Pitfalls under Hong Kong’s new Competition Ordinance

Author: | Published: 26 Sep 2012
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Before June 2012, only the telecommunications and broadcasting sectors were subject to competition law in Hong Kong. The Competition Ordinance, which was passed by the Hong Kong Legislative Council on June 14 2012, extends the application of competition law to all sectors in Hong Kong.

Hong Kong has long been considered one of the freest economies in the world, and the passage of the Competition Ordinance marks a significant watershed in the city's history. As might be expected, the new law generated fierce opposition and much debate, especially with respect to the potential impact on the cost of doing business and compliance burden for small and medium-sized enterprises (SMEs), and fears that the Ordinance would lead to a flood of antitrust litigation.

The new law includes a number of compromises that are intended to address these concerns, while retaining some provisions that are intended to address the specific characteristics of Hong Kong's business environment. Nonetheless, the Competition Ordinance has left many of its proponents disappointed while its opponents fear it will drive up the cost of doing business in Hong Kong.

The Ordinance prohibits three kinds of anti-competitive practices. The first is anti-competitive agreements. These are agreements, concerted practices or decisions between undertakings with the object or effect of preventing, restricting or distorting competition in Hong Kong (the First Conduct Rule). Second, abuse of market power which is abuse by undertakings with a "substantial degree of market power" by engaging in conduct with the object or effect of preventing, restricting or distorting competition in Hong Kong (the Second Conduct Rule). Third, telecommunications mergers: with respect to holders of telecommunications carrier licences, any merger that has, or is likely to have, the effect of substantially lessening competition in Hong Kong (the Merger Rule).

The First and Second Conduct Rules and the Merger Rule are collectively referred to in the Ordinance as the competition rules.

The Ordinance provides a transitional period to allow businesses time to prepare for when the key provisions take effect. The purpose of this brief guide is to assist businesses in understanding the new law, to assess their current business practices in light of the new law, and to make any necessary changes in preparation for the time when the relevant provisions of the Ordinance come into effect.

First Conduct Rule

By the First Conduct Rule, the Competition Ordinance prohibits anti-competitive agreements, concerted practices and decisions between undertakings that have the object or effect of preventing, restricting or distorting competition in Hong Kong, such as agreements which (i) directly or indirectly fix purchase or selling prices or other trading conditions, (ii) limit or control production, markets, technical development or investment, or (iii) allocate markets or sources of supply. This prohibition applies regardless of whether the agreement was entered into or the parties are located outside Hong Kong.

Agreements that have anti-competitive effects will be subject to a rule of reason analysis. In this respect, the prohibition will not apply to agreements that enhance overall economic efficiency, ie, agreements that (i) contribute to improving production or distribution or promoting technical or economic progress, and (ii) do not go beyond what is indispensable to reach such benefits, and (iii) do not afford the parties to the agreement the ability to restrict competition in respect to a substantial part of the market.

While the Ordinance does not make a distinction between agreements that are anti-competitive per se and those that are subject to a rule of reason, it makes a distinction between serious anti-competitive conduct, ie price fixing, market allocation, output control and bid-rigging, and lesser anti-competitive conduct. Both types of agreements will be subject to the same framework of analysis; a rule of reason. However, the Competition Commission will be able to pursue serious anti-competitive conduct directly before the Competition Tribunal. For lesser types of anti-competitive conduct, the Commission must, prior to bringing proceedings before the Tribunal, issue a warning notice requesting that the undertaking cease its anti-competitive behavior within a specified period of time. Only if the undertaking fails to comply with the warning notice may the Competition Commission pursue the case before the Tribunal.

There is no specific provision for vertical agreements. However, resale price maintenance schemes are likely to fall under the prohibition against fixing selling prices and will be subject to a rule of reason. The same applies to any other vertical agreement related to distribution networks.

