The Cartels and Leniency Review: China
Enforcement policies and guidance
i Statutory framework
Cartels, or horizontal monopolistic agreements, are mainly regulated by Articles 13 and 15 of the Anti-Monopoly Law (AML).2 Specifically, Article 13(2) sets out the definition for all types of monopolistic agreements, which provides that 'a monopolistic agreement referred under this law means any agreement, decision or other concerted action that excludes or restricts competition'.
Article 13(1) lists the types of horizontal monopolistic agreements by stipulating that 'competing undertakings are prohibited from entering into the following monopolistic agreements:
- fixing or changing the price of commodities;
- restricting the volume of output or sales;
- allocating the sales market or the raw materials procurement market;
- restricting the purchase of new technologies or new equipment, or restricting the development of new technologies or new products;
- jointly boycotting transactions; and
- other monopolistic agreements, as found by the antimonopoly enforcement agency under the State Council'.
Article 15 of the AML provides conditions for exempting monopolistic agreements, and prescribes that Articles 13 and 14 will not be applicable to such agreement if an undertaking can prove that the agreement:
- improves technology or research and develops new products;
- improves product quality, lowers cost, improves efficiency, unifies product specifications or standards, or implements specialisations;
- improves the operation efficiency of small and medium-sized undertakings;
- realises social public interests such as energy conservation, environmental protection and disaster relief;
- alleviates serious decrease in sales volumes or obvious overproduction caused by economic depression;
- protects legitimate interests in foreign trade and foreign economic cooperation; and
- protects other situations as provided by law and the regulations of State Council.
If the agreement falls into one of the situations mentioned in items (a) to (e), the undertaking must also prove that the agreement does not seriously restrict competition in the relevant market and that consumers are able to share the benefits generated therefrom, to exempt the agreement from the application of Articles 13 and 14.
ii Enforcement regime and regulations
In 2018, the antitrust enforcement regime in China experienced a major reform. The antitrust enforcement functions formerly shared by the National Development and Reform Commission, the State Administration for Industry and Commerce and the Ministry of Commerce have now been merged into the State Administration for Market Regulation (SAMR).
In July 2019, the SAMR promulgated three interim rules, including the Interim Rules on Prohibition of Monopolistic Agreements (Interim Rules), which contain both procedural and substantive rules for regulating monopolistic agreements.
In terms of procedure, the Interim Rules clarify the jurisdiction of enforcement, case delegation to provincial market regulation agencies, filing of complaints, the commitment procedure, the leniency application, etc.
In the substantive respect, the Interim Rules provide detailed guidance on the various types of monopolistic agreements and clarifies the concept of 'concerted action'.
The AML public enforcement agencies and the courts in China tend to have different understandings of the statutory framework of horizontal monopolistic agreements.
The agencies view that the types of horizontal agreements listed under Article 13(1) are by themselves monopolistic agreements and thus are, in principle, illegal. The only exception is that the undertaking under investigation may submit evidence to prove that the horizontal agreement satisfies the strict conditions laid out under Article 15, and thereby may be granted an exemption.
The courts in China hold a different view and think that the types of horizontal agreements listed under Article 13(1) are only presumed to be monopolistic agreements, and the defendants are entitled to rebut the presumption by proving the horizontal agreement at issue does not exclude or restrict competition (i.e., does not fall into the definition of monopolistic agreement under Article 13(2)).
Cooperation with other jurisdictions
China has entered into memorandums of understanding (MOU) on cooperation in the area of competition law with several jurisdictions, including the European Union, the United States, Germany, Russia, Brazil, South Korea, Japan, Morocco, South Africa and India. Coordinating investigation with other jurisdictions is an important issue addressed in these MOUs. The China–EU MOU, entered into on 20 September 2012, is a good example of this. Article 2.3 specifically stipulates that: 'Should the two Sides pursue enforcement activities concerning the same or related matters, they may exchange non-confidential information, experiences [and] views on the matter and coordinate directly their enforcement activities, where appropriate and practicable.'
