Struggling to teethe: Japan's antitrust enforcement regime

Fry, James D

I. INTRODUCTION

On February 22, 2000, Commissioner Shogo Itoda of the Fair Trade Commission (JFTC), Japan's independent antitrust enforcement agency, asserted that the JFTC "barks loudly and bites violators hard."1 The JFTC's literature and leadership openly and eagerly claim it is making tremendous strides in enforcing Japan's competition law, which is commonly referred to as the Antimonopoly Act (AMA).2 Despite three major amendments in the past decade stiffening Japan's sanctions, AMA enforcement measures still provide little deterrence or punishment for AMA violations. Admittedly, the JFTC has become more active in the past decade. Nevertheless, feeble enforcement measures available to the JFTC and Japanese courts limit the JFTC to merely gumming violators hard.

The purpose of this Note is to rebut Commissioner Itoda's above assertion. The purpose is emphatically not to attack the efforts of the JFTC or the Government of Japan. Rather, it is to examine the current weaknesses of Japan's antitrust enforcement regime, which stem from systemic shortcomings in both the AMA and the Japanese legal system

as it applies to antitrust enforcement. The arguments of this Note are based upon a rational choice theoretical framework, which assumes that Japan's corporate decision-makers evaluate and rank all possible options and choose the option that will most likely further the corporation's interests.3 The principle of deterrence used by enforcement agencies is based upon this theory.4 Applying this primarily criminal legal theory to a business scenario, the corporate decision-maker will be deterred when the likelihood of getting caught multiplied by the magnitude of the penalty is greater than the profits the corporation will make from the anticompetitive conduct.5 Thus, if the risk of getting caught is low, the penalty must exceed the profit in order to deter.

This analysis is delimited in two ways. First, it focuses primarily on AMA enforcement measures as actually constituted; this discussion neither attempts to speculate how Japan's antitrust enforcement regime should be organized nor addresses in detail non-legal voluntary measures such as threats of adverse publicity and administrative guidance. Second, although comparisons to the U.S. antitrust enforcement regime are used to support the thesis, the discussion does not compare the relative strength of these two systems. The types of available generalizations are limited by the qualitative methodology adopted. Despite strong internal validity, weaker external validity of the arguments presented here prevents broader application of the conclusions to all of Japan's statutes or administrative agencies. Determining causality between specific AMA provisions and degree of deterrence will be left to future quantitative research on the topic.

The body of the Note consists of six sections: (1) exploration of the history of the AMA clarifying the past and present structural flaws of the AMA; (2) explanation of antitrust enforcement procedures and the roles of the JFTC and Japanese courts in this process; (3) detailed discussion of four types of enforcement measures provided by the AMA; (4) examination of amendments to these measures adopted in the past decade; (5) analysis of the effectiveness in deterring and punishing AMA violators; (6) conclusions that Japan's lack of contempt of court powers is the fundamental reason for the ineffectiveness of

Japan's antitrust enforcement regime. This Note proposes that the AMA enforcement provisions, and Japan's legal system in general, are inadequate in deterring and punishing violations of the AMA.

II. THE HISTORY OF THE AMA AND ANTITRUST ENFORCEMENT IN JAPAN

A. The AMA's Toothless Birth

Japan lacked any type of antitrust law prior to the Second World War.6 Cartels and other anticompetitive institutions were considered by many of Japan's scholars and government officials to be an effective way of industrialization that counteracted the harmful effects of free competition.7 After the Second World War, the U.S. Departments of State and War instructed the Supreme Commander for the Allied Powers in Japan (SCAP), General Douglas MacArthur, to increase the "distribution of income and ownership of the means of production and trade" by adopting a vigorous antimonopoly program to dissolve Japan's zaibatsu (family-owned industrial conglomerates).8 The Government of Japan strongly opposed this program.9 However, American academics believed that zaibatsu had hindered the formation of a "peace-minded middle class" in prewar Japan, the formation of which in postwar Japan would supposedly save the country from future military resurgence and aggression.10 The U.S. Government concurred, and on September 6, 1945, a presidential directive instructed SCAP to dissolve the zaibatsu.11 There were seventeen zaibatsu in 1942 that exerted much influence in

all industries throughout Japan.12 The four largest zaibatsu-Mitsui, Mitsubishi, Sumitomo and Yasuda- controlled approximately a fourth of all of the paid-up capital in the Japanese economy prior to the Second World War.13 Indeed, zaibatsu had played a prominent economic and political role in prewar and wartime Japan, the removal of which became a key objective in U.S. reconstruction plans for Japan. 14 However, when MacArthur became reluctant to dissolve these zaibatsu for fear of the instability that might result, the U.S. Departments of State and Justice sent a "Special Mission on Japanese Combines" to Japan to draft and implement a comprehensive antimonopoly program.15 In July 1947, feeling threatened by this and other "interference" by U.S. civil authorities, MacArthur decided to draft and implement his own plan to dissolve the zaibatsu without conferring with Washington.16 Some historians consider this move as a reflection of MacArthur's presidential ambitions back home.17

Meanwhile, in response to U.S. pressure to enact an antimonopoly law,Japan's Ministry of Commerce and Industry had created an antimonopoly proposal that proscribed excessive market concentration unless it was deemed necessary.18 MacArthur found this proposal unacceptable, just as he had found unacceptable Japan's proposal for its new Constitution, and subsequently instructed the Imperial Diet to enact the American-drafted antimonopoly plan." When MacArthur heard that the Diet was about to conclude its session without enacting the antimonopoly bill, he sent an assistant to meet with Prime Minister Katayama with the message that the bill had to "be passed so as not to embarrass" MacArthur who "expected to be nominated for presi

dent."20 MacArthur informed Japan's leadership that he did not expect the bill to be enforced as long as there was "no sign of dissension in Tokyo" in its enactment.21 MacArthur further threatened the Prime Minister by saying that if the Japanese caused him any troubles, he would cause troubles for Japan when he became president.22 Under this duress, with the understanding that enforcement was optional, and without much debate, the Diet enacted the AMA.

