The Supreme People’s Court issued a final judgment in an anti-monopoly case concerning administrative penalties and administrative reconsideration against API (active pharmaceutical ingredient) operators who formed and implemented a horizontal monopoly agreement. In the judgment, the first-instance ruling, the contested administrative penalty decision, and the contested administrative reconsideration decision were maintained.
Wuzhou A Company, Jiangsu B Company and Suzhou C Company were the only three companies in China that produced the API camphor when the alleged monopoly conducts happened. Wuzhou A Company and Suzhou C Company produced synthetic camphor, and Jiangsu B Company produced natural camphor. In March 2018, Wuzhou A Company and Suzhou C Company signed a contract and a supplementary agreement, agreeing that Suzhou C Company entrusted Wuzhou A Company to produce the industrial-grade synthetic camphor, while Suzhou C Company assisted Wuzhou A Company to expand the market of the API camphor to reach a higher market share. The supplementary agreement further linked the increment of market share of Wuzhou A Company to the entrusted process price paid by Suzhou C Company, and also agreed that if the average sales price of the API camphor was lower than a certain price, both parties should re-negotiate the relevant terms in the contract manufacturing agreement. In addition, the three companies also reached a mutual understanding to refrain from price wars and maintain stable pricing levels through WeChat communications, phone calls, and meetings during pharmaceutical exhibitions. During trading, all three of them exchanged market intelligence about API camphor, coordinated sales prices, and communicated and negotiated the quotations provided to downstream finished pharmaceutical production enterprises that were their common clients.
In September 2019, Market Supervision Administration of Jiangsu Province launched investigations on the three companies after receiving clues of monopoly, and made an administrative penalty decision on May 31, 2021, determining that Wuzhou A Company reached and performed a monopoly agreement with Suzhou C Company to segment the market, and reached and performed monopoly agreement with Suzhou C Company and Jiangsu B Company to fix or change product prices. Thus, the authority ordered Wuzhou A Company to stop the illegal conducts, confiscated illegal earnings, and imposed a fine of 5% of the previous year's sales revenue. Wuzhou A Company was dissatisfied and requested a reconsideration before the State Administration for Market Regulation (the SAMR). The SAMR made an administrative reconsideration decision on November 16, 2021, maintaining the alleged administrative penalty decision.
Dissatisfied, Wuzhou A Company filed an administrative lawsuit, requesting to cancel the contested administrative penalty decision and the administrative reconsideration decision. The first-instance court ruled to dismiss its claims.
Wuzhou A Company, dissatisfied with the first-instance decision, appealed, claiming that: The chemical compositions of synthetic camphor and natural camphor are different, so they are two different types of API and the three companies involved in the case do not qualify as competitors. The contract manufacturing agreement and supplementary agreement were signed for Suzhou C Company to entrust Wuzhou A Company to process the industrial-grade camphor, and were not monopoly agreements. Wuzhou A Company did not have the intention to reach a monopoly agreement, nor did it implement any monopoly conduct. The fine of 5% of the previous year's sales revenue imposed by Market Supervision Administration of Jiangsu Province to Wuzhou A Company was too heavy, comparing to the 3% and 1% on Suzhou C Company and Jiangsu B Company.
In the second instance, the Supreme People’s Court determined that: In this case, the natural camphor and the synthetic camphor shared the basically identical usage, quality test channels, and sales channels. Downstream finished pharmaceutical production enterprises can seamlessly substitute one for the other, i.e. they had strong substitutability of demand. Therefore, natural camphor and synthetic camphor should be classified within the same relevant product market. The three companies involved in this case are three independent entities producing and selling the API camphor in the domestic market. The production and sales of the natural camphor and the synthetic camphor are relatively closely substitutable, so the three involved companies are competitors in the domestic API camphor market.