Fighting against international cartels is often the specifically addressed area of the cooperation between China and other jurisdictions. According to the Terms of Reference of the EU–China Competition Policy Dialogue, the content of the Dialogue is particularly concerned with the 'exchange of views with respect to multilateral competition initiatives, with a particular mention to fight against international hard-core cartels'.
Information sharing is important for improving efficiency, and the relevant documents, including the MOUs signed between China and other jurisdictions, do set down the framework and basis for cooperation in terms of information. A typical example is the Practical Guidance for Cooperation on Investigating Anti-Monopoly Cases between the Directorate-General for Competition of European Commission and the State Administration for Market Regulation of P R of China (Practical Guidance) entered into in 2019. Paragraph 6 of the Practical Guidance provides that 'when confidentiality waivers have been exchanged for the purpose of an investigation and the Sides communicate information in accordance with the confidentiality waivers during the course of case cooperation, they will ensure the protection of business secrets and other confidential information'.
Regarding extradition, according to the Criminal Law of China, the precondition is that the conduct under question constitutes a criminal offence according to both the law of China and of the country that raises the request. As China does not criminalise cartel activities, it is impossible for China to accede to extradition requests for Chinese citizens from foreign jurisdictions.
As to private enforcement against cartels through extraterritorial discovery, because China does not establish a discovery mechanism, foreign private entities aiming to initiate private action against cartel participants in China may encounter difficulties in acquiring evidence. Yet, some Chinese companies are aware of the possibility of taking advantage of the discovery mechanism established in foreign jurisdictions such as the UK. These Chinese companies have pioneered claiming damages against participants of cartels in foreign forums such as those in the UK.
Jurisdictional limitations, affirmative defences and exemptions
i AML's extraterritorial reach
The AML would apply to anticompetitive conduct outside the territory of China if such conduct has the effect of eliminating or restricting competition on China's domestic market. The statutory basis for this is Article 2 of the AML. In practice, companies that do not have a physical presence in China have been exposed to liability under the AML, and one typical instance is the Huawei v. InterDigital Company case.3 Another example is an ongoing case in which China State Grid Group is claiming damages against foreign cable manufacturers who engaged in cartels outside the territory of China and who have been penalised in the EU in accordance with EU competition law.4
ii Parent company liability
In China, the 'single economic unit' concept is not expressly recognised. However, in the realm of public enforcement, the 2016 Chlorophenol case,5 which concerned a price-fixing cartel, marked the agency's first attempt to apply this concept. In this case, five chlorophenol manufacturers who fixed prices of chlorophenol all sold their products through Shanghai Jiaodian Biotechnology Co, Ltd (Jiaodian). While Jiaodian was the controlling shareholder of one of the five manufacturers, the agency viewed this manufacturer and Jiaodian as a single economic unit and, thus, although not viewed as the manufacturer of chlorophenol, Jiaodian was still liable for implementing the price-fixing cartel. Jiaodian's actual participation in the price-fixing cartel is the most important reason for it being found liable, otherwise its controlling shareholder (Huifeng Joint Stock), which was not involved in the cartel, would have been investigated and penalised. Therefore, according to this case, a parent company will not always be liable for the conduct of its subsidiary.
This recognition appeared to be reinforced indirectly by the 2018 Tally case in which the two penalised tallying companies were both controlled by the China Merchants Logistics Group Co, Ltd (CMLG).6 The AML enforcement agency reasoned in its decisions that the CMLG did not have independent control over the two tallying companies, and it was known that the two companies competed independently, in accordance with state policy, which specified that a competition mechanism must exist in the industry. Therefore, although not expressly stated, the agency did not consider that the two tallying companies constituted a single economic unit, and the CMLG was not penalised.
iii Available affirmative defences
Article 15 of the AML lists in an inexhaustive manner the situations in which monopolistic agreements prohibited by Articles 13 and 14 can apply for exemption, which can be utilised as affirmative defences by undertakings that reach and implement monopolistic agreements. Regarding exemption for industries, Article 56 of the AML provides an exception for cartel activities in the agricultural industry.
