigation will be completely exempt from administrative fines. The second and the third reporting companies will be exempt from 50% and 30%, respectively, of the applicable administrative fines. Even after the JFTC begins an investigation, violating companies may still receive leniency, provided fewer than three companies have reported to the JFTC. In such cases, the amount to be discounted from fines would be 30% regardless of the order of participation.

The newly introduced Japanese system has two unique features. First, the Japanese leniency program will permit the second and third reporting companies to receive leniency for a portion of the applicable administrative fine. Second, the leniency exemption covers only the relevant administrative fines. Under current law, the JFTC may request that the Public Prosecutor’s Office (the "PPO") issue a criminal indictment of the violating companies and individuals who actually committed the violation. The amendments do not restrict the JFTC’s power to request such indictments. The Chairman of the JFTC commented at a Diet session that the JFTC will not request the indictment of a first reporter, but will consider a request for indictment of the second and third reporters on a case-by-case basis (that is, exemption from prosecution is not guaranteed).

Change of Administrative Hearing Procedures (Shimpan)

Under current law, companies are able to challenge JFTC allegations of unlawful conduct in an adversarial hearing process, and the JFTC is not permitted to impose conditions on the companies, pending the outcome of the hearing. The amendments flip this process on its head.
Under the current law, if a company disputes the JFTC’s recommendation, the JFTC convenes a hearing called "shimpan." The shimpan is conducted in an adversarial style similar to a court hearing or trial, and is presided over by one or more examiners of the JFTC. In the course of the shimpan, the company is provided access to the evidence on which the JFTC’s charges are based. If, after the shimpan, the examiners and the Commissioners conclude there was a violation, then the JFTC will render a final cease-and-desist order. If not, the JFTC will declare formally that there was no violation. The company may appeal an adverse JFTC decision to the Tokyo High Court.

Similarly, current law subjects the JFTC’s levy of administrative fines to a separate but similar administrative review process. The JFTC issues a separate order to levy an administrative fine (normally after the issuance of a corresponding cease-and-desist order). The company may challenge the surcharge order in a separate adversarial-style shimpan hearing within the JFTC. If the company challenges the fine, the order will be voided, and a shimpan hearing will be commenced on whether the surcharge order will be issued. As with hearings related to cease-and-desist orders, the company may appeal an adverse decision by the JFTC to the Tokyo High Court.

The amendments abolish the current process and allow the JFTC to issue a cease-and-desist order to an offending company without a shimpan hearing. The company may still submit evidence and arguments to the JFTC prior to issuance of the cease-and-desist order, but this pre-issuance process seems to be designed as simply an opportunity for a company to provide an apology; there is no adversarial hearing. The adversarial shimpan process will be available only to review cease-and-desist orders that already are in effect. Further, the JFTC has discretion as to whether to suspend the effectiveness of a cease-and-desist order pending the hearing.

The amendments also allow the JFTC to issue administrative fines that will be due even before a hearing challenging the fines. A company faced with such a fine must either pay the fine before knowing the outcome of the challenge or risk paying deferred interest at higher-than-market rates.

Criminal Investigation Power

The fourth key element of the amendments expands the JFTC’s criminal investigative powers.

Under current law, the JFTC has technical authority to raid companies to collect information and interrogate employees, but it lacks the direct authority to compel companies to cooperate with such activities. If a company refuses the JFTC’s request for inspection or interrogation, it is merely subject to a criminal penalty for "rejection of inspection." This is called "indirect compulsory enforcement." In addition, the PPO is required to follow an entirely separate procedure to collect evidence for criminal investigations.

The amendments permit the JFTC to seize documents, with a court-issued warrant, directly from company offices or even from individual employees’ homes. These direct compulsory enforcement powers are modeled on the similar investigative authority already granted to Japanese agencies conducting tax or securities investigations.

Effective Date

The amendments are expected to be promulgated on April 27, 2005, and the new law shall be in effect within one year from the promulgation. The JFTC is now drafting the rules to supplement the law on the assumption that the amendments become effective from January 2006.

As noted above, the amendments will be further reviewed two years after the effective date.

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.

© Morrison & Foerster LLP. All rights reserved

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