On Nov. 21, 2013, the Beijing No. 2 Intermediate Court issued a ruling in favor of a plaintiff against Beijing Seafood Wholesale Industry Association (the Association) in a private action alleging that certain rules of the Association are invalid under the Anti-Monopoly Law. The court ordered the Association to cease organizing its members to reach monopolistic agreements by adjusting and fixing the price of scallops produced by Dalian Zhangzi Island Group Company Limited (Zhangzi Island Company).
Certain rules of the Association prohibited its members from participating in unfair competition or refusing to sell scallops at the price fixed by the Association. Members also were prohibited from selling whole scallops to non-members in markets in which the Association’s members participated. A member’s violation of these rules would subject it to a fine of RMB 10,000 ($1,640) for each violation.
A seafood seller in Beijing, who also is a member of the Association, filed a lawsuit against the group, claiming that the rules setting prices for Zhangzi Island scallops and the rules prohibiting members from selling whole scallops to non-members violate the Anti-Monopoly Law. The seafood seller requested a ruling to confirm that the rules are invalid, to order the Association to cease engaging in the conduct, and also to receive economic compensation. The Association argued that it organized its members to fix and adjust the prices based on the requirements of Zhangzi Island Company, and that the Association’s members could determine their prices based on the minimum price. It argued that the purpose of the prohibition on selling whole scallops to non-members was to prevent members from selling across different areas.
The Beijing No. 2 Intermediate Court ruled that: (1) the Association intended to control the market by organizing its members to reach agreements on fixing and adjusting the price of Zhangzi Island scallops; this prevented competition among the members of the Association and caused members to jointly resist competition from non-members; this impacted the normal fluctuation of prices, harmed consumers, and excluded and restricted competition; (2) by prohibiting members from selling whole scallops to non-members, the Association increased the operation costs of non-members and harmed consumers; (3) the Association’s rules fixed commodity prices, which violates the Anti-Monopoly Law. The court reached a verdict in favor of the seafood seller, and a report on the decision is available here. The Association has filed an appeal.
On Oct. 31, 2013, Japan’s Ministry of Economy, Trade and Industry (METI) submitted a brief in support of the defendants in one of the TFT-LCD Flat Panel Antitrust Litigation cases, requesting the U.S. District Court for the Eastern District of Illinois to reconsider a ruling of the U.S. District Court for the Northern District of California, which held that the U.S. Foreign Trade Antitrust Improvement Act (FTAIA) did not preclude U.S. liability for sales of price-fixed LCD panels that never entered the United States.
Motorola sued a number of Korean, Taiwanese and Japanese manufacturers, alleging that they participated in an international price-fixing conspiracy for LCD panels. The case was filed in federal court in Illinois but was transferred for pre-trial purposes to the multidistrict litigation in the Northern District of California. Defendants sought summary judgment with respect to purchases by Motorola’s non-U.S. subsidiaries of LCD panels and products containing them that never entered the United States. The MDL court denied the motion on the ground that some of the negotiations to purchase the panels took place in the United States, and they therefore had a direct and reasonably foreseeable effect on U.S. commerce. The case was remanded to the district court in Illinois for trial, and defendants asked the Illinois court to reconsider the MDL court’s order. The Illinois court decided to accept briefing from the defendants.
METI filed an amicus brief in support of defendants’ position that the FTAIA blocked Motorola’s claims based on LCD panels that never entered the United States. The brief METI submitted was a copy of the same brief it submitted in F. Hoffmann-La Roche, LTD. v. Empagran S.A., 542 U.S. 155 (2004), the U.S. Supreme Court’s seminal decision explaining the scope and contours of the FTAIA. METI’s brief argues that the FTAIA “should not be interpreted to allow foreign purchasers of goods from foreign corporations in foreign markets to bring actions in the United States courts for alleged injuries under United States antitrust laws. … Giving foreign purchasers the right to damages for purely foreign market transactions undermines the important principles of comity, respect due to a sovereign nation to regulate conduct within its own national territory. Such an interpretation of the FTAIA has international public policy implications which would adversely affect the ability of the government of Japan to regulate its own economy and govern its own society.”
