Japan’s new caselaw on dominant position bargaining

Author: | Published: 26 Sep 2012
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The amendments to the Japanese Antimonopoly Act (AMA) effective as of January 2010 (the 2010 Amendments) strengthened the enforcement powers of the Japan Fair Trade Commission (JFTC) in relation to private monopolisation and unfair trade practices. The 2010 Amendments are notable for having introduced liability for surcharges as a sanction for certain unfair trade practices, including abuse of dominant bargaining position.

After the introduction of the surcharges, the JFTC imposed a relatively large amount of surcharges against three companies in relation to their abuse of their dominant bargaining position in three separate cases (respectively, the Sanyo-Marunaka case, the Toys 'R' Us Japan case and the EDION case). The Sanyo-Marunaka case represents the first case in which the JFTC issued a surcharge order in relation to an abuse of dominant bargaining position. The background to the strengthening of the enforcement powers against abuse of dominant bargaining position, along with these three cases, is worth closer examination.

The 2010 Amendments have also affected merger filings in light of the change in filing thresholds applicable to foreign companies. Following the 2010 Amendments, the JFTC abolished the prior consultation procedure, which came into force on July 1 2011. After the implementation of the new procedure, four cases were cleared subject to certain conditions under the Phase two review. The first case was the Nippon Steel/Sumitomo Metal case (December 14 2011) and the second and third cases were the Hard Disc Drive Sector cases (Western Digital Ireland/Viviti Technologies (December 28 2011) and Seagate Technology International/Samsung Electronics (December 28 2011)). The fourth case was the Tokyo Stock Exchange/Osaka Securities Exchange case (July 5 2012). We will briefly introduce the outline of new procedure and also the Nippon Steel/Sumitomo Metal case in detail to show the importance of close communication with the JFTC at an early stage in the process of planning the business combination.

Recent cases

As Japan's economy continued to deteriorate, the JFTC recognised that abuse of dominant bargaining position was becoming more of a serious social problem. Accordingly, the JFTC began cracking down on violations of the abuse of dominant bargaining position regulation as shown in the below chart. Further, the JFTC introduced surcharges for an abuse of dominant bargaining position and, in order to clarify the rules as to what constituted an abuse of dominant bargaining position, the JFTC issued Guidelines Concerning Abuse of Superior Bargaining Position under the Antimonopoly Act on November 30 2010.

Chart transition in the number of cases regarding abuse of dominant bargaining position
Fiscal Year 2007 2008 2009 2011 Total
Legal measures 0 4 2 3 9
Warning 0 1 2 0 4
Caution 12 8 22 52 106
Total 12 13 26 55 119
From Press Release by the JFTC on June 6 2012


Although the JFTC has not provided a large number of legal measures, three cases are of particular note. This is because these three cases are landmarks and integral to gaining an understanding of the enforcement of the abuse of dominant bargaining position regulation under the 2010 Amendments, which introduced liability for surcharges as a sanction for abuse of dominant bargaining position. The first case is the Sanyo/Marunaka case (June 22 2011), where the amount of surcharge imposed was ¥222.16 million ($2.83 million) for a period of less than five months. The second is the Toys 'R' Us Japan case (December 13 2011), which involved a surcharge of ¥369.08 million for a period of 13 months, and the third is the EDION case (February 16 2012) where the surcharge imposed was around ¥4.05 billion for a period of 11 months.

It is important to note that the period subject to surcharge in each of the above cases only began from January 1 2010, when the 2010 Amendments came into effect, and as such, the amount imposed was limited. The period, however, can be extended for three years (the surcharge rate applicable to abuse of a dominant bargaining position is 1%, which is multiplied by the amount of relevant sales of goods or services executed during the relevant period, subject to a maximum limit of three years). Accordingly, if the respective maximum periods were to have been applied to the surcharge payments in each of the above three cases, the amount of surcharge could have been substantially higher.

