Adelaide Luke, Partner and Howard Chan, Associate, Herbert Smith Freehills, consider the recent updates to the Hong Kong Competition Commission’s Leniency Policy and what they mean for companies that discover they have been involved in activities that infringe the Competition Ordinance.

The Competition Ordinance (Cap 619) (the Ordinance) has now been in force for nearly five years, and the competition law regulator, the Competition Commission (the Commission), has brought a total of six cases before the Competition Tribunal (the Tribunal) to date.

Under Section 80 of the Ordinance, the Commission may enter into a leniency agreement with a party and agree not to bring (or continue) proceedings in the Tribunal for a pecuniary penalty, in exchange for that party’s cooperation in an investigation or Tribunal proceedings. The Commission’s procedures and guidance on leniency applications by companies are contained in the Leniency Policy for Undertakings Engaged in Cartel Conduct (the Leniency Policy), which was revised in April 2020. It is important to note that a separate policy exists for leniency applications by individuals: this gives rise to the possibility of an employee (or indeed, former employee) reporting the undertaking for breaches of the Ordinance.

On 22 January 2020, the Commission initiated proceedings against Quantr Ltd and its director for alleged participation in bid-rigging in breach of the First Conduct Rule of the Ordinance. This was the first case brought as a result of a successful leniency application (made under an earlier version of the Leniency Policy). The leniency applicant, whose identity remains a secret, was a co-bidder of Quantr. The leniency application also triggered the issuance of an infringement notice under Section 67(2) of the Ordinance to Nintex, the upstream supplier to Qantr and its co-bidder that facilitated the coordination between the two. Nintex accepted the infringement notice in lieu of the Commission bringing proceedings against it in the Tribunal – the notice required Nintex to admit to its involvement in the infringement and to commit to implementing an effective competition compliance programme.

‘Type 1’ and ‘Type 2’ leniency

The new Leniency Policy applies to any ‘undertaking’ (a term referring to any entity or natural person engaged in economic activity, defined in Section 2(1) of the Ordinance) that has participated in ‘cartel conduct’, a breach of the First Conduct Rule under Section 6 of the Ordinance, by engaging in any agreement and/or concerted practice consisting of:

• price-fixing
• market allocation
• output restriction, or
• bid-rigging.

Under the Leniency Policy, the first undertaking to successfully apply for leniency will be granted either ‘Type 1’ or ‘Type 2’ leniency:

• ‘Type 1’ leniency is available to undertakings that alert the Commission to a cartel that is not currently the subject of an initial assessment or open investigation by the Commission, and
• ‘Type 2’ leniency is available to undertakings that provide substantial assistance to the Commission’s investigation or enforcement of a cartel that the Commission is already assessing or investigating.

In each case, where the undertaking complies with all of the conditions for leniency, the Commission may then enter into a leniency agreement with the successful applicant and this will include an agreement not to pursue any proceedings against it in the Tribunal.

The key difference between ‘Type 1’ and ‘Type 2’ leniency is that the Commission may issue an infringement notice against an applicant with ‘Type 2’ leniency, requiring the applicant to admit to its participation in the contravention of the Ordinance. This means that such party may be subject to damages claims from third parties that have suffered losses due to the cartel (known as ‘follow-on damages claims’), although the Commission has stated that it will only issue such infringement notices if any such follow-on damages claims are brought against other members of the cartel. On the other hand, an applicant with ‘Type 1’ leniency will not have to admit involvement and will be immune to follow-on damages claims from third parties.

This distinction between ‘Type 1’ and ‘Type 2’ leniency was introduced in the recent revisions of the Leniency Policy in order to encourage more cartel participants to apply for leniency. Previously, all successful leniency applicants were required to admit participation in the contravention, opening them up to possible third-party damages claims. The Commission found that this possibility had acted as a substantial deterrent for parties considering whether or not to apply for leniency.

As a result of this change, there is now an even greater incentive for any undertaking that discovers it has been involved in any cartel activity to consider applying for leniency from the Commission at the earliest opportunity.

Applying for leniency

As leniency is only available to the first party in a cartel to apply, the Leniency Policy sets out a procedure for parties to anonymously check (either directly, or through legal representatives) with the Commission whether leniency is available in relation to the relevant cartel arrangement.

If leniency remains available, the Commission will inform the applicant that a ‘marker’ is available. This means that the applicant can reserve its position as the ‘first in line’ for leniency, whilst it prepares a full application to submit to the Commission (a process known as ‘perfecting’ a marker) within a period stipulated by the Commission (ordinarily, 30 calendar days). The Commission may also request that the applicant provides evidence or makes witnesses available for interviews during this period.

At the conclusion of this process, the Commission will determine whether to offer leniency to the applicant (for example, based on whether the evidence provided by the leniency applicant provides substantial assistance to the Commission’s assessment or investigation). If so, the Commission will enter into a leniency agreement with the applicant, and will also impose conditions on the applicant, for example, to provide continued assistance to the Commission throughout its investigation and any subsequent legal proceedings. The successful leniency applicant will have to comply with these conditions on an ongoing basis in order to ultimately benefit from leniency from the Commission.

Cooperation and settlement beyond leniency

Where leniency is no longer available, the Commission may also enter into cooperation agreements with parties that assist with the Commission’s investigation under its Cooperation and Settlement Policy for Undertakings Engaged in Cartel Conduct (the Cooperation Policy). This process requires the relevant party to admit its involvement in a contravention of the Ordinance by way of a statement of agreed facts (known as an Agreed Factual Summary).

In return, the Commission may agree to apply a discount to the pecuniary penalty that it recommends to the Tribunal, as well as agree not to bring proceedings against officers or employees of the relevant undertakings.

The discounts that may be applied (as recommended in the Cooperation Policy) range from: 35–50% for a ‘Band 1’ discount; 20–40% for a ‘Band 2’ discount and up to 25% for a ‘Band 3’ discount. The ‘Band 1’ discount is usually applied to the first undertaking to express its interest in cooperation, whereas the Commission will apply a ‘Band 2’ or ‘Band 3’ discount at its discretion for all other parties, based on the order in which the parties apply.

Relevant considerations when applying for leniency

When a company discovers that it has been involved in an infringement of the First Conduct Rule, it should try to ascertain whether the conduct is of the type that can benefit from leniency (the policy only applies to ‘cartel conduct’), or whether it falls into another category. It should also consider whether there are any clear arguments that the relevant conduct may be exempted from the Ordinance.

Additionally, it is important for parties to ascertain the nature of their involvement in a cartel when considering whether to apply for leniency. Under the Commission’s Leniency Policy, leniency is not available to any party that was the ‘ringleader’ of a cartel arrangement, which usually means any party that coerced others to join or remain within a cartel.

If the company wants to apply for leniency, then it is advised to approach the Commission as soon as possible to maximise the likelihood that ‘Type 1’ leniency can be secured.

If ‘Type 1’ leniency is no longer available, then questions of strategy will arise – for example, how likely is it that the company could defend itself in any proceedings against the Commission. It is important to bear in mind that ‘Type 2’ leniency and other forms of cooperation will not protect the company from follow-on actions for damages brought by third parties.

Adelaide Luke, Partner, and Howard Chan, Associate

Herbert Smith Freehills