China Law Insight : China Law Insight: China Commercial and Intellectual Property Lawyers and Attorneys, Full Service Law Firm: King & Wood

Unilever's price signaling conduct 

On 6 May 2011, the NDRC announced that it ordered a RMB 2 million fine on Unilever for breaching the Price Law.  According to the NDRC decision, Unilever undertook conduct amounting to the "fabricat[ion] and disseminat[ion of] information in relation to price increases to disrupt the market and pricing order" in breach of Article 6(1) of the Penalty Regulations (accompanying the Price Law) and Article 14(3) of the Price Law.

Article 14(3) of the Price Law 1997 prohibits business operators from "fabricating and spreading information about price hikes, forcing up prices and thus stimulating excessive commodity price hikes". 
 
Article 6(1) of the Penalty Regulations (accompanying the Price Law) provides further guidance on the boundaries of Article 14 (of the Price Law).  Article 6(1) of the Penalty Regulations states that business operators are prohibited from undertaking conduct which amounts to "fabricating and disseminating information on price increases to disrupt market and pricing order" to cause a surge or an excessive increase in the prices of commodities.

According to the NDRC, in or around March 2011, Unilever made public announcements which articulated their intention to increase prices for specified products (including laundry detergents) by 10% in April 2011 due to rising costs in crude oil and logistics.  These public announcements were "widely disseminated".  The announcements contained words to the following effect "the household and personal care products industry has entered into a price hike cycle" and "the process of raising prices have to be made gradually in order to see if [our] competitors would follow suit" and "if our competitors don't follow suit, it would be a disaster for us and therefore we should only raise prices gradually".  The announcements caused widespread panic buying -consumers began to purchase various household and personal care products in large quantities in specified cities around China. 
 
In early May 2011, Unilever announced that it was not going to implement the above mentioned price increases for laundry detergents and apologised to consumers for causing widespread panic.  Pursuant to the Penalty Regulations, business operators in breach of the Price Law face fines of up to 5 times their illegal gains or up to RMB 3 million (in absence of illegal gains).  The NDRC decided to fine Unilever RMB 2 million as it took into account Unilever's apology and suspension of price increases as mitigating factors. 
 
In the NDRC decision and in a subsequent NDRC press statement, the NDRC mentioned that Unilever's announcements could have amounted to "price concerted practices" - the NDRC also made references to the Anti-Monopoly Law; although the RMB 2 million fine only had to do with a breach of the Price Law.
 
The above enforcement decision was ordered in the context of China's inflation rate hitting a 32 month high of 5.4% in March 2011 (the Government had set a target of 4% for 2011).  The NDRC has also expressly stated in press reports that monitoring and controlling the prices of daily necessities remains a pressing task for the NDRC this year.

Unilever's price increases

As mentioned above, Unilever's price signaling conduct was followed by actual price increases which took place between 26 to 28 May 2011.  Press reports have indicated that the NDRC is unlikely to investigate further into Unilever's price increases as they are of the view that such increases are "normal market practices" or unilateral "corporate decisions".

Comments

The Unilever case is interesting because it sheds some light in relation to whether and to what extent signaling or proposing price increases and actually increasing prices are in breach of the Price Law and the Anti-Monopoly Law. 

In relation to Unilever's price signaling conduct, the NDRC held that Unilever was in breach of Article 6(1) of the Penalty Regulations (accompanying the Price Law) and Article 14(3) of the Price Law.

On the face of it, a breach of Article 14(3) of the Price Law would require the following elements: (a) a fabrication or otherwise spreading information about price hikes of a certain product or service; and (b) resulting in excessive price hikes in relation to the same product / service.  In practice, there usually has to be a causal link between (a) and (b).  The NDRC held that Unilever's widespread dissemination of information re its proposed price hikes (including commenting on competitors following suit and there possibly being a price hike "cycle") was sufficient to constitute (a).  In relation to (b), prior to the Unilever case, it was unclear whether there had to be actual or potential price hikes in order for a breach to be made out.  From the Unilever case, it would appear that all that is required to fulfil (b) is that the spreading of information would likely or potentially result in price hikes (as at the time when the NDRC had ordered sanctions on Unilever, Unilever did not actually raise its prices).

It is also important to note that the NDRC decision focused on how Unilever had "disrupt[ed] market and pricing order" – as a result of its widespread dissemination of information re its proposed price hikes, consumers began to panic and bought up vast quantities of shampoos and detergents in specified cities in China.

As mentioned above, the NDRC also mentioned (albeit in passing) that Unilever's price signalling conduct could amount to "price concerted practices" in breach of the Anti-Monopoly Law.  While there are no express provisions within the Anti-Monopoly Law which prohibit price signalling; price signalling could be seen as a symptom of competitors trying to act in concert with each other to fix prices.  Price fixing is prohibited pursuant to the Anti-Monopoly Law.

Overall, we think the major "take outs" from the Unilever case are:
 

• there are no express provisions within the Price Law or the Anti-Monopoly Law which prohibit a unilateral increase in prices for commercial reasons;
• widespread public announcements about price increases for goods or services are at risk of being breach of Article 14(3) of the Price Law, even if no actual price increases take place after the announcements.  It is likely that the NDRC will take into account the extent to which such announcements either have or could "disrupt the market order" (for instance by causing consumers to panic and purchase those goods or services in large quantities within a short time frame), before determining a breach;
• while the Anti-Monopoly Law does not prohibit price signalling, it prohibits price fixing (and depending on the facts of the case, certain price signalling behaviour could be taken to be a precursor or could be sufficient evidence to prove concerted price fixing conduct between competitors).

