Anti-monopoly health enforcement and compliance trends

By Michael Gu and Sun Sihui, AnJie Law Firm
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The healthcare industry has gradually become a key focal point of the antitrust law enforcement authorities in China. In recent years, the National Development and Reform Commission (NDRC) and the State Administration for Industry and Commerce (SAIC) have incorporated antitrust efforts in the healthcare industry as a focus of their work. As of the end of April 2017, the NDRC and SAIC had fined 11 healthcare enterprises for a total of about RMB133 million (US$19.3 million).

Michael Gu Partner AnJie Law Firm
Michael Gu
Partner
AnJie Law Firm

The authors foresee the two law enforcers potentially raising a more forceful ‘antitrust windstorm’ in the healthcare sector this year, and possibly investigating and penalizing in succession certain well-known pharmaceutical and medical device enterprises. Through the investigation and handling of a series of cases, the NDRC and SAIC have accumulated a significant amount of experience in the healthcare sector, and healthcare enterprises are about to face a more serious antitrust compliance challenge.

Q: What are the distinctive features of the already punished healthcare industry antitrust cases? A: The antitrust cases that have been investigated and handled in the healthcare industry manifest the following defining features: (1) the enterprise entities that have been subjected to penalties are diverse, involving enterprises of various natures, such as private enterprises, Sino-foreign equity joint ventures, wholly foreign-owned enterprises, state-owned enterprises, etc.; (2) the types of antitrust acts are variegated, with the law enforcement authorities penalizing not only the abuse of dominant market position but also the violations of reaching and implementing of horizontal or vertical monopoly agreements; and (3) the cases extend over a broad area, covering both the upstream and downstream of the industry chain, with the recipients of penalties including active ingredient producers, pharmaceutical producers and distributors, medical device producers, etc.

Q: What are the specific types of antitrust behaviours that have been investigated? A: The cases that have been investigated and handled to date not only cover commonly seen antitrust behaviour, but also include certain relatively obscure or complex ones. As at the end of April 2017, the SAIC had investigated three cases in the healthcare industry, all of which included abuse of dominant market position in certain active ingredient markets in China; and the NDRC and provincial-level pricing authorities had handled a total of five cases, including one case of abuse of dominant market position, two horizontal monopoly agreement cases and two vertical monopoly agreement cases. It is worth noting that the cases of abuse of dominant market position to refuse a deal involving Chongqing Qingyang Pharmaceutical and Chongqing Southwest No. 2 Pharmaceutical Factory, investigated and handled by the SAIC, were the first and second refusal to deal cases in China. Furthermore, the Estazolam drug cartel case investigated and handled by the NDRC was the first concerted practice case since the implementation of the Antitrust Law.

Q: How do the authorities determine a concerted practice in a horizontal monopoly agreement? A: In the Estazolam case, three enterprises held secret meetings, reaching a tacit understanding on a collective increase in the price of Estazolam tablets. Although Changzhou Siyao Pharmaceutical did not actively participate in the conspiracy, it did not object to the collusion and later followed the other two companies’ lead. The NDRC determined that it engaged in a concerted practice. Article 6 of the Provisions on Anti-Price Monopoly, formulated by the NDRC, and article 3 of the Provisions for Administrative Authorities for Industry and Commerce on Prohibiting the Conclusion of Monopoly Agreements, formulated by the SAIC, set out specific provisions on the determination of concerted practice. Despite the fact that there are nuanced differences between the two articles, both consider the following major factors when analyzing whether concerted practice has occurred: uniformity; the exchange of information; reasonable explanations; and the market structure and market changes.

Sun Sihui Associate AnJie Law Firm
Sun Sihui
Associate
AnJie Law Firm

Q: What is the law enforcement authorities’ attitude towards vertical monopoly agreements? A: Vertical price monopoly has always been one of the priorities of the NDRC’s antitrust law enforcement, particularly in the healthcare industry. The authors envision that this trend will continue. It is worth noting that, in the Medtronic resale price maintenance case, the NDRC, in its penalty decision, not only clarified the illegality of the fixed resale price of Medtronic (Shanghai) Management and its setting of a minimum resale price, but also touched upon such acts taken by it as limiting the sales territory of distributors, prohibiting distributors from selling products of competing brands, etc. The NDRC held that “these restrictive measures were implemented together with the vertical pricing measures, further strengthening the anticompetitive effect of maintaining the resale prices and setting minimum resale prices”. This case, while indicating that antitrust law enforcers should continue their strict enforcement in vertical pricing monopolies, also sees them beginning to pay attention to other non-pricing vertical restrictive measures. Accordingly, it is necessary for relevant enterprises to act prudently with respect to vertical restrictive measures, regardless of whether they involve pricing or not.

Q: How should enterprises respond to the increasingly serious antitrust compliance challenge? A: The authors recommend that healthcare enterprises closely watch development trends in, and features of, antitrust investigations. Enterprises can strengthen their antitrust compliance in the following ways: (1) promptly conducting a risk screening and, if necessary, engaging a professional lawyer to assist in conducting an internal antitrust audit; (2) providing antitrust compliance training to senior officers and employees (particularly sales departments) and arranging for senior officers and employees to participate in drills for responding to ‘dawn raids’ in antitrust investigations; (3) examining the company’s product-pricing policy, discount or rebate system, sales policies, distributor contracts, etc., from the perspective of the Antitrust Law; (4) being vigilant for horizontal information exchanges, including concerted practice, and prudently handling sensitive information exchanges; (5) assessing one’s own market share, and if the same could constitute a dominant market position or relatively strong advantageous position, conducting a check of the agreements executed with upstream and downstream enterprises, and conducting an antitrust risk assessment regarding irregular terminations of dealing, refusals to deal, exclusive arrangements, other restrictive measures or commercial terms suspected of being unreasonable; and (6) if a suspected violation of the law is discovered, seeking legal opinion as soon as possible and promptly formulating a rectification or response plan.

Michael Gu is a partner and Sun Sihui is an associate at AnJie Law Firm

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