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The Hong Kong Competition Ordinance - 14 December 2015, the D Day


15 December 2015

On 14 June 2012, the Hong Kong Legislative Council passed the first cross-sector competition law in Hong Kong, the Competition Ordinance (Ordinance). The Ordinance created the Competition Commission (the Commission), which investigates and enforces the Ordinance; and the Competition Tribunal (the Tribunal), which hears actions in respect of the Ordinance. Today, 14 December 2015, three and a half years after its enactment, the Ordinance enters fully into effect. Both the Commission and the Tribunal made clear that they are ready for action. 

The sectors and behaviours in the line of fire

The Ordinance was passed in response to studies conducted in 1994 by the Hong Kong Consumer Council on business competitiveness in Hong Kong and studying sectors such as banking, supermarkets, fuel, broadcasting, telecommunications and residential property. Today, the same sectors are often mentioned as potential targets of the Commission's investigation, but other sectors, such as construction, sea transportation, retail, consumer goods, and healthcare, have been added to the list. 

The Ordinance has parallels with other jurisdictions such as Australia, the European Union, Singapore and the United Kingdom. As is the case in other jurisdictions, the aim of the Ordinance is to prohibit and deter anti-competitive conducts that have the object or effect of preventing, restricting or distorting competition in Hong Kong. The Commission has made clear in its enforcement policy document of 19 November 2015 that anticompetitive arrangements between competitors on pricing, market or customer allocation, bid rigging or output restrictions, also called “cartels”, would be a priority in its enforcement. “Resale price maintenance” misconducts (RPM), by which suppliers of goods require or induce their independent intermediaries (such as distributors or retailers) to resell their products at a given or minimum resale price, will also be under scrutiny. Abuses of substantial market power by incumbent operators that would involve exclusionary behaviour seem to be a third priority for the Commission. These are usual suspects in other jurisdictions too. 

See our alert of 1 December 2015 on the subject.  

The Commission and its activities since 2014

The Commission is tasked with investigating conduct that may contravene the Ordinance. The Commission may investigate anti-competitive conduct which it hears about through a variety of sources, including competitors, customers, or any other bodies who voluntarily provide to the Commission information on market events or practices. 

So as to enable it to perform its duties, the Ordinance gives it a range of powers to investigate. Many of these powers have parallels to the powers given to other law enforcement agencies, with notable similarities to the investigative powers of the SFC. 

  1. Statutory notices may be issued by the Commission to request information or answers to any questions relevant to the investigation.
  2. Interviews may be organised by the Commission to question any person in respect of the investigation.
  3. The Commission may search any premises without prior notice if it is relevant to the investigation. Searches, often called dawn raids, are conducted pursuant to warrants issued by the High Court of Hong Kong. During these dawn raids, subjects of an investigation must answer all questions from and submit all documents required by the Commission. Whilst conduct found to contravene the Ordinance does not constitute a criminal offence, failure to answer or submit documents required by the Commission does constitute a criminal offence punishable by significant fines and/or terms of imprisonment.
  4. Legal professional privilege is maintained under the Ordinance. The Commission is issuing a new policy on the way it will handle documents for which companies or individuals claim legal professional privilege status in particular during dawn raids. This policy is likely to play a key role considering that in Hong Kong communication with an in-house lawyer is protected.
  5. Self-incrimination:  Persons are not allowed to refuse answering the Commission on the grounds that their answer would expose them to criminal or other penalties. The Tribunal will, however, not be able to use them as a basis for inflicting pecuniary sanctions. 
As soon as the Commission exercises its powers of investigation, a well advised subject of the investigation should immediately be aware of the risk of enforcement action against it. Appropriate steps should be taken to mitigate those risks, including immediately seeking legal advice, considering its defence strategy and conflict of interests between the undertaking and its employees/officers.
In preparation for the full commencement of the Ordinance, since October 2014, the Commission has: launched a series of TV drama episodes and announcements, educational videos, radio drama segments and announcements; used printed media; and published various resources (including a practical compliance toolkit for SMEs published on 2 November 2015) to educate the public and give practical examples on how the Ordinance is likely to apply in real life. The Commission has also conducted market studies on the building management services and the electricity market. The Commission and the Communications Authority jointly released on 27 July 2015, six guidelines required to be published under the Ordinance, being: 
  1. Guideline on the First Conduct Rule (i.e. on anticompetitive arrangements, including cartels and RPM);
  2. Guideline on the Second Conduct Rule (i.e. on abuses of substantial market power);
  3. Guideline on the Merger Rule;
  4. Guideline on Complaints;
  5. Guideline on Investigations; and
  6. Guideline on Applications (Applications) for a Decision under Sections 9 and 24 (Exclusions and Exemptions) and Section 15 (Block Exemption Orders). 
Subsequently, on 28 October 2015, the Commission issued a press release to outline its approach when dealing with Applications including a reassuring statement that for the transitional period of 6 months after the full commencement of the Ordinance, “it may, in specific cases, indicate to Applicants that it would be unlikely to initiate enforcement action in respect of conduct or arrangements already existing at the date of full commencement of the Ordinance while it is considering an Application in respect of that conduct or the relevant arrangements”. The Commission released guidance notes on “How to Assess ‘Turnover’ for Exclusions from the Competition Ordinance Conduct Rules” on 5 November 2015 and “Fees Payable for Making an Application to the Competition Commission” on 12 November 2015. It also released the policy documents “Enforcement Policy” and “Leniency Policy for Undertakings Engaged in Cartel Conduct” on 19 November 2015 to shed light on its enforcement approach. Interestingly, this Leniency Policy does not cover leniency applications made in relation to misconducts other than cartels; such applications will thus be handled on a case-by-case basis by the Commission. All these materials shed light on how the Commission intends to interpret and apply the provisions of the Ordinance. The Commission is also about to release its “Policy on the Handling of Privileged Materials”.  

