Hong Kong’s Competition Law regime: regulatory and enforcement update

Introduction

This year marks the sixth anniversary of the full commencement of the Competition Ordinance (Cap. 619) (the ‘Ordinance’). In gist, the Ordinance prohibits three types of conduct, namely:

1. prohibition of anti-competitive agreements and concerted practices, under the First Conduct Rule;
2. prohibition of abuse of market power by undertakings that have a substantial degree of market power, under the Second Conduct Rule; and
3. prohibition of direct or indirect merger that results in the effect of substantially reducing competition in Hong Kong, under the Merger Rule.

In these two years, we have seen significant rulings and enforcement action taken by the Commission and the Competition Tribunal (the ‘Tribunal’) in safeguarding fair competition in Hong Kong. For example, the commission issued the first infringement notices last year; the Tribunal has also handed down some noteworthy rulings in accordance with the new policies published last year. In this article we provide an overview of these updates.

First successful settlement by infringement notice & leniency application

On 22 January 2020, in Competition Commission -v- Quantr Limited and Cheung Man Kit [2020] HKCT 10, the commission commenced proceedings against the two defendants for their involvement in cartel conduct in a bidding exercise for the provision of IT services. It was alleged that Quantr Limited (Quantr) had exchanged sensitive information with a co-bidder regarding their quotations, amounting to price-fixing activity in contravention of the First Conduct Rule.

Pursuant to s67(2) of the Ordinance, instead of bringing proceedings against a person for any contravention in the Tribunal, the commission may issue an infringement notice to that person on the condition that the person would make a commitment to comply with the requirements thereof.

Accordingly, the commission issued two infringement notices as a remedy for the first time, to both Quantr and a software supplier Nintex Proprietary Limited (Nintex) which also participated in the cartel conduct. However, only Nintex accepted the infringement notice and committed to take steps to strengthen its competition compliance programme, resulting in Nintex being the first successful party to resolve the matter outside the formal Tribunal process. As Quantr did not accept the infringement notice, its case was brought before the Tribunal. On 3 November 2020, a pecuniary penalty was then imposed on Quantr in light of its admission of the First Conduct Rule.

Further, following the introduction of the leniency policy in 2015, the co-bidder made the first successful leniency application to the commission, where the commission agreed not to bring proceedings against them in exchange for a pecuniary penalty and their co-operation in enforcement.

Being the very first case that creates two precedents – acceptance of an infringement notice to resolve the matter and a successful leniency application – this case represents a milestone development for the Competition Law regime in Hong Kong.

Introduction and revision of leniency policy

The commission’s previous leniency framework for cartel conduct under the First Conduct Rule was governed by two policies: the Leniency Policy for Undertakings Engaged in Cartel Conduct (the ‘Previous Leniency Policy’), and the Cooperation and Settlement Policy for Undertakings Engaged in Cartel Conduct (the ‘Cooperation Policy’). Under the Previous Leniency Policy, there were two significant issues, namely:

1. only undertakings were eligible to apply for leniency; and
2. the commission could initiate proceedings before the Tribunal against the leniency applicant for an order that an offence had been committed (but not for the imposition of pecuniary penalties).

In order to address these two issues, in April 2020 the commission published a revised Leniency Policy for Undertakings Engaged in Cartel Conduct and introduced a new Leniency Policy for Individuals Involved in Cartel Conduct (collectively, the ‘New Leniency Policy’). Under the New Leniency Policy,

1. leniency is available to the first individual involved in cartel conduct, eg employee of a company who reports the cartel to the commission; and
2. the commission has created a distinction between ‘Type 1’ and ‘Type 2’ applicants. Leniency is available to the first cartel member who meets the requirements of either disclosing a cartel that the commission has not yet initiated an investigation on (‘Type 1 Leniency’), or is able to provide substantial assistance to the commission’s investigation and enforcement action against a cartel that is already under investigation (‘Type 2 Leniency’). Under the New Leniency Policy, the commission will agree to not commence proceedings before the Tribunal against both Type 1 and Type 2 successful applicants. However, for Type 2 applicants, the commission may still issue an infringement notice requiring the applicant to admit a contravention of the First Conduct Rule, in order to permit a follow-on action for damages against the undertaking.

The New Leniency Policy provides a strong incentive for cartel members, both undertakings and individuals, to voluntarily report cartel conduct to the commission in return for a leniency agreement with the commission to not bring proceedings against them. It is believed that the New Leniency Policy will increase the chances of cartels being detected and further deter anti-competitive behaviour in Hong Kong.

For other undertakings engaged in cartel conduct that are not able to benefit from the New Leniency Policy, the Cooperation Policy allows them to opt to co-operate with the commission in its investigation in return for the commission’s offer of a reduction of the pecuniary penalty by up to 50 percent.

First pecuniary penalty judgment

Pursuant to s92 of the Ordinance, the commission may, on application to the Tribunal after investigation, impose a pecuniary penalty on any person that it has reasonable cause to believe has contravened or been involved in a contravention of a competition rule. As such, the Tribunal may order the person to pay a pecuniary penalty that it considers fit and appropriate.

