Aug 2016

Competition law in Hong Kong: 9 things you need to know

20160814155916 48836 - Competition law in Hong Kong: 9 things you need to know

Enacted in June 2012, the long-awaited Competition Ordinance (Cap. 619) (the “Ordinance”) came into full force in Hong Kong on 14th December 2015. The significance of the Ordinance lies in the fact that it establishes the first cross-sector competition law regime in Hong Kong. While this is a much welcomed development, we are lagging far behind the international community and other major economies in the region – Singapore adopted a full competition regime back in 2006, while the Anti-Monopoly Law took effect in China in 2008.

1. Haldanes’ experience in competition law

While the Competition Ordinance is still in its infancy, Haldanes is proud to be one of the first few Hong Kong law firms that has substantive experience in advising client on competition issues. Our Partner Felix Ng and Associate Jane Ma advised an internationally renowned fashion brand on the implications of the Ordinance on a potential anti-competitive agreement, and provided practical solutions to avoid a contravention. Internationally, Felix together with U.S. competition attorneys represented an investment banker in a cross-border price-fixing case involving complex financial products. The legal team made attorney proffers to the U.S. Department of Justice to secure a non-prosecution agreement for client.

Further, as early as 2013, Felix participated in the Anti-trust Committee Luncheon of the International Bar Association (IBA) at the Harvard Club of Boston, where he met the first Chief Executive Officer of the Competition Commission (2014 – 2016), Dr. Stanley Wong. In another IBA conference in Hong Kong in July 2016, Felix attended a session on “The Future of Competition Law in Hong Kong” and exchanged invaluable insights with international competition law experts including Mr. Carter Chim of the Competition Commission, Professor Mark Williams of University of Melbourne and Ms. Ameera Ashraf of WongPartnership, Singapore.

In the light of our international experience on anti-trust issues, this article seeks to review the major features of the Ordinance as well as the relevant Guidelines and Practice Directions issued by the Commission.

2. Regulatory framework

The Ordinance has two major “pillars” – the First Conduct Rule prohibits anti-competitive agreements and concerted practices between two or more undertakings, while the Second Conduct Rule targets the unilateral abuse of substantial market power. These substantive provisions are very similar to Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU).

The third “pillar” – the Merger Rule – is of relatively limited significance at this stage. Unlike other major jurisdictions, the Ordinance does not provide for a cross-sector merger control regime. The current scope of the Merger Rule is limited to the telecommunications sector only [Section 3 of Schedule 7 of the Ordinance repeals and replaces section 7P of the Telecommunications Ordinance, Cap 106].

The Ordinance also establishes two specialist institutions – The Competition Commission (“the Commission”) assumes the dual functions of a promoter of competition and an investigative and regulatory body, while the Competition Tribunal (“the Tribunal”) has primary jurisdiction to hear and adjudicate competition-related cases as well as reviews of certain determinations of the Commission

It should be noted that Section 8 of the Ordinance provides a far-reaching territorial application – as long as the anti-competitive conduct harms the Hong Kong market, it could be caught by the Ordinance regardless of where the conduct takes place, where the agreement is entered into, and where the parties are located or incorporated.

3. First Conduct Rule

Section 6 of the Ordinance prohibits anti-competitive agreements and concerted practices whose object or effect is to prevent, restrict or distort competition in Hong Kong.

(i) Agreement & Concerted Practice

An “agreement” is very broadly defined to capture virtually all forms of written or oral agreement and arrangements, including informal agreements and those made by any form of communication (including emails, instant messages etc.)

According to the Commission’s First Conduct Rule Guideline (Paragraph 2.27), a “concerted practice” means “a form of co-operation, falling short of an agreement, where undertakings knowingly substitute practical co-operation for the risks of competition”. Effectively, the notion of “concerted practice” provides the Commission with a fall-back option to target anti-competitive conduct where it is difficult to determine that an “agreement” is in place.

(ii) “Object” of harming competition

Agreements which have an “object” of harming competition are prohibited by the First Conduct Rule. Determining the “object” requires an objective assessment of the purpose or aim of the agreement viewed in its context and in light of the way it is implemented, and not merely the subjective intentions of the parties. [First Conduct Rule Guideline, Paragraph 3.5]

(iii) “Effect” of harming competition

Agreements that fall short of having an “object” of harming competition would still be prohibited if they have anti-competitive “effects”. Such agreements must carry adverse impacts on one or more of the parameters of competition in the market, including (i) price; (ii) output; (iii) product quality; (iv) product variety or (v) innovation.

A hypothetical “but for” test would be adopted by the Commission in determining whether an agreement has anti-competitive effects: what the market conditions would have been absent the relevant agreement in question, and this would be compared to the present market conditions (with the relevant agreement in question).

