Brent Snyder, Chief Executive Officer, Competition Commission, discusses the enforcement priorities of the Commission and how Hong Kong’s competition regime needs to evolve in the future.

You previously worked in anti-trust enforcement for the US Department of Justice, what’s your impression of the Hong Kong anti-trust landscape?

‘Hong Kong has the well-deserved reputation of being one of the most competitive cities in the world, but even the most competitive economies can benefit from anti-trust enforcement to ensure that competition remains vigorous and that strong market players don’t abuse their market power. For instance, both the US and Canada were the first two countries to adopt anti-trust laws. They already had a heritage of economic freedom and very competitive economies, but, more than 125 years ago, they came to the realisation that the competitive environment in their respective countries could still be nurtured and protected by the introduction of competition laws.

Here by comparison, competition is still in the formative stage. Only a little over two years ago, conduct that would be illegal in many other countries around the world, such as price-fixing and bid-rigging, was perfectly legal here unless it also included elements that contravened other laws in Hong Kong. As a result of that, it is not surprising that a business culture had evolved in Hong Kong around those types of anti-competitive business conduct.

In December 2015 the law changed overnight, but one cannot really expect that the business culture will be so quick to change. For that reason we have continued to be vigilant in our advocacy and public education efforts, which began well in advance of the effective date of the ordinance. In the two plus years since the ordinance became effective, we have also started bringing enforcement actions. At this point we have two litigation matters in progress, and we need to continue to build on those because enforcement both educates the public about what the Competition Commission and the Competition Tribunal see as illegal conduct, and creates the deterrence that is necessary to change business culture.

Some of the good news is that we are seeing positive signs that business culture is changing here. On the day after the ordinance became effective, there were price wars and price reductions in some market sectors that had not seen them before. Our investigative work also found that there were some cartels operating almost to the date that the ordinance came into effect, and then were abandoned and replaced with lawful and competitive conduct. Of course, there is still work to be done. As we do that work and as business culture continues to change, Hong Kong consumers and businesses are going to benefit from it.

In fact, the most direct beneficiaries of competition enforcement are very often other businesses. In the US, for instance, businesses that are victimised by different types of anti-competitive conduct are often very quick to bring it to the attention of the competition enforcers, and they will support any case that is brought, such as by acting as witnesses at trials. Those businesses see the ultimate bottom-line dollar value to themselves because if they are procuring goods and services they know that they are going to be competitively set as a result of competition enforcement. Also, if the businesses are trying to enter a market sector, they see the value of any protections that they receive against abuse by more dominant players. This reaction by businesses in jurisdictions with more mature competition regimes reflects a degree of acceptance and embrace of competition law that perhaps has not fully happened here outside of the multinational firms that are operating in multiple jurisdictions where competition laws are in effect. I do think that is changing, however, as we are starting to see more complaints from businesses about the conduct of other businesses.’

Coming from the US, have you been surprised by the high level of market concentration in some sectors of the Hong Kong economy?

‘What was eye opening for me was the level of public suspicion that certain market sectors are completely dominated by collusive conduct. I have never had the sense in the US that people have similar concerns about so many critical market sectors. There are market sectors in Hong Kong where there is a very high degree of market concentration. That alone does not mean that there has been abuse of market power or that there has been collusion, but from an anti-trust perspective that is at least a red flag.’

Can we discuss the challenges faced by the Commission in creating a culture of competition in Hong Kong?

‘I was not here at the time of the debate surrounding the passage of the ordinance, but my understanding is that some of the leading opponents of the ordinance were small and medium–sized enterprises (SMEs). SMEs comprise about 98% of Hong Kong businesses.

I think there were three general misconceptions about the competition law on the part of the SMEs. The first was that it was going to stifle enterprising companies. The second was that it was going to be difficult for them to understand the requirements of the Competition Ordinance, causing them to unwittingly contravene it. The third was that big corporations were going to use the competition law as a weapon against the SMEs.

The fact is that none of those misconceptions is accurate, especially for SMEs. When it comes to the issue of competition legislation stifling innovation, the great body of evidence developed over more than 125 years in the US and other jurisdictions shows that that is not the case. For instance, some of the most innovative companies in the world have developed in an environment of competition enforcement in the US. Many of those companies may never have had the opportunity to succeed had competition law not been in force, because they often were displacing entrenched incumbents who were stuck in an old and less innovative way of doing business. So, far from shackling enterprising companies, competition enforcement can really unleash those companies.

Secondly, the ways in which SMEs can violate the competition law in Hong Kong are quite few. The most likely contraventions really boil down to reaching price-fixing, bid-rigging, market-sharing or output-restriction agreements with their competitors. The line between legal and illegal in that area is pretty clear. It is true that there are more complicated aspects of competition law, such as abuse of substantial market power. SMEs are generally not going to possess the degree of market power that will raise those issues, however. So, if SMEs are not engaged in fixing prices, rigging bids, sharing markets or restricting output, they are going to be just fine, and, frankly, the prohibition against those types of conduct is only going to benefit them.