It is unusual for METI to submit amicus briefs in proceedings in the United States, so its resubmission of its brief in the Empagran case demonstrates a strong interest in protecting Japanese companies from the application of the U.S. antitrust laws to conduct that takes place outside the United States and which does not affect products imported into the United States.
On Aug. 7, 2013, the National Development and Reform Commission (NDRC) issued fines totaling around $110 million to six producers of baby formula (namely Danone, Mead Johnson, Fonterra, Abbott, FrieslandCampina and Biostime) for price-fixing and anti-competitive behavior.
As a percentage of Chinese revenues, the harshest fine was imposed on Biostime (the only Chinese company involved), for an amount of RMB 162.9 million (approximately 6 percent of Biostime’s revenues in the previous year). Mead Johnson was handed a fine equal to 4 percent of its annual sales revenues in China, while the other three companies’ fines were set at about 3 percent of revenues.
Collectively, these constitute the largest fine ever imposed by the NDRC and reflect the varying levels, among the respective participants, of cooperation with the authorities and corrective action taken in response to the investigation. Three other companies (Nestle, Beingmate and Meiji) were granted full immunity for cooperating with NDRC, providing information to the investigators and proactively implementing measures to rectify any breaches.
On Sept. 13, 2013, the head of the South Korean antitrust regulator (the Korea Fair Trade Commission) announced a strengthening of the penalties for unfair business activities. This announcement comes following accusations of excessive leniency being granted by the KFTC when imposing a reduced penalty of $8,300 on a brewery found to have engaged in abusive behavior.
The KFTC stated that the original fine imposed on Baesangmyun Brewery, which had forced wholesalers to purchase more products than they required in order to reduce its unsold inventory, was reduced because the company had reported recent consecutive annual losses and had shown a high degree of cooperation with authorities during the course of the investigation.
The KFTC explained that the current rules on penalties will be revised by the end of the year, with enforcement to start in 2014.
Until this year, China’s enforcement activities in the field of antitrust, particularly as these activities have affected foreign companies, had been mainly focused on merger control with merger filings handled by the Anti-Monopoly Bureau of the Ministry of Commerce (MOFCOM). Other areas of competition law such as resale price maintenance, price fixing, cartels and abuse of dominance, although addressed under China’s Anti-Monopoly Law (AML), had received scant attention from domestic and foreign companies, and the relevant regulatory bodies had taken few if any steps to enforce the relevant provisions of the AML. By way of example, until this year, an investigation into proposed price increases by Unilever in 2011, which resulted in a RMB 2 million (US$318,000) fine for Unilever, had been China’s only investigation of a multinational company related to pricing issues, and this investigation was carried out under the provisions of China’s Price Law, which dates from 1997.
Widening the scope of enforcement activities
For some time now, there have been signs that this limited focus is changing. Last year, both the National Development and Reform Commission (NDRC)—the body responsible for enforcing the price-related provisions of the AML—and the State Administration for Industry and Commerce (SAIC)—responsible for the enforcement of non-price-related provisions of the AML—expanded their antitrust teams in a move widely seen as a precursor of increased enforcement activities. In addition, the Supreme People’s Court (SPC) published the Provisions on Several Issues Concerning the Application of the Law in Trials of Civil Dispute Cases Arising from Monopolistic Acts (see previous Newsletter coverage here) with the apparent intention of encouraging the private enforcement of the provisions of the AML in the Chinese courts.
