Hong Kong: Cartels

A new economy-wide competition law

The Competition Ordinance (CO), Hong Kong’s long-awaited economy-wide competition law, was signed into law on 22 June 2012 and is expected to take full effect by mid-2015. In the interim, the Competition Commission (the Commission) and the Competition Tribunal (the Tribunal) will be established. The Commission will also consult on and issue guidelines that will provide further clarity and set out a detailed framework to govern enforcement of the CO (the Commission Guidelines).

The Commission Guidelines are highly anticipated and will provide welcome clarification, as there are a number of aspects of the CO (both in terms of the application of the substantive provisions of the CO and procedure and practice) that are currently unclear. However, in the absence of the Commission Guidelines, guidelines published by the Commerce and Economic Development Bureau (the CEDB Guidelines) during the legislative passage of the CO, provide a limited source of guidance on how the Commission may interpret the CO.

The chairperson of the Commission, together with the commissioners and yet-to-be appointed chief executive officer, will determine the enforcement approach of the Commission and competition policy in Hong Kong. The chairperson and commissioners have backgrounds in law, economics and industry, and bring a strong consumer focus to the Commission – a number of them have held positions at the Consumer Council in Hong Kong. Given this background, consumer-facing industries such as health care, leisure and retail could be an enforcement priority for the new authority.

Existing sectoral competition law

Prior to the CO, there was no economy-wide competition law. However, a limited sectoral competition law regime did exist under the Telecommunications Ordinance (TO) and the Broadcasting Ordinance (BO). With the passage of the CO, there will be a transitional period before the eventual repeal of some of the competition provisions of the TO and all of the competition provisions of the BO, when the enforcement provisions of the CO come into effect. During this transition period, the CO also envisages that the Commission and the Communications Authority (CA), the current sectoral competition authority for telecommunications and broadcasting, will enter into a memorandum of understanding for the purposes of coordinating the performance of their functions under the CO. The CO envisages the CA will have concurrent jurisdiction with the Commission over conduct of undertakings in the telecommunications and broadcasting sectors.

Cartels

Current regime

Anti-competitive practices are prohibited under the TO and BO, which is only applicable to telecommunications and broadcasting licensees in Hong Kong. The prohibition covers agreements (formal or informal, written or oral) and conduct that has the purpose or effect of preventing, distorting or substantially restricting competition in the relevant telecommunications market or television programme service market. To date, Hong Kong has not seen active enforcement by the CA against hard-core cartels and there has only been limited enforcement against anti-competitive agreements under the TO and BO.

The TO sets out a non-exhaustive list of potential anti-competitive practices, including price-fixing agreements, actions preventing or restricting the supply of goods and services to competitors, and market (customer or geographic) sharing.

The CA’s guidelines in relation to the TO state that it may regard price fixing and preventing or restricting supply to competitors as per se offences (ie, preventing, distorting or substantially restricting competition by object). Market sharing, on the other hand, may be regarded by the CA as having the ‘purpose or effect’ of preventing, distorting or substantially restricting competition.

The BO similarly sets out a non-exhaustive list of potential anti-competitive conduct including, price-fixing agreements, actions preventing or restricting the supply of goods and services to competitors and market (customer or geographic) sharing. The BO also identifies the following conduct as potentially problematic:

• limiting or controlling production, markets, technical development or investment;
• applying dissimilar conditions to equivalent agreements with other trading parties, thereby placing them at a competitive disadvantage; and
• making the conclusion of agreements subject to acceptance by the other parties of supplementary obligations that have no connection with the subject of the agreements.

The CA’s guidelines in relation to the BO state that the CA’s assessment involves a ‘substantial effect test’:  that agreements will generally have no substantial effect on competition, and thus will not be prohibited, if the undertakings’ combined share of the relevant market does not exceed 25 per cent. However, the 25 per cent threshold will generally not apply to price fixing, imposing minimum resale prices or agreements that are one of a network of similar agreements having a cumulative effect on the market in question. The guidelines do not indicate which types of agreement (or conduct) the CA regards as per se illegal under the BO.

