An extract from The Public Competition Enforcement Review, Edition 13

Cartels

i Definition

Cartels are regulated by the provisions governing concerted actions under the TFTA. A concerted action is the conduct of any enterprise, by means of contract, agreement or any other form of mutual understanding,6 with any other competing enterprise, to jointly determine the price of goods or services, or to limit the terms of quantity, technology, products, facilities, trading counterparts or trading territory with respect to the goods and services, etc., and thereby to restrict each other's business activities. A concerted action is limited to a horizontal concerted action at the same production or marketing stage, or both, which would affect the market function of production, trade in goods, or supply and demand of services.7

ii Significant casesRecord-breaking fine on power producers (2013)8

The TFTC rendered a decision on 13 March 2013 penalising nine independent power producers (IPPs) that are members of the Association of IPPs. The TFTC found that, from August 2008 to October 2012, at Association meetings, these IPPs agreed en bloc to refuse to amend power purchase agreements with the Taiwan Power Company, and not to adjust the sale price of electricity even when there was a decline in electricity production costs.

The TFTC found that the IPPs' joint refusal could disrupt the functioning of the market, since each participating IPP could boost its profits by maintaining the current sale price when its electricity production costs decreased. Eventually, refusal to adjust the price would lead to a price hike for the public. The TFTC therefore found the joint refusal to be a material violation of the concerted action regulation. To penalise the nine IPPs for the concerted action, the TFTC invoked the newly amended punishment provision under the TFTA – the fine formula – in which the maximum fine imposed on a violating enterprise can be up to 10 per cent of its turnover during the previous fiscal year. By applying the fine formula, the total fine imposed in this case was NT$6.32 billion, which is the highest amount imposed in a single cartel case in the TFTC's enforcement history.

The IPPs filed an administrative appeal against the TFTC's decision with the Executive Yuan. Although the issue regarding whether the TFTC calculated the fines recklessly is still being disputed in the administrative appeal procedure,9 the substance of the case (i.e., whether the action of the IPPs amounted to a concerted action) was further contested in the administrative litigation process after the Executive Yuan made a decision upholding the TFTC's second-time decision in September 2013. On 5 November 2014, the Taipei High Administrative Court (High Court) revoked the TFTC's decision mainly because as no market exists in the subject case, the IPPs cannot be deemed as competitors with the capability of competing with each other in quantity or price. The High Court stated that the subject case should be simply a contractual dispute, rather than a competition law matter.

The TFTC appealed to the Supreme Administrative Court. In July 2015, the Supreme Administrative Court revoked the High Court's judgment and remanded the case to the High Court on the basis that several issues, such as whether a relevant market exists, whether the IPPs reached a meeting of minds and whether the IPPs' conduct affected the market function, require further clarification. The TFTC filed an appeal against the judgment of the Taipei High Administrative Court. Then, in September 2018, the Supreme Court revoked and remanded the case again to the Taipei High Administrative Court. In May 2020, the Taipei High Administrative Court revoked the TFTC's decision in accordance with the following grounds: (1) no competitive relation existed: since the transmission of electricity relies heavily on geographical factor (i.e., the longer the distance of transmission, the greater the loss of electricity, IPPs would provide the electricity to the nearby area only). Therefore, the geographic market of provision of electricity should not be deemed as Taiwan. Furthermore, IPPs cannot decide the sale price of electricity by themselves and such price would not affect the quantity of the electricity purchased by Taiwan Power Company. As such, no competitive relation between the IPPs and Taiwan Power Company existed in the case; (2) the joint refusal of the amendment of the sale price of electricity should not be deemed as a conspiracy of concerted action: the IPPs jointly refused the amendment of the power purchase agreement and the adjustment of the sale price because Taiwan Power Company intended to apply such price to all the IPPs. Hence, the IPPs' joint refusal of such price cannot be deemed as sufficient evidence for proving that the IPPs are conspiring concerted action. According to the public information, the aforementioned decision was appealed to the Supreme Court; however, the trial proceeding is still pending.

