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On 17 June 2016, China’s National Development and Reform Commission (“NDRC”) published Draft Guidelines on the Determination of Illegal Gains and Fines in Relation to Business Operators’ Monopolistic Conduct (“Draft Guidelines”) for public consultation. These are one of the six antitrust guidelines which the NDRC took the lead to draft under the instruction of Anti-Monopoly Committee (“AMC”).

What does this mean for you?

  • The Draft Guidelines aim to:
    • align the different approaches adopted by the State Administration for Industry and Commerce (“SAIC”) and the NDRC as well as their local branches;
    • set out clear and transparent approaches on determining penalties (i.e. illegal gains and fines) in antitrust cases.
  • If adopted, the Draft Guidelines will represent a significant step towards a more consistent and transparent approach to antitrust fine calculation in China, bringing the Chinese antitrust enforcement regime closer to its international counterparts.
  • The Draft Guidelines come at a time when antitrust agencies around the globe are increasingly realising the importance of a consistent approach to setting penalties. The International Competition Network (“ICN”), composed of competition regulators from around the world, is currently considering producing guidance on fining policy. Although China’s antitrust agencies are not yet formal members of the ICN, these developments are further evidence of China’s awareness of international developments and trends in antitrust, as well as a commitment to a more sophisticated, transparent and consistent enforcement regime.
  • In other jurisdictions, fine calculation has proven fertile ground for companies appealing decisions of the regulator. In the EU, cartel defendants often claim in the European Courts that the European Commission has failed to follow its fining guidelines, for example by taking an incorrect reference year and/or duration for the infringement, or has failed to treat cartel participants in a consistent way. So far, defendants in China have been reluctant to challenge the decisions of the NDRC or SAIC in the courts. It remains to be seen whether such appeals will become more common as China’s antitrust regime grows in sophistication.

1.  The Current Approach to Penalty Calculation

The Anti-Monopoly Law (“AML”) provides for both fines and the confiscation of illegal gains resulting from anticompetitive behaviour (i.e. disgorgement) against business operators for antitrust violations. The AML provides a ceiling/cap for fines (10% of the company’s sales revenue in the preceding year). It does not explain how penalties should be set in individual cases.

Therefore, antitrust regulators have had a broad discretion to assess the amount of illegal gains, and the exact basis for calculating fines. In practice, Chinese antitrust regulators (in particular the NDRC and the SAIC[1]) and their local branches adopt a variety of approaches in determining penalties.

(a)  SAIC’s Current Approach

SAIC has adopted internal rules on determining the administrative penalty in all types of SAIC investigations:

  • SAIC’s Guiding Opinion on Proper Exercise of Discretionary Power in Administrative Enforcement[2], which provides some basic principles and particular circumstances to be considered in fine determination.
  • SAIC’s Measures on Confiscating Illegal Gains in SAIC Administrative Penalty Cases[3], which confirm that appropriate and reasonable expenditure (e.g. tax paid) can be deducted when calculating illegal gains. (together, “SAIC Internal Penalty Rules”)

The SAIC Internal Penalty Rules apply to all enforcement actions undertaken by SAIC including in antitrust cases.

Based on SAIC Internal Penalty Rules, the antitrust penalty in SAIC investigations is calculated as follows:

Figure 1 SAIC’s Current Approach in Determining Illegal Gains and Fines

chart 3

Nonetheless, as the above SAIC Internal Penalty Rules are not tailored for antitrust enforcement, some of the provisions are not always practical in antitrust cases. For example, some local AICs have not always confiscated illegal gains in previous cases due to practical calculation difficulties (for example, because of a lack of financial data). Some AIC decisions have not explained whether all expenditure or just parts of the expenditure were deducted under the “illegal gains” calculation methodology.

(b)  NDRC’s Current Approach

The NDRC has not adopted rules on determining illegal gains. The NDRC’s internal rules, i.e. Provisions on Regulating the Authority of Price-related Administrative Penalties[4] only provide some general aggravating, extenuating or mitigating circumstances to be considered in fine determination. Similar to the SAIC’s internal rules, the NDRC’s internal rules are not tailored for antitrust enforcement.

