Overview

More than two years have passed since the Competition Ordinance (CO) – the first economy-wide competition law in Hong Kong – came into force on 14 December 2015. In its second year of enforcement, the Hong Kong Competition Commission (the Commission) – the main agency charged with investigating conduct that may infringe the CO – has made steady progress in enforcing the CO, including, most significantly, bringing two cases before the Competition Tribunal (the Tribunal) – the specialist court in charge of hearing competition cases. Both of these cases concern cartel conduct in violation of the First Conduct Rule (FCR) of the CO.

The Commission’s enforcement actions to date indicate a clear focus on cartel conduct under the FCR. This is also reflected by statements from Anna Wu, chairperson of the Commission, such as ‘[Bid-rigging] is one of the most blatant and harmful forms of anticompetitive conduct’ as well as ‘market sharing and price fixing are serious anticompetitive practices which lead to reduced consumer choices and uncompetitively high prices, hurting consumers, other businesses and the economy as a whole.’

This chapter sets out:

• an overview of the FCR;
• the Commission’s enforcement priorities and cases before the Tribunal;
• the Commission’s other work under the FCR;
• a discussion on the private right of action in relation to alleged anticompetitive conduct; and
• the outlook for 2018.

Overview of the FCR

The FCR prohibits anticompetitive ‘agreements’ or ‘concerted practices’ that have the ‘object or effect of preventing, restricting or distorting competition’ in Hong Kong. The general prohibition under the FCR is broadly similar to the equivalent prohibition in the European Union (ie, article 101 of the Treaty on the Functioning of the European Union (TFEU)).

Types of conduct caught by the FCR

The FCR captures a wide range of conduct and includes cartel conduct between competitors such as:

• fixing, maintaining, increasing or controlling pricing;
• market allocation (territories, customers or markets);
• limiting the production or supply of goods or services (quotas); and
• bid-rigging.

The FCR also captures agreements between entities at different levels of the supply chain (ie, vertical arrangements).1

Similar to article 101 of the TFEU, the FCR is widely constructed to capture agreements and concerted practices. Written and oral agreements, whether or not they are intended to be legally binding, informal agreements and ‘gentlemen’s agreements’ are also caught. Collusion falling short of an actual agreement (ie, a ‘meeting of the minds’) may be regarded as a ‘concerted practice’. As such, discussions of competitively sensitive information among competitors at meetings (eg, trade association meetings) may fall foul of the FCR even if the competitors do not subsequently coordinate their conduct. In addition, the indirect exchange of such information via a common customer or supplier (so called ‘hub-and-spoke’) can also be caught.

The Commission’s enforcement priorities

According to its enforcement policy published in November 2015 (Enforcement Policy), the Commission will prioritise enforcement against conduct that is clearly harmful to consumers. In relation to the FCR, this includes cartel conduct and other agreements contravening the FCR causing significant harm to competition in Hong Kong, such as resale price maintenance. In relation to cartel conduct, the Commission is prioritising bid-rigging and market sharing, as reflected in the Commission’s choice of cases to take to the Tribunal to date. Following its ‘Fighting Bid-rigging’ campaign in 2016, the Commission launched its ‘Combat Market Sharing Cartels’ campaign in November 2017. Using a range of advocacy and educational initiatives (including a brochure explaining what the conduct entails and how to detect it, TV and radio advertisements, roving exhibitions and seminars), the Commission has sought to raise public awareness of the conduct and its harmful nature as well as to strengthen detection of such conduct.

The Commission’s statistics on types of conduct

As of the end of October 2017, the Commission had received approximately 2,500 complaints and enquiries. Approximately 60 per cent of the complaints relate to the FCR (cartels/other anticompetitive agreements). Of these 2,500 complaints/enquiries, the Commission escalated around 160 for further assessment; and over 10 per cent of those cases have proceeded to formal, in-depth investigations, with two cases being brought to the Tribunal on 23 March and 14 August 2017 respectively.

The Commission’s cases before the Tribunal

As mentioned above, the Commission took two cartel cases before the Tribunal in 2017. In both cases, the Commission is seeking remedies including financial penalties and a declaration that each defendant contravened the CO.

Bid-rigging case in the IT sector

On 23 March 2017, the Commission brought its first case before the Tribunal. The case concerns a tender issued by the Hong Kong Young Women’s Christian Association (YWCA) in July 2016 for the installation of a new server system based on technology provided by IT company Nutanix Hong Kong Limited.

In the first round of tenders, the YWCA only received one bid. However, this round of tender was rendered ineffective as the YWCA’s tender rules stated that at least five bids were required, unless otherwise approved.

In the second round of tenders, the YWCA received bids from four IT companies. The Commission alleged that Nutanix and one of the IT companies colluded to obtain four ‘dummy’ bids from the other IT companies to fulfil YWCA’s tender requirements. According to the Commission, the scheme was uncovered due to ‘a high degree of consistency in the substance and format of the bids submitted’ by the four companies.

