- China’s new price fixing rules prohibit price-setting agreements among competitors, vertical resale price maintenance agreements and agreements to fix or change prices in any “fraudulent manner.”
- Provisions addressing pricing by dominant firms contain vague prohibitions on “unfairly high” and “unfairly low” pricing, as well as price discrimination without “justifiable cause.”
- The new rules feature leniency incentives for “whistleblowers” and invite complaints from aggrieved private parties.
- If not implemented with caution and restraint, the broad discretion assumed by the NDRC could lead to enforcement investigations that may protect unhappy competitors at the expense of robust competition.
China’s National Development and Reform Commission (the “NDRC”), one of three agencies charged with enforcing China’s 2008 Antimonopoly Law (“AML”), has promulgated two regulations that became effective February 1, 2011. The new regulations include substantive provisions relating to price fixing (including an enumeration of certain justifications or defenses) and abusive pricing practices by dominant firms, as well as provisions addressing the procedural aspects of enforcement. The new rules assume broad investigatory powers for the relevant agencies and establish a leniency program akin to those already in existence in the United States and Europe. The rules also provide for extra-territorial reach—encompassing sanctions for conduct outside China that has an effect on a relevant market in China.
Even prior to the adoption of these new regulations, the NDRC had imposed fines for price fixing cartels (for example, 21 producers of rice noodles were fined last year). While China has not criminalized price fixing, there have been reports in the past of persons being prosecuted criminally for related conduct (e.g., obstruction-type offenses) in conjunction with antitrust investigations. The adoption of the new regulations is intended to bring greater transparency to the law and quite likely will make enforcement proceedings more commonplace. Much remains to be seen, however, about how the regulations are interpreted, whether companies take advantage of the leniency program (including whether the NDRC exercises its discretion to grant amnesty to the first in), and whether fines have sufficient teeth to bring about voluntary compliance.
New Substantive Legal Framework
The substantive provisions of the new regulations bring greater clarity to prohibitions related to so-called “price monopolies,” including (a) price fixing agreements; (b) the abuse of a dominant position through pricing; and (c) the abuse by government entities of administrative powers through pricing.
Price Fixing Agreements
Certain agreements or coordinated actions that eliminate or restrict price competition are prohibited. Coordinated action may be found based on uniformity in pricing among companies and exchanges or contacts among companies with respect to pricing. Mere parallel conduct will likely not be deemed improper, but we caution that much remains to be fleshed out as to what, if any, “plus factors” (as they are described in the United States) will be required.
S pecifically, Article 7 of the NDRC’s new price fixing rules prohibits the following agreements among competitors:
- agreements to fix the price of products and services;
- agreements to fix the range of price fluctuation;
- agreements to fix surcharges, discounts or other expenses that affect price;
- agreements setting a price that each of the parties to the agreement will use in their dealings with a third party;
- agreements to adopt a formula for calculating price;
- agreements to prohibit participants from making any pricing change without the prior consent of other parties to the agreement; and
- agreements to fix or change price in any other fraudulent manner.
Note that the new regulations do not expressly bar market allocation or output restrictions, although the final paragraph could be so interpreted.
Vertical Resale Price Maintenance
This conduct is likewise prohibited. Article 8 prohibits both agreements to fix the price of products resold to a third party as well as agreements to fix the minimum price at which products will be resold.
T he prohibitions in Articles 7 and 8 of the new price fixing rules are subject to certain justifications or defenses set forth in Article 15 of the AML. Thus, an otherwise prohibited agreement may be justified on the basis of:
- technology improvement or new product research and development;
- product quality upgrade, cost reduction, efficiency improvement and product specifications or standards unification;
- enhancing the competitiveness of small and medium-sized business operators;
- serving the public interest with respect to, for example, energy conservation, environmental protection and disaster relief;
- mitigation of serious sales decline or obviously excessive production during economic recessions; and
- safeguarding justifiable interests in the foreign trade or foreign economic cooperation.
Obviously, much remains to be seen as to how these defenses are interpreted. Note that the defenses are not recognized by the United States or European authorities, so companies operating on a global basis would be well advised not to place much reliance on them.