In China, rules on leniency are mainly stipulated under Article 46 of the AML, Articles 33 and 34 of the Interim Rules and the newly issued Guidelines on the Application of the Leniency Programme in Horizontal Monopolistic Agreements (the Guidelines of the Leniency Programme). Whether a leniency applicant can be immune from penalty or receive a favourable treatment depends on factors including the time sequence of filing the application, the significance of the evidence submitted and the situation in which the monopolistic agreement was reached and implemented.
ii Leniency application
To successfully obtain leniency, an applicant is required to voluntarily report relevant situations concerning the monopolistic agreement and to submit important evidence.
The Guidelines of the Leniency Programme distinguish the standard of report and evidence to be submitted to qualify for immunity from fines and reduction of a fine.
According to the Guidelines of the Leniency Programme, the report submitted in the context of immunity application shall expressly admit that the applicant has engaged in the conduct of reaching and implementing monopolistic agreements prohibited by the AML, and shall provide detailed information, including:
- basic information of participants of the monopolistic agreement (including but not limited to the names, addresses, contacts and relevant representatives involved);
- information of the monopolistic agreement (including but not limited to the contact time, addresses, content and individual participants);
- the main content of the monopolistic agreement (including but not limited to products or services, prices or quantities) and information on undertakings reaching and implementing the monopolistic agreement;
- territorial scope and market scale being affected by the agreement;
- duration of implementation of the monopolistic agreement;
- explanation of the evidence submitted;
- whether or not a leniency application has been filed to any overseas enforcement agency; and
- other relevant documents and materials.
Comparatively, the report submitted for the application for fine reduction shall include the participants of the monopolistic agreement, products and services involved, time and territory reaching and implementing the monopolistic agreement.
According to relevant statutory rules, important evidence refers to evidence that plays a key role in initiating an investigation or in finding monopolistic agreements, including on participants in the agreement, products covered by the agreement, the form and contents of the agreement and the implementation of the agreement.
In detail, important evidence submitted by immunity applicant refers not only to evidence sufficient to enable the agency to docket one case or initiate an investigation where the agency has not obtained any clues or evidence of the case, but also to evidence provided by an undertaking after the agency dockets the case or initiates an investigation that the agency has not obtained and by which the agency can find a monopolistic agreement.
In contrast, important evidence submitted for the purpose of fine reduction refers to evidence that the agency has not obtained and has significant probative value for finding monopolistic agreements.
iii Immunity or reduction in fine
The Guidelines of the Leniency Programme classify the fine reduction range according to the sequence of filing the application:
- for the first applicant: immunity or a fine reduction of no less than 80 per cent;
- for the second applicant: a fine reduction of 30 to 50 per cent;
- for the third applicant: a fine reduction of 20 to 30 per cent; and
- for an applicant ranking subsequently: a fine reduction of no more than 20 per cent.
iv Marker system
The Guidelines of the Leniency Programme, with the purpose of encouraging cartel participants to report violations as soon as possible, addresses China's marker system in the form of an official document for the first time. An undertaking that first applies for immunity from fines may secure its place in the queue while earning more time to gather evidence via the marker system.
Where the first immunity applicant submits to the agency the required report but fails to provide evidence or all evidence, the agency may grant a marker and issue an acknowledgement of receipt of documents. Additionally, the agency will specify the length of time within which the applicant shall submit the evidence required. Normally, the time length is no more than 30 days as of the date the marker is registered and may be extended to 60 days in exceptional circumstances.
