Trade and professional associations (hereafter, ‘Associations’) play a vital role in the economy, with their members representing the vast majority of Hong Kong’s businesses. Associations have a clear and positive impact on the Hong Kong economy by providing a platform for the promotion of common interests, and a forum for collective discussions and activities such as lobbying, advocacy, research, education and the promotion and improvement of product or service standards.
However, because Association activities usually involve the interaction of direct competitors, and Associations will commonly be the sole provider of certain services to their members, their activities and operating arrangements regularly raise competition law concerns. Hong Kong seems to be no exception.
Considering the significance of Associations to Hong Kong’s economy and their potential impact on key parameters of competition such as price, it comes as not surprise that trade Associations have been under the scrutiny of the Hong Kong Competition Commission (the ‘Commission’), even before the Competition Ordinance came into force on 14 December 2015.
The Commission initiated a vast compliance project in 2015, resulting in the publication of a brochure specifically targeted at Associations in June 20151. The brochure provides guidance on what Associations and their members should be aware of to ensure compliance with the Competition Ordinance. The guidelines on the First Conduct Rule2, published soon after in July 2015, also specifically address the competition concerns which may arise from the Associations’ activities3.
Further to the publication of the brochure, the Commission started to review the information available on the official websites of over 350 Associations. Based on this review, the Commission announced on 14 March 2016 that they had identified over 20 trade associations the practices of which would appear to raise significant concerns, such as price recommendations and/or fee scales issued by Associations, including in some cases terms of membership which indicated that failure to follow a fee scale would result in disciplinary action by the Associations. The Commission wrote to a number of Associations to ensure that they were aware of the Commission’s concerns. As a result, 12 Associations have indicated publicly that they had revised their practices or were in the process of doing so to remove one or more price restrictions or fee scales.
While the Commission welcomed these positive changes, it also noted that a number Associations were still engaging in conduct that places their members at risks. It also mentioned having received confidential complaints in relation to non-public practices of some Associations and their members, which the Commission is investigating.
In light of this, Associations and their members need to be aware of the Competition Ordinance in Hong Kong and review their current practices as well as their ways of operating. Ignoring the risks is clearly not a viable option anymore.
In this update, we summarise how competition law can impact on the activities of Associations, and provide compliance tips of general application.
WHAT TYPES OF ASSOCIATION ACTIVITIES OR ARRANGEMENTS COMMONLY GIVE RISE TO RISKS?
The most common sources of competition law risk for Associations relate to the way they are constituted and organised, their manner of admitting members, their work on behalf of members and the way Association meetings are conducted. More specific examples are discussed below, with attendant recommendations.
Membership and membership rules
In some industry sectors, being a member of a relevant Association may be seen as materially advantageous - or even as an essential requirement for competing in that sector. In such cases, membership rules restricting access to an Association may have the effect of restricting competition in a market, thus potentially raising competition law concerns.
Accordingly, it is usually prudent for membership of Associations to be open to all businesses competing in the relevant sector (although membership should always be voluntary), with any carve-outs based on reasonable and objective standards. Similarly, ongoing membership and ‘standards of conduct’ rules for members should be fair and non-discriminatory, and should not unduly restrict the competitive activities of members.
Examples of membership terms which may unduly restrict competition among Association members include a rule restricting advertising by members (whether total or partial) and a rule prohibiting members from soliciting for business from the customers of their competitors. While certain such restrictions may be argued to have valid justifications in particular circumstances, unless such restrictions are mandated by law they are likely to involve significant competition law risks if implemented without proper legal review.
More generally, it goes without saying that Associations should avoid sanctions or forms of coercion aimed at forcing members to obey recommendations that may have an anti-competitive effect (such as those identified by the Commission in relation to scale of fees or price recommendations and which are discussed further below in this update). However, sanctions that are implemented for legitimate purposes (such as for the failure to meet safety standards) will generally not raise competition law issues.
Meetings and discussions
Competition law prohibits competitors or potential competitors collectively agreeing to the terms or manner in which they supply (or acquire) goods and services. Amongst other things, this extends to all aspects of future pricing, and which suppliers and customers the business operators deal with going forward. Accordingly, the key principle for avoiding a violation of this aspect of competition laws is ensuring independent decision-making by business operators and avoiding collaboration between competitors.
Competition regulators are commonly concerned about the prospect of Association meetings being used as a cover for discussions that lead to - or sustain - cartel behaviour that violates the above- mentioned principle. Many cartel investigations begin with a review of the activities of any Association to which the suspected cartel participants belong, and suspicions may be heightened if relevant Association meetings are not well documented or appear to involve discussion of factors that could facilitate or further unlawful collusion.
In this context, for many Associations it will be prudent for clear agendas to be circulated in advance of Association meetings, and that comprehensive minutes of such meetings be recorded and filed. Issues not on the agenda should not be discussed in such meetings, and members should be advised to avoid ‘sidebar’ discussions. In summary, the key matter will be to ensure that the Association’s records reflect that Association members do not discuss competitively sensitive topics.
Where possible, such Associations should engage legal counsel to review agendas and minutes, and attend all Association meetings - particularly where there is potential for discussion of sensitive subjects. Associations should also ensure they have in place a document retention program setting out what documents (such as meeting guidelines, agendas and minutes) are to be retained and for how long.
As noted in our introduction, the setting of industry fee schedules or fee guidelines is a significant area of concern for the Commission in Hong Kong. While there can be real benefits realised through the dissemination of information on cross-industry fee levels, particularly in professional services sectors, care needs to be taken to ensure that such arrangements do not facilitate firm agreements by competing parties on the fees to be charged in the future.
