By Susan Ning and Ding Liang

On November 14, the National Development and Reform Commission ("NDRC") announced its decision to fine two private pharmaceutical companies nearly RMB 7 million for violating the Anti-monopoly Law (AML) (please see our previous article entitled NDRC Fined Two Pharmaceutical Companies for Abusive Conducts).  The NDRC’s news release did not clearly indicate which article(s) of the AML the two companies have violated and the method the NDRC adopted to calculate the fine. 

On December 16, Mr. Zhou Zhigao, an official from the NDRC’s Price Supervision, Inspection and Anti-monopoly Bureau discussed the reasoning behind this case in a seminar.  According to Mr. Zhou, the two pharmaceutical companies were fined under Article 17(3) of the AML because they abused their dominance by refusing to deal with reserpine manufacturers.  He also discussed the method used in that case to calculate the fine.

Refusal to Deal in a Disguised Form

Article 17(3) of the AML prohibits business operators holding dominant market positions from refusing to transact with trading counterparts without a valid reason. The NDRC believes that two pharmaceutical companies’ act constitutes refusal to deal in a disguised form based on the below reasoning:

– Weifang Shuntong Pharmaceutical Co. Ltd. (Shuntong) and Weifang Huaxin Pharmaceutical Trading Co. Ltd. (Huaxin) controlled the entire supply of promethazine hydrochloride by entering into exclusive sales agreements with the only two manufacturers of promethazine hydrochloride. Moreover, the two pharmaceutical companies had cross shareholding relationships. The reserpine manufacturers’ inability to obtain adequate supplies of promethazine hydrochloride is partly attributable to the lack of competition between the two pharmaceutical companies.

– There was sufficient production of promethazine hydrochloride and the reserpine manufacturers are willing to purchase promethazine hydrochloride under the usual trade terms.

– With the sales price of promethazine hydrochloride increased from less than RMB200/kg to RMB300-1350/kg, reserpine manufacturers were unable to carry on business as a result of not being able to obtain adequate supplies of promethazine hydrochloride on usual trade terms.  The two pharmaceutical companies effectively refused to deal with reserpine manufacturers.

Determination of the Fine

According to Article 47 of the AML, penalties associated with abusing market dominance include confiscation of illegal income and fines of 1-10% of the sales amount of the previous year.  It is, however, unclear under the AML how the sales amount of the preceding year should be calculated.  There have been speculations on whether the sales amount should be confined to that generated in the relevant market involved in the investigation or extended to the entire sales amount of the penalized company.
According to Mr. Zhou, the two pharmaceutical companies did not sell promethazine hydrochloride in 2010 and therefore the sales amount related to promethazine hydrochloride of the preceding year is zero.  Taking this into account, the NDRC calculated the fine on the basis of the entire sales amount of the penalized company in 2010.  We note that Weifang Shuntong was fined less than 5% of its sales amount in 2010 and Weifang Huaxin was fined little above 1% of its sales amount in 2010.