The Competition Ordinance (the "Ordinance"), Hong Kong's first cross-sector competition law, was enacted on 14 June 2012 and finally came into full force on 14 December 2015. Trade associations play an important role in society by advocating a specific industry sector to the public and the government and representing the common interests of their members. Through this platform, members are able to discuss important issues affecting their businesses, the trends in the marketplace and any legislation or policy proposed by the government which may be of relevance to them. Importantly, members are able to make use of invaluable networking opportunities that come with joining a trade association to grow their business. Trade associations also hold valuable information about the relevant industry, such as news, professional development and research materials to help members stay on top of market trends and developments. It is therefore clear that businesses can reap numerous benefits from joining a trade association. Given the benefits, it comes as no surprise that there are hundreds of trade associations in Hong Kong in different sectors and industries.
On 14 March 2016, the Hong Kong Competition Commission (HKCC) published its Report on Trade Associations in Hong Kong identifying trade associations as likely enforcement targets.
This article examines the key activities of trade associations and the competition law implications followed by a discussion of best practices to minimise the risks of a member or a trade association contravening the First and Second Conduct Rules under the Ordinance.
- The First Conduct Rule prohibits anti-competitive agreements and concerted practices by businesses, including horizontal agreements between competitors (such as cartels) and vertical agreements (such as resale price maintenance in a distribution agreement).
- The Second Conduct Rule prohibits businesses with a "substantial degree of market power" from abusing that power by acting anti-competitively. Examples of potentially abusive conduct include predatory pricing, refusal to deal and exclusivity arrangements.
APPLICATION TO TRADE ASSOCIATIONS
The First Conduct Rule and the Second Conduct Rule apply to "undertakings". An "undertaking" is defined as any entity, regardless of its legal status or the way in which it is financed, which is engaged in an economic activity.
Although an association as such may not itself be an undertaking, the Ordinance specifically prohibits an undertaking, "as a member of an association of undertakings", from making or giving effect to a decision of the association which harms competition. This prohibition is intended to target indirect anti-competitive cooperation between undertakings through an "association of undertakings", an example of which is a trade association. Trade associations themselves can also fall within the definition of "undertaking" to the extent that they are engaged in economic activity, and the Ordinance would then apply equally to a "concerted practice" and a "decision" by a trade association. This means that both members and trade associations can be liable under the Ordinance. Notably, although trade associations that are statutory bodies are exempt from the application of the Rules under the Ordinance (even where they are engaged in economic activity), their members or any third parties dealing with such statutory bodies are not.
The enforcement authorities, the HKCC and the Communications Authority, have jointly published Guidelines on the First Conduct Rule (the "FCR Guideline") and the Second Conduct Rule (the "SCR Guideline") which shed light on their approach to interpreting and enforcing the Conduct Rules.
The FCR Guideline devotes a whole section on discussing possible anti-competitive activities of members of trade associations or trade associations. Although the SCR Guideline does not consider the position of trade associations specifically, that is not to say that the Second Conduct Rule is irrelevant. The Second Conduct Rule may also be applicable when trade associations provide services to their members, particularly where the trade association is the main or only provider of such services and enjoys a substantial degree of market power.
Overall, the recent wide coverage of the possible effects of the competition rules on trade associations is most likely to have a chilling effect on their activities and membership.
THE KEY PITFALLS FOR TRADE ASSOCIATIONS AND THEIR MEMBERS
Price recommendations and fee scales
- Requiring members to set particular prices is anti- competitive by object.
- "Recommended fee scales" and "reference prices" of trade and professional associations are also likely to be seen as having the object of harming competition. The HKCC considers that price recommendations are issued with a view to members charging similar prices and that the very reason price recommendations are made is with the expectation that members will follow them. If price recommendations are allowed, they would enable indirect price fixing through associations.
- Any argument that the practice is a true recommended fee scale or mere guide which is generally not adhered to by members or can otherwise be justified (e.g. the fees represent an upper level or are considerably lower than would be the case if normal rates were to be charged) would need to be looked at in context including any regulatory background to the association in question (where for example scales are provided for by law and therefore outside the ambit of the Ordinance).
