Keep Calm And Carry On Competing In Hong Kong

What You Need to Know

• 14 December 2015 marks the full commencement of Hong Kong's Competition Ordinance targeting three major areas of anti-competitive behaviour: the "First Conduct Rule", "Second Conduct Rule" and "Merger Rule".
• Failure to comply may have serious consequences for businesses, including fines of up to ten per cent of three years' annual turnover in Hong Kong and a disqualification order for individuals involved in anti-competitive conduct.
• Hong Kong's Competition Commission has also published a number of useful materials to assist businesses including, on 19 November 2015, its finalised leniency and enforcement policies.

What you Need to Do

• Become familiar with the guidelines and policies published by the Commission about the operation of the Competition Ordinance and the examples contained in them.
• Review your current conduct and practices to ensure that you are appropriately managing risk and, if not, implement measures necessary to ensure compliance.

Background

After much debate and delay, Hong Kong is only a matter of weeks away from full commencement of its Competition Ordinance on 14 December 2015.

Since the legislation was enacted in June 2012, Hong Kong has been slowly gearing up for its first competition law of general application, which will be administered by Hong Kong's newly appointed Competition Commission (Commission).

All businesses will need to comply with the Competition Ordinance from day one of implementation, as the Commission has indicated that no additional transitional period will be allowed once it comes into full operation.

What does the legislation do?

The Competition Ordinance targets three major areas of anti-competitive behaviour:

1. The "First Conduct Rule" prohibits agreements and concerted practices between undertakings (i.e. entities or persons engaged in economic activity) that have the object or effect of harming competition in Hong Kong. Examples include price fixing, output restriction and collusive bidding activities between competitors, and minimum resale price maintenance.
2. The "Second Conduct Rule" prohibits undertakings with a substantial degree of market power from abusing that power by engaging in conduct that has the object or effect of harming competition in Hong Kong. Examples include predatory pricing, refusal to deal, and tying and bundling.
3. The "Merger Rule" prohibits mergers that have, or are likely to have, the effect of substantially lessening competition in Hong Kong. Presently, this will apply only to the telecommunications industry.

Under the Competition Ordinance, the competition law enforcement regime has two phases:

A failure to comply with the Competition Ordinance may have serious consequences. The Competition Ordinance provides for fines of up to ten per cent of three years' annual turnover in Hong Kong and disqualification orders for individuals involved in anti-competitive conduct.

The Commission's published guidelines

Since its formation, the Commission has been busy preparing guidelines and engaging in public consultations. In conjunction with the Communications Authority, the Commission has published final guidelines describing how the Commission expects to interpret and give effect to the First Conduct Rule, the Second Conduct Rule and the Merger Rule, and explaining procedural aspects for handling complaints, conducting investigations and considering applications relating to exclusions and exemptions.

The guidelines also include many hypothetical examples which will greatly assist financial institutions (and other undertakings) in self-assessing how best to manage risk associated with the implementation of the Competition Ordinance and understanding the Commission's likely investigative and enforcement approach.

For example, the guidelines describe the Commission's approach to:

• vertical agreements (i.e. arrangements between businesses at different levels of the supply chain);
• concerted practices, as opposed to mere parallel behaviour;
• the role of decision-making by, or in, trade associations;
• exchanges of information between competitors; and
• what level of market share might be indicative of substantial market power.

The finalised guidelines are all available on the Commission's website.

Leniency Policy

On 19 November 2015, the Commission published its finalised leniency policy. This document sets out the Commission's approach towards granting leniency for cartel conduct under section 80 of the Competition Ordinance. Like other competition authorities around the globe, the Commission considers that its leniency policy will be critical to its ability to be informed of, and then break, cartel arrangements.

Under the leniency policy, only the first member of the cartel who reports to the Commission the existence of the cartel will be eligible for leniency.

This approach is designed to incentivise cartel members to report themselves as soon as possible and is likely to create a "race" for leniency, as seen in other jurisdictions (including Australia). The Commission will use a marker system to identify which cartel member contacts them first. Only the first cartel member in the marker queue will be invited to formally apply for and enter into a leniency agreement with the Commission.

The leniency policy also sets out the obligations that the whistleblowing cartel member will have to meet in exchange for the Commission agreeing not to bring proceedings for a penalty. These include that they must be willing to sign a statement of facts that admits their participation in the cartel and an obligation to provide, at their own cost, continuing co-operation to the Commission during the course of its investigation and any prosecution. Based on experience in other jurisdictions, this last obligation will likely be a significant burden on whistleblowers (and individuals who will ultimately be required to provide evidence to the Commission to allow it to prosecute the remaining cartel members).

While a successful applicant for leniency may avoid punishment from the Commission, they will still face potential civil liability for follow-on claims for damages that are commenced by private litigants.