B. The Prohibitions of the AA

The original AMA, which remains Japan's fundamental competition law, prohibited three general types of anticompetitive conduct: private monopolization, unreasonable restraints of trade, and unfair methods of competition.23 The private monopolization provision prohibits monopolization intended to control or eliminate other enterprises.24 This provision applies to any individual entrepreneur, conspiracy, or combination of entrepreneurs, or other concerted activity that tries to exclude or control the activities of another entrepreneur and has a substantial anticompetitive impact.25 The unreasonable restraints of trade provision prohibits any concerted activities and agreements that attempt to control prices, output, or the number of participants in the market and has a substantial restraint on competition.26 Both of these prohibitions were modeled after Section 2 of the Sherman Act.27 The third prohibition of unfair methods of competition was taken indirectly from Section 5 of the Federal Trade Commission Act and was intended to supplement the other two prohibitions. It is the basis for the JFTC's five categories of anticompetitive conduct: (1) collective refusal to deal (group boycotts); (2) other refusals to deal; (3) price discrimination; (4) discriminatory dealing; and (5) discrimination in a trade associa

tion.28 Activities prohibited under the Clayton Act, such as regulations on mergers, transfers of business, acquisition of stock, interlocking directorates, concerted activities that affect competition, and establishment of private controlling organizations, were also prohibited in the AMA.29 The original AMA also applied a per se illegal standard against cartels, though this was amended in 1953 to prohibit cartels that substantially restrain competition contrary to public interest.30 Cartels that engage in price-fixing, output restrictions, and territorial and customer allocation are among the most typical cartels deemed illegal under the AMA.xl Finally, the AMA regulates trade associations because they often promote the formation of cartels.32

Although the U.S. AMA drafters in the 1940s ensured that the AMA addressed most of the anticompetitive principles embodied in U.S. antitrust laws, the vague overarching provisions characteristic of U.S. antitrust statutes were a weak guide for Japanese enforcers and led to the divergence of these two antitrust enforcement regimes.33 The JFTC staff was unfamiliar with the U.S. style of antitrust law enforcement, unfamiliar with antitrust terminology, lacked the U.S. common law system with its equitable remedial measures, and lacked effective antitrust guidelines.34 As a result, the JFTC brought only a few cases between 1947 and 1949. Thus began Japan's competition law with its long history of feeble antitrust enforcement.

C. The U.S. Reverse Course and Retreat of the AMA

As MacArthur's presidential hopes came to an end, so did his plans

for antitrust reform.36 Although he remained Supreme Commander in Tokyo for the next three years, he became much less defiant of Washington.37 As Japan's economic recovery continued to falter, Washington began to view MacArthur's antimonopoly program and other reforms as running counter to U.S. interests.38 The new U.S. goal of containing Communism, which resulted from the Korean War and the Truman Doctrine, caused a quick policy change from dissolving zaibatsu to rebuilding Japan into a heavily industrialized country in order for Japan to become a strong ally against the Communists.39 Under the program that has since been called the "Reverse Course," the United States reversed its agenda toward Japan by reviving zaibatsu to create internal stability in Japan.40 The Occupation goal shifted from industrial reform to increasing production and exportation, "even at the cost of reducing living standards."41

On May 4, 1948, MacArthur established a review board in Tokyo to assess the economic reforms that had been implemented since the end of the Second World War.42 This review board subsequently exempted all banks from antimonopoly enforcement in order to ensure the stability and strength of Japan's financial system.43 It also reversed or relaxed all but a few of the 325 orders issued to dissolve zaibatsU.44 The AMA amendments in 1948 and 1949 not only curtailed dissolution of zaibatsu, but even went so far as to encourage the formation of zaibatsu through the following: (1) making previously illegal intercorporate stock ownership legal; (2) easing the rules on mergers; and (3) easing the rules on interlocking directorates.45 Japan even saw the rebirth of many zaibatsu and the promotion of big business in general. From this point until the mid-1970s and possibly as late as the early 1990s, competition considerations were clearly subordinated by the goals of

industrial growth and promotion of exports.46

By 1951, as Japan became more independent, Japan's business community became eager to alleviate many of the burdens created by the AMA.47 This pressure from the business community was primarily due to the depression that followed the end of the Korean War.48 In April 1951, Prime Minister Yoshida proposed a relaxation of the AMA in accordance with the recommendations of Japan's Ordinance Review Committee. The committee argued that the AMA was too strict in light of Japan's economic troubles.49 Although SCAP acquiesced to the 1949 amendments that allowed the Japanese Diet to relax the AMA in order to minimize AMA interference with Japan's economic development, the U.S. Department of State was more reluctant to allow all of Yoshida's proposals.50 However, these were eventually adopted once the occupation ended on April 28, 1952, with the implementation of the San Francisco Peace Treaty.51

Also in 1952 to 1953, the business community and politicians were proposing major exemptions to AMA enforcement. These included exemptions to small and medium enterprise cartels, depression cartels, natural monopolies, resale price maintenance agreements, export and import cartels, air and ground transportation cartels, fire and marine insurance cartels, and cartels that deal with coal, fertilizers, and other commodities.52 In other words, virtually all cartels deemed illegal under the original AMA were legalized.53 These exemption proposals

were modeled after the prewar cartel promotion laws and significantly weakened AMA enforcement once they were adopted by the Diet during the period from late 1953 to 1957.54 Apparently, the idea that pro-cartel policy was needed to combat the negative impact of excessive competition had returned to Japan.55 The introduction of these exemptions marked the virtual end of all enforcement efforts in the 1950s as Japan focused on industrial growth at the expense of competition in order to recover from the destruction that had occurred during the Second World War.56 Moreover, these exemptions illustrate the type of cartel-friendly industrial policy that has continued to dominate Japan's economic law since 1948.57

