Hong Kong: Cartels

A new economy-wide competition law

After much anticipation, the Hong Kong Competition Ordinance (CO) came into full effect on 14 December 2015. The CO is an economy-wide competition law that repeals the cartel provisions under the Telecommunications Ordinance (TO) and the Broadcasting Ordinance (BO).

The Competition Commission (the Commission) has been busy over the past year. Its main activities have included reaching out to the business community about the CO, receiving and responding to enquiries and complaints, and revising and publishing the finalised guidelines on how the competition authorities expect to interpret and give effect to the competition rules of the CO (the Guidelines). The Guidelines do not have the force of law.

Specifically in relation to cartels, the Commission commenced public consultation in September 2015 on the Leniency Policy for Undertakings Engaged in Cartel Conduct (the Leniency Policy). The final Leniency Policy was published in November 2015. Its key features are discussed in this article.

In November 2015, the Commission also published its enforcement policy. The Commission states that it will initially focus on encouraging compliance with the CO in the Hong Kong economy as a whole, and that it will prioritise conduct that is clearly harmful to consumers, including:

• cartel conduct (ie, price fixing, market allocation, output restriction and bid rigging among competitors);
• other agreements contravening the First Conduct Rule (ie, anticompetitive agreements and concerted practices) causing ‘significant harm’ to competition in Hong Kong; and
• abuses of substantial market power involving exclusionary behaviour (ie, conduct preventing or limiting the ability by competitors to compete) by incumbents.

It is worth noting that at the time this article was written, the Commission has not yet published the memorandum of understanding (MOU) between the Commission and the Communications Authority (the CA). The CA is the sectoral competition authority which has concurrent jurisdiction over cases involving telecommunications and broadcasting. The MOU sets out how the two authorities will coordinate the performance of their functions under the CO.

Cartels

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 anticompetitive conduct:

• price fixing;
• allocation of sales, customers, territories or markets;
• fixing, limiting or otherwise controlling production and supply; and
• bid rigging.

The application of the First Conduct Rule is not limited to agreements between competitors, so vertical arrangements (ie, between entities at different levels of the supply chain) are caught. The Guidelines acknowledge that vertical agreements, as compared with horizontal agreements, are generally less harmful to competition, but could still be problematic. However, the Commission has refrained from setting an indicative ‘safe harbour’ in the Guidelines, by reference to market shares, below which vertical agreements would typically not run afoul of the First Conduct Rule. The lack of guidance and clarity is likely to create uncertainty for businesses when conducting self-assessment and, in turn, increase compliance costs.

In particular, resale price maintenance (RPM) may be considered by the Commission to have the object of harming competition and may even amount to serious anticompetitive conduct, but may be justifiable based on efficiency grounds. We note, however, that the standard for such justification is expressed to be high. It is also worth noting that the Commission intends the Leniency Policy to cover only horizontal cartel conduct. Therefore, vertical price fixing (ie, RPM), which may be classified as serious anticompetitive conduct under the CO, does not qualify under the Leniency Policy. Details of the Leniency Policy are set out in the section titled ‘Leniency’ below.

Other types of conduct capable of having the object or effect of preventing, restricting or distorting competition in Hong Kong include, for instance, the exchange of competitively sensitive information, including indirect exchange via a common customer or supplier (ie, hub-and-spoke).

Jurisdictional scope

The CO is applicable economy-wide and is 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

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 a combined turnover not exceeding 200 million Hong Kong dollars are exempt from the First Conduct Rule only if the agreement does not involve serious anticompetitive 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 that enhance economic efficiency, or that 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 by the Commission of this type may be reviewed by the Competition Tribunal (the Tribunal).

It is understood from the Commission’s press announcement that the Commission is unlikely to initiate enforcement action in respect of conduct or arrangements already existing at the date of full commencement of the CO while it considers an application for exclusion or exemptions in respect of that conduct or arrangements.

Regulatory framework

The CO introduces a two-tier enforcement system:

Tier 1: the Commission’s investigation phase. The Commission has been granted a wide range of tools to investigate potential contraventions of the CO. These tools include the power to:

• issue requests for any documents or information;
• conduct interviews; and
• conduct dawn raids.

While the Commission can enter into non-pecuniary settlements, it must bring proceedings before the Tribunal to enforce the provisions of the CO and impose sanctions; and

Tier 2: Tribunal prosecution phase. If the Commission has reason to believe that an infringement of the CO has taken place, it can initiate proceedings before the Tribunal, which has the power to adjudicate infringements of the CO and impose sanctions (including fines). The Competition Tribunal Rules (the Tribunal Rules) set out the procedures that apply during this adversarial process.

