27 February, 2020
2019 saw a number of significant developments in competition law in Hong Kong. The year started off with the Hong Kong Competition Commission’s (HKCC) announcement of its investigation of the Seaport Alliance, a joint venture among four of the largest container terminal operators in Hong Kong. In May, the Competition Tribunal made history in handing down its ruling on the first-ever two landmark cases under the nascent Competition Ordinance.
Two months after the HKCC won its first two cases, the HKCC took its fourth legal action in July. In October, the HKCC rendered a decision regarding an application submitted by the Hong Kong Association of Pharmaceutical Industry seeking for exclusion from the First Conduct Rule in connection with a proposed sales survey.
In this Review, we provide highlights of the significant developments in competition law in 2019 and an outlook for 2020.
HKCC launched formal investigation of Hong Kong Seaport Alliance
The HKCC announced on 10 January 2019 that it had opened a formal investigation into the Hong Kong Seaport Alliance (Seaport Alliance) to ascertain whether their joint operating agreement has the object or effect of preventing, restricting or distorting competition in Hong Kong in violation of the Hong Kong competition law.
The Seaport Alliance was formed by Hong Kong International Terminals Limited, Modern Terminals Limited, COSCO-HIT Terminals (Hong Kong) Limited and Asia Container Terminals Limited, which together account for around 95 per cent of seaport operations in Hong Kong. The four container terminal operators have entered into a joint operating agreement to operate and manage their 23 berths across eight terminals at Kwai Tsing Container Terminals in the New Territories. (Please refer to our 18 January 2019 Client Alert for more details.)
A spokeswoman of the HKCC confirmed to the press in December 2019 that the investigation was still continuing.
HKCC published Cooperation and Settlement Policy
The HKCC published a Cooperation and Settlement Policy for Undertakings Engaged in Cartel Conduct (Cooperation Policy) in April 2019. Undertakings engaged in cartels which do not benefit from the HKCC’s Cartel Leniency Policy may choose to cooperate with the HKCC in its investigations in exchange for a cooperation discount of up to 50 per cent off the pecuniary penalty which would otherwise be recommended to the Competition Tribunal. The HKCC may agree not to bring proceedings against individuals involved if they fully cooperate with the HKCC.
The Cooperation Policy also provides for a Leniency Plus programme under which companies that are prepared to extend cooperation with the HKCC in a cartel investigation by disclosing the existence of another cartel may, in addition to immunity that may be granted to it for the second cartel, apply for an additional discount of up to 10 per cent off the recommended pecuniary penalty in connection with the first cartel.
The purpose of the Cooperation Policy is to provide incentives for companies to extend its cooperation with the HKCC in order to obviate the necessity of a trial.
First two Judgments in the history of Hong Kong Competition Law enforcement
On 17 May 2019, the Competition Tribunal (Tribunal) handed down judgments for its first two competition cases. Four of the five respondents in the first case – Competition Commission v Nutanix Hong Kong Ltd and Others (YWCA Case), and all ten respondents in the second case – Competition Commission v W. Hing Construction Co. Ltd. And Others (Renovation Contractor Case) were found to have violated the First Conduct Rule under the Competition Ordinance (Ordinance).
On 23 March 2017, the HKCC commenced its first-ever legal proceedings in the Tribunal against five IT firms. The HKCC alleged that the five firms had participated in a bid-rigging scheme in connection with a tender conducted by the Young Women’s Christian Association in July 2016 for the supply and installation of an IT server system in violation of the First Conduct Rule under the Ordinance.
The Tribunal found that four of the five IT firms had infringed the First Conduct Rule, while the complaint against one of the IT firms was dismissed since the junior employee who submitted the bid was not acting in the course of his employment, and did not have the authority to act on behalf of the company. The junior employee’s acts were accordingly not attributable to his employer.
Renovation Contractor Case
On 14 August 2017, the HKCC commenced its second legal action in the Tribunal against ten residential renovation contractors, alleging that the contractors had violated the First Conduct Rule by participating in a floor allocation and package price fixing scheme by which each of them was allocated designated floors to carry out decoration work for individual tenants at a newly constructed public housing estate in Kwun Tong. The package prices for certain renovation work items were printed on a joint promotional flyer distributed to the tenants.