Where the applicant provides evidence as required within the designated time period, the application for leniency will be deemed to have been submitted on the date when the marker is granted. Where the applicant fails to do so, the agency will disqualify the applicant for a marker yet still reserve the applicant's right to apply for immunity again after collecting relevant evidence.
v Duties of cooperation
Apart from submission of a report and important evidence, Article 10 of the Guidelines of the Leniency Programme provides other obligations for the applicant to secure a leniency application. Such obligations include:
- timely termination of its involvement in the illegal conduct;
- full cooperation with the agency expeditiously and truthfully on a continuing basis;
- proper preservation and submission of relevant evidence and information;
- non-disclosure of the application to any other party; and
- non-engagement in any other conduct that affects the investigation.
In China, antitrust liability is limited to corporate liability only. Article 46 of the AML provides the statutory penalties for this, which include disgorgement of illegal gains and imposition of a fine amounting to 1 to 10 per cent of the turnover. Criminal liability will not be incurred for cartel violations.
Cartel violations are generally subject to higher fine rate. However, in some cartel cases cartel members have only received a 1 per cent fine. The highest fine to date was a 9 per cent fine imposed upon Eukor Car Carrier Inc for its involvement in the roll-on, roll-off cartel case.7
ii Factors to be considered
Pursuant to Article 49 of the AML, factors to be considered in terms of penalties include the nature, gravity and duration of the violation.
In addition, Article 27 of the Administrative Sanction Law also sets out several attenuating circumstance in which the agency reduces or mitigates the proposed penalty accordingly:
- the undertaking has taken the initiative to eliminate or lessen the harmful consequences occasioned by its illegal act;
- the undertaking was coerced by another to commit the illegal act;
- the undertaking has performed meritorious deeds when working in coordination with administrative organs to investigate violations of law; or
- other circumstances exist for which the undertaking shall be given a lighter or mitigated administrative penalty in accordance with law.
Although there is no statute specifically addressing aggravating factors for antitrust violations, in practice the agencies tend to view the following circumstances as such:
- the undertaking organised the cartel;
- the undertaking coerced other companies to participate in the cartel; and
- the undertaking has engaged in several types of monopolistic conduct or has repeatedly violated the AML.
iii Settlement procedure
In China, neither the law nor any regulations explicitly provide a settlement procedure. However, Article 45 of the AML sets out a commitment procedure under which the undertaking under investigation can earn suspension or even termination of the investigation by offering certain commitments to the agency. Based on this, the Guidelines for Commitments by Undertakings in Antitrust Cases (the Guidelines for Commitments) further elaborate the commitment procedure.
The Guidelines for Commitments make it clear that the agency shall disregard any commitment made by participants of hardcore cartels, or any commitment made after the agency has found the monopolistic conduct upon investigation.
Suspension of the investigation
Article 45(1) of the AML provides that a suspension of the investigation is possible if an undertaking under investigation commits to adopt specific measures to eliminate the consequences of its conduct within a certain period of time accepted by the agency.
The Guidelines for Commitments provide the criteria for evaluating the sufficiency of the commitment (i.e., the attitude of the undertaking in carrying out the suspected monopolistic conduct, the nature, duration, consequence and social impact of the suspected monopolistic conduct and the proposed commitments as well as the expected outcomes thereof).
Termination of the investigation
Where the agency decides to accept the undertaking's commitment and suspend the investigation, it shall oversee how the commitments are fulfilled. Where the undertaking fulfils its commitments, the agency may decide to terminate the investigation.
Resumption of the investigation
In any of the following circumstances, the agency shall resume the investigation:
- the undertakings concerned fail to fulfil their commitments;
- material changes have taken place in respect of the facts on which the decision to suspend the investigation was based; or
- the decision to suspend the investigation was based on incomplete or untrue information provided by the undertaking concerned.
iv Recent developments
In the past, the fine base for antitrust violation in China was the relevant turnover (i.e., the turnover generated from products or territories covered or affected by the antitrust violation). However, in 2019, the Director General of the Anti-Monopoly Bureau at the SAMR clarified that the fine base shall be the total turnover in the preceding year, which means companies are facing significantly heavier financial liability for antitrust violation.