(iv) Serious Anti-competitive Conduct

One unique feature of the First Conduct Rule is that it makes a distinction between serious and non-serious anti-competitive conduct. The following cartel activities among competitors (i.e. horizontal conduct) are considered serious anti-competitive conduct:

(a) Price Fixing: agreeing on customer prices, discounts and price range;

(b) Market Sharing: allocating products / customers / territories among competitor;

(c) Big-rigging: circumventing bidding or tender processes by agreeing with competitors on bidding term;

(d) Output restriction: controlling production or sales output to drive up prices

(e) Group Boycotts: agreeing not to deal with a specific party

It is anticipated that the aforesaid cartel activities shall be the focus of the Commission’s investigation and enforcement actions.

4. Second Conduct Rule

Section 21(2) of the Ordinance provides that an undertaking that has a substantial degree of market power must not abuse that power by engaging in conduct that has the object or effect of preventing, restricting and distorting competition in Hong Kong.

The Commission shall adopt a two-stage analysis in assessing whether an undertaking has breached the Second Conduct Rule:

First stage – “relevant market” & “substantial market power”

It is necessary to firstly define the “relevant market”, and to assess whether the undertaking possesses a “substantial degree of market power” in this particular market.

The Commission will look at the product and geographic dimensions in defining the “relevant market” [Paragraph 2.6 of Second Conduct Rule Guideline]:-

(i) Product Market

The relevant product market comprises all those products and services which are considered interchangeable or substitutable by consumers due to the product characteristics, prices and intended use.

By way of a simple example, if the Commission has to assess whether bananas and apples form the same product market or not, it will apply a “hypothetical monopolist test”: if a hypothetical firm with a monopoly in a market (the hypothetical monopolist) decides to significantly raise its price of bananas by say 5%, would the consumers then switch to purchase apples as substitutes? If the answer is affirmative, the “relevant product market” would include both bananas and apples.

(ii) Geographic Market

The relevant geographic market comprises the geographical regions or areas where buyers would be able or willing to find substitutes for the products in question.

The Commission will adopt a similar “hypothetical monopolist test” in defining the relevant geographic market. By a related example, if the hypothetical monopolist selling bananas in Hong Kong Island decides to significantly increase its prices by say 5%, would the consumers then switch to purchase apples as substitutes in Kowloon? If the answer is affirmative, the “relevant geographic market” would include both Hong Kong Island and Kowloon.

(iii) Substantial market power

Having defined the relevant product and geographic markets, the next issue is to ascertain if the undertaking concerned possesses a “substantial market power”. The Commission takes the view that a substantial degree of market power arises where an undertaking does not face sufficiently effective competitive constraints in the relevant market. If the undertaking has the ability to profitably charge prices above competitive levels, or to restrict supply below competitive levels for a sustained period of time (generally 2 years or above), it is likely to be considered to have possessed substantial market power [Paragraphs 1.7 & 3.2 of the Second Conduct Rule Guideline].

While market share is an important factor in assessing market power, the Commission has made it clear that it will look at a range of factors including market share in making such a determination. As such, neither the Ordinance nor the Commission’s Guideline stipulates a market share threshold above which an undertaking is likely to be considered to have substantial market power. This is in sharp contrast with other competition law regimes which provide guidance based on market share thresholds. For instance, the European Commission’s general view is that an undertaking with less than 40% market share is unlikely to be considered “dominant”, while the Competition Commission of Singapore specifies that a company with over 60% market share is likely to be considered “dominant”.

The relevance of market share and the definition of substantial market power will likely be a major moot question under the Ordinance, and future decisions of the Tribunal shall provide useful guidance in this connection.

Second stage – “abuse”

Having substantial market power itself will not be penalized under the Ordinance. However, undertakings possessing substantial market power are prohibited from abusing such power and harming competition in Hong Kong

In Paragraph 5 of the Second Conduct Rule Guideline, the Commission has set out non-exhaustive examples of conduct that may constitute an abuse :

(a) Predatory Pricing – Undertaking with a substantial degree of market power sets prices so low that it deliberately foregoes profits in an attempt to force one or more competitors out of the market and/or in an attempt to otherwise discipline competitor;

(b) Tying and Bundling – tying means a supplier makes the sale of one product (the tying product) conditional upon the purchase of another (the tied product) from the supplier. Bundling means a package of two or more products is offered at a discount. These practices would be considered anti-competitive if the competitiors in the tied market are foreclosed.

(c) Margin Squeeze – Undertaking in the upstream market reduces or “squeezes” the profit margin of its downstream market competitor so that the latter is unable to compete effectively.

(d) Refusals to Deal – Undertaking refuses to supply an input to another undertaking, or is willing to supply that input only on objectively unreasonable terms.

(e) Exclusive Dealing – Foreclosure of competitors by preventing them from selling to customers, for example, via imposing exclusive purchase obligations on those customers.

