China Steps up Antitrust Enforcement.

August 2014 China Steps up Antitrust Enforcement. Introduction In the 6th year of China s Anti-Monopoly Law ( AML ), enforcement by China s antitrust authorities has moved up a gear, underpinning the growing challenges faced by companies active in China. > The National Development and Reform Commission ( NDRC ) and the State Administration for Industry and Commerce ( SAIC ) have both launched substantial enforcement action in respect of monopoly agreements and abuse of dominance. Contents Enforcement of conduct rules... 1 Merger control... 3 Private enforcement... 4 Conclusion... 5 > In the merger control arena, several significant remedies have been imposed by the Ministry of Commerce ( MOFCOM ). Also MOFCOM s second prohibition decision reaffirms the agency s willingness to steer its own course, in comparison with more established antitrust jurisdictions. > Finally, private lawsuits alleging anti-competitive conduct are increasingly commonplace. Enforcement of conduct rules NDRC and SAIC, which are responsible for the enforcement of the prohibitions against price- and non-price-related anti-competitive conduct, have been pursuing considerable enforcement activities in the first half of 2014. Recent headline cases include NDRC s probes of multinational companies in the automotive industry (including spare parts and bearing manufacturers), the high-profile Qualcomm investigation which is drawing to a close, as well as SAIC s dawn raids on Microsoft. To date the agencies have probed into a broad range of (mostly consumerrelated) sectors, including aviation, books, paper, chemical, automotive, insurance, telecommunications, pharmaceuticals, milk powder, liquid crystal displays, wine, and gold. In addition, the focus of the authorities investigations has expanded from traditional areas of interest (in particular hard-core cartel cases and resale price maintenance), which nonetheless China Steps up Antitrust Enforcement. 1

continue to be relevant, to new frontiers such as different forms of abuse of dominance and the intersection between antitrust and IP rights (e.g. patent licensing). While SAIC is in the process of drafting a regulation on antitrust and IP rights, NDRC appears to have a head start in launching IP-related enforcement initiatives. Specifically, NDRC has investigated both IDC and Qualcomm in relation to their patent licensing practices. Recent enforcement activity shows that cases originate from various sources. Complaints from competitors, customers or suppliers tend to be the most important source of investigation. Despite their limited resources, both Chinese authorities have shown a tendency to act on the complaints. This has increased the enforcement risk, in particular for multinational companies, which are more likely to be the subject of complaints. For example, SAIC s current Microsoft investigation started from complaints, reportedly by its main Chinese competitor. Chinese authorities also increasingly pick up cases that have been investigated in other jurisdictions. A recent example is the Qualcomm-case, in which NDRC followed in the footsteps of the Korean Fair Trade Commission which levied a hefty fine on Qualcomm in 2009. In the course of the investigation, NDRC constantly exchanged views with its Korean counterpart. Similarly, the recent investigation into the automotive sector follows the global crack down led by the US, Europe and Japan in punishing parts makers. This month, NDRC doled out the biggest antitrust fines since the AML came into effect six years ago, against twelve Japanese car parts manufacturers. Total fines amounted to RMB 1.24 billion (EUR 150 million) with the largest-ever fine for a single company of RMB 290.4 million (EUR 35.8 million) and also one whistle-blower for the first time granted full exemption. Investigation methods As the agencies gradually accumulate experience, they have been adopting a wide variety of investigation tools that are already used by agencies in Europe or the US. Recent cases show that broader sector inquiries launched by NDRC were swiftly followed by investigations into infringements by individual companies. Typically the authority first sends generic questionnaires to a variety of market players and subsequently targets certain companies for follow-up inquiries or even formal investigation. We understand that NDRC has recently sent such questionnaires to companies which are active in the pharmaceutical sector. Similarly, in the ongoing probe of the automotive sector, NDRC made an industry sweep by sending requests for information to almost all major multinational car manufacturers. It should be noted that Article 52 of the AML provides for sanctions for the obstruction of an investigation and concealing, destroying or falsifying documents. In serious cases, fines against companies can be up to RMB 1 million (approx. EUR 125,000). The Chinese authorities are also entitled to impose fines against individuals, e.g. if an employee of a company refuses to provide the requested information or provides wrong or misleading information or otherwise obstructs the investigation. In extreme cases involving e.g. applying of force or threatening of officials in dawn raids, China Steps Up Antitrust Enforcement. 2

individuals can even be sent to prison for up to three years. Recently, two companies in Hainan Province were fined for transferring and destroying financial data requested by the authority. In NDRC s dawn raid at the office of an international automotive manufacturer, security guards reportedly blocked the investigators access to the office premises. Companies are, therefore, strongly advised to give proper dawn raid training to employees, in particular reception and security staff, in order to prevent employees from inadvertently obstructing investigators. We note that some investigations move very quickly, taking only a few months from the launch of formal investigation to the announcement of decisions, while others take a very long time. It is reported that in some cases, the authorities started their initial inquiries a couple of years ago. This may relate to the gathering of evidence by the enforcement authorities and cooperation of the companies under investigation. In practice, companies are often reportedly encouraged by NDRC to admit liability in order to bring the investigation swiftly to a close. Therefore, approach to admitting liability is likely to be a key strategic issue faced by any company under investigation. Price-related remedy A notable feature of the recent enforcement cases by NDRC is that many companies under investigation have offered price cuts in order to obtain a favourable treatment and/or to bring the investigation to an early end. For instance, a number of international car manufacturers (such as BMW, Mercedes-Benz, Audi) publically committed to cut their prices for cars, spare parts and repair/maintenance services. This is understood to be a gesture of willingness to cooperate and also illustrates NDRC s interest in negotiating price-related in the form for instance of price reductions, a preference which appears to echo its traditional role as a price regulator. Merger control On the merger control front, MOFCOM has continued to develop its own theories of harm and has been innovative in relation to the selection of an appropriate remedy. For example, conglomerate effects is a notion that is generally not recognised in the US and (in recent years) treated sceptically in the EU. However, MOFCOM seems receptive to this theory. So far, it has imposed remedies in two cases (Walmart/Niuhai, Merck/AZ Electronic Materials) and prohibited one case (Coca-Cola/Huiyuan) based on conglomerate effects, and MOFCOM appears to have set out no clear parameters for the application of this controversial theory of harm. MOFCOM also continues to rely on unconventional behavioural remedies, although it has reiterated its general preference for clear-cut structural remedies like divestments. In all four remedy cases which have been decided in the first half of 2014 (Thermo Fisher/Life Technologies, Microsoft/Nokia, Merck/AZ Electronic Materials, and Corun/Toyota/JV), MOFCOM required the parties to undertake to supply customers on fair, reasonable and nondiscriminatory terms. China Steps Up Antitrust Enforcement. 3

