Hong Kong bans anticompetitive conduct

Legislative council passes competition ordinance

Regulatory Update

By:
  • Jingwen Zhu

Introduction

On 14 June 2012, after years of debate, dozens of hearings, a flurry of amendments and a last minute filibuster, Hong Kong joined the rest of the industrialised world by enacting the Special Administrative Region’s first competition law. Known formally as the Hong Kong Competition Ordinance (the Competition Ordinance), the law prohibits anticompetitive agreements between and among undertakings (the First Conduct Rule) and bars undertakings with a substantial degree of market power from unilaterally acting in an anticompetitive manner (the Second Conduct Rule). Under the Competition Ordinance, undertakings are entities that, irrespective of their financing or legal status, engage in economic activity. However, not all undertakings are subject to the law. Most statutory bodies will enjoy a blanket exemption, and small and medium sized enterprises (SMEs) will receive preferential treatment under the First Conduct Rule and be fully exempt from the Second Conduct Rule. The Ordinance calls for the creation of both a Competition Commission and Competition Tribunal, thus leaving room for further modification and interpretation.

While there are important aspects that will only be resolved by the work of the Competition Commission, the enactment of the Competition Ordinance will have a profound impact on Hong Kong business practices and almost certainly give rise to governmental enforcement activity and related private actions.

The Long and Winding Road

Laws prohibiting anticompetitive agreements and behaviour date back to medieval England and beyond. Canada and the United States led the modern wave of competition laws, first enacting competition legislation in 1889 and 1890, respectively. By the late 20th century, most industrialised nations had enacted various forms of competition laws. Indeed, with the recent adoption of competition laws in Singapore, China and Malaysia, Hong Kong found itself increasingly isolated in regulating anticompetitive practices, instead choosing to maintain its laissez-faire approach. Until the Competition Ordinance, Hong Kong’s prohibition against anticompetitive conduct was limited solely to the telecommunications sector.

With debate in Hong Kong commencing in 1999, the formal process that led to the Competition Bill started in July 2010, with the introduction of the Competition Bill before the Legislative Council (LegCo) and a series of gruelling LegCo hearings. While the original Competition Bill had the look and feel of mainstream global competition legislation – indeed large swaths of the Bill had striking similarity to competition laws in Europe and elsewhere. However, it soon became apparent that the drafter of the original Competition Bill failed to fully anticipate public and private opposition to certain provisions, and the desire to maintain certain practices.

Many objected to the vague language of the Competition Bill – something that is common to most competition laws. Large undertakings argued that the statutory fine cap of 10% of an undertaking’s global turnover for the preceding three years could, if imposed, cause disproportionate financial harm. At the other end of the spectrum, small and medium-sized enterprises, ironically very well organised through Hong Kong’s various SME trade groups and forums, claimed that the Bill would place upon them significant regulatory burdens and, in an interesting twist, allow large undertakings to use competition law to bring legal actions against them. Against the backdrop of this debate, by way of Chief Executive designation, over 570 statutory bodies (including many with decidedly commercial activities) received an official exemption from the Competition Ordinance – only 6 statutory bodies failed to achieve this coveted exemption.

Specifics of the Competition Ordinance

The First Conduct Rule

The First Conduct Rule prohibits agreements and other concerted practice between or among undertakings, either directly or through industry or trade associations. Under the First Conduct Rule, competitors cannot engage serious infringements such as price-fixing, bid-rigging, market allocation or output limitations. Likewise, they cannot enter into other anticompetitive agreements with their competitors, suppliers, distributors or retailers. While the Ordinance does not specifically define the other anticompetitive agreements (beyond the serious infringements), case law and precedent from other jurisdictions, which along with yet-to-be published guidelines is likely to provide initial guidance in interpreting the Competition Ordinance’s scope, suggest the definition of anticompetitive agreements will be broadly interpreted. However, agreements that promote economic efficiency, or are otherwise required to comply with international obligations, will not be prohibited. The First Conduct Rule applies to both oral and written agreements, and applies to agreements that are consummated within Hong Kong, as well as those overseas agreements that have an effect on Hong Kong. Thus, it will be applied extraterritorially, which is consistent with global mainstream competition law.

The First Conduct Rule differentiates between serious and other concerted practices that may or may not be permissible, depending on the circumstances. For serious infringements, undertakings face a potential fine of 10% of their Hong Kong turnover. For less serious infringements, agreements among undertakings with a combined annual turnover of less than HK$200 million are exempt. However, this exemption does not apply to serious offences.

The Second Conduct Rule

The Second Conduct Rule applies to single firm conduct. It prohibits undertakings with a substantial degree of market power from engaging in conduct that has as its object or effect the prevention, restriction or distortion of competition. In practice, the Second Conduct Rule will bar predatory behaviour towards competitors, exclusionary practices and limiting production, markets or technical developments to the prejudice of consumers.

In determining whether an undertaking has a “substantial degree of market power,” the Competition Ordinance does not adopt a bright line test or statistical formula. However, proposed guidelines drafted for the limited purpose of assisting LegCo’s debate suggest the Commission will adopt a mainstream test that takes into account an undertaking’s current and potential market share, actual and potential competitors, the strength and sophistication of buyers, structural issues such as barriers to entry, existence of innovation, and the ability of customers to switch providers without incurring substantial costs or disruptions.

