Authored by Michael Gu (michaelgu@anjielaw.com)

Late June of this year, it was reported that the National Development and Reform Commission (“NDRC”) had been conducting antitrust probes against several major baby formula brands, including both foreign and domestic brands such as Mead Johnson, Dumex, Wyeth, Abbotts, Friesland Campina, Biostime, and Beingmate, for suspected price monopoly behavior. Shortly after that, NDRC confirmed that the investigations were underway, which immediately attracted extensive attention. In response to the NDRC’s investigation, the baby formula manufacturers have, one after another, taken rectification steps, such as cutting formula prices directly or indirectly. At the beginning of August, NDRC closed their investigations into the manufacturers. According to the NDRC news release, six of the nine investigated brands were fined various amounts while the other three did not receive administrative penalties.

The fines totaled RMB 668 million (approximately USD 108 million), higher than the total fines in the Moutai/Wuliangye case and the LCD case[1], and has set a new record in the history of the NDRC’s antitrust enforcement. The investigation indicated that all of the involved baby formula manufacturers had illegally limited their distributors’ resale prices by stipulating restrictive terms in contracts and fining and reducing or terminating supply of the noncompliant. NDRC concluded that such behavior constituted a violation of Article 14 of the Anti-Monopoly Law and destroyed market order by restraining and eliminating intra-brand competition and weakening inter-brand competition. Following the case of Moutai and Wuliangye, this is the second administrative penalty concerning a vertical monopoly agreement imposed by China’s antitrust enforcement authority.

Unlike previous statements, this time, the NDRC disclosed relatively detailed information on the case, including the penalized amount, the fines’ proportions of the enterprise’s annual turnover, and the reasons for penalty reductions and exemptions. This article focuses on the discussion of the application of the leniency program under the Anti-Monopoly Law and in particular, the reasons for the wide gap in fine amounts among the investigated enterprises.

Application of Leniency Program

The leniency program was installed in Article 46 of the Anti-Monopoly Law, which provided that “where any undertaking voluntarily reports the conditions on reaching the monopoly agreement and provides important evidence to the anti-monopoly authority, it may be imposed a mitigated punishment or exempted from punishment as the case may be.” The provision is not explicit on whether the leniency program is only applicable in horizontal monopoly agreement cases or not. In the meantime, neither the NDRC nor the State Administration of Industry and Commerce (“SAIC”) have provided any interpretation or guidance in their relevant antitrust implementing rules. The leniency program, as used in U.S. and E.U. practice, is usually applied in horizontal agreements since its purpose is to encourage cartel members to surrender information and further expose other members. In regards to PRC antitrust enforcement, the leniency program had previously been applied only to horizontal monopoly agreement cases and was not explicitly adopted even in the first vertical monopoly agreement case (i.e. the Moutai/ Wuliangye case). The penalty decisions in the baby formula brands case imply that the leniency program is applicable to vertical monopoly as well in the PRC. As illustrated in Table 1, Wyeth, Beingmate, and Meiji obtained full exemptions on the grounds of voluntarily reporting the relevant facts of entering into a monopoly agreement, providing important evidence to the antitrust agency, and taking rectification steps, while the other six undertakings were imposed fines equivalent to 3%-6% of their annual sales.

Undertakings’ Voluntary Reports and Cooperation

Three undertakings were exempted by the NDRC not only due to their voluntary report and provision of important evidence in accordance with Article 46 of the Anti-Monopoly Law, but also due to their cooperation with the antitrust probes. Firms such as Dumex, Abbotts, Friesland Campina, and Fonterra who have actively cooperated obtained lighter fines equivalent to 3% of their turnovers (please refer to Table 1). In contrast, due to their non-cooperation in the antitrust probe, Mead Johnson was penalized 4% of its annual turnover and Biostime 6% of its annual turnover. As the NDRC official said, “(given that the undertakings’) illegal behaviors are similar, the companies’ cooperation in investigations, such as providing relevant materials and useful evidence, is crucial for us in making the penalty decision.” Both the time taken before reporting and the level of cooperation are key factors to be considered in the application of the leniency program.

Investigated Brands

Basis of Punishment

Amount of Penalty (in million RMB)

Proportion of Last Year’s Turnover

Biostime

Seriously violated the Anti-Monopoly Law; reluctant to correct

162.7

6%

Mead Johnson

Refused to cooperate but actively corrected their behavior

203

4%

Dumex

Actively cooperated with investigation and rectification

171

3%

Abbotts

Actively cooperated with investigation and rectification

77

3%

Friesland Campina

Actively cooperated with investigation and rectification

48

3%

Fonterra

Actively cooperated with investigation and rectification

4.4

3%

Wyeth

Voluntarily reported relevant facts of entering into a monopoly agreement, provided important evidence to the antitrust agency, and took rectification steps

0

Exemption

Beingmate

Voluntarily reported relevant facts of entering into a monopoly agreement, provided important evidence to the antitrust agency, and took rectification steps

0

Exemption

Meiji

Voluntarily reported relevant facts of entering into a monopoly agreement, provided important evidence to the antitrust agency, and took rectification steps

0

Exemption

(Table 1: Penalties and Reasons for the Penalty in accordance with NDRC’s official announcement.)

Time Order of Reporting

Both the degree of reduction in sanctions and the time order of reporting are further stipulated in NDRC’s Procedural Regulations on the Administrative Enforcement of the Regulations on Anti-Monopolistic Pricing Practices (“Procedural Regulation”), that is, punishment may be mitigated by various degrees depending on the time order of reporting (please refer to Table 2).

