China imposes US$117 million tremendous for resale worth upkeep for the primary time within the pharmaceutical trade | Dentons
On April 15, 2021, the Yangtze River Pharmaceutical Group (YRPG) was fined 764 million by the Chinese antitrust regulator.It is also the first fixed price fixing (RPM) penalty in the pharmaceutical industry where antitrust and dominance abuse are more common violations are. This means that while the pharmaceutical industry remains under the radar of antitrust authorities, more attention is now being paid to the distribution level of the supply chain.
The YRPG case reaffirms some key public enforcement rules against RPM in China, such as that it is illegal per se and that requesting exemptions from RPM is almost impossible; and that the agreement can be made in writing, orally, or in any other informal manner. This case also shows when an RPM agreement is considered well implemented. With regard to the legal consequences, YRPG also exemplifies the fact that a parent company is liable for violations by its subsidiaries and that a cooperative attitude is of great importance in antitrust investigations. This warning shares our observations from this interesting case.
I. Key Findings About RPM
The investigation began after a report by the State Administration for Market Regulation (SAMR) in November 2019, which later found that YRPG had RPM agreements with downstream companies for five drugs in mainland China between 2015 and 2019, violating Article 14 the Chinese Antimonopoly Act (AML) to achieve and implement vertical monopoly agreements. In the announcement, SAMR clarified some key points in determining RPM practices as follows:
“General prohibition with exceptions for exceptions”
In China, there has long been a dichotomy between authorities and courts in determining RPMs. In short, courts use common sense in civil disputes over RPM and require a plaintiff to demonstrate that a defendant’s conduct has actually excluded or restricted competition, while law enforcement agencies take a different approach called “Prohibition in principle Exceptions to Exemption ”(“ 原则 禁止 加 例外 豁免 ”in Chinese), corresponds to the per se illegal approach in the investigation of RPM cases. After the Supreme People’s Court expressly stated in the Hainan Yutai case that courts would not intervene in the enforcement of the administration, SAMR now cites the support of the expert group of the State Council’s Antimonopoly Commission and affirms that it will continue to be the norm in public enforcement of RPM cases.
Substance over the form
Monopoly agreements can sometimes take forms other than the written agreement. This is the case with YRPG, as SAMR found that in addition to written forms such as collaboration agreements and issuing price adjustment letters, YRPG has also accepted verbal communications to implement RPM, including telephone communication, WeChat (a popular messaging and social media app ). Notification, door-to-door direct notification, etc. Pursuant to Article 5 of the Provisional Provisions on the Prohibition of Monopoly Agreements, an agreement or decision can be made in writing or orally. Therefore, this case reaffirms the principle that the content, not the form, determines the nature of a monopoly agreement.
Draw the line between completing and implementing RPM
Companies that enter into a monopoly agreement but fail to implement it face a fine of up to 500,000 RMB ($ 77,000), while companies that enter into a monopoly agreement and successfully implement it face a fine of 1% to 10% of their total sales need the previous year. To minimize the penalty, YRPG argued that the agreement was not strictly enforced. Nevertheless, SAMR came to the conclusion that the setting of the sanction measures (violation of the RPM agreement, such as bonus withholding or offer reduction) itself had a sufficient deterrent effect and does not actually have to be carried out to ensure implementation. That is, the real impact of the imposition of penalties proves that it is sufficiently dissuasive that the monopoly agreement has been demonstrably well implemented.
Request for exemptions: De facto not available
According to the “General Prohibition with Exceptions to Exemption”, it is possible for the companies examined to try to apply for exceptions to the RPM in accordance with Article 15 of the AMLA. In fact, there has not yet been a case in which an exemption under Article 15 has been successful. YRPG also requested exemptions based on the circumstances mentioned in Article 15 (1) (a) and (d) AMLA. However, SAMR found that the relevant circumstances are not met and that YRPG has not demonstrated that the behavior in question would not seriously restrict competition in the relevant market and enable consumers to share the resulting benefits and therefore rejected the claim Application from.