As with the First Conduct Rule, SMEs receive favourable treatment under the Second Conduct Rule. For those undertakings with annual turnover of less than HK$40 million, the Second Conduct Rule will not apply.

Exclusion of Merger Control

In a sharp departure from mainstream international competition law, including China’s notoriously detailed and often vexing merger notification regulation, Hong Kong will not have a cross-sector merger control regime. Instead, only mergers in the telecommunications industry are, as they have been in the past, subject to merger control. While merged entities are not exempt from either of the Conduct Rules, with no merger notification requirement, it is unlikely that the Competition Commission will be able to preemptively block mergers or extract concessions or conditions as a condition of consummating a transaction.

Enforcement

The Competition Commission, which is called for under the Competition Ordinance, will be responsible for investigating alleged or potential infringements and, if appropriate, initiating enforcement actions. These cases will be heard by the yet-to-be formed Competition Tribunal. The Commission may apply to the Tribunal to obtain injunctive relief while its investigation is pending.

The Commission will be able to issue an infringement notice when it has reasonable cause to believe that serious anticompetitive conduct or an abuse of market power has occurred. However, the Commission will not be able to impose a fine on the infringing undertaking. As one of the concessions made to ensure sufficient LegCo support, the right of the Commission to initially impose a penalty of up to HK$10 million does not appear in the Competition Ordinance. Another feature of the Competition Ordinance is in the case of non-serious infringements, or those agreements that could be legal depending on circumstances, the Competition Commission’s initial remedial tool will be to issue infringement notifications. Only the Competition Tribunal will be able to impose fines.

Penalty

Upon the Competition Commission’s successful prosecution, the Competition Tribunal may impose fines of up to 10% of infringing undertaking’s Hong Kong turnover for a maximum period of three years. While this amount represents a reduction of the original cap of 10% of global turnover, it still represents a substantial penalty. As many Hong Kong undertakings are completely local, or local subsidiaries of global organisations with separate corporate identities, this reduction in cap is not likely to have a meaningful impact on most undertakings. However, as in Europe, penalties are purely financial – there are no criminal remedies available to the Commission. The Competition Tribunal will also have at its disposal injunctive and structural remedies.

Private Litigation

The Ordinance allows aggrieved parties to bring “follow-on” private actions in court seeking damages following a finding of infringement by the Competition Tribunal or the formal admission of an infringement before the Competition Commission. While the Competition Ordinance does not currently permit “stand‑alone” actions, or those actions independent of enforcement proceedings, there is potential for meaningful private enforcement actions, particularly if Hong Kong allows for class action cases to be brought, as is currently being contemplated.

Next Steps

The Competition Ordinance represents a substantial milestone in Hong Kong’s regulatory framework. However, there is substantial work to be done – these steps could take a year or more:

  • Establishing the Competition Commission and Tribunal

The Competition Ordinance calls for a Competition Commission to be set up to investigate and prosecute infringements before a yet-to-be established Competition Tribunal. In the telecommunications and broadcasting sectors, the Commission will have concurrent jurisdiction with the Communications Authority. The Competition Commission will have the power to investigate alleged violations as well as prosecute alleged offences. The Competition Tribunal will act as the adjudicative body for both contested cases and settlements.

  • Drafting and Implementing Enforcement Guidelines

The Competition Commission is required to establish guidelines that set forth its interpretation of the Competition Ordinance, as well as procedural and substantive practices. These guidelines will be subject to a public consultative process, thus providing an additional opportunity to debate elements of the law as well as how it will be applied. If the practice in other mainstream jurisdictions is followed, we expect these guidelines to set forth important enforcement principles and establish “safe harbours”, or particular conduct that will not be prosecuted if undertakings stay within the safe zone.

  • Leniency and Immunity Processes

The Competition Commission will be responsible for adopting and implementing a leniency regime – one that allows undertakings to approach the Competition Commission voluntarily and admit to a violation in exchange for lenient treatment. Other jurisdictions, including Europe and the United States, rely heavily on their respective leniency programmes for disclosing serious infringements. Thus, we expect the Competition Commission to put considerable effort into designing and implementing an attractive and favourable leniency programme, one that adequately incentivises undertakings to come forward.

In an apparent departure from the direction of European competition law, and its emphasis on self-assessment, but in a manner consistent with United States, Australia and other antitrust regimes, the Competition Ordinance specifically calls for the ability of the Competition Commission to grant antitrust immunity to certain practices and agreements. While the Commission has yet to issue guidelines, the Competition Ordinance makes it clear that before granting such protections, the Competition Commission will be required to publish the proposed immunisation, bring it to the attention of those it considers to be likely impacted by the proposed exemption, and allow for a public comment period of at least 30 days.

  • Implications for Undertakings

During the implementation period, undertakings will need to review their current business practices, including relationships with competitors, trade associations, suppliers, distributors and customers to ensure current compliance with the Competition Ordinance. Undertakings will also need to design and implement comprehensive competition compliance programmes. While some undertakings in Hong Kong already have robust antitrust policies due to the extraterritorial reach of foreign competition laws, many do not. Indeed, many Hong Kong trade associations and other organisations openly and actively engage in conduct that would likely invite scrutiny or enforcement action by the Competition Commission. With the potential for “follow-on” private litigation, undertakings that breach the Competition Ordinance will be subject to both governmental and private actions.