This article is part of the June 2019 edition of our competition newsletter, focusing on some recent key competition developments.
On 17 May 2019, the Hong Kong Competition Tribunal (“Tribunal”) handed down two landmark decisions relating to cartel conduct.1 These two decisions are the first two successful enforcement actions by the Hong Kong Competition Commission (“Commission”) before the Tribunal.
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Legislative framework
The First Conduct Rule of the Competition Ordinance (“Ordinance”) (which came into full effect in 2015) prohibits anticompetitive agreements between two or more undertakings. Under the Ordinance, an undertaking must not make or give effect to an agreement or engage in a concerted practice if its object or effect is to prevent, restrict or distort competition in Hong Kong. Conduct in breach of the First Conduct Rule can be deemed “serious anticompetitive conduct” if it involves price fixing, market sharing, limiting supply and bid-rigging (or any combination of these activities). This, along with any breach of the First Conduct Rule must be established by the Commission before the Tribunal.
If conduct is deemed as serious anticompetitive conduct, the Commission is not required to afford undertakings with the opportunity to cease or alter the conduct in question within a specified warning period. In addition, the general exclusion for agreements of “lesser significance” does not apply to agreements pertaining to serious anticompetitive conduct. That is, these agreements do not get the benefit of the de minimis rule that agreements between undertakings with the combined global turnover of less than HKD 200 million (c.USD 25.5 million) are excluded from the application of the First Conduct Rule.
The first decision – the “IT companies case”
Facts
In June 2016, BT Hong Kong Limited (“BT”) submitted a bid to the Hong Kong Young Women’s Christian Association (“YWCA”) in response to its invitation to tender for the supply and installation of a Nutanix cloud-based server system (the “IT system”). The tender failed as BT was the only company who submitted a bid and YWCA’s procurement policy required a minimum of five bids.
The YWCA therefore decided to release a second invitation to tender for the IT System. To assist BT’s bid, Thomas Hung (“Hung”) (Territory Account Manager, Nutanix) and Denis Chan (“Chan”) (Technical Pre-Sales Manager, BT) agreed that Nutanix would obtain four “dummy” or “non-genuine” bids from specified Nutanix’s channel partners (i.e., namely, Innovix Distribution Limited (“Innovix”), Tech-21 Systems Limited (“Tech- 21”), iCON Business Systems Ltd (“iCON”) and SiS International Limited (“SIS”)).
Chan gave BT’s completed bid (including bid prices) to Hung. Hung prepared bids for each of SiS, Innovix, Tech-21 and iCON with substantially higher bid prices than BT’s and separately agreed with each of SiS, Innovix, Tech-21 and iCON to sign the bids which he arranged to be submitted to the YWCA. Pursuant to these agreements, SiS, Innovix and Tech-21 (but not iCON) each submitted a dummy bid to YWCA, in addition to the bid submitted by BT.
The Tribunal held that the arrangements between each of Nutanix and BT; Nutanix and Tech-21; and Nutanix, BT and Innovix constituted a breach of the First Conduct Rule. These businesses made or gave effect to agreements or engaged in concerted practices with the object of preventing, restricting or distorting competition. The Tribunal held that the agreements constituted “bid-rigging” and therefore were serious anticompetitive conduct.
Interestingly, the arrangement between Nutanix and iCON was not discussed further as iCON did not submit a bid in the end to the YWCA. In addition, the arrangement between Nutanix and SiS did not constitute an agreement due to the “attribution of conduct and knowledge” issue described in further detail below.
Insights
The key points considered by the Tribunal that should be noted include:
- Standard of proof: Having regard to the Court of Final Appeal’s judgment in Koon Wing Yee v Insider Dealing Tribunal [2008] 11 HKCFAR 170, as well as to the doctrine of presumption of innocence in Hong Kong’s Bill of Rights, the Tribunal was of the view that the relevant standard of proof when assessing alleged breaches of the First Conduct Rule was the criminal standard, which requires proof “beyond reasonable doubt”. In doing so, the Tribunal rejected the Commission’s arguments that the civil standard of proof, or proof on the “balance of probabilities”, should apply. The Commission reasoned that because of the potentially complex and technical nature of competition proceedings, it was inappropriate to apply the criminal standard. Should the criminal standard of proof be applied uniformly to all future breaches of the Ordinance, this will have far-reaching consequences for the Commission. It will have to prove the anticompetitive foreclosure effects of conduct and/or the presence of a substantial degree of market power beyond reasonable doubt. We expect the Commission to look for opportunities to revisit this issue in future cases, including in respect of any appeals arising from this case or other cases.
