In an announcement (the Announcement)1 made on March 31, 2010, China’s antitrust enforcement agency in charge of dealing with anticompetitive conduct related to pricing, the National Development and Reform Commission (NDRC), publicized a recent probe into a price-fixing cartel in the Guangxi Zhuang Autonomous Region (Guangxi) as well as the punishments imposed on the cartel members as a result of that probe. Simultaneous with the Announcement, NDRC released a record of a Q&A session2 revealing further information on the investigation and setting forth its justification for the penalties imposed. This case, occurring more than a year and a half after the implementation of the Anti-Monopoly Law (AML), is notable for the following reasons:

  1. it marks an exemplary test case for anti-cartel enforcement by NDRC under the AML;
  2. it represents the concurrent application of both the AML and the Price Law and its implementing regulations to a single pricing cartel;
  3. it demonstrates the application of the leniency provisions of the AML to cooperative violators; and
  4. it suggests the possibility of criminal liability for serious cartel acts.  

Background

According to the material released, on November 1, 2009, the individual responsible for the Nanning Xianyige Food Plant (Xianyige), which produces rice noodles, gathered seventeen other rice noodles producers from Nanning (the capital city of Guangxi) to discuss reorganizing the rice noodle manufacturing industry of Nanning and to propose a price increase to be implemented through outsourcing, joint operations, cross-investment and profit-sharing agreements. Following the meeting, nine producers signed outsourcing agreements and one signed a joint operation agreement with Xianyige. Further, on December 16, 2009 a group of sixteen producers (including Xianyige) from Nanning met again to further discuss a price increase, subsequently reaching a consensus. Allegedly as a result of this meeting,on January 1, 2010, eighteen rice noodle producers started to raise the average price for rice noodle from RMB 0.75/500g (approximately US$0.11/500g) to RMB 0.95/500g (US$0.14/500g). Other rice noodle producers who had not participated in the December meeting following suit. As a result, rice noodle peddlers and stores in Nanning raised the price for rice noodle food sold directly to consumers.

Following the price increase in Nanning, fifteen rice noodle producers from a neighboring city, Liuzhou, contacted Que Zhihe, the individual responsible for Xianyige, in the hopes of increasing the price for rice noodles in Liuzhou. Subsequent to these conversations, fifteen producers from Liuzhou allegedly met to discuss joint operations and a price increase. To realize a price increase, Que Zhihe, together with the senior executives of the Liuzhou Brother Plant, pressed other producers from Liuzhou on joint price increase. As a result of these actions, the price of rice noodles in Liuzhou increased as of January 21, 2010.

Investigation and Remedial Orders

Because rice noodles are a staple food in Guangxi, the price increase in Nanning and Liuzhou caused additional expenses for local consumers and provoked strong protests from local consumers. Against the backdrop of China’s lunar new year festival, NDRC, the Guangxi provincial price bureau and “other relevant agencies” having jurisdiction over the case launched an investigation.

NDRC, which took the lead in the investigation, is a powerful central ministry with authority over pricing activities in the market. NDRC is empowered by the Price Law to oversee pricing activities in the market, including, for example, unfair pricing acts. It also serves as the enforcement agency responsible for dealing with pricing-related cartels and abuse of market dominance under the AML.

In addition to these statutory powers granted it under the the anti-cartel provisions of the AML, NDRC also invoked the Price Law and one of its implementing regulations, the Provisions on Administrative Penalties for Unlawful Pricing Acts (Provisions), as the legal basis for its decision, meaning that any future unlawful pricing act also would probably be concurrently subject to both the Price Law and the AML. Although NDRC has not specified the provisions of the Price Law and the AML applicable to this case, the producers appear to have violated both Article 14(1) of the Price Law (which prohibits collusion in price manipulation as an "unfair price act")3 and Article 13(1) of the AML (which prohibits price fixing as an illegal "monopolistic agreement").4

The application of both the Price Law (as well as the Provisions) and the AML provided NDRC with a broader scope of remedial orders. Specifically, Article 46 of the AML allows NDRC to order cartel members to cease illegal acts, to confiscate unlawful gains and to impose administrative fines of 1%-10% of the cartel members’ annual revenues. Under the AML, it appears that NDRC should allow the restored market competition to adjust and reset prices by itself. However, in this case, NDRC went further, instructing the cartel members to restore the pre-cartel price, under measures prescribed by the Price Law and the Provisions. By doing so, NDRC was directly and actively intervening in the market to restore the price and to eliminate the anticompetitive effects of the cartel.

Fines and Leniency

NDRC found that the cartel members’ collusion for price manipulation constituted an “unfair price act” in violation of the Price Law, the AML and the Provisions. Accordingly, NDRC imposed a fine of RMB 100,000 on each of the three organizing factories (Xianyige, Liuzhou Brother and Liuzhou Yongcai), while eighteen cartel participants received fines ranging from RMB 30,000 to RMB 80,000, depending on the seriousness of their respective acts.

Notably, NDRC applied the leniency program under the AML in penalizing different cartel members. Twelve cartel members were exempted from monetary penalties and received warning letters only because they had “cooperated with the investigation, presented important evidence and actively taken corrective measures”. Other non-cartel-member producers that followed suit also received only warning letters requiring them to be “disciplined in pricing” in the future.

The legal basis for only giving warnings to some cartel participants can be found in the "leniency" provision under the AML. Article 46 of the AML stipulates that a cartel member can be given a mitigated punishment or be exempted from punishment if it has voluntarily reported information concerning the cartel and provided important evidence to the enforcement agency.  

Potential Criminal Liability

Though not reflected in the Announcement, it has been reported by the Chinese media that Que Zhihe, the initiator of the colluded price increase, has been arrested for violation of Article 225 of the Criminal Law, 5 which prohibits illegal business activities that “seriously disrupt the market order”.6 The AML itself does not prescribe criminal liability for any specific violation of the AML. If the media reports of Que Zhihe being arrested are accurate, this case should send a signal to companies that if a cartel conduct is sufficiently “serious,” the violator may face criminal liability.

Though this case demonstrates the possibility of the enforcement agency subjecting pricingrelated cartels to criminal penalty, it remains to be seen, as this case proceeds, whether the arrested Que Zhihe will finally be held criminally liable. Further, it is not yet clear to what extent criminal liability would be applicable (for example, whether non-pricing-related cartels, abuse of market dominant and merger control acts would also be covered), and how willing the enforcement agencies will be to apply criminal law to the enforcement of the AML.

Observations

As a high-profile, widely-publicized cartel enforcement action, the Guangxi rice noodle cartel case may demonstrate NDRC’s willingness to take actions against price cartels by applying the anti-cartel rules of the AML. While the pace of NDRC in implementing the AML has been substantially slower than that of the merger review of the Ministry of Commerce, it may be reasonably expected that, with this milestone case, NDRC’s anti-cartel enforcement under the AML is beginning to take shape.

In addition, this case sends a signal to companies doing business in China that pricing-related acts will usually be competitively sensitive and will likely be subject to stricter regulation by NDRC. Not only the AML, but also the Price Law and its implementing regulations will be applicable to pricing-related acts, and the Price Law and its implementing regulations will offer NDRC additional alternatives of measures to be taken against violators. Lastly, as this case demonstrates, business operators should be aware that serious violations of the AML may result in criminal liability, and thus they should closely monitor the development of how the Chinese People’s Procurators apply criminal laws in the context of antitrust.

In response to increasingly closer scrutiny, multinationals doing business in China should carefully examine their pricing policies and activities for compliance purposes under both the AML and the Price Law and its implementing regulations, especially when it comes to pricing for goods and services essential for consumers’ daily life.