6 May 2020
Introduction
One week of change – Hong Kong’s first ever competition law penalty, a MoU with the SFC and the appointment of a new Competition Commission chairperson. How will these competition updates impact you?
Last week was a hive of activity for competition law enforcement in Hong Kong. On 29 April, the Competition Tribunal handed down its first judgment on penalties and costs in respect of the Decorators’ cartel case. This now sets down a systematic approach to penalties for future cases. It was also announced that a MoU was entered into between the Competition Commission and the Hong Kong Securities and Futures Commission (“SFC”) to formalise their collaboration.
These significant milestones coincided with the stepping down of Hon. Anna Wu, the founding Chairperson of the Competition Commission for the past seven years, the appointment of a new Competition Commission Chairperson and new members of the Commission. Together they reflect a trend towards enhanced enforcement, increased legal certainty and a heightened desire to punish and deter businesses and individuals engaged in anti-competitive conduct.
Our summary and key takeaways are set out in this article.
1. First penalties imposed by the Competition Tribunal
This was the first time in Hong Kong that a financial penalty has been set down for anti-competitive conduct. The Competition Tribunal imposed fines totalling HKD 4 million against ten SME decorating contractors which were found in May 2019 to have engaged in price fixing and market sharing in connection with a renovation project at a public housing estate in 2016. The individual fines imposed ranged from HKD132,000 to HKD 740,000 – reflecting the different size of the companies involved.
By largely endorsing the proposals of the Competition Commission, the Tribunal has adopted a 4-step fine calculation methodology, similar to the EU’s and UK’s competition law fining framework:
Step 1 – Calculate Base Penalty (Value of Sales, Gravity percentage and duration)
Step 2 – Adjustment to the Base Penalty based on aggravating or mitigating circumstances
Step 3 – Confirmation that the Statutory Cap of 10% Hong Kong total group revenue is not exceeded
Step 4 – Cooperation reduction
Step 1: Determination of the Base Penalty
The Tribunal considers that Step 1 needs to reflect the nature and extent of the illegal conduct. To do so, the Tribunal will calculate the base amount as follows:
(a) Value of Sales: The value of sales is all revenue “directly or indirectly” derived from the infringing conduct. Therefore, revenues gained from other business-streams wholly irrelevant to the contravention will not be considered in Step 1. While the usage of “value of sales” is similar to the EU’s fining methodology, it appears to be a narrower concept than in the UK and Singapore, where the base amount is sales in the relevant market.
In the case in hand, the Tribunal relied on the work orders/invoices issued by the Decorators relating to the specific cartel conduct to calculate the value of sales.
(b) Gravity percentage: Only a percentage of the value of sales should be used to reflect the gravity and seriousness of the conduct. In this regard, the Tribunal agreed with the Commission that the range of 15% to 30% applicable to cartel conduct is in line with international practice and is appropriate for Hong Kong.
In this specific case, a gravity percentage of 24% was used. This is a very significant percentage when compared to overseas experience. Usually such high percentage is reserved for hardcore cartels over a number of years with a significant impact in the relevant market. The facts of the Decorators cartel did not appear to suggest it was worthy of such an elevated level.
(c) Duration multiplier: The amount will be multiplied by the number of years of the relevant contravention.
The respondents had debated that a duration multiplier of 1 is not appropriate as the infringement period was for only five months. The Tribunal has left this question open given that the value of sales of the respondents were the only revenues from the misconduct, rather than sales spreading over an entire financial year.
Step 2: Adjustments for aggravating, mitigating and other factors
The Tribunal considers it necessary to take into account various factors to consider whether it is appropriate to adjust the Base Penalty in Step 2.
In line with practices in the EU and the UK, the Commission had proposed the following aggravating and mitigating factors which may be relevant – (although not all factors were of relevance to the present case):
|
Aggravating factors (Upward adjustments) |
Mitigating factors (Downward adjustments) |
|
– Leader / instigator of the contravention
– Coercive or retaliatory measure taken to ensure implementation
– Continuation or concealment of the contravention
– Senior management’s involvement
– Conduct is of egregious nature
– Widespread industry practice
– Continuation of serious anticompetitive conduct after being made aware of the Commission’s investigation
– Obstruction of the Commission’s investigation |
– Genuine uncertainty as to the lawfulness of the conduct
– Limited participation in the conduct
– Genuine compliance with the Ordinance, reflecting a corporate commitment to competition compliance |
The Tribunal did not specify what percentage was appropriate for individual factors – so it remains difficult to assess how significant aggravating or mitigating factors would play overall in the penalty assessment.
