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Jan 04, 2017

On Dec. 5, 2016, China’s National Development and Reform Commission (NDRC) levied a fine of 118.5 million yuan ($17 million) on Medtronic, the world’s highest-grossing medical equipment company. Medtronic had violated China’s anti-monopoly laws by suppressing competition through agreements with distributors that set illegal minimum prices. 

While Western news media broadly covered the story of how such a prominent company found itself on the wrong side of the law, many Chinese people — most of whom are unfamiliar with the nation’s anti-monopoly legislation — thought that the penalty was too lenient. 

China’s anti-monopoly laws came into effect on Aug. 1, 2008. However, the investigation by the NDRC into Medtronic’s violations only began in 2014, allowing for the possibility that abuses had continued for more than eight years in total. Indeed, Medtronic’s illegal activity may only have been noticed thanks to stricter enforcement procedures over the last two years. 

Medtronic was able to persist in its activities until March 2016 for one reason: Article 46 of the anti-monopoly law stipulates that the maximum fine permitted is 10 percent of the company’s total sales income from the preceding year. However, the NDRC has always narrowed the definition of “income” to include only revenue from products related to the violations. Illegal gains outside that have never been seized.
 
As a result, Medtronic’s fine is at best only a fraction of its total sales income in a single country and does not fluctuate depending on how much of that overall income was gained illegally. In other words, as long as more than 10 percent of a company’s income is gained through illegal means, there is no incentive for the company to stop its monopolistic practices, as it can carry on turning a profit while paying the fine. In Medtronic’s case, the 10-percent figure comes out to 1.03 billion yuan for the 2015 fiscal year — much more than the company’s total fine.

A better response would be to confiscate illegal gains or to model the law on countries in the European Union that set the maximum fine at 10 percent of a company’s global profits. With global revenue topping $20 billion, Medtronic would then be facing a fine in China of up to $2 billion, or around 14 billion yuan. The threat of such a penalty could have nipped any illegal activity in the bud several years in advance.

A closer look at the fine print also reveals that the NDRC did not investigate all of Medtronic’s business in mainland China, again because of its narrow definition of “income.” Instead, it only accounted for around 3 billion yuan of the company’s total 10.3 billion yuan in sales revenue. The public still has no way of knowing if Medtronic’s other subsidiaries in China engaged in similarly illegal behavior. 

When the NDRC investigated automobile manufacturer Mercedes-Benz in 2014, the company admitted that it had engaged in monopolistic practices in certain parts of China. In exchange, the NDRC exacted an anti-monopoly fine of only 500 million yuan and did not pursue the investigation in other provinces. This figure was far lower than the industry estimate of 1 billion yuan that Mercedes-Benz should have paid. 

If we want to sufficiently empower China’s anti-monopoly law enforcers, then we must start by limiting their discretionary power and expanding their frontline staff.

It is against the law in China to refrain from imposing penalty fines in cases where the alleged illegal activity damages the public interest; the selective fining of Mercedes-Benz clearly violates this rule. Similarly, the Medtronic case raises several questions: Did the NDRC use the “Mercedes model” to secure Medtronic’s cooperation with the anti-monopoly investigation? Did Medtronic cooperate with the NDRC to prevent the investigation from expanding further into its other businesses? And did this, in turn, lower the base amount of the fine? 

Even more perplexing were reports that Xu Xinyu, head of the anti-monopoly enforcement department at the NDRC, said that Medtronic initially refused to cooperate with the anti-monopoly investigation. Instead, Medtronic even trapped the NDRC’s 40-person investigation team at its headquarters for more than six hours while a top executive hid in his office. State broadcaster CCTV reported that the anti-monopoly investigation team had to place more than 10 international calls to the company’s U.S. headquarters before the China branch agreed to cooperate.

Then, out of nowhere, a dramatic reversal occurred: Medtronic suddenly chose to cooperate with the late stages of the investigation. Like Mercedes-Benz, the company withdrew its rebuttal of the anti-monopoly enforcement organizations. Why the sudden about-face?

Medtronic clearly identified several weaknesses in the NDRC’s anti-monopoly enforcement. First, NDRC agencies rarely seize illegal gains and do not require companies to compensate for the losses either to consumers who purchased their products or to distributors who might have been affected by the sanctions. This allows lawbreakers to continue engaging in illegal activity knowing that the maximum fine will never exceed their existing illegal gains.

Second, China’s anti-monopoly law stipulates that the fine for refusing to cooperate, stalling, or wasting enforcement resources during the anti-monopoly investigation is capped at only 1 million yuan. This regulation differs vastly from, say, EU laws, which ensure that legal processes come to a more rapid conclusion. 

Third, companies also take advantage of understaffed anti-monopoly enforcement agencies, whose heavy workloads compel them to close cases as soon as possible. In exchange for a company admitting that violations occurred in certain parts of the business, like Mercedes-Benz did, investigators will often turn a blind eye to the company’s other businesses or illegal deeds in other provinces. This significantly lowers the base fine imposed on the company.

Fourth, since coming into effect eight years ago, the anti-monopoly law has lacked both detailed regulations regarding specific fines and legal mechanisms for public hearings as a means of monitoring the payment of fines. Anti-monopoly enforcement agencies are given vast discretionary power, allowing them to determine the leniency of the fine based on how cooperative a company is willing to be. This autonomy prevails regardless of the duration of illegal activity or the extent of its damage. As a result, companies can choose first to resist investigation and then change their attitudes entirely. They then try to leverage the sudden contrast between their initial resistance and subsequent cooperation in order to draw a more lenient penalty from the authorities.

As far as monopolistic practices go in China, the Medtronic case is only the tip of the iceberg. The case clearly shows that the extensive discretion enjoyed by enforcement agencies has been co-opted by lawbreakers to exploit China’s anti-monopoly regulations and give lobbyists more room to pressure the law enforcement agencies. 

A working draft of a policy document aimed at tightening fining procedures was released in June 2016, but it was condemned for lacking detail. If we want to sufficiently empower China’s anti-monopoly law enforcers, then we must start by limiting their discretionary power and expanding their frontline staff. Although this may lengthen investigations, it will also make them more thorough. 

Furthermore, introducing greater detail into the legal administrative procedures and bringing in external supervisory bodies to monitor the NDRC’s activities would improve efficiency and ensure that the fines collected become a powerful deterrent for illegally operating firms. 

Finally, the courts should protect the right of consumers affected by companies that flout anti-monopoly laws to sue those companies for compensation. This move would not only present unscrupulous businesses with the possibility of facing large-scale legal action from their end users, but also achieve something the current law fails to do: empower the ordinary customer to prosecute corporations with full confidence in the law. 

A Chinese version of this article first appeared on the website of The Paper, Sixth Tone’s sister publication.

(Header image: The national flag of China flutters behind a fence of the headquarters of the National Development and Reform Commission (NDRC) in Beijing, July 12, 2013. Kim Kyung-Hoon/Reuters/VCG)