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Heaviest Antitrust Fine Is Imposed in China

Friday, January 25, 2013
By Adrian Emch, Hogan Lovells International LLP

The National Development and Reform Commission (NDRC) has started 2013 with a bang. On 4 January 2013, it announced that it had imposed sanctions of close to $56 million on six liquid crystal display (LCD) makers from Korea and Taiwan, accusing the companies of illegal price-fixing.

These sanctions set an absolute record for antitrust offenses in China. NDRC's decision is also significant in that it is the first that exclusively sanctions “foreign” companies—firms from outside Mainland China.

Background

LCD panels are the main components of flat TV and computer monitors. China's many TV and computer makers are buyers of LCD panels, and hence were the direct victims of the price-fixing activities.

The companies punished by NDRC are Samsung and LG from South Korea, and Chimei, AU Optronics, Chunghwa Picture Tubes, and HannStar from Taiwan. With the exception of LG, these companies were also fined by the European Commission for the same cartel activities in 2010, and some of them were also targeted in investigations by the US Department of Justice and/or sued in private litigation in the United States.

The decision and the infringement

Some details of the NDRC decision can be found in a press release and a question-and-answer session between an NDRC official and a journalist (Q&A) posted on NDRC's website, as well as in statements made by NDRC officials to the Chinese press.

Still, overall, the underlying facts, procedures and NDRC's legal reasoning are only outlined in these materials.

In terms of the illegal conduct, the press release states that the six defendants had manipulated prices for LCD panels from 2001 to 2006, to the detriment of TV makers and end consumers. The decision also mentions exchanges of information on market conditions and consultation on prices between the six companies.

The Q&A states that NDRC's decision is based on the Price Law, not the Anti-Monopoly Law (AML). The reason given was that the AML only entered into force in 2008 and has no retroactive effect. Given that the objectionable events occurred from 2001 to 2006, the AML was found not to apply.

Complex, intriguing set of sanctions

NDRC imposed heavy sanctions on each of the six participants in the cartel. In total, the amount of the sanctions was RMB 353 million (around $56 million). With around RMB 118, RMB 101 and RMB 94 million (approximately $19, $16 and $15 million) respectively, LG, Samsung and Chimei received the highest penalties.

Reports in the Chinese press suggest that AU Optronics acted as the whistle-blower and voluntarily approached NDRC to self-report. The official materials on NDRC's website do not confirm this point explicitly, but the Q&A notes that the six defendants all “turned themselves in,” receiving different degrees of mitigation in the sanctions imposed. However, the press release also contains information on the volume of LCD panel sales in China for each of the six companies, and AU Optronics' share of the total amount of sanctions is below what its sales volume would imply. What is clear is that AU Optronics was not granted immunity and still had to pay a penalty of around $3.5 million.

Interestingly, NDRC said that the sanctions imposed on the companies consisted of two elements: the “unlawful gains” which the perpetrators realised through the anti-competitive conduct (RMB 208 million) and the fines themselves (RMB 144 million). In addition, the sanctions imposed in relation to the unlawful gains were also split into two parts: the “price overcharge” (RMB 172 million) and the “confiscation” (RMB 36.75 million).

For the price overcharge, the six defendants were required to refund the overcharged amount directly to the Chinese TV makers, and the press release notes that re-payment has already been made. As for the other element of the unlawful gains, the official NDRC materials are not clear. But, reading between the lines, it may be that it was simply not possible to attribute all the gains realised by the perpetrators to specific buyers, and perhaps this amount was confiscated and ended up in NDRC's coffers.

The refunding of the price overcharge to the buyers of the cartelized products has its basis in a provision of the Price Law, but this option would not, in principle, be available under the AML. This refund system has interesting features: it may remove the need for the aggrieved customers of the members of the cartel to bring follow-on suits to seek compensation for the damages suffered. Even for the defendants in the NDRC procedure, the refund system could be beneficial if it were to expressly preclude such follow-on litigation and allow them to turn the page and move on with their business. But that tactic would not necessarily be water-tight, as a TV maker could argue that it has suffered damages other than being overcharged and still bring a case seeking damages against the panel maker.

Non-pricing issues

According to the NDRC press release, the “action items” for the six cartelists were not limited to paying the monetary sanctions. The companies also had to commit to “using their best efforts to provide the Chinese TV companies with fair supplies, and to offer the opportunity to all customers to buy equivalent high-end products and new technology products.” Furthermore, the six defendants had to commit to extending the warranty period for LCD panels from 18 to 36 months, at no charge, to all Chinese TV makers.

The press release and the Q&A on the NDRC website do not provide further explanations on the rationale behind these two commitments. The Q&A notes that, according to estimates of the Chinese industry association, this extension of the warranty period could lead to savings of RMB 395 million (around $63 million).

In contrast, some reports in the Chinese press suggest that the domestic TV makers had actually complained about not getting access to the latest LCD technology, and that they felt discriminated against as to the warranty period, without however providing any further details to the point.

Without additional information on these “latest technology” and “warranty” issues, it is difficult to assess their relevance from a legal perspective. If the six defendants were shown to have conspired to refuse to provide the LCD panels made with the most up-to-date technology and to limit the warranty period to 18 months, then the commitments could be viewed as specific remedies to address the effects of the cartel conduct. If, on the contrary, the decisions as to the maturity of the technology used for the LCD panels and the duration of the warranty period were made unilaterally by each of the six defendants in isolation from each other, then it would be more difficult to find a proper rationale based on antitrust grounds for the imposition of these two commitments.

Whatever the facts or ultimate rationale behind these commitments, the NDRC decision in the LCD panels case is yet another example of what is becoming a litany of antitrust decisions in relation to high technology markets. Often, the explicit (or underlying) issue is the dependence—or perceived dependence—of Chinese industry on foreign technology. Examples of such decisions abound in the merger area—the ARM/Giesecke & Devrient/Gemalto joint venture, Google's acquisition of Motorola Mobility and the two hard disk drive cases are just some of the most recent decisions where the Chinese merger control authority has imposed conditions on its approval which appear to be aimed at reducing dependence on foreign technology.

What's next?

NDRC's decision in the LCD panels case suggests that anti-cartel enforcement is set to increase in China, perhaps quite rapidly. So far, NDRC had mainly prosecuted domestic cartels, rather than international cartels with foreign participants. But that “honeymoon” period may now be over. It would be reasonable to expect international cartels to become a focus of NDRC's investigations.

Despite the facts that the objectionable conduct dates back to 2001-2006 and the statute of limitation in Chinese administrative law is in principle two years, NDRC still sanctioned the LCD makers (presumably based on the theory that a complaint filed with it by the Chinese TV manufacturing industry in 2006 interrupted the running of the limitation period). Hence, companies that have been punished for anti-competitive practices elsewhere in particular need to keep a close eye on developments in the area of Chinese anti-cartel enforcement.

As mentioned, the LCD panels decision was made under the Price Law. In the Q&A on its website, NDRC defended itself against arguments that the level of fines imposed on the LCD panel makers was too low. The authority responded: “If the fines had been imposed pursuant to the Anti-Monopoly Law, then the basis for the amount of the fines would have been the sales revenues of these companies, and the fines would definitely have been much higher.” The warning signal for companies could not be clearer.

Adrian Emch is a partner in the Bejing, China, office of Hogan Lovells International LLP. He has completed an internship with the Directorate-General of Competition at the European Commission and has been in private practice in Brussels and Beijing. His experience covers merger control, multi-jurisdictional merger filings, cartel investigations, and antitrust counselling.

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