On 17 May, the Competition Tribunal issued its first two judgments holding that businesses had violated the Competition Ordinance (CO). The Tribunal has still to decide on the penalties it will impose.
Three important lessons can be drawn from the judgments, concerning:
- How does the Tribunal assess whether a business has restricted competition in violation of the Ordinance?
- Who bears the burden of proof in establishing whether a violation has taken place?
- What is the standard of proof: is it the criminal standard (beyond reasonable doubt) or the civil standard (balance of probabilities) that applies? Clearly, the former would normally make it more difficult for the Competition Commission to prosecute a case successfully.
The two cases
The first case (Case 1) concerned a tender for an IT contract in which a number of IT companies, and a supplier to them, were held to have engaged in bid-rigging. This is in breach of the “First Conduct Rule” of the CO, which prohibits anti-competitive agreements between two or more businesses. The second case (Case 2) concerned arrangements between a number of building decoration companies, in which they were held to have shared contracts for work on a public housing estate and engaged in price-fixing, also in breach of the First Conduct Rule.
How does the Tribunal assess a restriction of competition?
The first thing that is striking about these two cases is how limited the market effects of the conduct in Hong Kong were. Case 1 concerned a single contract tender, and Case 2 concerned a single public housing estate. This is because the conduct in question – bid-rigging, market-sharing and price-fixing – were held to have the “object” of restricting competition. In other words, they were essentially anti-competitive by nature, regardless of their actual effects on the market.
The second thing that is striking is the extent to which the Tribunal used European Union competition law to interpret the CO, instead of applying its own interpretation according to the “plain meaning” of the statute’s words – the first rule of statutory interpretation that is normally used by the courts.
This use of the E.U. as a persuasive guide is potentially very significant, as E.U. competition law is generally regarded as one of the most stringent competition regimes in the world, with the highest penalties. This was one of the reasons that the Chamber argued, in the course of the legislative process leading to the adoption of the CO, that the use of E.U. law as a template was not appropriate in Hong Kong.
It is true that some of the terminology in the CO is derived from E.U. competition law. But this is also the case in U.K. competition law. Unlike the CO, U.K. competition law even contains an express provision requiring the Tribunal to construe the law as far as possible consistently with E.U. law. But in spite of this, the then President of the U.K. Tribunal, Sir Christopher Bellamy, said, in the first case that went before the U.K. Tribunal, that E.U. law should not be used in substitution for proper statutory interpretation:
“...although section 60 of the Act enjoins us to construe section 2 [the equivalent of the First Conduct Rule] consistently with Community [E.U.] law, our primary task, as a United Kingdom tribunal, is to construe the statute with which we are concerned” (emphasis added).
Who bears the burden of proof?
It may seem self-evident that the Commission, as the prosecuting authority, should bear the entire burden of proving that a business has violated the CO, and that it is not for the business to prove that it is innocent. But the Tribunal did not agree.
The CO contains certain exclusions. One of these is the so-called economic efficiency exclusion. Essentially, it says that the First Conduct Rule “does not apply” if the agreement improves economic efficiency, a fair share of the efficiencies are passed on to consumers, there are no restrictions in the agreement which are unnecessary to achieve this, and the agreement does not substantially eliminate competition in the market.
Although the CO does not say so, the Tribunal held in Case 2 that it was for the business to prove that these criteria were satisfied, not for the Commission to prove that they did not apply. If the business could not prove its “innocence” in this way, the necessary implication is that it would be in breach of the law.
The Tribunal recognized that this was an interference with the normal principle of the “presumption of innocence” which is guaranteed by Hong Kong’s Bill of Rights, but said that such interferences could be permitted if there were good public policy reasons for doing so, and the interference was proportionate. It held that these conditions were satisfied in this case. As the businesses could not prove that the criteria for the exclusion were satisfied, they were held to have violated the CO.
What is the standard of proof?
While businesses may be concerned about the Tribunal’s views on the burden of proof, they might take some comfort from the fact that the Tribunal held unequivocally in Case 1 that the standard of proof under the CO is the criminal one (beyond reasonable doubt) not the civil one (balance of probabilities). This is clearly a significantly higher standard that the Commission has to satisfy to bring a successful case.
This may be less of a problem with the types of conduct at issue in Cases 1 and 2, which the Tribunal believed were by their nature anti-competitive, without the need to prove anti-competitive effects. Indeed, the criminal standard of proof did not stop the Tribunal from holding that the businesses in question violated the CO in these cases.
However, for other types of conduct– in particular, abuse of substantial market power, which is addressed by the Second Conduct Rule – complex economic assessments have to be made, and there is much greater scope for reasonable doubt and room for argument as to whether an infringement has taken place. This may make the task of the Tribunal considerably more difficult in establishing whether an infringement has been committed, and for the Commission to prove this to the requisite standard.
The first two cases under the CO certainly raise some significant, indeed controversial issues. It remains to be seen whether any of the businesses in question will appeal against the Tribunal’s findings, and if they do, whether the Court of Appeal will agree with the Tribunal’s views.