The draft Guidelines and the consultative process
The Hong Kong Competition Commission (the Commission) and the Communications Authority (the CA) have published draft Guidelines that explain how they will interpret and administer the Competition Ordinance (the Ordinance). The Ordinance is expected to come into force next year.
The draft Guidelines offer an early insight into Commission policy and are to be welcomed. According to the Commission, the draft Guidelines draw on best practices from other established competition law regimes. Moreover, the draft Guidelines would appear to be more extensive than those published by other newly established authorities (and other regulators in Hong Kong) and should assist companies seeking to grapple with unfamiliar competition law concepts.
This reflective briefing highlights our key observations on the draft Guidelines and identifies issues that are important for businesses. The short windows for responses to the drafts close on 10 November 2014 for the procedural guidance and 10 December 2014 for the substantive guidance.
The six draft Guidelines – the latest pieces of the jigsaw
The Commission has published six draft Guidelines. Three documents interpret the substantive rules:
- the First Conduct Rule, which prohibits anti-competitive agreements and concerted practices;
- the Second Conduct Rule, which prohibits the abuse of substantial market power; and
- the Merger Rule.
The others address procedural issues:
- complaints to the Commission about alleged anti-competitive behaviour;
- the Commission’s conduct of investigations; and
- whether and, if so, how companies can apply to the Commission for exemption decisions.
Two overarching points
The draft Guidelines should be reviewed with two overarching points in mind.
First, important pieces of the jigsaw are not yet in place. These include an amending Ordinance, the guidance on leniency procedures, enforcement policy and institutional cooperation between the Commission and the CA.
Second, the picture needs more clarity. Multi-national companies familiar with competition laws may view the draft Guidelines as rather high level. The Commission retains a wide margin of discretion in its future enforcement activities. This approach has resulted in the omission of some important policy areas and a degree of imprecision in respect of certain business critical issues. The consultation process should be used as an opportunity to seek clarification of some of these issues in order to provide greater legal certainty for businesses.
The Commission must be applauded for publishing this extensive guidance. But, there are key pieces of the jigsaw that are missing. I would hope to see further guidance emerge on, for example, the leniency policy and cooperation between the Commission and the Communications Authority as soon as possible to address some of the existing gaps and questions that remain.
Counsel and Co Head of China Antitrust
Resale price maintenance – automatically illegal?
Resale price maintenance (RPM) occurs whenever a supplier establishes a fixed or minimum resale price to be observed by its distributor when the product is re-sold. The draft Guidelines treat RPM as a restriction of competition by object and it may amount to “Serious Anti-competitive Conduct”. Its mere existence is a serious infringement of the Ordinance: the Commission does not need to show that the practice leads to anti- competitive effects. However, the Commission has recognised that RPM can sometimes lead to efficiencies that could outweigh any anti-competitive effects: certain RPM arrangements will not infringe the First Conduct Rule. So what should companies draw from this guidance?
The Commission’s guidance closely resembles that of the European Commission (EC). But, the EC’s practice is instructive: RPM is more or less prohibited per se in Europe – there is no example of the EC deciding that an efficiency outweighs the competitive harm arising from RPM.
There is no single common thread on the treatment of RPM between established competition law regimes. For example, the US Supreme Court has ruled that RPM should not be prohibited per se (as had been the case up until the late 90s) and an assessment is necessary as to whether the benefits outweigh the competitive harm. Meanwhile, in China, the NDRC has to date treated RPM as a per se restriction of competition and imposed significant fines on the parties involved in such conduct. Companies operating in Hong Kong should be very cautious in adopting any form of direct or indirect RPM.
Exclusive distribution – the need for a “safe harbour”
The draft Guidelines mention that exclusive distribution agreements may present risks to competition and the effects of such agreements will need to be assessed in order to determine whether they infringe the law.
The draft Guidelines provide very little guidance, however, as to how such agreements are to be assessed, it would seem that companies should undertake their own full competitive effects analysis for every distribution agreement. This is unrealistic:it is both time-consuming and costly. The present guidance risks creating an environment where businesses have to adopt an overly cautious approach to the negotiation of distribution agreements which are broadly recognised in other regimes not to create competition concerns in many situations.
Given the prevalence of such exclusive distribution agreements in supplier/ distributor relationships, the Commission could usefully provide a market share threshold below which such agreements would be presumed exempted from the First Conduct Rule – in effect a “safe harbour”.
Information exchanged via customers and suppliers – clarifying “hub and spoke”
Anti-competitive exchanges of information can take place between competitors (A + B) through the intermediary of a common supplier or customer (S). In such a scenario, S might be considered to be a “hub”, collating and relaying commercially sensitive information between the spokes (A + B).
The draft Guidelines provide no guidance on the elements needed for a breach of the Ordinance. The Commission could remedy this by setting out the test established by, for example, the leading UK case law regarding intention and use of the relevant information. Without this additional guidance, the draft Guidelines risk capturing conduct which should be considered as legitimate across supplier/customer relationships.
