Ensuring the Price Is Right - PRC Measures to Combat Price Gouging during the COVID-19 Crisis

Since the outbreak of COVID-19, the hoarding and price gouging of daily necessities and personal or medical protective goods has become a common issue in many countries due to supply shortages combined with high demand. Different markets have reacted differently to these issues with some (including Hong Kong) opting to allow free market prices, while others have either enacted new emergency laws and countermeasures or enhanced its existing laws to deter hoarding and price gouging of such products. The PRC and the United States are some examples of the latter.

This article highlights some key measures and enforcement actions taken by the PRC government to combat hoarding and price gouging of COVID-19-related items. Penalties can be serious and may include large fines, confiscation of illegal gains and revocation of business licence as well as imprisonment of the responsible persons. As illustrated by various case examples and public announcements, the PRC regulators and enforcement agencies have shown their determination to combat these issues, to facilitate the resumption of production in an orderly manner. Consumer-facing businesses as well as manufacturers and distributors should be watchful of the enforcement trend and monitor the latest updates to ensure their compliance in the PRC and to avoid severe penalties.

Key Measures

Despite existing anti-price gouging laws, emergency reinforcing countermeasures were introduced by the regulators specifically to address the COVID-19 outbreak in January 2020 in order to stabilize supply and ensure market order. As a result, there are a number of key measures issued at national level, although business operators need to be aware that local implementation guidelines may apply in different cities and provinces around the PRC.

On 1 February 2020, the State Administration for Market Regulation (“SAMR”) issued the Guidance on Investigation and Handling of Illegal Acts of Price Gouging during the Prevention and Control Period of Novel Coronavirus¹ (the “SAMR Guidance”), setting out detailed guidance on the application of the Price Law and the Provisions on the Administrative Punishment of Price-related Violation (the “Administrative Punishment Provisions”) and determination of price gouging offences of epidemic prevention products and daily necessities vital to the people’s livelihood (such as rice, oil, meat, eggs, milk and vegetables). Under the SAMR Guidance, epidemic prevention products include masks, antiviral medicine, disinfection and sterilization products as well as relevant medical devices and equipment.

In particular, the SAMR Guidance clarifies and provides examples of what may be determined as illegal price gouging under Article 6 of the Administrative Punishment Provisions:

On 6 February 2020, the Supreme People’s Court, the Supreme People’s Procuratorate, the Ministry of Public Security and the Ministry of Justice jointly issued the Opinions on Punishing the Illegal and Criminal Acts Obstructing the Prevention and Control of Novel Coronavirus Pneumonia Epidemic in accordance with the Laws⁷ (the “COVID-19 Judicial Opinions”). Paragraph (4) of Article 2 of the COVID-19 Judicial Opinions is set out below:

“[A]nyone who hoards or gouges the prices of masks, protective goggles, protective suits, disinfectants, medicines that are urgently needed for epidemic prevention and control or other products vital to the people’s livelihood for the purpose of making exorbitant profits, where the amount of illegal gains are relatively large, or if there are other serious circumstances and as a result of which causing significant market disruption, shall be guilty of and punished for the crime of illegal business operations under Article 225(4) of the Criminal Law” which prohibits any “illegal business activities that seriously disrupt the market order”.⁸

Penalties

Offences concerning COVID-19-related hoarding and price gouging include:-

1. Administrative Penalties - Under Article 6 of the Provisions on the Administrative Punishment of Price-related Violation, penalties for business operators include restitution, confiscation of illegal gains, and a fine up to 5 times of the illegal gains or, where there is no illegal gain, between RMB 50,000 to RMB 500,000, which can be increased up to between RMB 500,000 and RMB 3 million if deemed serious. In the most serious case, a business operator may be ordered to cease business operation pending rectification, or could even lose its business license.
2. Criminal Penalties - Under Article 225 of the Criminal Law, sanctions include a fixed-term imprisonment of up to 5 years or criminal detention in addition to or a simple fine of not less than 100% and not more than 500% of the illegal gains. Where circumstances are particularly serious, sanctions include a fixed-term imprisonment of no less than 5 years and a fine not less than 100% and not more than 500% of the illegal gains or the confiscation of property.

Enforcement Action

Enforcement agencies have been actively pursuing COVID-19-related cases. On 21 February 2020, an official of the Public Security Bureau announced at a press briefing that they had already handled 274 cases of illegal commercial practices such as price gouging and hoarding during the COVID-19 outbreak⁹. Further, at a press conference of the Joint Prevention and Control Mechanism of the State Council held on 12 March 2020, it was noted that over 250 cases had been transferred to the Public Security Bureau for the purpose of criminal prosecution¹⁰.

Various enforcement agencies at national and provincial level have also been publishing typical COVID-19-related enforcement actions concerning hoarding and price gouging activities.