New regime

The First Conduct Rule of the CO prohibits agreements between undertakings that have the object or effect of preventing, restricting or distorting competition in Hong Kong. The restriction on competition must be appreciable.

The CO distinguishes four types of ‘hard-core’ or ‘serious’ anti-competitive conduct, namely: price fixing; allocation of sales, customers, territories or markets; fixing, limiting or otherwise controlling production or supply; and bid rigging. Other conduct, while not permitted, is subject to a more lenient enforcement procedure. (See ‘Exclusions and Exemptions’ and ‘Regulatory Framework: Finding of an infringement and other determinations’, below.)

The application of the First Conduct Rule is not limited to agreements between competitors and therefore vertical arrangements (ie, between entities at different levels of the supply chain) are caught. While the CEDB Guidelines acknowledge that vertical agreements are less likely to give rise to competition concerns (as compared to horizontal agreements), the CEDB Guidelines do highlight that vertical arrangements, particularly where a supplier has a substantial degree of market power, could potentially be problematic.

Jurisdictional scope

Current regime

The current regime is applicable only to ‘licensees’ under the TO and the BO.

New regime

The new regime is economy-wide and extraterritorial in scope. Conduct that has an effect in Hong Kong will be caught, even if the undertaking concerned or the relevant conduct engaged in is outside of Hong Kong.

Exclusions and exemptions

Current regime

Under the TO, the chief executive of Hong Kong may by order exempt any person or any class of persons from the TO or from a provision of the TO, including the prohibition on anti-competitive practices

Under the BO, the CA may exempt conduct on the basis of a prescribed ground. However no grounds have been prescribed to date. Further, the prohibition on anti-competitive conduct does not apply to service programming, where the television programme produced wholly or substantially by the licensee of the service.

As explained in the ‘Cartels’ section, above, the CA also takes the view that under the BO, agreements other than price fixing, imposing minimum resale prices or agreements that are one of a network of similar agreements having a cumulative effect on the market in question, will generally have no substantial effect on competition, and thus not be prohibited, if the parties’ combined share of the relevant market does not exceed 25 per cent.

New regime

A number of exclusions and exemptions in relation to the First Conduct Rule are available under the CO:

• statutory bodies are exempted unless specified by the chief executive of Hong Kong;
• persons specified by regulation by the chief executive of Hong Kong are exempt (either in full or to the extent engaged in a specific activity);
• agreements (including concerted practices and decisions of an association of undertakings) between undertakings with combined turnover not exceeding HK$200 million are also exempt from the First Conduct Rule, but only if the agreement does not involve ‘serious’ anti-competitive conduct;
• agreements entered into for the purpose of public policy or to avoid conflict with Hong Kong’s international obligations may be exempt by order from the chief executive of Hong Kong; and
• agreements which enhance economic efficiency, or which are entered into to comply with a requirement of the Hong Kong law, or where the undertaking is entrusted by the Hong Kong government to operate ‘services of general economic interest’ are excluded from the application of the First Conduct Rule.

An undertaking may make an application to the Commission for a determination as to the applicability of the exclusions or exemptions outlined above to a particular agreement. The Commission is not required to consider hypothetical questions or agreements, but may by way of such a determination provide guidance as to the applicability of the relevant exclusion or exemption. If the Commission determines that the particular agreement is excluded or exempted from the First Conduct Rule, the undertakings concerned will be immune from the application of the CO with regard to that agreement. The Commission must publicly consult before making such a determination, and may attach any limitations or conditions to its determination. Determinations of the Commission of this type may be reviewed by the Tribunal (see ‘Regulatory Framework: Appeals’, below).

Regulatory framework

Current regime

Investigation

The CA has the power to investigate a licensee for a suspected infringement of the TO or the BO. An investigation may arise from a complaint, a reference to the CA by another authority or body or of the CA’s own initiative.

The CA has broad powers of investigation, including the power to require a licensee or a third party to provide any documents or information. The CA may also enter the premises of a licensee, inspect and copy documents and seize evidence. However, in practice, the CA has to date sought voluntary cooperation with any requests for information.

