The Asia-Pacific Antitrust Review 2017

Hong Kong: Cartels

04 April 2017

Freshfields Bruckhaus Deringer

Overview

It has been just over a year since the Competition Ordinance (Cap 619) (CO) – the first economy-wide competition law in Hong Kong – came into force on 14 December 2015. In its first year, the Hong Kong Competition Commission (the Commission) – the main agency charged with investigating conduct that may infringe the CO – has been active in enforcing the CO.

The Commission initially stated that it would focus on encouraging compliance with the CO and that it would seek to achieve this through a mixture of ‘education, engagement and enforcement’. In light of some initial statements from the Commission allied to publicly expressed concerns as to the constraints on its litigation budget, there was a sense that the Commission would focus on a ‘soft’ enforcement approach emphasising the importance of awareness and compliance in dialogues with the business community.

However, as the year progressed, the Commission appeared to convey a tougher message. Notably, in September 2016, Ms Anna Wu, chairman of the Commission, stated that ‘We now have exercised the gamut of our investigation powers, raids, search and seize.’ Ms Wu confirmed in October 2016 that the Commission had already conducted six unannounced inspections (ie, ‘dawn raids’) against companies – some or all of which are reported to be in the technology sector. She also said that the Commission is expected to bring a number of cases to the Competition Tribunal (the Tribunal) in the first half of 2017, and that it is realistic for the Commission to prosecute two to three cases per year.

In the first year since the entry into force of the CO, the press coverage indicates a strong focus of the Commission on the general prohibition on anticompetitive agreements contained in the First Conduct Rule (FCR) of the CO.

This chapter sets out:

  • an overview of the FCR;
  • the Commission’s enforcement priorities and actions taken to date;
  • the Commission’s proposed block exemption in relation to the liner shipping industry;
  • related work of other agencies in Hong Kong;
  • a discussion on the private right of action in relation to alleged anticompetitive conduct; and
  • our outlook for 2017.

Overview of the FCR

The FCR prohibits anticompetitive ‘agreements’ or ‘concerted practices’ that have the ‘object or effect of preventing, restricting or distorting competition’ in Hong Kong. The general prohibition under the FCR is broadly similar to the equivalent prohibition in the European Union (ie, Article 101 of the Treaty on the Functioning of the European Union (TFEU)).

Types of conduct caught by the FCR

The FCR captures a wide range of conduct and includes agreements between competitors relating to:

  • fixing, maintaining, increasing or controlling pricing;
  • market allocation (territories, customers or markets);
  • limiting the product or supply of goods or services (quotas); and
  • bid rigging.

The FCR also captures agreements between entities at different levels of the supply chain (ie, vertical arrangements). Such agreements include, most typically, distribution agreements between a manufacturer and a distributor. While acknowledging that vertical agreements are generally less harmful to competition as compared to horizontal agreements, the Commission has given particular attention to resale price maintenance (RPM). According to the Commission’s Guideline on the FCR published in July 2015 (the FCR Guideline), the Commission considers that imposing a minimum resale price may have the object of harming competition – ie, this could violate of the FCR even if it does not have an anticompetitive effect. The FCR Guideline does not have the force of law, but is indicative of how the agencies propose to apply the FCR.

Similar to Article 101 of the TFEU, the FCR is widely constructed to capture written and oral agreements, whether or not they are intended to be legally binding; informal agreements and ‘gentlemen’s agreements’ are also caught. Collusion falling short of an actual agreement (ie, ‘meeting of the minds’) is also sufficient. As such, discussions of competitively sensitive information among competitors at meetings (eg, trade association meetings) may fall foul of the FCR even if the competitors do not subsequently coordinate their conduct. In addition, the indirect exchange of such information via a common customer or supplier (so called ‘hub-and-spoke’) can also be caught.

The Commission’s investigatory powers

The CO empowers the Commission to initiate and conduct investigations of its own accord and it is given a broad range of powers to do so, including the powers to:

  • require an undertaking to provide any documents or information and to conduct interviews;
  • require any person to answer questions on any matters that the Commission believes to be relevant to the investigation; and
  • conduct inspections of premises and confiscate documents with a warrant issued by the Court of First Instance (CFI).

As noted above, the Commission has stated that it has now used its full range of investigatory powers.

