Hong Kong: Cartels
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More than four 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 fourth year of enforcement, the Hong Kong Competition Commission (the Commission), the main agency charged with investigating conduct that may infringe the CO, successfully obtained two favourable judgments before the Competition Tribunal (the Tribunal) (the specialist court in charge of hearing competition cases). The Commission also brought its fourth and fifth cases in the Tribunal. In the fourth case, the Commission has affirmed its willingness to pursue sanctions (in the form a pecuniary penalty and a director disqualification order) against individuals, in this case, against an individual who was not directly involved in the alleged contravention but whose conduct as a director made him unfit to manage a company. In its fifth case, the Commission brought its first proceeding following a successful leniency application and also made use of its infringement notice powers for the first time.
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 (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 brought to the Tribunal to date. Following its ‘Combat Market Sharing Cartels’ campaign in 2018, the Commission launched a ‘Report Anti-competitive Conduct’ campaign in August 2019. Throughout 2018 and 2019, the Commission continued its district outreach, which included briefings on building renovation and management. Using a range of advocacy and educational initiatives (including a brochure explaining what the conduct entails and how to detect it, newsletters, TV and radio advertisements, a micro-movie, 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 2019, the Commission had received approximately 3,603 complaints and enquiries since full commencement of the CO in December 2015. Of these, 709 were received during the 1 April 2018 to 31 March 2019 financial year. The majority of the complaints relate to the FCR (ie, cartels and other anticompetitive agreements), and the Commission escalated 28 cases for further assessment, some of which have proceeded to formal, in-depth investigations.
The Commission’s cases before the Tribunal
In 2019, the Tribunal handed down its decisions in Hong Kong’s first two competition cases involving bid-rigging, market-sharing and price-fixing. The Tribunal relied heavily on EU precedents (noting that the FCR was modelled on EU law), ruling in favour of the Commission and against 14 of the 15 respondents in these proceedings. The third and fourth cases concerning FCR issues in public housing estate renovation are still pending in the Tribunal.
First case: 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), BT Hong Kong, Innovix Distribution, Tech-21 Systems and SiS International (SiS) had engaged in bid-rigging via a series of vertical agreements. 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 Tribunal issued its judgment on 17 May 2019, which ruled that four out of the five companies were engaged in bid-rigging in breach of the FCR. The Tribunal did not make a ruling against the fifth defendant, SiS, as the employee involved in the submission of its bid lacked the authority to bind SiS, and the senior management of SiS were unaware of the bid-rigging arrangements.
The judgment clarified several important points under the CO:
- the Tribunal will not attribute all acts of all employees to an undertaking for the purposes of the CO. In this instance, the SiS employee making the bid submissions was relatively junior and lacked the necessary authority to submit the bid, despite the act having occurred during working hours. Successful attribution of acts by an employee requires a ‘sufficient connection’ between the acts of the employee and the undertaking ‘so that the former can properly be regarded as part of the latter in the relevant context’;
- the Commission is not required to issue a warning notice for bid-rigging cases under section 82 CO as it has reasonable cause to believe that a contravention involving ‘serious anticompetitive conduct’ has occurred. The Commission is also entitled to assess the categorisation of the conduct as ‘serious anticompetitive conduct’ at the investigative stage, as opposed to at the time of the Tribunal proceedings;
- the standard of proof the Commission has to establish is that of beyond reasonable doubt, as the Commission was seeking pecuniary penalties that involve the determination of a criminal charge. It is not necessary for every item to satisfy this standard in relation to every aspect of the contravention, as long as the body of evidence as a whole satisfies the standard;
- the bid-rigging agreement had the object of restricting competition and the Commission was not required to establish the arrangement had adversely affected competition; and
- WhatsApp, text and audio messages were admissible as evidence, irrespective of whether they came from personal phones.
Second case: 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 arrangements involved the allocation of tenant business from given floors to the respective contractors and price-fixing of renovation services through jointly produced flyers. The trial took place between 26 November 2018 and 21 December 2018, and the judgment was issued concurrently with the Nutanix judgment on 17 May 2019. Key points from the judgment include:
- some respondents argued that their subcontractors had actually carried out the works, but the Tribunal found that each of the respondents had formed a single economic entity with their subcontractor on the basis that their arrangement concerned without exception their internal, private relationship;
- the respondents argued that economic efficiencies were generated by floor allocation, such as reduced elevator waiting time and labour costs. The Tribunal ruled that the respondents bore the burden of proving this defence, and found that the respondents fell ‘very far short’ of satisfying the conditions of the defence; and
- both the floor allocation agreement and the package price agreement had the object of restricting competition and the Commission was not required to establish the arrangement had adversely affected competition.
Third case: 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.
Two company respondents and one individual respondent have agreed with the Commission to admit liability and apply for an order by consent from the Tribunal. The consent summons hearing is scheduled for February 2020, while the remaining respondents will proceed to a seven-day trial currently set for July 2020. The split hearings present a potential issue of inconsistent decisions for the two groups of respondents, which will be deliberated further in the February hearing.
On commencement of the proceedings, Brent Snyder, CEO of the Commission, stated:
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.
Fourth case: another building renovation sector case
On 3 July 2019, the Commission filed a suit in the Tribunal alleging six decorating contractors and three individuals engaged in market sharing and price-fixing arrangements while providing renovation services for a housing estate.
This case marks the first time the Commission has sought disqualification of a director who was not directly involved in the contravention, but whose conduct as a director made him unfit to be managing the company. The Commission indicated that it will seek this remedy in other appropriate cases. All but one respondent company have preliminarily agreed to admit liability. The trial is currently set for March 2021.