The Tribunal agreed with the HKCC that the floor allocation and the package price arrangements amounted to “serious anti-competitive conduct” in the form of market sharing and price-fixing, and therefore contravened the First Conduct Rule. (Please refer to our Client Alert dated 20 May 2019 for more details.)
Three of the four IT firms in the YWCA Case found to be in violation of the First Conduct Rule, and one of the ten contractors in the Renovation Contractor Case has lodged an appeal against the Tribunal’s ruling. A pecuniary penalty hearing with respect to the Renovation Contractor Case was held in mid-January 2020 to determine the pecuniary penalties to be imposed. Judgment was reserved by the Tribunal which may be handed down in mid-2020.
HKCC commences third legal action against residential renovation contractors
On 3 July 2019, the HKCC commenced legal proceedings in the Tribunal against six residential renovation contractors and three individuals for violation of the First Conduct Rule of the Ordinance. It was alleged that the six contractors had participated in a conspiracy by which they allocated customers and coordinated pricing in connection with the provision of decoration services to tenants at a newly constructed public housing estate in Kwun Tong.
The First Conduct Rule prohibits undertakings from entering into any agreement or engaging in any concerted action that has the object or effect of harming competition in Hong Kong.
This case is the HKCC’s fourth legal action since the Ordinance came into full effect in December 2015. It is also the HKCC’s third legal action against residential renovation contractors who provide decoration services to tenants at newly constructed public housing estates. All three actions involve residential renovation contractors who have engaged in alleged cartel conduct by entering into agreements to allocate customers among themselves in the provision of decoration services to tenants, and to fix prices for the services.
This latest legal action against residential renovation contractors is also the HKCC’s second legal action in which individuals are named as respondents. Two of the individual respondents were direct participants in the alleged customer allocation and price fixing agreements, and the remaining individual was a director of one of the renovation contractor respondents.
Agreements among competitors to allocate customers or fix prices are considered “serious anti-competitive conduct” under the Ordinance. The HKCC may commence legal proceedings against a company or individual without the need to first issue a Warning Notice if it suspects the company or individual has engaged in a serious anti-competitive conduct, which is what happened in the present case, as well as the previous two legal actions against residential renovation contractors. This latest action sends a clear message to businesses in Hong Kong that the HKCC is committed to exercising its power to enforce the competition law, and will not hesitate to take actions against companies or individuals that contravene the law.
HKCC publishes Decision on proposed Pharmaceutical Sales Survey
On 22 October 2019, the HKCC published a decision (Decision) with respect to a proposed pharmaceutical sales survey (Proposed Sales Survey), finding that the Proposed Sales Survey is not excluded from the First Conduct Rule on economic efficiency grounds. The Decision was rendered in response to an application submitted by the Hong Kong Association of the Pharmaceutical Industry (HKAPI) to the HKCC in January 2019. The HKAPI is an industry association of pharmaceutical companies whose members, according to its website, account for over 70 per cent of the prescription drugs sold in Hong Kong.
The HKCC concluded that the Proposed Sales Survey is not an exclusion from the First Conduct Rule on the grounds of economic efficiency, as the HKAPI has not provided sufficient evidence to meet the conditions for the efficiency exclusion. Moreover, the HKCC expressed concerns that certain data contained in the survey may facilitate the exchange of competitively sensitive information among competing pharmaceutical suppliers.
While the HKCC identified possible competition concerns in its Statement of Reasons, the HKCC did not form a view on whether the Proposed Sales Survey would contravene the
First Conduct Rule, as such a determination was beyond the scope of the decision required.
