The PRC's State Administration for Industry and Commerce (SAIC) has concluded its four year abuse of dominance investigation into Tetra Pak International SA and five of its Chinese subsidiaries (together, Tetra Pak) and found Tetra Pak in breach of Articles 17.4, 17.5 and 17.7 of the PRC's Anti-Monopoly Law (AML). The SAIC has ordered a fine of RMB667.7M (approx. 90.7m) and Tetra Pak has announced that it does not intend to appeal the decision.

This is one of the most high profile cases tackled under the AML. Driven by the SAIC, the decision has been hotly anticipated throughout the investigation process and represents a key piece of PRC jurisprudence in relation to the abuses involved, such as loyalty discounts.

1. Background

Tetra Pak is a food processing and packaging solutions company, and has been active in China for over 30 years. The SAIC commenced its investigation into Tetra Pak in 2012 following a complaint, and carried out a comprehensive investigation through site inspections, market surveys, interviews and document collection.

In its decision, the SAIC defined three separate product markets: (a) the supply of equipment related to aseptic packaging (the "Equipment" market); (b) the supply of technical services related to the Equipment (the "Services" market); and (c) the supply of aseptic packaging materials (the "Materials" market). The SAIC found that Tetrapak was dominant in each of these three markets between 2009 and 2013.

2. SAIC's findings The SAIC found that Tetra Pak abused its dominance in the following ways:

  • Tying and bundling: the SAIC found that Tetra Pak had contractually required its Equipment and Services customers to also use its Materials products. Although, in some instances, customers were permitted to use other products of "similar quality", the SAIC found from its market survey that Tetra Pak's customers understood this to mean that only Tetra Pak's Materials products could be used, acting as a de facto restriction. The SAIC further found that Tetra Pak did not have legitimate justifications for imposing such restrictions. For example, the SAIC considered that the requirement for customers leasing Tetra Pak Equipment to also use Tetra Pak Materials was an unreasonable restriction on the lessee's freedom of choice over the use of Materials, and which went beyond the general rights of Tetra Pak as lessor. The SAIC found that the above restrictions, imposed through Tetra Pak's dominance in the Equipment and Services markets, restricted competition in the Materials market. The SAIC therefore concluded that Tetra Pak's tying and bundling was in breach of Article 17.5 of the AML.
  • Restriction of trade: the SAIC found that Tetra Pak had restricted its supplier (the sole mass producer of a superior type of paper material used in aseptic packaging in the PRC market) through contractual terms such as restricting the use of "Tetra Pak technical information" for purposes other than for producing materials for Tetra Pak, and the supply of any products to any third parties incorporating "Tetra Pak technical information". The SAIC found, among other factors, that the relevant technology used to produce the paper material was not in fact acquired from Tetra Pak, nor was this Tetra Pak's exclusive technology. Tetra Pak therefore did not have the right to restrict the relevant supplier from using this technology to produce materials for third parties. The SAIC found that the above restrictions generated actual exclusionary effects and restricted competition by reducing competition in the Materials market, thereby also increasing the paper supplier's reliance on Tetra Pak. The SAIC therefore concluded that Tetra Pak's contractual restrictions on its supplier were in breach of Article 17.4 of the AML.
  • Loyalty discounts: the SAIC found that, in the sale of its Materials, Tetra Pak had offered its customers: (1) retroactive rebates; and (2) personalised sales target-related discounts. Tetra Pak also offered "special discounts" or "exceptional discounts" in the sale of its Materials. The SAIC found that the loyalty discounts used by Tetra Pak combined with certain market circumstances had anticompetitive effects. The SAIC acknowledged that Tetra Pak's dominant position meant that a significant proportion of market demand had to be fulfilled by Tetra Pak (the "non-contestable portion"). However, competition between Tetra Pak and other competitors could still have occurred for the market demand outside of this non-contestable portion (the "contestable portion"), but Tetra Pak's loyalty discounts and the specific circumstances of the market made the contestable portion of the market demand essentially non-contestable. The SAIC considered that this has led to anticompetitive effects.

The SAIC therefore concluded that Tetra Pak's loyalty discounts were in breach of Article 17.7 of the AML.

3. Penalties imposed

In imposing the fine in this case, the SAIC noted that during the course of the investigation, Tetra Pak had ceased some of the conduct described above and had cooperated throughout. Tetra Pak also actively offered a remediation plan prior to the conclusion of the investigation.

The SAIC ordered the termination of all abusive conduct and ordered a fine of RMB667.7m, which represented 7% of Tetra Pak's PRC turnover in 2011.

4. Our views

The SAIC is the authority responsible for non-price related monopoly activities governed by the AML. Whilst the enforcement activity of various branches of the SAIC has been progressing steadily in the past few years, this is one of the most high profile investigations conducted by the central authority thus far.

The facts considered within the decision and the concepts set out by the SAIC are very similar to EU case law (including the EU's decision in relation to Tetra Pak's tying practices in the 1990s). The decision itself is lengthy and fully reasoned, and this signifies the SAIC's commitment to establishing itself as a serious and authoritative regulator and the decision will likely serve as a blueprint for future decisions.

With respect to the fine imposed, the wording of the AML states that the calculation of fines shall be based on "the sales revenue in the previous year". However, there is some uncertainty as to the precise scope of this wording, such as what point in time should be used to ascertain "the previous year" and whether "sales revenue" includes only an undertaking's turnover in the PRC or the undertaking's global turnover. For example, there is a difference in the fining standard between this SAIC decision and the National Development and Reform Commission's (NDRC) Qualcomm decision in 2015. The fine in the Tetra Pak case was calculated on the basis of PRC turnover in the relevant product markets in the year preceding the start of the SAIC's investigation, whereas the fine in the Qualcomm case was calculated on the basis of all PRC turnover in the year on which the NDRC's investigation began.

It is hoped that these uncertainties in the fining practices under the AML will be clarified by the new Guidelines on the Determination of Illegal Gains and Fines in Relation to Business Operators' Monopolistic Conduct, which is currently still in draft form and will apply to the various AML enforcement agencies in China. The NDRC has completed the public consultation period for these draft Guidelines, but the timing for implementation is yet to be announced.