The Commission’s enforcement priorities and actions taken to date

According to its enforcement policy published in November 2015 (Enforcement Policy), the Commission will prioritise enforcement against conduct that is clearly harmful to consumers. In relation to the FCR, this includes cartel conduct and other agreements contravening the FCR causing significant harm to competition in Hong Kong, such as RPM.

The Commission’s statistics on types of conduct and sector giving rise to issues

Since the entry into force of the CO, the Commission has received a large number of complaints and inquiries. As at 14 December 2016 (the first anniversary of the CO), the Commission had received nearly 1,900 complaints and inquiries. Over 50 per cent related to the FCR, with cartel conduct and bid rigging being a particular concern. About 20 per cent of the complaints and inquiries concerned the Second Conduct Rule (SCR) of the CO, which prohibits the abuse of market power. The remaining 30 per cent is understood to concern the general state of competition.

According to the Commission’s 2015–2016 Annual Report (published in September 2016), the majority of cases that have been assessed by the Commission and have progressed to the ‘initial assessment’ phase of an investigation relate to the FCR. Out of 97 initial assessment cases as at 31 March 2016, 60 concerned alleged cartels; 39 concerned alleged information exchange; 18 concerned alleged RPM; 12 concerned allegations of other conduct violating the FCR; and the remainder (28 cases) concerned the SCR. This suggests a clear trend for the Commission to focus its resources on conduct tht may infringe the FCR. According to a Commission press release, as at 14 December 2016, 130 cases had moved to the ‘initial assessment’ stage, with more than 10 per cent of these cases being under ‘in-depth investigation’. In terms of sector focus, according to its 2015–2016 annual report, ‘professional and technical services’ accounted for most cases undergoing initial assessment by the Commission (17 cases), followed by transport, logistics and storage (10 cases) and the food and groceries sector (10 cases). Other sectors involving cases undergoing preliminary evaluation included construction and infrastructure, banking and financial services, travel and education. As at 14 December 2016, the top two sectors for cases undergoing ‘initial assessment’ were (i) property and property management and (ii) professional and technical services.

Trade and professional associations

In advance of the CO entering into force, the Commission contacted a large number of trade associations to ensure that they were aware of the CO and to flag that there may be concerns as to the activities of some of those associations.

In addition, in mid-2015, the Commission launched its engagement and education programme for trade associations with a brochure titled ‘The Competition Ordinance and Trade Associations’, which included a series of compliance ‘dos and don’ts’. In the months following the publication of the brochure, the Commission worked closely with trade associations to encourage compliance. It also reviewed the published practices of 350 trade and professional associations in Hong Kong, identifying over 20 associations with practices that might contravene the CO. These practices included, in particular, price recommendation and fee scales, and specific rules in codes of conduct seeking to restrict competition between association members.

That engagement and education has, according to the Commission’s 2015–2016 annual report, produced concrete results. As at 1 September 2016, the Commission stated that it was aware of 19 trade associations that had removed their price restrictions or fee scales to comply with the CO. For example, the Hong Kong Real Estate Agencies General Association removed its recommended agent commission. Moreover, a number of trade associations in the gold retail and jewellery industry also removed their daily reference price. Other trade and professional associations have made amendments to their practices, including those in the advertising, legal, insurance, surveying, transport and travel sectors.

Despite these efforts, the Commission has stated that certain trade associations may still not be compliant and has warned that enforcement action may follow for such associations and their members.

In that context, the Commission published an announcement in May 2016 welcoming quick rectification by the Hong Kong Newspaper Hawker Association (HKNWA) in withdrawing its recommended retail price of branded cigarettes. After finding out that the HKNWA issued a notice to its members to increase the price at which they sold certain branded cigarette products, the Commission met with a representative of the HKNWA to express its concern. Following the meeting, the HKNWA withdrew its letter and price recommendation, including immediately removing the notice from its social media platform. It also sent a letter to its members informing them that the HKNWA had withdrawn its recommended price of the branded cigarettes, reminding its members that they should determine prices independently. The Commission did not take any further action in this case because of HKNWA’s quick rectification and the fact that the conduct took place as a result of apparent ignorance of the law.