- Evidence: The evidence that ultimately resulted in the Tribunal being satisfied, beyond reasonable doubt, that the IT companies had entered into agreements or arrangements in contravention of the First Conduct Rule, included physical documents, emails and WhatsApp messages from the work and personal phones and computers of employees. The Commission also conducted raids in the offices of the relevant undertakings. This reinforces the message that companies should be prepared for investigations and that personal phones and computers are not immune from being seized.
- Privilege against self-incrimination: Despite the fact that Hung of Nutanix was the chief architect and implementer of the bid-rigging arrangements, surprisingly, the Commission did not submit any statements by Hung as evidence, nor did it decide to call Hung to testify during the trial. The Commission rejected written statements from Hung on the basis that these were factually inaccurate (as against the statements made during interviews) and was not prepared to grant him immunity. In addition, the Commission did not decide to call Hung to testify during trial, potentially because Hung threatened to invoke a claim for privilege against selfincrimination if he was called as a witness at trial. This suggests that the Commission is willing to take a robust approach and rely on contemporaneous documents instead of “live” witnesses who will not co-operate. This does not mean that the Commission would be adverse towards
taking action against individuals in later cases. Provisions in the Ordinance make it possible for the Commission to seek fines and other orders (including director disqualification orders) against individuals. In fact, the Commission has already commenced proceedings against two individuals in a third cartel case, lodged in September 2018. The Commission is seeking pecuniary penalties against both individuals and director disqualifications against one of
the individuals. This case is discussed in more detail below. - Attribution of conduct and knowledge: The Tribunal attributed the conduct of the relevant employees involved in the YWCA tender to each of Nutanix, BT, Innovix and Tech-21. However, it did not attribute the conduct of the relevantSiS employee, Keith Shek (“Shek”) (Product Manager, SiS) to SiS. As a result, the Tribunal held that SiS was not liable for a breach of the First Conduct Rule because there was no agreement between Nutanix and SiS. This was including because Shek’s duties did not include the submission of tender documents, Shek did not have the authority to bind SiS in relation to any commercial commitments and Shek did not inform SiS of the tender (and the Commission did not establish that Shek’s supervisors were aware of his actions). Furthermore, SiS did not supply IT products to end-users as a matter of course. Rather, SiS tended to sell products to re-sellers instead. In circumstances where employees have “gone rogue”, it is useful to have precedent such as the one described above to allow employers to divorce their conduct from the conduct of an employee acting outside the scope of their authority.
The second decision – the “renovation contractors case”
Facts
Ten renovation contractors were licensed to provide decorative works for tenants at On Tat Estate (a subsidized housing estate developed by the Hong Kong Housing Authority (“HKHA”)). Instead of competing with each other for the provision of decorative works to tenants on the estate, between June to November 2016, the contractors undertook:
The Tribunal held that each of the market sharing agreement and the price fixing arrangement had the object of preventing, restricting or distorting competition in Hong Kong in breach of the First Conduct Rule and were serious anticompetitive conduct.
Insights
The key points considered by the Tribunal that should be noted include:
- a market sharing agreement: where each of them were allocated four floors in each of three blocks of flats at the estate. The contractors agreed to:
- refrain from actively seeking business and accept business from tenants on floors allocated to the other nine contractors; and
- direct tenants on the floors allocated to the other nine contractors to their allocated contractors; and
- a price fixing arrangement: where they jointly produced and distributed a promotional flyer to tenants which set out, inter alia, prices for:< >ten types of commonly requested decorative works (for instance, “repaint living room and bedroom walls with Japanese 5-in-1 paint” and “install new kitchen cabinet using premium fireproof fibreboard”); andservice packages and prices for the four types of flats available at the estate (ie, “1 to 2 person flat”, “2 to 3 person flat”, “1 bedroom flat” and “2 bedroom flat”). Standard of proof: Like in the IT companies case, the standard of proof applied by the Tribunal to establish a breach of the First Conduct Rule was the criminal standard.
