Thoughts from the Legal Front
Competition Ordinance Exemptions
Competition Ordinance Exemptions<br/>《競爭條例》豁免

The rules in the Competition Ordinance are cast in very broad terms, essentially prohibiting any arrangement between businesses, or conduct by a business with a “substantial degree of market power,” which are regarded as harming competition in Hong Kong. 

There are several exemptions from the prohibitions. Because the prohibitions are so broad, businesses have a keen interest in knowing whether their arrangements or conduct could benefit from an exemption.
 
However, whether an arrangement causes harm to competition, and if so, whether it is exempted, are very complex assessments. Given this complexity, the Ordinance allows businesses to apply to the Commission for a decision as to whether any exemption applies. So far, two applications have been made. The first was by a group of container shipping lines, and the second by a group of banks. The Commission rejected the first one in part, and the second one in full. 

The general lesson to be learnt from these cases is that the decision to apply for an exemption from the Commission should not be made lightly, and should be made in the full knowledge of the potential implications. In other words, “be careful what you wish for.”

Case One: the application for a “block exemption” by container shipping lines
One of the grounds on which arrangements are excluded from the prohibition on anti-competitive agreements is where they “enhance overall economic efficiency.” In other words, they have efficiency benefits that outweigh the harm to competition that they cause. Parties to arrangements can apply for decisions from the Commission on a single arrangement. Or, if there is a category of arrangements which they think should qualify, they can apply for a “block exemption.”

A few days after the Competition Ordinance entered into force in December 2015, an association of container shipping lines, the Hong Kong Liner Shipping Association, applied for a block exemption, for two categories of agreement between the shipping lines. 

The first category was vessel-sharing arrangements (VSAs). These are essentially arrangements whereby shipping lines share capacity on each others’ ships – a bit like code-sharing arrangements between airlines. The second category was voluntary discussion agreements (VDAs) – whereby shipping lines exchanged commercial information including their proposed future shipping tariffs (albeit not the details of individual customer contracts).

In August 2017, the Commission issued a block exemption for VSAs (subject to a combined market share cap of 40% on any individual route to or from Hong Kong). However, it rejected the application for a block exemption for VDAs, as it was not satisfied that the potential harm to competition that VDAs caused was outweighed by efficiencies.

One important consideration for parties when deciding whether to make an application for an exemption from the Commission is: what are the implications if the exemption decision is refused? By making the application, have the parties effectively conceded that the agreement harms competition and therefore the logical consequence is that the Commission will immediately initiate enforcement action?

The Commission’s proposed decision (which it issued for consultation in September 2016) did seem to imply that this was the case, after having given the parties an initial “transitional period” of six months to remove the potentially objectionable features of the VDAs. 

HKGCC advocated strongly in its response to the proposed decision that the mere rejection of an exemption application should not automatically imply that the law has been breached, and that it should not absolve the Commission from its duty to carry out a proper investigation in accordance with its normal procedures. 

The Commission explicitly accepted this in its final decision, while still giving the parties a guarantee that it would not initiate any enforcement action within six months of the decision, to give them a chance to rectify the “potential concerns” the Commission had identified with VDAs.

If you decide to seek an exemption decision from the Commission, whether on an individual or block basis, it would still seem wise to make it clear (as the parties did in this case) that, in making the application for exemption, the parties are not conceding that the agreement harms competition.   

Case Two: the application for a “legal compulsion” exclusion by Hong Kong banks
On 11 December, 2017, two associations representing 14 banks in Hong Kong (including HSBC, Hang Seng, DBS, Bank of China, Bank of East Asia and Standard Chartered) applied for an exemption from the Competition Ordinance for the Code of Banking Practice. This is essentially a code of conduct agreed by the banks aimed at consumer protection, which is endorsed by the Hong Kong Monetary Authority (HKMA). 

The banks were concerned that certain provisions in the Code might be regarded as raising issues of compliance with the Ordinance, in particular provisions whereby the banks agreed not to charge customers, or agreed a maximum charge, for certain services. However, they insisted that these provisions did not harm competition, and that they were only applying for exemption to get legal certainty that they could implement the Code without the risk of enforcement action.

Unlike the shipping lines, the banks did not apply for exemption on grounds of economic efficiency, but argued that the “legal compulsion” exclusion applied. Under this exclusion, the Ordinance does not apply to an agreement (in this case the Code) to the extent that “it is made for the purpose of complying with a legal requirement.” 

The banks argued that the Code was made for this purpose, as it was endorsed by HKMA (a regulatory authority), HKMA monitored compliance with the Code, and it could impose certain regulatory measures for non-compliance, including ultimately revocation of a bank’s licence. 

However, the Commission decided that, in spite of this, the Code was not made for the purpose of complying with a legal requirement. 

Unlike the shipping lines’ case, the Commission did not give the banks a grace period to rectify any competition compliance issues. Instead, it stated that it prioritised action against agreements and conduct that clearly harm competition and consumers. Since the Code “may in fact benefit consumers” and is backed by HKMA and the Consumer Council, the Commission stated that it had “no current intention to pursue further investigative or enforcement action in respect of the present version of the Code.”

Conclusions: what lessons can be learnt?
The following main lessons can be drawn from these cases:

  • While the purpose of applying for a decision from the Commission is to get legal certainty that agreements or conduct will be safe from attack by the Commission, there is no guarantee that the parties’ arguments on exemption will be accepted. Moreover, the Commission does not feel it necessary to decide whether there is harm to competition in the first place, and seems to have been prepared to make its exemption decisions on the hypothetical assumption that there is such harm. So if exemption is refused, the prospect of enforcement by the Commission still remains, and the parties have no legal protection against this.
  • Potential harm to competition and/or consumers will be the main factor in assessing the likelihood of such enforcement action.
  • Support and encouragement by public authorities (such as HKMA) to enter into certain agreements or conduct will not necessarily be a safeguard against any action by the Commission.
  • When the Commission receives an application, it will consult publicly and take into account a wide range of views before reaching a decision. 

Clearly, deciding whether to make an exemption application is a decision that should not be taken lightly, and only after receiving specialist legal advice. 

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