Competition law developments in East Asia - June 2016

This month’s editors: Maxime Vanhollebeke, Emir Pohan, Pearl Yeung, Michael Kim, Sophie Chen, Yui Ota, Lydia Fung and Ada Lam.

Below is an excerpt from our monthly Competition Report. More detailed commentary on these issues and other recent competition law developments in the Asian region is to be found in this month’s edition of our report available on a free subscription basis (see further below).

During the first half of 2016, Korean and Japanese competition authorities imposed significant fines on companies for their involvement in cartel-like practices and bid-rigging. Other competition authorities in the region also imposed fines in a significant number of cases, bringing the total number of such decisions to 54 at the half-year mark.

While bid-rigging and cartels did attract the vast majority of fines across the region during the period, companies were also regularly sanctioned failing to seek clearance for their M&A transactions. Fine amounts are much more modest, but competition authorities in China, Indonesia and Taiwan continue to penalise breaches of this nature.

Consistent with historical trends, sectors that were most exposed to sanctions for antitrust violations remain capital-intensive segments of the industry, including construction, manufacturing, electronics and transport.

These figures are broadly in line with averages recorded over the last five years, both in terms of total fine amounts and the number of decisions. Aside from these statistics, there have also been noteworthy policy developments in China and Japan. Chinese authorities have recently published a first draft of a comprehensive fining policy, setting out how fines are to be calculated, with a focus on sales made in the relevant markets affected by the infringement. In the meantime, the Japanese Fair Trade Commission is considering revising its own fining policy, which has long been mechanically linked to sales made in the relevant markets, with a view to increase its margin of discretion.

On 17 June, the National Development and Reform Commission (NDRC) released a draft of the Guidelines on the Determination of Illegal Gains and Financial Penalties for public comment. The consultation period ends on 6 July.

While the guidance builds on the enforcement experience accumulated since the entry into force of the Antimonopoly Law, the draft provides for the first time a comprehensive methodology for the calculation of the amount of the illegal gains to be confiscated as well as the amount of the fine to be imposed pursuant to Articles 46 and 47 of the Antimonopoly Law. While the draft was prepared by the NDRC, the final guidelines are expected to be adopted by the Antimonopoly Commission, as they are of broad application and will be relevant to enforcement by both the NDRC and the State Administration for Industry and Commerce (SAIC). The draft only deals with infringements of the Antimonopoly Law’s behavioural rules, and does not concern violations of the merger rules.

As regards the disgorgement of illegal gains, the guiding principle under the guidelines is that such gains should be calculated by comparing the additional income earned and the reduced expenses derived from the anticompetitive conduct with a counterfactual which does not involve such conduct. All illegal gains earned during the entire duration of the infringement shall be confiscated. Where the conduct extends beyond Chinese borders, the guidelines clarify that only those gains derived from activities in the PRC markets shall be confiscated.

As regards the fining methodology, Article 46 of the Antimonopoly Law gives broad discretion to the enforcement authorities to impose fines ranging between one and ten per cent of a party’s sales achieved during the previous year. The draft guidelines explain that the authorities will use a three-step process when setting the amount of fines.

The starting point for the calculation is the amount of sales of products affected by the anticompetitive conduct in the relevant geographic area within the PRC. The starting amount may however be set at a higher level either where the infringement is very serious and a party’s sales outside of the relevant market are significant, or where the conduct affects several countries and sales within the PRC are minimal.

As a second step, the rate of the base fine is set by reference to a proportion of the starting amount. The main factors guiding this choice are the gravity and duration of the infringement. As regards gravity, the starting percentage ranges between two and three per cent for horizontal monopoly agreements, whereas for vertical monopoly agreements and abuses of a dominant market position, the starting percentage figure is set respectively at one and two per cent (or three per cent in the case of dominant market positions obtained by virtue of relevant laws and regulations). The starting percentage is then increased by one per cent for each year the anticompetitive conduct lasted.

The third and final step involves adjustments to this percentage figure to account for mitigating or aggravating circumstances. The guidelines provide for the possibility of further adjustments to reflect the degree of illegality of the anticompetitive conduct by reference to the harm caused to market competition and consumer interests. The percentage will be no less than six per cent where the illegality is high and no more than three per cent where the harm is minimal. The maximum proportion of relevant sales on which the fine is based is set at ten per cent in all cases.

The draft guidelines provide useful insight in the way illegal gains will be calculated. Up until now, decisions adopted by the NDRC and the SAIC have provided scant detail in this regard. As regards the setting of fines, decisions which have been published to date already contained an outline of the authorities’ calculation of fines. The draft guidelines set out a fining methodology broadly aligned with existing enforcement practice, although they now provide a much more systematic overview. One significant aspect of the proposed methodology is the possibility for authorities to rely on sales outside of the relevant market as a basis for the fines in some cases.

These draft guidelines are another step towards further enforcement transparency and predictability by the Chinese antimonopoly authorities.