Hong Kong: Cartels

In summary

The Hong Kong Competition Commission (the Commission) is the main agency charged with investigating conduct that may infringe the Competition Ordinance (Cap 619) (the Ordinance).

The Commission has a strong focus on cartel conduct under the First Conduct Rule (FCR) of the Ordinance.

Discussion points

• The Commission’s enforcement statistics;
• cases brought before the Competition Tribunal (the Tribunal);
• acceptance of the Commission’s first two sets of commitments;
• revision of the Commission’s Leniency Policy; and
• an outlook for FCR enforcement in 2021.

Referenced in this article

• The Nutanix case;
• the W Hing case;
• the Kam Kwong case;
• the Fungs E&M case;
• the Quantr case;
• the textbook cartel case;
• Section 6(1) of the Competition Ordinance;
• Section 60 of the Competition Ordinance;
• Section 113 of the Competition Ordinance;
• the Leniency Policy for Undertakings Engaged in Cartel Conduct; and
• the Hong Kong Competition Commission.

Overview

More than five years have passed since the Ordinance, the first economy-wide competition law in Hong Kong, came into force on 14 December 2015. In its fifth year of enforcement, the Commission, the main agency charged with investigating conduct that may infringe the Ordinance, successfully obtained three favourable judgments before the Tribunal (the specialist court in charge of hearing competition cases) and brought its sixth and seventh cases to the Tribunal in relation to an alleged cartel involving school textbooks and an alleged abuse of substantial degree of market power by a medical gas supply company respectively. Also for the first time, the Commission accepted commitments in two cases (instead of taking the cases to the Tribunal) and issued its first infringement notice under the Ordinance.

The Commission’s enforcement actions to date indicate a clear focus on cartel conduct under the FCR of the Ordinance. This is also reflected in statements from Anna Wu, former 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 uncompetitively high prices, hurting consumers, other businesses and the economy as a whole’. While we expect that cartel conduct will remain the focus and bulk of the Commission’s enforcement work, 2020 was significant as it also saw the Commission take its first abuse of a substantial degree of market power case to the Tribunal. ^[1]

The Commission underwent a change in leadership in 2020, with a new chairperson, Samuel Chan, along with four new members, being appointed as new members of the Commission and, the departure of Brent Snyder, the CEO of the Commission. As at the time of writing, a new CEO has yet to be announced.

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
• bid-rigging.

The FCR also captures agreements between entities at different levels of the supply chain, such as vertical arrangements. ^[2]

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,^[3] 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 causing significant harm to competition in Hong Kong, such as resale price maintenance. In relation to cartel conduct, the Commission has prioritised bid-rigging, price-fixing and market sharing to date, as reflected in the Commission’s choice of cases brought to the Tribunal. It has also undertaken a number of public advocacy and educational initiatives and campaigns to raise awareness of anticompetitive conduct and its harmful nature, most recently launching a ‘combat price fixing cartels’ campaign in November 2020. In addition, throughout 2019 and 2020, the Commission continued its local outreach, which included briefings to companies and sole traders in the building renovation and management sector.

The Commission’s statistics on types of conduct

As of the end of March 2020, the Commission had received approximately 4,277 complaints and enquiries since full commencement of the Ordinance in December 2015. Of these, 674 were received during the 1 April 2019 to 31 March 2020 financial year (a decrease of 5 per cent on the previous year). In the same period, approximately 73 per cent of all Conduct Rule complaints related to the FCR (ie, cartels and other anticompetitive agreements), and the Commission escalated 18 cases for further assessment (a decrease of 36 per cent on the previous year), some of which have proceeded to formal, in-depth investigations.

The Commission’s cases before the Tribunal

In 2019, the Tribunal handed down its judgment in the first two competition cases involving bid-rigging, market sharing and price-fixing brought by the Commission. The Tribunal relied heavily on EU precedents (the FCR was modelled on EU law), ruling in favour of the Commission in both proceedings. In 2020, the Commission continued its winning track record in the third and fourth cases, both concerning market sharing and price-fixing in the public housing estate renovation sector, and a fifth case concerning bid-rigging in the IT sector. A sixth case against an alleged school textbook cartel is also still pending in the Tribunal.

