An extract from The Dominance and Monopolies Review - 7th edition

Abuse

While conduct constituting private monopolisation may be either exclusionary conduct or controlling conduct, the former is at the heart of such conduct, and one should also be mindful of the following: it is highly likely that the JFTC makes its decisions regarding private monopolisation not only by paying attention to the anticompetitive nature of each such conduct, but also by considering overall the strength and weakness of factors such as: (1) the company's power in the market; (2) the anticompetitive nature of the conduct in question; and (3) the effect on the relevant market, as well as the causal relationship between the three, and further, taking into account the existence or absence of any pro-competitive effects, and the extent thereof.

For point (1), the JFTC takes into account not only the company's market share itself, but also the characteristics of the market, the difference in share between the company and the player ranking second in the market, and, where necessary, the extent of excess profits, the existence of potential new entrants, brand strength and so on.

Concerning point (2), while the Supreme Court has proposed 'practices of an artificial nature which deviate from methods of normal competition', this can simply be taken to mean anticompetitiveness. The extent of the anticompetitive nature of a conduct can be taken instead to mean the extent of the deviation from normal competition based on price and quality, that is to say from competition on the merits of the relevant products or services.

The effect on the relevant market (point (3)) refers to effects such as competitors failing to enter or being delayed in entering a market, withdrawing therefrom, experiencing fluctuations in their share, or increases or decreases in customer trading.

Because points (1) to (3) act on each other, if an anticompetitive effect is quantitatively assessed and given a numerical value, the anticompetitive effect is likely determined not through a summing up of such values, but by multiplying them and subtracting any pro-competitive effects instead. Once this is understood, the following examples become easier to comprehend.

In the Private Monopolisation Guidelines, four typical examples of exclusionary conduct constituting private monopolisation are given:

  1. predatory pricing;
  2. exclusive dealing;
  3. tie-in arrangements; and
  4. refusal to deal or discriminatory conduct.

While this is a simple way to classify such conduct, a much more broad and diverse range of types of conduct can be given. Additionally, the following classification of conduct is based on the JFTC's law applied to actual cases; however, this is fluid, and dependent on the details of each case. In many cases, if private monopolisation applies, this also constitutes a type of unfair business practice. However, the converse is not true.

i Exclusionary conduct (private monopolisation)Predatory pricing

According to the Private Monopolisation Guidelines, a price is highly likely to constitute exclusionary conduct where it is lower than the 'costs required to supply the product', which is a similar concept to average variable costs. On the other hand, where the price is lower than the total costs required to supply a product, but greater than the 'costs which does not arise if the product is not supplied', and there are no special circumstances such as that the product is being supplied over a long period of time and in high volume, there is a low possibility of such pricing constituting exclusionary conduct.

The USEN Corporation case is a typical example of this. USEN Corporation, which had a market-leading share in cable music broadcasting to retail offices (68 per cent, rising to 72 per cent as a result of exclusionary conduct), lowered the monthly listening fee that it charged to customers of its largest rival, Cansystem (26 per cent, decreasing to 20 per cent as a result of USEN's exclusionary conduct) as a condition of the customers switching to use its own service, and also extended its promotional campaign to those customers (whereby those monthly fees were made free) from the standard three months to six, and so was determined to have engaged in exclusionary conduct.

Margin squeeze

Margin squeeze means conduct whereby a company that does business in both an upstream market and a downstream market tries to bring the price of an upstream product close to that of a downstream product. In some cases, it is regulated as a refusal to deal.

The Supreme Court's judgment in NTT East is a typical example of this. When providing new communication services using fibre optics to detached residential properties, NTT East, which owns more than 70 per cent of the fibre-optic lines in the east Japan region, provided users with such communication services under a system whereby one person used a single fibre-optic line (central wire direct connection system). However, the fact that the usage fee for this was less than the connection fee for other communications providers, when using the same central wire direct connection system, was treated as them being excluded. While the monthly usage fee was ¥5,800, the monthly connection fee was ¥6,328.