This is the first case in which the fine formula has been adopted by the TFTC. As such, it is anticipated that the interpretation of whether a case should be considered as a material violation and how the 10 per cent turnover fine calculation formula should be calculated will be clarified in the subsequent administrative decision and court judgments. However, according to the decisions ruled by the courts so far, it seems that the courts did not address too much on the application of the Fine Formula. Rather, the courts emphasised more the market definition and elements of a concerted action. Nonetheless, in this case, the TFTC has shown how heavy-handed it can be when the public's interests are at stake; as such, enterprises that receive a high degree of public attention should exercise caution when interacting with their competitors.

The Hard Disk Drive (HDD) Suspension Products case (2020)Background

In its 1514th Commission Meeting held on 11 November 2020, the TFTC determined that Japanese corporation TDK Corporation (TDK), Thai corporation Magnecomp Precision Technology Public Co, Ltd (MPT) and Japanese corporation NHK Spring Co, Ltd (NHK) had exchanged sensitive information on hard disk drive (HDD) suspension products to avoid price competition, to jointly maintain or expand their market shares, and to eliminate competition, to the extent of affecting the supply and demand of the relevant product markets in Taiwan, and had therefore violated the restrictions on concerted actions set forth under Paragraph 1, Article 15 of the TFTA.10 According to the TFTC, the HDD suspension is one of the HDD components and its function is to allow the HDD head to float steadily above the HDD disk in order to read and write the data thereon smoothly. As of 2016, there are only four manufacturers of HDD suspension on the global market, namely, TDK Group (including MPT), NHK Group (including NHK), Hutchinson Technology Inc and Suncall Corporation. All the HDD companies around the world were supplied by these four HDD suspension manufacturers. Other than those sold to the end consumers through retail channels, the HDDs imported to Taiwan are used in the assembly of desktop computers, laptop computers or as an ancillary equipment of monitors; the value of HDD products imported to Taiwan reaches NT$10 billion every year. Then, the TFTC found that HDD suspension market is an oligopoly market. HDD manufacturers who need to procure HDD suspension would usually turn to TDK Group and NHK Group for price quotes. Hence, through bilateral exchanges of sensitive information on prices and quantities of orders, these two competitors were able to verify the offers or orders made by the HDD manufacturers during contract negotiation, and were therefore able to maintain the prices of HDD suspension or limit the range of price reduction. Also, if they become aware that a competitor is adopting a low-price strategy, they could work together to come up with a response strategy in order to maintain their market shares and profits. As such, TDK Group and NHK Group indeed had the incentive to engage in concerted action. Moreover, TDK Group and its competitor NHK Group had been in bilateral contact from May 2008 to April 2016. Hence, for the violation of the cartel regulations under the TFTA, TDK (Japan), MPT (Thailand) and NHK (Japan) have been fined, respectively, NT$159.09 million, NT$159.09 million and NT$285.55 million, which equals a total of NT$603.73 million.

Implications

According to the Regulations for Calculation of Administrative Fines for Serious Violations of Articles 9 and 15 of the Taiwan Fair Trade Act, since the concerted action by such manufacturers is highly damaging to the market orders and lasted eight years, and the TDK Group and the NHK Group have respectively generated more than NT$100 million from their product sales to Taiwan during the period of their violation, the TFTC determined such concerted action as 'serious violations'. Therefore, after weighing the severity of the violation and the profits generated therefrom, and considering the application of Articles 4 to 7 of the above Regulations, the TFTC decided to fine TDK, MPT and NHK heavily in accordance with Paragraph 2, Article 40 of the TFTA. It is notable that this case indicated that the amount of illegal profits generated from the violation of the TFTA would be a critical factor for the TFTC to determine whether an alleged violation should be deemed 'serious' and to decide the amount of the fine accordingly.

iii Trends, developments and strategiesCircumstantial evidence

In the past, the TFTC often had difficulty securing direct evidence to prove the existence of a cartel. To improve the TFTC's enforcement effectiveness, the new TFTA permits the TFTC to presume the existence of an agreement on the basis of circumstantial evidence, such as market conditions, characteristics of the products or services involved, and profit and cost considerations, etc. By way of this amendment, the new law substantially shifts the burden of proof regarding the existence of an agreement among competitors from the TFTC to the enterprises that are investigated or penalised. Thus, in the future, for an enterprise under investigation, it is advisable to present evidence in a timely manner to prove that its business decision was made independently and reasonably to rule out any possibility of being viewed as participating in a price-fixing scheme due to parallel activities in the market.

