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PHARMACEUTICALS AND LIFE SCIENCES
Competition law compliance for Asian
companies selling abroad
Marc Waha - Partner
Norton Rose Asia Competition Team
31 October 2012
Objectives
Deepen our understanding of selected topics
#1 Competition law and distribution
#2 Information exchanges and market intelligence
#3 Extra-territorial reach of antitrust and competition laws
3
Common trunk
The world of competition law
5
Three pillars
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First rule
Second rule
Merger control
Prohibits restrictive
agreements and concerted
practices
Prohibits the abuse of
significant market power
Prohibits M&A activity that
restricts competition
Horizontal and vertical
Only applies to businesses
with market power
Different merger control
procedures
Effects-based enforcement
The law applies to restrictive effects on a market within the jurisdiction
Irrelevant
7
Relevant
•
Law of the contract
•
Place of delivery
•
Nationality of the parties
•
Place of consumption
•
Location of the parties
•
Territorial scope of contract
•
Place of signature and
negotiation
•
Market for the goods and
services
Component supply
Trading / agency
Distribution / sale
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Competition law in Asia
9
Distribution and trading
supplier
manufacturer
manufacturer
distributor / wholesaler
customer
11
manufacturer
manufacturer
What are “vertical” agreements under competition law?
• Horizontal – between competitors (same level of supply chain)
• Vertical – with customers (downstream) or suppliers (upstream)
– concluded between (at least) two parties
– operating – for the purposes of the agreement – at a
different level of the production or distribution chain
– which is relating to purchase, sale or resale
– of goods or services
• Vertical relations generally treated more permissively than horizontal
12
Is it so easy?
• Single economic unit theory: all group entities are considered to
constitute one single “business”
• A business unit that is operated independently will still be considered as
being part of the group
• You may be in a horizontal relationship without knowing it
13
Competition law and vertical restrictions
A proposed risk map
Covenant
China
India
Indonesia
Japan
Exclusive
supply
Customer
restrictions
Territory
protection
Maximum
resale price
Fixed or
minimum
resale price
No risk if no dominance and short-term covenant
No risk if market shares are low and short-term covenant
Risk irrespective of market position
14
Korea
Singapore
Taiwan
RPM: the age-old question in trading and distribution
agreements
• What is resale price maintenance (RPM)?
• Is it prohibited everywhere?
• Are there exceptions?
• How do we structure trading agreements to mitigate risks?
15
RPM: what is it? (1)
• Rule: distributor must be free to determine its own resale price
• Limited exceptions apply to non-binding recommendations and the
obligation of a distributor to respect a maximum resale price
• A non-binding price recommendation or maximum resale price may only
be valid if it initially does not have the effect to ensure a minimum or fixed
price
• Rationale: because the distributor assumes the commercial risk and
should be free to compete freely
16
RPM: what is it? (2)
• Any indirect measure to ensure resale price level might attract risks
•
•
•
•
•
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Price monitoring
Report obligations re
deviations of other
distributors
Printing recommended
resale price on product
and/or obligation on buyer
to apply most favoured
customer clause
Fixing distribution margin
Fixing maximum level of
discount
•
•
•
Making rebates /
reimbursement promotional
costs conditional on given
price level
Linking prescribed resale
price to resale price of
competitors
Any form of pressure:
threats, intimidations,
warnings, penalties, delay
or suspension of delivery
or contract termination
Other vertical restraints
• Territorial restrictions
• Exclusive customer allocation
• Selective distribution
• Exclusive supply
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Structuring considerations for trading contracts
• What are the risks?
– Systemic risk
– Traditional trading contracts directly affect balance sheet, P&L, credit position,
tax position
• First avenue: a contract-specific approach
– Market types: global v local markets
– Types of products: consumer goods v industrial goods
• Second avenue: other collaterals
– No title transfer may bolster genuine agency claims
• Third avenue: no pricing involvement
– No longer acting as a “seller” but as a “trade facilitator”
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Information exchanges in a global economy
Asia
21
Europe / US
Information exchange
Sales
Asia
22
Europe / US
Information exchange
Sales
Asia
23
Europe / US
Information exchange
Sales
Asia
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Sales
Europe / US
Information and competition (1)
Sharing of information and knowledge is
good for competition
• Well-informed customers put pressure
to obtain the best services and
products at the lowest prices
• Well-informed suppliers know what
their customers want
• Weak suppliers cannot cheat or lie to
their customers about product or
service quality and price
• Knowledge and information sharing
promotes innovation
25
The more information,
the more competition
Information and competition (2)
Sharing of information among
competitors without the knowledge of
their clients is bad for competition
• Suppliers know what their competitors
do, but customers do not know
• Customers cannot put pressure on
suppliers regarding price and quality
• Suppliers know what to expect from
their competitors: the uncertainty
inherent to the competitive process is
destroyed
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Limited information
sharing is bad for
competition
What does the law say?