Investigation

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

Although the Commission is not empowered to determine whether a breach of the First Conduct Rule has occurred (nor to impose sanctions), it may issue an infringement notice where the Commission suspects that an undertaking has violated the First Conduct Rule with serious anticompetitive conduct. The infringement notice provides an opportunity for the undertaking concerned to offer commitments to remedy the anticompetitive behaviour 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 anticompetitive 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 the undertaking 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 is also entitled to make an application to the Tribunal for an interim order (eg, injunction) if it considers that a person is engaged in or is proposing to engage in conduct that contravenes or would contravene the First Conduct Rule. The precise parameters as to how and when the Commission can seek such interim orders remain unclear.

Leniency

The CO grants the Commission the power to enter into leniency agreements with any legal or natural person, in exchange for co-operation in an investigation or in proceedings under the CO.

The scope of leniency contemplated under the Leniency Policy (ie, price fixing, market sharing, restriction of output or bid rigging) is much narrower than the powers granted to the Commission under the CO, which states that leniency agreements may be available ‘in respect of an alleged contravention of a conduct rule […]’.

The Leniency Policy also states that ‘where other anticompetitive practices that may contravene the First Conduct Rule are used to give effect to the cartel conduct, those other practices would ordinarily benefit from this policy.’ This may include within the scope of leniency conduct such as:

• information exchange that is not part of a hard-core cartel but is considered to have a harmful effect on competition; and
• hub-and-spoke type conduct.

In relation to RPM, public statements made during the consultation period for the Leniency Policy suggest that the Leniency Policy itself will only be applicable to horizontal cartel conduct.

The Leniency Policy envisages immunity from fines for only the first leniency applicant involved in the cartel.

To benefit from immunity, the applicant must sign a statement of facts admitting its participation in the cartel. The applicant must also provide ‘full and truthful disclosure’ and ‘continuing cooperation’ to the Commission, including cooperation in subsequent Tribunal proceedings against the alleged cartelists.

The Commission may offer subsequent applicants a ‘lower level of enforcement action’, including recommending to the Tribunal a ‘reduced pecuniary penalty’. In assessing the extent to which the subsequent applicant should benefit from such ‘lower level of enforcement action’, the Commission would take into account factors such as whether the applicant:

• approached the Commission in a timely manner;
• provided significant evidence regarding the cartel conduct; and
• provided full and truthful disclosure, and cooperated fully and expeditiously on a continuing basis throughout the Commission’s investigation and any related court proceedings.

Tribunal proceedings

The Competition Tribunal Rules (the Tribunal Rules) came into final form in July 2015. The Tribunal Rules govern proceedings before the Tribunal, including Commission enforcement actions and follow-on damage claims.

Importantly, under the Tribunal Rules, unlike in most civil cases in Hong Kong, there is no automatic discovery of documents. This may present challenges to a defendant seeking to rebut the allegations of the Commission. In order to access documents in the Commission’s possession or control (ie, on its case file), the defendant will have to apply to the Tribunal for an order for discovery and production of documents. However, the Tribunal has the power to refuse an order for discovery and production of a document having regard to all the circumstances of the case. It is also worth noting that during the investigation phase the Commission is under no obligation to share any of the relevant underlying evidence with the parties.

Moreover, regardless of whether the proceedings will ever reach the hearing stage, the Tribunal will publish a notice of application to commence proceedings. It will contain – in a summary form – the names of the parties, the remedies being sought and the particulars of the claim. The Commission will also issue an accompanying press release. An undertaking should therefore be aware of the level of publicity that it may be exposed to once an initiating application has been filed against it. During the hearing phase, all hearings before the Tribunal will be held in public. An exception is when the Tribunal directs otherwise, but neither the CO nor the Tribunal Rules specify the conditions for permitting a private hearing.

Sanctions

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 conduct that 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 anticompetitive 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 anticompetitive conduct;
• disgorgement of illegal gains (or avoided losses) as a result of the anticompetitive 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 200,000 Hong Kong dollars and imprisonment for one year for an indictable offence, or a Level 5 fine (currently 50,000 Hong Kong dollars) 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 1 million Hong Kong dollars and imprisonment for two years for an indictable offence, or a Level 6 fine (currently 100,000 Hong Kong dollars) and six months’ imprisonment if convicted on a summary basis.

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, to the Court of Final Appeal, is available in limited circumstances.

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.

Private enforcement

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.

In relation to successful leniency applicants, they remain susceptible to private follow-on actions, as the Commission may seek an order from the Tribunal (as part of the leniency agreement) that the successful leniency applicant has contravened the First Conduct Rule.

* Please note that Jenny Connolly has left the firm. Please forward any enquiries to Nicholas French via [email protected].