The first half of 2013 has seen a notable increase in the scope of enforcement of China’s AML and the involvement of regulatory bodies other than MOFCOM. There were several high-profile court cases addressing complex antitrust issues. We highlight some of the most important developments below. Read More
China’s antitrust pricing regulator, the National Development and Reform Commission (NDRC), is investigating alleged price fixing and anticompetitive practices by international producers of infant milk formula following concerns about high prices for consumers. The concerns were triggered by complaints from domestic producers of infant milk formula whose market share has dropped after a string of high-profile food safety scandals affecting domestic brands. China’s official Communist Party newspaper, the People’s Daily, published an article stating that foreign and local players are equal before the law but that foreign brands should not raise prices frequently without regard to the law or abuse their competitive advantage. The investigation is believed to focus on the relationships between manufacturers, distributors and retailers and to cover attempts by the producers to require retailers not to sell their products below a certain minimum price. However, the regulator has published very little information about the investigation. Some of the companies involved in the investigation have issued statements stating that they are cutting their prices in China and/or reviewing their distribution arrangements.
China’s National Development and Reform Commission (NDRC) has launched a wide-ranging investigation into the costs of medicines in China amid concerns about discriminatory pricing and abuse of intellectual property rights. The investigation is not a surprise and there had been indications that the sector would be investigated this year. The regulator has previously expressed concerns about the pharmaceutical sector. In November 2012, the deputy director general of the Bureau of Price Supervision and Antimonopoly at the NDRC stated that some companies were abusing their dominance by monopolizing the materials needed for drugs and Chinese herbal medicine. A month later, the director general of the Bureau told an audience at a competition law conference that pharmaceutical companies were “over-protected” by patents and suggested that this created the potential for anticompetitive behavior. The sector has also been investigated in the past in China. However, this appears to mark the first time overseas pharmaceutical companies have been investigated. There has been no indication whether the NDRC will announce an official investigation of the sector or of particular companies, nor is it known how long the probe might last.
China’s national market regulatory agency, the State Administration for Industry and Commerce, has announced that it is investigating possible abuse of dominance by Tetra Pak. According to statements by the SAIC, more than 20 provincial and municipal level AICs are assisting in the investigation. The regulators have requested that Tetra Pak provide information relating to its China operations. This is the first time the SAIC has been involved in a major, high-profile antitrust investigation and it should provide some indication of what to expect from the SAIC as an antitrust regulator.
The China Council for the Promotion of International Trade (CCPIT), Nantong Sub-Council—a state-affiliated trade association—is recruiting qualified Chinese freight forwarders and trading companies from the city of Nantong to participate in the case of Emerald Supplies Limited & Southern Glasshouse Produce Limited v. British Airways Plc. The intention is to pressure British Airways and other defendants to enter settlement and compensation agreements. According to information published on the Sub-Council’s website, CCPIT has been coordinating with companies from all parts of the country to participate in the lawsuit. The Sub-Council also stated that the number of Chinese companies affected was large and that the amount of the losses is huge.
On June 10, 2013, Korea’s Fair Trade Commission announced that is has fined two major domestic plate glass manufacturers, KCC Corp. and Hankuk Industries Inc., a combined 38.42 billion won (US$34.24 million) for colluding on product prices. The two companies together account for about 80 percent of Korea’s plate glass market. Two executives from the companies are being further investigated and may be prosecuted. The companies are accused of colluding to raise prices of specific plate glass products used for construction four times between November 2006 and April 2009. The arrangements were made via phone calls and meetings and the companies raised prices at different times in order to try to avoid raising suspicions. Prices were raised by about 10-15 percent each time and affected the prices of apartment buildings in which the materials were used, thereby causing damage to consumers.
Google has been acquitted of charges of alleged anticompetitive conduct brought against it in Korea two years ago. In April 2011, search operators NHN and Daum Communications accused Google of taking unfair advantage by making its own search engine the default on the Android operating system. Korea’s Fair Trade Commission (KFTC) raided Google and carried out a long investigation following which it concluded that Google’s actions do not harm NHN or Daum. According to the KFTC, both companies have a healthy market share and users are easily able to download their apps onto their phones as alternatives.