The Ordinance provides various exemptions for agreements falling under the First Conduct Rule, such as agreements made for the purpose of complying with a legal requirement, or relating to an undertaking entrusted by the Hong Kong Government to operate services of general economic interest. In addition, it does not apply to agreements, concerted practices or decisions between undertakings with a combined worldwide annual turnover that does not exceed HK$200 million (US$25.7 million). However, this exclusion does not apply to agreements, concerted practices or decisions involving serious anti-competitive conduct. Turnover is to be determined in accordance with regulations to be promulgated under the Ordinance.

The Commission may also issue block exemption orders with respect to certain categories of agreement that are excluded from the Ordinance. An agreement that falls within a category of agreement specified in a block exemption order is exempt from the application of the First Conduct Rule.

There is no exemption for trade associations from the application of the Competition Ordinance. Thus, undertakings which participate in trade associations should be especially vigilant to ensure that their representatives understand what they can, and cannot, discuss to ensure that any exchange of information is fully compliant with the Ordinance.

Second Conduct Rule

By the Second Conduct Rule, the Competition Ordinance prohibits an undertaking 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, regardless of whether the conduct occurs or the parties are located outside Hong Kong.

An undertaking's conduct may constitute an abuse if it involves predatory behaviour towards competitors, or limiting production, markets or technical development to the prejudice of consumers.

There is no definition of substantial degree of market power in the Ordinance, but factors such as the market share of the undertaking, the undertaking's power to make pricing and other decisions, and any barriers to entry to competitors into the relevant market, as well as any other relevant matters specified in guidelines to be issued under section 35 of the Ordinance, may be taken into consideration in the determination of whether an undertaking has a substantial degree of market power.

The substantial degree of market power test is used in the US, Australia and New Zealand and exists where a firm has an ability to profitably maintain prices above the competitive level on an enduring basis. This is a different formulation of the threshold than the dominance test which applies in the EU, China, Singapore and other jurisdictions, and which applied under the pre-amendment Telecommunications Ordinance (Cap 106) (and will continue to apply in relation to exploitative conduct with respect to interconnection under new section 7Q of the Telecommunications Ordinance).

As a rule of thumb, an undertaking with a market share of less than 25% is unlikely to have a substantial degree of market power. Conversely, this could be seen as a risk that undertakings with market shares as low as 25% could be considered as having a substantial degree of market power, and would therefore have to adapt their conduct to ensure they do not breach the Second Conduct Rule. It is expected that the Competition Commission, once established, will issue guidelines (similar to the Competition Guidelines issued by the Communications Authority) to offer a clearer indication on what will constitute "substantial degree of market power".

The Second Conduct Rule does not apply to conduct to the extent that it is engaged in for the purpose of complying with a legal requirement, nor does it apply to an undertaking entrusted by the Hong Kong government to operate services of general economic interest. In addition, it does not apply to conduct engaged in by an undertaking with a combined worldwide annual turnover which does not exceed HK$40 million. Again, turnover is to be determined in accordance with regulations to be promulgated under the Ordinance.

Exemptions

In addition to the exclusions mentioned above, the Ordinance provides for exemptions for most statutory bodies in Hong Kong, as well as the possibility of exemptions being granted on public policy grounds or to avoid conflict with Hong Kong's international obligations.

Merger Rule

The Merger Rule prohibits an undertaking from, directly or indirectly, carrying out a merger that has, or is likely to have, the effect of substantially lessening competition in Hong Kong. For the time being, the Merger Rule will only be applicable to holders of carrier licences under the Telecommunications Ordinance. The Merger Rule applies to a merger even if the merger occurs outside Hong Kong or the parties are located outside Hong Kong.

The Merger Rule does not apply to a merger if the economic efficiencies that arise or may arise from the merger outweigh the adverse effects caused by any lessening of competition in Hong Kong. A specified merger may also be exempted on public policy grounds.

Enforcement

A new body, the Competition Commission will be established to conduct investigations into any anti-competitive conduct.

The Commission has power to investigate complaints and to conduct investigations into any conduct that contravenes or may contravene a competition rule of its own volition, where it has received a complaint, where the Court of First Instance or the Tribunal has referred any conduct to it, or where the Government has referred any conduct to it for investigation.