On 29 April 2020, the Tribunal passed the first pecuniary penalty judgment in Competition Commission -v- W. Hing Construction Company Limited and Others [2020] HKCT 1 after ruling that the ten contractor respondents had contravened the First Conduct Rule in respect of their participation in a market-sharing and price-fixing arrangement in the provision of decoration services to public housing.

The Tribunal approached the determination of pecuniary penalties under the Ordinance in the following four steps:

1. the commission may determine a ‘base amount’, reflecting the nature and extent of the conduct that constitutes the contravention;
2. the commission shall consider aggravating, mitigating and other factors to make adjustments to the base amount;
3. the commission shall apply the statutory cap, being not more than 10 percent of the total turnover of the undertaking in Hong Kong of each year, up to a maximum of three years. If the amount has exceeded the statutory maximum after the first two steps, the commission will then adopt the statutory maximum; and
4. the commission shall take into account any co-operation reduction if applicable and the ability to pay.

Accordingly, the Tribunal determined the pecuniary penalty in the region of 10 percent to 15 percent of the contractor’s revenue generated from their anti-competitive acts.

After passing this judgment, the Tribunal continued to adopt the structured four-step approach in assessing the pecuniary penalty for other cases, such as in the first case on abuse of the Second Conduct Rule, Competition Commission -v- Linde HKO Limited, Tse Chun Wah and Linde GmbH CTEA3/2020.

Policy on recommended pecuniary penalty

The Policy on Recommended Pecuniary Penalties published in June 2020 outlines the general principles and methodology the commission adopts when making recommendations to the Tribunal on the level of fines for businesses that have contravened, or have been involved in the contravention of the First Conduct Rule or the Second Conduct Rule.

In line with the Tribunal’s first judgment on pecuniary penalties, the policy sets out the said 4-step approach to the formulation of a recommended pecuniary penalty for businesses and business associations.

First disqualification order issued by the Tribunal

Based on s101 of the Ordinance, the Tribunal may make a disqualification order against a person on application by the commission if the person is found to have contravened a competition rule, or if it considers that the person’s conduct renders him /her unfit to continue in the management of the company. In October 2020, in the case of Competition Commission -v- Fungs E & M Engineering Company Limited and others CTEA 1/2019, the Tribunal has made the first disqualification order under the second ground against a director, Cheung Yun Kam, of Luen Hop Decoration Engineering Company (Luen Hop), on the basis that Cheung Yun Kam had reasonable grounds to suspect that the conduct of Luen Hop constituted a contravention of the First Conduct Rule, but he failed to take any steps to prevent or rectify the contravention. Having admitted the allegations, the period of disqualification was mitigated from two years to one year and ten months.

First proceedings under the Second Conduct Rule

Notably, the above policies and enforcement actions are all related to the First Conduct Rule. In fact, since the Ordinance has been in force, the proceedings brought by the commission were all concerned with the contravention of the First Conduct Rule. However, this trend has been broken by ground-breaking legal action taken by the commission in December 2020 against Linde HKO Limited (Linde), Tse Chun Wah and Linde GmbH under the Second Conduct Rule. It is alleged that Linde has abused its substantial market degree power in the medical gases supply market by engaging in exclusionary acts that have the effect of hindering competition in Hong Kong. This action by the commission shows that it is starting to strengthen its enforcement by not only focusing on a particular conduct rule but extending its enforcement to the other rules, such that we may expect to see some more enforcement actions under the Second Conduct Rule and even the Merger Rule in the future.

Third-party facilitators also subject to the Tribunal’s enforcement

The commission found in its investigation that, between March 2016 and May 2017, six hotel groups and a tour counter operator acted as facilitators by sharing pricing information (regarding the prices of tourist attractions and transportation tickets) between two competing travel service providers in circumstances where they had actively contributed to the implementation of the price fixing agreement, in contravention of the First Conduct Rule.

As mentioned hereinabove, the commission may issue infringement notices to resolve the matter instead of bringing proceedings, provided that the contravening party makes a commitment to comply with the requirements. The seven recipients admitted the contravention and committed to take concrete measures to effectively enhance competition compliance with their respective businesses, and five of them with larger business size committed to appoint independent compliance advisers to minimise their risk of engaging in similar anti-competitive conduct in the future.

Having considered that the use of infringement notices and getting commitments from the recipients to be the most appropriate approach, in February 2021, the commission issued infringement notices to the said seven recipients. Although the recipients did not directly engage in the cartel conduct, the commission has made clear for the first time that third-party facilitators would also be subject to enforcement action, warning other undertakings in the industry to steer clear of such anti-competitive conduct.

Despite being in the midst of a global pandemic, the latest policies and judgments laid down by the commission and the Tribunal in past two years show that Hong Kong’s Competition Law regime is potent and progressive. It is hoped that continuing development and enforcement action will promote a competitive business landscape in Hong Kong, as well as to deter anti-competitive behaviour more effectively and efficiently to protect consumers from predatory business practices.