It is also important to note that the above calculation method of surcharge does not allow the JFTC any discretion over deciding whether or not to impose surcharges or in relation to the amount of any surcharges imposed. Therefore, an amount calculated using the above calculation method will be automatically imposed by the JFTC.

Sanyo Marunaka

On June 22 2011, the JFTC issued a cease-and-desist order and surcharge payment order against Sanyo Marunaka, a large retailer that operates a major chain of a large local supermarket in the districts of Sanin and Shikoku of Japan, with annual sales of over JPY 120 billion. The JFTC alleged that Marunaka had coerced suppliers into providing undue and unjustifiable payments and services to Marunaka. In these orders, the JFTC pointed out that the following conduct constituted an abuse of dominant bargaining position:

(i) On the occasion of a new opening or a reopening due to renovations, Marunaka forced specific suppliers to dispatch its employees to engage in works, such as the display, supply and reception of goods, in connection to its stores, without Marunaka bearing the cost usually necessary for such arrangements;

(ii) On the occasion of a new opening or certain event, Marunaka forced specific suppliers to offer it money even though the event was not related in any way to the promotion of sales of the goods supplied by the supplier or the financial burden did not exceed any possible promotion effect;

(iii) Marunaka returned food products after the expiration of the sale period specified under the original standard established by Marunaka, despite there being no reason for the return of such goods attributable to the specific supplier.

(iv) Marunaka sold certain seasonal products at a discounted rate to its customers because the sale period for the seasonal products had expired, and for such products, Marunaka reduced payments to the suppliers by 50% despite there being no fault attributable to the suppliers; and

(v) Marunaka made specific suppliers purchase Christmas related products by distributing at certain events a purchase order form and instructing them to make the order by indicating a minimum purchase quantity.

This case is noteworthy because it represents the first case in which the JFTC imposed surcharges for an abuse of a superior bargaining position. Marunaka has appealed against the orders and an administrative hearing procedure has been opened.

Toys 'R' Us Japan

On December 13 2011, the JFTC issued a cease-and-desist order and surcharge payment order against Toys 'R' Us, Japan, a famous nation-wide retailer of children's toys. The JFTC alleged that Toys 'R' Us Japan had abused its superior bargaining position over suppliers.

In these orders, the JFTC pointed out that the following conduct constituted an abuse of a dominant bargaining position:

(i) Toys 'R' Us Japan returned unsold goods without any reasonable justification to certain suppliers who were in bargaining positions inferior to it, in light of the inventory growth due to stagnant sales, by using its superior position; and

(ii) Toys 'R' Us Japan reduced an amount, which is equivalent to a discount offered by the company to its consumers, from the consideration to be paid to certain suppliers who were in bargaining positions inferior to it, without any reasonable justification, by using its superior position.

This case is noteworthy because it represents the first case in which the JFTC imposed surcharges regarding the violation of the abuse of superior bargaining position regulation for a foreign company's Japanese subsidiary. Toys 'R' Us Japan has also appealed against the orders and an administrative hearing procedure has been opened.

The major events marking the process of this investigation are shown in the chart below.
Phase Date Event





2011.2.3 Release of merger plan by the parties.
2011.3.18 Submission of the draft notification by the parties to the JFTC.
After 2011.3 Voluntary submission of the written opinion by the parties.
Phase one review (Maximum of 30days)



2011.5.31 Receipt of formal notification of the merger plan by the JFTC.
2011.6.1 The JFTC starts to seek information from relevant parties including users and competitors.
2011.6.30 Request by the JFTC for reports on additional information that triggered Phase two review.
Phase two review (Maximum of 90 days after submission of all required documents)









2011.8 Submission of substantial part of the reports by the parties.

Request by the parties for the JFTC to explain issues and the JFTC's explanation thereof.Proposal by the parties of remedies to address the competition issues.
2011.11.9 Submission of all reports by the parties (the deadline of the Phase two review period was automatically set for February 7 2012, 90 days after all such submissions). Filing of the amendment to the notification regarding the remedy by the parties.
2011.12.9 Notification by the JFTC that cease-and-desist orders were not issued.
2011.12.14 Announcement of results of investigation. Answers questions in consultations based on the Act on Special Measures for Industrial Revitalization
2012.2.7 End of the Phase two review period


