On 30 March, the Hong Kong Competition Commission released its revised draft guidelines, following a public consultation process that was conducted from mid to late 2014 (see our previous client alert HERE). This brings the Commission and the Government one step closer to implementation of the Competition Ordinance (expected to come into force later this year).

A common theme in the public consultation had been the need for more clarity across a broader range of behavior that might be caught by the law. Concern was expressed about the lack of safe harbors, the introduction of the European concept of "by object" infringements (and the relationship between "by object": infringements and the concept of Serious Anticompetitive Conduct), the Commission's reticence in committing to a position on any possible block exemptions and the proposed strict approach to resale price maintenance without regard to the commercial rationale for businesses wanting to manage how their products are brought to market.

What this means for you

The publication of the final draft guidelines is an important milestone and acts as a reminder that the full implementation of the Ordinance is fast approaching. Given that there will be no grace period when the Ordinance comes into force, businesses are advised to take the opportunity during this interim period to review their business conduct for any possible contravention of the Ordinance and consider, where applicable, the appropriate remedial measures.

Overview

Whilst the revised guidelines do provide further clarity in a number of important respects, including for joint ventures and some forms of distribution arrangements, some stakeholders may be disappointed that the Commission did not take the opportunity to refine its approach in a number of areas.

First Conduct Rule

  • Resale Price Maintenance: the Commission continues to take the view that RPM may constitute a restriction of competition by object as well as "Serious Anticompetitive Conduct".  The revised guidelines include a new example of a distributor pressurizing a supplier to implement RPM to neutralize price competition from other distributors. According to the Commission, this example would constitute both a restriction of competition by object as well as Serious Anticompetitive Conduct. Whether pure RPM (i.e. not at the request of a distributor) would be treated as Serious Anticompetitive Conduct is unclear, likely because the Commission wants to retain a margin of discretion.  The message to business, however unwelcome, is that RPM is now high risk in Hong Kong.
  • Relationship between "by object" restrictions and "Serious Anticompetitive Conduct": the Commission has clarified its view that the question of whether conduct constitutes a restriction of competition by object or effect is considered separately from and before the question of whether conduct constitutes Serious Anticompetitive Conduct. So, only once the Commission concludes that an agreement restricts competition (either by object or effect), and no exclusions or exemptions are available, will it then consider whether or not the agreement constitutes Serious Anticompetitive Conduct (which will determine whether it can institute Tribunal proceedings or whether it must first issue a Warning Notice).
  • The Commission's list of "by object" restrictions is non-exhaustive, and much longer than the list of conduct which it will treat as "Serious Anticompetitive Conduct". It includes sharing information in private on future individual intentions or plans with respect to price, group boycotts, trade association prohibitions on a new entrant accessing standard terms vital for successful entry into the market or prices charged to consumers and use of industry standards as part of a broader restrictive agreement aimed at excluding actual or potential competitors. The Commission also says that it will consider whether a particular agreement constitutes a restriction of competition "by object" in light of its overall economic context and the aims of the arrangement. This, according to the Commission, can be distinguished from a full effects analysis. It will be interesting to see how the Commission and Competition Tribunal/Hong Kong courts approach this distinction, which has become an increasingly difficult area in Europe in recent years.  The practical risk, for now, is that it will likely be easier for the Commission to pursue "by object: infringements, which therefore represent a higher enforcement risk.
  • Vertical agreements: the Commission has still not agreed to issue a block exemption order for vertical agreements (of the kind used in some other jurisdictions, e.g. the European Union). Whilst the guidelines state helpfully that, in general, vertical agreements (i.e. agreements between parties at different levels of trade, e.g. a manufacturer and its distributor) do not restrict competition, a block exemption would have given businesses greater legal certainty in this area.
  • Appreciability: the Commission rejects calls for a clear statement that it will only apply the First Conduct Rule to agreements that appreciably affect competition (e.g. by a reference to a certain market share).

Second Conduct Rule

  • "Abuses by object": the Commission continues to suggest that some conduct can be treated as abusive under the Second Conduct Rule without a full effects based analysis (although, as with the First Conduct Rule, an assessment of the economic context of the conduct will still be appropriate). Helpfully, the Commission states that it envisages assessing the majority of conduct under the Second Conduct Rule by reference to its actual or likely economic effects. The Commission also clarifies that, whilst an economic efficiency defense is not applicable to conduct under the Second Conduct Rule under the Ordinance, it will nonetheless  be prepared to consider legitimate/objective justifications.
  • No Market Share Threshold: the Commission rejects widespread calls for a market share safe harbor under the second conduct rule. The Commission appears to have been concerned by the risk that such a figure would have become a focal point for market power analysis with other relevant factors ignored. 

Overseas precedents

  • In response to calls for guidance on the relevance of overseas precedent, the Commission states that foreign precedents or analysis will rarely be an exact 'fit' for the purposes of applying the relevant legal tests under Hong Kong's Ordinance.

Procedure / Timing

  • Timing was a big concern raised by a large number of respondents, which is unsurprising, given that competition investigations in other jurisdictions can take many years, leading to considerable business uncertainty and expenditure of management time and legal fees. The Commission declines to provide indicative or binding timetables for the conduct of its investigations, save for clarifying that it will "endeavor in all matters to conduct proceedings in an efficient and timely manner".

What is next?

The Commission will submit the final draft guidelines to the Hong Kong Legislative Council for consideration at a meeting of the Panel on Economic Development  scheduled for 27 April. It has invited any further comments that stakeholders have on the revised draft guidelines in the meantime, asking for such comments by 20 April 2015. After this consultation process, the Commission will adopt and issue final guidelines. In addition to the guidelines, the Commission is expected to publish documents providing guidance on its policies on leniency and enforcement. The Commission will also publish its Memorandum of Understanding with the Communications Authority for the purpose of coordinating the performance of their respective functions, as required under section 161 of the Ordinance.

The Commission is expected to complete all preparatory work, include finalizing the guidelines, in the first half of 2015 prior to when the Ordinance comes into force, which is anticipated to be in the second half of 2015.

This legal alert keeps the clients of the firm “Baker & McKenzie” and other interested parties abreast of changes in legislation that may, to one degree or another, affect their activity or cater to their particular interests. The opinions and commentaries expressed in this legal alert are not legal opinions and cannot replace the necessity of receiving legal consultations or opinions in specific practical situations.