In November 2016, the Commission published an advisory bulletin calling upon the Hong Kong Institute of Architects (HKIA) and the Hong Kong Institute of Planners (HKIP) to remove certain provisions in their respective codes of conduct that restricted their members to set their own fees and take on clients. The bulletin noted that while the HKIA and the HKIP are exempt statutory bodies under the CO, the conduct of undertakings that are members of these associations is not exempt. In January 2017, it was reported that the HKIA had decided to suspend its code of conduct, meaning that HKIA members who do not follow the code of conduct will not face disciplinary actions by the HKIA.

Also in November 2016, it was reported that the Commission had advised two of the largest human resources management institutes in Hong Kong against publishing industry-specific salary forecasts on the basis that such practice may facilitate wage-fixing and non-solicitation agreements between employers. The Commission declined to comment on the case, but press reports nonetheless indicated that the exchange of competitively sensitive HR-related information could risk violating the FCR.

The Commission’s focus on bid rigging

Again, even prior to the entry into force of the CO, the Commission was keen to engage and educate businesses in Hong Kong in relation to bid rigging, which is a major enforcement priority for the Commission.

In May 2016, the Commission launched its ‘Fighting Bid-rigging Cartels’ campaign. That campaign involved educational measures such as TV announcements and tips for businesses as well as other public awareness initiatives (eg, educational videos, radio programmes and a roving exhibition).

Alongside this campaign, the Commission published a report summarising the results of its market study into certain business practices in the building maintenance market. There had been concerns that the market was subject to bid manipulation and so the Commission undertook an analysis of certain tender data. While the CO was not in effect when the tenders took place, the study concluded that if the Commission were to come across similar tender data now, it would be concerned about potential breaches of the FCR and would investigate more closely.

There is also a sense that the Commission’s bid-rigging engagement and education campaign is being supplemented by a firmer stance. The Commission has received a large number of complaints and enquiries on suspected bid-rigging activities in Hong Kong and there have been reports of an investigation into the technology sector for suspected bid rigging.

It is also clear that bid rigging is not the sole preserve of the Commission under the CO. Possibly the most significant development this year on the bid-rigging front is the Independent Commission Against Corruption (ICAC) investigation into bid rigging in the building maintenance and renovation sector. In September 2016, a former proprietor of an engineering firm, who helped manipulate the bid of Garden Vista (a private residential estate) and another residential project by offering HK$45 million in bribes to members of incorporated owners and staff of property management companies, was sentenced to prison for 35 months by the District Court. Although not prosecuted under the CO, the Garden Vista case is an important decision for competition enforcement in Hong Kong. While criminal sanctions in the CO are limited to situations where a person has not complied with an investigation or has actively obstructed such an investigation, individuals who engage in bid rigging – which can involve other criminal conduct such as bribery – could be criminally sanctioned under anti-bribery and corruption law. In future, the Commission may seek to collaborate with the ICAC on bid-rigging investigations. This may be an important tool in the Commission’s arsenal in terms of encouraging compliance with the CO.

Market studies

The CO stipulates that the Commission may conduct market studies into matters that affect competition in Hong Kong. The Commission has, to date, conducted two market studies, which were on:

  • the building maintenance and renovation market (as discussed above); and
  • the auto-fuel market: the Commission undertook the market study because of significant public concerns over auto-fuel prices in Hong Kong. At the time of writing, the report has not yet been published. It remains to be seen whether it will share the concerns about existing pricing practices raised by the Consumer Council in its ‘Report on Auto-Fuel Price Monitoring 2016’ published in June 2016 (further discussed below).

The Commission has previously expressed reservations of the utility of market studies given the Commission has no ability to compel companies to respond to questionnaires that the Commission may issue. Nevertheless, market studies could be viewed as a precursor to potential investigations since they will often lay useful groundwork for future investigations. In some respects, this has been the approach of the UK authorities (ie, the Competition and Markets Authority) in relation to market studies and it may be an approach that the Commission seeks to replicate here.

Block exemptions

There is a range of exemptions and exclusions available to companies under the CO. On 17 December 2015, the Commission received an application from the Hong Kong Liner Shipping Association (HKLSA) to benefit from a block exemption under the CO.

A block exemption is designed to exempt certain categories of agreement from the application of the FCR on the ground that the category of agreements enhances economic efficiency, and is considered by the Commission as a useful tool for giving sector-specific guidance to market participants.

