Connie HY Lee and Tommy Cheung, Barristers-at-Law, Des Voeux Chambers, consider the implications of Hong Kong’s first two competition law enforcement actions, with a focus on the attribution of liability.

Overview of the competition law regime

Hong Kong joined over 130 jurisdictions around the world in having a cross-sector competition enforcement regime when the full provisions of the Competition Ordinance (Cap 619) (CO) came into force on 14 December 2015. The CO regulates or provides for the following:

  1. agreements which may harm competition (the First Conduct Rule)
  2. abuse of substantial market power (the Second Conduct Rule), and
  3. merger control for the telecommunications industry (the Merger Rule).

The Competition Commission (the Commission) is the regulatory body in Hong Kong that brings enforcement actions to the Competition Tribunal (the Tribunal).

First Conduct Rule

The First Conduct Rule is set out in Section 6(1) of the CO. It provides that an undertaking (that is, any entity engaged in economic activity; see Section 2(1) of the CO) – if the object or effect of the agreement, concerted practice or decision is to prevent, restrict or distort competition in Hong Kong – must not:

  • make or give effect to such an agreement
  • engage in such a concerted practice, or
  • as a member of an association of undertakings, make or give effect to such a decision of the association.

Common examples of anti-competitive conduct targeted by the First Conduct Rule include cartels, which usually involve price-fixing, bid-rigging, market sharing and/or output restrictions.

Second Conduct Rule

The Second Conduct Rule is set out in Section 21(1) of the CO. It prohibits an undertaking which has a substantial degree of market 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, the following matters listed in Section 21(3) of the CO will be considered:

  • market share of the undertaking
  • the undertaking’s power to make pricing decisions, and
  • any barriers to entry to competitors into relevant markets.

Common examples of abuse of substantial market power include predatory pricing, tying and bundling, refusal to deal and exclusive dealing.

Merger Rule

The Merger Rule is established by schedule 7 and takes effect pursuant to Section 162 of the CO. 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.

The significance of the competition law regime

The significance of this new regime must not be overlooked.

First, the regime applies to all Hong Kong’s economic sectors, including the construction sector, the financial services industry, retail sectors, the telecommunications and broadcasting sector and the transport industry (see Conor Quigley QC and Suzanne Rab, Hong Kong Competition Law; Hart Publishing, 2017, Chapter 7).

Second, undertakings, including natural persons, that contravene the rules may face serious consequences. They could face pecuniary fines of up to 10% of the turnover (that is, revenue before deduction of expenses) during the period 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 (see Section 93(3) of the CO).

Third, natural persons involved in a contravention of the rules may also face pecuniary fines. The Tribunal can also seek a disqualification order of up to five years against directors of the companies involved in the infringement (see Sections 101–102 of the CO).

The two enforcement actions

On 17 May 2019, the Tribunal handed down its judgments on the first two enforcement actions involving a breach of the First Conduct Rule: (i) Competition Commission v Nutanix Hong Kong Ltd and Others [2019] HKCT 2 (the Nutanix decision), and (ii) Competition Commission v W Hing Construction Co Ltd and Others [2019] 3 HKLRD 46 (the W Hing decision).

The Tribunal ruled that the criminal standard of proof applies in enforcement actions seeking a pecuniary penalty for contravention of competition law. This set Hong Kong apart from the UK, Canada, New Zealand, Singapore and Australia as the only common law jurisdiction that applies a criminal standard of proof, in other words, beyond reasonable doubt. This is a very onerous standard for the Commission to meet. In particular, most competition law infringements are necessarily clandestine by nature.

These two landmark decisions also laid down many other significant rulings that have helped to shape the landscape of the new competition law regime. We will however focus on the doctrine of attribution of liability: (i) whether a rogue employee’s contravention can bind his/her employer, and (ii) whether an independent contractor’s contravention can bind a party.