- Evidence: The evidence that ultimately resulted in the Tribunal being satisfied, beyond reasonable doubt, that the renovation contractors had entered into agreements or arrangements in contravention of the First Conduct Rule, included both direct and circumstantial evidence:
- witness evidence from tenants that each contractor worked exclusively, or almost exclusively, on four floors;
- documentary evidence in the form of work orders in which the contractors applied the agreed package prices. This indicated that the flyer was relied on and used to conclude orders with tenants; and
- evidence from some of the contractors that they agreed to allocate floors and to produce the joint flyer.
- Efficiency defence rejected: Arguments relating to how the impugned arrangements were economically efficient (the “efficiency defence”) were put forward by several contractors but these were rejected by the Tribunal. Those contractors claimed that significant efficiencies arose from, inter alia, being able to perform work on multiple number of flats on the same floor on account of the time saved from not having to wait for the lifts to move tools, equipment, supplies or raw materials from floor to floor. The Tribunal held that this argument was not credible for a number of reasons, including because:
- the difficulties caused by having to travel between floors were “rife with exaggeration”. For instance, contractors argued that the normal waiting time for a lift for a work crew to go from one floor to another could “easily” be upwards of 20 minutes and could even be 2 hours during peak times; and
- supporting statements from contractors did not come across as credible (some statements appeared to have been “put into the [contractors’] mouth” by the economic expert).
- Efficiency defence burden and standard of proof: The Tribunal held that the burden lay on the contractors to show, on the civil standard of proof (ie, balance of probabilities), that the efficiency defence was made out. It was held that they had failed to do so.
- Efficiency defence conditions: The efficiency defence does not only require that the respondents show that the conduct resulted in “overall” efficiencies (e.g., cost savings). It requires that the following four cumulative conditions are fulfilled:
- the agreement generates efficiencies;
- it allows consumers a fair share of the resulting benefit;
- it does not impose restrictions that are not indispensable to the attainment of the efficiencies relied upon; and
- it does not afford the undertakings concerned the possibility of eliminating competition.
- Sub-contractor defence rejected: Two contractors contended that they were not liable for any contravention of the First Conduct Rule on the ground that it was their sub-contractors, not them that were liable. This defence was rejected on several grounds, including:< >it was the contractors who contracted with the HKHA. The HKHA is the government body in charge of issuing licences to contractors to provide decorative works to the estate. The contractors were therefore liable under the licence for a number of obligations including to indemnify the HKHA for any loss or damage and to maintain a surety bond and insurance cover; and it was the contractors who contracted with the tenants. The work orders and receipts for payments were issued to the tenants in the names of the contractors. If a tenant defaulted in payment, a claim could only be made against it by the contractors. If a tenant made a contractual claim in relation to the decoration works (e.g., for defective workmanship), it would have to be made against the contractors. reputational damage and adverse publicity;
- legal costs and management time throughout the investigation and proceedings. For instance, from the commencement of initial investigations till the release of the Tribunal judgments, the IT companies case has been running for approximately 3 years and the renovation contractors case approximately 2 years; and
- follow-on rights of actions from persons who have suffered loss or damage as a result of the contravention of the First Conduct Rule (although it is unclear if the YWCA and/or the On Tat Estate tenants are likely to initiate follow on proceedings).
In addition, any appeals in respect of the Tribunal decisions must be lodged by 14 June 2019 (which is 28 days after the judgments were handed down).
Finally, these judgments will be immediately relevant to the third cartel proceeding that was commenced by the Commission in September 2018. In that case, the Commission alleged that three construction and engineering companies and two individuals engaged in conduct amounting to customer allocation and price fixing in relation to the provision of renovation services at King Tai Court, San Po Kong (Kowloon) – also a subsidised housing estate developed by the HKHA. Of note is the fact that the Commission is not only seeking pecuniary penalties from the companies involved but also from two individuals involved. A director disqualification order was also sought against one of the individuals.
With thanks to Adelle Elhosni, Ben Hartsuyker and Lucas Spezzacatena of Ashurst for their contribution.
1. Competition Commission v Nutanix & Ors [2019] HKCT 2 (CTEA 1/2017) and Competition Commission v W. Hing Constructions & Ors [2019] HKCT 3 (CTEA 2/2017).
For further information, please contact:
James Comber, Partner, Ashurst
james.comber@ashurst.com
