Introduction

On 14 June 2012, after nearly two years of ongoing deliberations, Hong Kong’s Legislative Council (LegCo) finally enacted Hong Kong’s first cross-sector competition law.  The new law, known as the Competition Ordinance (the CO), will enter into force at a date to be set separately by the Secretary for Commerce and Economic Development. The CO is likely to be introduced in stages with the provisions relating to the institutional framework coming into force first (to enable the establishment of the Competition Commission and the preparation of guidelines). It is expected that the transitional period will take at least one year.

The primary objectives of the CO are:

  • to prohibit conduct which prevents, restricts or distorts competition in Hong Kong; and
  • to prohibit mergers that substantially lessen competition in Hong Kong (although currently limited only to mergers in the telecommunications sector). 

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Who does what?

The CO provides for a judicial enforcement model, such as applies in Australia and New Zealand, with a Competition Commission (the Commission) and a Competition Tribunal (the Tribunal) established to enforce the CO.

The Commission’s primary role is to investigate suspected breaches of the CO. The Commission may commence investigations:

  • on its own initiative;
  • upon receipt of complaints; or
  • on referral from the Hong Kong Government (the Government) or a court. 

The Commission will be led by a Chairperson and will consist of at least 5 members (including the Chairperson). Commission members are expected to have expertise or experience in industry, commerce, economics, law, small and medium enterprises or public policy.

The Tribunal’s primary role is to adjudicate on whether breaches of the CO have occurred. The Tribunal will also hear appeals from the Commission on a limited set of matters where the Commission can make binding determinations such as on exemption or exclusion applications. The Tribunal may hear cases brought to it either by the Commission or by private parties.

All judges of Hong Kong’s Court of First Instance are Tribunal members. The Tribunal will formally be a division of the High Court. The Chief Executive in Council (CE) will appoint a President to lead the Tribunal. Each case will be led by a presiding Tribunal member who will sit with other judicial members. The Tribunal may also appoint one or more assessors or non-judicial persons to assist in the adjudication of cases.

The separation of investigative and adjudicative functions (between the Commission and the Tribunal) provides a good system of checks and balances appropriate in a small jurisdiction.

The following diagram outlines the institutional framework outlined by the CO.

Click here to view diagram.

What does the Competition Ordinance prohibit?

The CO prohibits three categories of conduct:

  • the First Conduct Rule prohibits undertakings (a broad term encapsulating any entity engaging in commercial or economic activities1 ) from engaging in agreements, concerted practices or decisions with the object or effect of preventing, restricting or distorting competition in Hong Kong.  The First Conduct Rule is not expressly limited to agreements between competitors, unlike Singapore’s Competition Act, and therefore could capture vertical arrangements.  However, the Government has foreshadowed that, consistently with the efficiency exemption in Schedule 1, the Commission would be expected to make a block exemption covering vertical arrangements.  The Government was concerned that a statutory carve out would be a too blunt instrument and could lead to efforts to restructure horizontal arrangements which adversely impact competition as exempt vertical arrangements2;
  • the Second Conduct Rule prohibits undertakings with a substantial degree of market power from abusing that power by engaging in conduct which has the object or effect of preventing, restricting or distorting competition in Hong Kong.  The formulation of the Second Conduct Rule differs from the EU and Singaporean ‘dominance’ rules by requiring a showing of the object or effect of limiting competition.  The intention is to exclude ‘exploitative’ conduct by large enterprises (which has been retained for the telecommunications section under an amendment to the Telecommunications Ordinance).  The Second Conduct Rule is closer to the Australian and New Zealand prohibitions which require a showing that the dominant firm took advantage of that dominance by acting in a manner in which a non-dominant firm would not; and
  • the Merger Rule prohibits undertakings from directly or indirectly carrying out a merger that has, or is likely to have, the effect of substantially lessening competition in Hong Kong. The Merger Rule will apply only to undertakings who are licensees in respect of the telecommunications industry. This is a continuation of the current merger regime applicable to telecommunications licensees in Hong Kong, although as the Government has said, the Merger Rule has been “modernised”.

The First Conduct Rule and the Second Conduct Rule are known collectively as the Conduct Rules. The First Conduct Rule, the Second Conduct Rule and the Merger Rule are collectively known as the Competition Rules.

The Conduct Rules have extra-territorial reach and will apply even if the agreement or conduct takes place outside Hong Kong. The Conduct Rules are focused on whether the relevant agreement or conduct has the object or effect of preventing, restricting or distorting competition in Hong Kong, regardless of where the parties participating in the agreement or engaged in the conduct are located.

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Hardcore and non-hardcore conduct under the First Conduct Rule

In response to concerns about the broad scope and generality of the First Conduct Rule, the original Competition Bill was amended to distinguish between “non-hardcore” and “hardcore” conduct. The CO identifies four types of hardcore cartel activities, namely price-fixing, bid-rigging, market allocation and output control.  Notwithstanding this distinction, hardcore activities, defined as “serious anti-competitive conduct” in clause 2 of the CO, will still be subject to the same framework of analysis as non-hardcore activities; a competitive effects test.  The key difference between the two lies in the enforcement options available to the Commission.         

