1 December, 2015
THE FINAL COUNTDOWN TO THE HONG KONG COMPETITION ORDINANCE
LESS THAN ONE MONTH TO GO: PUBLICATION OF ENFORCEMENT POLICY AND LENIENCY POLICY
With less than one month to go until the Hong Kong Competition Ordinance (“Ordinance”) comes into full force on 14 December 2015, the Hong Kong Competition Commission (“HKCC”) has published on 19 November 2015 its Enforcement Policy and the final version of its Leniency Policy.
The Enforcement Policy sets out the principal factors that the HKCC will take into account when exercising its discretion whether to investigate an individual case, and how to resolve that case. While, as anticipated, no sector-specific guidance has been provided by the HKCC, the Enforcement Policy provides some useful insight for Hong Kong businesses into the HKCC’s planned enforcement approach.
In the Leniency Policy, the HKCC provides some helpful guidance on the procedures involved in reporting cartel conduct. It confirms the adoption of a “winner takes all” approach and in doing so leaves subsequent potential applicants with a difficult decision as to whether to cooperate with the HKCC or not. It should also be noted that the leniency policy is not a joint policy with the Communications Authority (“CA”): indeed the CA has elected not to adopt a leniency policy at this stage (either independently or jointly) and will instead address applications for leniency on a case-by-case basis. The CA recommends that telecommunications or broadcasting licensees intending to apply for leniency under the Ordinance should approach the CA, and not the HKCC.
A. ENFORCEMENT POLICY
1. HKCC prioritisation and exercise of discretion
In its Enforcement Policy, the HKCC confirms that, in addition to the specific facts of the case, three key issues will determine how it deals with a particular case:
- Its Compliance Focus, with priority accorded to particular types of conduct, including cartel conduct;
- Severity Factors, i.e. whether the conduct involves one or more particular characteristics such as deliberate conduct, or involvement of senior management; and
- Effective and Appropriate Remedies i.e. whether the remedy will achieve the HKCC’s Remedial Goals.
Compliance Focus
As anticipated, the Compliance Focus places significant emphasis on cartel conduct. This follows the approach of other jurisdictions, such as the European Union, which for many years has made the dismantling of hard core cartels an enforcement priority. Cartel conduct is also the focus of the HKCC’s Leniency Policy (see further, below). Other types of conduct specifically noted in the Enforcement Policy are: (i) other agreements contravening the First Conduct Rule causing significant harm to competition in Hong Kong; and (ii) abuses of substantial market power under the Second Conduct Rule which involve exclusionary behaviour by incumbents.
The Enforcement Policy does not refer specifically to the approach that the HKCC will adopt in respect of resale price maintenance (“RPM”), which was highlighted in the Guideline on the First Conduct Rule as a type of vertical agreement that can constitute Serious Anti-Competitive Conduct (see further our e-bulletin on RPM). However, the inclusion within the Compliance Focus of other First Conduct Rule contraventions that cause significant harm to competition in Hong Kong appears broad enough to capture RPM. Other possible types of conduct falling within this category may include information exchange and collective boycott.
It is also unsurprising that the HKCC has decided to include exclusionary conduct under the Second Conduct Rule in its Compliance Focus, in light of the fact that a number of sectors in Hong Kong appear to be characterised by a high degree of market concentration (see further our e-bulletin on abuse of substantial market power).
Severity Factors
When determining what enforcement action to take once it considers that a contravention of the Ordinance has occurred, the HKCC will take into account its Compliance Focus and whether the conduct involves one or more so-called “Severity Factors”. Such factors include:
- Where the conduct demonstrates a blatant disregard for the law;
- The deliberate nature of the conduct, including deliberate steps to avoid detection;
- The conduct was engaged in by or under the direction of the senior management of an undertaking; or
- Ignoring previous advice by the HKCC in relation to concerns about the conduct, or recidivist tendencies (e.g. the previous issuance of a warning notice or infringement notice, a previous commitment under the Ordinance regarding similar conduct, or a previous finding by the Tribunal regarding contravention of the Ordinance).
