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On 14 June 2012, after years of debate, dozens of hearings, a flurry of amendments and a last minute filibuster, Hong Kong joined the rest of the industrialized world by enacting the Special Administrative Region’s first competition law. Known formally as the Hong Kong Competition Ordinance (Cap 619) (the ‘Competition Ordinance’), the law prohibits anticompetitive agreements between and among undertakings (the ‘First Conduct Rule’) and bars undertakings with a substantial degree of market power from unilaterally acting in an anticompetitive manner (the ‘Second Conduct Rule’). Under the Competition Ordinance, undertakings are entities that, irrespective of their financing or legal status, engage in economic activity. However, not all undertakings are subject to the law. Most statutory bodies will enjoy a blanket exemption thanks to a designation by the Chief Executive, and small- and medium-sized enterprises (SMEs) will receive preferential treatment under the First Conduct Rule and be fully exempt from the Second Conduct Rule.
While there are important aspects that will only be resolved by the work of the Competition Commission, the enactment of the Competition Ordinance will have a profound impact on Hong Kong business practices and almost certainly give rise to governmental enforcement activity and related private actions. But before the Competition Ordinance takes effect, it calls for the creation of the Competition Commission and the Competition Tribunal. These bodies will be responsible for investigating and issuing warning and/or infringement notices, and adjudicating competition disputes, respectively. Neither body has been created – thus there is still uncertainty as to when the Competition Ordinance will take effect.
How did we get here and where do we go?
Laws prohibiting anticompetitive agreements and behaviour date back to medieval England and beyond. Canada and the United States led the modern wave of competition laws, first enacting competition legislation in 1889 and 1890, respectively. By the late 20th century, most industrialized nations had enacted various forms of competition laws. Indeed, with the recent adoption of competition laws in Singapore, China and Malaysia, Hong Kong found itself increasingly isolated in regulating anticompetitive practices, instead choosing to maintain its laissez-faire approach. Until the Competition Ordinance, Hong Kong’s prohibition against anticompetitive conduct was limited solely to the telecommunications sector.
With debate in Hong Kong commencing in 1999, the formal process that led to the Competition Bill started in July 2010, with the introduction of the Competition Bill before the Legislative Council (LegCo) and a series of gruelling LegCo hearings. The original Competition Bill had the look and feel of mainstream global competition legislation – indeed large swaths of the Bill had striking similarity to laws in Europe and elsewhere. However, it soon became apparent that the drafter of the original Competition Bill failed to fully anticipate public and private opposition to certain provisions, and the desire to maintain certain practices.
Many stakeholders, including key business and consumer groups, objected to what they perceived to be the vague language of the Competition Bill. Large undertakings argued that the statutory fine cap of 10% of an undertaking’s global turnover for the preceding three years could, if imposed, cause disproportionate financial harm. At the other end of the spectrum, SMEs, ironically very well organized through Hong Kong’s various SME trade groups and forums, claimed that the Bill would place upon them significant regulatory burdens and, in an interesting twist, allow large undertakings to use competition law to bring legal actions against them. Against the backdrop of this debate, by way of the Chief Executive’s designation, over 570 statutory bodies (including many with decidedly commercial activities) received an official exemption from the Competition Ordinance – only six statutory bodies, Ocean Park, the Matilda and War Memorial Hospital, the Federation of Hong Kong Industries, the Federation of Hong Kong Industries general committee, Helena May and Kadoorie Farm, failed to achieve this coveted exemption.
Specifics of the Competition Ordinance
The First Conduct RuleThe First Conduct Rule prohibits agreements and other concerted practice between or among undertakings, either directly or through industry or trade associations, which have as their object or effect the prevention, restriction or distortion of competition. Under the First Conduct Rule, undertakings cannot agree to fix prices, allocate markets or customers, rig bids, or restrict output – these are all considered ‘serious infringements’. Likewise, undertakings cannot enter into other anticompetitive agreements with their competitors, suppliers, distributors or retailers.
While the Ordinance does not specifically define the other anticompetitive agreements (beyond the serious infringements), case law and precedents from other jurisdictions, which along with yet to be published guidelines, is likely to provide initial guidance in interpreting the Competition Ordinance’s scope, and suggest the definition of anticompetitive agreements will be broadly interpreted. However, agreements that promote economic efficiency, or are otherwise required to comply with international obligations, will not be prohibited.
The First Conduct Rule applies to both oral and written agreements, and applies to agreements that are consummated within Hong Kong, as well as those overseas agreements that have an effect on Hong Kong. Thus, it will be applied extraterritorially, which is consistent with global mainstream competition law.