The Commission will have a full range of enforcement options to deal with hardcore conduct. For this reason, undertakings that engage in conduct that could be considered hardcore cartel activity need to take steps to avoid a breach of the law, as penalties can be severe (for example, fines, damages, disgorgement orders). Practical safeguards should be put into place to ensure compliance with the First Conduct Rule.

As for non-hardcore activities, the Commission will adopt a lighter enforcement approach, which is discussed below.

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Exclusions and exemptions

Certain conduct or agreements may be excluded from the application of the Conduct Rules, provided these fall into the categories of conduct and agreements set forth in the exemption and exclusion framework set out in the CO.

The following table indicates the exemption and exclusion grounds under which conduct or agreements may be exempt, and which of the Conduct Rules these would be exempt or excluded from.  

Click here to view table.  

The original exclusion ground in (1) (in the table) above was amended to make clear that consumer welfare was one of the conditions to meet before an agreement is excluded from the application of the First Conduct Rule on the grounds of enhancing economic efficiency.  While this is in line with the approach adopted in the UK and EC, it sets a higher threshold for undertakings to meet. 

The exclusion grounds in (1) to (3) (in the table) above apply without the need for a Commission determination applying the exclusion to an undertaking. This allows scope for undertakings to undertake self-assessment to determine if their conduct or agreements fall into the exclusion grounds. Self-assessment is available in many jurisdictions and it is particularly useful as experience with competition jurisprudence develops over time.  Providing a statutory basis for self-assessment may assist build confidence in reliance on self-assessment rather than going to the Commission for formal decisions or exclusion decisions.

However, self-assessment always needs to be approached cautiously.  An incorrect view as to the conduct or applicability of the exclusion (as subsequently determined by the Commission, for example following a complaint) can give rise to an agreement being entered into which could be illegal, unenforceable and which could carry risk of fines and proceedings. Since the analysis of the infringement / applicability of the exclusion is based on market conditions, the analysis can change over time as markets develop. Self-assessment is also unlikely to be carried out appropriately unless sufficient guidance is provided by the Commission. Therefore the original self-assessment conclusions may require regular review.

In respect of the exemption grounds listed in (4) and (5) above, undertakings would not be able to undertake self-assessment to determine if their conduct or agreements fall under those grounds, until the CE makes an order indicating the sorts of conduct or agreements which may be exempt based on those grounds.

There is only one exclusion ground in relation to the Merger Rule. The Merger Rule does not apply to a merger if the economic efficiencies that arise or that may arise from the merger outweigh the adverse effects caused by any lessening of competition in Hong Kong.

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Exclusions for SMEs

It was the Government’s intention that exemptions for SMEs were best left for the Commission to formulate, as is the case in the EC and Singapore. However, as SMEs pressed for greater certainty, the CO now provides for a de minimis framework in the form of exclusions set out in Schedule 1:

  • the First Conduct Rule will not apply to all agreements between undertakings with a combined turnover not exceeding HKD200 million in the preceding financial year. In relation to decisions by trade or professional associations, the de minimis provision would apply if the aggregate turnover of the members does not exceed HKD200 million. Importantly, the exclusion will not apply to the four types of ‘hardcore” conduct regardless of the combined turnover of the undertakings to the agreement; and
  • the Second Conduct Rule will not apply to undertakings with a turnover not exceeding HKD40 million in the preceding financial year. 

“Turnover” in the context of the de minimis framework is defined as the total gross revenues of an undertaking on a global basis.

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Commission’s role in exclusions

There are two avenues by which the Commission can provide for more certainty about the application of exclusions.

First, the Commission has the power to issue Block Exemptions which exclude categories of agreements from the First Conduct Rule, based on the exclusion ground listed in (1) in the previous table.

Second, if undertakings wish for clarification or greater certainty as to whether their agreements or conduct are exempt or excluded, they would be able to seek clarification from the Commission. If the Commission makes a decision that conduct or agreements are excluded or exempt from the application of either or each of the Competition Rules, then those conduct or agreements are immune from any action pursuant to the CO (including both public and private enforcement action). However, the Commission may rescind a favourable decision if there has been a material change of circumstances since the decision was made or if the information in which it has based its decision was incomplete, false or misleading.

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Government and statutory bodies

The Competition Rules will not apply to the Government and to statutory bodies in Hong Kong. However statutory bodies may be brought within the scope of the Competition Rules through regulations. There are some 500 statutory bodies in Hong Kong with very diverse functions. In total, 575 statutory bodies will be exempt while 6 statutory bodies will be subject to the regulation of the Competition Rules.  Although exempt, the statutory bodies will still be required to act consistently with the principles underlying the Competition Rules.  

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Enforcement by the Commission

The Commission will be vested with a full range of investigative powers, including the power to require production of documents and information, the power to require persons to attend an interview before the Commission and the power to enter and search premises under a court warrant. The Commission may only conduct an investigation if it has reasonable cause to suspect that a contravention of a Competition Rule has taken place, is taking place or is about to take place. There are criminal penalties for non-compliance with the Commission’s investigative powers. 

