Hong Kong: Dominance

Overview

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.

The Hong Kong Competition Commission (the Commission) – the main agency charged with investigating conduct that may infringe the CO – has had an active first year in enforcing the CO. Starting with a softer enforcement approach, with activities such as making TV announcements, reaching out to the business community and the public, and conducting market studies, the Commission shifted to a harder line as the year progressed. It has, in the words of Ms Anna Wu, chairman of the Commission, ‘exercised the gamut of [its] investigation powers, raids, search and seize’. Ms Wu confirmed in October 2016 that the Commission had already conducted six unannounced inspections. She also said that the Commission is expected to bring a number of cases to the Competition Tribunal (the Tribunal) in the first half of 2017, and that it is realistic for the Commission to prosecute two to three cases per year.

While press coverage in the first year since the entry into force of the CO indicates a strong focus of the Commission on the First Conduct Rule (FCR), it is clear that the Second Conduct Rule (SCR) has not escaped the Commission’s attention entirely. Ms Rose Webb, chief executive officer of the Commission, stated in August 2016 that the Commission is ‘looking at abuse of substantial market power by incumbents, so we mean by companies here in Hong Kong’.The Legislative Council (Legco)’s call to the Commission in November 2016 to investigate potential violations of the SCR in the property sector may also lead to an increasing focus on the SCR in the second year of enforcement of the CO.

This chapter sets out:

  • an overview of the SCR;
  • the Commission’s enforcement priorities;
  • concerns raised by other stakeholders in relation to the SCR;
  • key developments in the sectoral competition law regime concerning the telecommunications and broadcasting sectors; and
  • our outlook for 2017.

Overview of the SCR

The SCR 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 SCR. The general prohibition under the SCR is broadly similar to the equivalent prohibition in the European Union (ie, article 102 of the Treaty on the Functioning of the European Union).

Beside provisions in the CO, the Commission and the Communications Authority (CA), the sectoral competition authority for tele­communications and broadcasting, published the Guideline on the Second Conduct Rule (the SCR Guideline) prior to the enforcement of the CO, which sets out how both agencies intend to interpret and administer the SCR. The SCR Guideline does not have the force of law, but is indicative of how the agencies propose to apply the SCR. In addition, guidelines have been adopted on the procedures for handling complaints, on conducting investigations and on considering applications for exclusions and exemptions.

Substantial degree of market power

As indicated, the SCR 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.

The SCR Guideline, although not binding on the Commission or the 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.

The SCR 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 SCR Guideline provides an indicative market share threshold at which an undertaking is considered to hold an SDMP. The Commission has repeatedly stated that it does not wish to give any indication because it holds the view that market share alone does not determine whether an undertaking has an SDMP. This is because 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 an SDMP.

It remains to be seen whether the Commission will find SDMP at levels similar to those for dominance under equivalent European rules, or whether it will adopt a different approach. In this regard, it is interesting to note that the Commission’s proposed block exemption order for vessel sharing agreements (VSAs) (published in September 2016) provides that only VSAs where the combined market share of all liner shippers involved is lower than 40 per cent will be exempt. This has led to some speculation as to whether the 40 per cent threshold is indicative of the Commission’s view of the level of market share above which SDMP may exist.

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 SCR 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 SCR 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.

The Commission’s investigatory powers

The CO empowers the Commission to initiate and conduct investigations of its own accord and it is given a broad range of powers to do so, including the powers to:

  • require an undertaking to provide any documents or information and to conduct interviews;
  • require any person to answer questions on any matters that the Commission believes to be relevant to the investigation; and
  • conduct inspections of premises and confiscate documents with a warrant issued by the court of first instance.

As noted above, the Commission has stated that it has now used its full range of investigatory powers, which potentially signals a move towards harder edged enforcement as a mechanism to encourage greater compliance with the CO.

The Commission’s enforcement priorities

The Commission stated in its enforcement policy published in November 2015 that it will prioritise enforcement against conduct that is clearly harmful to consumers. In relation to the SCR, the Commission will focus on the abuse of SDMP involving exclusionary behaviour (ie, conduct preventing or limiting the ability by competitors to compete) by incumbents. Ms Rose Webb has stated on a few occasions that the Commission’s initial focus will be on local companies whose conduct impacts Hong Kong consumers’ livelihoods, rather than multinational companies.

The Commission’s statistics on types of conduct and sector giving rise to issues

Since the entry into force of the CO, the Commission has received a large number of complaints and enquiries. As at 14 December 2016 (the first anniversary of enforcement), the Commission had received nearly 1,900 complaints or enquiries, about 20 per cent of which concerned alleged violation of the SCR.

