Hong Kong: Procedural Issues
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While administrative delays have meant that the Hong Kong Competition Ordinance (the Ordinance) has yet to be fully implemented, Hong Kong has seen some significant developments on the competition law front in 2014. In particular, Hong Kong now has a competition authority staffed and in place. Furthermore, the new Competition Commission (the Commission) has recently issued its draft Guidelines (the Guidelines), which explain how the Commission will interpret and apply various provisions of the Ordinance. With the consultation period for the Guidelines over as of late 2014, the Commission aims to finish its preparation work by the first half of 2015, which should pave the way for the full implementation of the Ordinance sometime in 2015. With this step, Hong Kong will become one of the final major advanced economies to enact comprehensive competition legislation. Hong Kong has long relished its reputation as ‘the most business-friendly city in the world’, with low personal and corporate tax rates and responsible government spending. Its free market principles espouse that light touch government intervention enables competition, which ultimately leads to more choice and better prices for the consumer. Therefore, the Commission will need to strike a delicate balance between safeguarding the competitive process while not being overly interventionist and over-burdening businesses that have flourished in Hong Kong’s open economy.
Since the draft Ordinance was first published in 2012, much has been written on its provisions and the way in which these have been ‘watered down’ to ensure its ultimate passage in the face of fierce public and private opposition. Rather than repeat that discussion here, this article will focus on recent developments and the procedural nitty-gritty of the Ordinance, and how this will affect companies not only once the Ordinance is fully implemented, but in the interim as well. It will look at the recent Guidelines issued, the institutional framework, and focus on the shape and scope of the powers of the new Commission, how these tie in with the new Competition Tribunal and, perhaps most importantly, the sanctions (and potential for avoiding such) that companies face (both from the enforcement agencies and from private follow-on litigants).
The Ordinance calls for the setting-up of two major institutions: the Competition Commission (the Commission) and the Competition Tribunal (the Tribunal), to enforce and adjudicate on its provisions.
The Competition Commission
The Commission is an independent statutory body with a wide range of investigatory and enforcement powers, including the ability to investigate suspected infringements (either in response to complaints or on its own initiative) and to issue warnings and infringement notices. It will prosecute serious infringements before the Tribunal. It does not have the power to impose fines or other penalties for infringements, this power being reserved to the Tribunal (the Commission was originally slated to be able to impose a HK$10 million penalty, but this power was one of the many casualties that landed on the Legislative Council’s cutting floor in order to get the bill passed). As in other jurisdictions, the Ordinance leaves it to the Commission to prepare and issue detailed regulatory guidelines on the precise interpretation of the rules, as well as on procedural and substantive matters (eg, complaints and investigations procedures, the treatment of vertical agreements, the application of block exemptions, etc). Other functions of the Commission will include promoting public understanding of the Ordinance, advising the government on competition matters and, importantly, issuing block exemption orders in respect of particular categories of agreements.
Finally, the Commission will also be able to issue individual exemptions, upon the application of undertakings, to agreements that, while caught by the broad prohibition in the conduct rules, nonetheless enhance overall economic efficiency or may otherwise justify exemption. The Commission is not obliged to make a decision on exemption, but may do so in novel areas of unsettled Hong Kong law. This makes sense given the infancy of the regime in Hong Kong and the lack of established principles to date. It is likely that, in the interim, private undertakings will welcome the certainty of such Commission exemptions, so long as sufficient resources are dedicated so that decisions can be taken in a reasonable time frame.
The Commission will consist of five to 16 members, including the chairperson, all appointed by the chief executive of the Hong Kong SAR. Such members are expected to have extensive experience and rich knowledge in their own industries – commerce, economics, law, small or medium-sized enterprise or public policy – and will have a significant impact on the direction and enforcement priorities the Commission will take.
On 26 April 2013, the chief executive of the Hong Kong SAR announced the appointment of Anna Wu Hung-yuk as chairperson along with 13 other members of the Competition Commission for a term of three years. In July 2014, the Commission announced the appointment of Dr Stanley Wong as chief executive officer with effect from 3 September 2014.