Effective and Appropriate Remedies
The HKCC has also outlined a number of Remedial Goals, which will inform the enforcement response adopted by the HKCC to resolve a matter it considers may contravene the Ordinance.
The HKCC will favour remedies that will:
- Stop the unlawful conduct promptly;
- Undo the harm caused by the contravening conduct (e.g. by affording damages to injured parties);
- Have a sufficient deterrent effect from an economic perspective (both as regards the infringing party and other market participants); and
- Be consistent with previous remedies in matters involving similar conduct, reflective of the culpability of the respective parties (bearing in mind their cooperation with the HKCC) and, where no precedents exist, set an appropriate standard for future similar cases.
Once proceedings reach the Tribunal, the Tribunal will have sole discretion to determine the appropriateness of a particular order in light of the specific circumstances of a case.
2. Other guidance
Cooperation and Settlement
The HKCC has confirmed that it will take into account cooperation with its investigations when determining its enforcement response.
Approaches may be made to the HKCC to settle a matter, including on a “without prejudice” basis. Offers of settlement will be subject to the HKCC’s general enforcement discretion, but may take various forms including:
- Agreement by the HKCC not to take action against individuals who wish to provide assistance to the HKCC in their personal capacity in return for their cooperation;
- Commitments by the infringing party not to engage in anti-competitive conduct in future and/or to offer appropriate redress to those affected by the conduct; or
- Agreeing to the resolution of Tribunal proceedings on a consent basis, through a statement of agreed facts and by seeking specific orders.
Where the HKCC decides to apply for a penalty or other order before the Tribunal, settlement may involve the HKCC agreeing to make submissions before the Tribunal for the imposition of a reduced penalty. Where cooperation relates to cartel conduct, the HKCC will exercise its discretion bearing in mind its Leniency Policy (see further, below).
Compliance Efforts
The HKCC has also confirmed that it will take into consideration compliance efforts of persons under investigation, where it can be shown that a genuine effort to comply with the Ordinance has been made. Whilst it remains to be seen what practical impact such efforts will have in an individual case, this is a welcome statement by the HKCC. Interestingly, under its Leniency Policy, the HKCC has also made entering into a leniency agreement conditional upon an undertaking agreeing to adopt an effective corporate compliance programme to the satisfaction of the HKCC.
3. What is not contained in the Enforcement Policy
As anticipated, the Enforcement Policy does not focus on any specific sectors of the Hong Kong economy, as the HKCC is keen to encourage compliance throughout the economy during its initial years of operation. This approach is consistent with the HKCC’s decision to publish the Enforcement Policy less than a month before full implementation of the Ordinance, reinforcing its expectation that businesses should have considered their competition compliance policy on a holistic basis, rather than focusing on individual priorities set out by the HKCC.
B. LENIENCY POLICY
1. The HKCC’s approach
The fundamental position set out in the HKCC’s draft Leniency Policy is unchanged in the final version, which is perhaps unsurprising given the short timeframe between the closing of the public consultation period and the publication of this final Leniency Policy (the consultation closed on 23 October 2015). The key elements of the policy are:
- Hong Kong has adopted a “winner takes all” approach, whereby only the first applicant to report the cartel (and fulfil its other obligations) can benefit from leniency; and
- The Leniency Policy only applies to cartel conduct that contravenes the First Conduct Rule.
Under a leniency agreement, and in exchange for the successful applicant’s cooperation, the HKCC will undertake not to commence proceedings for a pecuniary penalty against the successful applicant in the Tribunal, or to bring any other proceedings before the Tribunal, save for an order under section 94 of the Ordinance declaring that the successful applicant has contravened the First Conduct Rule. Leniency will be extended to current officers and employees of the successful applicant and specifically-named former officers or employees and current and former agents of the successful applicant who cooperate with the HKCC. This does not preclude the possibility of a follow-on action against the successful applicant by persons who have suffered loss or damage as a result of the cartel.
While the Leniency Policy contains guidance on numerous aspects of the leniency process, some uncertainty remains, particularly in relation to the treatment of subsequent applicants (discussed in more detail below). Businesses should also note the consequences of providing information to the HKCC but failing to secure a leniency agreement: the HKCC has stated that, under such circumstances, it will return information to the undertaking and not use it as evidence in proceedings for a finding of contravention of the First Conduct Rule against the applicant or any other person, while at the same time reserving its ability to request the same information using its formal powers of investigation.