Price Law breach

The following describes how the Price Law breach came about:

• In March 2011, several manufacturers of household and personal care products separately announced that the retail prices for their respective brands of washing agents would be increased by as much as 10% commencing early April 2011¹.

• In its announcements, the Manufacturer had reportedly made public statements to the effect that "the household and personal care products industry has entered into a 'price hike' cycle" and "[other than the first round of price hikes to commence in early April 2011] a second round of price hikes can't be ruled out".

• Shortly after these announcements, the NDRC and its associated price authorities held discussions with these manufacturers and certain trade associations.  The NDRC also commenced an investigation into these proposed price hikes.  As a result, the above mentioned price hikes did not take place in April 2011 as planned.

• The NDRC reported that the above mentioned announcements by the Manufacturer caused many consumers to panic – these consumers then went around "snatching up" the relevant household and personal care products in specified cities around China. 

• The NDRC was thus of the view that the Manufacturer breached the Price Law.  Specifically, the Price Law prohibits business operators from spreading news in relation to price hikes and thus disturbing the market price order.  Pursuant to the Provisions on Administrative Penalty of Illegal Price Conduct, business operators which breach the Price Law face up to five times of their illegal gains or up to RMB 3 million (in absence of illegal gains).

• In considering how much to fine the Manufacturer, the NDRC took into consideration that the Manufacturer had agreed to suspend their proposed April 2011 price hikes and also apologized to consumers for causing the "scare", after talks with price authorities.  These, according to the NDRC, constituted as "mitigating" factors.  The NDRC thus decided to fine the Manufacturer a total of RMB 2 million.

Possible AML references

As mentioned above, the NDRC made references to some AML concepts in respect of the above mentioned Price Law violation. 

During a press interview, NDRC officials noted that representatives from the Manufacturer made public statements to the following effect in or around March 2011: "the process of raising prices have to be made gradually in order to see whether competitors would follow suit"; and "if competitors do not follow suit, it would be a disaster for us and therefore, we should only raise prices gradually".  It appears that the NDRC also made comments to the effect that such statements may amount to "price concerted practices".

The AML prohibits anticompetitive concerted practices between competitors.  Fixing prices by way of a concerted practice between competitors can be said to be a "hard core" breach of the AML.

Concluding comments

The Manufacturer was found to be in breach of the Price Law despite the fact that they did not, in effect, carry out their proposed price hikes. Thus, in relation to the prohibition re spreading news in relation to price hikes to disturb the market price order – it is clear that an "illegal gains" test is not necessary. 

Furthermore, we note that the references to "price concerted practices" are interesting.  We note that in Australia, recently, there is a Bill in place which proposes to outlaw conduct amounting to price signaling.  In China, however, price signaling per se is not illegal pursuant to the AML.  However, since price signaling may be a symptom of a business operator trying to act in "concert" with competitors to raise prices – business operators would be well advised to think twice before making such announcements.
 

¹See our article entitled Price Hikes for Washing Powders, Soaps and Shampoos Expected in April : China Law Insight

The new version of the Insurance Law that came into force October 2009 made it clear that insurance companies would have more investment channels are open for insurance funds, specifically, the 2009 Insurance Law stated that investing insurance funds in real estate was acceptable. In September 2010, the CIRC promulgated the Provisional Measures for Insurance Capital Investment in Real Estate. This regulation provides the basic outline of what the types of real estate projects that insurance companies can invest in. Although this regulation is in place, it appears that the CIRC is not ready to approve insurance companies investing real estate projects, but announcement can probably be taken as evidence that CIRC is moving closer to being ready to approve insurance companies investing in real estate projects. Also based on Chairman Wu's statements it probably can be assumed that the first real estate project that insurance company investing will be located in Shanghai, and it most likely be a housing project that is subsidized to keep its prices affordable.

If you have any questions about the potential for insurance funds to be invested in real estate development projects, or if you would like more details on the Provisional Measure for Insurance Capital Investment in Real Estate please contact us.

The information contained in this post is available at: http://www.chinadaily.com.cn/usa/business/2011-03/07/content_12130923.htm

The Urban and Rural Planning Law of the People's Republic of China became effective on January 1, 2008 and replaced the City Planning Law. Previously, urban and rural plans were governed by different laws. The City Planning Law governed urban areas and the Administrative Regulations on the Country and Township Construction Plans governed rural areas. The new law now begins an era of integrated urban and rural planning.

Highlights of the Urban and Rural Planning Law

1. Emphasizing Procedural Requirements such as Notice & Comment Period

2. Tightening Environmental Protection, Natural and Cultural Heritage Protection

3. Strengthening Rural Planning

4. Public Participation and Increasing Supervision and Inspection

5. Providing Relevant Legal Liabilities Punishing Local Governments for Non-compliance.

A Few Hot Issues:

-The Urban and Rural Planning Law stipulates more stringent approval procedures for building premises required by township and village enterprises, rural common facilities or public interest establishments within a township or village planning area. The Urban and Rural Planning Law provides that no farm land can be used for such buildings unless approved by the corresponding department of urban and rural planning under the people's government of the city or county.

-Chapter III of Implementation of Urban and Rural Planning, provides more complicated construction land-use right approval procedures than that provided in the Land Administration Law and former City Planning Law. Procedures for changing land use purpose are more stringent to curb disorganized allocation, transfer and use of construction land.

-The right to legally recover State-owned land is addressed in Article 58 of the Land Administration Law, which provides that "proper compensation should be given to land use right owners", but the Urban and Rural Planning Law, in line with the legislative spirit of the Property Rights Law , provides that "compensations shall be made according to law". This provision denotes an inclination towards property right holders.

It will be interesting to see how the law is enforced. This could be a great tool for smart growth within China.