The Nutanix decision

In this first enforcement action, the Tribunal found all but one of the five respondents – each of which was an IT company – liable for contravening the First Conduct Rule by engaging in bid-rigging concerning a tender for the supply and installation of a new IT server system for YWCA in 2016. In brief, ‘dummy bids’ were arranged to be submitted in order to assist BT Hong Kong Ltd’s bid.

This enforcement action has far-reaching implications for when liability of an employee can be attributed to an employer.

  1. The conduct of submitting a dummy bid by a junior rogue employee of the third respondent (SiS International Ltd), whose general duties did not include submission of tenders nor provision of any binding quotation, was not attributable to SiS (see paragraphs 375 to 377 of the
    Nutanix decision).
  2. In reaching this decision, the Tribunal formulated a somewhat new test for attribution of liability in Hong Kong, that is, the ‘sufficient connection’ test, stating that: ‘There must be a sufficient connection between the acts of the employee in question and the undertaking so that the former can properly be regarded as part of the latter in the relevant context’ (see paragraph 372 of the Nutanix decision).

The W Hing decision

The Commission brought the second enforcement action against 10 decoration contractors approved by the Hong Kong Housing Authority (HKHA) for decoration works of three new blocks of flats in public housing estates. The Commission’s case was that the 10 respondents had allocated the floors they would work on and had used a joint flyer setting out basic packaged prices in providing decoration works in Phase 1 of On Tat Estate between June and November 2016.

All respondents – except the first respondent (W Hing) and the ninth respondent (Wide Project Engineering & Construction Co) – initially relied on the economic efficiency defence under Section 1 of schedule 1 to the CO. On the other hand, W Hing and Wide Project relied on the subcontractor defence in that they had subcontracted the entirety of the works to respective independent contractors for their own profit and loss, in exchange for a fee of HK$200,000.

The Tribunal ruled that all respondents were liable for the contravention of the First Conduct Rule in the form of market sharing and price-fixing. In so ruling, the Tribunal also rejected the economic efficiency defence and the subcontractor defence.

Key lessons from the two enforcement actions

Notwithstanding the fact that some of the respondents in the first two enforcement actions are appealing against the decisions, the decisions have nevertheless provided important pointers for compliance purposes and internal control.

Corporate entities in Hong Kong must familiarise themselves with the concept of an ‘undertaking’ as the perpetrator of a contravention of competition law that underpins the limits of an enforcement action. It is a very broad concept and can encompass several entities or even legal persons within an economic unit (see Akzo Nobel and Others v European Commission (C-97/08P) [2009], paragraphs 55–56; Sasol and Others v European Commission (re Candle Wax Cartel) (T-541/08) [2014] 5 CMLR 16, paragraphs 139–140). Not only are employees usually being treated as part of an undertaking, agents and subsidiaries may well also be treated as part of the undertaking of a principal or parent.

In the context of an employment relationship, an employer who has no knowledge of, or who has not authorised, a contravention carried out by an employee will only be able to escape liability if the employee’s duties had no sufficient connection with the acts that led to the contravention. In other words, the employee was clearly not put up to the very task in question.

Likewise, a party cannot disclaim liability by simply outsourcing the relevant works. The determining factor is whether there is unity in the conduct of the relevant entities on the market. In the W Hing decision, the Tribunal held that, amongst others, the renovation work was promoted to the tenants in the name of W Hing and Wide Project, and the contracts with the tenants were also executed in the name of W Hing and Wide Project, who remain ultimately answerable to the HKHA. Therefore, W Hing, Wide Project and their respective subcontractors had to ‘act together’ in the provision of renovation services such that there was unity in their conduct on the market (see paragraph 317 of the W Hing decision).

In order to protect companies and employers, proper internal monitors and compliance procedures must be in place. There must be training for both management and staff in the major pitfalls related to competition law, and specific directives on these compliance or regulatory matters must be issued. Crucially, companies should only place people they can trust in important positions that provide access to sensitive information, including price information.

Connie HY Lee, Barrister-at-Law, and Tommy Cheung, Barrister-at-Law
Des Voeux Chambers