An innovation in the CO is the power to issue infringement notices to undertakings alleged to have breached Conduct Rules. The Commission may only issue an infringement notice if it has reasonable cause to believe that a contravention of a Conduct Rule has taken place; and only if it has not yet brought proceedings in the Tribunal in respect of the alleged contravention. The infringement notice would describe the alleged infringing conduct, the evidence on which the Commission has formed its view and the terms on which the Commission would be prepared to settle the matter.  Undertakings who receive the infringement notice could choose not to accept the notice without any adverse inferences being drawn, in which case the Commission could proceed to institute proceedings before the Tribunal.

Infringement notices cannot be issued to undertakings found engaging in non-hardcore conduct in breach of the First Conduct Rule.  For such conduct, the Commission will issue a “warning notice” to warn infringing parties before instituting any legal proceedings. This allows an undertaking with the opportunity to rectify its conduct within a specified warning period, before more severe enforcement action is taken. If the contravention continues or is repeated after the specified warning period, the Commission may commence proceedings in the Tribunal against the undertaking, though only in relation to conduct engaged in after the warning period. It is only at this point that the Commission has the ability to seek sanctions by the Tribunal for non-hardcore conduct.

In addition, the Commission may accept commitments from a person to take any action or refrain from taking any action that the Commission considers appropriate to address its concerns about a possible contravention of a Competition Rule. If the Commission accepts a commitment, it may agree:

  • not to commence an investigation or if it has commenced an investigation, to terminate it; or
  • not to bring proceedings in the Tribunal or if it has brought proceedings, to terminate them.4 

However, if an undertaking has made an admission, in a commitment that has been accepted by the Commission, that it has contravened a Conduct Rule, the undertaking will not have immunity from follow-on private actions.

Another innovation in the CO is to provide a statutory basis to the granting of leniency by the Commission. The Commission may enter into leniency agreements with individuals and corporations who have breached the CO, but wish to mitigate their penalties by cooperating with the Commission. The Commission cannot bring or continue proceedings  for a pecuniary penalty against a party which is the beneficiary of a leniency agreement (which could include employees of a company which has made disclosure to the Commission). The CO does not specify how the Commission is to administer its leniency policy – for example, whether it is only available to the party who first reports a potential breach, can a ‘marker’ in the queue be obtained on an anomalous basis etc. These issues will need to be addressed by the Commission’s guidelines.

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Role of Commission guidelines in enforcement proceedings

As in other jurisdictions, guidelines issued by the Commission will play an important role in bringing some degree of certainty to the administration of the CO. The CO requires the Commission to issue guidelines in key areas. Draft guidelines were provided to the LegCo Bills Committee for discussion. However, there was concern that the guidelines would not provide sufficient certainty. The CO now provides that guidelines issued by the Commission will be admissible in evidence in any legal proceedings if the guidelines are relevant to determining a matter that is at issue.  If admitted, the guidelines change the onus of proof:  if a party is not in compliance with the guidelines, that party bears onus of proving that it is not in breach of the CO.  The role of the Commission’s guidelines are line in with the nature of the guidelines issued by Hong Kong’s Securities and Futures Commission pursuant to sections 399(6) and (8) of the Securities and Futures Ordinance (Cap. 571). Given their nature, Commission issued guidelines will need to be carefully considered by all undertakings.

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Penalties

The Tribunal is vested with the power to apply a full range of remedies for contraventions of the Competition Rules. These include pecuniary penalties; disgorgement orders; awards of damages to aggrieved parties; interim injunctions during investigations or proceedings; injunctions and disqualification orders against directors. The Tribunal may only impose pecuniary penalties on application by the Commission. Pecuniary penalties for a relevant violation will be capped at 10% of the total local turnover (for all products, not just those relating to a relevant contravention of the proposed law) for each year of the infringement, up to a maximum of three years.  If an infringement lasts more than three years, the three years of infringement with the highest turnover would be chosen. 

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Private rights of action

The CO provides for private actions to be brought by persons who have suffered loss or damage as a result of a contravention of a Conduct Rule. Such private actions can be brought by a private party, following on from a Tribunal determination (i.e. a “follow-on action”).  The Competition Bill originally provided for a “stand-alone action” which would allow a private party to bring an action independently of a Tribunal determination.  The “stand-alone action” was removed as a result of concerns raised by SMEs who feared that it would be used by large companies as a mechanism to harass them.  In our view, this concern was misconceived as overseas experience shows that large companies are typically defendants in such actions.  As a result, there could be additional pressure on the newly formed Commission given that it will be responsible for carrying out all initial enforcement.

In relation to follow-on actions, private parties do not need to prove that the breach of the Conduct Rule occurred (but merely that they have suffered loss or damage as a result of the contravention of the Conduct Rule).

Although there is no "stand-alone" action, a defendant in a civil case can still raise competition issues as a defence:  for example, in a case for enforcement of a contract, a defendant may raise the illegality of the relevant contract provision under the CO.