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27 December, 2017
Background
Two years have passed since the Hong Kong Competition Ordinance (Ordinance) came into full effect on 14 December 2015. Since then, the Competition Commission (Commission) has worked hard to build on its initial momentum – it has exercised its investigatory powers, including by way of dawn raids, and it has now brought two cases before the Competition Tribunal (Tribunal). The Commission has also conducted two market studies and seen some significant changes in terms of the personnel in its senior executive team (including a new CEO). In this e-bulletin, we will provide a broad overview of the developments we have seen in the past 24 months.
The first 24 months
When the Ordinance first came into force in 2015, the Commission focused a lot of effort in its advocacy and public education work. This included extensive engagement with, and education of, businesses, trade and professional associations, business chambers, and the general public. Among other things, in its first year, the Commission conducted numerous seminars targeting small and medium enterprises, trade associations and the public, and published various guides and brochures to assist different entities to review their practices and develop a compliance strategy. This was later accompanied by road shows and publicity on local television and public transport – who could forget the giant bid-rigging cat? As a result, various trade associations in particular made amendments to their codes and policies in order to comply with the Ordinance. In August 2017, in response to an application made by the Hong Kong Liner Shipping Association, the Commission issued a block exemption order for vessel sharing agreements between liner shipping companies. We have previously published an e-bulletin which discusses the application of competition law in the liner shipping sector in China and Hong Kong.
In 2016-2017, the Commission has put greater emphasis on enforcement, and has publicly stated that its enforcement actions must now be consistent and commensurate with the obligations of a law enforcer. As testament to these statements, the Commission has brought two cases to the Tribunal in 2017, and a third case is expected to be brought to the Tribunal in due course.
The Commission has also conducted market studies into: (1) the prevalence of bid manipulation practices in the residential building renovation and maintenance sector, prior to the Ordinance coming into force (the resulting report was published in May 2016); and (2) a market study on whether there was evidence of collusive behavior in the auto-fuel market after the Ordinance came into force (the resulting report was published in May 2017). In the former study, the Commission concluded that anti-competitive practices were prevalent in the market, and that certain cases would have likely been investigated further if they had occurred after the Ordinance was in force. In the latter study, the Commission did not discover direct evidence of collusive conduct, but noted that certain structural factors in the sector may have hindered competition.
Cases brought before the Competition Tribunal
The two cases the Commission brought before the Tribunal in 2017 were:
1. March 2017 – Competition Commission v Nutanix Hong Kong Ltd and Ors: this involves five information technology companies, each of which are alleged to have engaged in bid-rigging over a tender issued by the Hong Kong Young Women’s Christian Association.
We have previously published an e-bulletin setting out the facts of this case.
2. August 2017 – Competition Commission v W Hing Construction Company Limited and Ors: this involves 10 construction and engineering companies, each of which are alleged to have engaged in various forms of collusive conduct.
The companies, all appointed by the Hong Kong Housing Authority as licensed decorators for tenants of the same public rental housing estate, are alleged to have engaged in: (1) arrangements relating to market sharing; and (2) price fixing. As regards market sharing, the Commission has alleged that the parties allocated specific floors within the housing estate among themselves and agreed not to actively seek business from tenants on floors allocated to other parties. In relation to price-fixing, the Commission has alleged that the parties agreed upon and followed a package price arrangement advertised to all tenants of the Estate.
In both cases, the alleged infringements can be classified as “Serious Anti-Competitive Conduct” in breach of the First Conduct Rule. Whilst the substantive hearings for both cases are scheduled to take place in 2018, the Tribunal has already held a number of interlocutory hearings.
In particular, in the context of the Nutanix case, the Tribunal has made a procedurally significant decision relating to the potential application of privilege against self-incrimination available to companies. Here, the employees of two companies had been compelled to provide potentially incriminating information to the Commission:
Applications were made by two of the respondents in the Nutanix case : (1) to strike out certain statements given by employees during interviews conducted by the Commission; and (2) to prevent the Commission from using such statements in the upcoming substantive hearing. Both claims were based on the application of privilege against self-incrimination. The companies argued that statements made by an employee during an interview where he/she spoke on behalf of the employer ought to be inadmissible against the employer.
