4 June, 2019
On 17 May 2019, the Hong Kong Competition Tribunal (the “Tribunal”) handed down two important judgments – one in relation to bid-rigging, and another in relation to price fixing and market sharing. The cases demonstrate that the Hong Kong competition regime follows well-established EU antitrust norms and provide greater legal certainty in an area where no local jurisprudence previously existed. Brief summaries of the facts of the cases are outlined in our articles published on 28 March 20171 and 21 August 20172 respectively.
Competition Commission v Nutanix Hong Kong Limited & Ors.
These proceedings were initiated by the Competition Commission (the “Commission”) in 2017. This is the Tribunal’s first decision regarding bid-rigging and has clarified a number of issues from the Hong Kong law perspective. Of particular importance are the following findings:
- Vertical bid-rigging: It was made clear that the First Conduct Rule, which seeks to prohibit anti-competitive arrangements in Hong Kong, applies to any agreement and does not distinguish between agreements between undertakings at the same level of the supply chain (horizontal agreements), and agreements between undertakings at different levels (vertical agreements). The Tribunal therefore noted that the legislation does not exclude vertical agreements from the scope of the First Conduct Rule, as opposed to some other jurisdiction, e.g. Singapore.
In particular, the Tribunal stated that the vertical agreements between the respondents in the case had a horizontal dimension as they were not discussions about pricing or other parameters of the bidding process, but about what the supplier should procure other distributors or resellers to do in another tender, thus taking on a horizontal dimension. Their purpose was to procure non-genuine bids to meet the tender requirements so that a particular bidder would win. The judge made it clear that, in this particular context, the anti-competitive effect on competition occurred whether the submission of fake bids had resulted from a vertical or horizontal agreement. - Attribution of conduct and knowledge: Whilst acknowledging that policy consideration of the Competition Ordinance (the “Ordinance”) would be undermined if restrictions placed on undertakings could be easily bypassed, it was found that not every act of an employee is attributable to the undertaking. There must be a sufficient connection between the acts of an employee and the undertaking before the employee can properly be regarded as part of the undertaking.
The facts of the case pointed otherwise. SiS was the only respondent who was found not to have contravened the First Conduct Rule. SiS was a distributor of Nutanix, which co-ordinated the dummy bids. The rather junior employee who signed the tender was acting outside his authority and ordinary responsibility, it was found that the employee had gone rogue and was not acting with SiS’s interest in mind. Since he was acting outside his course of employment, his acts were not attributable to SiS. - Burden of proof: The Tribunal also decided that the applicable standard of proof required of the Commission is the criminal standard of proof beyond reasonable doubt. The reason being that the proceedings involved the determination of a criminal charge within the meaning of Article 11 of the Bill of Rights. In addition, there was neither express provision nor necessary implication by statute to justify the deviation from the criminal standard of proof.
Competition Commission v W. Hing Construction Company Limited & Ors.
The case found ten respondents (local decorating contractors) to have contravened the First Conduct Rule by carving up the market and fixing prices in a public housing project in Hong Kong. In essence a “Floor Allocation Arrangement” was found where the respondents were each allocated certain floors to perform decoration works, and a “Package Price Arrangement” where the respondents agreed to quote the same package prices to customers. It was decided that the arrangements had as their object the prevention, restriction and distortion of competition in Hong Kong.
Some of the respondents tried to justify their conduct by running the “economic efficiency” defence (i.e. section 1 of schedule 1 to the Ordinance). The Tribunal set out four conditions to be satisfied in order for the defence to stand:
- 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 objectives; and
- it does not afford the undertakings concerned the possibility of eliminating competition.
The Tribunal further decided that the burden of establishing the defence lies with the person asserting the defence, on the balance of probabilities.
The attempt to rely on the defence was, however, unsuccessful. The Tribunal found that the respondents failed to satisfy all four grounds of the economic efficiency defence. In particular, the respondents could not show that the way the floor allocations were arranged generated efficiencies. Another point to note was, as the Tribunal commented, how the case was pleaded, which is one of the fundamental reasons for failing to successfully invoke the defence. On the one hand, the respondents denied in entirety the existence of such arrangements, but on the other hand, claimed that such arrangements were necessary to deliver efficiencies. This caused the evidence of the respondents to be contradictory, thereby undermining their credibility.
Two other respondents invoked the “sub-contractor” defence to contend that they were undertakings separate from the sub-contractors who performed the work, and thus should not be liable for the sub-contractors’ conduct. This defence, too, was, rejected by the Tribunal, holding that respondents and their respective sub-contractor comprised of a single entity when carrying out the economic activity.
Key takeaways
The Tribunal’s decisions are its first two cartel cases that have been handed down under the new competition regime, which entered into force in 2015. The two landmark judgments therefore set an important precedent for practitioners and businesses operating in Hong Kong, as well as clarify a number of fundamental issues in the area of cartel enforcement.
Specifically, the bid-rigging case is the first time a vertical agreement between a manufacturer of products and a reseller to facilitate bid rigging has been found to result in an infringement. The case therefore demonstrates the fact that the so-called “by object restrictions” category is not closed and that reaching any agreement with any business to submit a bid that is not intended to be competitive (even though that business may not be a direct competitor) can amount to a breach of competition law.
Moreover, the fact that the Tribunal ruled that the criminal standard of proof applies in the enforcement of competition law sets Hong Kong aside from many other jurisdictions as the only common law jurisdiction which applies a criminal standard of proof.
As regards the decorative services case which involved market sharing and price fixing, the arrangements were properly characterised as an agreement that restricted competition by reason of its very object. The Tribunal also clearly set out the reasoning on the efficiency defence and how it should be applied. It was ruled that the burden rests upon the relevant respondents to establish the defence on the balance of probabilities and they had failed to meet the conditions of the efficiency defence. The Tribunal also shed some light on the application of the concept of a single economic entity, making it clear that the respondents were liable for their sub-contractors’ conduct, even though they had no knowledge and did not participate in the decoration works.
Most importantly, both cases make it clear that agreements involving bid-rigging, market sharing and price fixing all have an anti-competitive object and demonstrate that the competition regime under the Ordinance is now truly actively enforced. The two cases should therefore act as a serious reminder that any contraventions of the Ordinance will not be taken lightly.
For further information, please contact:
Marta Isabel Garcia, Partner, Stephenson Harwood
marta.garcia@shlegal.com
1 Hong Kong anti-trust regulator launches legal proceedings against suspected bid-riggers for the first time, 28 March 2017
2 Hong Kong anti-trust regulator launching its second proceedings against price fixing and market sharing