Accordingly, circulating fee guidelines that effectively operate as a direction to members on what prices they should offer going forward may very likely be in breach of the Competition Ordinance. This also applies to communications that may be in the form of ‘recommendations’, if it is deemed that the relevant communications are disseminated with the intention or expectation that members will adopt the suggested fees. Generally, the safest course of action for an Association is to avoid any form of forward-looking price recommendation to members.
Dissemination of accurate fee data genuinely intended to be a source of information as to historical fees charged in a particular market should not, in and of itself, raise an issue under competition laws but it could raise issues if it is used to establish or facilitate an agreement on prices or to promote adherence to specified fees going forward.
This usually require careful case-by-case consideration, but as a general rule it can be stated that historical fee information comprised of statistics gathered and compiled by an independent third party, and independently verified, is usually less likely to raise concerns than otherwise. Perhaps the most crucial aspect is that the dissemination of such data must not be done in a manner that may be interpreted by Association members as a signal that they cannot deviate from current or past documented fees without fear of recrimination or sanctions.
Establishing industry standards
Standard setting activities can be highly beneficial, particularly in cases where such activities enhance product safety, make it easier for consumers to compare the offerings of service providers, or ensure the interoperability of components made by different manufacturers (etc). Accordingly, competition regulators recognise that trade Associations may need to be involved in coordinating such activities with their members.
However, standard-setting activities may also give rise to competition law concerns if the standards they establish have the effect of restricting entry into a market, deterring innovation or otherwise inhibiting the ability of persons to compete and those goals are not consistent with legitimate goals recognised by relevant competition law regulation.
Accordingly, it will usually be prudent to involve competition lawyers before an Association commences any activities relating to the establishment or amendments of industry standards (or related matters, such as standardising terms of supply).
In the normal course of business, competing business operators may exchange information on a variety of matters legitimately and with no risk to the competitive process. Indeed, competition regulators have long recognised that heightened competition and consumer benefit may result from the sharing of information between competitors - such as where the information facilitates suitable benchmarking, allows suppliers to learn of relevant new technologies, or facilitates prudent risk calculation and management practices in industries such as the insurance sector.
In this context, competition regulators have allowed Associations to facilitate and conduct many forms of information sharing for the benefit of their members.
However, not all forms of information sharing that may be coordinated or facilitated by Associations will be lawful under competition laws. Where competitively sensitive information such as the future pricing intentions or customer-segment focus of members is collected and disseminated, substantial risks may arise. In particular, it may be deemed that the Association is assisting or participating in price-fixing or market-sharing cartel arrangements.
In this context, it is prudent for Associations to obtain legal advice about any information-sharing arrangements they arrange or assist in relating to the business of their members. While this is best done on a case-by-case basis with reference to the particular concerned sector and its competitive characteristics, the following principles will generally assist to reduce competition law risks:
- Collect only historical information;
- Disseminate information only in aggregated form - so that recipients cannot identify specific information relating to specific business operators (thus the level of appropriate aggregation may be greater in markets with fewer participants);
- Engage an independent data collection agency; and
- Do not require that data be provided by members – make the information supply optional only.
Offering services to members
The Competition Ordinance prohibits business operators that hold a sufficiently high degree of market power (‘substantial market power’ under the Second Conduct Rule) from engaging in conduct that amounts to an abuse of that power.
Evaluating whether a particular business operator or Association enjoys substantial market power can be highly complex and usually requires significant economic analysis. Further, a very broad range of conduct may be characterised as ‘abuse’ of market power, and it is beyond the scope of this update to delve into the detail of such matters.
For present purposes, the key message for Associations is that when they are providing services to members they may be participating in a market- and thus where they are the sole provider of such services (or one of just a few providers) they may enjoy significant market power. Therefore, Associations need to ensure that their service terms and arrangements do not unduly and unjustifiably restrict competition, to avoid falling foul of relevant competition law prohibitions.
The types of Association activities that can potentially raise ‘abuse of market power’ issues include setting educational, qualification or membership standards that result in impeding entry.
Another important and valuable function of many Associations is the marketing of the products and services of its members, through forums such as sponsored trade shows. When undertaking these types of activities, care must be exercised to avoid unlawful anti-competitive behaviour.
The most common competition law risk that can arise from this kind of event is that denying non- members access to participation may be seen as unlawfully restricting competition. However, this will usually only be the case if involvement in the relevant trade show (or similar) can be said to be essential or commercially crucial for market participation - and even in such cases participation of a particular entity may still be restricted if there are relevant objective and valid reasons for doing so. What such reasons may be will need review on a case-by-case analysis.
Additionally, for the reasons discussed further above in relation to the conduct of Association meetings, it is important that any customer-benefits that may be offered to attract patronage to trade shows (or similar) are not implemented in a manner that effectively constitutes unlawful price-fixing. For example, it may be unlawful for Association organisers to organise for all members participating in the event to offer a 10% discount off their prices so that the event can be advertised accordingly.
WHAT STEPS SHOULD ASSOCIATIONS BE TAKING RIGHT NOW?
Associations play a valuable role in promoting and furthering the interests of members and particular industry sectors. However, as noted above, competition regulators can be wary of their potential to act as a forum for cartels and their tendency to monopolise the provision of certain services to the sectors they represent.
Accordingly, it will be prudent for all Associations operating in Hong Kong to ensure they fully understand how the Competition Ordinance impacts their operations and members. Ideally, Associations should establish competition law compliance programs to assist them to comply with the requirements of the Competition Ordinance - and they should also consider whether they are an appropriate forum through which to provide competition law training to industry members.
Most importantly, Associations should also ensure they obtain legal advice before engaging in any of the activities mentioned in this update as potentially raising competition law risks. With appropriate guidance and risk management steps, most Associations should be able to continue to serve their members’ needs without undue interference from the region’s competition regulators - but those Associations who ignore the laws will risk exposing their own organisations, and their members, to significant penalties.