Japan: Japan Fair Trade Commission Watch

Last Updated: 26 October 2005

Executive Summary

This issue will discuss the major Antimonopoly Act violations of 2004 concerning bid rigging, enforcement, and injunction.

The issue for the bid rigging case in connection with the pavement construction projects ordered by Kyoto City was whether a "Basic Agreement" existed or not. The defendant companies’ assertion that most companies were not aware of the existence of a Basic Agreement was rejected. What was this Basic Agreement? This case was particularly important to understand Japan’s bid rigging practices. Most bid rigging cases in Japan have been carried out within the same industry through several decades. For example, a rule would be set where if there were six public road construction projects a year, six designated companies would discuss and agree so that each company would win one project. Unless a new candidate appeared, each company would be promised one project a year and no company would attempt to break such rule. In Japan, it has often been the case that such a rule would be clearly decided beforehand and the bid rigging would tacitly continue for a long period. The Japan Fair Trade Commission ("JFTC") proved and disclosed such Basic Agreements in the past. However, it has been said that the limit has been reached to prove such Basic Agreement in recent years because bid rigging has been difficult to continue based on these Basic Agreements due to decrease in public projects and JFTC reinforcement of efforts and penalties against bid rigging.

The second case discussed concerns the request for revocation of the cease and desist order against bid rigging in connection with mail sorting machines ordered by the former Ministry of Public Management, Home Affairs, Posts and Telecommunications ("MPM"; current Ministry of Internal Affairs and Communications). The bid rigging in this case was a typical collusive bidding at the initiative of a government agency where only the companies receiving bid information from the MPM could participate in the bidding. However, the issue at the Tokyo High Court did not involve the interpretation concerning the intention to bid rig under Article 2, clause 6 of the Antimonopoly Act. The main issue involved Article 54, clause 2 of the Antimonopoly Act, which had not been previously considered to date. Under Article 54, clause 2 of the Antimonopoly Act, the JFTC may revoke a cease and desist order if it deems necessary to do so. In the present case, the defendant asserted that the information provided by the MPM made it possible to participate in the bidding. However, that information flow stopped after JFTC’s investigation and continued bid rigging became impossible. The cease and desist order was issued although the bid rigging activity had already ceased. In addition, the JFTC did not prove whether the cease and desist order was especially necessary. The Tokyo High Court

found that the cease and desist order should be revoked against the defendant. The issue for the present case was not whether bid rigging activity existed, but rather JFTC’s inadequately determined issuance of the cease and desist order pursuant to Article 54, clause 2 of the Antimonopoly Act. The revocation of such order will influence JFTC’s order execution process in the future. JFTC has not clearly proved the necessity of the cease and desist order under Article 54, clause 2 of the Antimonopoly Act in the past. As such, the Tokyo High Court found that JFTC should be required to prove the necessity of such cease and desist order, with clear procedural due process in effect.

The last case involved the LP gas industry whereby 79 medium and small size LP gas companies in Tokyo filed for an injunction against a major company to cease its discriminatory pricing pursuant to Article 3 of the Designation of Unfair Trade Practices. In this case, the plaintiffs claimed that the defendant LP gas company in the Tokai region provided LP gas at a lower price in the Tokyo market, which it had newly entered, than for the Tokai market, intending to eliminate competition. However, the court rejected plaintiffs’ request for injunction by stating that Japan’s discriminatory pricing regulation is applicable only in cases where the unfair pricing strategy is implemented to oust competition. The backdrop behind this case involved the recent trend to utilize city gas or electricity in the market rather than LP gas, creating conditions of harsh competition in the market that could adequately justify this pricing behavior.

REPORTS1

ENFORCEMENT (Warning, Recommendation etc.)

Additional prosecution against bid rigging of steel bridge construction projects ordered by the Japan Highway Public Corporation ("JHPC")

(Announced: August 1 and 15, 2005)

The JFTC has filed a complaint against Yokogawa Bridge Corp. and two other companies to the Prosecutor General in respect of bid rigging of JHPC’s steel bridge construction projects for violation of Article 3 of the Antimonopoly Act (unreasonable restraint of trade), pursuant to Article 73-1 of the Antimonopoly Act, on June 29, 2005. Additional filings were made against the following corporations and individuals.