The Tribunal will be a superior court of record under the Ordinance, meaning that all proceedings will be recorded and published. Its purpose is to hear and determine enforcement applications brought by the Commission as well as follow-on private actions. The Tribunal will also review reviewable determinations made by the Commission. The chief executive of the Hong Kong SAR is to appoint one member of the Tribunal as president and one as deputy president of the Tribunal. The Tribunal may decide its own procedures and, if it deems fit, follow the practice and procedure of the Court of First Instance in the exercise of its civil jurisdiction. Section 147 of the Ordinance provides that the Tribunal is not bound by the rules of evidence except in proceedings where the Commission applies for a pecuniary or financial penalty; it can therefore take into account any relevant evidence or information whether or not such evidence would be admissible in a court of law.
The Tribunal was established on 1 August 2013 and the Honourable Mr Justice Godfrey Lam Wan-ho was appointed as the president of the Competition Tribunal, while the Honourable Madam Justice Queeny Au-Yeung Kwai-yue was appointed as deputy president, both for a term of three years.
The Communications Authority
In another notable departure from international norms, there is no general regime of merger control under the Ordinance at present. The merger rule only applies to the telecommunications sector, and the Commission will share jurisdiction with the Communications Authority (CA) regarding decision-making in this sector. The adjudicative power will be transferred to the Tribunal from the CA, where it currently resides. The Ordinance enables the routine exchange of confidential information between both agencies. While the Guidelines refer to the exchange of information between these authorities, there is no reference to information exchange between the Commission and other National Competition Authorities. This is something the Commission will no doubt have to clarify in due course.
The transitional period
The government intends to implement the Ordinance in phases to provide for a transitional period of at least a year and has indicated this period may be as long as 18 months to two years. Such period is intended to give businesses time to assess their current state of compliance and to adjust their agreements and practices as necessary before becoming subject to the full rigours of the law. It is also designed to give businesses time to train officers and management staff, and to consider the possibility of applying for exemption, for example. Based on the Guidelines and experience from other jurisdictions, companies should be able to make educated assessments of what their exposures are likely to be even at this stage and begin to take the necessary measures. On 18 January 2013 and 1 August 2013, key provisions of the Ordinance came into effect.
Powers of the Commission
While entrusted with ensuring the observance of the Ordinance, the Commission will lack a key enforcement tool found in other jurisdictions, namely the ability to levy fines directly on undertakings for breaches of the Ordinance. Instead, it will have the power to conduct investigations and bring proceedings against the alleged parties before the Tribunal, which in turn will issue fines where appropriate. However, the Commission is not left entirely toothless; it will have an array of powers, short of being able to levy fines, to enable it to monitor and enforce the Ordinance. The Commission will be able to issue exemption decisions, accept commitments from infringers in return for a decision not to prosecute, and issue warning notices for minor infringements and infringement notices for more serious violations.
In October 2014, the Commission published its long-awaited draft Guidelines, covering issues ranging from the handling of complaints and conducting investigations, to more substantive issues such as how the Commission will interpret the legal provisions of the Ordinance. The Guidelines describe the Commission’s interpretation of:
- the First Conduct Rule, which prohibits anti-competitive agreements and practices;
- the Second Conduct Rule, which prohibits the abuse of market power; and
- the Merger Rule
The First Conduct Rule
The Commission must demonstrate that an agreement has either an anti-competitive object or an anti-competitive effect. The Guidelines state that parties are free to argue that any restrictive agreement generates efficiencies, including agreements which have the object of harming competition. However, the Commission notes that, in practice, conduct involving an agreement between competitors to fix prices, share markets, restrict output or rig bids is unlikely to be justifiable on the basis of economic efficiency arguments.