It is prohibited for competitors to agree to restrict competition.
Agreements may be formal or informal: concerted practices,
informal understandings, etc. All are prohibited.
Sharing of strategic commercial information among competitors is
prohibited as it amounts to a concerted practice.
27
Is the law the same everywhere?
Very strict views
• EU, Australia, Singapore
Strict views
• Indonesia, Japan*, Korea, Malaysia
No guidance yet but likely to be strict
• China, India
*But see the guidance following 東日本大震災.
http://www.jftc.go.jp/pressrelease/11.june/110621
seirei.pdf
28
Sharing of strategic
commercial
information among
competitors is
prohibited
Examples
Example #1: Singapore / Indonesia ferry operators
• On 18 July 2012, the Competition Commission of Singapore imposed fines on
two ferry operators for engaging in a concerted practice in contravention of
Section 34 of the Competition Act. The two ferry operators were found to have
engaged in anticompetitive conduct by exchanging and providing sensitive and
confidential price information in relation to ferry tickets sold to corporate clients
and travel agents on two routes between Singapore and the Indonesian island of
Batam (Sekupang and Batam Centre).
• The CCS noted that the ferry operators enjoyed a duopoly on these routes and
that it had found evidence that they had exchanged sensitive and confidential
information relating to ferry ticket pricing, including quotations to clients. In view
of the nature of the information exchanged and the relevant economic
circumstances, the CCS concluded that the exchange of pricing information,
which removed market uncertainties, had the object of restricting or distorting
competition to an appreciable extent.
29
Examples
Example #2: dairy and coffee price increases in Taiwan
• On 19 October 2011, Taiwan’s Fair Trade Commission announced that it had
found evidence of coordinated price increases among fresh milk suppliers, and
imposed fines on them for price collusion.
• According to the TFTC, although the costs of raw milk had risen by NT$1.9/litre,
the increase in the three firms’ fresh milk resale prices was not only higher than
the rise in their purchasing costs for raw milk, but also in equal amount – all three
added NT$6 for their 1 litre packages, and NT$11-NT$12 for their 2 litre
packages.
• Since the companies failed to provide any reasonable justification for their
parallel behaviour, the TFTC concluded that they must have had communicated
with one another about their intended price increase, despite the absence of any
direct evidence to such communications.
30
Examples
Example #3: Korean instant noodles
• On 22 March 2012, Korea’s Fair Trade Commission imposed fines on four local
instant noodle manufacturers for fixing the prices of instant noodles.
• The four instant noodle manufacturers were found to have exchanged sensitive
business information, including future price levels, six times between 2001 and
2010. According to the KFTC, Nongshim informed the other producers of its
planned price increases as well as of their effective dates. The information
exchanges were further facilitated by regular meetings within the industry
association.
• Nongshim disputes the allegations and contends that information sharing does
not amount to price fixing under Korea’s Monopoly Regulation and Fair Trade Act.
31
What is prohibited and when?
Problem situations
• An information exchange may be a facilitating mechanism for the implementation
of a cartel; ancillary exchanges of information of this type are judged with the
cartel.
• Discussion among competitors of current and future commercial policies may be
treated like a prohibited cartel.
32
When is information sharing prohibited?
Red zone
• Direct information exchanges about strategic commercial policies such as
future prices and future commercial conditions (delivery terms, payment
terms, warranties, seasonality, etc.)
Yellow zone
• Direct information exchanges about current prices and current commercial
conditions (delivery terms, payment terms, warranties, etc.) and about future
strategic plans (production plans, etc.) may be illegal depending on market
conditions (small number of suppliers or customers, information asymmetry, etc.)
33
When is information sharing prohibited?
Green zone
• All non-strategic, non-commercial information: technical data, policy ideas,
environmental protection data, etc.
• All historical data: the older the data, the safer it is to share it
• Aggregated and anonymized data: production averages, industry price averages,
etc. collected by an independent third-party
34
Questions?
Singapore
Daniel Yong
[email protected]
Wilson Ang
[email protected]
35
Asia competition law specialists
Marc Waha (Hong Kong)
[email protected]
Maxime Vanhollebeke (Hong Kong)
[email protected]
Zhao Jingjing (Hong Kong)
[email protected]
Julienne Chang (Hong Kong)
[email protected]
Chris Viner (Tokyo)
[email protected]
Michael Joyce (Tokyo)
[email protected]
Sun Hong (Shanghai)
[email protected]
Wang Yi (Beijing)
[email protected]
Ronan Diot (Beijing)
[email protected]
Ross Ramsay (Jakarta)
[email protected]
Geoff Sutherland (Ho Chi Minh)
[email protected]
Backup: vertical restrictions
RPM: is it prohibited everywhere?
