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Antitrust: restrictive agreements and dominance

In 2018, the SAMR and local agencies concluded four abuse of dominance cases. Among these cases, two cases were terminated without any penalties. This shows the importance of active rectification and cooperation during the investigation.

Furthermore, the antitrust agencies concluded and published only one case in relation to vertical restriction cases. However, the investigation on resale price maintenance was still one of the key antitrust enforcement priorities.

i Significant casesChlorphenamine APIs case

On 30 December 2018, the SAMR issued its penalty decisions against Hunan Erkang Pharmaceutical Management Co, Ltd (Erkang) and Henan Jiushi Pharmaceutical Co, Ltd (Jiushi) for their abuse of dominance in relation to chlorphenamine active pharmaceutical ingredients (APIs). The two enterprises were fined a total of 10 million yuan.

The relevant market in this case was chlorphenamine APIs, which are widely used to produce anti-allergy medicine. In China, there are only three licensed manufacturers of chlorphenamine, including Jiushi, India Supriya Lifescience Ltd (Supriya India) and Shanghai Harsen Morden Pharmaceutical Co, Ltd. Erkang did not engage in production of cholorphenamine. However, Erkang signed an exclusive distribution agreement with Supriya India to control the source of import of cholorphenamine. On the other hand, Erkang entered into a strategic cooperation agreement with Jiushi in February 2018 to collectively supply cholorphenamine. According to the penalty decision, the combined market share of Erkang and Jiushi reached 96.38 per cent in 2017. Therefore, the SAMR deduced that Erkang and Jiushi collectively held the dominant market position in chlorphenamine APIs.

According to the penalty decision, Erkang and Jiushi abused their dominance by: (1) refusing to supply to downstream purchasers on the grounds that chlorphenamine was out of stock or other reasons that led to unavailability of chlorphenamine; and (2) bundling sales of chlorphenamine APIs with Erkang's other pharmaceutical accessories without a valid reason.

In addition to the aforementioned behaviours implemented by Erkang and Jiushi, Erkang had raised the price of chlorphenamine to 2,940 yuan per kilogram, which was four times the average purchase cost of chlorphenamine as at July 2018. Furthermore, the SAMR found that the price was also much higher than 700 yuan per kilogram, which was offered by Jiushi to its downstream manufacturers.

The SAMR concluded that Erkang and Jiushi had abused their dominance and imposed a total fine of 10 million yuan. In addition to refusing to supply without a valid reason and bundling sales, Erkang also sold chlorphenamine at unfairly high prices. That may be the reason why Erkang was fined 8 per cent of its 2017 revenue, which was relatively higher than the penalties imposed on the other pharmaceutical violators. Meanwhile, 8 per cent of revenue was the highest percentage out of the penalties imposed in 2018.

In recent years, antitrust law enforcement authorities have shone a spotlight on enterprises engaged in the manufacture and sale of APIs. The legal risks associated with the following behaviours in APIs industry are relatively high: (1) refusal to deal; (2) imposing unfair prices; (3) tying and bundling; and (4) imposing unreasonable trading conditions, etc.

Petro China case

On 26 January 2018, the NDRC penalised two subsidiaries of Petro China – PetroChina Daqing Oilfield Natural Gas and PetroChina Natural Gas Sales Daqing – for their maintenance of the minimum resale price on their downstream distributors for gas sold to consumers. The SAMR published the above penalty decision on 27 July 2018. According to the penalty decision, the two Petro China subsidiaries had been hit with a total fine of 84.06 million yuan, amounting to 6 per cent of their respective revenues for the previous year.

The SAMR found that the two branches had reached and implemented a minimum resale price maintenance agreement with 13 downstream compressed natural gas filling stations in Heilongjiang Province. According to the decision, the two branches conducted the following wrongdoings:

  1. They held meetings with the downstream purchasers to discuss the minimum resale price and arrange for the signing of such agreements. Also, they circulated a supplementary notice to enhance the implementation of such vertical agreements.
  2. The two companies supervised the involved companies to implement such vertical agreements and required the downstreamers to submit information of targeted consumers, volumes and selling prices at a regular interval. In addition, the two companies built up a group to supervise the implementation of the agreements by conducting on-site inspections.
  3. The two companies threatened to reduce or suspend gas supplies to the downstreamers that refused to obey the policy of resale price maintenance.

The SAMR held that the two companies had violated Article 14(2) of the Anti-monopoly Law by concluding and implementing a monopolistic agreement to restrict the minimum resale price of gas. The companies' violation had severely restricted and eliminated competition in the natural gas market, undermined fair competition and impaired consumer interests. The SAMR imposed fines equivalent to 6 per cent of the two companies' respective revenues for the last year. PetroChina Daqing Oilfield Natural Gas was fined 38.76 million yuan and PetroChina Natural Gas Sales Daqing was fined 45.3 million yuan.

This case is a typical monopolistic case involving resale price maintenance. The entities that were penalised are subsidiaries of PetroChina, a centrally administered state-owned enterprise. And the industry involved in this case is one of the natural monopoly industries. The case implies that the SAMR is expected to be more aggressive in its antitrust enforcement. Whether a company is a foreign company or state-owned, and whether the related industry is or is not a special industry, if a company violates the Anti-monopoly Law, it should expect to be scrutinised by the SAMR.

ii Trends, developments and strategies

As in the past, antitrust law enforcement authorities have kept an eye on the medical industry, particularly on the enterprises engaged in the manufacture and sale of APIs. The dominant position of the APIs enterprises can be explained for the reasons that: (1) few enterprises actually compete in certain APIs markets; (2) APIs manufacturers provide the active ingredients of drugs with a strong ability to control the market and downstream pharmaceuticals have no choice but to submit to and rely on the APIs manufacturers; and (3) China has a strict certification system for supervising the production of APIs and it is difficult to enter into APIs markets.

Another trend in the cases concluded by the antitrust authorities is the increase of terminated cases. The decisions to terminate various investigations revealed that in such cases, the companies submitted their commitments to rectify their behaviours and asked for a suspension. The antitrust enforcement agencies decided whether to suspend the investigation based on the nature of the illegality of violations, the duration of the illegal activities, the cooperation with the investigation and the commitment of rectification submitted by the companies. According to the published cases, normally one year after rectification, the companies involved were allowed to submit an application for termination of the investigation to the antitrust enforcement agencies. The agencies exercise discretional power when deciding whether to terminate an investigation according to the performance of rectification.

iii Outlook

In 2018, the SAMR and local enforcement agencies announced five cases in which the investigation was suspended or terminated. The termination of investigated cases reflects the importance of cooperation and active rectification by the relevant enterprises under investigation. All of the five cases targeted abuse of market dominance, focusing on the wrongdoings of tie-in sales and imposing unreasonable conditions.

Compared with cartel cases, the number of dominance cases and resale price maintenance cases was small in 2018. This is possibly because the SAMR was busy with the establishment and integration of the new antitrust authority; as the investigation of and the evidence collection in dominance cases are much more difficult than cartel cases. It is estimated that the SAMR will strengthen its crackdown on dominance cases and resale price maintenance cases in 2019, particularly with the assistance of local antitrust authorities.