Enforcement actions raise questions over nature of regulatory bodies' decision making

Multinationals such as GSK, Nestle, Microsoft, Daimler, Audi and Qualcomm are having their share of troubles because of enforcement actions initiated by Chinese government authorities.

Foreign companies believe they are being disproportionately singled out in bribery, food safety and antitrust probes. China at the same time is depicted as having a deteriorating foreign investment environment.

The actions were on the agenda of the China-US Strategic Economic Dialogue this year. On July 12, the US Treasury Department said: "China recognized that enforcement of its competition law should be fair, objective, transparent, and nondiscriminatory." It noted: "China's commitment to provide any party under investigation with information about the competition concerns with the conduct of transactions, as well as an effective opportunity to present evidence in its defense."

Yet, more multinationals in different industries are being probed by Chinese government bodies and are under attack by media, especially in connection with antitrust issues.

Thirty years ago, the Chinese government, desperate for foreign capital, offered special breaks to foreign companies. Such privileges have gradually been abolished and the same standards applied to domestic and foreign enterprises.

Media and netizens have wondered about the motives behind actions against foreign businesses. The Chinese government is accused of protecting its domestic enterprises by suppressing foreign competitors. It is said some actions were taken out of concern for national security given recent cyber espionage activities. The events were also labeled retaliation for trade restrictions on Chinese firms, such as those against Huawei in the US. Another theory is that multinationals are much easier targets for authorities, who dare not to target big, state-owned firms whose interests are intertwined with those in power.

In their defense, Chinese government agencies argue that they are not specifically targeting foreign companies. The actions are meant to tighten the regulatory framework in the market, they say.

But developments seem to suggest otherwise. It seems foreign investors did not receive transparent, non-discriminatory treatment. This becomes clearer when it comes to China's National Development and Reform Commission's recent investigations of pricing violations.

First, investigations against multinational companies far outnumber those against domestic ones. In cases where both foreign and local businesses, such as car producers, use the same pricing practices that allegedly violate antitrust laws, only foreign firms are probed.

Sanctions imposed on foreign and Chinese companies are also significantly different. The investigations into China Mobile and China Unicom, two Chinese state-owned telecom giants, ended with a "recommended restructuring" without any penalties.

Recent enforcement actions against foreign companies also raise serious concerns over the opaque nature of the commission's decision-making. The firms being investigated are not aware of the evidence upon which the commission relied, let alone allowed to rebut it. Such lack of due process has not only puzzled the companies but also severely undermined the government's efforts to call for the rule of law.

Worse still, the commission's decisions themselves are seriously flawed. Almost all the fines issued by the agency, mostly against foreign enterprises, since the country's Antitrust Law came into force in 2008 are based on resale pricing. But the decisions merely identified resale price-fixing without further justifying whether that would necessarily have the effect of restricting or eliminating competition.

Under national law and court opinions, minimum resale price-fixing is not per se unlawful but, rather, must be judged under the rule of reason. Last year, the Shanghai Higher People's Court ruled for the first time in Johnson vs Ruiyong and Kemao that, when analyzing the market effect on competition of minimum resale price agreements, various factors have to be considered and proved to the court's satisfaction. These include the market power of the concerted parties, the degree of competition in the relevant market, the motives for restricting competition and its unfavorable impact on competition. The commission's decisions make no reference to these factors.

Curiously, none of the companies filed for either administrative reconsideration (an administrative recourse available to private entities against government action) or judicial review. In fact, all foreign companies, once singled out by the commission, have chosen to surrender even before an official investigation starts.

It is probably because a simple flexing by the commission of its muscles is dissuasive enough. Any defiance or resistance would do them no good, but being submissive will probably get them some lenient treatment. Pursuant to the commission's rules, it will give no or lesser punishment to those who cooperate, restrain themselves from further violations and voluntarily reduce or eliminate the adverse effects, while the rules also provide for an aggravating circumstance when the party being investigated is not cooperative with the commission.

Unlike the antitrust agencies in the United States or the European Union, which are independent agencies established directly by the law for the sole purpose of preventing anticompetitive business practices, the antitrust enforcement authorities in China (the Ministry of Commerce, and the State Administration for Industry and Commerce and the commission) are all existing agencies empowered with other functions. Multinationals may feel that appealing the decisions could lead to administrative revenge.

In light of the above problems with China's law enforcement, justice needs to be done to create an open and transparent government, and more importantly, justice should be perceived to be done in order to create a level playing field. Chinese Premier Li Keqiang has insisted on the continued opening up of the Chinese market and also on the fair treatment of foreign investors, but the NDRC's handling of antitrust cases and the actions of other government agencies against foreign investors cast strong doubt on whether the enforcement authorities have simply disregarded the premier's call by imposing selective enforcement on foreign interests.

Public opinion in Western countries is already unfriendly toward China. Western governments, especially the US, are also very suspicious about China. Foreign investors have been lubricating the friction between China and the West, and urging their home countries to adopt more liberal and long-term views on China. They have also called for more tolerance from Western governments toward China's handling of issues such as foreign exchange controls and intellectual property protection. However, selective enforcement against multinationals may well turn them from de facto lobbyists for China to advocates of a less-than-friendly attitude.

The author is managing partner with Dechert LLP China.

(China Daily European Weekly 08/15/2014 page9)