2. Implications of the HKCC’s approach
Winner Takes All
The Hong Kong regime is such that only the first undertaking to report a cartel can benefit from leniency under the Leniency Policy. While the HKCC has tried to encourage reporting from subsequent applicants by promising to exercise its “enforcement discretion” in dealing with cooperating undertakings which do not qualify for leniency, potential applicants will face a very difficult decision due to the lack of certainty as to what this means in practice.
In terms of procedure, the Leniency Policy provides that an undertaking may enquire about the availability of a “marker” on an anonymous basis. However, in order to be granted a marker, the identity of the applicant must be disclosed. This system is used in many jurisdictions (for example, the UK) and, where a marker is granted, preserves the position of an undertaking in any queue that may form in terms of reporting the existence of the cartel to the HKCC.
If a marker is granted, and if on the basis of the information provided in that marker application the HKCC determines that cartel conduct exists and that leniency is available, it will notify the undertaking with the earliest marker that it may make an application for leniency. Such an application will involve entering into a non-disclosure agreement with the HKCC, and providing a “proffer”. The Leniency Policy sets out that such a proffer may be made orally or in writing, in hypothetical terms and on a “without prejudice basis” within a specified timeframe.
Based on the information provided by the undertaking, the HKCC will determine whether to make an offer to enter into a formal leniency agreement, a template for which has been published by the HKCC with the Leniency Policy.
Subsequent Applicants
Unlike some other jurisdictions which provide clear benefits for subsequent applicants for leniency (for example, the EU provides that the second, third and subsequent applicants may benefit from a reduction in fine of between 35-50%, 20-30%, and up to 20% respectively), the position is less clear for such undertakings in Hong Kong. A subsequent potential applicant for leniency in Hong Kong may (assuming it is made aware that a prior marker has already been granted) face a choice of keeping its identity confidential, thereby leaving open the option of defending any potential investigation, or disclosing its identity in order to obtain a marker and hoping that either: (i) the undertakings ahead of it will fail to fulfil the necessary requirements; or (ii) that the HKCC will exercise its “enforcement discretion” adequately.
The lack of certainty in the treatment of subsequent leniency applicants means that the decision to cooperate will involve very high stakes. Indeed, given that the Competition Tribunal is the decision maker in terms of finding that infringements of the Ordinance have occurred and imposing penalties for such infringements, the HKCC can only make recommendations that the Tribunal impose certain orders or grant a reduction in penalties. It may take some time, therefore, for sufficient confidence to be engendered among the business and legal community regarding the HKCC’s enforcement discretion – for example, it remains to be seen how closely the Competition Tribunal will follow the recommendations of the HKCC.
Application to Cartel Conduct Only
As set out above, the HKCC’s Leniency Policy applies only to “cartel conduct”, which includes agreements and concerted practices between competing undertakings that have as their object the prevention, restriction or distortion of competition in Hong Kong. Specifically, the policy applies to agreements and concerted practices that involve price-fixing, market sharing, output restrictions or bid rigging. While the HKCC states that the Leniency Policy does not preclude the HKCC from entering into a leniency agreement in respect of other conduct, it is unclear how the HKCC would in practice deal with undertakings who report such conduct.
The Leniency Policy does not appear to cover conduct that infringes the First Conduct Rule by effect, but the policy does state that where undertakings engage in anti-competitive practices that may contravene the First Conduct Rule and these practices are used to give effect to the cartel conduct, then these other practices may benefit from the Leniency Policy.
C. IMPLICATIONS FOR BUSINESS
The Enforcement Policy and Leniency Policy are amongst the final anticipated publications from the HKCC ahead of full implementation of the Ordinance.
As such, they represent a further reminder for Hong Kong businesses to make any remaining necessary preparations ahead of 14 December 2015.
For further information, please contact:
Mark Jephcott, Partner, Herbert Smith Freehills
mark.jephcott@hsf.com