In relation to its request for a shipping block exemption, the HKLSA asked the Commission to exempt two types of liner agreements from the application of the FCR:

  • vessel sharing agreements (VSAs): agreements between carriers within a shipping consortium to operate a liner service along a specified route using a specified number of vessels (akin to an airline code-sharing arrangement); and
  •  voluntary discussion agreements (VDAs): agreements that allow carrier members to exchange information including market data, supply and demand forecasts, international trade flows, industry trade, and even freight rates and surcharges applicable to the transportation of cargo and ancillary services.

The HKLSA argued that VSAs and VDAs bring about economic efficiencies that benefit consumers, such as rate and service stability, as well as cost efficiencies; the industry remains highly competitive despite the existence of VSAs and VDAs; and block exemptions or other statutory exemptions for VDAs and VSAs exist across Pacific Rim jurisdictions.

In September 2016, the Commission published a proposed block exemption order. The Commission made clear that it does not propose to grant any block exemption in relation to VDAs but that it proposes to grant a block exemption to VSAs on the following conditions:

  • the parties to the VSA not having a collective market share exceeding 40 per cent;
  • the VSA does not authorise or require liner operators to engage or otherwise be involved in (i) price fixing, issuing of price recommendation, the exchange of information with respect to current or future prices, (ii) limitation of capacity or sales, or (iii) market allocation; and
  • liner operators may withdraw from the VSA on giving any agreed and reasonable notice without incurring penalties.

This contrasts, in some respects, with the position in other jurisdictions. The EU adopts a stricter stance and exempts only VSAs where parties have a collective market share less than 30 per cent, but (like Hong Kong) does not exempt VDAs. Singapore, on the other hand, exempts both VSAs and VDAs where the parties have a collective market share of less than 50 per cent.

At the time of writing, the Commission is assessing the 15 submissions that it has received as part of a public consultation process on the block exemption that ended on 14 December 2016.

While there has been public discussion around a potential second block exemption for the insurance sector, in November 2016, the Hong Kong Federation of Insurers confirmed that it did not intend to apply for a block exemption at this stage. It will be interesting to see whether other sectors will seek block exemptions from the Commission.

Other agencies in Hong Kong

The Commission’s work in terms of ensuring the observance of the CO is supported by a number of agencies in Hong Kong, including the Communications Authority (CA), the ICAC in respect of bid rigging (as discussed above) and the Consumer Council.

The Communications Authority

Under the CO, the CA shares concurrent jurisdiction with the Commission in enforcing the CO in the telecommunications and broadcasting sectors. According to the Memorandum of Understanding between the Commission and the CA (signed on 14 December 2015), the CA will ordinarily take the role of the lead authority on competition matters in these sectors. In January 2017, it was reported that the CA was processing eight cases relating to alleged anticompetitive behaviour and had closed a further 100 cases without the need for further action since the introduction of the CO, although it is not clear whether the cases relate to the FCR or SCR.

In addition, the CA has reviewed two merger cases relating to the telecommunications sector: the indirect acquisition of New World Telecommunications by Hong Kong Broadband Network and the indirect acquisition of Wharf T&T by private investment firms MBK Partners and TPG. The CA decided not to commence investigations into either acquisition. In January 2017, it was reported that the CA was reviewing a third merger case.

The Consumer Council

The long-standing consumer protection agency has continued to be vocal about anticompetitive concerns affecting Hong Kong
consumers.

In June 2016, it published a report on auto-fuel prices, which found that while prices had overall decreased, these reductions had not fully reflected the corresponding price reductions in international crude oil or imported auto-fuel since July 2014. The Consumer Council also expressed general concerns about existing pricing practices in the sector and encouraged the Commission to make further recommendations to promote competition upon conclusion of its ongoing (separate) market study.

In November 2016, it published a report in relation to e-commerce, suggesting that there are anticompetitive concerns in this market. The report expressed concerns over the growing market power of certain e-commerce platforms, which could give rise to competition issues such as ‘raised prices, restrictions in choice and anticompetitive discriminatory treatment’ and covers online search engines, travel and airline online booking platforms and food delivery companies. One of the identified issues that could fall under the FCR was online travel agents’ (OTAs) imposition of most-favoured nation (MFN) clauses on hotels, requesting hotels to guarantee the best room rate to that particular OTA (as opposed to the rate on the hotel’s website or for other OTAs). These MFN clauses have already undergone substantial investigations by various competition agencies across Europe, for example, the European Commission, the CMA, the French Competition Authority and the German Federal Cartel Office. The Commission has said it will study the Consumer Council’s report carefully, but did not comment on whether it has considered investigating the e-commerce industry.

