With key parts of the Competition Ordinance uninterpreted in Hong Kong, Peter Westerlind Wigstrom, Registered Foreign Lawyer, Deacons, looks at overseas competition cases to guide businesses and individuals on the likely extent of their liability under the law.

The Competition Ordinance (the Ordinance) came into full force in December 2015. The law is designed to promote competition and prohibit anti-competitive conduct in Hong Kong to the benefit of consumers, businesses and the economy at large. While it is arguably too early to assess the effect on the overall competitive environment, active enforcement of the competition rules means that businesses and individuals are already exposed to potentially significant risks. The competition rules prohibit anti-competitive decisions, concerted practices and agreements between undertakings (the First Conduct Rule), anti-competitive conduct by undertakings with substantial degree of market power (the Second Conduct Rule) and, in relation to the telecommunications market, mergers between undertakings that substantially lessen competition in Hong Kong (the Merger Rule). The Hong Kong competition regime adopts a prosecutorial model, whereby the Competition Commission (the Commission) investigates suspected anti-competitive conduct and prosecutes cases before the Competition Tribunal (the Tribunal). There is no stand-alone private right of action, which means that parties cannot bring complaints of competition rule violations directly to the Tribunal. However, in a recent case, the Court of First Instance allowed an allegation of a contravention of the First Conduct Rule raised as part of the defence in a civil action to be transferred directly to the Tribunal, without the matter first being referred to the Commission. The Tribunal has the power to impose significant penalties for a contravention, or an involvement in a contravention, of a competition rule, including:

• imposing fines of up to 10% of the Hong Kong turnover of the relevant undertaking for each year the contravention occurred, up to a maximum of three years
• requiring the payment of an amount not exceeding the amount of any profit gained or loss avoided as a result of the contravention
• declaring an agreement, the making or giving effect to which constitutes the contravention, to be void or voidable or ordering modification or termination of such agreement, and
• ordering the disqualification of directors for up to a maximum of five years.

A party found to have contravened a competition rule is further exposed to civil follow-on actions for damages brought by third parties who have suffered harm as a result of the competition rule violation. In addition to civil liabilities, criminal liability may arise, including for non-compliance with the Commission’s investigatory powers. Clearly, there is significant risk exposure for businesses and individuals under the Ordinance. However, the exact scope of liability for anti-competitive conduct is not clear as the law is still in development with key sections of the Ordinance yet to be interpreted. This article raises some of the key questions relating to when liability for anti-competitive acts can be assigned to an undertaking and brings up the uncertainties regarding individual liability under the Ordinance.

Can an undertaking be held liable for anti-competitive conduct by its employees?

The competition rules apply to the conduct of an ‘undertaking’, which is defined as any entity engaged in economic activity, including a natural person engaged in economic activity. In a recent Tribunal decision, Justice Lam referenced a UK decision stating that since an undertaking that is a company can only act through individuals employed by it, the acts of a company are performed by its employees. It follows, it was held in the UK decision, that any act by any employee could, potentially, lead to an infringement attributable to the corporate employer. The EU courts have adopted an expansive approach, whereby a company as a matter of principle is liable for any anti-competitive conduct by its employees. A company cannot avoid liability on the basis that its employee acted contrary to instructions or without the management’s knowledge. Anti-competitive acts of a rogue employee can therefore put employers at significant risks. The question whether an employee’s unauthorised acts can be attributed to its employer has been raised by a defendant in the Tribunal’s hearing of the Commission’s case against five companies for alleged bid rigging. The Tribunal decision may therefore provide clarity on the scope of corporate liability for an employee’s anti-competitive conduct in Hong Kong.

Can an undertaking be held liable for anti-competitive conduct by its subsidiaries or joint ventures?

Parental liability is another key issue that remains uninterpreted by the Tribunal. The scope of parental liability is important as it determines under what circumstances an undertaking can be held liable for unlawful acts of its subsidiaries or joint ventures. A wide scope may significantly increase the potential risk exposure for undertakings under the Ordinance. The guideline on the First Conduct Rule provides guidance on when the Commission considers that two entities form one undertaking. Similar to the approach adopted in the EU, the Commission will assess whether the relevant entities constitute a single economic unit based on whether one entity exercises decisive influence over the commercial policy of another entity, such as a subsidiary. The Tribunal, however, is not bound by the Commission’s guideline and is yet to consider the ‘single economic unit’ doctrine and the scope of parental liability under the Ordinance. It therefore remains unclear under what circumstances an undertaking can be held liable for anti-competitive conduct by its subsidiaries or joint ventures. With the lack of clarity in Hong Kong, it may be helpful to understand how EU courts have determined the scope of parental liability. Under EU law, a parent company can be held jointly and severally liable for a competition law infringement by its subsidiary where the two entities form a single economic unit. This is the case where the parent company exercises decisive influence over the conduct of the subsidiary. In relation to wholly owned subsidiaries, decisive influence by the parent company is presumed. Where ownership of a subsidiary falls below 100%, decisive influence must be proven. Notably, the EU courts have held that a parent company with only a minority interest can exercise decisive influence over its subsidiary and, thus, form a single economic unit with that subsidiary. For liability for the acts of a subsidiary to arise, a parent company need not have participated in, or been aware of, the infringing conduct. With regard to financial investments in portfolio companies, the EU courts have held that liability can in principle be avoided, provided that the parent company behaves as a pure financial holding company with no influence over the portfolio company’s industrial or commercial activities. If, however, decisive influence over the conduct of the portfolio company is established, liability for anti-competitive conduct may be assigned to the parent company. In relation to joint ventures where the parent companies exercise joint control, the EU courts have held that each parent company can be regarded as exercising decisive influence over the joint venture, both in the case of a 50/50 joint venture and where one parent company holds a minority share. Thus, liability can be imputed on each of the parent companies for anti-competitive conduct by the jointly controlled venture.

