Last week (between 26 to 27 May 2011), it was reported in the press that Unilever has raised the prices of specific products (including Lux and Hazeline branded shampoos and shower gels) by 10% in some cities including Beijing, Shanghai and Guangzhou (Unilever’s price increases). This was touted as a surprising move given that Unilever was recently fined by the price authority, the National Development Reform Commission (NDRC) in relation to conduct to do with its proposed price increases just earlier in the month (see below for more details to do with this fine) (Unilever’s price signaling conduct).
This article outlines details to do with Unilever’s price signaling conduct and subsequent price increases and examines whether or to what extent such conduct would be considered in breach of the Price Law and the Anti-Monopoly Law in China.
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".
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).