Hong Kong: Cartels
More than three years have passed 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 third year of enforcement, the Hong Kong Competition Commission (the Commission), the main agency charged with investigating conduct that may infringe the CO, rode on the momentum of its first two cases and brought a third case before the Competition Tribunal (the Tribunal) (the specialist court in charge of hearing competition cases). This marked the first time the Commission decided to pursue a claim against individuals, as opposed to only pursuing corporate entities.
The Commission's enforcement actions to date indicate a clear focus on cartel conduct under the First Conduct Rule (FCR) of the CO. This is also reflected in statements from Anna Wu, chairperson of the Commission, who said that bid-rigging 'is one of the most blatant and harmful forms of anticompetitive conduct', and that 'market sharing and price fixing are serious anticompetitive practices which lead to reduced consumer choices and un-competitively high prices, hurting consumers, other businesses and the economy as a whole.'
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 cartel conduct between competitors such as:
- fixing, maintaining, increasing or controlling prices;
- market allocation (territories, customers or markets);
- limiting the production or supply of goods or services (quotas); and
The FCR also captures agreements between entities at different levels of the supply chain, such as vertical arrangements.1
Similar to article 101 of the TFEU, the FCR is widely construed to capture agreements and concerted practices. 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, a 'meeting of the minds') may be regarded as a 'concerted practice'. As such, discussions of competitively sensitive information among competitors (eg, at 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 arrangements) can also be caught.
The Commission's enforcement priorities
According to its Enforcement Policy published in November 2015, 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 resale price maintenance. In relation to cartel conduct, the Commission is prioritising bid-rigging and market sharing, as reflected in the Commission's choice of cases to take to the Tribunal to date. Following its 'Fighting Bid-rigging' campaign in 2016 and 2017, the Commission launched a 'Combat Market Sharing Cartels' campaign, which took place from January to July 2018. Using a range of advocacy and educational initiatives (including a brochure explaining what the conduct entails and how to detect it, TV and radio advertisements, roving exhibitions and seminars), the Commission sought to raise public awareness of the conduct and its harmful nature as well as to strengthen detection.
The Commission's statistics on types of conduct
As of the end of March 2018, the Commission had received approximately 2,900 complaints and enquiries since full commencement of the CO in December 2015. Of these, 789 were received during the 1 April 2017 to 31 March 2018 financial year. Approximately 56 per cent of the complaints relate to the FCR (ie, cartels and other anticompetitive agreements). The Commission escalated 36 cases for further assessment, some of which have proceeded to formal, in-depth investigations.
The Commission's cases before the Tribunal
Bid-rigging case in the IT sector
In the first enforcement action that the Commission brought in the Tribunal, the Commission alleged that Nutanix Hong Kong Limited (Nutanix), along with four other companies, engaged in bid-rigging. In particular, it alleged that Nutanix had coordinated with the other companies to submit dummy bids to the Hong Kong Young Women's Christian Association (YWCA) for a proposed tender to supply and install an IT server system.
The trial took place in June 2018 and closing submissions were heard in September 2018; the judgment is expected during the first quarter of 2019. The Commission is seeking remedies including financial penalties and a declaration that each defendant contravened the CO.
Before the main hearing, Justice Godfrey Lam made a number of decisions, two of which are worth highlighting as they carry important precedent value in relation to disclosure and the scope of the privilege against self-incrimination under the CO.