The Competition Tribunal 

The Tribunal is also prepared for the full commencement of the Ordinance.
The Chief Judge of the High Court and the High Court Rules Committee made four sets of procedural and fees rules for the Tribunal, including the Competition Tribunal Rules, which were published in the Gazette on 5 June 2015, tabled in the Legislative Council for negative vetting on 10 June 2015 and were passed into final form following the expiration of the negative vetting. 
The primary means by which the Ordinance will be enforced is through the Tribunal on the basis of the investigation and claims made by the Commission. The Tribunal has at its disposal a wide range of orders which can have a severe impact on the subject of the orders:
  1. Pecuniary Penalties that can reach up to 10% of turnover of the undertaking.
  2. Disqualification Orders against persons, disqualifying them from acting as a director and other roles in respect of companies, for a period not exceeding 5 years.
  3. Other Orders listed in Schedule 3 of the Ordinance, including restraining dealing with property, appointing a person to administer the property, requiring the termination or modification of an agreement, declaring an agreement to be void or voidable, and payment on damages. These orders may be granted on an interim basis before proceedings in the Tribunal have concluded.

The proceedings in the Tribunal are quasi-judicial. The Tribunal consists of the judges of the Court of First Instance; Mr Justice Godfrey Lam was appointed the first President of the Tribunal.

The procedure to be followed in the Tribunal is set out in the Ordinance and the Competition Tribunal Rules. Practice Directions No. 1 and 2 relating to proceedings under the Ordinance has also been published. The Tribunal may decide its own procedures, generally following the procedure in the civil courts. The overriding principle is that the Tribunal will conduct its proceedings with as much informality as is consistent with attaining justice. This means that the Tribunal is likely to reject defences that appear to it to be purely technical arguments.

Two key specific Tribunal procedures are: 

Tribunal is not bound by rules of evidence except when imposing pecuniary penalties. However, it is not entirely clear what standard of proof is to be applied in imposing these penalties.

  1. Discovery is more limited than civil proceedings.  Automatic discovery does not apply. The Tribunal has a wide discretion to make or refuse an order having regard to all the circumstances of the case, including: (a) the need to secure the furtherance of the purposes of the Ordinance; (b) whether the information in the document is confidential; (c) balance between the interests of the parties and other persons; and (d) the extent to which the document is necessary for the fair disposal of the proceedings. 
Finally, in addition to action brought by the Commission, private actions may be brought by any person suffering a loss as a result of a contravention of a conduct rule. This may have significant financial repercussions on a business faced by claims by consumers, which is why any investigation by the Commission should not be treated lightly.  

State of Play

Today, the Competition Ordinance enters into force. Rarely have administrative and jurisdictional authorities in the world been as ready as the Commission and the Tribunal. The Competition Ordinance – that some may view as a new Economic Basic Law for Hong Kong – has been in place and commented on for three and a half years, the majority of the secondary legislation, guidelines and other statements have been made public, both the Commission and the Tribunal have resources to handle cases, and companies have received multiple warnings and educational trainings. The only key ingredient which is missing now is the first cases. 

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