Leniency programme

The 2011 amended TFTA introduced the leniency programme for cartel participants (Article 35) and imposed a higher fine for cartel violations (Article 40). Under the authorisation of the amended TFTA, the TFTC promulgated the regulations for the leniency programme in early 2012, which specify, inter alia, the requirements for leniency, the maximum number of cartel participants eligible for leniency, the fine reduction percentage, the required evidence and confidentiality treatment. The adoption of the leniency programme is expected to affect the enforcement of cartel regulations in Taiwan significantly.11

Pursuant to the TFTA, the consequences of violating the cartel prohibitions under the leniency programme are as follows:

For any violation of the prohibitions against concerted action, the TFTC may order the violating entity to cease and rectify its conduct or take necessary corrective action within the time prescribed in the order. In addition, it may impose upon such violating entity an administrative penalty of between NT$100,000 and NT$50 million, which can be doubled if the violating entity fails to cease and rectify the conduct or take any necessary corrective action after the lapse of the prescribed period.

If the violation is deemed serious, the TFTC has the discretion to impose a fine of up to 10 per cent of the violating enterprise's revenue of the previous fiscal year.

An enterprise violating the cartel prohibitions under the TFTA can be exempted from or be entitled to a reduction of the above fine if it meets one of the following requirements and the TFTC agrees in advance that the enterprise qualifies for the exemption or reduction:

  1. prior to the TFTC knowing about the unlawful cartel activities or commencing its ex officio investigation, the enterprise voluntarily reports in writing or orally to the TFTC the details of its unlawful cartel activities, provides key evidence and assists with the TFTC's subsequent investigation;
  2. during the TFTC's investigation, the enterprise provides specific evidence that helps prove unlawful cartel activities and assists with the TFTC's subsequent investigation; or
  3. only a maximum of five companies can be eligible for a fine exemption or reduction in a single case: that is, the first applicant can qualify for a fine exemption, while the fine for the second to the fifth applicants can be reduced by 30 to 50 per cent, 20 to 30 per cent, 10 to 20 per cent, and 10 per cent or less respectively.

An enterprise that has coerced other enterprises to join or not to exit the cartel cannot be eligible for a fine exemption or reduction.

Fine calculation formula

According to the TFTA, if the TFTC considers a concerted action to be serious, it may impose a fine of up to 10 per cent of the violating enterprise's revenue of the previous fiscal year. The TFTC has published rules on the calculation of fines through the fine formula.12 Pursuant to the fine formula, a 'serious' concerted action is one that materially affects the competition status of the relevant market where the total amount of turnover of the relevant products or services during the period the cartel is active exceeds NT$100 million; or the total amount of gains derived from the cartel exceeds the maximum fine under the TFTA (i.e., NT$50 million).

In addition, the fine imposed on a serious cartel should be reached based on the 'basic amount' and 'adjusting factors', according to the fine formula. The basic amount refers to 30 per cent of the total amount of turnover of the relevant products or services during the period the cartel is active. Adjusting factors include aggravating factors such as being punished for violating cartel or monopoly regulations within the previous five years, and mitigating factors such as full cooperation during the TFTC's investigation. Further, the TFTC holds the view that the 10 per cent cap should be based on the violating party's 'global' revenues instead of Taiwanese sales only.

iv OutlookCartel enforcement in the wake of covid-19

Since in Taiwan life is carrying on as usual, the TFTC's enforcement action seems not to be slowing down amid the covid-19 pandemic. According to public information, the TFTC's fines for cartels soared in 2020, in particular as a result of the approximately NT$604 million fine given to the HDD Suspension Cartel case in November 2020. While the TFTC did not close any investigation into an international or serious cartel by imposing high fines in 2019, the HDD Suspension Cartel case in 2020 is the main reason for the sharp increase in the fine record.

Going forward, as long as Taiwan maintains control of the spread of covid-19 as it did in 2020, there should not be any substantial delay in the TFTC's enforcement. Nonetheless, since it generally takes years for the TFTC to conclude an international or serious cartel case, it is also possible that no decision will be made in 2021; in that case, the fines would decrease accordingly. However, such fluctuation is common concerning the investigation period for a serious cartel case and certainly does not mean the TFTC has lessened its scrutiny of cartel activities.