It’s been more than 20 years since the end of British rule in Hong Kong, but the territory’s first-ever cross sector competition law suggests that the UK legal system and common law principles continue to be a source of influence in the drafting and interpretation of legislation. On December 14, 2015, Hong Kong’s Competition Ordinance (the “Ordinance”) came into full effect. [1] Hong Kong spent 156 years as a British colony before reverting to Chinese sovereignty on July 1, 1997, and the Ordinance — which now operates as the primary source of competition law in Hong Kong — bears an uncanny resemblance to UK and EU competition law.

Since both before and after Hong Kong’s handover, product manufacturers have enjoyed a largely unregulated marketplace. Indeed, prior to the Ordinance, only the telecommunications and broadcasting sectors were subject to competition regulation in Hong Kong. [2] As a result, product manufacturers of consumer goods outside of these sectors had the freedom to implement pricing and distribution strategies without fear of liability. Now, product manufacturers operating in Hong Kong must review their distribution strategies to ensure compliance with the Ordinance.

While the Ordinance prohibits restrictions on competition through three main rules (The First Conduct Rule, the Second Conduct Rule, and the Merger Rule [3]), the First Conduct Rule is the most applicable to product manufacturers looking to implement distribution strategies in Hong Kong. The First Conduct Rule prohibits agreements and concerted practices that have the object or effect of restricting competition in Hong Kong. [4] The language of the First Conduct Rule is nearly identical to Article 101 of the Treaty on the Functioning of the European Union, which serves as a model for the UK’s Competition Act. The First Conduct Rule prohibits “all agreements between undertakings, decisions by associations of undertakings and concerted practices which . . . have as their object or effect the prevention, restriction or distortion of competition.” [5]

As one might infer given the parallel language of the two provisions, Hong Kong’s new regulations closely mirror UK and EU competition law. Accordingly, product manufacturers in Hong Kong now face similar restrictions to what we see in those regions. Under Hong Kong’s First Conduct Rule, resale price maintenance is generally prohibited [6] and presents a high risk for manufacturers who adopt this approach. [7]

Resale Price Maintenance Policies

The Competition Commission (the “Commission”) is the independent statutory body responsible for enforcing the Ordinance. The Commission, along with the Communications Authority, jointly issued guidelines on the First Conduct Rule in July 2015 (the “Guideline” or the “Guidelines”). [8]While resale price maintenance (“RPM”) agreements are strictly prohibited under the Ordinance, the Guidelines permit product manufacturers to recommend or suggest a resale price to retailers (known as the manufacturer’s suggested retail price) provided that the manufacturer makes it clear to all retailers that the suggested price is not mandatory. [9] In other words, retailers must retain ultimate freedom over a product’s advertised sale price. Product manufacturers who choose to implement such recommended retail price policies may not employ tactics aimed at fixing the minimum price, such as price monitoring. [10] Additionally, manufacturers should avoid taking measures against retailers that may be construed by the Commission as retaliatory — where a product manufacturer “retaliates or threatens to retaliate when its ‘recommended’ resale price is not followed, the Commission will consider the price is not truly recommended and assess the conduct as a form of RPM.” The same considerations apply to the UK and EU competition law regimes — RPM is considered to be a serious restriction of competition and is unlikely to be justified.

The Ordinance does not specifically discuss unilateral pricing policies, or UPPs. UPPs are particularly common in the United States. Through this strategy, a product manufacturer unilaterally announces the minimum advertised resale price for its products. Retailers are free to either acquiesce or disregard the policy; however, a manufacturer may refuse to deal with retailers who choose not to acquiesce.

Although the Ordinance does not explicitly address the legality of these pricing policies, product manufacturers should be aware of the significant risk that comes with the implementation of a unilateral policy in Hong Kong. Even a unilateral policy that only announces an advertised price will most likely be considered a form of indirect resale price maintenance and therefore unlawful under the Ordinance. [11] Additionally, product manufacturers with significant market power who implement UPPs may be charged with violating the Second Conduct Rule as well. [12]

While traditional resale price maintenance may not be a viable option, as in the UK and EU, an alternative strategy exists for product manufacturers seeking to establish distribution control and combat price erosion: selective distribution programs.

Selective Distribution Programs

Selective distribution programs enable a manufacturer to sell its products to consumers through a network of authorized retailers. Selective distribution programs are a common feature of the market in Hong Kong. Under the Guidelines, product manufacturers are lawfully permitted to implement selective distribution programs. Indeed, as stated in the Guidelines, selective distribution is “economically beneficial” and “an effective way of furthering inter-brand competition.” [13]

Through selective distribution programs, product manufacturers can gain increased control over two important elements of product distribution: (1) which dealers may sell their product, and (2) how those dealers may sell their product. Additionally, selective distribution programs allow manufacturers to maintain the image, quality, and reputation of their brand by prohibiting sales to unauthorized distributors.

However, selective distribution programs are subject to certain restrictions under Hong Kong’s competition law. Like in the UK and the EU, this strategy may only be used in instances where the characteristics of the manufacturer’s product require a selective distribution network in order to preserve its quality and ensure its proper use. [14] Additionally, product manufacturers may only select dealers on the basis of purely qualitative criteria such as a dealer’s technical qualifications or the suitability of a dealer’s retail premises. Product manufacturer may not select a dealer based on quantitative data, such as sales targets or the number of retailers in a geographic area. [15] Finally, product manufacturers must apply qualitative selective distribution criteria to all distributors in a uniform and nondiscriminatory manner. Following the EU and UK experience, it remains to be seen how the Commission will regard selective distribution in Hong Kong. However, one would expect the Commission to treat selective distribution models consistent with the EU and UK competition law regimes — where the compatibility of selective distribution systems rests on the notion that it may be permissible to focus not on price competition but rather on other factors of a qualitative nature.

Conclusion

Hong Kong has historically offered a vast consumer market with little to no regulation. Under the region’s new regulatory framework, product manufacturers must pay attention to the Ordinance and developing law in order to ensure compliance with Hong Kong law. By adopting flexible global distribution and pricing strategies that comply with competition regulations in Hong Kong and throughout the world, product manufacturers can achieve global price stability.