Greenberg Traurig January 2022 Competition Currents: China and Japan
The active pharmaceutical ingredient (API) industry has been a focus of China’s enforcement of its Anti-Monopoly Law (AML). On Nov. 18, 2021, the Anti-Monopoly Committee of the State Council published the Anti-Monopoly Guideline for the Active Pharmaceutical Ingredient Industry (Guideline). This Guideline is the third industry-specific anti-monopoly guideline. following the issuance of Anti-Monopoly Guideline for the Platform Economy Industry, published in February 2021, and the Anti-Monopoly Guideline for the Vehicle Industry, published in September 2021. The Guideline is the culmination of the Anti-Monopoly Bureau’s experience gained from over a dozen enforcement cases over the last decade. Highlights of the Guideline follow.
Definition of the relevant market.
While acknowledging substitutability as the cornerstone of defining a relevant market, the Guideline proclaims that, as a principle, one specific API usually forms an independent product market. When needed, the Guideline allows for further dividing the product market of a specific API into production and distribution. The geographic market for an API industry, as the Guideline opines, is usually country specific.
Prohibited monopoly agreements.
The AML prohibits both horizontal and vertical monopoly agreements. The Guideline sheds light on certain practical issues regarding such prohibited agreements or actions in the API industry. The following acts are specified in the Guideline as constituting, as a principle, a prohibited horizontal monopoly agreement or action:
a) API manufacturers’ entering into joint production, procurement, sales, bidding agreements with competitors regarding production volumes, sales volumes, sales prices, customers and regions of sales;
b) API manufacturers’ communication and coordination of competitively sensitive information, including sales price, production capacity and volume, plan of production and sales through third parties (e.g., dealers, downstream drug production enterprises), trade fairs or industry associations;
c) API manufacturers entering into compensation agreements with competitors in exchange for the competitor not producing or selling certain products;
d) API distributors’ communication and coordination of competitively sensitive information with other distributors on procurement volume, suppliers, sales price, sales volume and customers.
As a rule of thumb, the following agreements or actions are treated as prohibited vertical agreements under the Guideline:
a) Fixing resale price (including the lowest resale price) through contracts, oral agreements, written correspondence, emails, notifications of price adjustment.
b) Disguised resale price fixing, including fixing the margins, rate discounts and rebates of distributors, usually compounded with offering incentives like extra discounts and imposing penalties like discontinuation of supply.
c) Imposing geographic or customer restrictions on downstream distributors. The Guideline further elaborates that geographic and customer restrictions may lead to market segregation, price discrimination, impairment of competition in the API market, and possible reduction of dealer and manufacturer access to API.
Certain rules adopted in the Guideline are different from guidelines applicable to other industries. For example, in the anti-monopoly guideline for the automobile industry, joint production and joint procurement agreements are generally deemed to benefit market competition and increase market efficiency and consumer welfare. Conversely, such collaborative agreements are treated as generally prohibited horizontal agreements.
Abuse of market dominance.
The Guideline provides for the consideration of a number of factors for determining market dominance in the API industry, including market share, competitive landscape, production capacity and volume, control over the market, financial and technical conditions, and reliance of downstream enterprises. Because exclusive or sole distribution is prevalent in the API industry, the Guideline further adds that the sales volume of a manufacturer controlled by a distributor should be considered when evaluating the distributor’s market share. The Guideline also identifies certain types of common abusive behavior, including: (1) excessing pricing, including excessively increasing the price without justifiable reasons; (2) unfairly rejecting or prohibiting transactions, including prohibiting distributors from purchasing from other suppliers; (3) tied selling, including requiring purchase of excipient or packaging materials together with the API, (4) imposing unfair conditions on transactions, including sharing the margin of the counterparty or asking the counterparty to pay an excessive deposit for the transaction, and (5) discriminatory behavior, including discriminatory pricing.
JFTC closes investigation into Rakuten.
On Dec. 6, the Japan Fair Trade Commission (JFTC) announced that it had closed its investigation into Japanese IT giant Rakuten.
In 2019, Rakuten notified shop operators on their e-commerce site that it would uniformly introduce a “fee shipping line” starting in March 2020. In February 2020, the JFTC filed a petition with the Tokyo District Court for an emergency cease-and-desist order pursuant to the Antimonopoly Act, requesting a temporary halt to Rakuten’s uniform introduction of the free shipping line. In response, Rakuten announced it would take measures to exclude shop operators from the application of the free shipping line at the operators’ discretion, and subsequently established a procedure for operators to apply for an exemption. The JFTC withdrew the petition but continued to investigate whether there were Antimonopoly Act violations. The JFTC examined remedial measures implemented by Rakuten, found they resolved the above suspicions, and terminated the investigation.
JFTC closes investigation into online funeral service provider.
On Dec. 2, 2021, the JFTC closed its investigation into an online funeral service provider because the provider voluntarily abolished its unfair trade practice that violated the Antimonopoly Act.
The online funeral service provider receives funeral requests via its website from consumers; these requests are passed onto funeral operators – which conduct the funerals – under contracts with the provider. In June 2018, the provider introduced the “Special Contract Member System,” under which the funeral operators seeking a special contract with the provider were required to apply to the provider stating that they would comply with the prohibition on transactions with other online funeral operators. Under the system, the funeral operators paid a lower fee to the provider.