Private right of action in relation to alleged anticompetitive conduct

The CO provides for a two-tier enforcement model through the establishment of the Commission and the Tribunal. Under the CO, the Commission and the CA are the sole agencies with the power to investigate alleged infringements of the CO and initiate proceedings before the Tribunal. As such, unlike many other jurisdictions, private standalone actions for infringement of the competition rules contained in the CO are currently not available. In the absence of a determination by the Tribunal of an alleged infringement of the CO, alleged victims have no private right of action in the courts based on these alleged breaches.

That said, while conduct rules (ie, the FCR and the SCR) in the CO cannot be used as a ground of claims (a sword), it can be used as a defence (a shield) in civil litigation. According to the CO, where alleged breaches of the conduct rules are raised as a defence before the CFI, the Tribunal will have jurisdiction to hear that part of the case, and the CFI will have to transfer the relevant part of the case to the Tribunal.

To work around the limitation that breaches of the conduct rules cannot be grounds for private standalone actions, a travel agent has challenged the Travel Industry Council (TIC) for allegedly anticompetitive conduct using other laws, in particular the Companies Ordinance. In February 2016, travel agent Loyal Profit International Development challenged the TIC’s directives, which allegedly contravenes the FCR, using the Companies Ordinance. At the core of the lawsuit was the ‘Refund Production Scheme for Inbound Tour Group Shoppers’, which prohibits travel agents from bringing mainland Chinese inbound tour groups to shops that are not registered with the TIC. The plaintiff argued that this scheme is ‘outright anticompetitive’ as it created ‘an exclusionary list of shops’ that can be patronised by inbound mainland Chinese tourists. Given the CO does not allow private standalone actions, the plaintiff is seeking an injunction on the directives from the CFI on the basis that the TIC has acted in excess of powers granted by its articles of association, in contravention of the Companies Ordinance. The case was heard in court in January 2017 and its outcome is pending at the time of writing.

Looking forward: the next 12 months

While 2016 has seen a promising start for the Commission, enforcement activities can be expected to be more vigorous in 2017. An uptick of enforcement activities is expected, with cartel conduct and RPM being a focus. In line with its published enforcement policy and guidance, the main focus of the Commission’s activities will be likely to remain on consumer-facing markets. The Commission will also likely continue to exercise its broad investigatory powers, in particular the use of dawn raids, as it keeps moving to a harder-edged enforcement approach.

In particular, the Commission can also be expected to bring its first cases to the Tribunal in the first half of 2017. These first cases are likely to attract much attention. It will be interesting to see how the lack of automatic discovery in competition proceedings under the Competition Tribunal Rules is handled, as well as the uncertainty around the Commission’s leniency policy (ie, whether leniency applicants who do not qualify for immunity but nonetheless cooperate with the Commission in an investigation receive a fine reduction).

The shipping block exemption order should also be finalised and published in 2017. The scope of the block exemption is much anticipated, not only because it will have a significant impact on the shipping industry in Hong Kong, but also because it will indicate the Commission’s position with regard to other jurisdictions that have assessed VSAs and VDAs.

The Commission is also expected to publish the auto-fuel market study in early 2017. It remains to be seen whether the study will echo the findings in the Consumer Council’s Report on Auto-Fuel Price Monitoring 2016, and whether the Commission will announce further investigations into the sector.

Cooperation with antitrust agencies worldwide will also likely increase. In December 2016, the Commission signed a memorandum of understanding with the Canadian Competition Bureau to enhance cooperation between the two authorities. This is the Commission’s first international cooperation instrument in the area of competition policy and law since the entry into force of the CO.  It is expected that it will enter into similar arrangements with other international antitrust agencies.

Finally, the Commission will have a number of new senior officials, including a new CEO, in 2017. It remains to be seen whether this change in leadership will have any adverse impact on the Commission’s output in 2017.

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