'day one' response
Unannounced on-site inspection against undertakings under investigation is possible in China. The team conducting the dawn raid usually consists of between 10 and 30 officials, depending on the significance and complexity of the case and the scale of the undertaking.
The dawn raid team usually takes the following enforcement measures during a dawn raid:
- entering into the business premises of the undertaking. In some cases, the business premises of other undertakings relevant to the case may also be subject to dawn raid. For instance, in its investigation against Microsoft, the agency dawn-raided Microsoft's outsourced financial provider, Accenture Information Technology (Dalian) Co Ltd;
- interviewing relevant employees. Questions frequently asked include explanations on documents, location of designated documents and explanations on relevant facts; and
- reviewing and copying relevant documents and materials, as well as sealing and seizing relevant evidence. In practice, the agency will directly seize or copy relevant hard copies. And for electronic evidence, the official may search relevant employees' computers or even mobile phones and extract relevant evidence.
The dawn raid may last for more than one day; after which, the agency will usually issue a list of requested information or documents to the undertaking and require the undertaking to submit materials within a designated period of time.
ii Tasks and choices of the undertaking
It is essential for undertakings to develop a compliance programme to properly respond to an unexpected dawn raid. Among other things, the following are very important:
- undertakings should prepare a dawn raid response guideline in advance, which sets out the members of the task force and their respective responsibilities, the dos and don'ts during a dawn raid, and measures to be taken at each step, etc.;
- at the outset of a dawn raid, the undertaking should circulate an email to all employees of the site, explaining the situation and advising requirements of employees, including instructions to cooperate with the agency and not to interfere with, disclose or discuss the dawn raid;
- during a dawn raid, undertakings are advised to show a strong willingness to cooperate with the agency, including preparing the documents required by the agency and assisting the agency in accessing IT systems or copying relevant materials;
- during a dawn raid, undertakings are advised to keep a copy of all materials being collected by the agency, which is essential for subsequent risk assessments; and
- during a dawn raid, undertakings are advised to brief relevant employees on the fact that anything they say to the officials may be recorded as evidence, and that they need to be cautious in giving answers. If employees do not or cannot clearly answer a question during a raid, they can strive to submit a response subsequent to the raid, rather than giving false answers.
iii Risks of failing to respond properly
Failing to respond properly may adversely affect the company in the following ways:
- it may affect the subsequent response or defences to be raised by the undertaking. For instance, some companies fail to keep a record of the materials being collected or of interviews, and are, therefore, unable to properly identify the legal risks, which further adversely affects the preparation of the response strategy. In other instances, some employees who are over nervous may give inaccurate answers to the interview questions, and may, therefore, put the company in a very passive position in defence;
- it may incur liability for the company or relevant individuals. There have been several cases in China where employees have interfered with an investigation, or have even had physical conflicts with officials, and, as a result, significant penalties were imposed on the company or on relevant individuals; and
- it may adversely impact the image of the undertaking. For instance, in some cases, the employees of the company being raided improperly discussed the raid and even disseminated the information of the dawn raid, and thus adversely affected the brand image as well as the operation of the company.
i Basics of private right of action under the AML
Private right of action is available, and the statutory basis is Article 50 of the AML. However, as China does not have a collective action regime, it is impossible for private entities to claim their damages through a class action mechanism. Furthermore, unlike some other jurisdictions, such as the UK, which sets forth funding rules for private litigation, China has not yet issued any rule in this area.
ii Damages calculation
The law and other relevant regulations, rules and judicial interpretations have not yet touched upon this issue. Some judicial cases have involved damages calculation, yet these have not involved cartels. The most influential case among these is Rainbow v. Johnson & Johnson,8 which concerned vertical restraints. In that case, the court emphasised the causality between the monopolistic conduct and the claimed damages (i.e., loss of profit). The court further stressed that the loss of profit as claimed should not be based on the profit that should have been reaped assuming that the vertical restraint in question was implemented. Rather, the normal profit in the market where such vertical restraint in question is not implemented should be the basis for damages calculation, which is similar to the hypothetical market analysis adopted in other jurisdictions such as the United States.
iii Interplay between government investigation and private litigation
Under the AML, private and public enforcements can occur simultaneously. There is no requirement over the sequence of action taken. However, if an administrative decision is issued after investigation, that decision is legally binding on the undertakings being investigated. Hence, if no judicial review of the decision was filed, or if the court did not overturn the decision, the illegality of the conduct in question will be affirmed.
