Given that the new Hong Kong Competition Ordinance (the Ordinance) is closely modelled on the Treaty on the Functioning of the European Union (the TFEU), we consider to what extent Hong Kong’s recently established competition authorities are able to adopt a similarly rigorous stance to their European counterpart.
Over 130 countries now have competition laws and Hong Kong has recently joined them. The Ordinance was adopted by the Legislative Council on 14 June 2012 and its operative provisions came into force on 14 December 2015. In the three years since its adoption, two competition authorities have been established:
- The Competition Commission - the enforcement body that carries out investigations, initiates proceedings, settles cases and decides on the applicability of exclusions and exemptions.
- The Competition Tribunal - the body which adjudicates whether a breach of the Ordinance has occurred (and which sits within Hong Kong’s court structure).
Where the Competition Commission has reasonable cause to believe that a person has contravened a competition rule, it may initiate proceedings before the Tribunal. This split, with one competition authority responsible for investigation and enforcement and the other for sanctioning, is in contrast to the EU regime under which the EU Commission assumes both roles.
The Ordinance borrows heavily from the TFEU in its two central provisions:
- Section 6(1), the First Conduct Rule on restrictive agreements and practices, prohibits agreements that have the object or effect of preventing, restricting or distorting competition: “An undertaking must not (a) make or give effect to an agreement; (b) engage in a concerted practice; or (c) as a member of an association of undertakings, make or give effect to a decision of an association, if the object or effect of the agreement, concerted practice or decision is to prevent, restrict or distort competition in Hong Kong.”
- Section 21, the Second Conduct Rule on unilateral conduct, prevents abuse of market power: “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 addition to the First and Second Conduct Rules (collectively referred to as Conduct Rules), the Ordinance contains a Merger Rule, providing that an undertaking may not “carry out a merger that has, or is likely to have, the effect of substantially lessening competition in Hong Kong”, unless specifically exempted or excluded on the ground of economic efficiencies. The Merger Rule covers direct or indirect mergers, so it may apply to transactions outside Hong Kong if they have the effect of substantially lessening competition in Hong Kong, but the application of the Merger Rule is currently limited to licence holders within the meaning of the Telecommunications Ordinance (Cap 106). Given this sector-specific scope, the Ordinance is therefore unlikely, at least for the time being, to become another jurisdiction where a merger notification has to be considered outside the telecoms sector.
While the Competition Commission is the principal competition authority responsible for enforcing the Ordinance, under section 159 of the Ordinance, the Communications Authority may, pursuant to its concurrent jurisdiction with the Competition Commission, perform the functions of the Competition Commission under the Ordinance in so far as those functions relate to the conduct of certain undertakings operating in the telecommunications and broadcasting sectors. As required by section 161 of the Ordinance, the Competition Commission and the Communications Authority have prepared and signed a Memorandum of Understanding for the purpose of coordinating the performance of their functions under the Ordinance. However, while the Competition Commission has issued a Leniency Policy, the Communications Authority has not followed suit.
Where the Competition Commission has reasonable cause to believe that a contravention of the First Conduct Rule has occurred and the contravention does not involve Serious Anti-Competitive Conduct, the Competition Commission must, before bringing proceedings in the Competition Tribunal against the undertaking whose conduct is alleged to constitute the contravention, issue a Warning Notice to the undertaking concerned. The Warning Notice procedure affords an undertaking an opportunity to cease or alter the investigated conduct within a specified warning period.
In cases of Serious Anti-Competitive Conduct (including price fixing, market sharing, output restriction or services and bid-rigging) the Competition Commission may institute proceedings before the Tribunal without following the Warning Notice procedure – in other words the Warning Notice does not have to be issued but the Competition Commission may still issue one.
If an undertaking offers a Commitment, the Competition Commission may, subject to procedural requirements set out in Schedule 2 of the Ordinance, decide to accept it and terminate its investigation, subject to its right to enforce the Commitment. If a recipient of a Warning Notice chooses not completely to cease its offending conduct or make any Commitment which is accepted, it will be at risk of prosecution.