D. The AMA Amendments of the 1970s Increased the Potency of Enforcement Measures

Antimonopoly enforcement activities of the JFTC picked up in the 1960s.58 However, the AMA still lacked an efficient way of enforcing its orders.59 This would change when the public began to strongly criticize the actions of large corporations during the oil crises of the 1970s.60 As the import price of crude oil quadrupled, competition was severely hindered as Japan's oil producing corporations formed cartels to fix prices.61 As domestic prices dramatically increased, so did the level of public attention and panic over anticompetitive activities.62 The shortcomings of AMA enforcement were a central topic during the political

discussions at that time.63 The AMA violations of oil companies not only convinced the public and government officials of the dangers of cartel activities, but also showed the inherent weakness of cartel regulation in Japan in general.64 Politicians proposed an amendment to the AMA to make it more effective in combating cartels and economic concentration.65

The Government of Japan amended the AMA on June 3, 1977, with the adoption of Law No. 63.66 This Act, which was the first strengthening of the actual legislation, introduced the surcharge system by adding Article 7-2 to the AMA in order to impose an administrative fine on all participants of a cartel that fixes price.67 Antimonopoly enforcement was further strengthened by the addition of nine other provisions to the AMA, the two most important of which were the addition of Articles 8-4 and 95-2. These provisions authorized the JFTC to (1) dissolve or divest a company if concentration in a market was accompanied by barriers to entry, no price savings for consumers, and unusually high profits for the company and (2) impose fines for violation of the AMA from 500,000 yen to a maximum of five million yen (a tenfold increase from approximately $4,373 to $43,725 at current exchange rates).68 This fine was small compared to U.S. standards, but was the first step toward stronger AMA enforcement.69 Although the JFTC was given greater enforcement powers and became more active between 1977 and 1990, its decisions and orders still lacked a way of effective implementation because fines remained low and the criminal penalties were not used enough to be considered a deterrent. III. ANTITRUST ENFORCEMENT PROCEDURE THROUGH THE JFTC AND THE COURTS

A. The Role of the JFTC

The AMA established the JFTC to enforce the provisions of the

AMA.70 The JFTC is the independent administrative and quasi-judicial agency that combines the activities of the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice.71 JFTC members are selected by the Prime Minister from other government agencies, and are appointed with the consent of both houses of the Diet.72 Because the JFTC does not have cabinet rank, it is not viewed as being as powerful as other agencies responsible for economic regulation such as the Ministry of International Trade and Industry or the Ministry of Finance.73 Regardless, it is the most powerful agency when it comes to fulfilling its primary task of administering Japan's antitrust laws or exempting certain agreements from AMA enforcement.74

The JFTC performs a variety of functions under the authority given it by the AMA. These include, inter alia, investigation of suspected AMA violations either ex officio or from a reported violation, the ordering of cartels to pay surcharges, and the ordering of businesses and other organizations that violate competition laws to cease and desist such violations.76 Currently, the JFTC investigates about two hundred cases a year and applies administrative measures to about thirty cases every year.77

B. The Enforcement Procedures and the Role of the Courts

1. Introduction

If the JFTC finds a violation of the AMA from its investigation, then it has two options in taking formal action: (1) issue a recommendation that will "eliminate the violative act;" or (2) begin formal proceed

ings.78 The JFTC prefers issuing recommendations.79 Acceptance of the recommendation by the alleged violators also seems to be the preferred means of resolution as well, given the general propensity in Japanese culture to avoid courtroom confrontations. If the alleged violators accept the recommendation, then the formal hearing process can be avoided by the JF-FC issuing a formal recommendation decision, thus allowing the alleged violators to avoid adverse publicity and other substantial costs associated with a protracted court battle.sl If the alleged violators do not accept the recommendation, the alleged violators can try to sue for cancellation of the JFTC order.82 If certain conditions are met, the JFTC will then begin the hearing process by issuing a complaint against the violators. The following conditions require that no lawsuit be initiated: (1) the recommendation is not accepted; (2) the JFTC determines that the alleged violation severely affects the public interest enough to warrant a formal proceeding; and (3) there is sufficient evidence to prove a violation.83

2. The Hearing Procedure

Although the JFTC may carry out hearings, Hearings Commissioners, who are administrative law judges, conduct most hearings.84 While the hearing process resembles the process used in the courts with the calling of witnesses, the presentation of evidence, and an adversarial

style of litigation, it is not a court of law.85 In fact, Chapter 6 of the Japanese Constitution prohibits the formation of any special courts to hear administrative cases, and charges the Supreme Court and the lower courts to handle all types of cases.86 However, the JFTC has quasi-judicial powers to hold hearings and decide if there has been a violation of the AMA.87 On the other hand, the Hearing Commissioner cannot give a final order, but must send its decision to the JFTC, which then makes the final decision.8 This decision takes effect when a copy of the decision is served on the violator.so In this regard, the JFTC acts as a court of first instance.90