In the case in hand, the only mitigating factor was the “sub-contractor” defence (i.e. some of the respondents did not directly participate in the renovation project), which was considered worthy of a one-third reduction of the base amount.
In passing, the Tribunal made reference to other potentially relevant factors – namely specific deterrence and proportionality, and where parties have been found to have previously contravened the Competition Ordinance. None of those were relevant to the case in hand, so were not considered in any depth – and likely to be battlegrounds in the future.
Step 3: Applying statutory cap
The maximum penalty that can be imposed should be capped at 10% of the total group turnover in Hong Kong up to three years of a contravention.
In the case in hand, the statutory cap had to be applied to seven of the ten Decorators. The fact the statutory maximum is reached so easily is partially due to the fact that the businesses involved were SMEs and most of their revenues were confined to the cartel conduct.
In overseas cases, the statutory maximum is genuinely extraordinary. It thus remains to be seen whether Hong Kong continues to be a rather extreme example on the spectrum of fining practices.
Step 4: Cooperation reduction and inability to pay
A downward adjustment may be made depending on the level of cooperation a party engaged in with the Commission during the investigation and/or Tribunal proceedings. The Tribunal notes there is a strong public interest to facilitate cooperation and settlement, and therefore may have proper regard to any recommendation of discount by the Commission under the Commission’s cooperation and settlement policy. The recommended discounts fall within the range from 20% to 50%, depending on the timing, nature, value and extent of cooperation provided by the undertaking.
The Tribunal also considers that in exceptional circumstances, a firm’s inability to pay the penalty may justify a reduction of any penalties imposed. Although this was raised as a concern by some of the Decorators, the Tribunal rejected generalised and unsubstantiated claims for a reduction.
Costs of proceedings and investigations
Despite the application of a criminal standard of proof in competition proceedings in Hong Kong , the Tribunal concluded that the civil approach on costs should be applied.
Respondents should therefore be liable to pay the costs of the Commission on a party to party basis. In practice, this could be a very significant expense for parties involved in Tribunal proceedings – as the Commission has not shied away from extensive legal costs during the Trial process. The Tribunal noted such practices and only awarded costs for 2 of the 3 Counsel used by the Commission. The Tribunal also declined to award any sum in respect of costs of investigation in favour of the Commission.
The Tribunal noted that it was for the regulator to justify the heads of investigation costs claimed. In the case in hand, translation costs of HKD670,000 had not been properly claimed by the Commission.
Wider implications for businesses
The Tribunal’s judgment comes at a crucial time – just as the Commission introduced revisions to its leniency policy last month. The Commission has also been very active in its enforcement activities – in Q1 of 2020, the Commission has already brought two cartel cases to the Tribunal.
The Tribunal has sought to establish a clear and systematic penalty calculation framework, which will have far-reaching implications on competition enforcement landscape in Hong Kong to future cases.
Predictability matters. The Tribunal recognised that the language of the Competition Ordinance, which sets out factors to be considered when determining fines, is closer to the Australian competition legislation. Notwithstanding that, the Tribunal does not consider that it is the legislative intention that the Australian approach should be followed when calculating the pecuniary penalty. The Tribunal considers that a structured methodological approach, similar to the EU/UK’s approach, should be adopted in Hong Kong to better serve the object of deterrence. Undertakings are more likely to be deterred from engaging in cartel conduct where they are able to estimate the “price of contraventions” (i.e. the pecuniary penalty) through a transparent and systematic approach. This may also incentivise undertakings to cooperate / self-report as they can now weigh the cost / benefits of selfreporting / cooperation.
Fine reductions? As shown in the present case, there were very limited circumstances accepted as mitigating factors as sufficient justifications for a downward fine adjustment. For example, the Tribunal did not consider that the small size operation and low margins of the businesses involved were mitigating factors in that case. Further, inability to pay is only accepted as a justification to reduce fine in exceptional circumstances in the presence of clear and compelling evidence.
