Hong Kong: Dominance

A new economy-wide competition law

Hong Kong’s Competition Ordinance (Cap 619) (CO) took full effect on 14 December 2015. It is the first competition law that applies to all sectors of the economy in Hong Kong. Section 21 of the CO provides that an undertaking that has a ‘substantial degree of market power’ (SDMP) is prohibited from abusing that power by engaging in conduct that has as its object or effect the prevention, restriction or distortion of competition in Hong Kong. This prohibition is referred to as the Second Conduct Rule.

On 27 July 2015, the Competition Commission (the Commission) and the Communications Authority, the sectoral competition authority for tele­communications and broadcasting, published the Guideline on the Second Conduct Rule (the Guideline), which sets out how both agencies intend to interpret and administer the Second Conduct Rule. In addition, guidelines have been adopted on the procedures for handling complaints, on conducting investigations and on considering applications for exclusions and exemptions. These guidelines do not have the force of law, but are indicative of how the agencies propose to apply the Second Conduct Rule.

In its Enforcement Policy, published on 19 November 2015, the Commission indicated, in relation to the Second Conduct Rule, that it will accord particular priority to conduct involving exclusionary behaviour by incumbents (ie, conduct preventing or limiting the ability by competitors to compete).

Sectoral competition law

Prior to entry into force of the CO, a competition regime was already in place for the telecommunications and broadcasting sectors that also dealt with the behaviour of dominant firms:

• the Telecommunications Ordinance (TO) contained statutory prohibitions against anticompetitive practices in general, abuse of a dominant position and discrimination by a dominant licensee; and
• the Broadcasting Ordinance (BO) set out the two main prohibitions against anticompetitive conduct in general and abuse of dominance by television programme service licensees.

These rules were repealed with the entry into force of the CO, and this conduct is now covered by the Second Conduct Rule. At the same time, with the entry into force of the CO, section 7Q of the TO was adopted, which prohibits exploitative conduct of a licensee in a dominant position in a tel­ecommunications market. While the Commission is the principal competition authority enforcing the CO, it has concurrent jurisdiction with the Communication Authority in respect of the anticompetitive conduct of certain undertakings operating in the telecommunications and broadcasting sectors.

Dominance

As indicated, the Second Conduct Rule prohibits undertakings with an SDMP from abusing that power by engaging in conduct that has the object or effect of preventing, restricting or distorting competition in Hong Kong. SDMP appears to have a lower threshold than the concept of dominance. As a conse­quence, firms that are not dominant but have an SDMP will be subject to the Second Conduct Rule as well.

The Guideline, although not binding on the Commission or the Competition Tribunal (Tribunal), provides that:

a substantial degree of market power arises where an undertaking does not face sufficiently effective competitive constraints in the relevant market. Substantial market power can be thought of as the ability profitably to charge prices above competitive levels, or to restrict out­put or quality below competitive levels, for a sustained period of time.

Normally a period of two years can be considered to amount to a sustained period, although it can be longer or shorter depending on the case. The Guideline also provides for the possibility that more than one undertaking have an SDMP in a relevant market, particularly if the market is highly concentrated with only a few large market participants.

The CO provides the following non-exhaustive list of factors that may be taken into account to determine whether an undertaking holds an SDMP:

• the market share of the undertaking;
• the undertaking’s power to make pricing and other decisions;
• any barriers to entry into the relevant market; and
• any other relevant matters.

The Guideline indicates that undertakings are more likely to have an SDMP where they have high market shares, but that a high market share does not necessarily imply an SDMP (or vice versa). However, neither the CO nor the Guideline provides an indicative market share threshold at which an undertaking is considered to hold an SDMP. In a press release of the Commission and the Communications Authority, dated 30 March 2015, the Commission stated that it does not wish to give any indication at this time because it holds the view that market share alone does not determine whether an undertaking has an SDMP. Factors such as ease of entry and expansion, availability of supply-side substitution and buyer power have the capacity to prevent a firm with a high market share from having a substantial degree of market power. Chairperson of the Commission, Anna Wu Hungyuk has also indicated in an article in December 2014 that ‘to make such a determination, you have to look at whether or not a business’s conduct is such that it is prohibiting others from coming in […] Emphasis will be on abuse, not on market share.’¹

Abuse

The CO provides that abuse of an SDMP may, in particular, consist of:

• predatory behaviour towards competitors; or
• limiting production, markets or technical development to the preju­dice of consumers.

The Guideline further identifies the following (non-exhaustive) examples of conduct that may constitute an abuse of an SDMP:

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

The Guideline explains that certain types of conduct by undertakings with an SDMP can be regarded, by their very nature, to be harmful to the proper functioning of normal competition in the market. In such a case, there is no need for the Commission to examine or demonstrate their effects. Such conduct is considered to have the object of harming competition. Examples mentioned include pricing below average variable costs (predatory pricing), certain exclusive dealing arrangements and pay-for-delay arrangements.

On the other hand, conduct that does not have the object of harming competition may, nevertheless, be in violation of the Second Conduct Rule if it has an actual or likely anticompetitive effect (eg, higher prices, restriction in output and reduction in product quality or anticompetitive foreclosure). In that case the Commission is required to show that the conduct of an undertaking with an SDMP has the effect of harming competition.

Jurisdictional 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

The CO does not apply to ‘statutory bodies’ (unless specified by the Chief Executive) or ‘specified persons’ (being statutory bodies or natural persons identified in subsequent regulations to be adopted by the Chief Executive). In addition, the following general exclusions and exemptions to the CO have been adopted:

• compliance with legal requirements;
• services of general economic interest, insofar as com­pliance with the Second Conduct Rule would obstruct the performance of the particular task;
• mergers; and
• conduct of lesser significance (conduct of an undertaking concerned that has a turnover (whether in or out of Hong Kong) not exceeding 40 million Hong Kong dollars for the previous financial year).

