25 October, 2015
Cartels are serious anti-competitive practices
Cartel conduct is considered one of the most serious violations of competition law and the Hong Kong Competition Ordinance treats it as such. Cartel conduct is caught by the Ordinance's First Conduct Rule (FCR). The FCR applies to all undertakings (including self-employed persons) that engage in economic activity. It prohibits agreements, concerted practices and decisions of associations that have the object or effect of preventing, restricting or distorting competition in Hong Kong.
The Competition Commission will treat cartels (including the exchange of competitively sensitive information absent a legitimate business reason) as having the object of harming competition, meaning the Competition Commission is not required to demonstrate any anti-competitive effect.
This alert will explore four types of cartel conduct the Ordinance treats as serious anti-competitive conduct: price-fixing, market sharing, output limitation, and bid-rigging. These forms of conduct can also involve matters such as product quality, variety and innovation.
What is price-fixing?
Price-fixing is where competitors agree to fix, maintain, increase or otherwise control prices rather than determining prices independently. In this context, price includes discounts, rebates, allowances, price concessions or other advantages in relation to the supply of products. Price-fixing may take a number of forms, for example, competitors may agree upon a specified price, a price range, a percentage increase, not to quote before consulting another competitor or not to charge less than any other price in the market. Non-binding price recommendations or fee scales issued by a trade association will also likely be considered conduct with the object of harming competition.
What is market sharing?
Market sharing occurs when competitors allocate sales, territories, customers or markets amongst themselves. The result is that the undertakings are freed from competition in their allotted portion of the market. By way of example, competitors may agree not to sell in each other's agreed territories or to each other's customers.
What is output limitation?
Output limitation occurs when competitors fix, maintain, control, prevent, limit or eliminate the production or supply of goods or services on the market. Controlling production or supply often results in price increases and is treated as having the object of harming competition. The Competition Commission will not accept overcapacity in the industry as a defence to an agreement on output limitation.
What is bid-rigging?
Bid-rigging occurs when two or more undertakings agree that they will not compete with one another for a particular project, often with the objective of allowing one of them to win the tender for that project. It can take a number of forms. For example, undertakings may agree that certain parties will not submit a bid (bid suppression) or that certain bidders will submit bids of terms less attractive than those of the chosen "winner" (cover bidding).
When is cartel conduct likely to be a real risk?
Cartel conduct requires a degree of involvement with a competitor, therefore any agreements, memberships and involvement in trade associations or the exchange of competitively sensitive information involving competitors (including via third parties) will always require close attention. A competitor may be an actual or potential competitor and involves an undertaking that operates at the same level of the production or distribution chain.
Is cartel conduct ever allowed? Do any of the general exclusions or exemptions apply?
The Ordinance provides some general exclusions and exemptions to the FCR. Unless you are complying with a Hong Kong law or are an exempt statutory body these have little practical relevance to conduct involving cartels. There are two important points to note:
The general exclusion for "agreements of lesser significance" (where the undertakings' combined turnover for the turnover period is less than HK$200 million) does not apply to serious anti-competitive conduct.
The Competition Commission's Guideline on the First Conduct Rule suggests that serious anti-competitive conduct is unlikely to be justifiable on the basis of the general exclusion for agreements enhancing overall economic efficiency.
Cartel conduct will not arise if the conduct involves two or more entities that are part of the same undertaking, that is, a 'single economic unit'. Entities will be part of the same undertaking if one of the entities exercises 'decisive influence' over the commercial policy of the other entity. The test is not clear cut and it will always depend on the facts at hand. Generally, entities that are more likely to be part of the same undertaking are those within the same corporate groups. It is less obvious in the case of joint ventures and distribution agents, where a detailed assessment will need to be conducted.
What are the consequences of engaging in cartel conduct?
Where it has reasonable cause to suspect an undertaking has engaged in cartel conduct the Competition Commission may:
issue a warning notice, providing an opportunity to cease or alter the offending conduct; or
institute proceedings in the Competition Tribunal without first issuing a warning.
If brought before the Competition Tribunal and it finds the supplier has committed an offence, it can issue a fine of up to 10 per cent of its group turnover in Hong Kong for the duration of the infringement (with a three-year cap) for each offence.
The take-home message is that all businesses and organisations, big or small, should expect to be subject to the scrutiny of the Competition Commission for serious anti-competitive conduct. Agreements and business practices should be carefully reviewed in anticipation of the Ordinance coming into effect.