Breaches of the Conduct Rules do not give rise to criminal penalties, although substantial civil penalties can be imposed relating to the turnover of the breaching party or parties at the time of breach. The Competition Tribunal can fine infringers for any single contravention an amount up to 10% of total local (Hong Kong) turnover for the duration of the infringement (up to three years). The Competition Tribunal may also make any order that it considers appropriate, including an order to pay the costs of investigation, disqualification orders for directors for up to five years and interim orders to cease and desist from anti-competitive conduct.
A wide range of other civil penalties might also apply, as may criminal sanctions, for obstructing the Competition Commission in exercising its enforcement powers.
The Ordinance also provides for follow-on actions to be initiated by those who have suffered a loss caused by an infringement of either Rule, once it has been determined. Under Section 110 of the Ordinance, claimants can rely on the infringement decision and do not have to re-prove the facts of the infringement. However, there is not yet the ability to bring stand-alone actions prior to a Competition Tribunal decision and Hong Kong law does not permit class actions. For the time being then, victims of anti-competitive agreements/abusive conduct are left without private redress; they must first persuade the Hong Kong competition authorities to investigate and even then it may frequently be the case that the losses suffered by each individual potential claimant do not justify the expense of a follow on action under Section 110.
One potential weakness of the split system is that the Competition Commission is unable by itself to produce an all embracing leniency policy. The Competition Commission can only decide whether or not to prosecute. It cannot promise binding discounts on penalties because it is the Competition Tribunal which is alone responsible for sanctions. This dilemma is reflected in the Leniency Policy for Undertakings Engaged in Cartel Conduct issued by the Competition Commission (which is the only leniency policy so far issued). To our knowledge, the Competition Tribunal does not intend to issue corresponding sentencing guidelines. The consequent lack of certainty for subsequent whistleblowers may in the early years, until a body of case law clarifies the discounts available, deter potential whistle blowers and undermine the leniency regime.
Strength of the Rules
The lack of a general merger rule, outside of the telecoms sector, is a deliberate gap in the Ordinance. If two businesses wish to engage in cartel behaviour, as things currently stand, they can choose to merge and remove any competition law risk.
On the other hand, the Conduct Rules are extra-territorial in their effect. They apply to agreements conceived outside Hong Kong, if they have the “object or effect” of preventing, restricting or distorting competition in Hong Kong, regardless of where the conduct takes place or where the parties are located. Therefore, there is nothing to prevent the competition authorities imposing penalties on businesses operating abroad if either an “object” or “effect” infringement occurs in their eyes.
Such broad scope is not uncommon. Both the US and EU competition regimes are frequently applied to arrangements that are carried out by overseas companies. Under the US regime disclosure of evidence located abroad is facilitated through bilateral agreements with other countries and the extradition of foreign executives to the US is not uncommon. In Europe, the EU Commission has traditionally found liability for foreign based companies either on the basis that such agreements were “implemented” within the jurisdiction, or, if a local subsidiary exists, the non-EU parent can be held liable as part of a broader “economic entity”. The fundamental question is whether harm is suffered in the EU.
Test case: resale price maintenance
Resale price maintenance (RPM) will be an interesting test-case for the assertiveness of the Hong Kong competition authorities in using their powers. RPM is the practice of suppliers forcing their distributors (via their distribution contracts) to maintain a certain price level on goods sold within their territory. In Hong Kong RPM is an important economic issue given the large retail sector.
In the Guideline to the First Conduct Rule, the authorities have indicated a willingness to be accommodating by taking an open view on whether RPM will be considered an infringement: “the case turns on a consideration of the content of the agreement establishing the RPM, the way the arrangement is implemented by the parties and the relevant context”.1
By modelling the Ordinance on the TFEU’s competition provisions, the Hong Kong government has given its competition authorities a broad set of powers. But in some respects the competition regime is incomplete; particularly given the lack of stand-alone or class action suits and the limitation of the new Merger Rule to the telecommunications sector. Having a split regulatory regime coupled with the Competition Tribunal not having issued sentencing guidelines mirroring the Competition Commission’s Leniency Policy may undermine the attractiveness of the leniency regime to all but the first whistleblower. Furthermore, the approach outlined in the Guidelines with respect to RPM and the granting of potential exclusions, indicates that the competition authorities intend to be flexible at first. As things stand therefore the new regime is far less stringent than the European regime, however, it may be that ancillary legal mechanisms are bolted on at a later date and, as ever, the interpretation of the Ordinance and its Guidelines will take a number of years to develop into a body of law.