Once it has been determined that an agreement has the object or effect of harming competition, and assuming no exclusions or exemption apply, the Commission will go on to consider whether the conduct amounts to ‘serious anti-competitive conduct’. The Commission takes the view that arrangements between competitors that seek to fix prices, shares markets, restrict output or rig bids are forms of serious anti-competitive conduct. While generally the Commission does not consider vertical arrangements to amount to serious anti-competitive conduct, it does consider that resale price maintenance (RPM) has both the object of restricting competition and may amount to serious anti-competitive conduct ‘in certain cases’ (no further guidance is given at this stage on how it will determine whether a case is serious or not). Absent any further guidance from the Commission, parties would be well advised to proceed with caution before entering RPM agreements with suppliers or customers.
The Guidelines note that as a general matter, competition concerns with vertical agreements will only arise where there is some market power at either the level of the supplier, buyer, or both. While the Guidelines do provide for a general de minimis threshold for agreements of ‘lesser significance’,1 there is little guidance given to companies engaging in vertical agreements which do not fall within this category. For instance, the Guidelines do not give any market share indicators below which it can be presumed there is little or no effect on competition.
The Second Conduct Rule
This provision only applies to anti-competitive conduct where an undertaking has a substantial degree of market power.2 The Guidelines reiterate that this provision (like the First Conduct Rule) applies to conduct that has the object or effect of harming competition in Hong Kong, therefore an undertaking could be in breach of this provision notwithstanding that the abusive conduct takes place outside Hong Kong.
The Guidelines outline the methodology for defining the relevant product and geographic markets. Once the relevant market is defined, the factors taken into account when determining whether an undertaking has market power include:
- the market share of the undertaking;
- the undertaking’s power to make pricing and other decisions;
- any barriers to entry to competitors into the relevant market; and
- other relevant matters.
Again, the Guidelines give no guidance on any ‘safe harbours’ as regards market share levels, below which it could be presumed there is little or no effect on competition. Such a threshold would be a useful first step for firms in assessing whether their conduct towards competitors could raise competition concerns. As regards abusive conduct, the Guidelines give some examples of conduct which may be prohibited under the Second Conduct Rule such as predatory pricing, tying, bundling and refusals to deal. However, this list is not exhaustive and the category of abusive conduct is an open one.
The Merger Rule
The Guidelines set out how the Commission and the CA intend to interpret and give effect to the Merger Rule in the Ordinance. Presently, the Merger Rule only applies where an undertaking that directly or indirectly holds a ‘carrier licence’ within the meaning of the Telecommunications Ordinance is involved in a merger.3 While not mandatory to notify a merger, the Commission encourages parties to seek informal advice on the transaction on a confidential basis. Therefore, if either party to a transaction holds, directly or indirectly, a carrier licence, then it is advisable to engage with the Commission to minimise the risk that proceedings are brought by the Commission before the Tribunal. This is particularly important given that the Commission may bring such proceedings to unwind a completed merger or stop the process in relation to an anticipated merger. These proceedings must be brought within six months after the day on which the merger was completed or the Commission became aware of the merger, whichever is later.
In addition to the Guidelines, the Commission intends to release, early in 2015, further guidance on the Commission’s interpretation of the leniency programme, its enforcement policy, and a pamphlet addressing the concerns of small and medium-sized enterprises.
Complaints and investigations
Part 3 of the Ordinance empowers the Commission to hear complaints and to conduct investigations of its own accord. It is given wide investigatory powers and may conduct raids, enter property and confiscate documents and property upon obtaining the appropriate warrants from the Court of First Instance when it has ‘reasonable cause’ to suspect violations of the Ordinance. Following an investigation, the Commission may decide to bring proceedings against the alleged parties before the Tribunal.