Time Order of Reporting

Possibility of Penalty Waiver

First Undertaking

100 %

Second Undertaking

More than 50%

Other Undertaking

Less than 50%

(Table 2: Penalty Waiver Possibility in accordance with Article 14 of the Procedural Regulation)

It is noteworthy that in the NDRC’s announcement, the voluntary reporting of the relevant investigated undertakings was actually occurred during the course of investigation. This indicates that “voluntarily reporting” or “providing important evidence” shall not be limited to pre-probe stage. Therefore, undertakings may have opportunities to “voluntarily report facts” and “provide important evidence” even while the investigation is ongoing (e.g. in the process of inspecting business premises, interviewing respondents, and obtaining and copying the undertaking’s information) and accordingly entitled to apply for reduced punishment and exemptions from the antitrust agency. The earlier the companies report, the higher the possibility that the company may receive a waiver. According to the Procedural Regulation, the provided evidence from the investigated companies must be “critical proof for identifying a monopoly agreement”.

Another interesting phenomenon in this case is that, instead of identifying a sequence of the first, second, and third among the reporters, the NDRC chose three voluntarily reporting companies to receive waivers. To our understanding, the nine companies were probed at almost the same time with no horizontal monopoly agreement established among these undertakings. The undertakings in question separately entered into vertical monopoly agreements with downstream distributors. As such, each investigated company is the only subject in the vertical monopoly agreement and thus, sequence is not applicable in this regard. This is a significant difference in the application of the leniency program between vertical and horizontal monopoly agreements.

Violators’ Commitment and Rectification

In addition to the leniency program provided in Article 46, Article 49 stipulates that “the specific amount of the fines shall be determined in consideration of such factors as the nature, extent, and duration of the violations.” Generally speaking, initiating rectification measures is encouraged by the law and is a critical factor in the antitrust agency’s sanction decisions. An NDRC official has emphasized that “[the decisions] depend on the firms’ rectification outcomes” when addressing the media. In the Moutai/ Wuliangye case, the antitrust agency alleged that because both Moutai and Wuliangye actively cooperated with the antitrust agencies during the investigations by taking corrective measures (e.g. returning previously deducted guarantee deposits from distributors for selling at lowered prices and amending the distribution agreements in accordance with the Anti-Monopoly Law), consequently, both companies received a relatively slight fine equivalent to 1% of the respective company’s sales in 2012.

NDRC also published the undertakings’ commitment and rectification measures in their announcement, including any measures taken to (1) stop illegal behaviors, (2) adjust the distribution contracts, marketing policies, and business policies in accordance with the laws, (3) reorganize the sale system and provide antitrust training to employees so that their behaviors comply with Chinese laws, and (4) take actions to eliminate negative influences due to illegal activities and share any benefits with customers. Considering that the NDRC’s concern over the increased prices of baby formula in recent years due to the investigated companies’ vertical price fixing, their price-cutting measures, and in particular, the time of the release in price-cutting, the specific price dynamics, and the commitment to no price increase, are major factors in the NDRC’s consideration of the amount of penalty. Wyeth taking the lead to cut prices could be a strong evidence for penalty exemption. Following Wyeth, both Friesland Campina and Dumex’s price-cutting led to mitigation in their punishment. On the other hand, NDRC did not fully share Boistime’s view that the choice to bestow points rather than directly cutting prices was a way to share benefits with consumers. As a result, NDRC imposed the highest fine on Boistime in consideration of its attitude and acts during their rectification. From the results, it is apparent that firms should voluntarily adopt rectification measures in response to NDRC investigations so as to obtain the best possible penalty decision (please refer to Table 3).

Undertaking

Rectification

Other Commitment

Fine (millions RMB)

 

Turnover Equivalent

Biostime

Bestowed 50% extra points

Will maintain price for one year

162.7

6%

Mead Johnson

Cut prices by 7%-15% for major products

Will maintain price for one year

203

4%

Dumex

Cut prices by 5%-20% for all major products

Will maintain price of major products for one year

171

3%

Abbotts

Cut prices by 4%-12% for six major products

Committed to actively correct behavior

77

3%

Friesland Campina

Cut prices by 5% for all products

Committed to correct behavior

48

3%

Fonterra

Cut prices by 9% for major products

Committed to actively correct behavior

4.4

3%

Wyeth

First to cut prices by 6%-20% for six major products

Will maintain prices of new products for one year

0

Exemption

Beingmate

Cut prices by 5%-20% for major products

Committed to stop the practice of illegal monopolistic activities

0

Exemption

Meiji

Cut prices by 3%-7% for all products

Will maintain prices for two years

0

Exemption

(Table 3: Rectification Measures in accordance with public information)

Revelations

The antitrust penalty against baby formula brands has illustrated NDRC’s determination to intensify antitrust enforcement and to encourage undertakings to voluntarily report relevant facts and to cooperate with investigations. There is a certain flexibility in the application of leniency program and punishment range that (1) the NDRC confirmed that companies that  voluntarily report the relevant facts of entering into a monopoly agreement and provide important evidence to the antitrust agency will obtain reduced sanctions or even exemptions, (2) the leniency program is applicable to vertical monopoly cases, (3) “voluntarily report[ing]” and “providing important evidence” before or during the process of investigation may lead to a mitigation in punishment, and (4) companies are encouraged to take corrective actions and make detailed commitments during the probe. In conclusion, the NDRC announcement on this case is of guiding significance for companies when responding to antitrust enforcement in the future.


In January of 2013, six leading LCD manufacturers, including Samsung, LG, Taiwanese Chi Mei and AU Optronics, received total economic penalties of RMB 353 million for engaging in a price cartel while Moutai and Wuliangye received a total fine of RMB 449 million for engaging in vertical price-fixing in February 2013.

From TV interview of the NDRC official: http://finance.people.com.cn/n/2013/0808/c1004-22489185.html

TV interview of the NDRC official: http://finance.people.com.cn/n/2013/0808/c1004-22489185.html