Competition Tribunal adopts four-step approach to penalties

On 29 April 2020, The Hong Kong Competition Tribunal ("Tribunal") has handed down its first judgment concerning pecuniary penalties, which provides guidance on how fines are to be calculated for breaches of the Competition Ordinance (Cap 619) ("Ordinance").

On 17 May 2019, the Tribunal found ten renovation contractors had contravened the First Conduct Rule of the Ordinance by engaging in market sharing and price fixing in providing renovation services to tenants at On Tat Estate in Kwun Tong (see our earlier newsletter summary).

Nearly a year later, on 29 April 2020, the Tribunal handed down a further judgment which determines: 

• the pecuniary penalties imposed on the ten contractors; and
• whether and to what extent the contractors should be ordered to pay the Commission's costs. This is the first judgment on pecuniary penalties under Hong Kong's competition law regime.

Ultimately, the Tribunal ordered the contractors to pay pecuniary penalties ranging from HKD132,000 (c.USD 17,000) to HKD 740,000 (c.USD 95,000), and the majority of the Commission's costs (the Tribunal allowed a 20% reduction on the Commission's given that this was the first case before the Tribunal and likely incurred additional costs).  

Legal framework

The Tribunal has discretion to determine pecuniary penalties, subject to two limitations (Ordinance, s93). First, the Tribunal must take into account: 

• the nature and extent of the illegal conduct;
• the loss or damage caused by the conduct;
• the circumstances in which the conduct took place; and
• whether the offender has previously contravened the Ordinance.

Second, the maximum penalty which can be imposed is 10% of the turnover of the offender for each year in which the contravention occurred or, if the contravention occurred in more than three years, 10% of the turnover for the three years with the highest turnover.

The Tribunal held that pecuniary penalties serve the principal purpose of deterring anti-competitive conduct, and that the object of deterrence is best served in Hong Kong by a structured and methodological approach.  The Tribunal also focused on the emerging nature of competition law in Hong Kong, adding that a structured approach results in certainty, clarity and transparency.

The four step approach

The Tribunal approached the determination of pecuniary penalties under the Ordinance in the following four steps:

• Step 1: Determining the "Base Amount": The starting point is to identify the value of sales directly or indirectly related to the contravention in the relevant geographic area within Hong Kong in the financial year in which the contravention took place. This value is then multiplied by: (a) a gravity percentage to reflect the gravity and blameworthiness of the conduct (the range accepted by the Tribunal to be applied in Hong Kong is between 15 to 30%); and (b) a duration multiplier to reflect the number of years in which the respondent participated in the contravention. This determines the "Base Amount" of the pecuniary penalty.
  
  In this case, the gravity percentage recommended by the Commission and accepted by the Tribunal was 24%. Although the respondents were relatively small enterprises, the breaches were "not technical or trivial", and the conduct engaged in was "serious anti-competitive conduct" as defined in the Ordinance.  The duration multiplier was one (despite the fact that the conduct in question only lasted for 5 months).
• Step 2: Making adjustments for aggravating, mitigating and other factors: This involves consideration of the surrounding circumstances which may impact the proper penalty, including any aggravating and mitigating circumstances to increase or decrease the Base Amount.
  
  The Tribunal found no aggravating factors, despite the fact that the Commission submitted that there were aggravating factors, namely, that there were directors/senior management involved and evidence that the anticompetitive arrangements reflected long-running and widespread industry practice.
  
  As for mitigating circumstances, the Tribunal took into account the limited role of respondents (some of them became liable only as a result of issuing licences to sub-contractors who were engaged in the infringing conduct). A one-third reduction was applied to the Base Amounts for four of the respondents for this reason.
• Step 3: Applying the statutory cap: A pecuniary penalty may not exceed 10% of the turnover of the undertaking concerned for each year in which the contravention occurred (the "statutory cap"). The Tribunal reiterated that the statutory cap applies to all sales made by the offender in the relevant financial year, rather than only to the category of goods affected by the conduct.
  
  The statutory cap limited the pecuniary penalties imposed on seven of the ten respondents. This is because these respondents were small companies and the statutory cap is calculated by reference to overall sales.
• Step 4: Applying cooperation reduction and considering pleas of inability to pay, if any: This final step involves applying a reduction, where relevant, to reflect the respondent's cooperation with the Commission. The Tribunal may also consider a firm's financial inability to pay the penalty to justify a reduction of the amount assessed.
  
  None of the respondents made a claim for reduction on the basis of cooperation. Although one of the respondents argued that its penalty should be reduced by reason of its inability to pay, the Tribunal refused in the absence of clear and compelling evidence that the respondent's viability would be undermined by the penalty.

The pecuniary penalties ultimately imposed by the Tribunal ranged between HKD 132,000 (USD17,000) and HKD 740,000 (USD 95,000) for each of the ten respondents.  These penalties can be contrasted against the value of the sales directly or indirectly related to the anti-competitive conduct, which for the ten respondents were between HKD 1.32 million (USD 170,000) at the lowest end and HKD 4.94 million (USD 638,000) at the highest.

Commission's legal costs and costs of investigation

In addition to the pecuniary penalties imposed, the Tribunal required the respondents to pay the Commission's legal costs on a party and party basis, in ten equal shares, applying the civil approach to costs.  However, given that this was one of the first cases dealing with this area of law, and that more costs would have been incurred because of the novelty of it, the Tribunal reduced the costs payable by 20%.

In relation to costs of investigation, section 96 of the Ordinance provides that any person who has contravened a competition rule must pay the amount of the costs of, and incidental to, any investigation into the conduct or affairs of that person reasonably incurred by the Commission.  The Tribunal held that it is for the Commission to justify why an order under section 96 should be made and, in the absence of evidence, declined to make such an award in favour of the Commission.

Analysis

As this is the first decision of the Tribunal in determining pecuniary penalties under the Ordinance since it came into full force in December 2015, it is likely that Hong Kong's jurisprudence on this topic will continue to develop as the Tribunal deals with different types of anti-competitive conduct.  In time, appellate courts will also invariably play an active role in developing the approach to pecuniary penalties in Hong Kong.

In the meantime, however, the Tribunal's four step approach to determining pecuniary penalties provides a useful framework through which market participants can assess the potential consequences of contraventions of the Ordinance.  In setting this approach it is notable that the Tribunal considered a structured and methodological approach was the best means of achieving a deterrence effect in Hong Kong and that "[c]ontraventions of competition law 'do not occur as a result of passion or accident'" and are instead the outcome of conscious attempts to achieve financial gain.

The decision also demonstrates that the Tribunal will apply an independent mind when setting penalties and not simply follow the recommendations of the Commission.  While the Commission must establish an evidential basis upon which pecuniary penalties are to be imposed, the Ordinance provides the Tribunal with a broad discretion to determine the penalties appropriate to the respondents' actions in each case. 

With thanks to Melanie Wong of Ashurst for her contribution.