Section 37 provides that any person can lodge a reasonable complaint alleging infringement of any Conduct Rule with the Commission. The Guidelines describe the manner and form in which complaints may be made to the Commission and the processes the Commission will use for determining what action to take in relation to a complaint or query. However, the Guidelines stress that the Commission has discretion to decide which complaints may warrant further investigation. This includes the discretion not to investigate a complaint further, as well as the discretion to investigate a complaint even where the complainant no longer wishes to cooperate with the Commission. The Guidelines make clear that interventions will be focussed on areas where the impact on the economy is greatest. The forthcoming document outlining the Commission’s enforcement policy should give further details on particular sectors or areas of the economy where the Commission will focus its work.
Division 2 of part 3 lays out the Commission’s investigatory powers, including the power to:
- obtain production of documents and information (section 41);
- require attendance of persons before the investigators (section 42); and
- require the veracity of any answers or evidence given to be verified by statutory declaration (section 43) before the Commission.
The Commission will also have the power to:
- enter and search a premises;
- use reasonable force;
- take copies or extracts from any document (or to take possession thereof); and
- require any person on the premises to explain any document, if so required.
The Guidelines give some further details on the extensive powers granted to the Commission under the following provisions.
The Commission may request information recorded in any form such as:
- draft documents;
- original documents;
- records in electronic form;
- databases; and
- the means of accessing the information contained in those databases.
Section 41 notices will often include questions that may require the creation of new documents, such as written responses to Commission questions, lists of customers or suppliers, contact details or data extracted in various forms.
Persons who may be required to appear before the Commission and answer questions include:
- current or former employees, competitors, customers, distributors or suppliers of the parties under investigation;
- representatives of relevant trade associations; or
Under section 48, the Commission may apply to a judge of the Court of First Instance for permission to enter and search any premises to obtain documents, information and other items relevant to the investigation. The Commission expects the types of situations where it may seek a section 48 warrant include:
- secretive conduct;
- instances where it considers that documents or information relevant to its investigation may be destroyed or interfered with; or
- where the Commission has been unsuccessful in obtaining documents and suspects there has been non-compliance with its earlier requests.
Failure to comply with the investigation without a reasonable excuse is a criminal offence which may lead to a fine or imprisonment for up to one year. If an undertaking destroys documents (section 53), obstructs a search (section 54) or provides false or misleading information (section 55), stricter criminal penalties including increased fines and imprisonment for up to two years are possible.
Sections 9 and 24 of the Ordinance empower (but do not oblige) the Commission to make decisions on applications made by an undertaking seeking clarity as to whether its conduct or agreements meet the criteria of exclusion or exemption from the first or second conduct rule (whether by virtue of the application of a block exemption or otherwise). In common with other jurisdictions, and to avoid overburdening the resources of the Commission, the Commission will only consider ‘novel or unresolved questions of wider importance or public interest’ or questions for which ‘there is no clarification in existing case law or decisions of the Commission’. The Commission must publish such applications and allow time for representations thereon. The effect of a positive decision will be to exclude or exempt certain conduct or agreements from the prohibitions contained in the First Conduct Rule and the Second Conduct Rule. A decision can be made with a condition or limitation, and the exemption will not be provided when an undertaking does not comply with a condition or limitation.
The Guidelines make it clear the Commission may initiate enforcement action in respect of any agreement or conduct if it declines the application. In such cases, the Commission may use the information provided by the applicant in a subsequent enforcement action against the applicant or other parties. Companies should therefore consider carefully before applying for an exemption given that they may find themselves at the centre of a Commission investigation if the application for an exemption is refused.
Where the Commission suspects a possible breach of the Ordinance, it may accept from a person or undertaking a commitment to take or refrain from taking any action and will, upon receipt of this commitment, not commence or continue an investigation nor bring or continue proceedings in the Tribunal. If the Commission decides to accept a commitment, it must give notice in writing of that decision to the person offering the commitment as well as register the commitment in the register of commitments.
The Commission may withdraw its acceptance of a commitment if, at any time, it believes there has been a material change of circumstances or it has reasonable grounds for suspecting that the commitment has failed to be complied with, or that the information upon which it based its decision to accept the commitment was incomplete, false or misleading (section 61).