On April 16, 2013, China’s Ministry of Commerce (MOFCOM) approved Glencore’s tie-up with Xstrata with conditions. MOFCOM was the last global regulator to approve the transaction. The approval process took many months and the parties were required to re-file the case with MOFCOM in early 2013 when the initial deadline for approval was approaching with no apparent agreement on remedies. To obtain MOFCOM’s approval, Glencore agreed to divest Xstrata’s Las Bambas copper mining project in Peru and to maintain copper, zinc and lead concentrate supplies to Chinese customers for eight years from 2013. A certain proportion of the sales of copper concentrate during this period is required to be under the annual contract system, which used to define global commodities markets, rather than be based on daily spot prices which have been used more recently. Sales of zinc and lead concentrate are to be on “fair and reasonable terms.” These conditions have been imposed despite the fact that the transaction does not result in obviously high market shares or the reduction of significant competitors in the market to three or fewer, factors that would normally trigger antitrust concerns. The parties together accounted for roughly 18 percent of China’s imports of copper ore in 2011 and competitors in the market include BHP Billiton, Freeport-McMoRan Copper Gold, Anglo American, Rio Tinto and Grupo Mexico’s Southern Copper unit. The full Chinese text of the approval is available here.
On April 23, 2013, China’s Ministry of Commerce (MOFCOM) approved Japanese trading house Marubeni’s $5 billion acquisition of U.S. grain merchant Gavilon, subject to significant conditions in the Chinese soya bean market. The approval took many months to obtain and the parties were required to re-file their application for approval in early 2013 as the deadline for approval approached and no agreement on remedies had been reached. MOFCOM’s approval is subject to the condition that the two parties continue selling soya to China as separate companies with two different teams and firewalls between them blocking the exchange of market information. MOFCOM did not impose conditions in corn, wheat or any other food commodity. China is the world’s largest soya bean importer and accounts for more than 60 percent of global trade. In 2011, Marubeni was the largest soya supplier to China. Nevertheless, the parties’ combined share of the market for the supply of soya beans to China is no more than 20 percent, well below the threshold that would generally trigger antitrust concerns with other regulators. The combined entity will continue to face competition from other sophisticated international competitors including Archer Daniels Midland, Cargill, Louis Dreyfus and Bunge. The full Chinese text of the approval is available here.
On April 3, 2013, China’s Ministry of Commerce (MOFCOM) published the Provisions on the Criteria Applicable to Simple Cases of Concentrations of Business Operators (Draft for Comments). The draft contains only seven articles that are mainly focused on setting out the criteria for concentrations suitable for treatment under the simplified review procedure. According to the draft, the simplified procedure will be suitable for cases with no or negligible competition concerns. These include cases where the combined market share of the parties after the concentration is lower than 15 percent (for horizontal mergers) or where each party has a market share of less than 25 percent in its own market (for a vertical merger). The draft also provides that cases in which the parties to a concentration establish a joint venture outside of China shall be reviewed under the simplified procedure provided that the joint venture does not engage in economic activity in China. In addition, acquiring sole control or enhancing control over an undertaking over which one or more parties already has joint control shall be deemed as a simple case. However, the new draft does not address any procedural issues with respect to the fast track review, such as the requirements for submission documents, short-form decision and review timeline, etc. These will need to be clarified separately. The full Chinese text of the draft is available here.
On March 27, 2013, China’s Ministry of Commerce (MOFCOM) released the Provisions on Appending Restrictive Conditions on Concentrations of Business Operators (Draft for Comments). The draft is intended to replace the Interim Provisions of the Ministry of Commerce on Implementing Asset or Business Disposals Related to Concentration of Business Operators, which were issued in 2010.