The First Conduct Rule differentiates between serious infringements and other concerted practices that may or may not be permissible, depending on the circumstances. For serious infringements, undertakings face a potential fine of 10% of their Hong Kong turnover. For less serious infringements, agreements among undertakings with a combined annual turnover of less than HK$200 million are exempt. However, this exemption does not apply to serious offences.
The Second Conduct RuleThe Second Conduct Rule applies to single firm conduct. It prohibits undertakings with a ‘substantial degree of market power’ from engaging in conduct that has as its object or effect the prevention, restriction or distortion of competition. In practice, the Second Conduct Rule will bar predatory behaviour towards competitors, exclusionary practices and limiting production, markets or technical developments to the prejudice of consumers or competition.
In determining whether an undertaking has a ‘substantial degree of market power’, the Competition Ordinance does not adopt a bright line test or statistical formula. However, proposed guidelines drafted for the limited purpose of assisting LegCo’s debate suggest the Commission will adopt a mainstream test that takes into account an undertaking’s current and potential market share, actual and potential competitors, the strength and sophistication of buyers, structural issues such as barriers to entry, existence of innovation, and the ability of customers to switch providers without incurring substantial costs or disruptions. Indeed, during the LegCo debate, the government suggested that a market share of less than 25% would almost certainly not constitute a substantial degree of market power, while a market share of 40% or more would create a presumption of a substantial degree of market power. However, as market power is a dynamic metric, it is unlikely that a specific figure will be delineated in the guidelines, except to the extent that the Competition Commission may provide for a safe harbour.
As with the First Conduct Rule, SMEs receive favourable treatment under the Second Conduct Rule. For those undertakings with annual turnover of less than HK$40 million, the Second Conduct Rule will not apply.
Exclusion of merger control In a sharp departure from mainstream international competition law, including China’s notoriously detailed and often vexing merger notification regulation, Hong Kong will not have a cross-sector merger control regime. Instead, only mergers in the telecommunications industry are, as they have been in the past, subject to merger control. While merged entities are not exempt from either of the Conduct Rules, with no merger notification requirement, it is unlikely that the Competition Commission will be able to preemptively block mergers or extract concessions or conditions as a condition of consummating a transaction.
Enforcement The Competition Commission, which is called for under the Competition Ordinance, will be responsible for investigating alleged or potential infringements and, if appropriate, initiating enforcement actions. These cases will be heard by the yet to be formed Competition Tribunal.
The Commission may apply to the Tribunal to obtain injunctive relief while its investigation is pending. The Commission will be able to issue an infringement notice when it has reasonable cause to believe that serious anticompetitive conduct or an abuse of market power has occurred. However, the Commission will not be able to impose a fine on the infringing undertaking. As one of the concessions made to ensure sufficient LegCo support, the right of the Commission to initially impose a penalty of up to HK$10 million does not appear in the Competition Ordinance. Another feature of the Competition Ordinance is in the case of non-serious infringements, or those agreements that could be legal depending on circumstances, the Competition Commission’s initial remedial tool will be to issue infringement notifications. Only the Competition Tribunal will be able to impose fines.
PenaltyUpon the Competition Commission’s successful prosecution, the Competition Tribunal may impose fines of up to 10% of an infringing undertaking’s Hong Kong turnover for a maximum period of three years. While this amount represents a reduction of the original cap of 10% of global turnover, it still represents a substantial penalty. As many Hong Kong undertakings are completely local, or local subsidiaries of global organizations with separate corporate identities, this reduction in cap is not likely to have a meaningful impact on most undertakings. However, as in Europe, penalties are purely financial – there are no criminal remedies available to the Commission. The Competition Tribunal will also have at its disposal injunctive and structural remedies. Likewise, the penalties apply to undertakings and not individuals.
The Ordinance allows aggrieved parties to bring ‘follow-on’ private actions in court seeking damages following a finding of infringement by the Competition Tribunal or the formal admission of an infringement before the Competition Commission. While the Competition Ordinance does not currently permit ‘stand-alone’ actions, or those actions independent of enforcement proceedings, there is potential for meaningful private enforcement actions, particularly if Hong Kong allows for class action cases to be brought, as is currently being contemplated.
The Competition Ordinance represents a substantial milestone in Hong Kong’s regulatory framework. However, there is substantial work to be done – these steps could take a year or more:
Establishing the Competition Commission and Tribunal
The Competition Ordinance calls for a Competition Commission tobe set up to investigate and prosecute infringements before a yet to be established Competition Tribunal. In the telecommunications and broadcasting sectors, the Commission will have concurrent jurisdiction with the Communications Authority. The Competition Commission will have the power to investigate alleged violations as well as prosecute alleged offences. The Competition Tribunal will act as the adjudicative body for both contested cases and settlements.