3. The Appeal Process

JFTC decisions can be appealed.91 The alleged violators who are dissatisfied with the JFTC decision can file a suit to quash the JFTC's final decision with the Tokyo High Court within thirty days of when the final decision becomes effective.92 The Tokyo High Court is given exclusive jurisdiction over these lawsuits to quash these decisions.93 However, the alleged violator cannot appeal a consent decision.94 Because the JFTC is considered the expert on AMA matters, the JFTC's final decision is made after a thorough hearing process. Thus, the Tokyo High Court is bound to follow the JFTC's findings of fact, unless it is shown that they are not supported by substantial evidence or that the decision violates Japanese law.95 Article 81 of the Constitution

charges the Supreme Court and the lower courts with deciding whether a law, order, regulation, or administrative disposition is compatible with the Constitution.96 If the court decides the action is unconstitutional or lacks substantial evidence, the court either quashes the JFTC's order or returns the case to the JFTC for further hearings.97 If the alleged violators are displeased with the decision of the Tokyo High Court, the Supreme Court can hear an appeal.98 In order to provide the reader with some idea of the magnitude of the number of orders and appeals involved in this process, the JFTC made roughly one thousand orders against company conduct by the end of 1996.99 Thirty-four appeals to the Tokyo High Court were made to quash these orders.loo The JFTC orders were affirmed in twenty-nine of these appeals, four were quashed and sent back to the JFTC, and one went to the Supreme Court.101

IV. ANTITRUST ENFORCEMENT MEASURES

The AMA provides three types of enforcement measures in punishing and deterring AMA violations: (1) administrative penalties, such as surcharges and injunctions on price cartels; (2) criminal penalties; and (3) private damage actions.102 Administrative fines and criminal penalties have been the JF[C's primary means of deterrence with regard to antimonopoly enforcement.103 Although private damage actions are a potential deterrent, these are rarely brought for various reasons discussed in Section V below. All of these enforcement measures are insufficient deterrents and penalties to AMA violations.

A. Administrative Surcharges

The principal administrative sanction against AMA violations is the surcharge payment order. This sanction was introduced to Japan's antimonopoly enforcement regime by a 1977 amendment to the AMA

responding to the formation of cartels during the first oil crisis. 104 Prior to this amendment, the AMA only had a small criminal penalty, allowed private damage suits, and authorized the JFTC to prohibit the continued existence of a cartel.105 Without a suit by the JFTC or a private individual, there was virtually no other way to induce Japanese companies to comply with the AMA.106 Even when the JFTC brought an action, the conduct often went unpunished, and therefore, subsequent conduct went undeterred.107 The 1977 amendment introduced Article 7-2 to the AMA, which introduced surcharges to Japan's arsenal of enforcement measures.108 The surcharge system relies on an administrative measure, not a criminal penalty, which allows the JFTC to punish AMA violations without relying on the courts.109 Under this system, the JFTC levies the surcharge in an effort to put illegal cartels at an economic disadvantage by retaking overcharge profits.110 Some analysts and officials feel these surcharges have been the most successful enforcement measure in Japan with regard to relative efficiency in enforcing AMA provisions.111

The surcharge is imposed on all entrepreneurs of a cartel or trade association and its members who engage in any unreasonable restraints on trade that affect price or output of a good or service. 12 The JFTC is not only empowered to order the violator to pay the surcharge, but it is required to levy the surcharge! 13 Since the surcharge payment order is

mandatory, JFTC discretion is eliminated once it has found a price-- affecting cartel.114 The JFTC is also unable to exercise discretion in choosing the rate for calculating the surcharge.115

The calculation of the surcharge is somewhat complex. The surcharge rate applicable to the category of business activity is multiplied by the total amount for goods and services sold during the period when the cartel was engaging in the illegal conduct by this rate.116 The rates were as follows: large wholesalers, 0.5% of sales; small to medium wholesalers, 0.5%; large retailers, 1%; small to medium retailers, 1%; large manufacturers, 2%; small and medium manufacturers, 2%; large companies engaged in activities other than wholesale, retail, and manufacturing, 1.5%; and small to medium companies engaged in activities other than wholesale, retail, and manufacturing, 3% of sales. 117 These rates were amended in 1991.118 The distinction between small, medium, and large firms is based upon number of employees and amount of paid up capital.l 19 The surcharge due will be one-half of this product.120 Surcharge payment orders of less than 200,000 yen will not be made (approximately $1,749 at current exchange rates).121

Once this surcharge has been calculated, the violator is given notice of the amount, the figures used in the calculation, why this surcharge is being imposed, and the payment deadline.122 If the violator does not pay the surcharge by the deadline, a reminder of the surcharge due is sent along with a new deadline.123 The JFTC may then impose a late charge of 14.5% per annum of the original surcharge amount.124 If the violator continues not to pay, the JFTC may get a lien on the violator's

property, which is superior to all claims except taxes.125

In addition to these surcharges, administrative fines can be imposed for noncompliance with JFTC orders or court injunctions.126 The maximum fine for disobeying a JFTC order is 500,000 yen (approximately $4,373 at current exchange rates), whereas the maximum fine for disobeying a court injunction is 300,000 yen (approximately $2,624 at current exchange rates). Although these amounts represent a tenfold increase over the pre-1977 amounts, it is clear these small amounts would not be much of a deterrent, even for an individual. Moreover, such fines are rarely imposed.128

B. Criminal Penalties

Besides administrative sanctions, the AMA provides for criminal penalties.129 The AMA actually has relatively stiff criminal penalties against AMA violators since it was patterned after the U.S. antitrust laws."' Penalties provided by the AMA for its violation include criminal fines and imprisonment for private monopolization, unreasonable restraint of trade (cartels), and trade association activities.131 Prior to the 1977 amendment, the maximum criminal fine was 500,000 yen (approximately $4,373 at current exchange rates) for "private monopolization and unreasonable restraints of trade in violation of Articles 3 and 8." 132 The 1977 amendment increased this amount tenfold to 5 million yen (approximately $43,725 at current exchange rates).133 Furthermore, a maximum of three years imprisonment with compul

sory labor can be applied to these same types of violations under Article 3.134 It is important to note here that there are no criminal sanctions applied to unfair business practices in the 1977 amendments, though some were included in the JFTC's 1974 amendment proposal.135 The JFTC is left with just the simple prohibition of unfair business practices in Article 19 and the administrative measures of surcharge payment orders and orders to cease and desist to combat violations that fall short of being categorized as a horizontal price or output restriction.156