In relation to this case, Brent Snyder stated:
This is the third market sharing and price-fixing case that the Commission has filed over the past two years in relation to the provision of renovation services at public housing . . . such conduct is a blatant violation of the Ordinance and it is particularly egregious when the people directly targeted are some of Hong Kong’s most vulnerable consumers.
Fifth case: Leniency, infringement notice
In January 2020, the Commission commenced its first enforcement proceedings from a successful leniency application in relation to an IT cartel. This case is significant as it is the first case in which the Commission has exercised its infringement notice and commitments powers. The alleged cartel concerned bid-rigging conduct in a bidding exercise organised by Ocean Park (a theme park) in 2017 for the procurement of IT services based on Nintex technology. The parties involved in the bid-rigging conduct included Quantr and the leniency applicant (whose identity has not been disclosed). Nintex, the software supplier, allegedly participated in the bid-rigging conduct through the acts of a former employee.
The Commission issued an infringement notice to Quantr and Nintex in lieu of commencing enforcement proceedings in the Tribunal. Nintex accepted the infringement notice, which required Nintex to sign up to a set of commitments, and included admitting to a contravention of the FCR and agreeing to the implementation of a range of compliance measures. Quantr, on the other hand, rejected the infringement notice, which subsequently led to the Commission issuing proceedings in the Tribunal against it and its director. The case is therefore a type of hybrid settlement where the Commission settles its investigation with one party while issuing proceedings against another.
The trend of investigating individuals and seeking director disqualification is clearly continuing in this latest case, and it is notable that the Commission’s commitments revolve around the concept of prevention and education.
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’. The trial at the Court of First Instance is being carried out concurrently with the Tribunal proceedings, albeit before the same judge.
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.
A decision was made on 26 September 2019 in which the Commission concluded that the Proposed Survey did not meet the conditions of the efficiency exclusion. However, the Commission did not form a view on whether the Proposed Survey would contravene the FCR since it was beyond the scope of the required decision.
In its statement of reasons, the Commission referred to the FCR Guideline on information exchange and stated that the Proposed Survey could permit the exchange of potentially competitively sensitive information between competing manufacturers of pharmaceutical products.
The decision is helpful as it clarified the Commission’s approach on the competitive effects of information exchange between competitors. In particular, the data relating to value of sales was held to be the most competitively sensitive, especially where it is product-specific. However, the Commission also clarified that the context of the information exchange matters and the competitive concerns may differ depending on the products, markets and characteristics of the information exchange in question. The Commission was also concerned that the information would not be anonymised, too recent for certain categories and insufficiently aggregated. The Commission further clarified that competition concerns are heightened when the survey proposes to cover a large proportion of the product sector and where the markets are highly concentrated.
The five efficiencies claimed by HKAPI were all found to have failed the first condition of the efficiency exclusion, which requires that undertakings provide convincing evidence of their efficiency claims. 2 In relation to the third condition, the Commission found it unlikely that the inclusion of product level sales data would be indispensable to achieve the claimed efficiencies.
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 2020
The year 2019 saw two landmark judgments handed down by the Tribunal that were resounding victories for the Commission. Although the rulings are now on appeal, they have established the foundational precedents to help clarify various aspects of the CO. This significantly boosts the profile of the Commission as a credible regulator in Hong Kong with teeth.
In 2018–2019, the Commission received an increase in the annual government subvention of over 25 per cent, with a dedicated funding of HK$238 million being provided to support the Commission’s litigation work. This will enable the Commission to step-up its enforcement and litigation activities and implement the initiatives set out in its Three Year Strategic Plan. It is anticipated that the Commission will continue to bring more actions against both companies and individuals in 2020. In relation to the latter, the Commission has made it clear that it will not rule out pursuing directors deemed unfit to perform such role, despite not being directly involved in the contravention (as seen in the fourth case).
Following the fifth case, it is likely that the Commission will, in certain circumstances, continue the trend of issuing infringement notices to parties willing to cooperate with its investigations while not hesitating to take non-cooperating companies before the Tribunal.
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 published a Cooperation and Settlement Policy in April 2019 to supplement the existing Leniency Policy and Enforcement Policy. The framework allows companies which do not benefit from the Leniency Policy to admit their wrongdoings and cooperate with the investigation in exchange for a recommendation by the Commission for a penalty discount from the Tribunal. The Commission is also developing a guidance on the calculation of pecuniary penalties, which would increase transparency when calculating pecuniary penalties and therefore provide greater certainty to parties in a trial. In the announcement for the Commission’s latest case in the Tribunal, the Commission called for market participants in all sectors to stay away from cartel conduct, while those already involved should approach the Commission for leniency or cooperation.
Finally, the Commission remains keen to introduce private actions in Hong Kong. This is reflected in statements from Anna Wu in September 2018, that the lack of stand-alone actions for damages in the current regime may mean the Commission has to bring more cases to the Tribunal to ensure that victims have a means of recovery. The Hong Kong government reviewed the CO during 2019 and the introduction of private enforcement was one of the major issues it considered. Until conclusions of the review are published, victims of anticompetitive conduct will have to rely on their follow-on right.
Alongside enforcement, educating the public remains a priority for the Commission. In the press announcement for the Commission’s latest case to the Tribunal, Brent Snyder stated:
While enforcement of the Ordinance is important in deterring anti-competitive behaviours, education of stakeholders also plays an integral role in fostering a compliance culture. To this end, the Commission has been actively engaging with businesses in all sectors, including the building renovation and maintenance sector, and leveraging the recent Tribunal judgments, we will further step up our advocacy initiatives in this regard.
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.
2 The five economic efficiencies claims by HKAPI are: better, more efficient allocation of stock for existing products; easier introduction of new products into the market; enhanced marketing and distribution efforts of pharmaceutical companies; greater investments in other patient welfare enhancing activities; and development of public policy, academic and research and development generally.