The draft classifies different categories of restrictive conditions including: 1) structural conditions such as the disposal of tangible businesses, intellectual property rights or related rights and interests of operators participating the concentration; 2) behavioral conditions such as requiring the business operators participating in the concentration to make available their infrastructure including their networks or platforms, to license core technologies (including patent, proprietary technology, or other intellectual property), or to terminate exclusive agreements; and 3) comprehensive conditions which are a combination of structural and behavioral conditions. To enable a business operator to propose restrictive conditions, the draft provides that MOFCOM shall inform the business operator of the adverse effects that the concentration might have on competition and provide reasons therefore and shall request the applicant to submit proposed conditions. After the applicant submits the proposed conditions, MOFCOM shall evaluate the effectiveness, feasibility and timeliness of the proposal, and inform the business operator of its decision. The draft allows divestitures to be conducted by the divestiture obligor or by the trustee. It also sets out requirements for the buyer of the business to be divested and procedures for the sale. In the event that the divestiture meets the thresholds for a merger filing in China, it shall be filed with MOFCOM for approval and the business shall not be divested before MOFCOM’s review is complete.
The draft also sets out rules for the supervision of restrictive conditions by the supervision trustee, the amendment and termination of restrictive conditions and the legal liabilities for parties, including officials of MOFCOM, that violate the provisions of the draft. The full Chinese text of the draft is available here.
On March 28, 2013, the Guangdong Higher People’s Court ruled against Qihoo 360 (Qihoo) in its long running dispute with Tencent over market dominance. This is the first antitrust case to be heard by a higher people’s court in China and the first significant decision since the Provisions on Several Issues Concerning the Application of the Law in Trials of Civil Dispute Cases Arising from Monopolistic Acts came into effect on May 4, 2012. (See Orrick Antitrust and Competition Newsletter coverage here.)
Qihoo, a leading Chinese antivirus software developer, filed a lawsuit against Tencent, China’s biggest Internet company, in October 2011 accusing Tencent of abusive practices and alleging that Tencent had abused its dominant market position by introducing bundled sales to prevent users from installing Qihoo’s antivirus software. Qihoo sought damages of RMB 150 million ($24 million).
Qihoo claimed that QQ, the online chat program developed by Tencent, has a market share of over 76 percent in China. However, the court disagreed with Qihoo’s market definition and also refused to consider some of Qihoo’s evidence about the defendant’s market power. The court found against Qihoo and ordered it to pay RMB 790,000 ($125,912) in legal fees. The chief judge in the case, Zhang Xuejun, stated: “Those who gain a dominant market position through technological innovation, better operation and management and price advantages are not the targets of the country’s anti-monopoly law.” The judgment indicates that market share is only one of many factors the court will consider when assessing market dominance. Qihoo is considering an appeal to the Supreme People’s Court.
On March 14, 2013, the jury in In re Vitamin C Antitrust Litigation, 06-MD-1738 (E.D.N.Y.) returned a $54.1 million verdict ($162.3 million post-trebling) for the direct purchaser class plaintiffs after a trial that lasted nearly three weeks. The plaintiffs, in what is the first antitrust case ever filed against Chinese companies in a U.S. court, alleged that the four major Chinese producers of vitamin C conspired to fix prices and production levels of vitamin C exported from China to the United States. The defendants, with support from the Ministry of Commerce of the People’s Republic of China, mounted a defense based on the foreign sovereign compulsion doctrine and argued that although the Chinese vitamin C producers coordinated on pricing and production, the Chinese government required them to do so.
Of the four manufacturer-defendants, one was not sued for monetary damages because its sales contracts contained arbitration clauses that required any claims for such damages to be resolved by arbitration. Another manufacturer settled the case before trial for $9 million. A third manufacturer settled the case during the trial for $22.5 million. The jury found the overcharges amounted to $54.3 million dollars. After trebling and a reduction for amounts paid in settlement, the defendant against which the court entered judgment will be liable for $131.7 million plus attorney’s fees.