In practice, the NDRC has rarely confiscated illegal gains. Based on its public decisions, the NDRC only confiscated illegal gains in very few cases. For example, in the compound reserpine APIs case in 2011, the NDRC confiscated the illegal gains of two pharmaceutical companies. However, the NDRC did not explain how it determined the amount of illegal gains. The NDRC also confiscated the illegal gains of the companies involved in the LCD panel cartel case in 2013. But this case was taken under Price Law rather than AML, because the period of infringement occurred before the AML came into force.

2.  The Proposed Approach in the Draft Guidelines

The Draft Guidelines suggest that Chinese antitrust regulators are working to clarify the “grey areas” in antitrust penalty determination, to move towards a more rule-based system for calculating penalties in antitrust cases. The comparatively sophisticated approach in the Draft Guidelines shows that Chinese antitrust regulators have gained rich experience in the past intensive investigations. Though the Draft Guidelines are less than perfect and are still under public consultation, we can expect once finalised, they will make the process of setting fines more transparent and consistent, allowing companies under investigation to better defend their interests in receiving a fair/lower penalty.

2.1 Illegal Gains

The Draft Guidelines define the illegal gains as the additional profits earned and/or reduced expenses [5] resulting from the monopoly agreements or the abuse of market dominance during the period of the illegal behaviour.

(a) Territorial Scope

In general, the territorial scope for calculating illegal gains only covers the territory of China. In other words, antitrust regulators only confiscate illegal gains generated from business operators’ economic activities within the territory of China. We understand the territorial scope may be narrower in the case of infringements that only affect local or regional markets within China.

(b) Calculation Methods

The Draft Guidelines provide the following alternative methods for the calculation of illegal gains, which will be used depending on the nature of the infringement, i.e. whether it is likely to have boosted revenues (for example, a price fixing cartel) or lowered expenses (for example, as a result of a purchasing or buyers’ cartel):

Figure 2: Two Methods for Calculating Illegal Gains in the Draft Guidelines

  • If the business operators obtain additional incomes from the monopoly conduct:

1

  • If the business operators reduce their expenses as a result of the monopoly conduct

2

The variables in the above two formulae are defined as follows:

  • Actual Income or Actual Expenses means the incomes or expenses actually occurred during the period that the monopoly conduct lasts. The amount of actual income or actual expenses can be determined by reference to the business operators’ financial records.
  • Hypothetical Income or Hypothetical Expenses refers to the income that business operators could have obtained (or the normal expenses that business operators should have incurred) in the relevant market if there was no monopoly conduct during the period concerned.

Hypothetical Incomes or Hypothetical Expenses can be calculated in either of the following two ways:

(i) The Hypothetical Incomes/Hypothetical Expenses can be determined by multiplying Reference Price and Reference Sales Volume

Hypothetical Incomes/Hypothetical Expenses = Reference Price × Reference Sales Volume

Reference Price is the price of relevant products that would have been applied in the absence of monopoly conduct;
Reference Sales Volume reflects the volumes relevant products that would have been sold in the absence of monopoly conduct.

The Draft Guidelines propose factors for determining the Reference Price and Reference Sales Volume. These include looking at either: (i) the price and sales volumes of the relevant business operator(s) either before the implementation of the monopoly conduct, or after the monopoly conduct is terminated; or (ii) the price and sales volumes of other business operators who were not involved in the monopoly conduct, or (iii) prices and sales volumes in comparable markets not affected by the monopoly conduct, etc.

(ii) The Draft Guidelines go on to suggest that the regulators may also assess Hypothetical Incomes / Hypothetical Expenses by comprehensively considering various factors, such as the business operators’ market shares and purchase volumes before the monopolistic conduct, historical profit margins, profit margins in the industry concerned and profit margins in similar industries.

Apart from the above two methods, the Draft Guidelines also specify the calculation methods for certain specific infringement. For example, if the business operators charge unreasonable fees in addition to the price, all of the unreasonable fees should be deemed as the illegal gains. If the business operators unlawfully discriminate between customers in terms of the trading price, the Reference Price should be the lowest purchase price or the highest sales price.
The Draft Guidelines also list certain circumstances where illegal gains will not be deemed to arise:

  • the monopolistic conduct does not significantly affect the business operators’ sales volumes, prices and competition in the relevant market; or
  • the monopolistic conduct has no monetary consequences (e.g. refusal to deal).