Loss or damage. In the Tribunal’s view, it is not necessary to embark upon a detailed quantitative analysis in every case, notwithstanding that it is a mandatory consideration under section 93(2)(b) of the Ordinance for the Tribunal to consider “loss or damage cause by the conduct”. This again adds to the certainties and efficiencies of the Commission’s enforcement, as it is not essential for the Commission to assess the quantum of harm, specifically in by-object cartel cases.
Prevailing uncertainties remain
Due to the specific circumstances of the present case, the judgment has left some doubts on the application of the steps, including:
Value of Sales: In the present case, the Value of Sales were the sales made by the respondents for the renovation work directly relevant to the contravention. Value of Sales is likely to be a highly contestable figure in future cases, given that it is a key starting point that has an impact on the level of the penalty. For example, in a one-off bid rigging case, should the Tribunal take into account the value of sales in relation to the specific tender (i.e. tender value), or should the Tribunal consider the sales made by contravening undertakings in relation to the products in the broader market? The Tribunal appears to have endorsed a narrower approach linked to the conduct in question.
Duration multiplier: As mentioned above, the Tribunal has not come to a conclusive view on whether a duration multiplier of 1 should be used in future cases if (i) the duration of a contravention is less than one year; or (ii) the contravention has been on-going for a number of years, but some of the periods are less than 1 year (e.g. 2 years 1 month).
Specific deterrence: It remains uncertain what impact aggravating and mitigating factors will have. The Commission had indicated in its proposal to the Tribunal that adjustments may be made on the basis of specific deterrence (i.e. to deter contravening undertakings to engage in further anti-competitive practices). However, it is unclear how this will apply in future cases – specifically, if the application of specific deterrence involves taking into account the financial position and size of an undertaking (including its parent company under single economic entity concept), global businesses may be “punished” due to their sizeable operations, regardless of the level of the Value of Sales. Such discrimination may raise more significant issues of concern.
A copy of the Tribunal’s judgment can be found here.
2. Competition Commission signs MoU with SFC
It was announced on 28 April 2020 that a Memorandum of Understanding was entered into between the Commission and the SFC with a view to strengthen cooperation and exchange information between the two regulators. The MoU, which came into effect on 16 April 2020, aim to allow stronger partnership and synergies between these two regulators when performing their respective statutory functions. The MoU is available here.
Other than an arrangement with the Communications Authority in December 2015, this is the first time the Competition Commission has entered into a MoU with another domestic regulator.
The Competition Commission and the SFC have distinct statutory functions. The MoU, however, does not come as a surprise, as both regulators have similar powers when conducting investigations under Competition Ordinance and Securities and Futures Ordinance (SFO) respectively (e.g. power to issue mandatory information requests or interviews, and power to conduct dawn raids).
Specifically, the Competition Commission is a relatively young agency compared to the SFC. SFC case law has been a useful precedent for the Competition Commission with regard to procedural issues. For example, in a Competition Tribunal hearing last September, the Tribunal suggested that the so-called Carecraft procedure, which is often adopted in proceedings involving the SFC, may be applied in the Competition Commission’s settlement proceedings.
Scope of the MoU
The MoU covers all regulated entities under the SFO. It also applies curiously to the entities related to Hong Kong Exchanges and Clearing Limited that are exempt from most parts of the Competition Ordinance.
The principal areas of cooperation are likely to be the following:
(a) Policy notification and consultation. The Competition Commission and the SFC have agreed that where any of their proposed policies and guidelines may have a significant impact on the securities and futures industry or competition issues, they will consult with each other in advance.
(b) Investigation cooperation – sharing information and views. The information will be shared as and when it is considered appropriate and necessary for the purposes of the Competition Commission / SFC carrying out their functions or objectives. This includes issues arising from specific investigations, proceedings and processes of the Competition Commission and SFC. For example:
decisions or block exemptions orders, infringement / warning notices by the Competition Commission; or
consultation papers or circulars by the SFC.
The Competition Commission will also give consent to the regulated entities subject to competition investigations to (i) inform the SFC of the exercises of the Competition Commission’s power; and (ii) provide details of the investigation to the SFC.