EDION case

On February 16 2012, the JFTC issued a cease-and-desist order and surcharge payment order against EDION, a major electronics retail company, alleging that EDION had abused its superior bargaining position over specific suppliers. In these orders, the JFTC pointed out that the following conduct constituted an abuse of a dominant bargaining position:

EDION forced certain specific suppliers who were in bargaining positions inferior to it, to dispatch their employees in order to have them engage in work which did not require the technique or skill of the employees dispatched, such as conveying, unloading of goods and setting up of stores, without the prior agreement of the specific supplier regarding their working conditions and without payment of expenses usually required for such dispatch to EDION, by use of its superior position.

This case is noteworthy due to the large amount of the surcharge payment imposed, which was approximately ¥4.05 billion. EDION has also appealed against the orders and an administrative hearing procedure will be opened.

New merger filing procedures

Up until the end of June 2011, a prior consultation procedure was available for parties to consult with the JFTC about substantive issues relating to the business combination before a formal filing of the notification. As of July 1 2011, however, the JFTC abolished the prior consultation procedure and introduced a new system by implementing Policies Concerning Procedures of Review of Business Combination. Under the new system, at the pre-notification stage, the JFTC provides consultation as to how to fill in the notification form. After the formal notification, the JFTC starts to review the substantive issues and the parties can request the JFTC to explain any issues in relation to the proposed transaction at any time during the review period. It is further possible for the parties to submit opinions to the JFTC (including a proposal for remedies).

Under this new system, when a party plans to implement a business combination that may raise substantive issues, the party may first consider consulting with the JFTC at the pre-notification stage. The consultation system at the pre-notification stage is mainly to assist parties with filling in the notification form, but since the notification form includes some items that are crucial for substantive issues, such as market definition and market share, the parties may discuss substantive issues with the JFTC in connection with such items. The party can also proactively communicate with the JFTC, for example, by requesting the JFTC to explain certain issues in order to understand concerns at an early stage and by submitting its written opinions for addressing such concerns. As another example of such proactive communication with the JFTC, the Nippon-Steel/Sumitomo Metal case is worth examining.

Nippon Steel /Sumitomo Metal

Nippon Steel, which is a company engaged in the manufacture and sale of steel products, and Sumitomo Metal, which is also a company engaged in the manufacture and sale of steel products, plan to merge on October 1 2012.

Due to the many overlapping portfolios in relation to steel products between Nippon Steel and Sumitomo Metal, the JFTC set approximately 30 fields of trade to review the merger and focused on the following six fields of trade in particular:

(i) Non-oriented electrical steel sheets;

(ii) High-pressure gas pipeline engineering business;

(iii) Steel sheet piles;

(iv) Spiral welded pipes;

(v) Hot-rolled steel sheets; and

(vi) H-section steel.

Phase one review

Although this formal notification was submitted on May 31 2011 before the abolishment of the prior consultation procedure, Nippon Steel and Sumitomo Metal had decided in this case based on their respective internal policies not to use the prior consultation procedure. As a result, the circumstances of this case are similar to that of a business combination transaction review made after the abolishment of the prior consultation procedure.

In this case, prior to the formal notification, the parties voluntarily submitted a written opinion to the JFTC stating that, with respect to the steel products, the titanium products and the engineering businesses in which the parties competed, they considered that the merger would not substantially restrain competition from March 2011. The JFTC held several meetings with the parties at the request of the parties. Thereafter, on May 31, the formal notification of the merger was submitted and the Phase one review commenced.

In complex cases, the JFTC often seeks information from the public, usually during the Phase two review. However, in this case, the JFTC sought information from the general public at the Phase one review stage because of the size and complexity of the merger.

The JFTC conducted the Phase one review by considering a range of materials, including the formal notification and written opinions that were submitted by the parties, interviews with users and competitors, and information collected from the general public. Consequently, the JFTC determined to enter the Phase two review.