Indictment Date

Defendants

Violation

August 1

Kawada Industries, Inc. and two other companies

Article 3, Antimonopoly Act

Former director of the JHPC and four individuals in charge of the bidding for the defendant company

Article 3, Antimonopoly Act

Vice President of the JHPC

Article 3, Antimonopoly Act

August 1

Director of the JHPC

Article 3, Antimonopoly Act

The bid rigging in connection with steel bridge construction projects ordered by the government and JHPC, began with JFTC’s investigation against approximately 70 steel bridge manufacturers in respect of the October 2004 project ordered by the Ministry of Land Infrastructure and Transport ("MLIT") and ended with the arrest and indictment of two JHPC directors.2

The market size for steel bridges being approximately 350 billion yen annually (approximately 60% ordered by the government and JHPC3), this case became the largest government bid rigging case ever. This case is the ninth criminal case for violation of the Antimonopoly Act since 1974, and comes two years since the bid rigging case in connection with the purchase of water meters by Tokyo Metropolitan Government.4 A total of 26 steel bridge manufacturers and 10 individuals were indicted in respect of bid rigging on steel bridge construction projects ordered by MLIT and JHPC. Subsequently, the two JHPC directors were indicted as "principal offenders" for violating the Antimonopoly Act rather than as "aiders and abettors".5

The method of bid adjustments differed between the steel bridge construction projects ordered by MLIT and JHPC. In respect of the MLIT projects, a group of 47 steel bridge manufacturers organized the "K Club" among 17 major companies and the "A Club" among 30 medium and small size companies, for the purpose of conspiring to adjust bids using a so-called "discretionary" model controlled by the director corporations. The six director corporations6 held several "work" meetings a year. A "benchmark" was set based on the past five-year bidding performance, and the next scheduled bid winner was determined accordingly.7

On the other hand, bid adjustment activities for projects ordered by the JHPC were conducted by preparation of a "bid allocation list" by the former JHPC director who had become a consultant to Yokogawa Bridge Corp after retiring from JHPC ("amakudari"). The two JHPC directors indicted received and approved such "bid allocation list" from this consultant on several occasions each year. In addition, the two directors arranged to divide projects and accelerated project schedules upon request from such consultant.8

Cease and desist order against Big Eleven Co., Ltd. ("Big Eleven")

(Announced: August 2, 2005)

Big Eleven advertised its products in its fliers as being sold at "manufacturers’ suggested price" when in fact the price was much higher. In actuality, the "manufacturers’ suggested price" was set by Big Eleven rather than the manufacturer and the representation made the price appear much cheaper, misleading the general consumer. As such, JFTC issued a cease and desist order against Big Eleven as being in violation of Article 4, clause 1-2 of the Act against Unjustifiable Premiums and Misleading Representations (favorable misrepresentation of quality).

SURCHARGE

Decisions and Order for Surcharge Levy

Case

Details

Applicable Law

Surcharge Amount (10,000 yen)

Decisions for Surcharge Levy

Niigata City Construction Bid Rigging

(Decision: August 3, 2005)

Bid rigging against construction projects ordered by Niigata City.

Article 3, Antimonopoly Act

See the next table

(Surcharge Amount and Order for Surcharge Levy)

 

Number of Violations (company)

Order for Surcharge Levy (company)

Surcharge Amount
(10,000 yen)

Sewage implementation construction

68

3

7,137

Sewage cut construction

59

14

8,437

Building operations

70

5

4,415

Total

cumulative: 197 (actual count :144)

cumulative: 22 (actual count: 20)

19,989

Total

cumulative: 197 (actual count :144)

cumulative: 22 (actual count: 20)

19,989

RECENT CASE REVIEW9

Bid rigging of pavement construction projects ordered by Kyoto City

(Decision: September 17, 2004)

Summary

This case involved bid rigging in connection with pavement construction projects ordered by Kyoto City. 13 construction companies, including the eight defendant companies, agreed to select the scheduled bidder in any case more than one bidder desired to bid for a particular project (hereinafter "Basic Agreement"). The defendants colluded to adjust their bids based on this Basic Agreement for all 74 pavement construction projects ordered by Kyoto City from April 2000 through August 2002. The JFTC issued a recommendation against such dealings in violation of Article 3 of the Antimonopoly Act (unreasonable restraint of trade). One company accepted the recommendation, however 11 companies objected and commenced this proceeding (out of the 11 companies, consent judgment was issued to one company and two companies received declaration of bankruptcy after the commencement of the proceeding, leaving only eight remaining defendants).

The defendants’ assertions were as follows:

  1. No Basic Agreement existed.
  2. Even if a Basic Agreement existed, 71 out of 74 pavement construction projects had only one bidder; no company was prevented to bid and the act did not amount to "mutually restricting their business activities" pursuant to Article 2, clause 6 of the Antimonopoly Act.

Findings

JFTC rejected the defendants’ claim by stating as follows:

    1. Basic Agreement

    The existence of a Basic Agreement was found based on the following facts.

      • Individuals in charge of sales from at lease six out of 13 companies selected the bidder beforehand, and the 13 companies agreed to cooperate for the successful bid of the selected bidder.
      • For all 74 projects, the scheduled bidder circulated estimates to other members indicating a higher bid price than the actual bidding price, in order to enable it to bid at the lowest price. The members determined their bidding price based on such estimate and cooperated for the selected bidder to win.
      • For 51 out of 74 projects, bidders were confirmed and one company was selected by the group as the winning bidder.
      • For 3 out of 74 projects many multiple group bidders existed, and in these cases the winning bidder was selected through discussion among the bidding candidates.