While the main hearing is not set until June 2018, some procedural aspects have already been settled by the Tribunal in 2017, most notably in relation to the protection against self-incrimination where the Tribunal held that this protection only applies to the person addressed on the interview notice. This means that, where an individual employee is the addressee, any incriminating answers provided by this individual can still be used against his or her employer.

In addition, despite the absence of the right to automatic discovery under the Competition Tribunal Rules (the Rules), which govern the practice and procedures in the Tribunal, the Tribunal ruled that the scope of discovery is not in dispute. The Commission must disclose all documents that it seeks to rely upon as well as all unused materials, subject to objections on grounds of confidentiality, privilege or public interest immunity. The Tribunal’s decision will be welcomed by defendants seeking to understand the case against them, although a potential drawback is the Commission’s ability to withhold disclosure on the grounds identified above, and particularly on the ground of ‘confidentiality’, which would be easier to establish than ‘privilege’ and ‘public interest immunity’. 

That said, the Tribunal handed down another decision on the treatment of confidential information which should resolve this issue. It held that information confidential to the public could nonetheless be disclosed to the parties, so long as such information is held within a ‘confidentiality ring’ of nominated persons. If anyone else outside of this ‘confidentiality ring’ was to receive copies of relevant documents, the confidential information would be redacted.

Market sharing and price fixing case in the building renovation sector

On 14 August 2017, the Commission took 10 construction and engineering companies to the Tribunal for an alleged market sharing and price fixing cartel relating to the renovation of over 800 flats in a public housing estate.

According to the Commission, the 10 contractors divided the renovation projects in three residential blocks in the estate by drawing lots. Each of the 10 contractors was allocated four floors of each of the three blocks. The contractors agreed not to infringe each other’s territory and to direct tenants to the allocated contractor. In addition, they used the same promotional leaflets to advertise their services. The prices of the basic packages offered by the contractors were the same.

In the Commission’s market study report on the renovation and maintenance sector published in May 2016, the Commission noted that anticompetitive behaviour was present in the sector and stated that it was keeping an eye on any potential contravention of the CO in the industry. It is therefore perhaps no surprise that the Commission has picked this case as its second case before the Tribunal, especially given its enforcement focus on consumer protection. Commenting on the case, Anna Wu said: ‘The Commission accords priority to combating such conduct which is particularly egregious when the people directly affected belong to low income groups such as the residents of the relevant public housing estate in the present case.’

The case is set for substantive hearing before the Tribunal in December 2018.

Private right of action in relation to alleged anticompetitive conduct

Unlike many other jurisdictions, private stand-alone actions for infringement of the competition rules contained in the CO are currently not available. This means that in the absence of a determination by the Tribunal of an alleged infringement of the CO, alleged victims have no private right of action in the courts based on these alleged breaches. This was confirmed in a judgment handed down by the Court of First Instance (CFI) in April 2017.

In 2016, a travel agent, Loyal Profit International Development, challenged the Travel Industry Council’s (TIC) directives for allegedly violating the FCR by using other laws to work around the limitation that breaches of the conduct rules cannot be grounds for private stand-alone actions. At the core of the lawsuit was the ‘Refund Production Scheme for Inbound Tour Group Shoppers’, which prohibits travel agents from bringing mainland Chinese inbound tour groups to shops that are not registered with the TIC. The plaintiff argued that this scheme is ‘outright anticompetitive’ as it created ‘an exclusionary list of shops’ that can be patronised by inbound mainland Chinese tourists. Given the CO does not allow private stand-alone actions, the plaintiff sought an injunction on the directives from the CFI on the basis that the TIC:

• acted in excess of powers granted by its memorandum of association, in contravention of the Companies Ordinance; and
• breached the CO.

In April 2017, the CFI dismissed the claim on grounds that stand-alone, private litigation is not envisaged by the CO, and that the only court that can rule on an alleged breach of the CO is the Tribunal. The CFI further stated that, even if it were in a position to rule on a CO case, the plaintiff would at a minimum have to put forward a base case for violation of the CO, applying a standard similar to what the Commission would do before the Tribunal. As the plaintiff did not put forward such a case, its case would not have succeeded anyway.

This case confirms that the courts of Hong Kong are reluctant to undermine the legislative intent of the CO. Parties suffering from a breach of the CO only have one realistic remedy at the moment: to lodge a complaint before the Commission. However, this may change in the future as the Commission is expected to assess whether the right of private action should be introduced to the Hong Kong competition regime in 2018, although any actual legislative changes will likely take some further time before being enacted.

Block exemption order in relation to the liner shipping industry

A range of exemptions/exclusions is available under the CO so that parties can seek comfort from the Commission that their conduct, while technically a breach of the CO, does not infringe the CO for various reasons, for example, generating economic efficiencies that outweigh the anticompetitive effect or compliance with a legal requirement.