To start a criminal prosecution, the JFTC must first file the case with the Public Prosecutor General.137 The Public Prosecutor is unable to begin a criminal investigation into AMA violations without this filing because Japan's competition policy requires that administrative measures first be used to try to revive competition before other measures are used.138 To give the reader an idea of the magnitude of these types of criminal prosecutions filed by the JFTC, the JFTC brought six criminal prosecutions in the 1990s.139 Of these six, two are still being litigated while all of the others received a guilty verdict. 140

Noncompliance with a court or administrative order may also be subject to a criminal sanction.141 For example, with the AMA, noncompliance with the JFTC's order calls for a maximum criminal fine of three million yen (approximately $26,235 at current exchange rates) and a maximum imprisonment term of two years.142 However, as discussed earlier, these criminal sanctions are hardly used in Japan, thus eliminating them as an effective deterrent to noncompliance.143 The JFTC has reportedly never sought a criminal penalty against noncompliance of an order.144

C. Private Damage Actions

The AMA also provides for private damage actions.145 A person is entitled to compensation for damages if injured by the following: (1) private monopolization; (2) undue restraint of trade or unfair business practice; (3) entrance into an international agreement unduly restraining trade or establishing an unfair business practice; (4) efforts to limit the number of entrepreneurs in a field of business; or (5) causing of other entrepreneurs to engage in unfair business practices.146 The private party who thinks she has been injured by anticompetitive conduct files a complaint under Article 45 (1) with the JFTC, which then investigates the matter. 147 Once the JFTC makes a final decision as to whether there has been a violation, the private individual can then file a damage suit.148 Although this action allows the private victim to recover from her damages, this action has a second purpose of deterrence by increasing the penalty for an AMA violation.149 The alleged AMA violator is held strictly liable for these damages, which removes the entrepreneur's ability to claim exemption from liability due to his or her lack of willfulness or negligence.15 Unlike the United States, Japan's private antitrust suits lack treble damages for the winning plaintiff.151 However, the winning plaintiff can be awarded attorney's fees.152 D. Injunctive Relief

The AMA in 1947 allowed the Tokyo High Court to grant a tempo

rary injunction against alleged AMA violations when out of urgent necessity.153 Such an urgent necessity is where the normal process of the JFTC reaching a decision and making an order might take so much time that competition will be hurt unless an injunction is immediately applied.154 The AMA also gave the JFTC power to issue cease and desist orders and to take other measures required to stop the violation. 55 Some of the measures that the JFTC is able to force upon the violators are "partial transfers of business operations, transfer of shares, rescission of agreements and dissolution of cartels."156 Although the order might be delayed if the respondent deposits the bond or security that the Court requires, such a stay of an order has never been allowed.157 The JFTC has requested this type of injunction in six cases; an injunctive order was granted in five cases and the JFTC dropped the sixth motion when the respondent agreed not to go ahead with the merger until the JFTC made a decision on the case.158

V. AMENDMENTS To ANTITRUST ENFORCEMENT MEASURES IN THE PAST DECADE

Countries have been calling for Japan to open up to foreign competition since the 19"70s.159 Pressure intensified in the mid-1980s when the U.S. Government alleged Japanese firms and trade associations violated Japan's competition law, which put foreign firms at a competitive disadvantage.160 Two series of negotiations between Japan and the United States resulted from this increased pressure, the first of which was the Market Oriented Sector Selective (MOSS) talks of 1985, followed by the Structural Impediments Initiative (SII) talks of 1989.161 During these talks, the United States tried, inter alia, to encourage

Japan to adopt reforms to make AMA enforcement stronger and more of a deterrent to potential violators.162 In doing so, the U.S. negotiators hoped to make Japan's markets more accessible to foreign firms. 163

Following these talks, the Government of Japan agreed to make some changes to competition law and policy. The most significant of these included changes allowing: (1) the JFTC to bring greater formal actions against AMA violators, especially price-fixing cartels and bidrigging arrangements; and (2) the government to increase AMA's calculation rates of surcharges.164 It is unclear whether these changes were actually implemented because of these talks or because of Prime Minister Hashimoto's broad reform program to make Japan more globally competitive as a result of the 1990-91 stock market crash.165 Regardless, it is safe to say that foreign and domestic pressure combined to encourage the Government of Japan to commit to making competition law enforcement more effective.166 The Government of Japan has since adopted three amendments to the AMA to help in deterring AMA violations and punishing violators: (1) greater calculation rates of surcharges; (2) greater criminal penalties; and (3) the introduction of the injunction relief system. 167 Despite these changes, many within the U.S. business community and government officials still complain that the Government of Japan needs to further increase both the penalties for AMA violations and its efforts to make private party actions a more viable option.168 Following a brief discussion of each of these amendments is an explanation of why these amendments still do not allow the JFTC to bite violators hard.

The amendment to increase the calculation rates of surcharges was adopted by the Government of Japan in April 1991, but it did not take effect until July 1991.169 This amendment changed the rates in several

ways. The rate for large wholesalers, small to medium wholesalers, and large retailers doubled. The rate for small to medium retailers remained the same. The rate for large companies engaged in cartel activities other than retail, wholesale, or manufacturing quadrupled, and the rate for small to medium companies engaged in cartels activities other than retail, wholesale, or manufacturing doubled.170 Most of these rate increases are quite a substantial percentage increase from the previous rates, especially with regard to the quadrupling of the rate levied against price cartel members engaged in cartel activities other than retail, wholesale or manufacturing.

