The new Competition Ordinance will come into full effect on 14 December 2015. The Competition Ordinance lays down two basic rules on anti-competition activities.

The First Conduct Rule provides that:-

“An undertaking must not:-

(a)   make or give effect to an agreement;

(b)   engage in concerted practice; or

(c)    as a member of an association of undertakings, make or give effect to a decision of the association,

if the object or effect of the agreement, concerted practice or decision is to prevent, restriction or distort competition in Hong Kong.”

The Second Conduct Rule provides that:-

“An undertaking that has a substantial degree of market power in a market must not abuse that power by engaging in conduct that has as its object or effect the prevention, restriction or distortion of competition in Hong Kong.”

In relation to HR practices and employment matters, the main concerns will likely be related to the First Conduct Rule. In this regard, we will focus on the First Conduct Rule in this newsletter.

Undertaking

The First Conduct Rule applies to undertakings, and the term “undertakings” refers to any entity (including natural person), regardless of its legal status or the way in which it is financed, which is engaged in an economic activities.

The First Conduct Rule does not apply to conduct involving two or more entities if the relevant entities are part of the same undertaking. Generally, if entity A exercises decisive influence over the commercial policy of entity B, whether through legal or de facto control, then the Competition Commission (the “Commission”) will consider A and B a single economic unit and part of the same undertaking. Therefore, if there are any agreements among group companies (which would be defined as the same undertaking) with regard to wage/bonus levels of staff members, it will not fall under the ambit of the First Conduct Rule.

The Commission does not consider an employee to be an undertaking. Therefore discussions or arrangements in relation to salary or other working conditions between one or more employees and their employer take place within the framework of a single economic unit and are outside the scope of the First Conduct Rule. In addition, where a trade union acts on behalf of its members in collective bargaining with an employer on employment terms, the trade union is not engaged in economic activity and is not an undertaking.

Agreement

The term “agreement” is a broad concept and is defined in the Competition Ordinance to include any agreement, arrangement, understanding, promise or undertaking, whether express or implied, written or oral, and whether or not enforceable or intended to be enforceable by legal proceedings. Agreements between competitors with the aim of fixing, maintaining, or controlling wages are examples of agreement with the object of harming competition.

Concerted practice

A concerted practice is a form of cooperation, falling short of an agreement, where undertakings knowingly substitute practical cooperation for the risk of competition.

A concerted practice typically involves an exchange of competitively sensitive information between competitors, including salary or bonus level and increment percentage.

The Commission will likely conclude that there exists a concerted practice with the object of harming competition where competitively sensitive information is exchanged between competitors in the circumstances where (a) the information is given with the expectation or intention that the recipient will act on the information when determining its conduct in the market; and (b) the recipient does act or intends to act on the information.

Without a legitimate business reason for an information exchange, the Commission will likely to infer from the information exchange that the party providing the relevant information had the requisite expectation or intention to influence a competitor’s conduct in the market. Similarly, absent of a legitimate business reason for taking receipt of the information exchange, or other evidence showing that the recipient did not act or intend to act on the information when determining its conduct in the market, the Commission will likely infer that the recipient undertaking acted on or intended to act on the information exchanged.

The type of information exchanged and the structure of the market in which the information exchange occurs are important factors in the analysis. For example, the exchange of historical, aggregated and anonymised salary/bonus data is less likely to harm competition as the exchange of such information is unlikely to reduce independent decision-making by undertakings which regard to their actions in the market. In general, the exchange of publicly available information is unlikely to involve a contravention of the First Conduct Rule. Publicly available information in this sense is information that is equally accessible in terms of the cost of access to all competitors and customers.

Decision of an association of undertakings

The First Conduct Rule applies where an association of undertaking (including trade associations, professional associations, societies or associations without legal personality), makes or gives effect to a decision of the association which has the object or effect of harming competition. A decision of an association may fall within the First Conduct Rule even if it is non-binding e.g. recommended prices/salary level.

Object or Effect of harming competition

Where an agreement has an anti-competitive object, it is not necessary for the Commission to also demonstrate that the agreement has an anti-competitive effect. If an agreement does not have an anti-competitive object, it may nevertheless contravene the First Conduct Rule if it has an anti-competitive effect. In assessing whether conduct has the actual or likely effect of harming competition, the Commission may assess what the market conditions would have been in the absence of the conduct, and compare these counter-factual market conditions with the conditions resulting where the conduct is present. Where the effect of an agreement on the competitive process is insignificant, the Commission considers that the agreement does not contravene the First Conduct Rule on the basis of its effect (save and except that the agreement also has the object of harming competition).

Where the main arrangement covered by an agreement is not in itself harmful to competition, the Commission considers that restrictions contained in the agreement which are necessary for the agreement to be workable (sometimes termed ancillary restrictions) fall outside the prohibition in the First Conduct Rule.

A restriction of competition will be ancillary when it is directly related to and necessary for the implementation of a separate, main (non-restrictive) agreement and proportionate to it. The restriction must be subordinate to the implementation of the main agreement and be inseparable linked to it.  In addition, it must also be objectively necessary for the implementation of the main arrangement and proportionate to it. A classic example is the case of a joint venture where a non-compete clause between the parent entities and the joint venture might be regarded as ancillary to the joint venture or necessary for the joint venture agreement to be workable for the lifetime of the joint venture.

General Exclusion

Schedule I to the Competition Ordinance provides for the following general exclusions in respect of the First Conduct Rule:-

  1. agreements enhancing overall economic efficiency;
  2. compliance with legal requirements;
  3. services of general economic interest;
  4. mergers; and
  5. agreements of lesser significance (i.e. agreement/concerted practice or a decision of an association of undertakings in any calendar year if the combined turnover of the undertakings/association for the turnover period does not exceed HK$200million)

Please note however that the general exclusion for agreements of lesser significance is not available if the agreement is considered “Serious Anti-competitive Conduct” under the Competition Ordinance.

“Serious Anti-competitive Conduct” means any conduct that consists of any of the following or any combination of the following:-

(a)    fixing, maintaining, increasing or controlling he price for the supply of goods or services;

(b)   allocating sales, territories, customers or markets for the production or supply of goods or services;

(c)    fixing, maintaining, controlling, preventing, limiting or eliminating the production or supply of goods or services;

(d)   bid-rigging.

Therefore, even if the turnover of the undertakings are below HK$200 million, if they reach any agreements or exchange sensitives information which will lead to fixing wages, bonus or salary increment, these activities will not be exempt from the First Conduct Rule.

Conclusion

Therefore, from a HR perspective, in order to avoid any breach of the Competition Ordinance, it is advisable not to reach any agreement with any competitors with respect to fixing wages/bonus/salary increment of staff members. In addition, it is also advisable to avoid exchanging sensitive information on wages, bonus or increment level with competitors.