Can an undertaking be held liable for anti-competitive conduct by third-party subcontractors or service providers?

Having considered whether liability can be assigned to an undertaking for unlawful conduct carried out by its employees, subsidiaries or joint ventures, the question arises whether the scope of liability under the Ordinance extends to acts carried out by third-party subcontractors or service providers with which the undertaking does not form a single economic unit. The Tribunal’s view may be clarified in its decision in the Commission’s case against 10 contractors for alleged price-fixing and market sharing. In the pre-trial hearings, arguments have been raised by two defendants that the alleged conduct was carried out by subcontractors and, therefore, liability for that conduct should not be imputed to the defendants. The decision is expected later this year. In the EU, the question was considered in a case involving a concerted practice between a service provider and two competitors of the undertaking to which the service provider provided services. It was held that, in principle, an undertaking can be liable for a concerted practice on account of the acts of an independent service provider supplying services to it, provided that one of the following conditions is met:

• the service provider acted under the direction or control of the undertaking
• the undertaking was aware of the anti-competitive objectives pursued by its competitors and the service provider and intended to contribute to them by its own conduct, or
• the undertaking could reasonably have foreseen the anti-competitive acts of its competitors and the service provider and was prepared to accept the risk.

As can be seen, the EU courts have taken an expansive approach to liability and may attribute unlawful conduct of a service provider to an undertaking to which it provides services, despite the absence of a structural link between the entities.

Are individuals exposed to liability under the Ordinance?

In addition to undertakings being exposed to significant risks under the Ordinance, the Commission CEO, Brent Snyder, has advocated for holding individuals accountable to competition law violations. However, there is significant uncertainty as to whether the Tribunal can assign liability and impose pecuniary penalties on individuals for contraventions of the competition rules. As mentioned above, the Ordinance prohibits certain anti-competitive conduct by ‘undertakings’ and empowers the Tribunal to impose fines, upon an application by the Commission, on any ‘person’ found to have contravened the competition rules. This inconsistency of the legislative text creates uncertainty. An ‘undertaking’ is defined as any entity engaged in economic activity. A ‘person’ is broader in scope and includes any public body and any body of persons, corporate or unincorporated, including an undertaking. A key question is therefore whether an individual, for example a director of a company, falls within the definition of an ‘undertaking’ and as such can be held liable for a contravention of a competition rule. The Commission has clarified that it does not consider an employee to be an ‘undertaking’. The Ordinance also empowers the Tribunal to impose fines on a ‘person’ found to have been involved in a contravention of a competition rule. Such accessory liability can be imposed on a person who:

• attempts to contravene a competition rule
• aids, abets, counsels or procures any other person to contravene a competition rule
• induces or attempts to induce any person to contravene a competition rule
• is knowingly concerned in, or a party to, the contravention of a competition rule, or
• conspires with any other person to contravene the rule.

There is further uncertainty as to the amount of fines that can be imposed on an individual. The maximum amount of a pecuniary penalty is set in relation to an undertaking’s turnover and there is no provision in the Ordinance on how to determine fines for an individual. It remains unclear how the Tribunal will interpret the relevant provisions of the Ordinance, including whether liability for individuals is limited to accessory liability and how fines for individuals will be determined. In addition to possible pecuniary penalties, the Tribunal may order the disqualification of directors for up to a maximum of five years, provided that the undertaking of which the person is a director has contravened a competition rule and the person is considered unfit to be involved in the management of that undertaking. Last, individuals may be exposed to criminal liability under the Ordinance. In particular, failure to comply with the Commission’s investigatory powers is punishable by fines of up to HK$200,000 and imprisonment for up to one year. Destroying or falsifying documents, providing false or misleading documents or information, or obstructing a dawn raid is each a criminal offence punishable by fines of up to HK$1 million and imprisonment for up to two years.

Conclusion

With key parts of the Ordinance uninterpreted, the exact scope of liability for anti-competitive conduct remains unclear. Businesses are exposed to possibly significant risks as liability could arise from unlawful conduct of rogue employees, subsidiaries, portfolio companies, joint ventures and, even, third party contractors or service providers. Individuals also face significant risks and penalties under the Ordinance. However, it remains to be seen how the Tribunal interprets the scope of individual liability and how fines for individuals are set. Given the significant penalties available under the Ordinance, businesses and individuals should take appropriate actions to mitigate competition law risks and avoid liability. This may include reviewing business practices and agreements to ensure compliance with the Ordinance, implementing competition law compliance and dawn raid policies and conducting targeted training programmes for management and employees. Businesses should also consider extending competition law compliance efforts to entities whose conduct may be attributed to them, such as their subsidiaries and joint ventures, owing to the possibly wide scope of parental liability. Importantly, compliance programmes and policies should be reviewed periodically to ensure that they are attuned to the developments of the law. Peter Westerlind Wigstrom Registered Foreign Lawyer, Deacons