Disclosure of documents
On the first of these issues, Justice Lam issued a decision on 14 March 2018 addressing the discovery obligations of the Commission and whether it may oppose the production of documents on grounds such as without prejudice privilege and public interest immunity. In particular, Justice Lam noted the following:
- discovery is a balancing exercise – in a discovery application, the Tribunal will often be required to conduct a balancing exercise to determine whether the public interest in non-disclosure outweighs any contrary interest in disclosure;
- claims for 'blanket' immunity are not permitted – the Commission cannot assert a 'blanket immunity' and refuse disclosure or production of documents on the basis of public interest or privilege. Any assertion of irrelevance, public interest or privilege is subject to challenge by the respondent and the Commission will have to justify its claim based on the content and nature of the document. As stated by Justice Lam, 'to make a proper claim for immunity, it would be incumbent on the Commission to specify the document and state the grounds on which it is said immunity exists in as much detail as possible'; and
- practical application – Justice Lam grouped the documents subject to the discovery applications into the following key categories:
|Class of documents||Disclosable?|
|Without prejudice correspondence and records between the Commission and the respondents in relation to the Commission's Leniency Policy||Not disclosable|
|The complainant's original complaint form submitted to the Commission||Not disclosable unless the identity of the complainant had been disclosed previously with the express or inferred consent of the complainant|
|Without prejudice correspondence and records between the Commission and any respondent where a leniency agreement has not been reached||Not disclosable|
All confidential internal reports, minutes and correspondence relating to the Commission's investigation and proceedings, including records of communication between the Commission's staff during the execution of search warrants
|Depends on the context and nature of the document, but there is no blanket immunity to non-disclosure for these documents. An assessment on relevance, public interest immunity and legal professional privilege must be made when considering whether or not such documents should be disclosed|
|Internal communications of the Commission relating to a witness||A high degree of disclosure is required in this context but not everything must be disclosed|
Privilege against self-incrimination
On 3 October 2017, Justice Lam issued a decision on two applications made by Nutanix and BT Hong Kong Limited (BT) for orders to strike out references to certain statements from the Originating Notice of Application and for associated orders to debar the Commission from adducing into evidence or relying upon all such statements in the substantive hearing. The applications raised the question of whether statements made by an employee in an interview held pursuant to section 42 of the CO are by virtue of section 45(2) inadmissible against the employer.
Justice Lam decided against Nutanix and BT by ruling that only the subject of the interview under the section 24 notice (ie, the person who is required to attend and answer questions) may benefit from the protection of inadmissibility under section 45(2) and not the company itself (ie, Nutanix or BT). In practice, this means that the protection afforded under section 45(2) in the context of section 42 interviews will only ever apply to individuals and not undertakings.
Market sharing and price-fixing cases in the building renovation sector
On 14 August 2017, the Commission took 10 local construction and engineering firms to the Tribunal for an alleged market sharing and price-fixing cartel related to the renovation of over 800 units in a public housing estate. The trial took place between 26 November 2018 and 21 December 2018, and the judgment is expected during the first quarter of 2019. Some of the key issues highlighted during the trial include:
- competition harm – a major argument of the respondents was the Commission's failure to demonstrate competition harm, which the Commission countered by citing judicial findings in Europe and the United States that did not require effects to be shown in a by-object infringement; and
- economic efficiency exclusion – the respondents sought to rely on the application of the economic efficiency exclusion, arguing it was more economical to carry out decoration work for flats located on the same floor, and that this was the reason why the respondents sought business from tenants on the same floor. It remains to be seen whether this line of argumentation will be accepted given the absence of evidence from the respondents regarding how, when and to what extent the efficiency could be achieved, and the standard of proof in bringing an efficiency defence.
First market sharing and price-fixing case against individuals
On 6 September 2018, the Commission commenced proceedings in the Tribunal against three construction and engineering companies and two individuals over alleged collusive conduct in relation to the provision of renovation services. This is the Commission's second case before the Tribunal in the building renovation sector.
The Commission alleges that the three companies allocated customers and coordinated pricing in relation to the provision of renovation services for at least 178 units at a Hong Kong Housing Authority residential estate. The Commission is of the view that the alleged conduct amounts to cartel behaviour violating the FCR.
