Cartels

The principal statutes governing cartels in China are:

• the Anti-Monopoly Law, which was promulgated on 30 August 2007 and took effect on 1 August 2008; and
• the Interim Provisions on Prohibition of Monopoly Agreements, which were promulgated on 26 June 2019 and took effect on 1 September 2019. They were issued by the State Administration for Market Regulation (SAMR), the newly established anti-monopoly enforcement agency, which integrates the anti-monopoly departments of the Ministry of Commerce, the National Development and Reform Commission (NDRC) and the State Administration for Industry and Commerce (SAIC) in a single body.

With respect to the substantive law on cartels, the interim provisions correspond to those of the Anti-monopoly Law on the classification of cartel behaviour. However, the interim provisions go further and provide greater detail, in particular on:

• the recognition of monopoly agreements;
• the suspension of investigations;
• exemptions; and
• the leniency programme.

This has significantly increased the clarity and the practicality of applying these provisions.

With regard to the procedural laws on cartels, the interim provisions cover major aspects of anti-monopoly investigations, such as:

• SAMR’s remit;
• authorisation;
• the complaint;
• the investigation procedure;
• sanctions; and
• publication of the decision.

In addition, detailed provisions on hearings and penalties are set out in the Interim Measures for Hearing the Administrative Penalty and the Interim Measures on the Procedures for Administrative Penalty, both of which were promulgated by SAMR on 21 December 2018 and took effect on 1 April 2019.

Prior to the promulgation of the Anti-monopoly Law, both the Price Law and the Bidding Law included similar, albeit more general provisions on the prohibition of collusive activities. The Anti-monopoly Law – which sets out more detailed and specific provisions, and provides for higher penalties – is commonly understood as the primary legal basis for cartel practice.

On 2 January 2020 SAMR published for consultation the draft amendment to the Anti-monopoly Law. Under the draft amendment, the types of monopoly agreement will be expanded to cover not only ‘hub-and-spoke’ schemes, but also schemes where a company facilitates the establishment of a monopoly agreement.

The Anti-monopoly Law sets forth exemptions for alliances or other concerted conduct by agricultural producers and rural economic organisations in relation to activities such as the manufacture, processing, sale, transportation and storage of agricultural products.

Before the institutional reform that established SAMR, the SAIC and NDRC were responsible for investigating monopoly agreements. On 10 April 2019 SAMR was formally established, which has consolidated the responsibilities of cartel enforcement of the SAIC and NDRC in a single integrated agency. Since then, SAMR has been responsible for enforcing the Chinese cartel regime.

In addition, SAMR may authorise its provincial branches to carry out anti-monopoly enforcement.

Cartel enforcement increased steadily in 2019. Eight enforcement initiatives were conducted that year, all of which were aimed at industries that relate directly to people’s everyday lives, such as construction, catering and automobiles. The investigations are set out below.

Three decisions relating to the construction sector – Decisions 2, 5 and 6 in the table above – were key decisions issued in 2019. Before they were issued, in early April 2019, SAMR met with six major cement manufacturers to warn them against monopolistic practices. In addition to three national industry associations in the construction sector, 15 provincial building materials cement concrete industry associations, and representatives from 10 provincial anti-monopoly enforcement authorities attended the meeting with SAMR. Later in 2019, the three construction decisions were handed down.

All eight decisions illustrate SAMR’s commitment to rigorous anti-monopoly law enforcement in sectors that affect people’s livelihoods.

‘Monopoly agreements’, as defined under Article 13 of the Anti-monopoly Law, are agreements, decisions or other concerted practices between business operators that have the purpose or effect of eliminating or restricting competition. Article 5 of the Interim Provisions on Prohibition of Monopoly Agreements provides further that a monopoly agreement may be executed either in written or oral form. The existence of a concerted practice will be considered plausible where business operators are found to be acting in concert substantially.

The types of the monopoly agreements defined in the Anti-monopoly Law and the Interim Provisions include the following:

• fixing or changing the price of products;
• restricting output or sales volumes of products;
• allocating sales or purchase markets for raw materials;
• restricting the purchase of new technology or new equipment, or restricting the development of new technologies or new products;
• organising joint boycotts; and
• other monopoly agreements as determined by the State Administration for Market Regulation (SAMR).

Specifically, Articles 6 to 11 of the interim provisions deal with concerted practices, price fixing, the restriction of output, market/customer allocation, the restrict of innovation and new technology, as well as joint boycotts.

Neither the Anti-monopoly Law nor the interim provisions expressly include bid rigging as a form of cartel. However, this could nonetheless be regarded as additional type of monopoly agreement recognised by SAMR pursuant to Article 13(6) of the Anti-monopoly Law.