Alternatively, where illegal gains are difficult to calculate (e.g. because the Reference Price/Reference Sales Volumes cannot be ascertained), the NDRC/SAIC may decide not to confiscate the illegal gains but to adjust the proportion of fines.

2.2 Three-Step Process for Determining Fines

The Draft Guidelines propose a three-step process to determine fines.

3

Step 1 – Identify Relevant Revenues

(a) How to define the “preceding year”?

The Draft Guidelines clarify that the preceding year refers to the year prior to the launch of the investigation. If the infringement has terminated before an investigation is launched, “the preceding year” shall be the last year prior to the termination of the infringement.[6] However, due to the two-year statutory limitation, if the unlawful act is not discovered within two years from the date of termination, the regulators can no longer impose the penalty

(b) What is the territory scope of the “sales revenue” for the purpose of fine calculation?

The NDRC/SAIC generally takes the sales of the products in the geographical area covered by the monopolistic conduct. If the geographical area concerned is larger than the territory of China, the regulators generally take the China-wide domestic sales revenue of relevant products as the basis for calculating fines.

The Draft Guidelines appear to give the authorities some discretion in determining the relevant revenues. According to the Draft Guidelines, in certain circumstances, the antitrust regulators may take worldwide sales as the basis for calculating fines. Those circumstances include but are not limited to:

(i) situations where, the sales generated in the geographic area where the monopolistic conduct occurs are small relative to the total revenue of this business operator, and would not fairly reflect the harm resulting to competition and consumer welfare. This appears to have been inspired by the deterrence multiplier in the EU fining guidelines.

(ii) situations where, the monopolistic conduct occurs both in China, and in markets outside of China, but there are no/limited sales generated within China during the period of the illegal conduct. One example of this scenario might be a market sharing agreement, where one competitor agrees not to sell into China. By definition, the competitor who agrees not to sell into China will not generate revenues in China.

The prospect of NDRC/SAIC taking worldwide sales into account gives rise to legitimate concerns. To the extent that the same infringements have been sanctioned in other countries, a China fine based on worldwide sales is likely to entail double counting – since the company will have been fined in other jurisdictions based on its sales in those jurisdictions.  Businesses in China will be hoping that the NDRC reconsiders this section of the draft prior to adoption.

(c) Who are the “business operators” concerned? Is the parent company included?

The NDRC/SAIC generally fine the business operators who directly implement the monopolistic conduct. However, the Draft Guidelines make clear that the NDRC/SAIC may impose fines on, and in respect of, a parent company, provided that the parent company can exercise decisive influence over the business operator which has engaged in the monopolistic conduct. This is in line with the position in other jurisdictions, including the EU. The Draft Guidelines do not address the position of joint ventures, i.e. whether the parents of a jointly controlled joint venture can be fined in respect of illegal behaviour committed by the joint venture.

Step 2 – Identify % Proportion Based on the Nature and the Duration of the Infringement

The Draft Guidelines propose a 1-3% starting point (“Initial Proportion “) depending on the type of the unlawful behaviour. The Initial Proportion will be increased by 1%[7] for each year of the infringement, up to a total of 10%.

Table 1 Initial Proportion of Fines Based on the Nature of Monopoly Conduct

No. Monopolistic Conduct Initial Proportion of Fine
1 Horizontal agreements relating to:

  • Price fixing;
  • Output restriction;
  • Market allocation.
3%
2 Horizontal agreements relating to:

  • Restrictions on the purchase of new technologies or equipment, or on the development of new technologies or products;
  • Collective boycotts;
  • Other monopoly agreements determined by antitrust regulators
2%
3 Resale Price Maintenance 1%
4 Abuse of market dominance, where the dominance is obtained as a result of laws or regulations (in industries e.g. tobacco, water supply, electricity supply, etc.) 3%
5 Abuse of market dominance, where the dominance is obtained through market competition 2%

Step 3 – Adjust the Proportion Based on Aggravating or Mitigating Circumstances

The NDRC/SAIC can adjust the Initial Proportion of fines in Step 2 by considering aggravating or mitigating circumstances.