Finding of an infringement

The CA is empowered under the TO and the BO to determine whether an undertaking has engaged in an anti-competitive agreement or concerted practice and impose penalties on the undertaking concerned. (See ‘Sanctions’, below.)

The CA, in enforcing the TO, will consider lenient treatment of any licensee who promptly volunteers information and evidence about an anti-competitive practice, including an anti-competitive agreement or concerted practice, once it comes to light, even if that licensee is also implicated. The same leniency treatment is not mentioned in the CA’s guidelines on the enforcement of the BO.

Appeals

Any person aggrieved by an opinion, determination, direction or decision of the CA in relation to the finding of an anti-competitive practice under the TO may appeal to the Telecommunications (Competition Provisions) Appeal Board. A notice of appeal must be lodged no later than 14 days after the appellant knows (or ought reasonably to have known) of the proposed appeal subject matter.

A licensee (including a person seeking to be a licensee) aggrieved by an order, determination, direction or decision of the CA in relation to the finding of an anti-competitive conduct under the BO may appeal by way of petition to the chief executive of Hong Kong. Appeals must be made by petition no later than 30 days from the date of the relevant order, determination, direction or decision. The BO does not contain appeal procedures for non-licensees, but an application can be made by a non-licensee for judicial review on common law grounds.

New regime

Investigation

The Commission may investigate a suspected infringement of the First Conduct Rule of its own initiative, or on receipt of a complaint, or on referral from the Court of First Instance, Tribunal or other authority in Hong Kong.

The Commission has broad powers of investigation, including the power to require an undertaking to provide any documents or information. The Commission may also conduct dawn raids or inspections of premises and confiscate documents, with a warrant issued by the Court of First Instance. (For a description of the consequences for a failure to comply with a Commission investigation, see ‘Sanctions’, below.)

Finding of an infringement and other determinations

The Commission is not empowered to determine whether a breach of the First Conduct Rule has occurred (nor to impose sanctions), but may nevertheless issue an infringement notice where the Commission suspects that an undertaking has violated the First Conduct Rule involving a ‘serious’ anti-competitive conduct. The infringement notice provides an opportunity for the undertaking concerned to offer commitments to remedy the anti-competitive behaviour and/or admit to an infringement of the First Conduct Rule, in lieu of the Commission bringing proceedings before the Tribunal.

If the Commission suspects that an undertaking has violated the First Conduct Rule but the breach does not involve ‘serious’ anti-competitive conduct, then the Commission, before commencing proceedings before the Tribunal, must issue a warning notice to the undertaking concerned. The warning notice provides an opportunity for an undertaking concerned to rectify its conduct within a specified warning period. If the conduct continues or is repeated, the Commission may issue an infringement notice or commence proceedings in the Tribunal against the undertaking concerned. Notably, however, such proceedings will only relate to conduct engaged in after the expiry of the warning period (or issuance of an infringement notice).

The Commission also has the power to enter into leniency agreements with people and undertakings, providing full or partial immunity from prosecution in return for cooperation with an investigation or proceedings under the CO. There are no specific guidelines as yet as to how the Commission will approach applications for leniency, including for example, the criterion it may apply in deciding to accept an application for leniency. However, it is anticipated that hard-core cartels will be one of the Commission’s enforcement priorities, and therefore likely that guidance will be published in due course.

The Tribunal may, upon application by the Commission, and if it is satisfied that an infringement of the First Conduct Rule has occurred, make an order declaring that a person has contravened the First Conduct Rule and, by order, impose penalties on the undertaking concerned. (See ‘Sanctions’, below.) The requisite standard of review that the Tribunal will apply to the Commission’s application is not yet clear, however the Tribunal must be ‘satisfied’ that a contravention has occurred.

Appeals

Decisions, determinations and orders of the Tribunal may be appealed to the Court of Appeal. The Court of Appeal is able to confirm, set aside or vary the decision of the Tribunal. If the Court sets aside a decision, determination or order of the Tribunal it may substitute any other decision, determination or order as the Court considers appropriate. The Court may also remit the matter back to the Tribunal for reconsideration in light of the decision of the Court. A further appeal of the decision of the Court of Appeal is available in limited circumstances to the Court of Final Appeal in Hong Kong.

