The Hong Kong Competition Ordinance – 2018 in review and the potential enforcement horizon in 2019

The Competition Ordinance (Ordinance) is currently being reviewed for its effectiveness by the Government, having just passed its third anniversary. At this milestone, we consider the key takeaway points from the Hong Kong Competition Commission’s (HKCC) 2018 activities and our predictions in terms of enforcement for 2019.

2018 in review

The HKCC had a busy 2018: it brought its first two prosecution cases to trial, a third case was started, and a number of other activities were undertaken. Of note was the exemption application decision relating to the banking sector, and reports of introducing a new leniency and cooperation framework.

First two prosecution cases go to trial

In June 2018, the HKCC brought its first case to trial before the Hong Kong Competition Tribunal (Tribunal). The HKCC filed a lawsuit against BT Hong Kong, Nutanix Hong Kong, SiS International, Innovix Distribution and Tech-21 Systems for infringement of the First Conduct Rule (which prohibits anticompetitive agreements). The HKCC alleges that the companies rigged bids in relation to a tender to install a new computer server for the Young Women’s Christian Association.

It remains to be seen whether the defence arguments raised by the respondents will hamper the HKCC’s first prosecution (see our previous bulletin for details of these arguments). The Tribunal’s judgment, which is expected in early 2019, should clarify amongst other things the standard of proof that is to be discharged by the HKCC and applied in Tribunal proceedings. The HKCC has argued for a civil standard, i.e. a balance of probabilities, which is the standard applied in most other major competition law jurisdictions. Conversely, the respondents have argued for a criminal standard of beyond reasonable doubt. Interestingly, the Tribunal ruled in March 2018 that discovery in Tribunal proceedings should approach the standard applicable to the prosecution in criminal proceedings, which required the HKCC to disclose relevant material which could undermine its case or advance a respondent’s case.

The HKCC’s second case went to trial in late November 2018, in which the HKCC alleges that ten local contractors entered into market sharing (floor allocation) and price fixing agreements involving decoration services at a public housing project. The appropriate standard of proof to be applied is also at issue in this second case.

Additionally, seven of the respondents have argued that the agreements were entered into to generate cost efficiencies. They have adduced expert economic evidence which sets out the efficiencies generated by the allocation of floors between the contractors, for example reducing elevator waiting time and labour costs. If sustained, this argument could result in the agreements being exempt from the application of the First Conduct Rule.

Having raised this efficiency defence, the respondents argue it is now for the HKCC to disprove the defence beyond reasonable doubt, and that the HKCC should be required to analyse the effects of the conduct in the market. This argument, which contrasts with the approach taken in other jurisdictions, appears to stem from the absence of any legislative provision in the Ordinance providing that the burden of proof in respect of the efficiency exclusion falls on the companies seeking it (unlike, e.g., in the EU where this is explicitly set out in legislation). The Tribunal’s decision in this case is expected in the first quarter of 2019.

Third case started by HKCC

On 6 September 2018, the HKCC started prosecuting its third case in the Tribunal, again alleging infringement of the First Conduct Rule. The HKCC is alleging that three construction companies and two individuals allocated customers and coordinated pricing, from June to November 2017, in relation to the provision of interior renovation services at a housing estate in Kowloon. The case reportedly arose from a complaint by a member of the public to the HKCC, following the widespread reporting of the HKCC’s second case (see above).

Importantly, this is the first time the HKCC has brought direct enforcement action against individuals. It is seeking a pecuniary penalty and director disqualification orders against the individuals involved in the anticompetitive conduct. In explaining its decision to do this, the HKCC commented that “to deter a company from engaging in cartel conduct, it is also necessary to deter the individuals through which the company acts”. It remains to be seen whether the higher criminal standard of proof will be applied in proceedings involving penalties against individuals.

Exemption decision and other initiatives

On 15 October, 2018, the HKCC published a decision finding that the Hong Kong Code of Banking Practice (Code) is not excluded from the application of the First Conduct Rule (see our previous bulletin for further details). While the clarification of the HKCC’s intentions in respect of the Code is to be welcomed, the HKCC’s decision shows that the legal requirements exclusion will be narrowly construed. This will have an impact on any future applications relying on this exclusion.

In terms of other initiatives, the HKCC held two seminars in September 2018 aimed at policymakers: one targeting agencies such as the Securities and Futures Commission and Hong Kong Monetary Authority, and the other targeting high level policymakers in the Government and public bodies. The aim of both was to encourage these policymakers to take more account of competition issues when undertaking their work. HKCC CEO Brent Snyder also spoke at a conference in Beijing in August 2018 where he indicated that the HKCC has been more involved in the early stages of the Government’s policy making process in recent months.

Separately, the HKCC reportedly intends to introduce a revised leniency programme and a new framework for cooperation in the near future in order to enhance its enforcement function, ensure consistency and foster transparency. These initiatives are expected to introduce a settlement procedure, set out the rewards for cooperation in HKCC investigations and explain how the HKCC will calculate pecuniary penalties to be recommended to the Tribunal.

Predictions for 2019 – a stronger enforcement horizon?

The HKCC is becoming an increasingly active regulator and the current Government review of the Ordinance provides an opportunity to give the Hong Kong regime sharper teeth. Possible changes that could be examined during the review include greater powers for the HKCC (for example, in the context of market studies), the removal of the exemption from the application of the Ordinance for statutory bodies and the introduction of standalone private actions for damages. In relation to the latter, it is noteworthy that two cases involving a contractual claim were transferred from the High Court to the Tribunal in 2018 due to an antitrust defence being raised (see our previous bulletin for further details).

We expect 2019 to see a continued focus on cartel conduct, and further investigations and market studies being started by the HKCC (alongside its continued public awareness initiatives). Indeed, the HKCC started a new investigation into a container terminal alliance on 10 January 2019. In terms of sector focus, there is no suggestion of significant changes from the sectors set out in the HKCC’s latest annual report as those being the most active. These sectors include real estate, information technology, transport and logistics, travel and hospitality, financial services and automotive.

Success in the first cases pursued by the HKCC (as well as clarification on matters such as the burden of proof on the HKCC) may well result in the regulator taking on increasingly complex cases and sectors. In line with comments made by HKCC senior personnel, including Chairwoman Anna Wu, we also expect the HKCC to take an increasingly tough line on individuals involved in cartel conduct (although this will partially depend on the success of the HKCC’s third case). Any material changes made as a result of the Government’s current review, as well as the proposed revised leniency programme and new framework for cooperation, are also likely to strengthen the HKCC’s enforcement activities in 2019 and beyond.