Exclusive dealing

In Nordion, the Canadian company Nordion, that held the majority of global production volume and a large part of the sales for Molybdenum 99 (a substance used in radiation therapy) and 100 per cent of the market share in Japan, required its Japanese business partners to purchase all of the products they required from it over the course of 10 years, and accordingly, was found to have excluded its competitors. This is an exclusive purchasing obligation, which is one type of exclusive dealing.

Rebates

The Private Monopolisation Guidelines attempt to draw a line under whether conduct is illegal by listing a diverse range of factors, including loyalty rebates, but are unsuccessful in doing so. As such, analysis of exclusionary conduct is at a developing stage, whereby factors such as the discount aspect of rebates and pro-competitive effects are also taken into account.

A representative example of this is Intel. Intel, which has a larger share of the market for central processing units (CPUs) installed in computers (rising from 76 to 89 per cent as a result of exclusionary conduct), provided its business partner computer manufacturers with rebates, etcetera, on the condition that they would use Intel CPUs for 90 to 100 per cent of their computers, and would not use CPUs from Intel's competitor, AMD (with a share of 22 per cent falling to 10 per cent as a result of Intel's exclusionary conduct), for those computers that had a high production volume. Intel's conduct in causing them not to adopt the CPUs of its competitor was deemed to be exclusionary.

Mixed conduct

There are some situations in which various different types of exclusionary conduct are mixed together, or combine to form a consecutive series.

NIPRO is a typical example of mixed conduct. In this case, NAIGAI Group, a business partner of NIPRO that produces and sells glass tubes for use in ampoules (and has a share of 85 per cent), began dealing in non-Japanese made glass tubes, which were competitor products to NIPRO's. To restrain the expansion of NAIGAI's dealing in such glass tubes, and with the intention of imposing sanctions on it, NIPRO raised the sale price for glass tubes to NAIGAI Group only (price discrimination); refused to accept orders placed by NAIGAI Group (refusal to deal); and required NAIGAI Group alone to provide security or to settle invoices with cash payments (abuse of superior bargaining position).

The JFTC decided that exclusionary conduct had taken place after taking into account a series of conduct by NIPRO over some four years. While NIPRO was the first case of private monopolisation in which the JFTC's findings were contested, it also alleged in the course of the hearing as a preliminary claim that NIPRO's same series of conduct also constituted unfair business practices.

As NAIGAI Group had not decreased its dealings in imported glass tubes despite such course of conduct, NIPRO was able to exclude the imported tubes, but only slightly, and accordingly, the JFTC added an allegation of unfair business practices, which have a low evidential burden and for which it is sufficient to show that there was a 'likelihood of impeding fair competition'. Finally, the JFTC returned to its claim of private monopolisation and won its case.

Hokkaido Shimbun is also an interesting example of a mixed conduct case. The Hokkaido Shimbun newspaper covered the entire Hokkaido area, and had a dominant position even within newspaper sales in the Hakodate region (which is located within the Hokkaido area). Given that Hakodate Shimbun was established in the same region with the aim of publishing an evening paper, Hokkaido Shimbun both filed a trademark on title lettering that the new market entrant, Hakodate Shimbun newspaper, was likely to use, and also greatly reduced its newspaper advertising fees in the same region and put pressure on the press agency not to broadcast news to Hakodate Shimbun. It further demanded that the TV stations would not broadcast its commercials. This conduct was treated as Hakodate Shimbun being excluded.

Other examples of mixed conduct are outlined below. While these types of conduct are difficult to typify under the Private Monopolisation Guidelines, they are clear examples of exclusionary conduct.

In Japan Medical Foods Association, the Association, which exclusively carried out inspection work on medical food products (that is, it had a share of 100 per cent) through the public inspections system, colluded with Nisshin Healthcare Food Service Co, Ltd, a primary seller of food products for medical use, to construct a production and sale system that made it clearly difficult for new players to enter the market, such as requiring registration for medical food products and certification for production plants, and so was deemed to have excluded new market participants from producing and selling medical food products.

