Michael Gu Sihui Sun August 4 2016 NDRC rules in first international shipping company monopoly case AnJie Law Firm | Competition & Antitrust - China Michael Gu, Sihui Sun Competition & Antitrust IntroductionMonopolistic conductCombination of punishment and leniencyCommentIntroductionIn 2015 the National Development and Reform Commission (NDRC) imposed penalties totalling Rmb407 million on eight international roll-on/roll-off shipping companies (Kawasaki Kisen Kaisha Ltd, Nippon Kabushiki Kaisha, Mitsui OSK Lines, EUKOR Car Carriers, Wallenius Wilhelmsen Logistics, Compania Sud Americana de Vapores, Eastern Car Liner and Compania Chilena de Navegacion Interoceanica) for entering into and implementing monopolistic agreements.(1) This was the first international shipping monopoly case in China and involved a lengthy investigation that lasted from August 2014 to the end of December 2015.(2)Following comprehensive consideration of the nature, duration, severity and scope of the monopolistic conduct – as well as the cooperation and rectification measures taken by the companies – the NDRC imposed individual fines on the companies based on their respective 2014 sales in international roll-on/roll-off freight services relevant to the Chinese market. However, the NDRC took advantage of the leniency programme and:removed the penalty imposed on the first company that voluntarily reported collusion and provided important evidence; andreduced the original penalties imposed on the second and third companies to do so by 60% and 30%, respectively.Monopolistic conductManner and nature of illegal conductHorizontal competition developed among eight shipping companies operating in the international roll-on/roll-off freight service market between China and other countries and regions. 'Roll-on/roll-off freight' refers to goods that can be transported by non-containerised cargo and loaded and unloaded by being rolled on and off a ship (eg, automobiles and certain types of machine). In order to divide the sales market, make excessive profits and maintain or raise freight rates, the companies frequently conducted bilateral or multilateral communications via telephone calls, meetings (both formal and informal), dinners and emails, in which they:exchanged sensitive information;negotiated prices;discussed their bidding intentions;allocated customers and shipping routes; andconducted bid-rigging against shipping business inquiries issued by roll-on/roll-off manufacturers for imports and exports in China.The companies frequently reached and implemented price agreements to assist competing shipping companies to get orders. The companies agreed that during the business solicitation process, they would 'respect' the specific business of each company's pre-owned shipping route by not quoting or offering a higher price, in order to help the company to obtain the order. This conduct – which involved collusion, the exchange of sensitive information and price inflation – was typical bid-rigging behaviour and enabled the companies to achieve their illegal goals of dividing the sales market and fixing or changing commodity prices.The Anti-monopoly Law includes no express provision stating that bid rigging is a type of monopolistic agreement. However, the NDRC's analysis of the conduct shows that by entering into and implementing horizontal monopolistic agreements, the companies had intended to maintain orders, allocate customers and shipping routes and undermine price competition among their peers. Therefore, the NDRC specified in its penalty decision that such bid-rigging conduct was a type of monopolistic agreement involving price fixing and market dividing, which violated Article 13 of the Anti-monopoly Law and eliminated and restricted competition in the market and damaged the interests of Chinese roll-on/roll-off importer-exporters and customers.The companies went to great lengths to evade regulatory investigation such as using aliases and code names to conceal their identities and deleting emails immediately after viewing them.(3) Such destruction of evidence caused great difficulties for the NDRC in its investigation, but also confirmed the companies' understanding of the illegality of entering into horizontal agreements and their subjective intention of violating the Anti-monopoly Law.Calculation of illegal periodThe monopolistic conduct – including the exchange of sensitive information, price negotiation and fixing and the allocation of customers and shipping routes – had taken place over a long period. According to the NDRC's penalty decision, this was "at least from 2008 [the year in which the Anti-monopoly Law came into effect] to September 2012". This wording implies that the NDRC did not hold the companies accountable for the monopolistic behaviour that had occurred before the implementation of the Anti-monopoly Law. This differs to the earlier 12 Japanese Auto Parts and Bearing Manufacturers case, in which the NDRC identified that the illegal conduct had lasted from 2000 to the end of 2010, which included the period before the law was implemented.