December 2020 marked the fifth anniversary of the Competition Ordinance’s entry into force. However, it is only relatively recently that the competition law adjudicator, the Competition Tribunal, has been deciding cases.
Even in this short time, the Tribunal’s judgments have shed light on a number of practical issues that are very important for businesses. This article highlights some of the key issues.
Who needs to prove what in competition cases? The burden and standard of proof
This issue affects a business’s prospects of success if it is prosecuted in the Tribunal. It also affects the risk assessment that businesses need to make, before deciding on a proposed commercial agreement or course of conduct.
The so-called First Conduct Rule in the Ordinance prohibits arrangements between businesses if their “object or effect” is to “prevent, restrict or distort competition” in Hong Kong. However, such arrangements are excluded from the prohibition if they fall within one of various exclusions in the Ordinance. Of these exclusions, the one that businesses will most frequently invoke in practice is for “agreements enhancing overall economic efficiency.”
The Tribunal confirmed in one of its first judgments (Competition Commission v Nutanix Hong Kong Ltd and Others) that the burden of proof is on the Commission to show that the agreement has the object or effect of preventing, restricting or distorting competition in Hong Kong. What was more surprising, however, was the Tribunal’s determination that the standard of proof that the Commission has to meet is the criminal standard of proof beyond reasonable doubt. In other words, if there is any reasonable doubt as to whether the business has engaged in anti-competitive conduct, the business is not guilty.
Assuming the Commission can prove beyond reasonable doubt that the prohibition applies in principle, it is a completely different matter when it comes to deciding whether one of the exclusions from the prohibition applies. The burden here is on the business to prove that their arrangement satisfies the criteria for exclusion, and the standard of proof is the civil one – on a balance of probabilities (Competition Commission v W Hing Construction Ltd and Others).
Although the civil standard is a lower standard than the criminal one, it is still a tough one for businesses to meet, particularly where they are relying on the exclusion for “agreements enhancing overall economic efficiency.” The Tribunal has made it clear that businesses will be expected to produce a complex economic assessment to justify their case. For example, one of the conditions for the exclusion is that consumers should obtain a “fair share” of the alleged efficiencies that the agreement brings. However, in W Hing, the Tribunal found that this condition was not met because:
“...there is no rigorous assessment in the respondents’ evidence of the extent to which the cost savings claimed to result from the Floor Allocation Arrangement were likely to be passed on to the tenants, by reference to the characteristics and structure of the market, the nature and magnitude of the efficiency gains, the elasticity of demand, the magnitude of the restriction of competition, the tenants’ price-sensitivities, and the respondents’ own capacity constraints.”
What conduct is prohibited?
In the cases so far, the Tribunal has found that the conduct had the “object” of harming competition, so it was unnecessary to analyse the actual effects of the conduct on competition. The “object” concept (and indeed the drafting of the First Conduct rule generally) is derived from E.U. competition law. The Tribunal has found that the practices between competitors of price-fixing, market-sharing and bid-rigging have the “object” of harming competition, and there is therefore no need for the Commission to prove whether they actually had the effect of harming competition. These types of conduct are referred to in the Ordinance as “serious anti-competitive conduct.”
If the Commission proves beyond reasonable doubt that the conduct of these types took place, there should be little difficulty for it to succeed in a prosecution, unless the business can prove (on a balance of probabilities) an efficiency justification for the conduct. This will rarely be the case for serious anti-competitive conduct. As noted above, proving that the efficiency justification applies is a challenging task, given the complex economic analysis that this requires, and in the W Hing case the Tribunal rejected the parties’ arguments.
How are penalties calculated?
In W Hing the Tribunal held that the assessment of penalties involves a four-step analysis:
ν Apply a “gravity percentage” to the turnover gained by the businesses from the conduct in question to determine the “base amount.” For serious anti-competitive conduct such as price-fixing, market-sharing or bid-rigging, the Tribunal held that a range of 15 to 30% is appropriate (24% was selected in the W Hing case).
ν Adjust the base amount upwards or downwards to take account of aggravating or mitigating factors respectively. Aggravating factors include whether the contravention is a repeat offence, whether senior management encouraged the contravention, and whether it caused serious harm. Mitigating factors include whether there was a genuine lack of clarity as to whether the conduct is illegal, and whether the company had put in place an appropriate competition law compliance programme.
ν If the two steps above result in an amount that exceeds the statutory cap of 10% of Hong Kong turnover, reduce the amount to the statutory cap.
ν Adjust downwards for cooperation during the proceedings, and inability to pay.
What are the minimum ingredients of an acceptable compliance programme?
Having a proper competition compliance programme can reduce a company’s exposure to penalties if a contravention takes place, as well as avoiding the risk of contravention in the first place. In Competition Commission v Quantr Ltd and Another, the Commission agreed, with the Tribunal’s consent, to suspend the proceedings, on the condition (among others) that the company implement a compliance programme consisting of the following elements:
ν Circulate to all staff, with the instruction to read carefully, various Commission compliance materials including its Guideline on the First Conduct Rule.
ν Adopt and issue to all staff a compliance policy, stating the personal commitment of the directors to competition law compliance, and that such compliance is the responsibility of all staff.
ν Ensure that all staff attend one of the Commission’s public seminars or workshops on competition law, and keep attendance records for such training.
This is a useful indicator of what the Tribunal would regard as a basic acceptable compliance programme for SMEs, such as the companies involved in this case. Larger companies will no doubt be expected to have a more sophisticated compliance programme.
The Tribunal’s judgments have usefully clarified several important practical aspects of the Competition Ordinance. It will be worthwhile for businesses to monitor further guidance that the Tribunal provides in future cases.