Law360: How to React to Chinese Anti-Monopoly Surprise Inspections

Washington, DC – August 20, 2014 – The article co-authored by Lei Mei and titled “How to React to Chinese Anti-Monopoly Surprise Inspections” was published in Automobile Law360, Competition Law360, Technology Law360, and White Collar Law360.

A copy of the article is reproduced below:

Recently, as reported by international media, Chinese anti-monopoly authorities raided Chinese offices of Microsoft and Mercedes-Benz that were suspected of monopoly activities. These surprise inspections shocked many companies doing business in China. This article discusses these surprise inspections and offers five tips for responding to these types of inspections.

Overview of Recent Surprise Inspections.

On July 28, 2014, China’s State Administration for Industry and Commerce (“SAIC”) performed surprise inspections of four Microsoft offices in China, including offices of Microsoft (China) Co. Ltd. and its subsidiaries in Shanghai, Guangzhou and Chengdu, and interviewed relevant Microsoft personnel. SAIC announced that Microsoft was under investigation for possible violations of the Chinese Anti-Monopoly Law regarding compatibility, tying sales, document verification and other issues because Microsoft did not fully disclose relevant information about its Windows and Office software.

The surprise inspections were performed by SAIC officers from nine provinces including Beijing, Shanghai, Guangdong, Sichuan, Fujian, Hubei, Jiangsu, Chongqing and Hebei. SAIC officers inspected offices of the vice president, senior manager and staffs of Microsoft’s marketing and finance department. SAIC officers copied relevant contracts, financial statements, and internal Microsoft documents, as well as emails from computers and servers. SAIC officers also confiscated two computers.

On August 4, 2014, SAIC’s Special Investigation Unit questioned Ms. Mary Snapp, Vice President of Microsoft Corp. Two days later, SAIC performed another round of surprise inspections of Microsoft offices, including previously uninspected departments of Microsoft (China) Co. Ltd. and its outside financial service provider Accenture LLP (Dalian).

Also on August 4, 2014, in a separate antitrust investigation, China’s National Development and Reform Commission (“NDRC”) raided Mercedes-Benz’s office in Shanghai and questioned several senior managers. Two days later, NDRC held a routine conference answering questions regarding the ongoing anti-monopoly investigation in the automobile industry, stating that Shanghai Chrysler, Hubei Audi, and twelve Japanese auto companies were involved in monopoly activities for which NDRC would announce the penalties soon. However, whether Mercedes-Benz committed monopoly activities was still under investigation.

These investigations follow the footsteps of NDRC’s investigations of InterDigital in 2013 and Qualcomm (which is still pending). Rumors spread that the Chinese government is using the Anti-Monopoly Law to target foreign companies. These rumors resulted from lack of knowledge of the Chinese anti-monopoly enforcement regime.

In recent years, Chinese anti-monopoly authorities have also investigated Chinese companies, including China Unicom and China Telecom, because of their suspected monopoly activities regarding internet services. Moreover, two famous Chinese liquor companies, Maotai and Wuliangye, were fined last year for 247 million RMB (about US$40.1 million) and 202 million RMB (about US$32.8 million), respectively, for monopoly activities.

Indeed, in the past five years, the NDRC investigated many price monopoly cases , both in the cases of price-fixing agreements by operators and industry associations and the cases of abuse of market dominance and administrative power to eliminate or restrict competition. The investigated entities included not only state-owned enterprises and private enterprises, but also foreign-funded enterprise; covering broad sectors such as aviation, books, paper, chemical, automotive, insurance, telecommunications, medicine, milk powder, liquid crystal panels, wine, gold, and corn seeds.

All of SAIC’s 16 final decisions on administrative punishments for monopoly activities involved Chinese companies and associations. Therefore, it is clear that Chinese anti-monopoly authorities have merely targeted companies with suspected monopoly activities irrespective of their nationalities.

Legal Authority of Surprise Inspections

Chapter 6 of the Chinese Anti-Monopoly Law provides the enforcement power for Chinese anti-monopoly authorities. Specifically, Article 39 states: “The anti-monopoly authority may take any of the following measures in investigating suspicious monopolistic conducts: (1) conducting the inspection by getting into the business premises of business operators under investigation or by getting into any other relevant place, (2) inquiring of the business operators under investigation, interested parties, or other relevant entities or individuals, and requiring them to explain the relevant conditions, (3) consulting and duplicating the relevant documents, agreements, account books, business correspondences and electronic data, etc. of the business operators under investigation, interested parties and other relevant entities or individuals, (4) seizing and detaining relevant evidence, and (5) inquiring about the business operators’ bank accounts under investigation.”

