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Self-imposed legal compliance

Kiyofumi Koutani
Associate Professor, Chuo Law School
Areas of Specialization: Economic Law, Antimonopoly Law

This work was supported by JSPS KAKENHI Grant Number 15K03220. (Public Relations Office)

1. Self-control and legal compliance

Taking on competition is essential for succeeding in business. In order to emerge victorious from competition, some companies may take action which borders on the very edge of what is lawful. However, laws contain gray zones and the line which must not be crossed is often vague. It is necessary to make case-by-case judgments based on specific individual conditions.

If possible, it is preferable to keep your company out of such risky areas. However, if your company is the only entity to avoid risk, then your rivals may push forward and you will ultimately lose. Obviously, such an outcome must also be avoided.

When managing the ferocity of competition and risk of illegal action, industries sometimes develop self-imposed rules. These rules are agreements which draw a clear line immediately before the aforementioned gray zones and restrict competition to a certain area.

There are also legal systems which actively utilize the self-imposed rules of industry. For example, the Act against Unjustifiable Premiums and Misleading Representations contains a system known as the Fair Competition Code. In this system, industries develop self-imposed rules regarding invalid representations and premiums which may mislead or deceive consumers. This Fair Competition Code is established based on approval from the Japan Consumer Affairs Agency and the Japan Fair Trade Commission (JFTC). In addition to preventing violations of the Act against Unjustifiable Premiums and Misleading Representations, representations and premiums which follow the Fair Competition Code are usually free from issues related to the Antimonopoly Act. In this system, appropriate information is provided to help consumers resolve the asymmetry of information.

2. Industry self-imposed rules and the Antimonopoly Act

In some cases, it is a violation of the Antimonopoly Act for industries to agree on self-imposed rules. It is easy to image a situation in which the concept of self-imposed rules is used to cloak measures to protect income of existing companies. Some examples would be suppressing price competition or excluding certain companies or imported products.

A cartel is created when industry self-imposed rules restrict free competition among companies and when competition is avoided for factors such as price, quantity, or quality. A boycott is created when rules exclude a certain company or product from the competition. Article 3 and Article 19 of the Antimonopoly Act apply to agreements and arrangements among companies, while Article 8 applies to cases in which an industry group is the subject.

Items (1) to (3) below explain the important points of each case based on relevant examples.

(1) Agreements and arrangements for adjusting prices and production amounts are almost always illegal. During an oil shock, it was illegal to voluntarily decide on as a group the range for price increases and production amount based on administrative guidance issued from the Ministry of International Trade and Industry (MITI) (Supreme Court decision dated February 24, 1984; Keiji Hanrei-shu Vol. 38, No. 4, p. 1,287). Doing so constitutes a price cartel. The base of a free market economy is for prices and quantity to be determined through adjustments between demand and supply as a function of the market mechanism. The conduct of manipulating price and quantity through agreements among companies is almost always illegal, with very few exceptions. Upon receiving administrative guidance from the MITI, it was acceptable for each company to make independent decisions and take self-imposed action. However, a cartel was formed when companies responded excessively to the administrative guidance and formed industry agreements.
A single exception in which an industry agreement was not found to be illegal was the case of a group of bus companies that agreed to take action to reform a situation in which the illegal practice of renting out buses for less than the fees approved by law had become commonplace (JFTC decision dated July 10, 1995; Judgments Vol. 42, p. 3).

(2) Other than agreements which directly affect price, there are also cases in which agreements that suppress price competition or agreements which avoid competition among companies have been found as illegal. There are numerous cases in which it was found to be illegal for medical associations not to display the price for medical service on advertisements, to restrict the number of advertising signs posted, or to establish rules that require approval from nearby hospitals when opening a new medical institution, increasing the number of patient beds, or adding a new medical department (for example, Tokyo High Court; February 16, 2001; Hanrei Jiho No. 1,740, p. 13). Although such rules may have originated from the principle that medical treatment is focused on caring for people rather than pursuing profit, these actions indisputably result in restricted competition for price and quantity. Restricted competition has also been found as illegal in the case of organizations other than medical associations which have put forth plausible reasons for their agreements.

(3) Self-imposed rules are voluntary. As such, each business decides whether or not to participate in said rules. There is a high probability of illegality when forcing a company to participate, when harassing companies that do not participate, or when encouraging business partners to discontinue transactions with non-participating companies. In one example, self-imposed standards for consumer safety were established by a group of toy manufacturers which produced toy guns that fired plastic bullets propelled by the force of compressed air. In this case, it was found illegal for the group to encourage distributors to cease transaction of products manufactured by a company which did not belong to the group and which ignored the self-imposed restrictions (Tokyo District Court; April 9, 1997; Hanrei Times No. 959, p. 115; Hanrei Jiho No. 1,629, p. 70). Although rules may be rational from the perspective of consumer safety, there are cases in which the content or implementation method of those rules is irrational. Forcible participation in self-imposed rules or exclusion of non-complying companies is irrational implementation methods, and thus illegal.

3. Implementation and monitoring of self-imposed rules

However, it is not always illegal for rules to be implemented through agreement/arrangements by a gathering of competitors.

By studying a number of illegal cases like those presented above, it is possible to form a general understanding for criteria used when judging legality. Even so, it is difficult to confidently state the legality of agreements. Although the facts and applicable laws are disclosed for cases which were judged as being illegal, there is no collection of legal cases, and there is no way to understand the details. In actuality, there are many instances of self-imposed rules which seem to have questionable legality based on base cases, yet were never questioned. Nonetheless, this does not mean that such cases have been approved as legal. The only way to clarify criteria would be to study numerous cases which were analyzed and found to be legal. However, such cases are scarce.

Thus, the gray zone continues to exist. Companies can realize a fairly safe answer related to legality by consulting with experts or government agencies regarding the objective and details of self-imposed rules. The JFTC accepts such consultation and periodically releases collections of consultation cases.

The real problem is the actual implementation of the self-imposed rules. Even when the regulations and criteria established as self-imposed rules are acceptable, suppression of competition through irrational implementation is a violation of the Antimonopoly Act. It is easy to imagine cases in which a noble cause is used to disguise implementation that results in loss to certain business or boosts profits for members of a certain group. Furthermore, many of the companies behind such implementation view their actions as righteous. In such cases, the self-assured companies fail to consult with another and frequently run amuck based on a lopsided theory of self-justification.

In order to prevent such undesirable conditions, it is necessary to create a system for objective internal monitoring on a daily basis. However, to ensure correct functioning of such a system and to enable the prevention of illegal self-imposed rules, it is necessary to overcome the hierarchical relationships which exist inside of an organization. This means that creating self-imposed rules creates a new and different kind of legal risk.

Kiyofumi Koutani Associate Professor, Chuo Law School Areas of Specialization: Economic Law, Antimonopoly Law: Kiyofumi Koutani was born in Hiroshima Prefecture.
In 1993, he graduated from the Chuo University Faculty of Law.
In 1995, he completed the Master’s Program in private law in the Kobe University Graduate School of Law.
In 1998, he completed the required courses for the Doctoral Program in private law in the Kobe University Graduate School of Law, finishing without a degree.
From 1998 to 2000, he served as research fellow at the Japan Society for the Promotion of Science.
From 2000 to 2003, he served as full-time instructor and as Associate Professor in the Osaka Gakuin University Faculty of Law.
From 2004 to 2013, he served as Associate Professor in the Chuo University Faculty of Law.
From 2004, he served as Associate Professor in the Chuo Law School.
From 2014, he served as Director of the Japan Association of Economic Law.