Substantial degree of market power: no market share threshold
The Second Conduct Rule prohibits the abuse of a substantial degree of market power. Businesses with a “substantial degree of market power” will have “special responsibilities”, a concept borrowed from the EU. However, the draft Guidelines do not provide any indication of the level of market share at which a company might be viewed as holding such power.
This silence confers discretion on the Commission. It also creates business uncertainty as a market share threshold of 25% (possibly even lower) was debated during the legislative passage of the Ordinance and gained some traction. So, the 25% figure remains in play. This would leave the Commission at odds with most established and mature antitrust regimes, which typically provide a higher indicative market share threshold.
A reasonable indicative market share threshold would serve as a useful screening device for companies to determine whether or not they are more or less likely to be subject to the “special responsibilities” imposed by the Second Conduct Rule.
The draft Guidelines lack many ‘bright lines’ that would be helpful for companies. The absence of an indicative market share threshold for the assessment of substantial market power and the absence of a clear policy line on exclusive distribution agreements may be particularly problematic.
Partner and Co Head of China Antitrust
An emphasis on exclusionary abuses of market power?
The draft Guidelines address exclusionary abuses of market power. These include predatory pricing, tying and bundling, margin squeeze, refusal to deal and exclusive dealing. These abuses are considered to be exclusionary in nature as the relevant conduct aims unjustifiably to exclude competitors from the market. The Commission has not discussed exploitative conduct (e.g. excessive pricing) in the draft Guidelines. Nor was exploitative conduct a feature of the legislative discussions on the Ordinance. This may suggest a keen enforcement focus on exclusionary abuses.
This focus mirrors other established competition authorities, such as the EC. But even without guidance, it is premature to conclude that the Commission will not concern itself at all with exploitative abuses as a matter of policy.
When can the Commission refuse to investigate complaints?
Complaints will be a key source of business for the Commission. Along with leniency applications (for which draft guidelines are yet to be produced), complaints are a straightforward way for the Commission to identify possible infringements of the Ordinance. The draft Guidelines encourage the making of complaints by “any person”, including anonymously, and in “any form”. This is broader than the approach in the EU, for example, where the complainant must demonstrate a “legitimate interest” in relation to the subject matter of the complaint.
Despite this apparent encouragement, the draft Guidelines stress that the Commission retains the discretion not to investigate complaints. The ability for the Commission to prioritise is sensible from a policy perspective, and in keeping with the position in the EU. However, the Hong Kong regime is structurally different from the EC’s regime and the guidance on this discretion is likely to prove contentious. This is because the Commission has the exclusive right to address potential infringements of the Ordinance: businesses that believe that they have been the victim of anti-competitive practices cannot initiate court proceedings to seek a remedy, as they would be able to in the EU or the US.
The Commission is the “gatekeeper” for all actions under the Ordinance, and this will make its choices subject to particular scrutiny.
Cooperation with foreign authorities
As a new competition authority in a global economic hub, it is likely that the Commission will be keen to cooperate with overseas competition agencies, and companies will be keen to understand the extent to which the Commission intends to cooperate with other agencies. Both the Ordinance and the draft Guidelines are silent on this issue.
The Commission is a member of the International Competition Network (ICN). The critical issue is sharing confidential case material in international investigations. The draft Guidelines are silent even as to whether this is possible, and give rise to uncertainty on some key issues. More specifically, it is unclear how and when contact between the Commission and overseas agencies will take place, what type of information may be exchanged and how the Commission will treat confidential information it may receive from those overseas agencies. Further guidance would be welcomed.
Businesses need to realise that the Commission will be amongst the most powerful regulators in Hong Kong.
The Commission is in the difficult position of having to publish detailed guidance before it has really grappled with its powers under the Ordinance. It has understandably sought to avoid unduly fettering its discretion but that may give rise to concerns that, in some areas, business certainty has been compromised.
The circularity of applying for exemptions
Various exclusions and exemptions from the Conduct Rules are provided for in the Ordinance, notably for agreements that generate economic efficiencies. According to the draft Guidelines, companies can either self-assess the legality of their conduct according to this test or they can apply to the Commission to that effect if they require “greater legal certainty”, i.e. to confirm the application of the general exclusion. Before rushing to the Commission, however, companies should appreciate that the draft Guidelines anticipate that the Commission can rely on information and evidence received during the course of a company’s application for a decision to initiate enforcement action against any company. The application itself does not grant any form of immunity to a company making the application.
In light of the above, companies would be well advised to proceed with caution before seeking confirmation from the Commission that the relevant agreement or conduct is exempt/excluded from the application of the Ordinance. That cautious approach seems to be endorsed by the Commission itself which suggests that companies should seek legal advice before making any relevant application.