Apr 2021

Five Major Trends in Competition Law – A Year in Review: 2020/2021

2020/2021 has been a remarkable year for competition law practitioners in Hong Kong: the Competition Commission (“the Commission”) has been increasingly active in initiating investigations and commencing enforcement actions against parties which contravened the First Conduct Rule and the Second Conduct Rule of the Competition Ordinance (Cap 619, “the Ordinance”). Whilst a number of proceedings have been commenced at the Competition Tribunal (“the Tribunal”), the Commission has also granted leniency and issued infringement notices to parties who were cooperative throughout the investigation process.

Upon reviewing the recent enforcement actions of the Commission and judgments made by the Tribunal, we notice five major trends in antitrust enforcement which we shall discuss below:

1. Issuance of Infringement Notices

Under section 67 of the Ordinance, if the Commission has reasonable cause to believe there has been a contravention of the First Conduct Rule (involving serious anti-competitive conduct) or the Second Conduct Rule, and that no proceedings have been brought in the Tribunal in relation to the suspected anti-competitive conduct, the Commission may issue an infringement notice to such person and offer not to bring proceedings on the condition that the person makes a commitment to fulfil the requirements in the notice.

In 2020 and 2021, infringement notices were issued in two cartel cases:

(i) Price-fixing in an IT bidding exercise[1]

Nintex Proprietary Limited (“Nintex”) is the supplier of an IT workflow automation software. Evidence showed that a former representative of Nintex in Hong Kong imposed influence on two resellers, Quantr and a Company X to coordinate on the proposals and fee quotes they would submit to Ocean Park in a bidding exercise for the supply and installation of Nintex’s software in 2017.

(ii) Price-fixing and/or control over the prices of tourist attractions and transportation tickets sold at hotel premises in Hong Kong[2]

A tour counter operator and six hotel groups had passed on pricing information between Gray Line Tours of Hong Kong Limited and Tink Labs Limited to facilitate the fixing and/ or controlling of the prices of tickets sold to tourists at service counters or through designated devices in 2016 and 2017. Despite not participating in the sale of tickets, the seven parties had actively contributed to the implementation of the price-fixing cartel, thereby acting as facilitators in the cartel.

Factors considered by the Commission when issuing infringement notices

In deciding whether to issue an infringement notice to a contravening party or to bring proceedings against it, the Commission took into account various factors, including:-

– Whether the party concerned had knowledge of the anti-competitive conduct committed by its staff;

– Nature of the party’s conduct in the anti-competitive arrangement; and

– Whether the party concerned had early and active cooperation with the Commission’s investigation.

Commitments to be made

Upon receiving an infringement notice, the recipient will have to make commitments to comply with the requirements stated therein,[3] including:-

– Admission of its contravention of the First Conduct Rule;

– Cessation of anti-competitive conduct;

– Circulation of materials published by the Commission (e.g. the Infringement Notice, the Commitment, brochures, Guideline on the First Conduct Rule);

– Adoption of competition compliance program/ appointment of an independent compliance advisor;

– Submission of compliance review, compliance report and annual report to the Commission;

– Attendance at training provided by the Commission.

In contrast with the uncertainties brought by enforcement proceedings (in terms of the outcome, time and costs incurred), the contravening party can avoid penalties by taking steps to comply with the commitments made in an infringement notice. Undertakings or persons who are under investigations by the Commission should consider cooperating with the Commission at an early stage to increase its chance of obtaining an infringement notice.

2. Successful Leniency Applications by Cartel Members

The abovementioned price-fixing cartels were discovered by the Commission through leniency applications.

Under the revised Leniency Policy for Undertakings Engaged in Cartel Conduct and the Leniency Policy for Individuals Involved in Cartel Conduct, the first undertaking or individual that reports a cartel to the Commission and meets all the requirements for leniency may enter into a leniency agreement with the Commission. The Commission will commit not to commence proceedings (including proceedings for a pecuniary penalty) against the leniency applicant. Besides, as seen in Nintex’s case, despite the publishing of infringement notices and press release regarding the cartel, the identity of the leniency applicant is protected in these documents.

With the non-disclosure of the leniency applicant’s identity and exemption from penalties, a member engaging in a cartel conduct is strongly encouraged to take the initiative and make a report to the Commission to avoid liabilities and penalties.

3. Pecuniary Penalties – a Four-step Approach

Following the Tribunal’s ruling in Competition Commission v W. Hing Construction Company Limited & Others[4] (“W. Hing”) in April 2020 and the issuance of the Policy on Recommended Pecuniary Penalties by the Commission in June 2020, a four-step approach is formulated for determining the pecuniary penalties:

– Determining the base amount: value of sales x gravity percentage x duration multiplier;

– Making adjustments for aggravating, mitigating and other factors;

– Applying the statutory cap; and

– Applying any cooperation reduction and considering the respondent’s inability to pay.

In 2020 and 2021, further decisions were made regarding the factors to be taken into account when calculating the pecuniary penalties.

Gravity percentage

When determining the base amount in step (i) above, three elements will be considered by the Tribunal:

– value of sales

– gravity percentage; and

– the duration multiplier.

In Competition Commission v Fungs E&M Engineering Company Limited and others[5] (“Fungs E&M”), the Tribunal recognized that “a basket of factors” should be considered when determining the gravity of an infringement, which include:

– the nature of the infringement;

– the number and size of the undertaking(s) involved;

– the proportion of the market controlled by the undertaking(s) involved;

– the situation of the market when the infringement was committed;

– the volume and value of the goods or services in respect of which the infringement was committed;

– the geographic scope of the infringement;

– the precautions taken by an undertaking to prevent the infringement from being exposed;

– the role played by an undertaking in the establishment of the infringement;

– the profit which an undertaking was able to derive from the infringement; and

– the threat that the infringement poses to the objectives of competition law.