The Commission's investigative powers include powers to obtain documents and information, require any person to attend before the Commission to answer questions, enter and search premises, and take possession of any relevant document and computers upon a warrant issued by the court.

It is an offence, punishable by fine or imprisonment, to fail to comply with a requirement or prohibition imposed by the Commission in the exercise of its powers of investigation, to destroy or falsify documents, to obstruct the Commission in the exercise of its powers of search and seizure, or to provide false or misleading documents or information. However, legal professional privilege is protected.

Parties subject to an investigation by the Commission can offer a commitment 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 terminate an investigation which as commenced.

When the alleged anti-competitive conduct involves agreements qualifying as serious anti-competitive conduct under the First Conduct Rule or abuses of a substantial degree of market power under the Second Conduct Rule, the Commission may, instead of bringing proceedings in the Tribunal in the first instance, issue an infringement notice setting out the commitments that the alleged violator must enter into if it wants to avoid a procedure before the Tribunal. The Commission may also enter into a leniency agreement with a person in exchange for that person's co-operation in an investigation or proceedings. The Commission must not bring or continue proceedings for a pecuniary penalty in breach of a leniency agreement.

If the Commission has reasonable cause to believe that a contravention of the First Conduct Rule has occurred that does not involve serious anti-competitive conduct, it must, before bringing any proceedings in the Tribunal against the alleged violator, issue a warning notice to the relevant undertaking requesting that the undertaking cease its anti-competitive behavior within a specified period of time. Only if the undertaking fails to comply with the warning notice may the Commission pursue the case before the Tribunal.

The Commission will have concurrent jurisdiction with the Communications Authority in matters relating to telecommunications and broadcasting, subject to the two authorities agreeing on arrangements to handle matters in which they both have jurisdiction.

Competition Tribunal

The Competition Tribunal to be established under the Ordinance is a superior court of record and will consist of the judges of the High Court of Hong Kong. One of the members will be appointed as President of the Tribunal.

The Tribunal has jurisdiction to hear and determine, amongst others, applications made by the Commission with regard to alleged contraventions of the conduct rules, private actions concerning contravention of the conduct rules, and applications for review of determinations of the Commission. The Tribunal has all the powers, rights and privileges of a superior court of record including the power to require attendance of witnesses, production and inspection of documents and enforcement of its orders. A decision, determination or order of the Tribunal is subject to appeal, as of right, to the Court of Appeal, with limited exceptions.

Decisions and guidelines

The Competition Ordinance provides procedures for applications to be made to the Commission as to whether an agreement or conduct is excluded or exempt from the First or Second Conduct Rules or the Merger Rule. Undertakings may apply to the Commission for a formal decision as to whether conduct complies with the Ordinance. However, the Commission will only be required to issue a decision if the application pertains to novel or unresolved questions of wider importance or public interest in relation to the application of the Ordinance, or to a question for which there is no clarification in existing case law or decisions of the Commission.

The Commission is also required to issue guidelines as to how certain provisions of the Ordinance will be applied.

Penalties

Upon finding anti-competitive conduct, the Tribunal may impose a fine on a person who has contravened or been involved in a contravention of a conduct rule. Such fine will be payable to the government and in an amount considered appropriate by the Tribunal, but such fine may not exceed 10% of the total gross revenue in Hong Kong for each year of contravention, up to a maximum of three years. There is a five-year limitation period for imposition of pecuniary penalties for contravention of the conduct rules, and 6 months for contravention of the Merger Rule.

In addition to imposing pecuniary penalties, the Tribunal may make any other order it considers appropriate, including declaring any agreement to be void, ordering defendants to pay damages or disgorge profits, ordering undertakings to refrain from engaging in the relevant anti-competitive conduct, as well as making a disqualification order prohibiting a person from being a company director.

In relation to an anticipated merger that, if carried into effect, would result in a merger that is likely to contravene the Merger Rule, the Tribunal may issue orders ordering the relevant parties not to proceed.