The amendment to increase the maximum criminal fine for monopolization and unreasonable restraint of trade by an enterprise or trade association was adopted and implemented at the end of 1992.171 This amendment increased the fine from five million yen to 100 million yen for violations of Articles 3 and 8 (1) (i) of the AMA, exactly twenty times the original amount.172 Not only did the criminal penalties increase in the 1990s, but the JFTC announced on June 20, 1990, that it would seek criminal penalties more frequently for repeat offenders and the more serious AMA violations of "price fixing cartels, supply restraint cartels, market allocation cartels, bid rigging, and group boycotts."173

The amendment to introduce the injunction relief system against AMA violations was adopted in May 2000, during the 147th Diet session, though it will go into effect within six months from January 6, 2001.174 This amendment allows any person whose interests are infringed by unfair business practices prohibited by Articles 8 (1) (v) and 19 and suffers serious damage to demand suspension of these activities.175 Although the lawsuit is filed directly with a court, the JFTC may be allowed to share its opinion on the case with the court. 176 In this regard, it seems as though private damage actions might become more of a deterrent to AMA violations as this new system is implemented because the right of victims to sue for damages is emphasized with this amendment However, it seems equally likely that nothing will actually change.

VI. CAUSES OF THE WEAKNESS OF AMA ENFORCEMENT MEASURES

Many business people and foreign government officials still complain that the penalties applied to AMA violations are insufficient, the JFTC is still too reluctant to enforce the AMA, and "not enough has been done to encourage private party actions."177 The following are some of the potential reasons why these enforcement measures are inadequate in deterring and punishing AMA violations.

A. Unproductive Reliance on Administrative Guidance

One potential explanation for ineffective AMA enforcement is Japan's general reliance on administrative guidance instead of strict legal enforcement to influence the activities of companies. 178 Administrative guidance is informal action that is not legally binding on the recipient; rather, it relies on voluntary compliance. 179 Japan's administrative agencies typically provide guidance through informal recommendations, advice, or request to alleged violators before resorting to formal statutory actions.lao The goal in providing administrative guidance is to foster the cooperation of the recipients of the guidance through persuasion. 18 This type of guidance was particularly useful to regulators during Japan's postwar economic boom because it was extremely difficult and costly for legislation and formal regulation to keep up with the increasing demand for regulation in Japan's ever-changing economy.182

The power of the agency and the strength of the economy have often determined the effectiveness of administrative guidance. 13 When Ja

pan's economy was trying to recover from the destruction of the Second World War and the recessions of the 1970s, industries were eager to accept the guidance because they needed the Government of Japan's assistance.184 However, as the economy has matured and the industries have become more independent and economically powerful, they have been less willing to follow administrative guidance.185 This has left the JFTC in a difficult position of having to resort to relatively foreign and inflexible statutory enforcement measures.

Administrative guidance, which allows both parties to avoid potentially embarrassing confrontations, has been the preferred method of influence for Japan's regulators.186 Not only do Japan's agencies and companies dislike legal confrontations because of high costs and long delays, but there also seems to be a cultural aversion to law and legal matters in general.117 Although the administrative guidance system allows for non-legal resolution of AMA violations in accordance with Japanese culture and provides maximum flexibility to both parties at a low cost, it has a major disadvantage of having no way of legally enforcing compliance.188 Without a legally binding order or penalty, companies lack an incentive to comply with the guidance when it runs contrary to the company's rational self-interest.

As mentioned above, the AMA provided the JFTC with legally binding enforcement measures from the beginning. However, these measures did not reflect Japanese weltanschauung because they were simply imposed on Japan during the Occupation.189 As a result, the JFTC developed its own style of nontransparent guidance-unofficial notification to possible violators and informal warnings to violators after formal investigation! 90 It was nearly three decades before Japan's economy was strong enough that its industries no longer needed assistance. By this time, formal AMA enforcement had severely atrophied due to the JFTC's lack of experience with enforcing these measures and the AMA's own lack of contemporary, potent enforcement measures in proportion to the strength of modern industry. The

JFTC struggled to cut teeth during its transition to a more vigorous enforcement regime throughout the 1990s. However, the transition has been slow and the amendments painfully inadequate.

B. Ineffective Administrative Sanctions

On the implementation level, the JFTC has consistently implemented the mandatory administrative surcharges.'9' As a result, surcharges have raised a large amount of money for the Government of Japan.192 However, it is unclear whether this system truly deters AMA violations. For example, these administrative surcharges have been well accepted, which might be an indication of its weak deterrent impact since one would expect these to be largely unpopular with Japan's big business community if they significantly threatened potential violators.193 While the rate calculations of surcharges have been greatly increased from a relative perspective, cartel members might think of surcharges merely as a cost of doing business, and are not deterred from pursuing their price-related anticompetitive activities.194 For example, these remedial surcharges fail to restore price competition because prices typically do not change even after these measures are levied against all the cartel members in an industry."95

There are three systemic reasons for why the surcharge system is a weak deterrent to AMA violation. First, the detail and rigidity of the surcharge calculation and payment provisions reflect the general weakness of Japan's civil enforcement system because the JFTC and the courts are unable to fashion an equitable remedy according to the specific circumstances of the violation.196 Second, the mandatory nature of the surcharge system hinders this system from becoming an effective deterrent; potential violators are able to calculate the surcharge before they even begin to engage in the anticompetitive con

duct and include this cost in calculations to determine the price or quantity the cartel should set.197 This problem is magnified by the lack of relationship between the company's profits derived from its anticompetitive conduct and the surcharge levied.198 This exclusion virtually ensures that surcharges will not be painful to offending companies, which can increase prices accordingly to compensate for the surcharge beforehand. This is a situation where effective criminal penalties are most needed. However, the JFTC's abysmal record in using criminal sanctions neither punishes such calculating AMA violators nor deters such manipulation. Finally, collection of civil fines, such as these surcharges, for violation of an administrative order depends upon attachment of property.199 This means that payment depends upon the violator's ability to pay the fine or willingness to obey the court order, even though it is unwilling to obey the agency order.e In theory, the court order could be unenforceable against those who lack property or who are able to hide their possessions through fraud.201 Courts in the United States and other common law countries, on the other hand, have contempt of court powers that enable the courts to provide prompt fines of an unlimited amount or imprisonment for an indefinite term, or both, in order to coerce compliance with the order.202 Part VI below addresses this point in greater depth.