According to the Commission’s 2015/16 Annual Report (published in September 2016), only a relatively small proportion of cases that have been assessed by the Commission and have progressed to the ‘initial assessment’ phase of an investigation relate to the SCR. Out of 97 initial assessment cases as at 31 March 2016, 28 concerned the SCR. According to a Commission press release, as at 14 December 2016, 130 cases had moved to the ‘initial assessment’ stage, with over 10 per cent of these cases being under ‘in-depth investigation’.

In terms of sector focus, according to its 2015/16 Annual Report, ‘professional and technical services’ accounted for most cases undergoing initial assessment by the Commission (17 cases), followed by transport, logistics and storage (10 cases) and the food and groceries sector (10 cases). Other sectors involving cases undergoing preliminary evaluation included construction and infrastructure, banking and financial services, travel and education. As at 14 December 2016, the top two sectors for cases undergoing initial assessment were (i) property and property management and (ii) professional and technical services.

Other stakeholders

Other stakeholders, particularly the Consumer Council (Hong Kong’s long-standing consumer protection agency) and the Legco, have raised concerns about abuse of SDMP by local and multinational companies.

The Consumer Council

In its report on the e-commerce sector published in November 2016, the Consumer Council expressed concerns over the growing market power of certain e-commerce platforms, which could give rise to competition issues such as ‘raised prices, restrictions in choice and anti-competitive discriminatory treatment’ and covers online search engines, travel and airline online booking platforms and food delivery companies. The Consumer Council highlighted behaviours by dominant online travel agents that prevent their competitors from offering lower prices to consumers as potential violations of the SCR.

The legislature

In November 2016, the Legco passed a non-binding motion calling the Commission to investigate the conduct of a property developer that owns certain wet markets, shopping malls and parking lots that potentially violates the SCR. Prior to this, the Commission has also reportedly started investigating conduct concerning certain wet markets in Hong Kong.

Sectoral competition law: the telecommunications and broadcasting sectors

Prior to the entry into force of the CO, provisions in the Telecommunications Ordinance (TO) and the Broadcasting Ordinance (BO) regulated the behaviour of dominant telecommunications or broadcasting licensees. These provisions were revoked with the entry into force of the CO. Undertakings with an SDMP operating in these sectors are now regulated by the SCR. Dominant telecommunications licensees are also regulated by section 7Q of the TO (adopted when the CO came into force), which prohibits exploitative conduct of a licensee with a dominant position in a telecommunications market.

While the Commission is the principal competition authority, it has concurrent jurisdiction with the CA in enforcing the CO in the telecommunications and broadcasting sectors. The CA appears to have been relatively active in enforcing the CO in 2016. In January 2017, it was reported that the CA was processing eight cases relating to alleged anticompetitive behaviour and had closed a further 100 cases without the need for further action since the introduction of the CO, although it is not clear whether the cases relate to the FCR or the SCR.

On 29 January 2016, in Television Broadcasts Ltd v Communications Authority (HCAL 176/2013), Justice Godfrey Lam (Tribunal president), sitting in the court of first instance, handed down a judgment overruling the CA’s 2013 decision that TVB (the incumbent free-to-air broadcaster in Hong Kong) had violated the competition provisions (both in relation to anticompetitive agreements and abuse of dominant position) in the BO on procedural grounds, while upholding the CA’s competition analysis. In 2013, the CA found that some of TVB’s policies on its artists and singers were anticompetitive. These policies concerned are exclusive clauses in TVB’s artist and singer contracts, restricting them from (i) appearing on other Hong Kong television stations, (ii) attending promotional events by other television stations and (iii) when appearing on other television stations, speaking in their ‘original voice’ (ie, without any voice-over) or in Cantonese. TVB was fined HK$900,000, and ordered to abandon all infringing clauses. Justice Lam quashed the CA’s decision on the basis that, contrary to the Hong Kong Bill of Rights, the CA did not provide TVB with a hearing by an independent and impartial tribunal, and that the remedies imposed by the CA were disproportionate. The decision is likely to be of precedential value for future enforcement of the SCR as Justice Lam clarified certain legal principles, particularly those in relation to ‘market power’.

Looking forward: the next 12 months

While 2016 has seen a promising start for the Commission, enforcement activities can be expected to be more vigorous in 2017. In line with its published enforcement policy and guidance, the main focus of the Commission’s activities will be likely to remain on consumer-facing markets. The Commission will also likely continue to exercise its broad investigatory powers, in particular, the use of dawn raids, as it keeps moving to a harder edged enforcement approach.

An uptick of enforcement activities is expected: the second year of enforcement could see more SCR enforcement actions, in particular with respect to local incumbent firms, although possible breaches of the FCR (particularly cartels) will likely remain the Commission’s primary enforcement focus. The Commission can be expected to bring its first cases to the Tribunal in the first half of 2017. These cases could involve the SCR although it is more likely that they will relate to the FCR.

Finally, the Commission will have a number of new senior officials, including a new CEO, in 2017. It remains to be seen whether this change in leadership could adversely impact on the Commission’s output in 2017.

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