If the Commission considers a person has failed to comply with a commitment, it may apply to the Tribunal, which in turn may order that the relevant person must:
- comply with the commitment;
- pay a fine equal to any profit gained as a result of the failure to comply with the commitment; or
- pay compensation to any third party for any loss or damage caused by failure to comply with the commitment (section 63).
Under section 82, for less serious ‘non-hard-core’ violations to the First Conduct Rule, the Commission must issue a warning notice to the offending party before it can bring proceedings in the Tribunal. The warning notice should identify the contravening undertaking and conduct, and should specify that the conduct should cease within the warning period and should not occur again, failing which the Commission will continue with proceedings in the Tribunal. This effectively gives an undertaking a period to rectify its wrongdoing and avoid sanction, and is likely to be used often as the Commission seeks to educate the Hong Kong market as the Ordinance and guidelines are rolled out.
Section 67 provides that in cases where the Commission finds the conduct falls within the definition of more serious anti-competitive conduct or ‘hard-core violations’ to the First Conduct Rule and Second Conduct Rule, it may, in lieu of bringing proceedings before the Tribunal, reprimand offenders by issuing an infringement notice. The infringement notice will contain required undertakings such as ‘to refrain from any specified conduct, or to take any specified action, that the Commission considers appropriate’, and may ask an undertaking to admit ‘a contravention of the relevant conduct rule’.
Undertakings are not obliged to accept such commitments, but the Commission may bring proceedings before the Tribunal if they do not. Notice of the intention to issue an infringement notice must be given and the concerned party must be given time to indicate why an infringement notice would not be appropriate. An infringement notice can be withdrawn at any time in writing or may be extended, either at the Commission’s own volition or on application.
Settlement and commitments are becoming an increasingly used tool in other jurisdictions, although they tread a delicate balance between efficiently bringing infringements to an end and undermining the deterrent effect of heavy sanctions for getting caught. That balance may be somewhat restored in practice, as the Ordinance specifically identifies an ‘admission’ under a commitment as sufficient grounds for a ‘follow-on’ private damages action (section 110). In practice, the deterrent effect may therefore come from the private rather than the public sector.
Section 80 provides the framework for a leniency regime under the Ordinance. The Commission may enter into a leniency agreement with a person or an undertaking in exchange for cooperation in an investigation or proceedings under the Ordinance. The Commission is given wide discretion not to bring or continue proceedings before the Tribunal for a pecuniary penalty in respect of an alleged contravention of a conduct rule. Leniency extends to officers and employees of corporations. It may be terminated:
- if the information is incomplete, false or misleading;
- if the undertaking has been convicted of an offence; or
- if the undertaking has failed to comply with the terms of the agreement.
In other jurisdictions, the leniency programme has been a major tool in uncovering anti-competitive behaviour, especially in the field of cartels. This is one area where companies require clarity and certainty before taking the difficult decision to come in for leniency and ‘admit’ to their misconduct. The Commission’s forthcoming Leniency Agreement Policy should hopefully provide this clarity.
Powers of the Tribunal
The Tribunal may hear applications for the review of reviewable determinations made by the Commission from an affected party as well as hearing applications from the Commission for pecuniary penalties under section 93, where it feels such are appropriate after the conclusion of its investigation. The Tribunal can also hear private damages actions under section 110. Decisions of the Tribunal may be appealed to the Court of Appeal under section 154.
Review by the Tribunal
Section 83 defines the scope of ‘reviewable determinations’ from the Commission. The Tribunal can review:
- a decision or recession thereof of the Commission under the exclusion and exemption mechanism of the Conduct Rules;
- a decision relating to the issue, variation or revocation of a block exemption order;
- a decision, or rescission thereof, regarding specific conduct under section 26;
- a decision relating to the variation or release of a commitment;
- a decision relating to the termination of a leniency agreement; and
- a decision, or rescission thereof, regarding a merger or proposed merger.