On 19 November 2015 Hong Kong's Communications Authority (which shares certain powers with the Commission in respect of the broadcasting and communications sectors) also issued a statement that it will not implement a formal leniency policy, and will instead treat applications for leniency on a case-by-case basis. This difference in approach could impact directly on those in the communications and broadcasting sectors. The Commission and Communications Authority have stated that they will sign a memorandum of understanding after the Competition Ordinance comes into full force setting out how their relationship will work in practice, but it remains to be seen whether this will resolve the uncertainties likely to arise as a result of their differing approaches.

What Can You Do to Prepare? Act Now!

If you have not already started to prepare for the full commencement of the Competition Ordinance, now is the time to do so.

While the Competition Ordinance does not have retrospective application, any anti-competitive agreements or conduct that is continuing or commenced after its full implementation will be caught. The Competition Ordinance does not contain any transitional provisions, so there will be no period during which it is phased in.

Businesses Should:

• Familiarise themselves with the guidelines published by the Commission about the operation of the Competition Ordinance and the examples contained in them.
• Review their current conduct and practices to ensure that they are appropriately managing risk and, if not, implement measures necessary to ensure compliance. For example, in the absence of any competition law to date, businesses may:
  • have entered into joint bidding, alliance or other collaborative arrangements with competitors which should now be considered under the First Conduct Rule;
  • have in place arrangements with distributors or resellers that contain features such as pricing controls and exclusivity, which should be considered under the First Conduct Rule;
  • participate in industry associations and be party to discussions and decisions made within those associations which will, in future, expose the business to competition law risks; and
  • have a particularly strong position in some market, or segment of a market, which means they must exercise caution in understanding what risks arise in making decisions about how to supply in that market or segment, and to whom.
• Consider involving external legal advisers in the review process so that a claim for legal professional privilege can be maintained over information gathered and any concerns that may come to light.
• Consider implementing a competition law compliance training programme, as this would greatly assist your employees in understanding the new law, avoiding risks of contravention, detecting any concerns at an appropriate stage, and understanding whether competitors are gaining an unfair advantage by not playing by the appropriate rules.
  Keep in mind, as the legislation comes into force, that you can consider applying to the Commission for an exemption, available for conduct that may contravene the law but enhances overall economic efficiency, and that the Commission offers immunity in appropriate cases.

What to Expect From the Commission

The Commission has indicated that it will take a proactive stance in the lead up to full implementation of the Competition Ordinance. It has said that, prior to full implementation, it will contact businesses, trade associations and professional bodies directly if it considers their conduct or practices to be anti-competitive.

The Commission also issued its enforcement policy on 19 November 2015. In this document, it has stated that its planned approach for the first few years of the Competition Ordinance coming into full operation will be to encourage compliance in the Hong Kong economy as a whole, rather than focusing on specific sectors. This will occur through a mixture of education, engagement and enforcement.

The enforcement policy states that the Commission will prioritise three types of misconduct for investigation: cartel conduct, other agreements in breach of the First Conduct Rule that cause significant harm to competition in Hong Kong and abuses of substantial market power that involve incumbents seeking to prevent or limit the ability of competitors to effectively compete.

The Commission has reminded trade associations not to engage in anti-competitive practices which are still commonplace in Hong Kong, such as setting price floors or making price recommendations to members and providing forums to engage in collusion or share information on pricing. Through the enforcement policy the Commission has indicated that it may also prioritise enforcement action against trade associations and officers (including directors) of businesses involved in cartel conduct.

The enforcement policy indicates that the Commission's favoured approach will be to focus on remedies that will stop the unlawful conduct quickly, undo the harm it has caused and impose "sufficient economic sanction" to encourage future compliance with the Competition Ordinance by both those involved in the misconduct and other market participants. The Commission has also placed an emphasis on cooperation as a means of resolving contraventions, indicating that approaches to the Commission to resolve contraventions can be made on a "without prejudice" basis.

While the full implementation of the Competition Ordinance is fast approaching, some have suggested that there is no need for panic. It appears that the Commission is currently under significant budget constraints which means that it is unlikely to have the level of resources required for significant enforcement actions. The Commission is currently lobbying for increased budget allocations for enforcement and it remains to be seen whether the legislature will accede to these requests.

The lack of a sizeable enforcement budget is likely to have a significant impact on the ability to commence private actions for breaches of the legislation. While private actions are permitted under the Competition Ordinance, these are only possible where it has been established by the Competition Tribunal or Hong Kong courts that a contravention has occurred, or alternatively, where an admission has been made in a commitment that has been accepted by the Commission that a contravention has occurred.

While all of this may mean slow beginnings for enforcement actions and private claims for compensation, the Commission hopes that, following the first few enforcement actions, public awareness will increase and further complaints and admissions of cartel and other anti-competitive conduct will grow in their frequency.

How We Can Assist

Our team are well-placed to assist with undertaking a review of your current conduct and practices and with developing a compliance training programme for your team. For further information, please contact a member of our team listed below.