Abuse of a Dominant Position
T he new regulations also contain specific restrictions on pricing by a firm with a dominant position in the relevant market (hereinafter, “Dominant Firm”). A Dominant Firm is defined as one with more than 50% of the relevant market (and also includes two firms with more than 67% of the market or three firms with a combined 75% share). The prohibitions include the following:
- selling a product at an unfairly high price or purchasing a product at an unfairly low price or selling to similarly situated customers at different prices without “justifiable cause” (which might include, e.g., bad credit history);
- selling a product at a below-cost price without “justifiable cause” (which might include, e.g., seasonal variations or new product promotions);
- demanding an exclusive arrangement with a customer or demanding a customer to deal with a specific third party designated by the Dominant Firm by offering price discounts without “justifiable cause” (which might include, e.g., maintaining brand image or ensuring product quality); and
- demanding unreasonable surcharges.
The new regulations are designed to have an extra-territorial reach: According to Article 2, the price fixing enforcement provisions apply to conduct occurring outside China that has the effect of eliminating or restricting competition in the relevant market within China.
The enforcement provisions designate the NDRC as the enforcement agency at the national level and the NDRC’s local subdivision as the enforcement agency at the provincial level. The NDRC or the local subdivision (hereinafter, the “Enforcement Agency”) may initiate an investigation on its own. Alternatively, an investigation may be launched upon receipt of a complaint meeting certain specified requirements: The complaint must identify the alleged wrongdoer, describe the alleged wrongful conduct, provide evidence supporting the allegations, and confirm that the complainant has not sought other recourse.
The Enforcement Agency is granted broad powers in the conduct of the investigation, including the ability to engage in onsite inspection, to request information from all the parties involved, to obtain copies of relevant documents, books and records, business correspondence and communications, and electronic data, and to access the target’s bank accounts. The Enforcement Agency must make a decision upon conclusion of its investigation and has the discretion to make its investigation report public. However, the rules do not spell out a time period in which the Enforcement Agency will make its decision.
Upon a finding of wrongdoing, the Enforcement Agency may impose penalties on the wrongdoer ranging from an order to cease the prohibited conduct, forfeiture of the illegal gains, and the imposition of fines from 1% to 10% of the sales revenues derived from the affected product during the preceding year (if the agreement has been implemented) or up to RMB 500,000 (US$76,000) (if the agreement has not yet been implemented).
As for findings of abuse of administrative powers, remedies include an order to cease the wrongdoing, rectification, and sanctions on the officials in charge or who are found to be the main culprits.
The first “whistleblower”—a company that has participated in the prohibited conduct but voluntarily reports it to the Enforcement Agency and provides “important” supporting evidence—“may” be granted immunity from the penalties. “Important” evidence is defined as key evidence that allows the Enforcement Agency to determine the existence of a price fixing agreement. Pursuant to this article, the participant who reports next may be granted a 50% penalty reduction, and any other participants who cooperate may be granted no more than a 50% penalty reduction, all subject to the sole discretion of the Enforcement Agency.
The alleged wrongdoer may submit a written application to suspend an investigation on the condition that it admits to the wrongdoing and commits to undertake concrete actions to rectify the wrongful conduct within a specific time. If the Enforcement Agency is satisfied that the wrongdoer has taken specific steps to eliminate the effects of its wrongful conduct within an appropriate time, the Enforcement Agency has the discretion to suspend the investigation.
Once the decision is made, either party may appeal the decision to the upper level of the Enforcement Agency or file a lawsuit in court challenging the Enforcement Agency’s decision.
Consistent with the AML, it appears that the NDRC rules against price fixing gravitate more toward the EU model than the U.S. model. If not implemented with restraint, the prohibitions on “unfairly high” and “unfairly low” pricing by Dominant Firms could invite investigations brought at the behest of competitors who claim to be aggrieved by pricing practices that would be viewed as pro-competitive and pro-consumer by antitrust enforcers in the United States and elsewhere.
While gaps and ambiguities remain, the new NDRC regulations against price fixing are certainly a step toward greater competition enforcement in China. It is anticipated that in contrast with 2010 when “only a few dozen enforcement actions” (in the words of the top NDRC official in charge) were taken by the NDRC on price fixing, enforcement activity going forward should see a sharp increase with the introduction of the new NDRC regulations.