In addition, MOFCOM s high-profile decision to block the proposed P3 Alliance between Maersk, MSC and CMA CGM demonstrates the regulator s confidence to set an independent course from established antitrust jurisdictions such as EU and US, both of which had given P3 the green light. MOFCOM also continues to become more sophisticated in its assessment of economic evidence in merger cases: in assessing the competitive effects of a complex transaction, it increasingly engages external economists to conduct quantitative economic analysis, which now seems to be a standard requirement for any remedy case. In June, MOFCOM issued a revised Guiding Opinion on merger filings which provides, for instance, improved guidance on the meaning of control in the context of transactions. However, while this guidance was long-awaited, it still lacks clarity and continues to allow MOFCOM a significant degree of flexibility on a number of fundamental questions. For further details on MOFCOM s revised Guiding Opinion, please refer to our separate client alert here. Earlier in 2014, MOFCOM also released new rules on cases that qualify for the simplified procedure. Similar to the EU, cases involving low market shares, offshore transactions without an effect on the Chinese market or the reductions in shareholdings of jointly controlling parents in a JV can qualify for a simple case review procedure. The simplified procedure is intended to reduce the amount of information that parties have to provide to MOFCOM and to render the review process more efficient. Although MOFCOM has not committed to clearance within Phase I in all simplified cases, experience to date with simple cases has been that it is generally more likely that parties will receive clearance within Phase I or early within Phase II. For more information on MOFCOM s simplified procedure please refer to our separate client alert here. Private enforcement Private enforcement of competition matters has seen some new trends in 2014. Unlike previous cases where the plaintiff s claims were mostly dismissed because the courts considered that the plaintiff failed to establish its case, plaintiffs increasingly prevail on the merit, such as in the Huawei v. InterDigital case. In addition, earlier this year, three concrete manufacturers in Nanjing filed an administrative lawsuit against the Jiangsu local branch of NDRC, alleging that the fines imposed in a cartel investigation were excessively high. This is the first time that companies have challenged an enforcer s decision in China and the outcome of this ongoing case is expected to provide guidance for future enforcement. The emergence of private enforcement underlines the growing awareness of competition law in the Chinese business community and the general public. Different market players (competitors, customers, suppliers, and consumers) have recently started to challenge another company s conduct on grounds of alleged antitrust law violations by bringing a lawsuit in the Chinese courts. China Steps Up Antitrust Enforcement. 4

Conclusion In an environment of increased Chinese public enforcement and emerging private enforcement, companies doing business in and with China need to take antitrust compliance seriously. They are well advised to consider a range of compliance tools, including audits to identify areas of risk and to establish solutions to mitigate such risks, antitrust compliance training and more comprehensive compliance programmes tailored to the specific features of Chinese antitrust enforcement. Contacts For further information please contact: Fay Zhou +86 (10) 6535 0686 fay.zhou@linklaters.com Clara Ingen-Housz +852 2901 5306 clara.ingen-housz@linklaters.com Yuan Cheng Counsel +86 (10) 6535 0609 yuan.cheng@linklaters.com Gavin Robert Consultant +44 (20) 7456 3364 gavin.robert@linklaters.com Jonas Koponen +32 2505 0227 jonas.koponen@linklaters.com Christian Ahlborn +44 (20) 7456 3570 christian.ahlborn@linklaters.com Authors: Fay Zhou, Yuan Cheng, Xi Liao, Christoph Barth This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors. Linklaters LLP. All Rights reserved 2014 Linklaters LLP is a limited liability partnership registered in England and Wales with registered number OC326345. It is a law firm authorised and regulated by the Solicitors Regulation Authority. The term partner in relation to Linklaters LLP is used to refer to a member of the LLP or an employee or consultant of Linklaters LLP or any of its affiliated firms or entities with equivalent standing and qualifications. A list of the names of the members of Linklaters LLP and of the non-members who are designated as partners and their professional qualifications is open to inspection at its registered office, One Silk Street, London EC2Y 8HQ, England or on www.linklaters.com Please refer to www.linklaters.com/regulation for important information on our regulatory position. We currently hold your contact details, which we use to send you newsletters such as this and for other marketing and business communications. We use your contact details for our own internal purposes only. This information is available to our offices worldwide and to those of our associated firms. If any of your details are incorrect or have recently changed, or if you no longer wish to receive this newsletter or other marketing communications, please let us know by emailing us at marketing.database@linklaters.com. Michael Cutting (+44) (20) 7456 3514 michael.cutting@linklaters.com Linklaters LLP Beijing Office 25th Floor China World Office 1 No. 1 Jian Guo Men Wai Avenue Beijing 100004 China Telephone +86 (10) 6505 8590 Facsimile +86 (10) 6505 8582 China Steps up Antitrust Enforcement. 5