Introduction

The Japan Fair Trade Commission (JFTC) – Asia's oldest competition authority, with 70 years of enforcement history – is undergoing a modernisation process. Over the past decade, the JFTC has made progressive efforts to revise its enforcement practice and procedures in order to align itself more closely with international standards, particularly those of the European Commission. The JFTC had fallen behind overseas regulators, which are increasingly investigating complex, global infringements, as its enforcement priorities had long been focused on the most common types of violation in the Japanese domestic sphere, such as bid rigging in public works projects. However, in order to catch up with regulators in other advanced economies, as well as other emerging regulators, the JFTC has started to widen the scope of its enforcement to catch international cartels and conduct that takes place outside Japan, but has an effect on the Japanese market. This update explores two main areas of reform that the JFTC is examining at present:

  • the substance of enforcement; and
  • procedure.

This reform is taking place not only in the investigation sphere, but also in the merger control sphere. As part of its modernisation process, the JFTC is gradually adopting other regulators' assessment tools – for example, it is increasingly using economic analysis in its assessments. It has also adopted the new practice of reviewing internal documents, which has increasingly come into play in recent cases.

New tools to catch foreign companies

The JFTC's investigation procedure is interview driven. Interviewing is a key, powerful tool in behavioural investigations and often leads to confessions. However, it is difficult for the JFTC to investigate foreign companies' conduct if the language and geographic location of key persons are not easily accessible. Further, the JFTC is unable to conduct dawn raids on foreign companies' overseas offices. To overcome these barriers, the JFTC appears to have begun adopting EU-style procedures when dealing with foreign companies, particularly use of written information requests rather than interviews. This new approach has been tested in recent investigations in the financial services and energy sectors.

Pursuing new enforcement targets

The JFTC is entering new enforcement areas and moving away from its traditional investigational focuses, such as bid rigging in the construction sector. This shift has largely been prompted by earlier, similar investigations in Europe and the JFTC's global enforcement priorities are expected to continue to track those of the European Commission. One recent example is the JFTC's joint e-commerce industry market survey with the Ministry of Economy, Trade and Industry. Another is the JFTC's first-ever challenge of the legality of most-favoured-nation clauses in Amazon's agreements with independent retailers, in which it informally ended its investigation after Amazon offered commitments. Liquefied natural gas (LNG) distribution is another recent area of interest for the JFTC, as an investigation was recently conducted, under the auspices of a market survey, into destination clauses in LNG trade contracts.

The JFTC has also expressed a clear interest in investigating the digital economy (which involves the Internet of Things, artificial intelligence and big data), unlike other regulators in Asia, which have been hesitant in this regard. In relation to the application of fair, reasonable and non-discriminatory (FRAND) terms, the JFTC has become one of the first competition authorities to clarify that refusal to license a standard-essential patent (SEP) or seeking an injunction against a willing licensee – after declaring an intention to license that SEP on FRAND terms – may violate Japanese competition law under certain conditions. In late 2016 it made its first such finding against a US-based patent pool for Blu-ray disc-related patents.

Finally, the JFTC is looking into the application of competition law in the employment sphere, which has long been excluded from the scope of its work. In July 2017 a study group was formed to explore the potential competition law implications of human resource practices, such as collusion on wage levels and non-compete clauses in employment contracts.

Enhancing due process

The JFTC's procedural reform to enhance due process also brings Japan into line with the European Union. The JFTC-led appeals tribunal (hearing proceeding) was recently abolished and replaced with an independent judicial review process, under which the Tokyo District Court has exclusive jurisdiction to hear appeals of JFTC decisions in the first instance. This new check-and-balance mechanism has increased procedural protections for companies.

Attorney-client privilege protection is unavailable in an investigation context in Japan (since privilege is not recognised under Japanese law more generally). This flaw is now closely scrutinised and a JFTC panel that was established to examine possible reforms to fining procedures indicated in its recent report that the introduction of privilege protection (in whatever format) will likely be discussed in the near future. This topic is still being hotly debated in the context of broader plans to reform the calculation of penalties.

Potential reform of penalty calculation system

As another procedural reform, the JFTC is considering introducing a new penalty calculation system to provide it with more flexibility and discretion in setting fines in return for companies' cooperation. The existing system does not allow any room for the JFTC to use its discretion in calculating penalties, which is a serious drawback to providing incentives for companies to cooperate. The new system will most likely be modelled on the EU system, under which the European Commission can consider various mitigating and aggravating factors in setting fines up to a statutory maximum.

Looking ahead

Although the JFTC's new approach is unclear at this stage, EU practices may provide valuable guidance in predicting and understanding its new approach. The JFTC is also likely to observe development in the European Union and continue to take its lead from the European Commission when deciding its enforcement priorities.

For further information on this topic please contact Kaori Yamada or Yuki Sugawa at Freshfields Bruckhaus Deringer LLP by telephone (+81 3 3584 8500) or email (kaori.yamada@freshfields.com or yuki.sugawa@freshfields.com). The Freshfields Bruckhaus Deringer LLP website can be accessed at www.freshfields.com.

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