(c) Other technical collaborations. The Competition Commission and the SFC will exchange know-how by allowing their staff members to attend their respective training courses and may arrange temporary secondments to one another’s offices.
Provisos and Safeguards
Noting that both regulators are bound by their respective confidentiality obligations and statutory functions, the sharing of information between the regulators are not without limits. Various provisos and safeguards have been established under the MoU to govern the collaboration and information sharing mechanism.
Under the MoU, a regulator may decline to take particular action relating to notification, consultation and information sharing if it is not permitted by law. Notably, one of the grounds of lawful disclosure under section 126 of the Competition Ordinance is “disclosure with a view to the bringing of, or otherwise for the purposes of, any criminal proceedings or investigations carried out under the laws of Hong Kong, in Hong Kong.” Under the SFO, section 378 is the statutory ‘secrecy’ provision. Essentially, Section 378 requires all persons caught by the SFO regime, including regulated firms and the SFC, to preserve the secrecy of confidential information which arises under the SFO regime. However, the provision sets out forms of disclosure of information that do not attract secrecy, and includes wording similar to that in the Competition Ordinance which permits “the disclosure of information with a view to the institution of, or otherwise for the purposes of, any criminal proceedings, or any investigation carried out under the relevant provisions or otherwise, in Hong Kong.”
It therefore does not appear to be a high threshold preventing the sharing of information, provided that the Competition Commission or the SFC confirms that such disclosure is necessary for purposes of carrying out an investigation.
The safeguards however also provide some rooms for the regulators to apply their discretion when determining whether exchange of information is appropriate. For example, a regulator may decline to take any action if the performance of a regulator’s function or exercise of its powers could be prejudiced by the action, or it is not appropriate/ proportionate to take the particular action because of resource /operational considerations. In this regard, the Competition Commission has sought to provide comfort to leniency applicants by stating that it may refuse to share information with the SFC where such sharing undermines the efficacy of the leniency policy.
Implications for regulated entities
There are currently no public investigations by the Commission against any SFC regulated entities. However, competition cases in financial services and investment funds sectors are not uncommon in other jurisdictions.
With a clear information exchange and consultation mechanism in place, the MoU is likely to increase the efficiencies of enforcement activities of SFC and the Competition Commission where there are overlaps in information required by these two regulators when conducting their respective investigations. This is particularly relevant if the conduct of a regulated entity may result in potential contraventions under both the Competition Ordinance and the SFO, or where one of the regulators uncovers evidence of illegal conduct which falls within the purview of the other regulator.
With a clear information exchange and consultation mechanism in place, the MoU is likely to increase the efficiencies of enforcement activities of SFC and the Competition Commission, as there is likely to be an overlap between the information required by these two regulators when conducting their respective investigations. This is particularly relevant if the conduct of a regulated entity may result in potential contraventions under both the Competition Ordinance and the SFO, or where one of the regulators uncover evidence of illegal conduct which fall within the purview of the other regulator.
3. End of an Era – new Commission Chairperson Hon.
Anna Wu Hung-yuk stepped down from the Commission on 30 April. She had been the founding chairperson of the Commission since its establishment in 2013. She is widely acknowledged as being one of the key and essential drivers for the Competition Commission’s successful enforcement activities in its pioneer days.
Three other Commissioners, including the legislator Dennis Kwok, did not have their existing terms renewed by the Government.
Ms. Wu’s successor is Mr Samuel Chan Ka-yan, who has been a Commission member since May 2016. He has been chairing the agency’s Enforcement Committee since May 2019. As the Enforcement Committee is tasked with overseeing the Competition Commission’s enforcement activities, Chan has been familiar and close to all on-going investigations through his role as the Chair of Enforcement Committee. His appointment will therefore likely to ensure consistency of the Commission’s enforcement approach and priorities.
Chan is a practising barrister and has experience in various advisory and statutory bodies (including his prior experience as the Vice-Chairman of the Consumer Council, and his involvements in the Communications Authority, Insurance Authority, Town Planning Appeal Board and Equal Opportunities Commission).
With Chan chairing the Competition Commission, we anticipate continuity in the Competition Commission’s work relating to its policies and its enforcement trends.
For further information, please contact:
Marcus Pollard , Competition Counsel, Linklaters
marcus.pollard@linklaters.com