The Chief Executive of the Council of the Commission may adopt other exemptions (among others upon application) by order, either on public policy grounds or to avoid conflict with international obliga­tions that directly or indirectly relate to Hong Kong.

Moreover, it is indicated in the Guideline that undertakings may argue that a conduct does not contravene the Second Conduct Rule because it entails efficiencies suffi­cient to guarantee no net harm to consumers (the concept of efficiency-based defences to rebut the finding of an abuse of an SDMP is not contained in the CO). A key consideration will be whether the claimed efficiencies are, in fact, passed on to consumers. The Commission may also accept defences to rebut the finding of an abuse of an SDMP if it is demonstrated that the conduct concerned is indispensable and proportionate to the pur­suit of some legitimate objective. For example, a refusal to deal may not be abusive where an undertaking with an SDMP refuses to supply an input to a particular customer because the customer is, as an objective matter, insuf­ficiently creditworthy.

Undertakings may assess for themselves whether their conduct falls within the terms of a particular exclusion or exemption, but may also apply to the Commission for a decision on whether this is indeed the case.

Regulatory framework

Investigation

The Commission has broad powers to investigate a suspected infringement of the Second Conduct Rule. These include:

• the power to require an undertaking to provide any information that may be relevant to its investigation;
• the power to conduct interviews and require any person to answer questions on any matter that the Commission believes to be relevant to the investigation; and
• upon obtaining a warrant from the Court of First Instance, the power to conduct dawn raids and search the premises (not limited to business premises and may include homes, cars, etc) of alleged infringers.

Specifically in relation to the telecommunications and broadcasting sectors, the Communications Authority will have concurrent jurisdiction with the Commission over conduct of undertakings that are:

• licensees under the TO or BO;
• persons (although not licensees) whose activities require them to be licensed under the TO or BO; or
• persons who have been exempted from the TO.

Finding of an infringement and other determinations

The Commission does not have the power to make a finding of infringement and cannot impose any pecuniary sanc­tions. Where the Commission suspects that an undertaking has vio­lated the Second Conduct Rule, it may issue an ‘infringement notice’, offer­ing not to bring proceedings before the Tribunal, in exchange for commitments to remedy the anticompetitive behaviour or an admission of an infringement. Alternatively, it may directly bring proceedings before the Tribunal.

The CO also authorises the Commission to enter into leniency agreements with respect to a suspected infringement of the Second Conduct Rule. However, the Commission has currently made the choice to limit its leniency policy to cartel conduct only. It is therefore unclear under which conditions leniency could (or will) be granted in relation to suspected abuse of an SDMP.

Only the Tribunal may, upon application by the Commission, find an infringement of the Second Conduct Rule and impose sanctions for the infringement. 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

An application may be made to the Tribunal to review certain determinations of the Commission (including decisions by the Commission in relation to commitments). The Tribunal can confirm or set aside (in whole or in part) such determination. If it 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.

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

Under limited circumstances, a further appeal is available before the Court of Final Appeal in Hong Kong.

Sanctions

The Tribunal may impose a wide range of sanctions for an infringement of the Second Conduct Rule.

It may impose fines of up to 10 per cent of the Hong Kong group turnover of the undertaking for each year in which the contravention occurred, up to a maximum of three years (if the contravention occurred in more than three years, the fine will be a maximum of 10 per cent of the Hong Kong turnover for the three years that saw the highest, second-highest and third-highest turnover).

Moreover, a wide range of orders is at the Tribunal’s disposal, including, for example:

• a declaratory order that a person or an undertaking has contravened the Second Conduct Rule;
• a cease-and-desist order to prohibit further contravening conduct;
• an order that a contravening agreement be modified, terminated, void or voidable;
• an order to pay damages to another person who has suffered loss or damages as a result of the contravention;
• an order for the Competition Commission’s costs;
• 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;
• 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); and
• an order requiring a person who has contravened the Second Conduct Rule to do ‘any act or thing’.

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

For failure to comply with instructions received from the Commission during an investigation, the Court of First Instance may impose a fine of 200,000 Hong Kong dollars and imprisonment of one year for an indictable offence, or a Level 5 fine (50,000 Hong Kong dollars) and six months’ impris­onment in case of conviction on a summary basis.

For more serious non-cooperation, including active obstruction of a Competition Commission investigation (such as the obstruc­tion of a dawn raid) or tampering with evidence (such as destruction or falsi­fication of evidence or providing misleading evidence), the Court of First Instance may impose a fine of 1 million Hong Kong dollars and imprisonment of two years for an indictable offence, or a Level 6 fine (100,000 Hong Kong dollars) and six months’ imprisonment in case of conviction on a summary basis.

Private enforcement

Private follow-on actions are not permitted in the absence of a prior infringement finding. But once the Tribunal has found that an infringement of the Second Conduct Rule has taken place (or the party concerned has made an admission to this effect in a commitment to the Commission), fol­low-on damages actions can, in principle, be initiated by private parties.

Aggrieved persons suffering loss or damage due to a contravention of the CO, including the Second Conduct Rule, may then bring an action before the Tribunal, which is the primary forum for private competition claims. If an action is a composite claim, (ie, 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.

Under section 39A of the TO, a person sustaining loss or damage from a breach of section 7Q of the TO has a claim for damages, an injunction or other appropriate remedy, order or relief against the person who is in breach.

Notes

1. Hong Kong Lawyer, the official journal of the law society of Hong Kong, December 2014, page 19.

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