Recent antitrust and anti-bribery investigations in China

March 2014 | PROFESSIONAL INSIGHT | FRAUD & CORRUPTION

Financier Worldwide Magazine

There have been new trends of active law enforcement in China in various sectors since the new leadership and administration took the helm in early 2013. In particular, during the past year, we have seen several high-profile and major government investigations with respect to antitrust and anti-bribery. We believe that such active enforcements will continue in 2014. This article is prepared based on publicly available information and intended to review the recent antitrust and anti-bribery investigations and make some recommendations to multinational companies.

Antitrust

Antitrust investigations by the Chinese government are currently handled by the National Development and Reform Commission (NDRC) and the State Administration of Industry and Commerce (SAIC) and their local branches. NDRC investigates price-related anticompetitive conducts, including price-fixing, resale price maintenance, predatory pricing, price discrimination, etc. SAIC investigates non-price anticompetitive conducts, including market division, group boycott, tying, etc.

In 2013, most major antitrust investigation cases were handled by NDRC. NDRC’s actions include: (i) penalising six global liquid-crystal display manufacturers for price-fixing with an economic penalty in the total amount of approximately RMB 353m (based on the nation’s Price Law, rather than the Anti-Monopoly Law (the ‘AML’), because the AML had not yet taken effect when the alleged conduct occurred); (ii) penalising Moutai and Wuliangye, two major Chinese liquor producers, for resale price maintenance with a fine of approximately RMB 247m and RMB 202m respectively; and (iii) imposing a total fine of approximately RMB 669m altogether on several baby formula makers, for resale price maintenance.

Compared to NDRC, SAIC’s antitrust investigations were less significant in terms of penalty amount and influence in 2013. It concluded the investigations against several monopoly agreement conducts organised by local industry associations in the construction and tourism sectors. What is noteworthy is that in 2013 SAIC finished the first investigation case of abuse of market dominance (in particular, tying) against a local utility supplier of water in Guangdong.

Moreover, during the past year, NDRC has started an antitrust investigation against Qualcomm. This ongoing case has drawn much public attention, particularly the attention of multinational companies. As a major global manufacturer of wireless telecommunication products, Qualcomm holds a large number of standard essential patents (SEPs). Its SEPs are necessary for the manufacturing of smart phones. Chinese smart phone makers have complained that Qualcomm’s royalty fees for them are very high. In December 2013, NDRC’s Price Supervision and Anti-Monopoly Bureau announced that it has obtained a large volume of evidence during the investigation against Qualcomm.

We can reach the following observations from the aforesaid recent antitrust investigations: (i) most of the latest major antitrust investigations have been initiated against multinational companies; (ii) the penalty amounts have been unprecedentedly significant; (iii) various industries have been subject to investigations; (iv) various types of anticompetitive conducts have been investigated; (v) various investigation methods were adopted; (vi) the government has started using technology to save evidence from potential spoliation; (vii) a large volume of evidence was sequestered and potential adverse impact on the target company’s normal business has increased; (viii) investigation cases have become more and more complex and increasingly sophisticated analysis has been adopted; and (ix) whether the government has followed due process in investigations will become increasingly important to all parties involved.

Anti-bribery

Anti-bribery has been a hot issue for multinational companies since 2013. Starting from July 2013, extensive anti-bribery enforcement actions have been continuously conducted toward the biomedical and pharmaceutical sectors by various Chinese government agencies, including the public security bureaus, administration of industry and commerce, food and drug administration, health and family planning agencies, with several multinational pharmaceutical companies involved. In early 2014, Gan & Lee Pharmaceutical, a domestic company, had some sales representatives arrested for commercial bribery.

The National Health and Family Planning Commission (NHFPC), which is the watchdog over hospitals and related matters, established an anti-bribery enforcement coordination team. Most recently, NHFPC has promulgated the Regulation On Establishing Bad Records of Commercial Bribery In Sector of Medical-Pharmaceutical Procurement, to be effective from 1 March 2014. That Regulation specifies that China will officially establish such bad records of commercial bribery. As for medicine production and operation companies, and agents thereof, listed once in local bad records of commercial briberies, all public medical care organisations or medical and health institutions receiving fiscal funds in their province shall not purchase any medicine, medical equipment or medical consumables from them within two years after the publication of the aforesaid bad records. Further, the public medical institutions or medical and health institutions receiving fiscal funds in other provinces shall deduct the points of the aforesaid companies’ products during bidding and procurement scoring within those two years. As for those listed in adverse records twice in five years, all public medical institutions or medical and health institutions receiving fiscal funds in China shall not purchase any medicine, medical equipment or medical consumables from them within two years. Such bad records include not only the bribery which constitutes a crime but also the bribery conducts that were administratively penalised by government agencies.

Besides medical and pharmaceutical sectors, other sectors have also been subject to anti-bribery investigations in China. For instance, SAIC has recently announced that it will carry out more strict enforcement actions against commercial bribery in medical care, education, bidding and other sectors which people care about in their daily lives. SAIC’s anti-bribery actions will also cover logistics, information and financial sectors. The State Administration of Press, Publication, Radio, Film and Television of China have also recently vowed to take strict enforcements against all sorts of commercial bribery relating to the publication and circulation of primary and middle schools-use textbooks. The Supreme People’s Procuratorate of China recently announced that its focus on prosecuting commercial bribery cases includes transactions of property right, pharmaceutical purchase, government procurement, etc.

Recommendations

Antitrust and anti-bribery investigations have recently been two priorities for law enforcement agencies in China. In the past year, multinational companies have been targets in several major investigations in these two areas. 2014 will probably witness an even stronger record of antitrust and anti-bribery investigations. Multinational companies might continue be a focus of relevant enforcement actions. The legal, business and political environments in China are different from those in more developed countries. Multinational companies should take appropriate measures to minimise investigation risks. We recommend that measures to be adopted should be effective and feasible in China, and that local experts with relevant experience should help to facilitate adoption of such measures.

Janet Hui and George Wang are partners, and Stanley Wan is an associate, at Jun He. Ms Hui can be contacted on +86 10 8519 1280 or by email: xurr@junhe.com. Mr Wang can be contacted on +86 21 2208 6243 or by email: wangz@junhe.com.

Janet Hui and George Wang and Stanley Wan

Jun He