Abuse of dominance

Definition of abuse of dominance

How is abuse of dominance defined and identified? What conduct is subject to a per se prohibition?

The SCR applies to conduct carried out by an undertaking with SDMP that has as its object or effect the prevention, restriction or distortion of competition in Hong Kong. The legislation, therefore, follows both form-based and effects-based approaches in identifying abusive conduct.

The SCR Guideline provides that conduct may be considered to have the object of harming competition if it can be regarded, by its very nature, as being so harmful to the proper functioning of normal competition in the market that there is no need to examine its effects. In this context the object of conduct refers to the purpose or aim of the conduct, viewed in its context, and in light of the way it is implemented, and not merely the subjective intentions of the undertaking concerned. The SCR Guideline further sets out a number of examples of conduct that the CC and CA regard as potentially having the object of harming competition, including predatory pricing (setting prices below average variable costs); certain exclusive dealing arrangements; and paying to delay the introduction of a competitor’s products.

In cases where the conduct in question does not have the object of harming competition, it will be considered to be an infringement if it has an anticompetitive effect. According to the SCR Guideline, when demonstrating that conduct has an anticompetitive effect, the CC or CA may consider not only any actual effects, but also effects that are likely to flow from the conduct. The SCR Guideline also states that for conduct to have an actual or likely effect on competition, it must harm the process of competition (as opposed to harming individual competitors) and identifies tying and bundling, margin squeeze, refusals to deal and exclusive dealing as (non-exhaustive) examples of the types of conduct that may potentially constitute an abuse.

Exploitative and exclusionary practices

Does the concept of abuse cover both exploitative and exclusionary practices?

In its Enforcement Policy dated November 2015, the CC indicated that it will accord particular priority to conduct involving exclusionary behaviour by incumbents operating in one or more markets in Hong Kong. As noted in the answer to question 10, the SCR Guideline states that for the CC or CA to regard conduct as having an actual or likely effect on competition, it must harm the process of competition. All of the examples of abuses provided in section 5 of the SCR Guideline are exclusionary in nature and exploitative abuses such as excessive pricing or price discrimination are not mentioned. This clearly indicates that the CC’s focus will be on exclusionary conduct. Nevertheless, the SCR does not draw any distinction between exploitative and exclusionary practices and it is at least arguable that both types of practices could constitute an abuse.

Exploitative conduct by a licensee in a dominant position in a telecommunications market is specifically prohibited by section 7Q of the TO.

Link between dominance and abuse

What link must be shown between dominance and abuse? May conduct by a dominant company also be abusive if it occurs on an adjacent market to the dominated market?

The SCR prohibits an undertaking that has SDMP in a given market from abusing its power in that market by engaging in conduct with an anticompetitive object or effect. This suggests there must be a nexus between the market in which the undertaking in question has power and the (ab)use of that power. However, the SCR does not expressly require that the impugned conduct must have effect in the same market in which the undertaking maintains market power: the abusive conduct need only have as its object or effect the prevention, restriction or distortion of competition in Hong Kong.

The SCR Guideline makes it clear that, in the view of the CC and CA, it is possible for an undertaking with SDMP in one market to engage in conduct that has an impact in a different market. Paragraph 4.2 of the SCR Guideline gives as an example a situation in which an undertaking leverages its market power in a one market to harm competition in a second. Likewise, paragraphs 5.8 to 5.12 of the SCR Guideline envisages that tying and bundling (whereby an undertaking abuses SDMP in the tying market with a view to harming competition in the tied market) would amount to an abuse.

Defences

What defences may be raised to allegations of abuse of dominance? When exclusionary intent is shown, are defences an option?

The CO does not contain any statutory defences. However, there are a number of exclusions and exemptions to the SCR, which are set out in Schedule 1 to the CO.

Broadly, the SCR does not apply to conduct:

  • to the extent it is engaged in for the purpose of compliance with legal requirements;
  • that would obstruct the performance of particular tasks assigned to an undertaking entrusted by the Hong Kong government with the operation of services of general economic interest;
  • that would result in a merger within the meaning given by sections 3 and 5 of Schedule 7 of the CO; and
  • of an undertaking that has a turnover (whether in or out of Hong Kong) not exceeding HK$40 million in the financial year preceding the calendar year in which the conduct in question was engaged in.

There is no efficiency-based exclusion available for conduct within the scope of the SCR. However, the SCR Guideline envisages that it would be open to an undertaking to argue that the conduct in question is not abusive because either: it was indispensable and proportionate to the pursuit of some legitimate objective unconnected with the tendency of the conduct to harm competition; or the conduct entails efficiencies sufficient to guarantee no net harm to customers.

Neither the CO nor the SCR Guideline precludes the application of these exclusions to conduct that is abusive by ‘object’.

In addition to the defences outlined above, an undertaking may be able to defend a prosecution of an abuse by effect on the basis that no anticompetitive effect is likely to arise. However, such an argument would not be available in a case where the abuse in question was found to have had the object of preventing, restricting or distorting competition in Hong Kong.