The case is noteworthy as it is the first case where the Commission has taken enforcement action against individuals. The Commission is seeking a pecuniary penalty against each of the two individuals and a disqualification order against one of them. The Commission alleges that both individuals were responsible for their companies' business activities at the housing estate concerned, and one of them was the sole shareholder and one of only two directors at the company. Interestingly, while the CO establishes a maximum cap on pecuniary penalties for undertakings, it provides no such cap for individuals.
Enforcement against individuals will likely continue to be a priority for the Commission going forward. On commencement of the proceedings, Brent Snyder, CEO of the Commission, stated that 'we have, for the first time, brought direct enforcement action against individuals who were involved in the conduct. These proceedings drive home the deterrent message that not only companies, but also individuals who engage in cartels may expect to face the full force of the law.'
The trial is likely to take place in the second quarter of 2020.
The Commission's other work under the FCR
Private right of action in relation to alleged anticompetitive conduct
Under the CO, the Commission is the sole entity that can initiate proceedings at the Tribunal. In the absence of a determination by the Tribunal of an alleged infringement of the CO, alleged victims of breaches of the competition rules have no private right of action in the Tribunal or in the courts based on those alleged breaches. This is different from many other competition regimes, and the lack of the right of stand-alone private actions has been flagged as a weakness in the current regime and a potential area for future reform.
The competition rules can, however, be used as a defence (ie, a shield rather than a sword) in civil litigation. Section 113 of the CO provides a mechanism for the transfer of a case to the Tribunal where a contravention of the CO is alleged as a defence in civil litigation.
In May 2018, the Court of First Instance ordered, for the first time, an alleged contravention of the CO to be transferred to the Tribunal. The allegation was made as a defence by Meyer Aluminium Limited (Meyer), a Hong Kong-based manufacturer of aluminium products, in a lawsuit brought by Taching Petroleum Company Limited (Taching), a local authorised dealer of Sinopec, over the non-payment of dues for the supply of diesel. A separate case involving Meyer and another diesel supplier, Shell Hong Kong Limited (Shell), in which Meyer raised a similar competition defence, was also transferred to the Tribunal.
In its defence, Meyer accused Taching and Shell of violating the FCR by engaging in price collusion. In particular, it alleged that Taching and Shell had followed each other's pricing closely and adjusted their own prices accordingly. It further alleged that Taching and Shell had privately negotiated pricing matters and the net prices they charged were almost identical over an extended period of time, and were much higher than a 'fair market price'.
It is worth highlighting that a similar request to refer an alleged infringement of the CO to the Tribunal in relation to a travel agency case was previously refused on the basis that the court did not consider that there was a matter to be investigated by the Tribunal. The contrasting results of the two cases give rise to interesting questions about the requirements for referral under section 113 of the CO.
Individual exclusion application in the banking sector
On 11 December 2017, 14 institutions authorised under the Banking Ordinance applied to the Commission for a decision that the FCR does not apply to the Code of Banking Practice (the Banking Code) by virtue of the legal requirements exclusion under section 2 of schedule 1 to the CO. The Banking Code is an industry code of practice jointly issued by the Hong Kong Association of Banks (the HKAB) and the Hong Kong Association of Restricted Licence Banks and Deposit-taking Companies (the DCTA), and endorsed by the Hong Kong Monetary Authority (the HKMA). On 15 October 2018, the Commission issued its decision that the Banking Code is not excluded from the application of the FCR by or as a result of the legal requirements exclusion.
In its statement of reasons, the Commission noted that the code was non-statutory in nature and therefore was not a legal requirement imposed 'by' or 'under' the Banking Ordinance. Among other things, the Commission was of the view that where a legal requirement applies, one would ordinarily expect a sanction to be specified in respect of breaches of the requirement. In this case, neither the Banking Ordinance nor the Banking Code specified any sanctions for non-compliance.
