The Hong Kong Competition Commission (“Commission”) has released draft guidelines for the enforcement of the Competition Ordinance.  The Commission intends to finalize them by the first half of 2015, after which the Ordinance will come into force. 

These draft guidelines are in line with the antitrust principles applied in most Western jurisdictions. This note summarizes some of the key elements, including some issues that were points of contention debated before the adoption of the Competition Ordinance.

Background

The Competition Ordinance includes prohibitions on anticompetitive agreements (“First Conduct Rule”) and on abuses of substantial market power (“Second Conduct Rule”).  There is a merger control system, but it only applies to the telecommunication sector.  Violations of the Ordinance are subject to fines.

The Commission has the power to investigate breaches of the Ordinance, but only the Competition Tribunal can take infringement decisions.  Private litigation is limited to follow-on actions after the Competition Tribunal has taken an infringement decision.

The Commission has released six draft guidelines, including on (i) how complaints should be made to the Commission, (ii) how the Commission will investigate, (iii) the First Conduct Rule, (iv) the Second Conduct Rule, (v) mergers, and (vi) exclusions and exemptions.

Guidelines on the First Conduct Rule – anticompetitive agreements

The First Conduct Rule prohibits agreements or concerted practices having as object or effect the restriction of competition.  The Ordinance then “exempts” certain agreements from the prohibition, including agreements that enhance overall economic efficiency.

According to the draft guidelines, agreements between undertakings part of a single economic entity are outside the scope of the prohibition.  Where an undertaking exercises decisive influence over the commercial policy of another, they will be considered as part of the same economic entity.  This clarification is important in a small economy like Hong Kong’s.

A point of contention preceding adoption of the Ordinance was the treatment of resale price maintenance.  The guidelines consider that resale price maintenance constitutes a restriction by object – what would be called the “per se rule” in the United States – so the Commission does not need to demonstrate anticompetitive effects. The Commission does nevertheless leaves the door open to arguments that, in a particular case, the resale price maintenance is procompetitive; the circumstances in which the Commission will allow this exemption are likely to be very limited. 

Guidelines on the Second Conduct Rule – abuse of dominance

The Second Conduct Rule prohibits undertakings with substantial market power from abusing that power by engaging in conduct that has the object or effect of preventing competition in Hong Kong. This is the equivalent of abuse of dominance prohibitions in the European Union.

There was some debate about a possible market share threshold to determine when an undertaking has substantial market power. But the released guidelines do not include any safe harbor. They simply state that substantial market power can be thought as “the ability profitably to charge prices above competitive levels or to restrict output or quality below competitive levels, for a sustained period of time.”  A sustained period of time means 2 years but can be longer or shorter depending on the specific circumstances.

The guidelines provide more details on conduct that may constitute abuse of substantial market power, including predatory pricing, tying and bundling, margin squeezes, refusals to deal, and exclusive dealing.

The Commission’s interpretation of refusals to deal is by and large similar to the prevailing view in the European Union.  While an undertaking is in principle free to decide with whom it will or will not do business, the Commission states that concerns are likely to arise when a refusal to deal relates to an input that is indispensable to competing in a downstream market.  In this respect, the Commission states that it will investigate the ability to duplicate the relevant input. The Commission’s position on refusals to license intellectual property rights is in line with European case law. The draft guidelines state that such refusals will only amount to abuses of substantial market power in exceptional circumstances, for example where it prevents the emergence of a new product or a secondary market.

The guidelines also explain that conditional (or loyalty) rebates may constitute abuses of substantial market power. These are rebates granted if a customer’s purchases over a defined period exceed a particular threshold.  These are the type of rebates involved in the European Commission’s famous Intel decision, currently under appeal.

Conclusion

The guidelines are by and large in line with the competition law principles applicable in most Western jurisdictions.  The most contentious elements in the Hong Kong context are the prohibition on resale price maintenance and the lack of a safe harbor for the existence of substantial market power.  Companies operating in Hong Kong now have a little over 9 months to review and adapt their practices to the Competition Ordinance.