Private actions

One of the concerns raised during the legislative process was that the Competition Ordinance would lead to a flood of litigation. As a result, the Ordinance includes a significant limitation on the ability to bring private lawsuits for alleged anti-competitive conduct and a private action (called a follow-on action) can only be brought by a person who has suffered loss or damage as a result of any act that has been determined to be a contravention of a conduct rule after the Competition Tribunal has ruled that there has been anti-competitive conduct. The limitation period for follow-on actions is three years.

The Government has stated that it will reconsider the need for the introduction of stand-alone rights of private action a few years after the implementation of the Ordinance.

The Ordinance will come into effect on a day to be appointed by the Hong Kong Secretary for Commerce and Economic Development by notice published in the Hong Kong Government Gazette.

Getting ready

In preparation for the time when the new Ordinance comes into effect, businesses should do the following:

  • Determine whether their annual turnover is below the applicable thresholds for exemption under the First Conduct Rule and the Second Conduct Rule
  • Determine whether their market share is below 25%
  • If their turnover is above the relevant thresholds, undertake a review of all their existing activities and dealings, especially with competitors, including: contracts and spot purchases/sales agreements, concerted practices or decisions with competitors; direct or indirect exchanges of information with competitors; participation in trade associations and other situations where their directors, officers or employees may come into contact with competitors; adopt and implement compliance programs, policies and procedures to ensure compliance with the Ordinance or consider applying for block exemptions

The authors would like to thank Emily Lam, Nick Taylor and Peter Wang for their assistance with this article.

Don Hess
 

Jones Day
29th Floor, Edinburgh Tower
The Landmark
15 Queen's Road Central
Hong Kong

T: +852.3189.7211
F: +852.2868.5871
E: dhess@jonesday.com
W: www.jonesday.com

Don Hess focuses on cross-border M&A, joint ventures, private equity and venture capital, corporate governance, commercial contracts, and telecommunications. He has a wealth of experience in corporate strategic and operational decision-making in various industries. Based in Hong Kong since 1994, Don has practised as a lawyer in Australia, the US and Hong Kong, and has more than 20 years experience advising clients doing business in Asia. He has acted for global clients such as All Nippon Airways, Amcor, DuPont, Kraft Foods, Macquarie Bank Group, Schneider Electric, Sinopec and Thomson. His experience includes several years as director of legal affairs and company secretary of publicly listed telecommunications company Cable & Wireless HKT (formerly called Hong Kong Telecommunications or Hongkong Telecom) and, following its acquisition of Hong Kong Telecom in August 2000, as general counsel and company secretary of PCCW. Don is admitted as a solicitor in Hong Kong, and he is a member of the bars of Victoria (Australia), New York, and California.

Sébastien Evrard
 

Jones Day
32nd Floor, China World Office 1
No.1 Jianguomenwai Ave
Beijing 100004

T: +86.10.5866.1112
F: +86.10.5866.1122
E: sjevrard@jonesday.com
W: www.jonesday.com

Sébastien Evrard handles complex antitrust matters in China and the EU, including merger control, non-merger investigations, and litigation. His practice also focuses on the antitrust aspects of intellectual property rights. Sébastien’s experience spans a wide range of industries including aviation, mining & energy, media & entertainment, software & hardware, telecommunications, pharmaceuticals, transport, and fast moving consumer goods. He has represented clients before the EC, various European national competition authorities, telecom regulators, and the Consumer Ombudsmen in Belgium, the Netherlands, the Nordic countries, and the UK. He has represented clients before courts in Belgium, France, and Germany. His representative clients include Abbott, Adobe, American Airlines, Apple, Dell, Entreprise des Postes et Télécommunications, ICANN, KPN Group, Procter & Gamble, SanDisk, SES ASTRA, and Viacom/MTV. Sébastien practiced in Brussels and New York before joining Jones Day in 2003. He is a coauthor of Anti-Monopoly Law and Practice (Oxford University Press, 2011), a treatise on competition law in China.

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