Other than the general offences described above, the Anti-monopoly Law and the interim provisions also prohibit trade associations from encouraging business operators to engage in anti-monopolistic conduct.

Under the cartel legislation, a cartel violation may incur both administrative and civil liabilities; however, it will not incur criminal liability. However, if an individual refuses to cooperate or hinders the investigation, this may lead to criminal liability.

No, under the cartel legislation only companies will be prosecuted.

Foreign companies do not have immunity under the cartel legislation.

Yes, as long as the cartel practice eliminates or restricts competition on the Chinese market, the cartel legislation will apply to overseas cartel activity and SAMR will have jurisdiction to investigate accordingly.

The limitation period for public enforcement against cartel activity is two years, which begins to run from the date on which the cartel activity last took place. If the outcome or effects resulting from the illegal conduct are enduring, the illegal conduct will be deemed continuous.

In principle, the State Administration for Market Regulation (SAMR) may open an investigation on its own initiative, in response to a complaint or upon a referral from other government agencies, provided that it reasonably believes that cartel activity is taking place.

Prior to the formal commencement of an investigation, SAMR will take all necessary steps to verify the facts and initial evidence. Internally, some necessary formalities must also be met (eg, preparation of a written report and approvals) before the enforcement proceedings are formally opened.

Article 39 of the Anti-monopoly Law entrusts SAMR with broad investigative powers, including the power to:

• conduct on-site inspections of the business premises or other relevant places of the undertakings that are under investigation;
• make inquiries of the undertakings, interested parties and other relevant entities and individuals, and require them to provide information;
• review or make copies of relevant documents and information, including contracts, accounting books, business correspondence, electronic data and files of relevant entities or individuals;
• seize and detain relevant evidence; and
• make inquiries into the bank accounts of the undertakings.

In general, the levels of cooperation and communication between SAMR and its counterparts in other jurisdictions remain high. This international cooperation is mainly focused on the merger control regime, in particular as regards global filings, which may be subject to conditional approvals. No international cooperation in relation to cartel enforcement has been observed thus far.

Yes, during the investigation, SAMR may make inquiries of third parties in order to obtain further information concerning the suspected cartel.

In addition, during the hearing procedure, interested third parties may apply to participate and make statements.

The general rights of SAMR during the investigation include the right to:

• undertake an investigation and exercise its investigative powers under the Anti-monopoly Law;
• approve or block a concentration of undertakings;
• issue a decision on the existence of cartel activity; and
• impose penalties.

Its obligations primarily relate to confidentiality. In particular, SAMR must take all necessary measures to protect the business secrets of the investigated party during the investigation.

The rights of the target company during the investigation include the right to:

• state its opinions during the investigation, either itself or through its lawyers;
• where the target company may be subject to an administrative penalty, apply for a hearing and have its opinion been heard before the penalty decision is officially made;
• apply for leniency; and
• where the target company is subject to a penalty, seek relief either by filing administrative litigation against SAMR’s decision or by applying for administrative reconsideration of SAMR’s decision.

Target companies and individuals are also obliged to cooperate with the investigation and to submit information/material as required by SAMR.

In China, attorney-client privilege has not yet been established.

Usually, once the penalty has been imposed, SAMR will release the full decision on its website, with all business secrets and sensitive information redacted.

Article 38 of the Anti-monopoly Law provides that if a cartel violation is initiated by a whistleblower, the State Administration for Market Regulation (SAMR) must take all necessary steps to verify the facts and initial evidence submitted. Internally, some necessary formalities must also be met (eg, preparation of a written report and approvals) before the enforcement proceedings are formally opened

Yes, dawn raids are commonly conducted in China. However, there are no particular rules or regulations on dawn raids; as such, the substantive (if any) and procedural requirements are generally in line with those that apply to regular anti-monopoly investigations. Dawn raids are conducted by officials of SAMR and/or its provincial branches. They normally take place after an initial investigation by SAMR.

When conducting dawn raids, SAMR does not have the power to search private premises, although it can search company premises.

The investigative powers of officers are generally in line those of SAMR itself. The Anti-monopoly Law provides further guidance on the limitation of these powers for officers, as follows:

• When investigating a cartel violation, SAMR must send at least two officials to conduct the investigation;
• The officers must present their law enforcement badges; and
• Before exercising any investigative powers, a written report must be submitted to the principal officials of SAMR for approval.

The rights and obligations of the target company and any individuals targeted during a dawn raid are in line with these during regular anti-monopoly investigations.