(4) Such overly strict law enforcement gave rise to queries, and in this case the NDRC imposed penalties on the violations that had occurred only after the law was implemented. This follows the fundamental non-retroactivity principle and reflects more rigorous law enforcement.Scope of case and harm to competitionIn addition to the extensiveness of its duration, the monopolistic conduct had a wide impact. The affected routes included:Europe to China;North America to China;China to Europe;China to North America;China to South America;China to Southwest Africa; andall major routes across the coastal waters of China.In addition – in terms of roll-on/roll-off cargo transportation – multiple manufacturers were affected, including automotive and engineering machinery brands.The companies reached and implemented horizontal monopolistic agreements with respect to price-fixing and market-dividing, which directly eliminated or restricted competition in China's international roll-on/roll-off freight service market and excluded other new and potential price-competitive market entrants. The bilateral and multilateral horizontal agreements reached by the companies:involved directly inflated international shipping fees;harmed the interests of importers, exporters and end consumers; andundermined the international competitiveness of the relevant manufacturers.Combination of punishment and leniencyThe NDRC determines the level of fine in accordance with the severity, duration and scope of an enterprise's illegal conduct, but also applies the leniency programme based on the enterprise's voluntary reporting and degree of cooperation in an investigation.According to the NDRC's penalty decision in this case, Nippon Kabushiki Kaisha, Kawasaki Kisen Kaisha Ltd and Mitsui OSK Lines could have incurred fines of 10% of their 2014 international roll-on/roll-off freight service sales relevant to the Chinese market for their leading roles and severe violations, as well as their conduct, which had covered a long period and involved many brands. However, each enterprise was either exempted from the penalty or incurred a lesser fine due to the leniency programme. Further, Compania Sud Americana de Vapores and Eastern Car Liner had played leading roles in some violations and their illegal conduct had covered a long period. However, since fewer brands and shipping routes had been involved, they incurred fines of 6% and 5% of their 2014 sales, respectively. As Compania Chilena de Navegacion Interoceanic had played a minor role in assisting collusion, which had included fewer brands and shipping routes, it incurred a fine of 4% of its 2014 sales.Due to the severity of the violations, the NDRC based its fines on a percentage of each company's sales in the previous year, which was in accordance with its conventional practice. In 12 Japanese auto parts and bearing manufacturers three auto-parts manufacturers (Furukawa, Yazaki and Sumitomo) incurred penalties of 6% of their sales in the previous year because their price-fixing agreements had related to only one product.(5) However, the other three auto-parts manufacturers (Asian, Milsuba and Mitsubishi Electric) incurred penalties of 8% of their sales in the previous year because their price-fixing agreements had related to more than two products. Similarly, in this case, the NDRC concluded that three enterprises should incur fines of 10% of their relevant market sales in the previous year due to the severity of their violations, but was lenient in its actual calculation of the fines. Conversely, the company whose illegal conduct had been less severe incurred a penalty of 4% of its relevant market sales in the previous year, which shows the NDRC's strict law enforcement (see table below for detailed penalties).Penalised companyReasons for penaltyGrounds for mitigation of penaltyFine as % of 2014 turnoverAmount of fineNippon Kabushiki KaishaIllegal conduct covered a long period of timeMany brands were involvedCompanies played leading roles in some of the violations These companies would have incurred fines of 10% of their 2014 sales, but the NDRC applied the leniency programme due to the fact that they voluntarily provided information and important evidence concerning the establishment of the monopolistic agreements.First company that voluntarily reported – completely exemptExemptNilKawasaki Kisen Kaisha LtdSecond company that voluntarily reported –penalty reduced by 60%4%Rmb23,980,869Mitsui OSK LinesThird company that voluntarily reported – penalty reduced by 30%7%Rmb38,121,126EUKOR Car CarriersIllegal conduct covered a long periodMany brands were involvedCompanies played leading roles in some of the violations While there were no grounds to mitigate the penalties, these companies provided relevant evidence that was initially unavailable to the NDRC.9%Rmb284,731,338Wallenius Wilhelmsen Logistics8%Rmb45,061,269Compania Sud Americana de VaporesIllegal conduct covered a long periodPlayed leading roles, but in fewer violations that involved fewer brands and shipping routesNo grounds for mitigation of penalty6%Rmb3,076,680Eastern Car Liner5%Rmb11,268,578Compania Chilena de Navegacion InteroceanicIllegal conduct covered a long periodAssisted in fewer violations that involved fewer brands and shipping routesNo leading role4%Rmb1,198,354When dealing with important anti-monopoly cases, the NDRC insists on combining strict punishment with the leniency programme. The application of the leniency programme exempts some companies from or reduces the penalties, which encourages the originally colluding companies