First two cases in 2019: cartel activities in the IT and building renovation sectors

The trial of the first enforcement action, which involved bid-rigging in the IT sector (the Nutanix case), took place in June 2018 and closing submissions were heard in September 2018. The Tribunal issued its judgment on 17 May 2019, which clarified several important points under the Ordinance:

• the Tribunal will not attribute all acts of all employees to an undertaking for the purposes of the Ordinance. In this instance, the Tribunal did not make a ruling against the fifth defendant since its 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 of the Ordinance 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 must establish is that of beyond reasonable doubt, as the Commission was seeking pecuniary penalties, which 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.

The trial of the second enforcement action, which involved market sharing and price-fixing in the building renovation sector (the W Hing case), took place between 26 November 2018 and 21 December 2018, and the judgment was issued concurrently with the Nutanix case’s judgment on 17 May 2019. Key points from the judgment include:

• the Tribunal found that each of the main contractor respondents had formed a single economic entity with their sub-contractor on the basis that their arrangement concerned, without exception, their internal, private relationship;
• the respondents argued that economic efficiencies were generated by the market sharing arrangements. The Tribunal ruled that the respondents bore the burden of proving this defence but found that the respondents fell ‘very far short’ of satisfying the conditions of the defence; and
• where the arrangements had the object of restricting competition, the Commission was not required to establish the arrangement had adversely affected competition.

At the time of writing, both Tribunal decisions are being appealed to the Hong Kong Court of Appeal.

Third and fourth cases: building renovation sector cartels with orders made against individuals

On 6 September 2018, the Commission commenced its third 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 (the Kam Kwong case). The Commission alleged that the three companies had 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 case is noteworthy as it is the first case where the Commission has taken enforcement action against individuals and, in particular, sought a disqualification order against a director.

Two company respondents and one individual respondent agreed with the Commission to admit liability and apply for an order by consent from the Tribunal. On 17 July 2020, the Tribunal granted a liability declaration for the three parties following the Carecraft procedure, marking the first time the Tribunal had disposed of proceedings by consent of the parties. The Carecraft procedure allows a judge to limit the facts (by way of a statement of agreed facts) on which the judge can base his or her judgment for the purposes of granting the declaration order, and was in the Tribunal’s view a ‘ready-made blueprint’ for the disposal of proceedings under the Ordinance. Following the decision, the remaining company and second individual respondents agreed to settlements with the Commission, which avoided the potential issue of there being inconsistent decisions with the Commission’s settlement with the other respondents. The Tribunal has not released the final penalty judgment and its decision on the disqualification order at the time of writing.

On 3 July 2019, the Commission commenced its fourth proceedings in the Tribunal against six decorating contractors and three individuals engaged in market sharing and price-fixing arrangements while providing renovation services for a housing estate (the Fungs E&M case). This was the Commission’s third suit in the building renovation sector.

This case marks the first time the Commission sought the disqualification of a director that 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. The Commission also sought from the Tribunal a declaration that all six companies and remaining two individuals had contravened or were involved in the contravention of the FCR and for fines to be issued on these eight respondents.

On 14 October 2020, the Tribunal in its judgment granted the declarations sought by the Commission pursuant to the Carecraft procedure (with the penalties to be decided at a separate hearing) and, on 30 October 2020, it issued a disqualification order of 22 months against the final respondent. In its judgment, the Tribunal noted that the purpose behind the disqualification order was not one of punishment, but of deterrence. The Tribunal also set out three levels of disqualifications, which corresponded to the severity of an individual’s participation in the infringing conduct, before declaring that the respondent fell within the second level of severity. Consequently, the Tribunal noted that the starting point of the disqualification was two years, which was then reduced by two months following mitigation. On 5 January 2021, the Tribunal issued its penalty judgment against the remaining eight respondents (see below).

The determination of pecuniary penalties under the Ordinance

The Tribunal issued its first penalty judgment under the Ordinance in relation to the W Hing case on 29 April 2020. In the judgment, the Tribunal clarified its approach to assessing pecuniary penalties under the Ordinance, whereby it applies a four-step process:

• first, determining the base amount, which reflects the mandatory considerations stipulated under the Ordinance, namely the nature and extent of the conduct constituting the contravention;
• second, making adjustments for aggravating and mitigating circumstances;
• third, applying the statutory cap for pecuniary penalties under the Ordinance, which is currently 10 per cent of the undertaking’s Hong Kong turnover for each year the contravention has occurred (or, if the contravention exceeds three years, the undertaking’s top three revenue years through the contravention period); and
• fourth and finally, applying any reduction to reflect the undertaking’s cooperation with the Commission and considering the undertaking’s inability to pay.

