Richard Leung JP, Barrister-at-Law, and Tommy Cheung, Barrister-at-Law, Des Voeux Chambers, give a brief introduction to Hong Kong’s Competition Ordinance and assess what approach the courts in Hong Kong have taken so far in this largely uncharted area of law.
Hong Kong joined with over 130 jurisdictions around the world in having a cross-sector competition regime when the full provisions of the Competition Ordinance (Cap 619) (the Ordinance) came into force on 14 December 2015. The Ordinance regulates agreements that may harm competition (the First Conduct Rule) and abuse of substantial market power (the Second Conduct Rule) across the Hong Kong economy. Furthermore, merger control for the telecommunications industry was provided for in the Merger Rule.
This article first explains the major competition rules established by the Ordinance, the enforcement procedures for them and their significance to the business sector. It then offers an update on the local competition case law to assess what approach the Competition Tribunal and other courts in Hong Kong have taken so far in interpreting this new law.
The competition regime
1. Starting point: anticompetitive conduct
There are three major competition rules under the Ordinance. The First Conduct Rule is set out in section 6(1) of the Ordinance. It prohibits an undertaking (any entity engaged in economic activity) from making or giving effect to (1) an agreement, or (2) a decision of the association of undertakings of which the undertaking itself is a member, or (3) a concerted practice if the object or effect of such agreement, decision or concerted practice is to prevent, restrict or distort competition in Hong Kong. The most common examples of anticompetitive agreements are cartels, where competitors agree to cooperate rather than to win customers via natural competition, by anticompetitive means such as price fixing, bid rigging, market sharing and output restriction.
The wording in the statute bears closer study. For example, the broad notion of an ‘agreement’ includes any agreement, arrangement, understanding, promise or undertaking, whether express or implied, written or oral, and whether or not enforceable or intended to be enforceable by legal proceedings (section 2(1) of the Ordinance; Guideline on the First Conduct Rule, para 1.6). That means an undertaking may have agreed to an anticompetitive arrangement even where it failed to object sufficiently to the arrangement when attending a meeting leading to it. ‘Concerted practice’ is a form of cooperation, falling short of an agreement, where undertakings knowingly substitute practical cooperation for the risks of competition. Parallel behaviour by competitors in the market is not necessarily concerted practice, so long as there is no sufficiently precise and coherent proof to justify such behaviour being the result of concerted action by the undertakings.
The Second Conduct Rule is set out in section 21(1) of the Ordinance. It prohibits an undertaking that has a very substantial degree of power in a market from abusing that power by engaging in conduct that has as its object or effect the prevention, restriction or distortion of competition in Hong Kong. In determining whether an undertaking has a substantial degree of market power, matters listed in section 21(3) of the Ordinance, amongst other relevant matters, should be considered. The listed matters include:
- the market share of the undertaking
- the undertaking’s power to make pricing decisions, and
- barriers to entry to competitors into relevant markets.
Examples of abuse of substantial market power are predatory pricing, tying and bundling, refusal to deal and exclusive dealing.
The Merger Rule is established by schedule 7 and takes effect pursuant to section 162 of the Ordinance. It prevents 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. Nevertheless, the rule only applies where an undertaking that holds a carrier licence within the meaning of the Telecommunications Ordinance (Cap 106) is involved in a merger.
2. Enforcement of the competition rules
The Ordinance establishes a dual administrative and judicial system. The administrative duties (for example the application of the competition rules, complaints, investigations and settlements) are carried out by the Competition Commission (the Commission), while the judicial enforcement of the rules is performed by the Competition Tribunal (the Tribunal) on the application by the Commission.
3. Why do the competition rules matter?
The significance of the competition rules is twofold. First, the rules have an impact on all of Hong Kong’s major economic sectors, including the construction, financial services, telecommunications and broadcasting, retail and transport sectors. Second, undertakings that contravene the rules may face serious consequences. They may face fines up to 10% of the turnover (revenue before deduction of expenses) during the year of contravention. If that contravention occurs for more than three years, the cap is at 10% of the turnover of the three years with the highest turnover (section 93(3) of the Ordinance). Moreover, persons involved in a contravention of the rules may face fines and the Tribunal may even disqualify the company directors of the involved undertakings (in the case of companies) for up to five years (sections 101–102 of the Ordinance).
The case law
Since the operation of the Ordinance, the case authority on competition law in Hong Kong has been developing gradually. The first four written decisions covered below concern different procedural challenges arising in the first case before the Tribunal, and the jurisdiction of the Tribunal and the standard of evidence in a case before the Court of First Instance of the High Court (CFI).
1. The Nutanix case
Proceedings were brought against Nutanix Hong Kong Ltd (Nutanix), BT Hong Kong Ltd (BT) and three other companies over alleged bidrigging in a tender exercise conducted by the Hong Kong Young Women’s Christian Association (YWCA) in mid-2016 for the supply and installation of IT server system. Employees of Nutanix and BT were accused of inviting friends from the other respondent companies to submit dummy bids to meet the number of tenders required under YWCA’s procurement policy. The Commission sought pecuniary penalties and a declaration that each of the respondents had infringed the First Conduct Rule.
Confidentiality protocols – in Competition Commission v Nutanix Hong Kong Ltd & Ors (CTEA 1/2017, 28 March 2017), the Commission made an application pursuant to rule 37(1) of the Competition Tribunal Rules (Cap 619D) (CTR) for confidential treatment of three categories of information contained in the Originating Notice of Application against the public, including:
- the prices submitted in the tenders
- the identities of the individuals employed or formerly employed by the YWCA and the respondents, and
- the identity of the complainant.