(a) Aggravating Circumstances

Table 2 Aggravating Circumstances in the Draft Guidelines

No. Aggravating Circumstances Adjustment to the Initial Proportion
1 Playing a leading role in the monopolistic conduct, coercing or inviting other business operators to implement the monopolistic conduct, or preventing other business operators from stopping the monopolistic conduct +1% for each circumstance
2 Committing multiple infringements in the same case, or having infringed the AML in the past (i.e. recidivism)
3 Actively compelling or facilitating administrative authorities or organisations[8] to eliminate or restrict competition through abusing administrative power
4 Continuing the monopoly conduct after being ordered to stop by the antitrust regulators
5 Other aggravating circumstances +0.5% for each circumstance

(b) Mitigating Circumstances

Table 3 Mitigating Circumstances in the Draft Guidelines

No. Extenuating or Mitigating Circumstances Adjustment to the Initial Proportion
1 Being coerced by other business operators to implement monopolistic conduct -1% for each circumstance
2 Being forced or coerced by administrative authorities or administrative organizations to implement the monopolistic conduct
3 Cooperating with administrative agencies in the investigation and making meritorious contribution
4 Actively eliminating negative consequences of infringements
5 Actively mitigating negative consequences of infringements -0.5% for each circumstance
6 Voluntarily providing relevant evidence of other business operators’ violation of the AML (outside of the scope of leniency)
7 Other mitigating circumstances

(c) Final Adjustment

The Draft Guidelines grant the antitrust regulators the ultimate discretion to make a final adjustment to the proportion of fines if they consider the percentage concluded from following Steps 1-3 does not adequately reflect the severity of the infringement. The percentage after the final adjustment should still be within the following ranges:

  • For severe infringements, the proportion after the final adjustment should not be less than 6%;
  • For infringements which do not cause significant damage to competition/consumer welfare, the proportion after the final adjustment should not exceed 3%.

The Draft Guidelines suggest that the final proportion of fines should never be less than 1%, except where:

  • A business operator has received a whole or partial reduction having sought leniency; or
  • Where the infringement is not severe, lasts no more than one year, involves at least two mitigating circumstances, and where there are no aggravating circumstances.

[1] The Ministry of Commerce (“Mofcom”) is responsible for merger review in China, thus it is less involved in the disgorgement and fine determination.
[2] 国家工商行政管理总局《关于工商行政管理机关正确行使行政处罚自由裁量权的指导意见》,2008年2月22日。
[3] 国家工商行政管理总局《工商行政管理机关行政处罚案件违法所得认定办法》,国家工商行政管理总局令第37号,2008年11月21日。
[4] 《规范价格行政处罚权的若干规定》发改价监[2014]1223号, 2014年6月7日。
[5] If the business operators obtained both additional incomes and reduced expenses, the antitrust regulators would confiscate both of them.
[6] The last year for the purpose of revenue calculation should start from January 1 and end on December 31. If a business operator operates using a different fiscal year, its revenue should be adjusted to the above definition accordingly.
[7] The initial percentage of fines will increase by 0.5% for any additional period less than 6 months and by 1% for any additional period longer than 6 months but shorter than 1 year.
[8] Administrative organizations refer to organizations with function of public affairs management under the authorization of laws or regulations.

Author

Stephen Crosswell is a partner in Baker McKenzie's Competition practice in Hong Kong, where he oversees competition matters in Hong Kong, China, Vietnam and Korea. He is consistently recognized as a leading lawyer for competition/antitrust by Chambers Asia. He wrote the Hong Kong chapters of Sweet & Maxwell's Competition Law in China & Hong Kong and the Oxford University Press Global Antitrust Compliance Handbook. Mr. Crosswell regularly speaks at leading antitrust events in Asia. He is also involved in capacity building with regional regulators and antitrust policy work. Prior to joining Baker McKenzie, Mr. Crosswell headed a Magic Circle firm's antitrust and competition practice in Hong Kong and coordinated their overall practice in Asia.

Author

Tom Jenkins is an associate in Baker & McKenzie's Hong Kong office. Tom’s practice covers a wide range of China and EU competition law issues, including merger control, competition investigations, distribution systems, abuse of dominance, joint ventures, issues relating to intellectual property and competition law and general competition compliance. He joined the London Office of Baker & McKenzie as a trainee solicitor in 2008, and qualified into the European & Competition Law Practice in Brussels in March 2010. Since January 2015, he has been on secondment to the Hong Kong office.

Author

Bao Zhi is a partner in Baker McKenzie's Beijing office.

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