SAMR may make copies of relevant documents and information, including contracts, accounting books, business correspondence, electronic data and files of relevant entities or individuals; and may seize and detain relevant evidence.

During the investigation, SAMR may make inquiries of interested persons, which must cooperate with the investigation.

Companies should:

• keep track of antitrust enforcement trends;
• conduct internal self-evaluations; and
• establish a taskforce to deal with any investigation and conduct rehearsals if necessary. Ideally, the taskforce should include:
• • the executive members of the company;
  • the heads of the legal, financial and sales departments; and
  • support staff such as receptionists, IT staff and security, who might participate in the investigation if a dawn raid actually happens.

Companies should consult external counsel specialised in antitrust law in practising the above.

In the event of a dawn raid, the receptionist should immediately inform the head of the legal department, the executive members and external counsel on the arrival of the officers. The head of the legal department or of the taskforce should accompany the officers throughout the dawn raid and take notes on the details of the dawn raid. The company should make copies of all documents that are copied or seized by the officers for further analysis. The company should cooperate fully with the dawn raid. Employees should not:

• make false or misleading statements;
• provide fraudulent materials or information;
• conceal, destroy or remove evidence; or
• obstruct the dawn raid inspection.

In practice, SAMR may follow up with another round of requests for information based on the initial information obtained through the dawn raid. It may also require interested parties, other relevant persons or trade associations to cooperate with the investigation. As the investigation moves forward, SAMR may conduct an in-depth investigation of the details of the suspected cartel.

SAMR will consider evidence that constitutes a direct indication of the existence of a cartel, as well as indications of business practices that resemble cartel activity, in assessing whether cartel activity has taken place.

During the investigation, the undertakings may propose commitments to SAMR in order to suspend the investigation. In some cases, investigations have been suspended in response to commitments proposed by the target company.

However, both in law and in practice, the commitments that are usually involved in case of abuse of dominant position or vertical restraints are not applicable in the context of a cartel.

Yes, China has established a leniency programme. Article 46 of the Anti-monopoly Law sets out the general rules on leniency: where a cartelist reports to the State Administration for Market Regulation (SAMR) and provides important evidence, SAMR may grant it full immunity or a reduced penalty.

Before SAMR was established, two sets of substantive rules and procedures rules were issued by the National Development and Reform Commission (NDRC) and the State Administration for Industry and Commerce (SAIC). In February 2016 the NDRC published draft leniency guidelines on matters such as:

• the application procedure;
• the marker system;
• acceptance; and
• determination.

Comments on the draft guidelines are currently being solicited. In recent cartel cases, the penalties issued by SAMR appear to have followed the spirit of the draft guidelines. It is expected that the draft guidelines will be finalised and promulgated by SAMR in the near future.

Both the previous two sets of rules issued by the NDRC and the SAIC and the draft Leniency Guidelines indicate that the first mover and subsequent applicants will benefit from the leniency programme. Normally, the benefits will be immunity or a reduction in the penalty.

In practice, before submitting a formal leniency application, the applicant may consult SAMR with regard to the application. If the applicant proceeds with the application, it may file an initial report setting out the basic facts on the cartel, how it was established and implemented, and the participants, to assist SAMR in understanding the cartel. Based on its initial review of this submission, SAMR may issue a written opinion on the application, together with a request for information.

The applicant must also take action to show its determination to cease the cartel activity, including actual cessation of such activity and full cooperation with the investigation. SAMR will review the actions taken by the applicant and, at its discretion, will grant it full immunity or a reduction in penalties.

In essence, the applicant is entitled to either immunity or a reduction in penalties. During the leniency process, the applicant may:

• consult with SAMR;
• make statements;
• have its business secrets protected; and
• apply for a hearing.

The applicant is obliged to make submissions in accordance with certain guidelines and to cooperate fully with SAMR.

The leniency programme is currently open to individuals. There are no rules on applications for leniency by employees or former employees.

Yes, the leniency may be denied if the applicant:

• does not cease the cartel activity in a timely manner;
• makes false or misleading statements, provides fraudulent materials or information, or conceals, destroys or removes evidence;
• discloses the application without prior consent from SAMR; or
• obstructs the investigation.

As stated above, in China, cartel activity will not result in criminal sanctions, either for companies or for individuals. However, an individual may incur criminal liability if he or she provides fraudulent materials or information, conceals, destroys or removed evidence, or obstructs the investigation

In China, cartel enforcement is more administration orientated and cartel activity will not generally result in civil proceedings. If a purchaser seeks remedies in civil proceedings, the compensation should reflect its losses as a result of the cartel activity, assessed on a case-by-case basis.