The Commission also took the opportunity to clarify certain provisions that were suspended by the HKAB and the DTCA prior to the commencement to the CO (the Suspended Provisions). These Suspended Provisions relate to the imposition and level of fees, interest rates and charges set by banks, which could potentially give rise to concerns under the FCR. Nevertheless, the Commission considered that preventing banks from imposing fees or charges benefits consumers by helping them avoid having to pay for the relevant banking services, and likewise with setting upper limits as it prevents excessive fees or rates being charged.
While the decision has left open the question of whether the giving of effect to the Banking Code will have the object or effect of harming competition, the failure to obtain an exclusion means that there remains a possibility that banks will be caught in contravention of the competition laws by adhering to the banking regulators' expectations under the Banking Code. Nonetheless, banks can take comfort from the fact that the Commission has expressly indicated that it has no present intention to pursue an investigation or enforcement action in respect of the current version of the Banking Code.
Exclusion application in the pharmaceutical sector
On 31 January 2019, the Commission received an application from the Hong Kong Association of the Pharmaceutical Industry (HKAPI) for an exemption of their proposed survey to collect and distribute data on the sales of prescription and over-the-counter pharmaceutical products in Hong Kong and Macau (the Proposed Survey). The HKAPI is seeking the exemption on the basis that the operation of the Proposed Survey falls within the economic efficiency exclusion (with benefits such as more efficient allocation of stock and easier introduction of new products) and is therefore excluded from the FCR.
Hong Kong Sea Port Alliance
On 10 January 2019, the Commission announced that it was investigating whether an alliance between container terminal operators Hongkong International Terminals Limited, Modern Terminals Limited, COSCO-HIT Terminals (Hong Kong) Limited and Asia Container Terminals Limited to jointly operate and manage their 23 berths across eight terminals at Kwai Tsing in the New Territories, Hong Kong, may constitute a contravention of the FCR.
Outlook for FCR enforcement in 2019
The year 2019 will be a historic one for Hong Kong's competition regime as the legal community eagerly awaits the first two decisions of the Tribunal. These decisions will no doubt play a critical role in the development of jurisprudence and set the path for future competition enforcement in Hong Kong. In particular, a decision in favour of the Commission would be a confidence boost and significantly raise the profile of the Commission as a regulator in Hong Kong with teeth.
With the additional dedicated funding to cover the cost of litigation from the Hong Kong government, it is anticipated that the Commission will continue to bring more actions against both companies and individuals in 2019. In relation to the latter, the Commission has made it clear it does not intend to bring cases against junior staff members who are merely following orders given by more senior staff but rather target those senior staff.
The Commission is likely to continue prioritising actions against cartel conduct but may also bring an abuse of substantial market power case under the Second Conduct Rule if an appropriate case arises.
It is expected that the Commission will start bringing actions against the parent companies of entities that are found to have violated the CO. In an interview, Brent Snyder said that the Commission will consider going after parent companies whose subsidiaries violate the law and, if appropriate, an action will be brought against these parent companies under the 'single economic entity' doctrine.
From a policy perspective, the Commission is developing a framework for cooperation in investigations, guidance on the calculation of pecuniary penalties to be recommended to the Tribunal as well as a leniency policy for individuals. The aim of the framework is to encourage companies to cooperate, which would allow the Commission to reduce the amount of litigation by having more settlements, while the guidance on the calculation of pecuniary penalties would increase transparency when calculating pecuniary penalties and therefore provide greater certainty to parties in a trial.
Finally, the Commission continues to be keen to introduce private actions in Hong Kong. This is also reflected in statements from Anna Wu in September 2018, that the lack of stand-alone actions for damages in the current regime may mean that the Commission has to bring more cases to the Tribunal to ensure that victims have a means of recovery. The Hong Kong government is set to review the CO during 2019 and the introduction of private enforcement will be one of the major issues for it to consider.
1 Such agreements typically include 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, it could violate the FCR even if it does not have an anticompetitive effect). The FCR Guideline is not legally binding on the Commission or the Communications Authority (CA), but is indicative of how they propose to apply the FCR.