Phase two review

On June 30 2011, the JFTC requested that the parties submit the report on additional information and commenced the Phase two review. During the Phase two review, the JFTC held several meetings with the parties at their request. The parties made assertions and submitted materials to clear up and resolve the questions raised by the JFTC during such meetings. The JFTC conducted a further investigation of the competitive effects of the merger, taking into consideration such assertions and materials submitted by the parties, the results of interviews with users and competitors and of investigations undertaken through questionnaires, the information collected from the general public, and other such sources.

By August 2011, substantial parts of the reports on additional information that the JFTC requested had been submitted by the parties. The parties then requested the JFTC to explain the issues at the time that was allowed under the new system. Upon such request, the JFTC explained the current issues of the review in consideration up until this stage. The JFTC also pointed out that there was a possibility that with respect to non-oriented electrical steel sheets and the high-pressure gas pipeline engineering business the merger had the potential to substantially restrain competition. In light of this, the parties then offered to undertake certain measures to resolve the competition issues, and on December 9 2011, submitted an amendment to the formal notification regarding the addition of the remedies.

On December 14 2011, in consideration of the remedies, the JFTC issued an official notification to the effect that a cease-and-desist order would not be issued and made a public announcement regarding the results of the review of this merger. During the Phase two review, the parties had many meetings with the JFTC to discuss the issues.

Implications

The review period of this case by the JFTC was approximately six months after the submission of the formal notification by the parties, which is considerably short given that this was a merger case between large-scale companies representing a sizable portion of Japan. The shortened review period can be attributed to the following two elements.

First, the parties voluntarily submitted their written opinion to the JFTC before the submission of the formal notification, stating that the merger would not substantially restrain competition. After this submission of written opinion, the JFTC and the parties held meetings regarding the merger review. These consultations with the JFTC prior to the formal notification significantly contributed to shorten the review period by making it possible for the parties to identify the substantive issues at early stage.

Second, after the submission of the formal notification, the JFTC and the parties held many meetings and discussed the competition issues in the various fields of trades. The parties also requested that the JFTC explain the issues in consideration at this stage and the JFTC gave such requested explanations. Through these frequent discussions, the JFTC and the parties were able to focus and develop the competition issues, and a common understanding was formed.

It is important to consult with the JFTC at an early stage in the process of planning a business combination and to remain in close communication with the JFTC. Further, it is also useful to utilise the new system, such as requesting explanations from the JFTC in order to ensure the success of the merger filing.

Etsuko Hara
 

Anderson Mori & Tomotsune
Izumi Garden Tower
6-1, Roppongi 1-chome
Minato-ku, Tokyo 106-6036
Japan

T: +81 3 6888 1000
E: inquiry@amt-law.com
W: www.amt-law.com

Etsuko Hara is a partner at Anderson Mori & Tomotsune with broad experience in antitrust, corporate transactions, M&A and general corporate work. In the area of antitrust, she is experienced in international cases, including assisting clients on cartel investigations by the JFTC and foreign competition authorities, merger filing in various countries, and cross border distribution/license agreements. She is a graduate of Columbia Law School and The University of Tokyo. She was admitted as a lawyer in Japan in 2001 and in New York in 2007.

Yoshiharu Usuki
 

Anderson Mori & Tomotsune
Izumi Garden Tower
6-1, Roppongi 1-chome
Minato-ku, Tokyo 106-6036
Japan

T: +81 3 6888 1000
E: inquiry@amt-law.com
W: www.amt-law.com

Yoshiharu Usuki is an associate at Anderson Mori & Tomotsune. He has been engaged in a wide range of practice areas since he joined the firm in 2008. In particular, he has advised foreign and domestic companies on merger notifications to the JFTC, cartel cases involving the JFTC, as well as authorities in other foreign jurisdictions, other antitrust matters and general corporate matters. He is a graduate of Keio University and Keio Law School. He was admitted as a lawyer in Japan in 2007. 

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