Article 46 of the Anti-monopoly Law stipulates that penalties include the confiscation of illegal gains and a fine of between 1% and 10% of the undertaking’s sales revenue in the previous year. In practice, this will be calculated based on Chinese revenue only, rather than global revenue.

The State Administration for Market Regulation will render penalties independently and will not consider penalties imposed in other jurisdictions.

There is no such mechanism in China.

Yes, the defendant company can appeal the State Administration for Market Regulation’s (SAMR) decision. As this is an administrative decision, the defendant can choose either to apply for administrative reconsideration with SAMR or to file administrative litigation before the court.

Only the final decision may be challenged. In case of administrative reconsideration, SAMR is responsible for the review; while in administrative litigation, the competent court is responsible for the review. The standard of review applied in both cases is the review of all facts and evidence.

Yes, third parties can challenge SAMR’s decision, as long as they have been directly affected by the decision.

Yes. All private enforcement actions must be brought before a competent court. In China, this will be determined by grade jurisdiction and territorial jurisdiction.

Grade jurisdiction: The courts of first instance for civil disputes involving cartels are:

• the intermediate people’s courts in those municipalities where the people’s governments of provinces, autonomous regions and centrally administered municipalities are located;
• the intermediate people’s courts at municipalities with independent planning status; and
• the intermediate people’s courts designated by the Supreme People’s Court.

Upon approval by the Supreme People’s Court, grassroots people’s courts may be the court of the first instance for civil disputes involving cartels.

Territorial jurisdiction: Territorial jurisdiction of civil disputes involving cartels shall be determined in accordance with the specific details of the case, and pursuant to the provisions of the Civil Procedural Law and the relevant judicial interpretations on the jurisdiction for tort disputes, contractual disputes and so on.

No. The individuals behind the company will not be held personally liable for the company’s wrongdoing.

Yes. There is a broad ‘joint action’ which allows such claims.

Where litigation involves two or more persons and the same subject matter, the people’s court may order that it be tried as a joint action, upon consent by the litigants.

Where a party to a joint action has common rights and obligations pertaining to the subject matter of the litigation, and where the litigation actions of one litigant are acknowledged by the other joint litigant(s), such actions shall be binding on the other joint litigant(s). Where there are no common rights and obligations pertaining to the subject matter of the litigation, the litigation actions of one litigant shall not be binding upon the other joint litigant(s) (Article 56 of the Civil Procedure Law).

First, a complaint is filed with the competent court. This is followed by court hearings and the issue of a judgment.

If the plaintiff fails to collect damages from the defendant after prevailing in the case, it may apply to the court for enforcement.

The types of relief that are commonly awarded include compensation for losses and cessation of infringement. If the plaintiff requests compensation for expenses incurred in investigating and shutting down the cartel, reasonable may be awarded by the court within the scope of losses for compensation.

All relief will be granted on condition that anti-competitive conduct has taken place. The burden of proof is on the plaintiff, except where the conduct has already been found to constitute cartel activity by the competent administrative authority. Once cartel activity has been proven, the plaintiff shall bear the burden of proving the losses. In awarding relief, the court will determine whether the losses are reasonable and were caused by the cartel activity.

Where the plaintiff has suffered losses as a result of cartel activity, the people’s court may order, based on the plaintiff’s claims and the facts investigated, that the defendant shall bear civil liability such as cessation of the infringement and compensation of losses.

Based on the plaintiff’s request, the people’s court may include reasonable expenses incurred in investigating and shutting down the cartel within the scope of losses for compensation (Article 14 of the Provisions of the Supreme People’s Court on Several Issues Relating to Laws Applicable for Trial of Civil Dispute Cases Arising from Monopolies)

Yes. Private enforcement falls within the scope of civil litigation and the Civil Procedure Law applies. The reviewing authority is the IP Court of the Supreme People’s Court.

Case volume is increasing year on year and certain sectors (eg, active pharmaceuticals and construction) are coming under heightened scrutiny. This trend is expected to continue over the next 12 months.

As regards legislative reform, amendments to the Anti-monopoly Law, the latest judicial interpretation and the long-awaited Leniency Guidelines are all expected in the next 12 months.

For companies in sectors that are on the radar of the State Administration for Market Regulation (SAMR), choosing to cooperate with the investigation is definitely a smart move, given that SAMR is already has its finger on the pulse of the industry. Failure to cooperate or obstruction of the investigation might result in a record high penalty. Always keep an eye on other potential anti-monopoly violations, to avoid surprise findings by SAMR.