The Tribunal ordered fines ranging between HK$132,000 and HK$740,000 on the 10 respondents, with seven out of 10 of the respondents meeting the statutory cap. The base amount of the fines represented approximately 24 per cent of the sales value of the project relating to the infringement.

In June 2020, the Commission published a Policy on Recommended Pecuniary Penalties, which largely reflects the four steps set out in the Tribunal’s judgment above. This policy is not binding on the Tribunal, and the Commission has clarified that it may depart from the policy depending on the particularities of each case. The policy is specific to companies and does not apply to individuals. Nevertheless, in the Fungs E&M case, the Tribunal applied the four-step approach in determining the level of pecuniary penalty to be impose on individuals. Since the individuals in this case were involved in the contravention for representing certain respondent companies, the applicable statutory caps for both individuals under step three were calculated by reference to the sales revenue of the companies they represented. The individuals were fined HK$200,000 and HK$600,000 respectively.

Fifth case: first proceedings following a successful leniency application

On 22 January 2020, the Commission commenced proceedings in the Tribunal against a company and its director for their participation in cartel conduct in relation to a bidding exercise for the procurement of IT services (the Quantr case).

The Commission alleged that the respondent had exchanged competitively sensitive information with a co-bidder in relation to its intended quotations in the bidding exercise for certain IT services. The Commission was of the view that respondent had contravened the FCR by engaging in anticompetitive conduct in the form of price-fixing, and that its director was involved in the contravention.

This case marks an important enforcement milestone for being the first case to follow a successful leniency application, where the cartel was disclosed by the respondent’s co-bidder. This case is also noteworthy as it is the first time the Commission has issued an infringement notice. Before bringing proceedings in the Tribunal, the Commission attempted to resolve the matter by issuing infringement notices to the respondent and the software supplier, which also participated in the cartel conduct through the acts of a former employee. The infringement notice is a procedure under the Ordinance that allows suspected contraveners to commit to certain requirements specified in the infringement notice in exchange for the Commission not to institute proceedings at the Tribunal. The supplier accepted the infringement notice and cooperated with the Commission throughout the investigation, while the respondent refused to accept the notice and was subsequently taken to the Tribunal by the Commission. The respondent and its director eventually admitted liability and a judgment was handed down in November 2020, where a declaration of liability was made pursuant to the Carecraft procedure and a pecuniary penalty was imposed on the respondent.

Latest developments: pending case against textbook cartel

On 20 March 2020, the Commission commenced proceedings against three school textbook suppliers, alleging they had contravened the FCR by engaging in price-fixing, market sharing or bid-rigging, or a combination of these, in relation to tenders for the supply of textbooks to primary and secondary schools in Hong Kong.

The Commission’s other work under the FCR

Private right of action in relation to alleged anticompetitive conduct

Under the Ordinance, 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 Ordinance, 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 Ordinance provides a mechanism for the transfer of a case to the Tribunal where a contravention of the Ordinance 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 Ordinance 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, 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. In May 2020 and December 2020, Meyer appeared before the Tribunal and Court of Appeal respectively seeking to admit expert evidence to define the market and demonstrate whether pricing mechanisms of Taching and Shell were due to collusion or independent conduct, but was only granted a limited leave to adduce such expert evidence. The case is still pending before the courts.

A similar request to refer an alleged infringement of the Ordinance 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 Ordinance.

Acceptance of first set of commitments by online travel agents

On 31 March 2020, the Commission commenced a consultation of commitments offered under Section 60 of the Ordinance by three major online travel agents (OTAs), namely Booking.com, Expedia and Trip.com. The Commission was concerned that the use of wide most favoured nation (MFN) clauses in contracts between the OTAs and accommodation providers in Hong Kong (which required the accommodation providers the same or better terms to the OTA than those offered on all sales channels) might harm competition, potentially in contravention of the FCR of the Ordinance.