On 8 August 2017, the Commission issued its first block exemption order a little over 18 months after the Hong Kong Liner Shipping Association (HKLSA) had applied, on 17 December 2015, for a block exemption from the application of the FCR for two categories of shipping liner agreements:

• vessel sharing agreements (VSAs): agreements between carriers within a shipping consortium to operate a liner service along a specified route using a specified number of vessels (akin to an airline code-sharing arrangement); and
• voluntary discussion agreements (VDAs): agreements that allow carrier members to exchange information including supply and demand forecasts, freight rates and surcharges.

The HKLSA argued that VSAs and VDAs bring about economic efficiencies that benefit consumers, such as rate and service stability, as well as cost efficiencies; that the industry remains highly competitive despite the existence of VSAs and VDAs; and that block exemptions or other statutory exemptions for VDAs and VSAs exist across other Pacific Rim jurisdictions.

The Commission’s block exemption order exempts VSAs where the parties do not collectively exceed a market share limit of 40 per cent, but not VDAs. In respect of the latter, the Commission was not persuaded that the claimed efficiencies would outweigh the potential restriction of competition resulting from VDAs. In particular, the authority noted a lack of evidence or data in support of the arguments for exempting VDAs.

While the Commission’s approach is consistent with that taken in the European Union, it contrasts with the more permissive approach taken in other Pacific Rim jurisdictions such as Malaysia and Singapore, where VDAs are exempted. The block exemption order is effective for five years and will be reviewed by the Commission on or before 8 August 2021.

Individual exclusion application made by the banking sector

On 11 December 2017, 14 international and local banks applied to the Commission for a decision to exclude/exempt the Code of Banking Practice (the COBP) from the application of the FCR on the grounds of ‘compliance with legal requirements’. The COBP sets out practices to be adhered to by banks in dealing with customers; some provisions – suspended prior the CO’s entry into force to avoid legal uncertainty – concerned the abolition of fees and setting maximum fees with the aim of protecting customers and therefore raised concerns under the FCR.

While the COBP is a voluntary industry code issued by the Hong Kong Association of Banks and the Hong Kong Association of Restricted Licence Banks and Deposit-taking Companies, the Hong Kong Monetary Authority – Hong Kong’s banking regulator – expects and monitors compliance from the banks, regarding the COBP as the minimum standard for good banking practices.

At the time of writing, the application is under public consultation.

Outlook for FCR enforcement in 2018

Looking ahead, all eyes will be on the substantive trials of the Commission’s two cases before the Tribunal in 2018; in particular, there will be considerable interest in whether the Tribunal sides with the Commission and finds violations of the CO and whether it follows the Commission’s recommendations of any fines to be imposed on the parties involved.

In terms of new cases, it is expected that there will be an uptick in enforcement activities with the focus remaining on cartel conduct, in particular bid-rigging and market sharing in consumer-facing markets. In addition, the Commission’s senior management appears keen to enforce the CO against individuals and it has been reported that Commission members are likely to consider individual penalty guidelines in 2018. While prosecution against individuals is consistent with practice in other jurisdictions such as the United States, this is likely to be an area of contention due to concerns that the Hong Kong competition regime is not adequately set up to hold individuals liable (for example, in terms of rights of defence and due process for individuals).

From a policy standpoint, the Commission is likely to revise its leniency policy (applicable to cartel conduct), clarifying:

• the applicability of the leniency policy to individuals (which currently only applies to undertakings); and
• protection for second/third/etc leniency applicants (the current regime is a ‘one and done’ regime, which means that only the first applicant is immune from prosecution).

This may include a ‘leniency plus’ scheme (whereby a company being investigated for cartel conduct would be offered a fine reduction for the first cartel where it reports other cartel conduct and receives full immunity for the other cartel conduct) and a ‘penalty plus’ scheme (whereby the Commission would recommend higher fines for companies that could have sought leniency but did not do so).

Finally, the Commission is expected to issue a preliminary view on the application for exemption/exclusion for the COBP made by the banks. Of particular interest will be how the Commission balances the potential tension between compliance by the banks with the CO and their other regulatory obligations.

Our outlook of other key developments of the competition regime for 2018 are covered in the ‘Hong Kong: Overview’ chapter.

Notes

1 Such agreements include, most typically, distribution agreements between a manufacturer and a distributor. While acknowledging that vertical agreements are generally less harmful to competition as compared to horizontal agreements, the Commission has given particular attention to resale price maintenance (RPM). According to the Commission’s Guideline on the FCR published in July 2015 (the FCR Guideline), the Commission considers that imposing a minimum resale price may have the object of harming competition – ie, this could violate the FCR even if it does not have an anticompetitive effect. The FCR Guideline is not legally binding on the Commission or the Communications Authority (CA), but is indicative of how they propose to apply the FCR.