HKAPI’s application for decision
The HKAPI proposed to conduct a survey to collect data from its members, on a voluntary basis, on their respective actual sales of prescription and over-the-counter pharmaceutical products (in dollars), separately to each of the “key” sectors in Hong Kong – i.e., Government (hospitals and clinics operated by the Hospital Authority or the Department of Health); Private (private hospitals, clinics and doctors); and Trade (pharmacies, drug stores and retailers). The HKAPI would then collate, process and compile the raw sales data into a sales survey report, which it plans to publish quarterly and make available to the public for purchase.
Notably, in its application for a decision, the HKAPI emphasises that the sales survey report would not contain any information on prices, sales volume, stock keeping units or patient numbers. Moreover, the HKAPI also indicated that it used to conduct similar quarterly sales surveys since as early as 2011 until the Ordinance came into full effect in December 2015, after which the survey has been suspended.
The HKAPI applied for a decision from the HKCC to confirm that the operation of the Proposed Sales Survey would be excluded from the First Conduct Rule on the grounds of economic efficiency under Schedule 1 of the Ordinance (Agreements enhancing overall economic efficiency).
In applying for a decision for exclusion from the First Conduct Rule on the grounds of enhancing overall economic efficiency, the HKAPI bears the burden of proving that the four cumulative conditions of the exclusion set out in the Ordinance are met, that is, the Proposed Sales Survey (
i) contributes to “improving production or distribution” or “promoting technical or economic progress”;
(ii) allows “consumers a fair share of the benefits”;
(iii) is not indispensable in attaining the claimed efficiencies; and (iv) does not eliminate competition regarding a substantial part of the market.
The HKCC concluded that the HKAPI has not provided sufficiently convincing evidence to support its claims of economic efficiency from the Proposed Sales Survey, and thus failed to satisfy the first condition of efficiency exclusion.
The HKCC also found that the HKAPI has not demonstrated that the inclusion of product sales data in the Proposed Sales Survey would be “indispensable” to achieving the claimed efficiencies, and hence failed to meet the third efficiency exclusion condition. As such, the HKCC concluded that the HKAPI has not shown that the Proposed Sales Survey met the conditions of the efficiency exclusion, and hence the Proposed Sales Survey is not excluded from the First Conduct Rule.
In addition, the HKCC found that certain data to be included in the Sales Survey Report could be commercially sensitive. In particular, the HKCC expressed concerns that the sales information on specific drug products contained in the sales survey report may allow product-specific data (such as unit prices) to be directly or indirectly discerned or robustly estimated by rival pharmaceutical suppliers. The direct or indirect exchange of competitively sensitive information may decrease rival pharmaceutical suppliers’ incentives to compete vigorously, and/or facilitate explicit or tacit coordination among competing suppliers, which may harm competition.
Nevertheless, the HKCC notes that whether the exchange of information would give rise to anti-competitive concerns depends on the characteristics of the relevant market, the nature of the information exchanged, the circumstances of the case, as well as other relevant factors. In general, the HKCC will consider the sharing of competitively sensitive information, such as information relating a company’s future prices or pricing strategies, or sales to particular customers or sectors, as highly problematic. In contrast, it is less likely that the exchange of information which is historical, aggregated, or publicly available will harm competition.
Outlook for 2020
Since the Ordinance came into full effect in December 2015, the HKCC has received several hundreds of complaints and enquiries each year, among which dozens were escalated for further assessment or investigation. The assessment and investigation cases involve a wide range of industry sectors, including, for example, real estate and property management, transportation and logistics, information technology, machinery and equipment, beauty and personal care products, construction and infrastructure, automotive, among others. Although most of these cases involve alleged cartel conduct (i.e., price fixing, customer allocation and bid rigging), the HKCC also indicates its commitment in pursuing abuse of market power by dominant firms in their respective markets.
With two simultaneous favourable rulings from the Tribunal in May last year, we expect the HKCC will intensify its investigation and enforcement efforts in 2020. We also anticipate that the HKCC will bring more legal actions against both companies as well as individuals who have engaged in anti-competitive conduct. Companies in all sectors of the economy, regardless of their sizes, should be prudent about how they conduct their businesses, and to ensure that they comply with competition law at all times.
For further information, please contact:
Machiuanna Chu, Partner, Deacons