    2. Mutual Restriction

    The Basic Agreement for the present case was to select the winning bidder and cooperate for such bidders’ successful bid. Pursuant to the Basic Agreement, the bid applicants would express their desire to bid for a certain project and discuss and select the scheduled bid winner, and the other members would cooperate for such selected bidder to win the bid. As a result, the member companies substantially restricted competition by mutually restricting their business activities.

    Mail Sorting Machine Case

    (Decision: April 23, 2004)

    Summary

    This case concerned the action for revocation of investigation of bid rigging in connection with automatic mail sorting machines ordered by the MPM. The two manufacturers successfully tendered about half of the bids consistently by receiving bid information in advance from MPM officials, whereas companies failing to receive bid information could not participate in the bidding process. However, the two companies discontinued the foregoing collusive bidding practice after JFTC commenced investigation on December 10, 1999 and the MPM officials stopped providing information.

    The JFTC ruled and ordered the following measures in violation of Article 3 (unreasonable restraint of trade) pursuant to Article 54-2 of the Antimonopoly Act (Article 7-2): (1) cease the advance selection of bidding candidate and (2) report the measures taken for the act under (1) to JFTC. The two companies appealed to rescind this decision.

    Findings

    Cease and desist orders may be issued where a possibility exists that the plaintiffs may continue bid rigging in connection with mail sorting machines ordered by MPM. The act of receiving information from government officials is illegal per se. However, in the present case, the court found that it was difficult to judge whether the plaintiffs would continue to collude in the event that the information flow from the MPM officials ceased. Under Article 54-2 of the Antimonopoly Act, injunctive measures may be ordered even if the illegal act had already ceased, if the court finds such measures "particularly necessary", but such necessity did not exist in the present case. The Tokyo High Court vacated the JFTC’s order due to its procedural violation, without ruling on the substance of the bid rigging violation.

    Injunction for discriminatory pricing of LP gas

    (Decision: March 31, 2004)

    Summary

    This case involved the filing of a request for injunction by 79 medium and small size companies selling LP gas against a major LP gas distributor to force it to suspend the sale of LP gas to general consumers at a discounted price. The major LP gas distributor sold and provided LP gas to new customers at 3,505 to 4,404 yen per 10 m³. Customers contracting prior to 1996 were sold LP gas at above 5,000 yen per 10 m³, creating a price differentiation between the new and existing customers.

    Consequently, the plaintiffs sought for injunction against the defendant pursuant to Article 24 of the Antimonopoly Act to cease the discriminatory pricing of LP gas, as such price differentiation for new and existing customers had no rational basis and should be designated as "discriminatory pricing" under Article 3 of the Designation of Unfair Trade Practices.

    Finding

    The pricing of an entity’s product or service is left to such entity based on the quality of such product or service as well as the market demand, productivity and competition. It is understood that market competition is created by such activities by individual entities, striving to maximize profits. Considering the aim of the law to facilitate free competition among entities, the determination whether such price differentiation infringes on fair competition depends on whether the pricing strategy is designed to exclude the seller’s competitor from the market. The exclusion of fair competition shall be based on various factors including market trend, supply cost, market power, and subjective intention to differentiate price. Furthermore, determination of fair competition exclusion shall be performed carefully so as not to disturb the market price mechanism of retailers based on market supply and demand for product or service pricing by a competitor, excluding a clear dumping situation.

    The court found that it could not be said that the price differentiation in the present case was implemented to exclude competition from a competitor, and the Tokyo District Court rejected plaintiffs’ claim.

    Footnotes

    1.This report is based on the August 2005 issue of the JFTC "Press Release". (http://www.jftc.go.jp/pressrelease/17index.htm)

    2. Nihon Keizai Shimbun August 19, 2005 article.

    3. Nihon Keizai Shimbun August 2, 2005 article.

    4. Prosecuted on July 2, 2003.

    5. The two directors were indicted for breach of trust as well for splitting bridge projects into several orders and thus causing unnecessary payments for JHPC. Nihon Keizai Shimbun August 15, 2005 article.

    6. The director companies were selected by Mitsubishi Heavy Industries Ltd., former member of the K Club; however, the director company selection method changed around 2001 whereby the heavy machinery and steel bridge manufacturers would select four companies each. Yomiuri Shimbun May 27, 2005 article.

    7. Nihon Keizai Shimbun May 23-25, 2005 article.

    8. Nihon Keizai Shimbun August 15 & 18, 2005 article.

    9. Introduction of significant decisions and precedents in 2004. This portion of the report is based on "Explanation of Significant Case Law in 2004" Extra Edition of Jurist, Volume 1291 (2005).

    The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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