In Pachinko machine production patent pool, 10 pachinko machine producers that held key patents on the manufacturing of such machines (and together held approximately 90 per cent of the pachinko machine market), and that had gathered their patents together and were managing them as a patent 'pool', were deemed to have committed exclusionary conduct for not granting new participants licence rights to those patents.

In Paramount Bed, Paramount Bed placed pressure on the person at the Tokyo metropolitan government in charge of placing orders for medical-use beds (Paramount had an almost 100 per cent share of this market) to enable delivery only of beds for which Paramount Bed had utility model rights, so that competing providers could not supply other beds, and accordingly was found to have committed exclusionary conduct.

ii Controlling conduct (private monopolisation)

There are few cases concerning controlling-type conduct; nor are there any guidelines thereon from the JFTC. An example that constitutes controlling is a company using a given investment in another company to restrict its sales areas against its wishes, and to prohibit the establishment of new factories.Also, while there are very few examples of this (just five cases to date), cases such as the Japan Medical Foods case and the Paramount Bed case involved both exclusionary conduct and controlling conduct. Since the Toyo Seikan case, there has been only one case of controlling conduct alone – the 2015 Fukui Agricultural Cooperative case.

While Fukui Agricultural Cooperative is a controlling-type case, the scale thereof was small and it was extremely local in nature.

iii Unfair business practicesPrice discrimination

In Hokkaido Electric Power, the company set different fees for returning consumers that were higher than those for new consumers, and accordingly the JFTC issued a warning on suspicion of price discrimination.

While Japanese electric power companies once tended to dominate certain areas for long periods of time, the regulations were gradually eased to accommodate new market entrants. In particular, in recent years a liberalisation of retail electricity has begun, starting with the super-high voltage field (such as for large-scale power plants), then office buildings, and finally low-voltage family retail electricity as of April 2016, with the result that the Japanese electricity retail market has become completely liberalised. The case of Hokkaido Electric Power can be positioned as occurring in the midst of the retail electricity market's shift to a competitive market.

The JFTC has made it clear to the energy industry (such as electricity and gas) that it will proactively investigate the situation going forward.

Tying

Microsoft Japan licensed its word processing software, Word, to computer manufacturers together with Excel (the spreadsheet software for which it has the leading market share) at the same time as licensing the latter, and accordingly was deemed to have engaged in 'tying'. Following this, Ichitaro, competitor word processing software, suffered a notable reduction in its market share.

Non-assertion provisions clause

The Microsoft case is a typical example of this. Microsoft US was found to have created an anticompetitive effect in the computer audiovisual technology market by including in its contracts for licensing Windows (its core software for PCs), original equipment manufacturer (OEM) sales provisions whereby the OEM providers entering into those contracts promised not to sue Microsoft or other OEM providers for breaches of patent infringement by Windows (non-assertion provisions), and so this conduct was found to constitute trading subject to restrictive conditions.

In the decision, it was determined that the non-assertion provisions were extremely unreasonable given that it enabled the OEM providers' worldwide patents to be incorporated into the Windows series for free, and accordingly that there was a high probability of OEM providers losing the desire to research and develop new computer audiovisual technology.

In addition, given that the OEM providers and Microsoft are competitors in the computer audiovisual technology market, the OEM providers would, as a result of the non-assertion provisions, lose the desire to research and develop computer audiovisual technology if they had such powerful technology in their possession, and accordingly, their position would be weakened, while on the other hand, Microsoft could rapidly and widely distribute its computer audiovisual technology on a global scale by installing it within the Windows series.

Accordingly, it was determined that the non-assertion provisions had a likelihood of excluding competition in the computer audiovisual market, or causing it to stagnate, and so there was a high probability of an anticompetitive effect being extended to that market.