On Feb. 4, 2013, the Intermediate People’s Court in China’s southern city of Shenzhen issued a landmark decision, ruling that U.S. company InterDigital violated China’s Anti-Monopoly Law (AML) by charging excessive royalties and tying the licensing of essential patents to the licensing of non-essential patents. This is one of the first rulings by a China court in a plaintiff’s favor in an antitrust case, and it is the first antitrust lawsuit in the intellectual property area in China that adopted FRAND principles. The ruling also appears to be the first time that any judicial authority has ruled on the appropriate royalty rate in the context of a requirement to license on FRAND terms.
In its ruling, the court ordered InterDigital to cease the alleged excessive pricing and alleged improper bundling of its essential and non-essential patents and to pay the plaintiff, Huawei Technologies, approximately $3.2 million in damages. The court ruled that InterDigital’s license offers to Huawei, reviewed under Chinese law, did not comply with FRAND requirements. According to InterDigital’s Feb. 26, 2013 Securities and Exchange Commission filing, the court ruled that under Chinese law, the royalties to be paid by Huawei for InterDigital’s 2G, 3G and 4G essential patents should not exceed 0.019 percent of the actual sales price of each Huawei product. InterDigital has said that the court did not explain how it arrived at the figure and it intends to appeal the court’s ruling. In May 2012, Huawei also filed an antitrust complaint against InterDigital in European court alleging that the company had abused its market dominance by refusing to license key wireless patents.
The Xi’an Intermediate Court in western China’s Shaanxi province recently ruled that Shaanxi Broadcast and TV Network Intermediary Group (“Shaanxi TV”) abused its dominance in the provincial cable TV transmission service market. The court found that Shaanxi TV is the only legitimate cable TV transmission service operator in the province and maintains 100 percent control of the market in the province. The court held that Shaanxi TV did not offer users the opportunity to choose the services they wished to receive, but instead imposed bundled trading of basic and paid services by charging the fees for basic services and paid services together. Because of its dominant position, users were forced to accept its services. The court ruled that Shaanxi’s tie-in charge was not valid and ordered that it should refund RMB 15 (approximately $2.40) to the plaintiff.
Although the penalty is very small, this case is significant. In an essay published in the People’s Court Daily, the presiding judge of the Intellectual Property Rights Tribunal at the Xi’an Intermediate Court made reference to the Supreme People’s Court Judicial Guidance on Civil Antitrust Lawsuits issued in May 2012 (“the Judicial Interpretation”). He stated that the main reason the court accepted the civil antitrust case was because the Judicial Interpretation stipulates that when business operators’ monopolistic behavior causes loss to others, or their contract or industry associations’ regulations violate the Anti-Monopoly Law (AML), the business operators shall bear civil liability and such disputes shall be within the jurisdiction of the courts. The judge also referred to Article 8 of the Judicial Interpretation, which states that in dominance cases, the defendant should present evidence to justify its conduct according to the AML. In this case, the defendant did not present any evidence to justify the tie-in sales and simply claimed that it had the right to charge the extra fees.
On Feb. 22, 2013, China’s antitrust regulators announced that they had imposed a total penalty of around RMB 449 million ($71.5 million) for resale price maintenance by two state-owned liquor companies, Wuliangye Yibin and Kweichow Moutai. This is the largest fine the Chinese authorities have levied in an antitrust case to date. In a statement issued by the Sichuan Provincial Development and Reform Commission, the regulator said that Wuliangye, a leading company in the high-end liquor industry that enjoys strong consumer loyalty, signed agreements with more than 3,200 independent, third-party distributors to restrict the minimum resale price. It used its strength to impose the minimum prices and also carried out regional monitoring and assessment and terminal control. In 2012, it punished 14 distributors who did not implement its resale price restriction policies. The Guizhou Price Bureau issued a statement saying that Kweichow Moutai had fixed minimum resale prices for third-party distributors of its liquor, and punished those distributors that did not comply. According to publicly available information, Wuliangye was fined RMB 202 million ($ 32.2 million) and Kweichow Moutai was fined RMB 247 million ($39.3 million).