II. Parental liability in the event of antitrust violations: assessment of potential legal risks
In view of the fact that the SAMR follows a “full caliber” approach when calculating the basis for calculating the fine, ie that the “sales of the previous year” as the basis for calculating the fine includes not only the sales of the products affected by the Monopoly Act, but all sales of the party concerned, so that it makes a considerable difference to the overall sentence whether the parent company or the subsidiary is punished.
Unfortunately, in the present case, SAMR has identified the parent company YRPG as an infringer, as YRPG turned out to be the decision maker, implementer and supervisory authority in the conclusion and implementation of the monopoly agreement, while its subsidiaries only followed its use. In particular, the fact that the legal representative of YRPG is also the director of the price committee and legal representative of the pharmaceutical production and sales branches also illustrates the subordinate nature of subsidiaries.
To learn from this lesson, a firewall may prove necessary upfront for organizations that want minimal legal exposure. It should enable the parent company to effectively demonstrate that it has no role in the subsidiary’s AML violation.
III. Risks of initially low vertical non-price reluctance
In addition to RPM, YRPG announced that it was also imposing vertical price restrictions on distributors, which required territorial division and forbade them to cross-ship. It could have been a non-RPM vertical monopoly vertical agreement. However, SAMR only identified it as a measure to ensure the implementation of RPM and did not separately state that it violates Article 14 of the AML.
This approach is in line with what the antitrust authorities were pursuing prior to the establishment of SAMR in 2018. Before the institutional reform of the antitrust authorities, the NDRC (National Development and Reform Commission) system was used to investigate and deal with price-related monopoly actions, while the SAIC (State Administration for Industry and Commerce) was responsible for investigating and dealing with monopoly actions Actions that do not include prices was responsible. As a result, NDRC and its local authorities were not empowered to make decisions about vertical, non-price restrictions when enforcing RPM practices.
Today, however, SAMR has amalgamated its enforcement agency and has no apparent obstacle to working with RPM to enforce vertical price restrictions. The fact that SAMR is still following the NDRC approach could be interpreted to mean that SAMR has not yet included vertical, non-pricing restrictions in its enforcement priorities.
IV. How to deal with an investigation: cooperate or not cooperate
Chinese antitrust enforcement has repeatedly proven that cooperation is the best strategy for companies facing an antitrust investigation. In the case of the Calcium Gluconate API Monopoly (2020), for example, heavy fines were paid for refusing to cooperate. In the present case, YRPG was not cooperative at the beginning of the investigation and then softened its attitude as the investigation progressed.
Six months after SAMR opened the investigation, YRPG had twice applied for engagement, both of which were rejected by SAMR. Under the commitment process, companies suspected of the RPM can request the suspension of the investigation and commit to taking specific action to eliminate the effects of their actions within a specified period of time, as previously in the Haichang Contact Lenses (2019) and Lenovo cases (2020). ), where successful suspensions have been imposed and appropriate penalties have been issued. However, the application should be made as early as possible, as such an application will no longer be accepted once the enforcement authority has examined the constitution of the monopoly treaty. It is also possible that YRPG’s initial non-cooperation affected its request for engagement.
This case also shows that the SAMR is developing and improving its capacity to fulfill its antitrust enforcement tasks. The SAMR commissioned a total of 27 market surveillance departments in the provinces to carry out extensive investigations into the implementation of the monopoly agreement and also obtained statements from the expert advisory board of the State Council’s Antimonopoly Commission on important legal issues.
Although the pharmaceutical industry has long been the focus of antitrust enforcement, previous enforcement has mainly focused on the area of APIs (active pharmaceutical ingredients), and has mainly concerned horizontal monopoly agreements and abuse of dominant position. It is the first time that a vertical monopoly agreement in the pharmaceutical industry is being investigated and punished in China, so that it could become the focus of enforcement in the future. We therefore advise relevant pharmaceutical companies to pay particular attention to their compliance in sales management and to closely monitor the implementation trends in this area.