The decision will be a basis for the relevant undertakings to claim damages against those who implemented the monopolistic conduct, and usually has a two-fold influence on the follow-on damages claim: the facts found by the decision are usually presumed to be true by the courts, while the legal findings are only of referential value to the courts, which means the courts tend to conduct independent legal analysis over the illegality issue.
i Unsettled points of law application
In China, the courts and the enforcement agencies do not seem to have formed a uniform understanding of establishing whether a horizontal restrictive agreement violates the AML. In addition to focusing on the effects of eliminating or restricting competition by the agreement in question, some courts also take the view that undertakings referred to in Article 13 of the AML should be operating at the same economic level as, and have a competing relationship with, different brands from different companies. Consequently, distributors of the same brand cannot be eligible entities for horizontal monopolistic agreements under Article 13 of the AML, even though they may decide to allocate the market between them.
Hence, either by pointing to the actual effect, or emphasising that the competing relationship between undertakings should be among competitors of different brands, the courts set a high standard for finding cartels and they do not appear to favour a presumption of illegality of the restrictive agreements listed under Article 13 of the AML. Nevertheless, in some cases involving judicial review of public enforcement decisions concerning the conclusion and implementation of cartels, the courts have not yet reversed any of these decisions, even though the AML enforcement agency does not appear to have fully considered the harm caused to competition by the concerned cartels.
ii Cutting-edge issue in key cases of public enforcement
In 2018, the public enforcement agency adopted the hub-and-spoke conspiracy theory to penalise three glacial acetic acid manufacturers for implementing a price-fixing cartel.9 Although they reached and implemented the cartel under the organisation of Jiangxi JinHan Pharmaceutic Adjuvant Co, Ltd (JinHan), JinHan was not penalised. One important reason for the failure to apply the AML to JinHan may be the lack of stipulation of liability for those other than industrial associations that facilitate cartels under the AML. While China is a statute law country, there is basically no room for the AML enforcement agency to penalise JinHan according to the AML. This decision has triggered criticism. While the Draft of the Revised AML (Public for Comments) issued early this year explicitly prohibits undertakings from organising and assisting other undertakings in reaching monopolistic agreements and laid down the same legal liability on these undertakings as that on undertakings engaging in monopolistic agreements, this gap is hoped to be eliminated through legislation in the near future.
1 Wei Huang is a senior partner and Wendy Zhou and Bei Yin are senior associates at Tian Yuan Law Firm.
2 The AML does not use the term 'cartel'. Rather, it uses 'monopolistic agreement'. The terms cartels and horizontal monopolistic agreements are used interchangeably in this chapter.
3 (2013) Yue Gao Fa Min San Zhong Zi No. 306, Guangdong Higher People's Court, 16 October 2013.
4 (2019) Zui Gao Fa Zhi Min Xia Zhong No. 356, Supreme People's Court, 01 December 2019.
5 (2015) Su Jia Fan Long Duan Nos. 1-001 to 1-006, Jiangsu Price Bureau, 10 May 2016.
6 (2018) Guo Shi Jian Jia Jian Chu Fa Nos. 5 and 6, State Administration for Market Regulation, 9 July 2018.
7 (2015) NDRC Administrative Sanction Decision No. 4, NDRC, 15 December 2015.
8 (2012) Hu Gao Min San (Zhi) Zhong Zi No. 63, Shanghai Higher People's Court, 1 August 2013.
9 (2018) Guo Shi Jian Chu No. 17, State Administration for Market Regulation, 5 December 2018.