That really is the main point. Big companies are more likely to be the ones to contravene the competition law in a way that victimises SMEs. The direct victims of many of the cartels I have investigated in my career were often SMEs doing business with bigger companies. Competition enforcement helps level the playing field and creates opportunities for small businesses to enter into markets and to obtain cheaper, better and more innovative products that they need for their business, which will in turn allow them to be more competitive. Hopefully over time we will develop an enforcement track record of going after companies that are victimising other companies and SMEs will see that benefit.’

What are the Commission’s enforcement priorities?

‘Our enforcement priorities are always going to be based on bringing cases that have the greatest positive impact on Hong Kong consumers. Usually, that will mean prioritising enforcement against hard-core cartels. Cartel enforcement has the twin virtues of pursuing the most harmful competitive abuses (the US Supreme Court has called cartels “the supreme evil of anti-trust” because they seek the complete elimination of competition) and being on the easier end of the spectrum to successfully prosecute. By contrast, abuse of substantial market power investigations usually take longer and involve more complicated issues related to whether a company has significant market power, whether it is abusing that power and whether there are efficiencies that should be taken into consideration.

Having said that, we are going to enforce the entire Hong Kong Competition Ordinance. If we develop evidence that warrants bringing abuse of substantial market power cases, we are going to bring those cases. In fact, we have active abuse of substantial market power investigations underway right now. While cartels may be a priority, there are no contraventions of the law that we are going to ignore if we feel we have adequate evidence to obtain an enforcement outcome.’

What’s your view of how Hong Kong’s competition regime needs to evolve in the future?

‘At this point, the Competition Ordinance is entirely uninterpreted by the Competition Tribunal. We have our first two cases in litigation, but the issues decided by the Tribunal to date have been more procedural in nature than substantive. It is going to take rulings by the Tribunal on substantive issues to start to flesh out more clearly what the provisions of the ordinance mean.

The primary competition law in the US was passed in 1890 and really amounted to two substantive provisions; one was about cartels and the other one was about monopolisation. They were not well drafted provisions, but they now have 125 years of judicial interpretation behind them. Here in Hong Kong, the Competition Ordinance has about 170 provisions but zero judicial interpretation behind it to date. Where is the Tribunal going to draw lines? How is the Tribunal going to interpret the substantive provisions of the ordinance? The answers to these questions are ultimately going to provide the best guidance for the Commission’s work and for the conduct of the business community. That’s going to happen over time. Obviously that process will be aided by more active enforcement on the Commission’s part to give the opportunity for the Tribunal to make substantive rulings.’

What’s your view of how to tackle the three main gaps in Hong Kong’s competition regime: the statutory body exemption, the prohibition against private actions and the absence of cross-sector merger control?

‘The government’s review of the Competition Ordinance, which is expected to start three years after its full commencement, may look at all three of the issues you mention. Knowing that the government may be taking a look at these things, we have started an internal review of the ordinance ourselves. Because I have been here only a few months, I have not yet reached any hard and fast decisions about whether any changes should be made to the ordinance, so please take everything I say with that caveat.

With respect to the statutory bodies exemption, I have heard from quite a number of people in the business community that the exemption should be eliminated because it creates an uneven playing field between private businesses and government bodies engaged in competing commercial conduct. That view certainly has support in competition neutrality principles that say that state-owned enterprises are not supposed to be favoured with different competitive conditions compared to private business. But it should also be noted that the Competition Ordinance does provide a mechanism for the ordinance to be made applicable to specific statutory bodies under certain circumstances, which may be a sufficient remedy as long as the government is diligent about applying it in a meaningful way. We are still in the process of developing our internal position on this.

The issue of creating a private enforcement remedy also has potential arguments in favour and against. There is currently a right in Hong Kong to bring a follow-on action. This means that victims of a contravention of the ordinance can bring an action for damages against a company first found by the Competition Tribunal to have contravened the ordinance. The requisite contravention finding will be the result of enforcement action by the Commission. Allowing a private enforcement right will eliminate the need for victims of anti-competitive conduct to wait for a contravention finding by the Tribunal before seeking to recover damages. Our Chairperson, Anna Wu GBS, JP, has said publicly that there are a number of benefits to private enforcement. The benefits include not making the recovery rights of victims of anti-competitive conduct dependent on the Commission’s enforcement actions. Currently, a company that has been the victim of a cartel that has not resulted in an enforcement action by the Commission (and in a finding of a contravention by the Tribunal) would not have the ability to seek recovery from the cartelists. Adding a private right of action to the ordinance would change this.