Exchanges of information
- Exchanging information on intended product prices is anti- competitive by object as this would allow others to adjust their future prices to reflect the price of their competitors. The same applies to exchanges of information to facilitate other cartel conduct.
- Both the characteristics of the market and characteristics of the information exchange need to be considered in assessing whether the information exchange has the effect of harming competition. Factors which are more likely to suggest harm to competition include:
- a highly concentrated market (i.e. where there are few players);
- frequent information exchanges;
- the exchange of current, detailed and individualised/company specific information; and
- limited access to the information exchanged.
- Information surveys prepared by trade associations for members may be problematic if they involve the sharing of competitively sensitive information, especially in highly concentrated markets where there are few players with identical or similar product offerings.
- Competition concerns are less likely to arise for exchanges of historical, aggregated and anonymised data, general market information or publicly available information.
- Competition concerns are also less likely to arise where the information is exchanged in public and is available to others, including consumers.
- The pro-competitive purposes of the information exchange should be documented where possible and should not be departed from.
- Discussions involving hard-core cartel conduct or other anti-competitive conduct under the veil of trade association meetings will contravene the Ordinance.
- Members should always be alert to the possibility that a member will become a whistle-blower and cooperate with HKCC to avoid being fined or pursued for anti-competitive conduct.
- To minimise risks:
- circulate a clear agenda in advance of the meeting and adhere to it during the meeting;
- circulate minutes of the meeting afterwards;
- get legal counsel to attend the meeting; and
- object or leave the meeting if competitively sensitive topics come up, and insist on recording the objections / departure.
Certification standards and standard terms
- Trade associations may award certifications to members to recognise that they meet certain minimum industry standards, as a hallmark of quality, to promote the compatibility of a certain product, or to constitute a qualification to practice. Standard terms by trade associations may help promote certainty.
- Certifications, qualifications and standard terms by trade associations may however be problematic if they restrict price or product competition, for example in respect of fees charged or products and services supplied.
- Competition concerns will also arise where such certifications, qualifications or standard terms are vital for successful entry into the market but are not transparent or accessible to new entrants.
Membership and event participation criteria
- Membership of an association or participation in certain organised events such as trade shows may be essential for competing in a market. As such, the terms upon which an entity can join a trade association as a member or participate in an organised event can in some instances be anti-competitive if they exclude the entry of a new member.
- Any terms which are not transparent, proportional, non- discriminatory and do not provide for an appeal procedure in the case of a refusal to admit a member may be seen as having either the object or effect of harming competition. For example, a minimum turnover threshold requirement for membership is likely to be anti- competitive.
- Where a trade association is the main or only provider of a service and enjoys a substantial degree of market power, the trade association should refrain from engaging in conduct which would amount to an abuse of its power, such as imposing barriers to entry.
The HKCC recognises that trade and professional bodies have a positive impact on Hong Kong's economy by encouraging best industry practices, addressing training needs and promoting industry interests, but warns that they must be careful not to organize or facilitate anti-competitive conduct as they involve competitors coming together.
While the public practices of trade associations such as price recommendations and fee scales are likely to be easy targets for the HKCC, non-public practices will also attract scrutiny. Indeed, the HKCC has already received confidential complaints and enquiries relating to the non-public practices of some associations and their members.
Therefore, associations must review not only their published practices but also their non-published practices to identify risk areas and ensure that their practices comply with the CO. In respect of published practices, it will not be enough to show that they have been changed if the changes are not translated into actual changes to the underlying agreement between competitors to restrict competition. The key messages which trade associations should note are:
- Members of trade associations must not make or give effect to trade association decisions which harm competition.
- Price-fixing might arise from the activities of a trade association.
- Unless justified, even non-binding price recommendations or fee scales of a trade association may be assessed as having the object of harming competition, as arrangements in substance no different from a direct agreement or concerted practice between members of the association.
- The terms upon which an undertaking can join a trade association as a member may be anti-competitive if they exclude the entry of a new member.
Finally, the brochure published by HKCC specifically for trade associations should be a valuable resource for trade associations in relation to the do's and don'ts in their operations (see here).