The Tribunal granted the confidentiality treatment sought, having considered the factors as required under rule 37(6) CTR, including:
- the public interest
- legitimate business interests of the undertaking (for commercial information)
- interests of the natural person (for information on private affairs of the person), and
- the interests of justice.
In support of the decision, the Tribunal reasoned that tender prices are commercial information and not generally available in the public domain. It also recognised that the current and former employees were not parties to the proceedings and disclosure of their identities, at least before any findings were made, may cause them unnecessary harm. The identity of the complainant was also of little significance to these proceedings and unnecessary disclosure may become a disincentive for potential complainants.
Further confidentiality protocols – in Competition Commission v Nutanix Hong Kong Ltd & Ors (CTEA 1/2017, 12 June 2017), a decision was handed down pursuant to the first case management conference of the same case abovementioned. The principal issue was whether the order of a confidentiality protocol should direct that all documents produced in the context of the proceedings must be used in connection with the proceedings, or only those parts of the said produced documents which have been validly redacted should be subject to such restriction.
The Tribunal opted for the first alternative on the basis that the precise manner in which the confidentiality order interacts with any implied undertaking at common law was not wholly clear. It further opined that while the practice could be developed, a form of wording offering wider protection of confidentiality should be adopted at this stage, leaving collateral use subject to the parties’ consent or the direction of the Tribunal.
Admissable evidence – Competition Commission v Nutanix Hong Kong Ltd & Ors (CTEA 1/2017, 3 October 2017), concerned applications by Nutanix and BT under section 45(2) of the Ordinance to strike out references to certain statements made by their employees from the Originating Notice of Application, and for associated orders to debar the Commission from adducing into evidence or relying upon all such statements in the substantive hearing. Section 45(2) of the Ordinance provides that no statement made by a person in explaining a document or answering a question is admissible against that person in proceedings unless it was adduced or asked by that person or on that person’s behalf.
The Tribunal dismissed their applications upon proper construction of the relevant statutes in light of their context, purpose and considerations of fairness and policy. The Tribunal observed that the employees, instead of Nutanix and BT, were the subjects of the notices issued under section 42 of the Ordinance by the Commission to require the employees to attend interviews and answer questions. Accordingly, the Tribunal decided that the employees were not giving answers ‘on behalf of’ Nutanix and BT and that records of interviews could not be excluded on the ground of self-incrimination.
Disclosure obligations of the Commission – the same decision (Competition Commission v Nutanix Hong Kong Ltd & Ors (CTEA 1/2017, 3 October 2017) addressed the application for orders of discovery against the Commission as it refused to produce a number of classes of documents. The Tribunal decided that a generous ambit of disclosure should apply and that the standard applicable to the Commission would be the standard applicable to the prosecution in criminal proceedings, which would include disclosure of all relevant unused materials. Accordingly, documents, except those which are protected by informer privilege and without prejudice privilege, were ordered to be produced.
In passing, trial of this case has recently been completed. A judgment is expected to be delivered soon by the President of the Competition Tribunal. It will be interesting to watch out for the results of the first competition case ever tried in Hong Kong, as well as subsequent appeal(s) if any.
2. The Taching Petroleum case
In Taching Petroleum Company Ltd v Meyer Aluminium Ltd (HCA 1929/2017, 17 May 2018), the plaintiff sued the defendant for the price of diesel oil sold and delivered to the defendant. The only defence raised was based on alleged price collusion between the plaintiff and another fuel supplier, Shell. In particular, the defendant contended that the diesel oil supply contracts between the parties were tainted by illegality for breaching the First Conduct Rule and were therefore unenforceable. Moreover, the defendant counter-claimed for damages being the amount overcharged as a result of the collusion.
This decision concerns the plaintiff’s application for summary judgment. The CFI first found the defendant’s allegation of plaintiff’s contravention of the First Conduct Rule not wholly without substance. The decision was based on:
- the prima facie evidence of parallel pricing over a prolonged period between the plaintiff and Shell
- the (as yet) uncontradicted evidence that the list price and fixed discount in the sales to the defendant being confidential information, and
- the absence of any relevant evidence from the plaintiff to show that the defendant’s express or implied assertions of fact were beyond belief or to set out or explain what had happened.
Having recognised there were triable issues in relation to the defendant’s illegality defence, the CFI dismissed the plaintiff’s application and directed the defendant’s allegation to be transferred to the Tribunal pursuant to section 113(3) of the Ordinance.
Key takeaways from the decisions
The first two decisions of the Nutanix case show the Tribunal’s readiness to provide extensive protection to confidentiality in competition law proceedings so as to encourage the development of competition law and potential complaints while preventing undue prejudice to private commercial and personal information.
The decision relating to the application by Nutanix and BT to strike out references to certain statements made by their employees signifies the Tribunal’s refusal to allow parties alleged to have committed anticompetitive conduct to avail themselves of procedural tactics to conceal evidence that may be detrimental to their case in the substantive hearing.
The decision relating to the application for orders of discovery against the Commission indicates the importance for extensive discovery, similar to criminal standards, on the part of the Commission, despite the large volume of internal reports and relevant documents unless protected otherwise by privilege(s).
The final decision (the Taching Petroleum case) demonstrates the court’s unwillingness to give summary judgment whenever the defendant has a triable issue unless the plaintiff can give concrete evidence to prove otherwise, which is consistent with the usual approach of the courts in dealing with summary judgment applications. Moreover, triable allegations based on Ordinance before the courts shall be transferred to the Competition Tribunal, but can always be transferred back to the courts in the interests of justice.
Richard Leung JP, Barrister-at-Law, and Tommy Cheung, Barrister-at-Law
Des Voeux Chambers