Case Example 1¹¹

On 29 January 2020, Nanchang Municipal Market Supervision Bureau issued a Notification on Hearing of Administrative Punishment to a drugstore in Jinxian County, imposing a fine of RMB 3 million (which is the upper limit for a the prescribed fine of such category of offences), for its illegal acts such as hoarding masks and other epidemic protective products and price gouging.

In this case, 224 pieces of absorbent gauze masks and 320 bottles of disinfectant were seized. It was found that, for the purpose of making exorbitant profits, the party concerned publicly sold epidemic prevention-related commodities, the price of which was raised by a margin ranging from 50% to 1300% since 22 January despite the fact that there was no substantial change in purchasing cost, which activities fall within the ambit of Article 2(2) of the Measures for the Implementation of Administrative Punishments on Price-related Illegal Acts. The circumstances were considered relatively serious and a maximum fine of RMB 3 million was imposed.

Case Example 2¹²

Defendant No. 1 (“D1”) is a company in Shanghai and Defendant No. 2, Mr Xie (“D2”), its legal representative. In early January 2020, D1 purchased a batch of regular non-medical grade masks at the price of RMB 5.125 per box (50 pieces per box) and publicly sold those masks via the company’s online store on the Taobao platform. After the outbreak, D2 decided to profit from the epidemic by raising the prices to RMB 198 per box. It was found that the illegal gains made by D1 from selling the masks at the increased price exceeded RMB 160,000.

The People’s Court of Songjiang District found that the masks in dispute were purchased by D1 before the outbreak of the epidemic and its operating costs did not change significantly after the outbreak, but D1 raised the price by 10 times. D1 had made exorbitant profits by price gouging. As a result, both D1 and D2 were found to have committed the crime of illegal business operations. D1 was fined RMB 200,000 and its illegal gains were confiscated. D2 was sentenced to an eight-month imprisonment and fined RMB 180,000.

Case Example 3¹³

A’s company produced and sold filter materials. Around 20 February 2020, B contacted A to produce six tons of melt-blown non-woven fabric which was the key raw material for making face masks. They agreed that the price per ton was RMB 180,000, and A received a payment of RMB 1.08 million from B. After investigation, the production and transportation costs of these melt-blown non-woven fabrics were found to be less than RMB 20,000 per ton. A had confessed he knew that melt-blown non-woven fabric was the main material for masks, so he raised the selling price.

After obtaining the melt-blown non-woven fabric, B immediately resold it to four mask manufacturers in Guangdong, Jiangxi and Fujian at prices ranging from RMB 300,000 to RMB 380,000 per ton. B resold the materials in his personal capacity at a profit of about RMB 700,000.

The People’s Procuratorate of the First District of Dongguan City, Guangdong Province, approved the arrest and requested the Public Security Bureau to carry out the arrest of A and B (who had already been detained) on the grounds that A’s company violated the COVID-19 price-related laws and regulations, made exorbitant profits and was considered to have committed the offence of illegal business activity. A was the person in charge of the company, with direct responsibility. B immediately resold the materials with substantially higher prices after receiving them and made exorbitant profits. The illegal gains were large and with serious implications and therefore both A and B were considered to have engaged in illegal business activities and arrested for prosecution.

Other Considerations

Depending on the circumstances and the market position of the business operators, the PRC Anti-Monopoly Law may also become relevant as it prohibits “abuse of dominant market positions by business operators”, which under Article 17 includes setting prices in “selling commodities at unfairly high prices or buying commodities at unfairly low prices”. In addition, Article 13 also prohibits competitors from agreeing on, among other things, price fixing, restricting the amount of commodities manufactured or marketed or splitting market share for raw and semi-finished materials. Article 14 also prohibits agreeing with trading counterparts on fixing the prices of commodities resold to a third party or restricting the lowest prices for commodities resold to a third party.

Business operators also need to bear in mind the third party risks in their commercial dealings, including with their suppliers, partners, distributors, agents, and channel sales. Appropriate due diligence, monitoring and proper documentation of records and business communication as well as adequate representations and warranties (if relevant) is advisable. Given the introduction this year of the new Social Credit Rating system which is an integrated compliance based rating system (that will ultimately impact all PRC businesses), using information from multiple government bodies and agencies including information as to non-compliant behaviour concerning business partners are all the more important.

Going Forward

As illustrated by the above measures and examples of enforcement actions, the PRC government is determined to step up and take stronger actions against COVID-19-related hoarding, profiting and price gouging. Business operators are advised to be mindful of the pricing, sales and marketing behaviour not only of its own but also of its distributors and channel sales to avoid the risk of non-compliance with or allegation of collusion against price-related laws and regulations.

If you have any questions about this article, please feel free to contact Terence Tung, Ian Lewis and Liang Pu or your usual contacts at Mayer Brown.

For an overview of the relevant measures in the United States, please see our Legal Update Pricing Compliance in the United States During the COVID-19 Pandemic.

For general measures that the PRC has taken in response to COVID-19, please see out Legal Update The China Experience – Understanding the Evolution of the COVID-19 Crisis (Updated on 6 April, 2020).