Wuzhou A Company and Suzhou C Company signed a supplementary agreement to transfer the original API camphor clients and market shares of Suzhou C Company to Wuzhou A Company, under the normal performance of API camphor contract manufacturing agreement, which affected the natural transformation of the market share of the API camphor under the normal market competition status. It also allowed the operators with competition relationship re-distributed product sales market that they had operated independently through negotiation, which constitute a conduct segmenting the sales market of API camphor. The supplementary agreement also agreed that if the average sales price of the API camphor was lower than a certain price, the parties should re-negotiate relevant terms in the entrusted process contract, which was to link the entrusted processing conditions of the industrial-grade synthetic camphor with the market price of the API camphor and restrict the independent pricing authority of operators. By signing and performing the supplementary agreement, Wuzhou A Company and Suzhou C Company reached and performed a horizontal monopoly agreement segmenting the sales market and fixing product price.
The three involved companies also precluded and restricted the price competition between operators through meetings, WeChat, and phone calls, which broke the competition order of the domestic API camphor market. In addition, in the trade with downstream finished pharmaceutical production enterprises, the three companies quoted those downstream enterprises based on the prices that had been negotiated among them, compelling the downstream enterprises to accept the price intervened by negotiations. Therefore, the three involved companies reached and performed a horizontal monopoly agreement fixing or changing product price.
The act of segmenting the sales market and fixing product price conducted by Wuzhou A Company and Suzhou C Company overlapped with the pricing synergy acts conducted by the three involved companies. While, the supplementary agreement confirmed the goal to fix the API camphor’s price, the pricing synergy conduct formed a broader pricing collusion and further strengthened the anti-competition effect caused by eliminating price competition, which severely damaged the benefits and interests of the downstream finished pharmaceutical production enterprises and terminal consumers.
In this case, Wuzhou A Company obviously enjoyed benefits from said two monopoly conducts, because compared to 2017, its market share in 2018 grew by 59.2% and its sales price grew by 46.0%. In the meanwhile, the evidence on file has shown that Wuzhou A Company repeatedly delayed investigation procedures and made untrue statements during the investigation of Market Supervision Administration of Jiangsu Province and Wuzhou A Company also failed to prove the existence of circumstance where they should be punished in a mild or mitigated manner. In comparison, during the investigation, Suzhou C Company and Jiangsu B Company proactively admitted illegal facts, cooperated with the law enforcement institution to find out facts, and adopted self-check and correction measures, mitigating the damages of the illegal acts. Thus, they met the circumstance of mild punishment. Therefore, the determination of whether Wuzhou A Company conducted multiple monopoly acts, the level of benefits it obtained from the monopoly acts, and whether it met the circumstance of mild punishment was distinctively different from those of Suzhou C Company and Jiangsu B Company. The fines of 1%, 3%, and 5% the previous year’s sales revenue imposed by Market Supervision Administration of Jiangsu Province to Jiangsu B Company, Suzhou C Company, and Wuzhou A Company respectively were within the administrative penalty scope as prescribed by law, and the differentiated fine proportions adapted to the nature, circumstance and damaging consequences of the three involved companies, as well as the roles in the monopoly acts, investigation cooperation situations, acts to eliminate illegal conducts’ consequences of the three companies, which matched with the principle of proportionality in penalty.
Accordingly, the Supreme People’s Court determined the contested administrative penalty decision and the contested administrative reconsideration decision on Wuzhou A Company’s reaching and performing of monopoly acts were without legal impropriety, and the fine proportions made were legal and appropriate, so Wuzhou A Company’s claims did not stand. The Supreme People’s Court dismissed Wuzhou A Company’s appeal and maintained the original ruling.
This case is an important practice of anti-unfair competition law enforcement in the API industry. This judgment has a positive effect on standardizing the competition acts of API enterprises and safeguarding basic livelihood. It also has exemplary significance for the people’s court to supervise and support the law enforcement by anti-monopoly administrative department and to commonly maintain a fair competition in the API market.
(2023) Zui Gao Fa Zhi Xing Zhong No. 30
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