March 2013 China’s highest antitrust fines against two liquor SOEs provide new guidance on the AML enforcement. Contents Introduction ....................... 1 Introduction Background ....................... 1 On 22 February 2013, two provincial-level price control authorities, the Significance of these Guizhou Price Bureau and the Sichuan Development and Reform decisions ........................... 2 Commission (“Sichuan DRC”), announced that two well-known distillers of RPM: per se illegal or premium Chinese liquors were fined RMB 247 million and RMB 202 million “rule of reason” .............. 2 respectively for resale price maintenance (“RPM”). Fining calculations ........ 2 These groundbreaking RPM cases raise a number of significant issues Role of local enforcement regarding the enforcement of the PRC Anti-monopoly Law (“AML”). This is authorities ...................... 3 the largest fine to date that Chinese antitrust regulators have imposed in Conclusion ........................ 3 relation to the enforcement of the AML. It is also the first occasion when the AML authorities have considered the application of the AML to RPM practices. Background Maotai and Wuliangye are considered to be the leading players in China’s high-end strong aromatic liquor market. Both are provincial-level state-owned enterprises (“SOEs”). In January 2013, both companies announced that they had been inspected by the National Development and Reform Commission (“NDRC”) and the relevant provincial-level price control authorities and that their respective distribution activities were being investigated. On 22 February 2013 the Guizhou Price Bureau and Sichuan DRC published their formal announcement of the investigations and the decisions to impose fines on each of Maotai and Wuliangye. The announcement by the Guizhou Price Bureau is very brief, while the statement made by the Sichuan DRC is more detailed and provides more guidance on the enforcement of the AML. According to the Sichuan DRC, Wuliangye had since 2009 pursued distribution agreements with independent third party distributors across China which had the effect of restricting the minimum resale price of its products. Those distribution agreements included penalty mechanisms, such as reducing supplies, confiscating marketing support money, and imposing fines China’s highest antitrust fines against two liquor SOEs provide new guidance on the AML enforcement. 1 on the distributors. It is reported that Wuliangye ceased supply to a large supermarket chain in 2011 as a means to force the supermarket to abide by the terms of the RPM agreement, and also imposed punitive fines in 2012 on 14 distributors across China for their non-compliance with their RPM obligations. In its announcement of the fine against Wuliangye, the Sichuan DRC referenced Wuliangye’s “strong market position” in respect of strong aromatic Chinese liquor, a product that has low substitutability with other Chinese liquor products. The Sichuan DRC elaborated that the alleged RPM practice brought about three categories of anti-competitive effects. First, it precluded intra-brand competition amongst distributors. Second, it restricted the inter- brand competition in the liquor market and set a bad example for other competitors to follow, thus causing greater damage to the market and additional anti-competitive effects. Third, the RPM jeopardized consumers’ interests and eliminated the possibility to obtain low-priced liquor products. Significance of these decisions There are a number of important issues that arise as a result of these decisions. RPM: per se illegal or “rule of reason” In a recent judgement by the Shanghai Intermediate People’s Court regarding Johnson & Johnson’s subsidiaries in Shanghai, the court adopted a rule of reason analysis on RPM where the plaintiff had the burden of proving the anti-competitive effect resulting from RPM, and ruled against the plaintiff on the grounds that it failed to satisfy this burden. The case is being appealed before the Shanghai Higher People’s Court and the decision is yet to be made. The fact that the Sichuan DRC refers to Wuliangye’s strong market position and three categories of anti-competitive effects, instead of directly ruling Wuliangye’s RPM practice illegal, indicates that a rule of reason analysis may have been adopted by the Sichuan DRC. In contrast, the Guizhou Price Bureau ruled Maotai’s RPM practice illegal without providing any reasoning, making it hard to conclude definitively on the NDRC’s approach on this issue. Notwithstanding the above uncertainty in terms of approach, both cases take a hard-line approach to RPM. Companies active in China should closely monitor their distribution activities and be alert to the fact that RPM practices are under the regulators’ spotlight. Fining calculations The Chinese AML authorities have been considering the issues concerning the calculation of fines under Article 46 of the AML since its coming into force. The Sichuan DRC’s fine on Wuliangye in particular may be a good indicator of the current thinking of the authorities. The notable features of the Sichuan DRC’s fine on Wuliangye are as follows: China’s highest antitrust fines against two liquor SOEs provide new guidance on the AML enforcement. 2 > Turnover to be taken into account. The fine on Wuliangye amounted to 1% of “sales turnover involved in the infringement”, rather than “sales turnover” as set out in the AML. Further, even though Wuliangye had been enforcing RPM since 2009, the fine is limited to one year’s turnover of the previous year – in line with the wording of Article 46 of the AML. > No sanction of “confiscating of illegal gains” is imposed. In these decisions, the fine was the only financial sanction imposed against the two Chinese liquor distillers. In all previous cartel decisions, such as the LCD panels cartel decision made by the NDRC on 4 January 2013, a sanction of “confiscated illegal gains” was also imposed in addition to a fine, which is in line with the provisions under Article 46 of the AML. > Reductions for cooperation with the investigation. Wuliangye received a reduced fine because of its full cooperation with the investigation, and taking measures to rectify the illegal activities. This reduction was, once again, made under the leniency rules of the general administrative law and not the leniency rules for voluntary reporting of the infringement under Article 46 of the AML. Role of local enforcement authorities The AML enforcement procedure rules promulgated by the NDRC give it power to delegate to provincial-level price control authorities the authority to investigate and deal with pricing-related AML violations. The NDRC nevertheless retains sole jurisdiction for investigating “significant” cases. Given the leading position of Wuliangye and Maotai in the national liquor market, one might have expected these cases to have been identified as significant and therefore allocated to the NDRC. However, although the NDRC appears to have been initially involved in the investigation, the fines were imposed by the Sichuan DRC and the Guizhou Price Bureau. In practice, both the NDRC and SAIC are increasing the involvement of their local agencies in their AML-related enforcement. Companies active in China should thus be aware of this and be particularly alert in dealing with inquires from local AML authorities. Conclusion The recent flurry of activity by the NDRC is testament of its ambitions to rigorously enforce the AML. After only a small number of decisions since the AML’s introduction in 2008, NDRC has quickly taken a number of decisions in succession. In the LCD Case in early January 2013, the NDRC powerfully demonstrated its extraterritorial jurisdiction upon foreign firms who had been involved in the global LCD panel cartel. Now, less than two months later, fines are being imposed against Wuliangye and Maotai. This sets the stage for an increasingly rigorous enforcement of the price- related provisions of the AML. China’s highest antitrust fines against two liquor SOEs provide new guidance on the AML enforcement. 3 For more details, please click here for the official announcement by the Contacts Guizhou Price Bureau and here for the official announcement by the Sichuan DRC. For further information please contact: Michael Cutting Partner (+44) 20 7456 3514 [email protected] Gavin Robert Partner (+44) 20 7456 3364 [email protected] Jonas Koponen Partner (+32) 2 505 02 27 [email protected] Yuan Cheng Counsel (+86) 10 6535 0609 [email protected] Fay Zhou Counsel (+86) 10 6535 0686 Authors: Yuan Cheng, Fay Zhou [email protected] This publication is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts, or contact the editors. © Linklaters LLP. 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