Therefore, anti-monopoly enforcement officers may enter working premises of parties involved and perform inspection. In order to obtain related evidence, no appointment is required for such inspection.

Antitrust regulators in Europe, Korea, and Japan have also used surprise inspections when necessary to protect evidence. Antitrust regulators can perform the inspection on the premise of involved parties. Surprise inspections can help obtain key evidence because of no preparation by the involved parties.

The concept of surprise inspections (also known as “dawn raids”) was originated from western countries and institutionalized in the antitrust investigations all over the world. It has become a common action to search and confirm violation activities of the involved parties, in order to prevent involved parties from hiding, destroying, altering and forging evidence.

On July 12, 2005, EU antitrust regulators together with antitrust regulators from other countries inspected warehouses of Intel in Europe as well as its IT offices involving manufacture and sales of computers in Spain, Italy, Germany and the United Kingdom. Similarly, the Korean Fair Trade Commission performed a surprise inspection of Google’s office in Soul and the inspection lasted two days obtaining important evidence to initiate a case in 2011.

In 2013, the European Commission Competition Authority also inspected Deutsche Telekom, Telefonica and France Telecom without notice, suspecting that these companies abused their domination position in the internet service market to squeeze out small-sized competitors.

Therefore, China is acting in accordance with the international norm in using surprise inspections in their anti-monopoly inspections.

5 Tips for Responding to Surprise Inspections

Article 37 of the Law on Administrative Punishments regulates surprise inspections by a government agency. It requires, for example, that “[n]o less than two law administering personnel shall be present on the scene when the administrative organ conducts investigation or inspection, and shall show their certificates to the party or related persons who should give truthful reply to inquiries and cooperate in the investigation or inspection, without obstructing the process.”

When facing a surprise inspection, the company should keep the following points in mind.

First, stay calm. The company’s personnel in charge onsite should inform the company’s senior management personnel and legal representative about the surprise inspection. And notice or email should be sent to all staff on the premise, asking them to stay calm and avoid confrontations. The involved parties should learn to accept the reality and handle the inspection peacefully.

Second, ask for appropriate identification and inquire about the nature of the inspection. A company’s onsite personnel should first ask the enforcement officers to show their IDs, ascertain the identity of the agency performing the surprise inspection and understand the nature of the alleged violation(s). At the same time, the company should immediately notify its Chinese attorney and have him or her present during the inspection.

Third, keep copies of the evidence collected. The company’s personnel should accompany and assist enforcement officers. Provide and copy documents and data taken by the enforcement officers and do not destroy any document. Enforcement officers may copy documents, take original documents, statements or materials, as well as computers during the onsite inspection. They will issue a detention notice listing confiscated documents and properties and will have the company’s personnel in charge to sign and confirm the detention noticed.

Fourth, cooperate sincerely and strive to keep open a cordial communication channel. Avoid any negative treatment, including any verbal or physical attack, of the enforcement officers. Cooperating and communicating actively and effectively will impact the penalty decision.

The company should also provide IT support to answer any computer technology questions that the enforcement officers may have. Recently, some commentators recommend that the company’s personnel should disconnect power and withhold computer passwords. This is absolutely not the right way to respond to the surprise inspection. And it is deemed to be against the law and could subject the company to even more severe punishment.

Fifth, handle the enforcement objectively. Foreign companies should change any preconceived negative opinion about the Chinese Anti-Monopoly Law. Specifically, China does not single out foreign companies for anti-monopoly enforcement, as discussed above.

Currently, China is the second largest economy in the world. Because China’s Anti-Monopoly Law is still fairly new, Chinese anti-monopoly authorities are learning from western countries. Their diligent enforcement of the Anti-Monopoly Law helps build and maintain a fair market for all and protects the legal rights and interests of consumers.

China’s Anti-Monopoly Law is here to stay. Predictably, Chinese anti-monopoly enforcement will continue and cover even more market sectors in the future.

–By Lipeng Mei and Lei Mei. Lipeng Mei is an anti-monopoly enforcement official with the Chinese government and a visiting scholar at the George Washington University Law School. She may be reached at Lei Mei is the managing partner of Mei & Mark in Washington, D.C. He is the author of the book “Conducting Business in China: An Intellectual Property Perspective” (Oxford University Press 2012).

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.