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 October 2014, the Competition Commission (the Commission) and the Communications Authority (CA) (the current sectoral competition authority for telecommunications and broadcasting) published draft guidelines on the CO (the Draft Guidelines) that explain how they intend to interpret and administer the CO.

The Draft Guidelines outline how the authorities expect to interpret and give effect to the three competition rules in the CO – the First Conduct Rule (the prohibition of anti-competitive agreements, concerted practices and decisions); the Second Conduct Rule (the prohibition of an abuse of a substantial degree of market power); and the Merger Rule – as well as the procedures for handling complaints, conducting investigations and considering applications for exclusions and exemptions. The guidelines will not have the force of law, but are indicative of how the agencies propose to apply the CO.

The public consultation period of the Draft Guidelines drew to a close in December 2014, after which the Commission will refine and produce the finalised Draft Guidelines for consultation with the Hong Kong Legislative Council. Separately, the Commission will also prepare additional guidance and policies (eg, on leniency and enforcement priorities). The Commission anticipates completing all of the above preparatory work in the first half of 2015, before the CO takes full effect. In the absence of finalised guidelines, the Draft Guidelines are a source of guidance on how the Commission may interpret the CO.

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 CA 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 the conduct of undertakings in the telecommunications and broadcasting sectors.

New economy-wide competition law

Once the CO comes into effect, the competition provisions under the BO will be completely repealed but the TO will retain the concept of dominance in relation to licence restrictions and price control regulations of dominant licensees, and in relation to exploitative conduct of a licensee in a dominant position in a tele­communications market.

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 a substantial degree of market power in a 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 a substantial degree of 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.

Neither the CO nor the Draft Guidelines provide an indicative market share threshold at which an undertaking would be viewed as holding a substantial degree of market power. It remains to be seen whether the Commission will provide an indicative market share threshold in the finalised Commission Guidelines which would be a useful tool for businesses operating Hong Kong in assessing whether they are subject to the Second Conduct Rule.

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 an 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.

The Draft Guidelines explain that the Commission is only required to show that the conduct has the object or effect of harming competition. The object of the conduct refers to the objective purpose of the conduct engaged in by the undertaking considered in its legal and economic context and not merely the subjective intention of the undertaking concerned. On the other hand, a conduct that does not have the object of harming competition may nevertheless infringe the CO if it has an actual or likely anti-competitive effect (eg, higher prices, restriction in output, reduction in product quality or anti-competitive foreclosure).

The Draft Guidelines also provide a non-exhaustive list of conduct that may fall foul of the Second Conduct Rule:

• predatory pricing;
• tying and bundling;
• margin squeeze conduct;
• refusals to deal; and
• exclusive dealing.

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 takes place 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 turnovers 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 relevant conduct will not fall within the scope of the Second Conduct Rule. 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 Competition Tribunal (the Tribunal).

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.

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 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.

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 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 any person, 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 the criteria it may apply in deciding to accept an application for leniency. The Commission has stated that it will publish guidelines on leniency before the CO comes into effect.

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. 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 decisions by the Commission in relation to commitments or the termination of leniency) may be appealed to the Tribunal, which 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 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.