In Short
The Development: China's State Administration for Market Regulation ("SAMR") fined three suppliers of active pharmaceutical ingredients ("API") for injectable calcium gluconate a total of RMB 325.5 million (approximately $46.2 million) for allegedly abusing their collectively dominant position by charging unfairly high prices and imposing unreasonable trading conditions.
The Significance: This is the largest antitrust fine in the pharmaceutical industry since China implemented its Anti-Monopoly Law ("AML") in 2008, and just the fourth case involving the collective abuse of dominance theory.
Looking Ahead: Companies that operate in concentrated industries in China should review any contracting or pricing strategies that could be perceived as exclusionary or unfair. In addition, SAMR's recent cases and public statements signal a renewed focus on the pharmaceutical industry.
Abuse of Collective Dominance
The AML, like nearly all global antitrust laws, prohibits a company from using a dominant or monopoly position in a market to unfairly exclude competition or enhance its dominant position. The AML also outlaws abuse of "collective dominance" in an oligopolistic industry through a rebuttable presumption that three companies with combined market shares of 75% are dominant. By contrast, the U.S. antitrust laws permit a company without monopoly power to engage in unilateral conduct that, if done a by monopolist, might otherwise be unlawful. Like China, European Union law includes a collective dominance test, however, the European Commission's collective dominance cases are rare and involve structural or contractual links among companies that facilitated coordination.
In this case, SAMR presumed that three companies, Shandong Kanghui Medicine ("Kanghui"), Weifang Puyunhui Pharmaceutical ("Puyunhui"), and Weifang Taiyangshen Pharmaceutical ("Taiyangshen") were collectively dominant with a combined market share of more than 87% in the supply of injectable calcium gluconate in each year between 2016 and 2018. SAMR also considered several other factors to support its finding of dominance, including the ability of the companies to control the market, the importance of the suppliers to customers, and market entry barriers.
In the three prior collective dominance cases in China, as in the EU, the authority found agreements or structural links between the accused companies. In this case, SAMR found that Kanghui controlled both Puyunhui and Taiyangshen through the exchange of management teams, oral agreements, and actual control over their financial systems. SAMR therefore concluded that Puyunhui and Taiyangshen were alter egos of Kanghui.
Exclusionary or Unfair Conduct
According to SAMR, the three companies violated Article 17(1) of the AML by selling injectable calcium gluconate, used to treat conditions arising from calcium deficiencies, at unfairly high prices. To determine whether prices were unfairly high, SAMR compared the companies' procurement costs and prices, finding that the companies achieved margins between 9.5 to 27.3 times cost, as well as sharp increase in price during the relevant period. In addition, SAMR alleged that the companies pushed prices higher through a "double-margin model" in which Kanghui purchased from API manufacturers and resold to Puyunhui and Taiyangshen, which then sold to downstream calcium gluconate injection manufacturers. SAMR alleged that Kanghui used this business model to hide its unfairly high profits to avoid becoming the target of an antimonopoly investigation.
SAMR also found that the defendant companies violated Article 17.(5) of AML by imposing unreasonable trading conditions. According to the penalty decision, the defendant companies threatened to terminate supply if downstream calcium gluconate injection manufacturers did not either sell the finished product back to the defendant companies or act as their OEMs. Threats of termination, according to SAMR, were attempts to monopolize the downstream market for calcium gluconate injections.
Calculation of Fines and Confiscation of Illegal Gains
Under the AML, the maximum fine for a violation of abuse of dominance is 10% of sales. Neither the AML nor SAMR regulations have stipulated whether SAMR would calculate fines based on a company's total sales or consider only the sales of relevant products involved in the investigation. In this case, SAMR imposed the maximum fine on Kanghui, totaling RMB 143.8 million. The other two defendants were fined 9% and 7% percent of their 2018 sales. Although the SAMR did not explain is fine calculation method in its decision, it appears that SAMR levied the penalty against the companies' total revenues in China.
In addition to fines, SAMR has authority under the AML to confiscate ill-gotten gains that result from a violation. Since China formed SAMR in April 2018, consolidating antitrust enforcement under a single agency, the number of cases in which the agency confiscated illegal gains has increased. SAMR's predecessor agencies confiscated illegal gains in just 12% of cases, but SAMR has done so in 20% of its penalty decisions. In this case, SAMR calculated Kanghui's ill-gotten gains at RMB 108.9 million. Confiscations from Puyunhui and Taiyangshen totaled RMB 12.1 million.
SAMR's decision also suggests that the defendants' conduct during the investigation contributed to the large penalties. SAMR imposed additional fines of RMB 2.53 million on Kanghui, Puyunhui, and 14 individuals at those two companies for allegedly obstructing SAMR's investigation. According to the SAMR, employees refused to provide information, and concealed, destroyed, or relocated evidence.
Two weeks prior to this penalty decision, SAMR published an enforcement notice cautioning companies, particularly pharmaceutical companies, that it will adopt a faster and more stringent approach to investigations during the coronavirus pandemic. Investigating unfairly high prices will an enforcement priority. While SAMR did not refer to COVID-19 in its penalty decision in the calcium gluconate case, the timing of SAMR's enforcement notice and the large fines in this case are a warning to deter similar conduct.
Three Key Takeaways
- Although China largely has abandoned price controls, its antimonopoly agencies are quick to intervene when they uncover evidence of prices they believe to be high and unfair. Given the COVID-19 crisis, SAMR will apply heightened scrutiny to pricing conduct in sensitive industries such as pharmaceuticals, medical equipment, and public utilities.
- SAMR has pursued collective dominance cases in oligopolistic markets with greater frequency than its counterparts in other jurisdictions. So far, all of SAMR's collective dominance cases have involved companies with agreements or structural links that facilitated coordination among them. Companies operating in concentrated industries in China should review any contracting or pricing strategies that could be perceived as exclusionary or unfair.
- This penalty decision highlights SAMR's growing use of its power to require companies to repay ill-gotten gains to punish and deter antitrust violations.
Originally published on May 2020
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