Certain determinations of the Commission (including, for example, the termination of leniency) may be appealed to the Tribunal, and the Tribunal may confirm or set aside (in whole or in part) such determination. If the Tribunal sets aside a determination, it may remit the matter back to the Commission with a direction to reconsider and make a new determination in accordance with the decision of the Tribunal. A further appeal of the Tribunal’s decision is available on a question of law only.

Sanctions

Current regime

The CA may impose a number of sanctions for engaging in anti-competitive practices or conduct under the TO and the BO, respectively, including:

• a warning to a licensee (if the CA considers that any other sanction is not justified in the circumstances);
• directions requiring a licensee to bring the anti-competitive conduct to an end and to take any such steps as the CA may consider necessary to comply with the TO or the BO; and
• a fine of HK$200,000 (rising to HK$1 million for recidivists). If the CA considers that the fine it may impose is not adequate for the breach, the CA may apply to the Court of First Instance, who may impose a fine of up to 10 per cent of the licensee’s turnover during the period of the breach or an amount of HK$10 million (in the case of the TO) or HK$2 million (in the case of the BO), whichever is higher.

In very serious cases under the BO, the CA is empowered, depending on the type of licence, to suspend or revoke the licensee’s licence or recommend the chief executive of Hong Kong to revoke the licence. Such sanctions are not available under the TO.

New regime

The Tribunal may impose a wide range of sanctions for an infringement of the First Conduct Rule, including:

• a declaration that an infringement of the First Conduct Rule has occurred;
• an order prohibiting a person from engaging in the conduct which constitutes an infringement of the First Conduct Rule;
• an order requiring a person who has contravened the First Conduct Rule to do ‘any act or thing’;
• fines of up to 10 per cent of the Hong Kong turnover of the undertaking concerned for each year in which the infringement occurred (for up to three years, taking those years in which the highest turnover was achieved);
• director disqualification orders, disqualifying the individual for a period of up to five years for being directly or indirectly involved in the anti-competitive conduct (contravention of a director disqualification order may result in criminal penalties, including payment of a fine);
• an interim injunction pending determination of proceedings under the First Conduct Rule;
• an order for damages, payable to any person who has suffered loss or damage as a result of the anti-competitive conduct;
• disgorgement of illegal gains (or avoided losses) as a result of the anti-competitive conduct, payable to the government of Hong Kong or any other specified person; and
• a costs order for the Commission’s costs.

The Court in Hong Kong (but not the Tribunal) may impose criminal sanctions for failure to cooperate with a Commission investigation.

The Court may, for failure to comply with an investigation into a suspected breach of the First Conduct Rule, impose a fine of HK$200,000 and imprisonment for one year for an indictable offence, or a level-five fine (currently HK$50,000) and six months’ imprisonment if convicted on a summary basis.

In relation to more serious non-cooperation, including if an undertaking or a person actively obstructs a Commission investigation (such as the obstruction of a dawn raid) or tampers with evidence (such as destruction or falsification of evidence or providing misleading evidence), the Court may impose a fine of HK$1 million and imprisonment for two years for an indictable offence, or a level-six fine (currently HK$100,000) and six months’ imprisonment if convicted on a summary basis.

Private enforcement

Current regime

The TO provides that a person sustaining loss or damage from an anti-competitive practice may bring an action for damages and/or an injunction or other appropriate remedy against the licensee who is in breach. A similar provision exists under the BO which permits a person sustaining loss or damage as a result of anti-competitive conduct to bring an action for damages, an injunction or other appropriate remedy, order or relief against the licensee who is in breach.

New regime

The CO provides that aggrieved persons suffering loss or damage due to a contravention of the CO, including the First Conduct Rule, may bring a follow-on private action before the Tribunal, which is the primary forum for private competition claims. Such a follow-on action may only be brought after a contravention has been established by the Tribunal. If an action is a composite claim, containing competition and non-competition claims, the competition claim will be heard by the Tribunal unless the Tribunal considers, in the interests of justice, that the competition claim should be heard before the Court of First Instance.