The implementation of the new Competition Ordinance (Chapter 619 of the Laws of Hong Kong) (the Competition Ordinance) on 14 December 2015 will mark the first time that Hong Kong has a general and cross-sector competition law.

Background

The Competition Ordinance was enacted on 14 June 2012 as a general and cross-sector competition law to curb anti-competitive conduct, and will come into full effect on 14 December 2015.

Three major forms of anti-competitive conduct are prohibited under the First Conduct Rule, the Second Conduct Rule (collectively referred to as the Conduct Rules) and the Merger Rule. In this issue, we will discuss the Second Conduct Rule.

What is the Second Conduct Rule?

The Second Conduct Rule[1] prohibits an undertaking that has a substantial degree of market power 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 rule applies to unilateral conduct by an undertaking, regardless of whether the undertaking itself is, or the abusive conduct takes place, inside or outside of Hong Kong. Abusive conduct which takes the form of an agreement may also contravene the First Conduct Rule.

A flowchart illustrating how the Second Conduct Rule works is set out in the Appendix.

Key terms used in the Second Conduct Rule

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"Substantial degree of market power" – different from "market dominance"

Under the Competition Ordinance, the degree of market power that would render an undertaking liable to possible charges of abusive conduct is "substantial", which is a lower threshold than that of the "dominance" test adopted in some jurisdictions such as Europe (where there is a presumption of dominance at 50% of market share). The legislation does not specify what percentage threshold of market share amounts to "substantial".

During the consultation process of the Guidelines[8], it was suggested that some form of market share-based threshold, including a specific percentage as a 'safe harbour' or a presumptive threshold, be included to assess whether an undertaking has a substantial degree of market power.

This was not adopted for the various reasons as set out in the Guide for the Revised Draft Guidelines issued under the Competition Ordinance[9]. In particular, it is noted that market share is only one of the factors for assessing an undertaking's market power. Other factors such as ease of entry and expansion, availability of supply-side substitution and buyer power may prevent an undertaking with a high market share from having a substantial degree of market power and engaging in abusive conduct. Applying a specific market share threshold across sectors may not accurately reflect the competitive structure in a particular sector, resulting in an incomplete and potentially incorrect assessment as to the degree of substantial market power in that sector.

Exclusions and exemptions from the Second Conduct Rule

As with the First Conduct Rule, there are certain situations where the Second Rule does not apply. Schedule I sets out the following general exclusions in respect of the Second Conduct Rule:

  1. compliance with legal requirements;
  2. services of general economic interest;
  3. mergers; and
  4. conduct of lesser significance (i.e., conduct engaged in by an undertaking the turnover of which does not exceed HK$40 million for the turnover period)[10].

There is no comparable efficiency-based exclusion for conduct within the scope of the Second Conduct Rule. It is suggested that undertakings may, however, argue that the conduct does not contravene the Second Conduct Rule because it entails efficiencies sufficient to guarantee no harm to customers. The key considerations include whether:

  1. the conduct concerned is indispensable and proportionate to the pursuit of some legitimate objective unconnected with the tendency of the conduct to harm competition;
  2. the claimed efficiencies are in fact passed on to consumers notwithstanding the market power of the undertaking; and
  3. the undertaking can demonstrate no net harm to consumers[11].

Further, as with the First Conduct Rule, there are certain additional statutory exemptions such as public policy exemptions and international obligations exemptions.

What next?

The imminent implementation of the Competition Ordinance is a significant step in the evolution of Hong Kong’s fledgling antitrust regime and multinational enterprises doing business in Hong Kong can no longer afford to ignore the Special Administrative Region as one that has no competition regime or antitrust enforcement. Understanding and complying with competition law principles is therefore more important than ever. In the next issue, we will discuss the Merger Rule and the Telco Rule in greater detail.

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