• US: rule of reason (federal level) but still per se prohibition in larger
States (California, New York, etc.)
• EU: “hardcore violation” but possibility for an individual exemption
• China: rule of reason
• Korea: recent Supreme Court decision moves towards US model but still
many KFTC investigations and fines
• ASEAN: prohibited in most jurisdictions
• India: most likely prohibited
37
RPM: exceptions to the prohibition (1)
• Intra-group sales (everywhere)
• Agency (in EU and jurisdictions following the EU model):
– “Genuine” Agency Agreement fall outside the scope of Article 101(1) TFEU
– Negotiates/concludes contracts for sale or purchase of goods/services on
behalf of principal in either own name or name of principal
– Property in goods does not pass to agent/the agent does not provide service
– Carries out instructions of principal
– Requires that sales contracts be entered into directly between the principal and
the customer
– Financial and commercial risks not borne by the agent
– Risks directly related to contract concluded
– Risks related to market specific investments
– Receives commission not profit (but should be allowed to share commission
with customer)
38
RPM: exceptions to the prohibition (2)
• Agency agreement - examples of commercial risks
Participation at costs/risks
Marketing investments
Customer service
Investments
Liability for damages
Contractual risks
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Transport, storage
Sales promotions, contributing to advertising of principal
Costs after sales services, repair and maintenance services,
warranty service
Equipment, premises or personnel
Product liability, unless caused by agent
Risk related to contract performance, unless failure of agent (e.g.
anti-theft measures)
RPM: exceptions to the prohibition (3)
• Efficiencies defense in the US (federal level) and the EU
• In the EU:
– In principle hardcore restriction not covered by the new Vertical Block
Exemption Regulation, but real possibility of individual exemption
– Most credible efficiencies for targeted imposed minimum prices are described
by the Vertical Guidelines:
– entry in a new market or introduction of new brand
– elimination of “loss leader” practices
– short-term advertising campaigns (low price)
– Unclear criteria – burdensome, expensive and uncertain justification
– Recent investigations indicate increased enforcement in certain EU Member
States
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Single branding
• What is single branding?
• Is it an issue everywhere?
• Valid justifications for single branding?
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Single branding: what is it?
• A restriction on the ability of a distributor or agent to sell or
promote products of a competitor
• Principle: single branding obligations usually do not raise
important competition law risks in the absence of market power
• If any of the parties has market power, single branding obligations
must be objectively justified.
• Rationale: with market power, single branding obligations could
have anti-competitive foreclosure effects.
42
Single branding: is it an issue everywhere?
• US: rule of reason
• EU: rule of reason + no issue if single branding arrangement does
not exceed 5 years and none of the parties have a market share
exceeding 30 per cent.
• China: likely to be prohibited if it involves a dominant company
• Singapore: possible issue if it involves a dominant company
• ASEAN: gradual move towards rule of reason approach (example
Indonesia and Malaysia) but some exceptions (for instance
Vietnam and Thailand)
43
Single branding: relevant considerations
• Market power
• Duration
• Barriers to entry
• Level of trade (retail vs. wholesale)
• Efficiencies resulting from single branding arrangements
– transfer of substantial know-how
– better (after-)sales service
– reduced distribution costs
– brand management
– addressing hold-up issues (distributor specific investments)
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Backup: fine stats
Fines statistics in East Asia (1)
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Fine statistics in East Asia (2)
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Fine statistics in East Asia (3)
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EU fines on Asian companies
Asian companies
Since 2000, more than €2.3 billion in
fines have been imposed on Asian
companies by the European
Commission
€2,380 million
Others
€14,218 million
Total
€16,598million
• Most of the fines were imposed for
conduct occurring in Asia
• The European Commission has the
power to impose fines for cartels in
Asia that affect EU markets
• Companies from Taiwan, China,
Japan, Korea, Singapore, etc. were
fined for conduct which took place in
part in their home jurisdiction
14%
86%
Asian companies
Figures for the period 2000-Feb 2012
49
Others
US fines on Asian companies
Since 1995, more than US$2.9 billion in
fines have been imposed on Asian
companies by the US Department of
Justice
• Most of the fines were imposed for
conduct occurring in Asia
• The US authorities and courts have
the power to impose fines for cartels in
Asia that affect US markets
• Companies from Taiwan, China,
Japan, Korea, Singapore, etc. were
fined for conduct which took place in
part in their home jurisdiction
Asian companies
$2,969.4 million
Others
$3,469.7 million
Total
$6,439million
46%
54%
Asian companies
Figures for the period 1995-Feb 2012
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Others
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Marc Waha
Wilson Ang
Partner
Of Counsel
Norton Rose Hong Kong
Norton Rose (Asia) LLP
+852 3405 2508
+65 6309 5392
[email protected]
[email protected]