The Commission announced its acceptance of the voluntary commitments by the three OTAs in May 2020. The commitments aim to address the Commission’s concerns by requiring the OTAs to remove wide MFNs clauses from their contracts with accommodation providers for a period of five years. Notably, the Commission decided not to pursue the use of narrow MFNs (affecting the accommodation provider’s online channels) on the basis that they may have legitimate pro-competitive efficiencies, as they could prevent providers from ‘free-riding’ on the OTA’s advertising of their accommodation. While MFNs are new to Hong Kong, European national competition authorities have been investigating them for over a decade.

Acceptance of second set of commitments by the 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 (the Alliance), may constitute a contravention of the FCR. The Commission assessed whether the Alliance harms competition on the three primary markets in which the parties provide port terminal services, namely international transshipment, barge transshipment and gateway services.

The investigation concluded in October 2020. The Commission found that the Alliance was unlikely to give rise to anticompetitive effects in relation to international transshipment and barge transshipment due to the parties’ low combined market shares. Although competition concerns were likely to arise in relation to gateway services and other related markets, the parties have accepted a set of behavioural commitments, including price caps and certain service level commitments, which the Commission considered appropriate to address its concerns. The case is noteworthy for the ‘effects’ analysis undertaken by the Commission as compared with its cartel cases where the authority has identified concerns under a ‘by object’ analysis.

Revision of the Leniency Policy

In April 2020, the Commission revised its Leniency Policy^[4] and published a new Leniency Policy for Individuals Involved in Cartel Conduct.^[5] The major revisions to the Leniency Policy include creating a distinction between Type 1 applicants who disclose their participation in a cartel of which the Commission has not begun an investigation, and Type 2 applicants who provide substantial assistance to the Commission’s investigation and enforcement action of a cartel that the Commission has started investigating.

Under the current Leniency Policy, the leniency will extend to current and former agents, officers and employees of the cartel members who cooperate with the Commission. The Leniency Policy for Individuals Involved in Cartel Conduct further allows individuals involved in cartel conduct, such as employees of a company, to seek leniency from the Commission independent of the company.

Response to the covid-19 outbreak

In response to the covid-19 outbreak, the Commission published a statement on the application of the Ordinance during the pandemic. The Commission confirmed that it will continue to enforce the Ordinance, but will take a ‘pragmatic approach’ in recognising that there could be a need for additional cooperation between businesses on a temporary basis that are ‘genuinely necessitated by the covid-19 outbreak and in the interests of Hong Kong consumers and society’. The Commission also issued a warning to participants in the anti-epidemic subsidy programmes to comply with the Ordinance. The Commission reminded the public that ‘it is important for all stakeholders in the market to safeguard a competitive business environment for the benefit of everyone in Hong Kong and the economy as a whole’.

Outlook for FCR enforcement in 2021

Despite the challenges in 2020, Hong Kong’s competition regime has achieved a number of notable successes on enforcement – the imposition of the first pecuniary penalties by the Tribunal, commencement of the first proceedings following a successful leniency application and acceptance of the first two sets of commitments, all of which have further clarified various aspects of the Ordinance. While the Commission is undergoing a leadership change, with a new chairperson appointed in 2020 and a new CEO taking over in 2021, the Commission’s enforcement policy is not expected to change materially. Additionally, the Tribunal has handed down judgments of three more cases in 2020, bringing the total under the regime to five with the Commission being successful in all the cases.

From 1 April 2019 to 31 March 2020, the Hong Kong government enhanced the financial support for the Commission with an increase of the annual government subvention by over 10 per cent. 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. In light of its successful track record and its increased budget, it is anticipated that the Commission will continue to bring more actions against both companies and individuals in 2021.

The Commission is likely to continue prioritising actions against cartel conduct and is expected to start bringing actions against the parent companies of entities that are found to have violated the Ordinance under the ‘single economic entity’ doctrine.

Alongside enforcement, educating the public remains a priority for the Commission. On taking the Fungs E&M case to the Tribunal, the Commission’s then CEO, Brent Snyder, stated, ‘while enforcement of the Ordinance is important in deterring anticompetitive 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’.

Notes