C. Ineffectual Criminal Penalties

Criminal penalties could be a strong deterrent against AMA violations-a maximum term of imprisonment of three years seems rather tough.2" However, the fact that criminal penalties are provided in a statute does not mean that these types of sanctions are applied to violations. Indeed, Japan has not considered criminal penalties as necessary sanctions against AMA violations.204 It is this limited reliance on criminal sanctions-not a lack of severity-which makes these sanctions weak.205 For example, between the years 1949 and 1984, only

six criminal actions were brought for antitrust violations, three of which were brought in 1949.206 Only one of these six cases is considered a significant criminal prosecution. Furthermore, the JFTC has apparently never imposed a criminal fine for a violation of an order. Between 1990 and 2000, the JFTC has made only six criminal accusations one against a price cartel, one against a market share cartel, and four against cartels that engaged in bid rigging.209 Although two are still in litigation, the violators in the other four were all found guilty. The first of these six criminal charges, filed in 1991, was the first criminal prosecution filed by the JFTC in seventeen years.211

The most likely reason for why criminal sanctions have not been relied on more in enforcing the AMA is the unwieldy nature of criminal sanctions in general. Criminal sanctions are difficult to implement in Japan because of institutional limitations on the JFTC.212 First, JFTC staff is subject to political pressure with regard to filing criminal charges, since they are all appointees chosen from other government agencies.213 This problem is compounded by the JFTC having the exclusive right to file criminal charges against AMA violations.4 Second, there are only a small number of prosecutors to manage all types of litigation, not just criminal litigation.215 Finally, Japan's criminal justice system is based on a corrective philosophy rather than a punitive one.216 As such, violators are given a chance to avoid criminal charges by correcting their actions and compensating the victims.217 These limitations hint at the possibility that the Government of Japan would be forced to change the law out of political necessity if the JFTC started bringing more criminal prosecutions, which would entirely

remove any potential deterrence from such increased prosecution.218 Regardless, the JFTC has committed itself to bringing more criminal charges against anticompetitive activities.219 Only time will tell whether the JFTC will follow through with its promise.

Even if the JFTC brings more criminal charges against violators, maximum Japanese fines are so much smaller than the maximum U.S. fines that enforcement can hardly be considered tough. For example, the 1992 amendment to criminal fines increased the maximum possible fine to 100 million yen (approximately $874,508 at current exchange rates) against corporations.221 On the other hand, the United States has two alternative maximum fines. The first allows a maximum fine on individuals of $350,000 and $10 million for corporations, whereas the second allows a maximum fine on both individuals and corporations equal to twice the amount of money made by the violation or twice the loss occasioned by the violation.222 According to these numbers, U.S. maximum criminal fines against corporations for anticompetitive conduct are at least 10 times stronger than Japan's equivalents. Furthermore,Japan's maximum fines apply only to a small subset of the most serious types of AMA violations.223

D. Infrequent Use of Private Damage Actions

Private damage actions brought under the AMA provision have shown to be weak.224 Although the AMA provides for such claims, practically none of Japan's antitrust suits have been brought in the form of private actions; when they are brought, the claimant never prevails. There are several possible reasons for this paucity of private damage actions in Japan. First, Japan's criminal and civil law system lacks the treble damages, or even punitive damages, of the U.S. system

for antitrust violations. As a result, private individuals in Japan who are injured by antitrust violations have less of a monetary incentive to file lawsuits than their American counterparts, and therefore, damage actions lack sufficient deterrent power.227 Second, Japanese prohibitions against class action suits for damages, the extremely limited scope of discovery available in Japan, and the difficulty of satisfying legal proof of violations and damages all make it more difficult for victims to bring private damage actions.228 With regard to discovery, Japan's legal system does not have processes that allow for interrogatories, requests for admission, or depositions comparable to those of the United States.229 In order to have a document produced in preparation for litigation in Japan, the specific document must be identified, the holder of the document identified, the document's contents summarized, the fact to be proved with the document specified, and several other requirements must be met.230 Finally, the high cost of litigation due to long trials and high attorney fees is just another barrier to private damage actions.231 All of these factors together inhibit the filing of private damage actions, which effectively removes this option as a viable deterrent to AMA violation. Some academics claim that without the threat of these private suits, "[a] business executive considering fixing prices in Japan has practically nothing to lose."232

E. Inadequate Injunction Measures

Although the JFTC is required to follow a formal quasi-judicial procedure in issuing cease and desist orders, the JFTC is neither a court of law nor do its orders carry much weight."' The AMA, which is based on American concepts, gives the JF[C the right to "take any other

necessary measures to eliminate" violations of various prohibitions.234 Although this provision seems powerful on its face, the AMA fails to provide the JFTC with sufficient remedial powers to effectively enforce these orders, such as the equity power given to U.S. administrative agencies that go to the courts.235

