Competition briefing: China's NDRC endorses fines against rice noodle producers for price fixing - the first cartel action under the AML

• Competition, EU and Trade - Competition e-briefings

13-04-2010

On 30 March 2010, China's National Development and Reform Commission (NDRC), the body responsible for all price-related antitrust actions under the Anti Monopoly Law (AML), published the first decision against a price cartel since the AML came into force in August 2008. This action, taken against members of a rice noodle cartel, suggests that further anti-cartel enforcement action may be on the horizon.

Background

The Guangxi Rice Noodle Cartel decision is the first price-related antitrust investigation to be published in China since the AML came into effect in August 2008.

China divided responsibility for enforcement of the AML amongst three separate government agencies:

• the Ministry of Commerce (MOC)
• the State Administration for Industry and Commerce (SAIC)
• the NDRC.

The MOC was made responsible for examining merger control filings, SAIC handles cases relating to abuse of dominance and non-price-related antitrust cases and the NDRC regulates all price-related antitrust cases. Each body was made responsible for the enforcement of the AML in addition to their pre-existing functions within China's administrative structure. This means that, as well as gaining power under the AML, the NDRC retained their jurisdiction for enforcement of the Price Law, which, among other things, prohibits unfair pricing behaviour.

The MOC and SAIC have been active ever since the publication of the AML, being involved in a number of high profile decisions and publishing numerous regulations. In comparison, the NDRC has been conspicuous in their inactivity and, apart from releasing draft implementing regulations, they have seemingly lagged behind the other agencies in their implementation of the AML.

The AML does not require the NDRC to publicise details of enforcement action taken, so this action provides key insight into how future antitrust investigations may be run in China.

The Guangxi rice noodle cartel

The cartel, co-ordinated by a senior executive of the Nanning Xiangyige Food Plant, involved 33 producers of rice noodles from the neighbouring cities of Nanning and Liuzhou, in China's Guangxi province.

In November 2009, 18 companies from Nanning staged meetings and telephone conferences where they discussed the possibility of profit sharing agreements and increasing their cost prices for noodles. Following these discussions they agreed to jointly increase their prices for noodles by RMB 0.2 (approx. two pence) per 500 grams, resulting in a retail price increase of RMB 0.5 (approx. five pence) per 500 grams. Upon learning of the price increases in Nanning, 15 companies from Liuzhou contacted the organiser of the cartel to enquire about becoming members and signed a profit sharing agreement with the Nanning group. These companies subsequently followed suit and also raised their prices.

The price increase, which came in the run up to Chinese New Year, attracted negative public reaction and resulted in protests from local consumers. In response, the NDRC endorsed the launch of an investigation by local price authorities, the municipal governments of Nanning and Liuzhou and other relevant government agencies, such as the Food Bureau and the local SAIC. Interestingly, the NDRC has stated publicly that it was the local government authorities who made the decisions relating to the administrative response to the Guangxi rice noodle cartel, but there is little doubt among expert observers that the NDRC played a key role in the enforcement activities (even if behind the scenes).

Action taken and penalties imposed

Following the conclusion of the investigation, the authorities found that the actions of the cartel members amounted to "unfair pricing behaviour" and were in violation of the AML, the PRC Price Law and other related regulations. The Liuzhou government, endorsed by the NDRC, required that the parties stop their illegal activities and return pricing levels to those that were in place prior to the cartel action. Usual practice would be to allow resumed competition to reset pricing to normal levels but the NDRC has explained in its news release that this move was taken in order to "stabilise the rice noodle market, protect consumer's legal rights and to ensure that people have a peaceful and happy Chinese New Year".

The AML sets the fine for parties that engage in monopoly agreements at between one per cent and ten per cent of their sales revenue from the previous year; this range of potential fines allows the parties to be fined an amount that reflects the seriousness of their participation in the cartel. Accordingly, the parties that organised the cartel received fines of RMB100,000 (approx. £10,000), while the 18 companies who participated in the cartel received fines ranging from RMB30,000 to RMB80,000 (approx £3,000-£8,000).

Leniency under the AML

The final 12 members of the cartel were only issued with warning letters and escaped any financial punishment on the basis that "they cooperated with the investigation, provided important evidence and took measures to correct the effects of the cartel".

Other parties who replicated the price increase without being part of the cartel also received caution letters from the local pricing authorities asking that they "retain their self discipline" on pricing issues in the future.

Whilst the PRC Price Law does not provide for leniency, Article 46 of the AML does allow the enforcement agencies to "mitigate or waive penalties" where any business involved provides evidence, at their own initiative, of the existence of a monopoly agreement or co-operates with an investigation. The decision, endorsed by the NDRC, allowed leniency for those cartel members who provided important information to the investigators and is the first time that the leniency provisions under the AML had been used. It is not clear, however, whether these companies provided such information at their own initiative. Whilst SAIC have issued procedural rules for the use of leniency in non-price related monopoly cases, the NDRC is yet to do so for how they will implement leniency.

Criminal liability

The organiser of the cartel was also arrested for coercing several companies to participate in the cartel. Whilst there is no provision for criminal sanctions under the AML (other than for obstructing an investigation or failing to provide information), the offender was arrested pursuant to Article 226 of the PRC Criminal law, which makes it a criminal offence to buy or sell products by violence or intimidation or compel another person to provide or receive a service. The punishment for such conduct under the PRC Criminal Law is a maximum of three years' imprisonment.

Comment

This case raises some interesting questions over the enforcement of the AML by the NDRC. Notably, the possibility of criminal sanctions for breach of the AML, and also the issue of leniency. The main concern from an international perspective is the overlap between the AML and other national legislation, such as the Price Law and Criminal Law in this instance. The boundaries between the various areas seem to be becoming blurred and it seems the NDRC is using this lack of clarity to their advantage in procuring the taking of actions that many thought were outside the scope of the AML (ie imposing criminal sanctions and ordering that the companies return to their pre-cartel pricing). We expect the NDRC to issue procedural rules to address any concerns surrounding these matters in the coming few months.

This is also the first enforcement action under the AML, by any of the administrative authorities, where the parties have been exclusively Chinese companies. Commentators have expressed concern in the past that the AML had previously only been applied in relation to foreign companies and had accused the administrative agencies of protectionism. This case shows that China is willing to apply the provisions of the AML to all companies, irrespective of whether they foreign or domestic.

In our January 2010 edition of China in Focus ("Chinese internet search engine Baidu cleared of abuse of dominance in China's second antitrust court decision"), we predicted that early 2010 would "see the first wave of antitrust investigations in China by SAIC and the NDRC". Whilst a case on raising basic food prices around the time of Chinese New year seems to be an easy one to get the NDRC started, we would now expect many more to follow in the coming few months. Companies that are part of a cartel or monopoly agreement should be concerned about the NDRC beginning to exercise its power more widely and should be aware of the possibility of on-site investigations, dawn raids and substantial fines.

For further information or advice, please contact Peter Corne, Charlie Markillie or Wei Zhang.

Peter Corne
Managing Director
Eversheds, Shanghai
Tel: +86 21 6137 1001
petercorne@eversheds.com

Charlie Markillie
Solicitor, Leeds
+44 845 498 4037
charliemarkillie@eversheds.com

Wei Zhang
Legal Advisor, Shanghai
+86 135 6432 3129
weizhang@eversheds.com

© Eversheds LLP, 2010

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