Ultimately, upon comparing the facts and circumstances in W. Hing and the present case, the gravity percentage was fixed at 20%, which was lower than the 24% adopted in W. Hing case.

Lump-sum approach

Whilst the Tribunal may impose a fine of up to 10% of the respondent’s Hong Kong turnover for each year in which the contravention took place (for a maximum of 3 years), problems arise when a respondent did not generate any turnover from the sales of the relevant product in Hong Kong and the “value of sales” did not reflect the actual scale of the undertaking’s activities in that product.

In response to this, the Commission proposed and the Tribunal accepted in Competition Commission v Nutanix Hong Kong Limited and others[6] that a lump-sum approach can be adopted. When fixing the lump sum, the Tribunal may take into account the recommended pecuniary penalties for the other respondents in the same case, the role and culpability of the respondent relative to the other respondents and other circumstances of the case. It will then proceed to consider other steps, including whether the lump sum is above or below the statutory cap, cooperation discount to be applied – in reaching a final recommended penalty for that respondent.

4. Adoption of Carecraft Procedure

In cases where the parties of an enforcement proceedings are able to agree on the terms of the orders to be imposed on the respondent(s), they have to submit the proposed orders to the Tribunal for approval pursuant to rule 39 of the Competition Tribunal Rules (Cap 619D). This was the situation in Competition Commission v Kam Kwong Engineering Company Ltd and others (“Kam Kwong”)[7], where consent summonses were filed to apply for the disposal of the proceedings. The Tribunal had to determine whether the Carecraft procedure[8] is the correct way to dispose of the proceedings against the respondents.

Carecraft procedure is a mechanism which allows the parties to submit a Statement of Agreed Facts and the proposed orders for the court’s approval. The judge will determine the orders to be made based on the agreed facts and thus dispenses with a full hearing of all factual allegations. The procedure facilitates the expeditious disposal of proceedings and avoids the substantial costs that would otherwise be incurred if there is a trial.

In Kam Kwong, the Honourable Justice Harris recognized that the Carecraft procedure provides a readymade blueprint for disposing of proceedings under the Ordinance. In determining that the first, second and fourth respondent had contravened the Ordinance, Judge Harris granted the declarations that each respondent has contravened or was involved in the contravention of the First Conduct Rule.

Thereafter, the Carecraft procedure is adopted in other Tribunal proceedings such as Fungs E&M and Competition Commission v Quantr Limited and Cheung Man Kit[9].

5. Tribunal Proceedings against Second Conduct Rule Violations

Section 21(1) of the Ordinance prohibits an undertaking that has a substantial degree of market power from abusing that power by engaging in conduct that has the object or effect of preventing, restricting and distorting competition in Hong Kong, (i.e. a contravention of the Second Conduct Rule). However, in the past five years of enforcement, no proceedings had been commenced against any companies or individuals under this rule until December 2020.

On 21 December 2020, the Commission filed the first Second Conduct Rule case in the Tribunal against Linde HKO Limited, Linde GmbH (collectively “Linde”) and a general manager for conducting exclusionary acts to cease or limit the supply of medical gases to the only other potential gas service provider for public hospital, MGI (Far East) Limited. The Commission seeks the following orders against the respondents:

– a declaration that the respondents have contravened the Second Conduct Rule;

– a declaration that the general manager was involved in the contravention;

– pecuniary penalty against all the respondents;

– an order that the respondents be prohibited from engaging in any conduct that constitutes the contravention or involvement in the contravention;

– an order for the companies to implement an effective compliance programme; and

– a director disqualification against the general manager.

With the commencement of proceedings against Linde for contravention of the Second Conduct Rule, it is foreseeable that the Commission will be increasingly proactive to pursue undertakings which violated both the First and Second Conduct Rule.

[1] See infringement notice dated 10 January 2020

[2] See infringement notices dated 26 January 2021

[3] Section 68 of the Ordinance provides that a person is not obliged to make a commitment to comply with the requirements of an infringement notice, but if the person does not make the commitment within a specified period, the Commission may commence proceedings against him in the Tribunal.

[4] CTEA 2/2017 dated 29 April 2020

[5] CTEA 1/2019 dated 5 January 2021

[6] CTEA 1/2017 dated 16 December 2020

[7] CTEA 1/2018 dated 17 July 2020

[8] Originated from Re Carecraft Construction Co Ltd [1994] 1 WLR 172

[9] CTEA 1/2020 dated 3 November 2020

 

Haldanes’ Competition Law Practice

If you are interested to know more about the Competition Ordinance, please visit our previous article on this topic: https://www.haldanes.com/competition-law-in-hong-kong-9-things-you-need-to-know/

Haldanes has substantive experience in advising local and international clients on competition and anti-trust issues. Our services include:

– Advising clients on potential anti-competitive conduct under the First Conduct Rule and Second Conduct Rule;

– Representing clients in handling investigation interviews, production notices and dawn raids by the Competition Commission;

– Defending clients in Competition Tribunal proceedings;

– Designing internal controls and compliance procedures for clients;

– Providing training to company staff on the Competition Ordinance; and

– Drafting and reviewing commercial agreements to ensure that they are not considered anti-competitive.

For further details of our competition law and antitrust practice, please visit: https://www.haldanes.com/practice-areas/competition-law/

The 2021 edition of our Cartels and Leniency Review – Hong Kong Chapter can be viewed here: https://thelawreviews.co.uk/title/the-cartels-and-leniency-review/hong-kong

Written by: Felix Ng, Partner

                      Christina Ma and Able Au, Associates

Written by:

Felix Ng

Partner

Christina Ma

Associate

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