There are two potential benefits in the JFTC going to the courts for an order or injunction. First, the alleged violators are allowed to defend themselves in front of a more neutral forum.36 Second, turning to a court for a decision on the violation may increase the adverse publicity for the violator, thus increasing the likelihood that the violators will comply with the JFTC's order without going to court.237 While these benefits may be significant, they seem to apply equally to all jurisdictions. However, one major difference between the United States' and Japan's antitrust enforcement agencies going to a court for an order is that Japan's courts lack contempt powers. Court orders and injunctions in the United States are sought in order to increase the incentives to violators to comply with the order or injunction by the contempt of court charges that arise from noncompliance.238 Lack of contempt powers is the major reason an American administrative agency would go to a court.239 The United States and Japan are similar in that court orders and administrative orders are technically equal in effectiveness because they are equally legally binding.240 However, the difference lies in the fact that Japan's courts are less able to enforce their orders.241 This difference is significant in assessing the toughness of Japan's antitrust enforcement regime.

VII. JAPAN'S LACK OF CoNTEMPT POWERS AS THE FUNDAMENTAL FLAW IN AMA ENFORCEMENT

Japan's legal system is based on a Romano-Germanic civil law system with some Anglo-American principles.242 Civil law systems, like that of Japan, do not provide the courts with contempt powers to remedy

noncompliance with an order in an equitable manner.243 As a result, civil law courts are considered weak visa-vis common law courts in enforcing their orders.244 In common law systems, these contempt powers are "exercised without any external constraints."245 If a court's efforts to enforce a civil order continue to go unheeded, sanctions that would be considered civil contempt judgments would become punitive and would no longer be considered ciVil.246 Criminal contempt is then used to protect the court's authority with even tougher penalties.247 In Japan, as in other civil law countries, the courts have virtually no role in civil enforcement of regulations- except for hearing appeals of agency decisions-because they lack contempt powers.248 However, AMA enforcement, on its face, makes Japan seem somewhat unique in that the AMA, based on an American common law concept, allows the JFTC "to take any other necessary measures to eliminate" violations of various prohibitions.249 Upon further inspection, this provision is more a result of the American drafters' failure to consider the underlying deficiency caused by Japan's lack of contempt powers.250 This conclusion is apparent by the AMA's failure to provide the JFTC with the enforcement powers needed to make this provision effective as a penalty or as a deterrent.251 Some analysts consider this provision a "moribund vestige of Occupation reforms."252 Although Japan has tried to remedy the

AMA's shortcomings through amendment, the basic features of the law, along with its fundamental weaknesses, remain intact.253 As a result, neither the JFTC nor the courts in Japan have as strong powers to construct and apply a remedy for noncompliance as the contempt powers of the U.S. common law system.254

That said, civil law systems have a potential substitute for contempt of court in the form of criminal or administrative sanctions, or even private damage actions.215 In Japan, noncompliance with a court or administrative order may be subject to a criminal penalty.256 However, as discussed above, these criminal sanctions are rarely brought in Japan, thus eliminating them as an effective substitute for contempt powers. Additionally, administrative fines can be imposed for noncompliance with JFTC orders or court injunctions.258 However, as discussed above, these fines are woefully inadequate in magnitude and are not even brought against a party for noncompliance with an order. Lastly, there are significant institutional barriers to bringing private damage actions against AMA violations, which virtually eliminates them as a viable deterrent. Without an effective substitute for contempt powers, Japan is left with no effective deterrent to AMA violation or JFTC order noncompliance. Even if Japan had effective alternatives to contempt powers, these would always be inferior since the basic idea of the contempt power is "violative of basic philosophical approaches to the relations between government bodies and people," which is the approach supposedly espoused by civil law countries.259 Thus, this author does not share Commissioner Itoda's confidence that the JFTC "bites violators hard," given the AMA enforcement provisions as presently constituted.

VIII. CONCLUSION

This Note would be remiss in not recognizing the laudable efforts of

the JFTC in the past decade to enforce the AMA with the tools of enforcement the AMA provides. The Government of Japan's efforts to increase the size of the JFTC staff and the amount of its budget has allowed for greater investigation into AMA violations and are commendable.26 However, the following points outline the shortcomings of Japan's antitrust enforcement regime, as discussed above:

Mandatory surcharge rates allow cartels to calculate penalties beforehand and can include these penalties as costs of doing business when determining target price.

* Japan's surcharge rate calculations, which lack a relationship to overcharge profits and fail to generate sufficiently large penalties to retake all of the profits in a consistent manner, do not remove the monetary incentives for corporations and trade associations to collude.

* Criminal sanctions could be a successful means of deterring AMA violations in conjunction with the surcharge system. However, criminal sanctions are used too infrequently to be an effective deterrent because of institutional and systemic limitations provided by the AMA and Japan's legal system.

* Private damage actions could also be an effective means of deterrence, though low monetary incentives for victims and the high costs and difficulties associated with litigation in Japan inhibit the filing of such suits.

* Japan's courts lack contempt powers or a comparable substitute that could ensure compliance with the JFTC's facially powerful cease and desist orders.

These deficiencies call for much more than just cosmetic surgery. Short of starting anew with an antitrust enforcement regime that is tailored specifically to Japan's legal system and corporate culture, no amount of effort by the JFTC can put teeth into the AMA's otherwise toothless enforcement measures.

JAMES D. FRY*

* J.D. Candidate, 2002, Georgetown University Law Center; Law clerk, Office of the Legal Adviser, U.S. Department of State. The views expressed here are the author's own and not those of the Department of State. The author wishes to thank Professors Judy Whalley and Scott Flick of the Georgetown University Law Center for their invaluable guidance with this Note.

Copyright Georgetown University Law Center Summer 2001
Provided by ProQuest Information and Learning Company. All rights Reserved