Private enforcement would also be what I call a “force multiplier” for government enforcement. It allows enforcement in cases where the government has inadequate resources or has not detected the conduct. In the US, anti-trust suits between private actors serve these purposes and have resulted in judicial precedents on important aspects of the US anti-trust law, including aspects that have shaped how the government has enforced going forward. So that could be an important benefit of allowing private enforcement here, especially at a time when everybody will benefit by more jurisprudence and interpretation of the law here.

If private enforcement is added, however, thought will have to be given to what procedures are needed to ensure that it is available to everyone. Big companies often can afford to hire lawyers and file lawsuits in cases where they are victimised by anti-competitive conduct, but there may not be similar financial incentives in cases involving “high-volume” victims and “low-volume” harm. If, for example, lots of people buy a particular product that is price-fixed by a small amount, the amount of harm to any one of those victims might not be sufficient to warrant them bringing an enforcement action, but, added together, the cumulative harm suffered by all victims might be very substantial. If we do not have some system in place that provides a remedy in these cases, which are very typical of certain types of cartels, there is going to be a subset of potentially very harmful cartels that are not subject to any realistic private enforcement remedy and are under-deterred. This same issue applies not only to a private enforcement remedy but also the existing follow-on remedy.

Turning to the issue of implementing some form of cross-sector merger control in Hong Kong, this is an issue that in some ways is the most complicated of the three. Most competition enforcement regimes have three mutually supporting legs of competition enforcement – pursuit of cartels, enforcement against abuse of substantial market power, and some form of merger control (which makes it more difficult for companies to achieve substantial market power and prevents concentration that facilitates cartels). If one were to analogise competition enforcement to a three-legged stool, one sees that removing any one of these legs leaves a wobbly stool at the very least.

Some companies achieve substantial market power through efficiency and innovation. That is not a bad thing as long as they do not abuse that power in a way that keeps competitors from entering the market. If companies are allowed to merge with no oversight, however, they can achieve substantial market power through means that have nothing to do with efficiency or innovation, and then be in a position to prevent entry by those who may actually be more efficient and innovative.

As a result, most jurisdictions have some form of cross-sector merger control. The thing that is different about Hong Kong and may warrant more nuanced thinking is that Hong Kong is a very compact economy and may already be benefitting from the merger control actions of other jurisdictions internationally, which review some of the mergers that arguably would have a competitive impact here. One question is whether and the degree to which the remedies obtained by other jurisdictions would adequately address the competitive impact in Hong Kong. But, nobody is specifically looking out for Hong Kong’s interests in connection with such international mergers or in connection with mergers that are purely domestic. These are the types of issues that should be considered when reviewing whether to transition to cross-sector merger control.’

What would be your top message for directors, company secretaries and governance professionals regarding compliance with the Competition Ordinance?

‘Invest in anti-trust compliance. The risks to companies, as well as to their officers, directors and employees, are too great not to. Enforcement action and pecuniary penalties are not the only risks to consider – there is also the risk of follow-on liability in Hong Kong. As I mentioned, that follow-on right exists right now, even without private enforcement.

Additionally, one of the most significant developments in competition enforcement over the last 20 years, particularly on the cartel side, has been the rise of multi-jurisdictional investigations and enforcement. As businesses become increasingly global, conduct that takes place in one jurisdiction very often has a competitive effect in another jurisdiction. This opens up the possibility of enforcement actions in multiple jurisdictions.

I can cite numerous investigations that I personally have worked on where companies paid fines in four or five or even more jurisdictions and had individuals subject to enforcement action in some of those same jurisdictions. Even more importantly, some of those companies became subject to different types of private enforcement actions in different places; class actions in the US and Canada and other types of private enforcement in places like Australia and Europe. It is a very complicated international landscape and if you engage in business that has any international scope to it, you are at great risk if you do not have some sort of anti-trust compliance programme in place.

As a corporate secretary or as a director, you should not just be trying to protect the company, you also want to protect your individual officers, directors and employees. In some jurisdictions, your company’s officers, directors and employees can be sent to prison for cartel violations. I’ve seen the top executives taken off companies and sent to prison in the US. And, while we do not have criminal sanctions in Hong Kong, the ordinance allows individual fines for those involved in a cartel violation, as well as a disqualification provision for directors. The Commission plans to use those sanctions. Our first two cases did not seek individual sanctions, but I’m a firm believer in them. Companies can only act through their employees, so my view is that if you want to deter companies from acting illegally you have to deter the officers, directors and employees. That means seeking sanctions against them. Holding individuals accountable will be a part of our cases going forward.’

Brent Snyder was interviewed by Mohan Datwani FCIS FCS(PE), Institute Senior Director and Head of Technical & Research, and Kieran Colvert, Editor, CSj.