Breach of fair, reasonable and non-discriminatory terms

One-Blue, LLC manages and operates the patent pool for the standard essential patents for Blu-ray disc standards. Despite declaring that it would license these under fair, reasonable and non-discriminatory (FRAND) conditions, it did not reach an agreement with Imation Corporation, which wished to receive a licence under the FRAND conditions, and furthermore told its business partners that the Blu-ray discs produced and sold by Imation would infringe One-Blue, LLC's patent rights. Accordingly, this conduct was determined to constitute unfair interference with a competitor's transactions.

Most-favoured nation clause

Amazon Japan was found to have included in its seller display contracts for Amazon Marketplace (its electronic shopping mall) an MFN clause that required sellers to set prices and terms and conditions for products sold by them on Amazon Marketplace at whichever were the most favourable prices and terms and conditions of the same product as sold by other sales routes, and accordingly was investigated by the JFTC on suspicion of trading subject to restrictive conditions. However, as Amazon Japan made a petition to the effect that it would take voluntary measures itself, and those measures, including deleting MFN clauses from the contracts and not introducing the clauses in new contracts, dispelled the suspicion, the JFTC broke off its investigation. It could be said that Amazon took commitment procedures in advance. In March 2018, the JFTC raided Amazon Japan on suspicion of abusing superior bargaining power, which is discussed in Section II. The case is ongoing.

Unfair interference with a competitor's transactions

DeNA is an online game platform that uses mobile phone and social network services (SNS), was ranked top in sales of SNS game software and was also in hot pursuit of its rival, Gree. DeNA planned to disrupt SNS game developers from providing software to Gree by eliminating their links to the DeNA platform when they provided software to Gree. DeNA was determined to have engaged in unfair interference with a competitor's transactions.

Exploitative abuse (abuse of superior bargaining position)

The provisions on unfair business practices contain prohibitions on abuse of superior bargaining position that are unique to Japan. One aspect to these provisions is the traditional Japanese industrial policy of protecting small and medium-sized companies, and, while they are somewhat hard to understand in terms of pure competition law theory, the JFTC makes frequent use of these provisions, therefore making them a key part of the regulations against unfair business practices. It is enough for a company to have a superior bargaining position relative to its suppliers, and there is neither any need for the relevant company to have market power nor to have a strong position in the relevant market. Of course, if such elements exist, the possibility of the company being targeted by the JFTC will increase.

As such, the company is an important trading partner for suppliers; if they have a relationship with such company whereby they must accept any demand made by the company, no matter how unreasonable, the company in question will be deemed to have a superior bargaining position. Theoretically, the key factor in finding a superior bargaining position is the degree of dependence by the supplier on the transaction with the company, and the degree of dependence is generally evaluated by dividing the supplier's volume of sales to the company by the supplier's total amount of sales. However, in practice, the JFTC often finds dependency, even if the ratio is less than 5 per cent.

The rules primarily regulate against large companies, such as mass electronics retailers, supermarkets, department stores, home and convenience stores, demanding cooperation fees from their suppliers, requiring them to dispatch their employees on secondment without charge, and returning products or reducing payments therefor without due cause.

However, there are no restrictions on the types of industry that may be targeted, and in the past, there have also been cases where banks were investigated. In Mitsui Sumitomo Bank, the JFTC found that Mitsui Sumitomo Bank forcing borrowers to purchase financial products was unlawful.

Apple case

The JFTC has been investigating Apple Inc (Apple), the ultimate parent company of Apple Japan GK (Apple Japan), in accordance with the provisions of the AMA, since October 2016. Apple Japan has, based on its agreements with NTT Docomo KK, KDDI KK and SoftBank KK (collectively, three mobile network operators (3 MNOs)), been suspected of restricting the business activities of 3 MNOs regarding the following:

  1. quantities of iPhones that 3 MNOs order from Apple Japan;
  2. telecommunication service plans that 3 MNOs offer iPhone users;
  3. iPhones that users traded in to 3 MNOs; and
  4. subsidies that 3 MNOs and others offer users purchasing iPhones.