5. Possible Defences – Exemptions & Exclusions

The Ordinance provides for a number of exempletions and exclusions [section 30 and Schedule 1]:

(a) Agreements that enhance overall economic efficiency;

(b) Agreements entered into for the purpose of complying with legal requirements;

(c) Undertakings entrusted by the government to operate services of general economic interest;

(d) Merger agreements;

(e) Agreements of lesser significance – Agreements and concerted practices between firms whose combined turnover is lower than HK$200 million are excluded from the First Conduct Rule (absent any Serious Anti-competitive Conduct). Conduct by an undertaking whose turnover is below HK$40million is excluded from Second Conduct Rule.

6. Investigation & Right Against Self-incrimination

The Hong Kong regime adopts a “prosecutorial model” similar to the United States, Canada and Australia, whereby the Commission has the powers to investigate and prosecute but not to impose penalties or sanctions by itself. This is in stark contrast with the “administrative model” adopted by the European Union and most of the Asian jurisdictions, whereby rulings are made and penalties are imposed by the competition authority itself.

The Commission has extensive powers to investigate suspected breaches of the Ordinance, including:

(a) issuing written notices to obtain documents or information under Section 41 of the Ordinance (“Section 41 Notice”);

(b) compelling individuals to attend interviews by way of a written notice under Section 42 of the Ordinance (“Section 42 Notice”);

(c) “dawn raids” – entering and searching premises upon obtaining warrants from the Court of First Instance.

It should be emphasized that under section 45 of the Ordinance and Paragraph 45.1 & 45.2 of the Investigation Guidelines, a person cannot exercise the right of silence at investigation interviews or refuse to produce documents or offer explanations based on the right against self-incrimination. That said, the compulsory statement obtained is not admissible evidence against that person in any criminal proceedings or proceedings concerning financial or pecuniary penalties.

7. Enforcement Actions – Warning Notice & Infringement Notice

Following an investigation, if the Commission has reasonable cause to believe that an undertaking has engaged in a non-serious anti-competitive conduct under the First Conduct Rule, the Commission must first issue a “Warning Notice” before it is able to commence proceedings before the Tribunal.

A “Warning Notice” is a rather unique feature in the Hong Kong regime – it allows the suspect an opportunity to alter its conduct in order to avoid Tribunal proceedings. That said, the “Warning Notice” will be published on the Commission’s website which could tarnish the reputation of the undertaking concerned. It should be noted that a “Warning Notice” is not applicable to suspected breach of the Second Conduct Rule.

On the other hand, if the Commission has reasonable cause to believe that serious anti-competitive conduct or a contravention of the Second Conduct Rule has occurred, it may issue an “Infringement Notice” before commencing proceedings before the Tribunal (although it is not mandatory). The purpose of the “Infringement Notice” is to allow the suspect an opportunity to enter into binding commitments with the Commission to comply with the requirements of the “Infringement Notice” without the need to go through Tribunal proceedings.

Subject to the aforementioned options, the Commission can commence proceedings before the Tribunal against an undertaking for any contravention of the First or the Second Conduct Rule.

8. Tribunal proceedings

The Tribunal is a specialist court which has the primary jurisdiction to hear and adjudicate on competition cases, and is the only authority that can impose sanctions under the Ordinance. The Tribunal consists of judges of the Court of First Instance (CFI) and has the same jurisdiction and powers as the CFI. Hearings of all proceedings must be conducted in open court in front of one member of the Tribunal, except interlocutory hearings which are heard in chambers.

The Tribunal proceedings will be governed by the Competition Tribunal Rules (Cap 619D) and the Rules of the High Court (Cap 4A) supplemented by two sets of Competition Tribunal Practice Directions. Practice Direction No. 1 sets out procedures for the conduct of Tribunal proceedings, and Practice Direction No. 2 sets out the practice relating to confidential information in Tribunal proceedings.

9.Sanctions

The Tribunal may impose a broad range of sanctions on the party that contravenes the Ordinance, including:

1. Fines of up to 10% of the total turnover of the undertaking concerned in Hong Kong for each year of infringement, for a maximum of 3 years;
2. Directors’ disqualification orders of up to 5 year;
3. Awards of damages to persons suffered as a result of the anti-competitive conduct;
4. Disgorgement of illegal profits or avoided loss;
5. Other forms of contractual and behavioural sanctions to cease the anti-competitive conduct and to restore effective competition in the relevant market;
6. Orders to pay the Commission’s investigation costs

It should be noted that unlike other jurisdictions such as the United Kingdom, the Hong Kong regime is civil in nature and no criminal sanctions are provided for under the Ordinance (except for offences such as obstructing the Commission’s investigation or providing false information).

For further information about our Competition Law Practice and our experts, please click here.

Written by: Felix Ng, Partner & Jane Ma, Associate

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