Only the parties that applied for the decision or made the commitment, or are parties to the leniency agreement in question, can make applications to the Tribunal. The Tribunal may either confirm or set aside the whole or part of the determination, and may refer the matter back to the Commission with a direction. Application for review of a reviewable determination must be made within 30 days of the day on which the Commission’s decision was made although the Tribunal may extend this period for no more than three years. An undertaking can apply for a stay of the execution of reviewable determination pending review although such a stay is not automatic (section 89).
Enforcement by the Tribunal
If the Tribunal is satisfied, on application by the Commission, that an undertaking has contravened a competition rule, the Tribunal may order that undertaking to ‘pay the government a pecuniary penalty of an amount it considers appropriate’. In determining the severity of the fine, the Tribunal may have regard to the nature and extent of the conduct, the loss or damage caused, the circumstances in which the conduct took place and whether the person involved had previously been found to have contravened the Ordinance.
Fines can be levied on up to 10 per cent of the turnover of the undertaking for each year in which the contravention occurred or, if the contravention occurred over more than three years, 10 per cent of the turnover of the undertaking concerned for the three years in which the contravention occurred that saw the highest, second highest and third-highest turnover.
The Tribunal can also grant a wide array of other behavioural and structural remedies under schedule 3, as well as grant interim measures and directors’ disqualification orders (for up to five years) under part 6 division 5 of the Ordinance. Like the European Union, there is no provision for criminal sanctions under the Ordinance (save for failing to comply with an Order, obstructing an investigation, providing false or misleading information, etc).
Private damages action
Unlike in many other jurisdictions, stand-alone private claims are not allowed under Hong Kong’s new Ordinance. The provisions were removed from the original legislation after fierce lobbying from SMEs who, ironically, feared that larger companies would use private actions to harass them. The Ordinance does allow for ‘follow-on’ actions for damages, following determinations by the Tribunal (or appellate courts) of an infringement or, crucially, an admission, in a commitment that has been accepted by the Commission, that a person has contravened a conduct rule (section 110). The appetite for such actions in Hong Kong remains to be seen, but there is no reason to believe that this will not be a well-used tool, especially if the current debate surrounding the availability of class actions in Hong Kong ends positively.
Hong Kong is going through an exciting period. The next few months, and the enforcement priorities taken by the Commission, will shape the competition agenda in Hong Kong for the foreseeable future. The fundamental structures and institutions are now in place, and it will be interesting to see how these shape up in practice – in particular, whether the extensive consultation process currently under way on the numerous guidelines will shape recognised international norms into a uniquely ‘Hong Kong’ affair or whether market players will value the certainty and stability that adoption of international experience will offer. In either event, it is imperative that undertakings conducting business in Hong Kong begin to review their agreements and procedures now, and roll out awareness and compliance training to their senior officers and managers. They may wish to evaluate whether applications for exemptions are necessary in light of their existing practices and whether it is in their interests to become actively involved in the consultation process to try and input into the forthcoming guidelines.
- Section 5 of the Ordinance contains a general exclusion for agreements of lesser significance. The First Conduct Rule does not apply to:
• an agreement between undertakings in any calendar year if the combined turnover of the undertakings for the turnover period does not exceed HK$200million;
• a concerted practice engaged in by undertakings in any calendar year if the combined turnover of the undertakings for the turnover period does not exceed HK$200 million; or
• a decision of an association of undertakings in any calendar year if the turnover of the association for the turnover period does not exceed HK$200million.
- Section 6(1) of the Ordinance provides that the Second Conduct Rule does not apply to conduct engaged in by an undertaking with an annual turnover of not more than HK$40 million,
- ‘Carrier licence’ is defined in section 2(1) of the TO as ‘a licence issued for the establishment or maintenance of a telecommunications network for carrying communications to or from the public between fixed locations, between moving locations or between fixed locations and moving locations, within Hong Kong, or between Hong Kong and places outside Hong Kong, on a point-to-point, point-to-multipoint or broadcasting basis’.