During the investigation, Apple reported to the JFTC that it would amend a part of the agreements. The JFTC reviewed these amendments. Consequently, on 11 July 2018, the JFTC decided to close the investigation, concluding that the amendments would eliminate the suspicion of the violation mentioned above. The JFTC's evaluations are as follows.

Apple Japan concluded iPhone agreements with, and sold iPhones to, 3 MNOs. The iPhone agreements include provisions regarding 3 MNOs' purchase and sale of iPhone products, iPhone service and support provided to users purchasing iPhones, and telecommunication services provided to users purchasing iPhones. The JFTC investigated the following provisions in the iPhone agreements.

Provisions regarding iPhone order quantities

It was seen that Apple Japan obligating an MNO to order a specific order quantity of iPhones could be a problem under the AMA if, for example, it reduces the sales opportunities of other smartphone makers. However, considering the fact that a specific order quantity was not set out in the iPhone agreements except for during a limited time period and a stipulated order quantity did not appear to oblige an MNO to order the quantity, as well as other facts, it was not recognised that Apple Japan restricted an MNO's business activities.

Apple reported to the JFTC that, when concluding a new iPhone agreement with the MNO, it would stipulate that an order quantity would be a target for the MNO and that a failure to meet an order quantity would not be a breach of contract.

Provisions regarding iPhone plans

It was seen that Apple Japan obligating an MNO to offer an iPhone plan only could be a problem under the AMA if, for example, it lessens competition on service plans among MNOs. However, considering the fact that it was possible for other service plans to be offered under the iPhone agreements and a stipulated iPhone plan had not been offered, as well as other facts, it was not recognised that Apple Japan restricted an MNO's business activities.

Apple reported to the JFTC that it would amend the iPhone agreements and abolish the provisions regarding iPhone plans.

Provisions regarding traded-in iPhones

It was seen that Apple Japan restricting an MNO of its sales of traded-in iPhones within Japan could be a problem under the AMA, if, for example, it maintains or enhances the status of Apple Japan in the smartphone market, or it maintains the sales prices of iPhones, by promoting Apple Japan's sales of iPhones. Also, it is concerned that such restriction could hinder competition between MNOs and mobile network virtual operators, which offer telecommunication services to users who possess used handsets or that sell used handsets. However, considering the fact that the provisions regarding traded-in iPhones only defined the purpose of use within Japan of traded-in iPhones for one of the 3 MNOs, as well as other facts, it was not recognised that Apple Japan restricted the domestic distribution of traded-in iPhones.

Provisions on subsidy

Subsidies provided to users purchasing smartphones is considered to lessen the substantial costs to users in purchasing smartphones and to have promoted the wide use of smartphones. However, Apple Japan obligating an MNO to provide a certain amount of subsidy could be a problem under the AMA if, for example, it lessens competition among mobile telecommunication businesses through the smooth offering of low-price and diverse service plans, by constraining the price reduction of telecommunication services and the price combination of smartphones and telecommunication services under the current situation where MNOs bundle smartphones and telecommunication services to many users.

Apple proposed, to the JFTC, to amend the iPhone agreements with 3 MNOs so that they may offer (even if users purchasing iPhones subscribed to a term contract), service plans without subsidies (alternate plans), on the condition that 3 MNOs provide clear, fair and informed choices to users in their selection of either service plans with subsidies (standard plans) or alternate plans and other conditions. Apple agreed on such amendments with 3 MNOs and then reported them to the JFTC.

Even after the implementation of the above amendments, 3 MNOs' obligation to provide subsidies to users purchasing iPhones will still partly remain. However, it will become possible for 3 MNOs to offer alternate plans to users, which will not breach the iPhone agreements with Apple Japan. However, as long as 3 MNOs' sales promotion activities of alternate plans are not hindered, it is considered that such marketing will provide users with the optimal service plan choice, promoting competition among telecommunication businesses. Considering these points, it is recognised that the amendments will eliminate the suspicion of the violation of the AMA.