to report voluntarily and compete for the position of top-ranked leniency applicant.According to Article 14 of the Regulations on Procedures for the Administrative Law Enforcement of Anti-price Monopoly:the first party to report monopolistic pricing agreements and provide important evidence may be exempted from receiving a penalty;the second party to report such agreements and provide important evidence may have its penalty reduced by 50% or more (depending on the severity of the case); andpenalties may be reduced by 50% or less (depending on the severity of the case) for others that take the initiative to report such agreements and provide important evidence.According to China Reform Daily, in this case the three companies voluntarily reported within one week and there were short intervals between each company reporting, showing that the programme had encouraged them to be the first to report in order to be exempted from receiving a penalty or incur a reduced penalty.(6) If Nippon Kabushiki Kaisha, Kawasaki Kisen Kaisha Ltd and Mitsui OSK Lines had not reported, they would have incurred fines of 10% of their 2014 turnover (the highest penalty). Thus, penalty exemptions or reductions are evidently more attractive to companies whose violations are relatively more severe than the other companies involved.Regardless of the leniency programme, the provision of evidence that is unavailable to the NDRC has a positive effect on penalty reductions. EUKOR Car Carriers and Wallenius Wilhelmsen Logistics could not apply for the leniency programme because they did not voluntarily report the violations in time. However, they voluntarily provided relevant evidence that the NDRC was unaware of earlier in the investigation. Thus, they incurred penalties of 9% and 8% of their 2014 sales, respectively, which is less than the highest penalty that can be imposed (ie, 10% of their 2014 annual sales). Evidently, cooperating with an investigation and providing evidence that is unavailable to law enforcement authorities will have a positive effect on the final result – even if the leniency programme does not apply.Comment As this was the first monopoly case in the Chinese roll-on/roll-off freight services industry, the high fines indicate the NDRC's determination to intensify anti-monopoly law enforcement. One reason for the NDRC's investigation was the joint US, EU and Japanese raid of roll-on/roll-off international shipping companies in September 2012, which caught the NDRC's attention.(7) The NDRC usually monitors cases in important anti-monopoly jurisdictions closely. The 12 Japanese auto parts and bearing manufacturers case is a typical example of the NDRC following a foreign antitrust investigation and imposing punishments. Therefore, companies undergoing an investigation by antitrust law enforcement authorities in other jurisdictions should monitor their antitrust compliance in China closely and:evaluate and inspect potential antitrust risks;provide up-to-date and tailored antitrust training; andpromote awareness of antitrust compliance.Companies that have already violated the Anti-monopoly Law should seek professional advice and:voluntarily report to the antitrust law enforcement agencies as soon as possible;undertake rectification measures; andtake practical actions to eliminate the consequences of their wrongdoing.Such measures can help companies to receive penalty exemptions or reductions.The leniency programme played a key role in this case, but the companies involved should be aware of the potential consequences had they tried to evade investigation. In particular, as voluntarily reporting and providing important evidence is directly related to the reduction of penalties, the leniency programme plays a significant role in breaking up cartels by damaging the close relationship between members. According to one source, at the start of this case the NDRC could track only extremely limited information.(8) However, it promptly launched an official investigation after the first company had voluntarily reported, and after that two other companies also reported within the same week. With the information provided by these three companies, the NDRC gradually pieced together the whole case, obtaining sufficient evidence which laid the foundation for the penalties that it imposed.For further information on this topic please contact Michael Gu or Sun Sihui at AnJie Law Firm by telephone (+86 10 8567 5988) or email ([email protected] or [email protected]). The AnJie Law Firm website can be accessed at www.anjielaw.com.Endnotes(1) The original Chinese notice issued by the NDRC is available at http://jjs.ndrc.gov.cn/gzdt/201512/t20151228_769084.html.(2) China Reform News, available at www.cfgw.net.cn/2015-12/28/content_18263997.htm.(3) Ibid.(4) 12 Japanese auto parts and bearing manufacturers, available at http://jjs.ndrc.gov.cn/gzdt/201408/t20140820_622756.html.(5) The NDRC imposed fines totalling Rmb1.24 billion on 12 Japanese auto parts and bearing manufacturers that engaged in price-related monopolistic behaviour. Details are available at http://jjs.ndrc.gov.cn/gzdt/201408/t20140820_622756.html(6) China Reform Daily reported the first anti-monopoly case in the roll-on/roll-off shipping industry. Details are available at www.cfgw.net.cn/2015-12/28/content_18263997.htm.(7) Ibid.(8) Ibid.