Hong Kong: Dominance

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.

Dominance

Current regime

The abuse of a dominant market position is prohibited under the TO and BO, which are only applicable to telecommunications and broadcasting licensees in Hong Kong. According to the TO and the BO, a licensee is in a dominant position when, in the opinion of the CA, it is able to act without significant competitive restraint from competitors and customers.

The CA does not suggest any specific percentage level at which dominance may arise under the TO. The CA will take into account all relevant matters including, among other things, the licensee’s market share, the licensee’s power to make pricing and other decisions and any barriers to entry to competitors in the relevant market in considering whether a licensee is dominant. The CA will also examine the degree of product differentiation and sales promotion as additional factors.

A broadcasting licensee will be presumed to be dominant under the BO if it has a market share persistently in excess of 50 per cent (eg, for a period of more than 12 months). A licensee is unlikely to be considered individually dominant in a defined television programme service market, in the absence of factors suggesting otherwise, if its market share is below 40 per cent. However, the existence of very weak competitors, substantial barriers to market entry and limited buyer or supplier countervailing power, would provide strong evidence of dominance by that licensee.

New regime

The Second Conduct Rule of the CO prohibits undertakings with substantial market power in a relevant market from engaging in conduct that has as its object or effect the prevention, restriction or distortion of competition in Hong Kong. The restriction on competition must be appreciable.

Conduct can only be caught under the Second Conduct Rule where an undertaking holds substantial market power. The CO provides that an undertaking’s market power may be measured by, among other things, its market share, pricing power and barriers to entry in a relevant market. The CEDB Guidelines also emphasise that the Commission may take into account a variety of factors in determining market power beyond market share (similar to the current position under the current telecommunications and broadcasting sectoral competition regimes).

The CO does not provide a market share threshold at which an undertaking would be viewed as holding substantial market power. Notably, the CEDB, during the legislative passage of the CO, proposed to adopt a minimum market share threshold of 25 per cent, although a substantial degree of market power could still be established if other relevant factors provide evidence of such market power. It remains to be seen what level of market share will be required for an undertaking to be considered to hold a substantial degree of market power. It is expected that this point will be addressed in the Commission Guidelines.

Abuse

Current regime

The TO and the BO prohibit a licensee that is in a dominant position in a telecommunications market or television programme service market from abusing its position by committing any act to inhibit the competitive activities of other licensees and would-be market entrants. A licensee that is in a dominant position is deemed to have abused its position if, in the opinion of the CA, it has engaged in conduct that has the purpose or effect of preventing or substantially restricting competition in a telecommunications market or preventing, distorting or substantially restricting competition in a television programme service market.

The TO and the BO set out a non-exhaustive list of such types of conduct that the CA may consider anti-competitive, including predatory pricing, price discrimination and discrimination in the supply of services to competitors.

There are no defences available under the TO or BO to allegations of abuse of a dominant position.

New regime

The CO does not exhaustively list the conduct that could constitute and abuse of a substantial degree of market power, but it does provide a partial list including predatory behaviour and limiting production, markets or technical development to the prejudice of consumers. It is expected that the Commission Guidelines will address the concept of abuse in more detail. In the interim, the CEDB Guidelines note that the Commission and the Tribunal may consider conduct such as tying and refusal to deal as abusive.

There are no defences available under the CO to rebut the finding of an abuse of a substantial degree of market power. However, the CEDB Guidelines suggest that objective justification type arguments may be applicable to certain types of abusive conduct (such as predatory pricing and refusal to supply). The issue of the availability of defences to allegations of abuse of a substantial degree of market power may be addressed in the Commission Guidelines.

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 abuse of a dominant position. There are no exclusions or exemptions available under the BO in relation to the abuse of dominant position.

New regime

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

• statutory bodies are exempted unless specified by the chief executive of Hong Kong;
• small and medium-sized enterprises (with turnover not exceeding HK$40 million) are excluded from the application of the Second Conduct Rule;
• 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);
• conduct engaged in 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
• conduct engaged in for the purpose of complying with Hong Kong law or where the undertaking is entrusted by the Hong Kong government to operate ‘services of general economic interest’ is excluded from the application of the Second Conduct Rule.

There is no economic efficiency defence available for the contravention of the Second Conduct Rule, although such defence is available in relation to the First Conduct Rule, which prohibits anti-competitive agreements between undertakings.

An undertaking may make an application to the Commission for a determination as to the applicability of the exclusions or exemptions outlined above to particular conduct. The Commission is not required to consider hypothetical questions or conduct, 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 conduct is excluded or exempt from the Second Conduct Rule, the undertaking, to the extent that it is engaging in that conduct, will be immune from the application of the CO. 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 abused a dominant market position 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 the abuse of a dominant position, 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 abuse of a dominant position 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 abuse of dominance 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 Second Conduct Rule of its own initiative, 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 Second 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 Second Conduct Rule. 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 Second Conduct Rule, in lieu of the Commission bringing proceedings before the Tribunal.

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 criteria it may apply in deciding to accept an application for leniency.

The Tribunal may, upon application by the Commission, and if it is satisfied that an infringement of the Second Conduct Rule has occurred, make an order declaring that a person has contravened the Second 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, decisions by the Commission in relation to commitments or 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 the abuse of a dominant market position under the TO and the BO, 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 Second Conduct Rule, including:

• a declaration that an infringement of the Second Conduct Rule has occurred;
• an order prohibiting a person from engaging in the conduct which constitutes an infringement of the Second Conduct Rule;
• an order requiring a person who has contravened the Second 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 Second 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 Second 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, including the abuse of a dominant position, 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 from a breach of, among others, a prohibition on abuse of dominance 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 Second 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.