In his judgment, Mr. Justice Godfrey Lam rejected the applications and held that statements made during the interview are inadmissible only against the subject of compulsion. In the present case, this would be each individual employee named on the Interview Notice issued by the Commission, and not their respective employers. In other words, the Tribunal held that a company cannot rely on the application of privilege against self-incrimination when its employees are compelled by the Commission to give potentially incriminating evidence against it.
Looking forward
The past year has also seen developments of note which may impact the future direction of the Commission.
New senior executives
Most notably, the Commission has seen a number of personnel changes in the senior executive team, including the arrival of a new CEO, Mr Brent Snyder. Snyder, a former criminal antitrust enforcer at the US Department of Justice, gave rise to expectations that the Commission would take a more aggressive approach towards individual prosecutions and individual sanctions. In a media interview, Snyder stressed that he “strongly believes” that individuals who are responsible for corporate misconduct should be made to accept responsibility for it. While recognizing that Hong Kong’s regime does not include provisions for imprisoning offenders, Snyder sounded a warning that the Commission will make full use of the punitive measures available, such as fines and director disqualifications.
Snyder is joined by two other new arrivals: a new Executive Director of Operations, Mr. Jindrich Kloub, who joins from the European Commission’s Directorate General for Competition Cartel Unit where he focused on high profile global cartel investigations, most recently in the financial sector, and the new Executive Director of Legal Services, Mr. Steven Parker, who was previously the Chief Litigation Counsel of the Hong Kong Monetary Authority. As a result of these appointments, we anticipate a greater likelihood that the financial sector (and the often complex antitrust issues that can arise within it) could be a future target of Commission enforcement.
Increased funding for litigation costs
In October 2017, in response to on-going calls by the Commission for the government to establish a litigation fund, the government announced that it will provide dedicated funding of about HKD 200m (USD 25.62m) to help cover the Commission’s litigation work. With the additional funding, the Commission has significantly greater scope for investigation and litigation.
Increased procedural clarity, particularly in relation to settlements
As proceedings continue to develop in the Tribunal, it can be expected that there will be clarifications on some of the procedural rules where there is currently a degree of uncertainty. These include important questions such as the implications for a cartel participant in cooperating with the Commission where full immunity has already been granted to another leniency applicant. At present, the Commission is largely confined to recommending a reduced pecuniary penalty to the Tribunal, the effectiveness of which remains untested. Nonetheless, the Commission is understood to be actively considering other methods to increase transparency in the settlement process.
Continued focus on First Conduct Rule
Since the Ordinance came into full effect, the Commission has received over 2,500 enquiries and complaints, of which 60% related to the First Conduct Rule – more than twice the number of those relating to the Second Conduct Rule received in the same period.
According to the Commission’s annual reports published in 2016 and 2017, the Commission has escalated over 160 cases to the “Initial Assessment Phase” between December 2015 and March 2017. The sectors involved in the highest numbers of such Initial Assessments were: Real Estate and Property Management (26 cases); Professional and Technical Services (18 cases); and Food and Groceries (18 cases). In addition, 11 of the cases escalated to the Initial Assessment Phase related to the financial services sector.
Various public statements have been made by representatives of the Commission that cartels continue to be a priority in its enforcement efforts. This is due to both the seriousness of cartel behaviour in impeding competition on the market, but also for practical reasons of ease of prosecution since there is no need to prove the ‘effects’ of collusive conduct that are ‘object’ restrictions. The Commission is therefore expected to continue to focus on cartels, as shown by a series of advocacy and educational initiatives launched by the Commission, including a campaign to raise public awareness of market sharing cartels and the harm it causes launched in November 2017.
For further information, please contact:
Mark Jephcott, Partner, Herbert Smith Freehills
mark.jephcott@hsf.com