Drafting and implementing enforcement guidelinesThe Competition Commission is required to establish guidelines that set forth its interpretation of the Competition Ordinance, as well as procedural and substantive practices. These guidelines will be subject to a public consultative process, thus providing an additional opportunity to debate elements of the law as well as how it will be applied. If the practice in other mainstream jurisdictions is followed, we expect these guidelines to set forth important enforcement principles and establish ‘safe harbours’, or particular conduct that will not be prosecuted if undertakings stay within the safe zone.
Leniency and immunity processes The Competition Commission will be responsible for adopting and implementing a leniency regime – one that allows undertakings to approach the Competition Commission voluntarily and admit to a violation in exchange for lenient treatment. Other jurisdictions, including Europe and the United States, rely heavily on their respective leniency programmes for disclosing serious infringements. Thus, we expect the Competition Commission to put considerable effort into designing and implementing an attractive and favourable leniency programme, one that adequately incentivises undertakings to come forward.
In an apparent departure from the direction of European competition law, and its emphasis on self-assessment, but in a manner consistent with United States, Australia and other antitrust regimes, the Competition Ordinance specifically calls for the ability of the Competition Commission to grant antitrust immunity to certain practices and agreements. While the Commission has yet to issue guidelines, the Competition Ordinance makes it clear that before granting such protections, the Competition Commission will be required to publish the proposed immunization, bring it to the attention of those it considers to be likely impacted by the proposed exemption, and allow for a public comment period of at least 30 days.
The institutions’ respective responsibilities and interactions
Though the details have yet to be formalized, the Competition Ordinance calls for the creation of two important institutions, the Competition Commission and the Competition Tribunal. Based upon the Ordinance’s framework, it is anticipated that the following steps will occur, and the resulting institutions will have these responsibilities:
Implications for legal practitioners
Solicitors and other legal practitioners will need to familiarize themselves with the Competition Ordinance. While the text of the Ordinance is of course a useful starting point, its legislative history helps put some of the current language into context. While the forthcoming competition guidelines will provide additional guidance for practitioners, it is anticipated that foreign competition law will, at least during the early implementation stages, be persuasive to both the Competition Commission and the Tribunal. In particular, the Second Conduct Rule, which applies to single firm conduct, will be largely guided by foreign case law, guidelines and economic theory. For those solicitors with clients that are unhappy with the current state of the Competition Ordinance, the consultation process under which the applicable competition guidelines will be drafted and promulgated by the Competition Commission provides an additional opportunity to shape Hong Kong competition enforcement policy.
In addition to these practice points, lawyers will need to look to their own practices to ensure personal and firm compliance with the Competition Ordinance. For example, to the extent practice areas rely upon either formal or informal minimum fee schedules or recommended fee schedules, these would likely be subject to the First Conduct Rule, which applies equally to all undertakings, including trade associations, professional societies and law firms. In Goldfarb v Virginia State Bar, 421 US 773 (1975), the United States Supreme Court held that a minimum recommended fee schedule for legal services published by the Virginia State Bar for real estate transactions was illegal per se under the United States Sherman Act. It rejected arguments including: (1) the fee schedule was not mandatory, but voluntary; and (2) law is a profession and not ‘trade or commerce’ (commercial activity). Even if the Hong Kong schedules are voluntary or suggested, they are likely to be considered as having as their object or effect restricting or distorting competition. Moreover, minimum salary levels for trainee solicitors may come under competition law scrutiny. In the United Kingdom, on 17 May 2012, the English Solicitor Regulation Authority announced that the national minimum trainee solicitor wage will be abolished effective January 2014. While solicitors in other jurisdictions have argued that the law is a profession and not a trade, such arguments have not been successful. Likewise, arguments that minimum fees and/or salaries ensure a minimum or standard level of service have been summarily rejected.
Martin DajaniHead of Competition AsiaDLA Piper
除了該等實踐重點外，律師還需觀察本身的業務以確保個人及公司遵守《競爭條例》。舉例說，如果業務範圍靠的是正式或非正式的最低收費表或建議收費表，這可能會受第一行為守則約束，而該守則同樣也適用於包括貿易協會、專業學會和律師事務所在內等所有業務實體。在Goldfarb v Virginia State Bar, 421 US 773 (1975)一案中，美國最高法院判定Virginia State Bar為房地產交易發佈法律服務的最低建議收費表本身在《美國謝爾曼法案》(United States Sherman Act)下屬違法行為。該法院駁回以下論據： (1)收費表並非強制而是自願的；及(2)法律是專業而非「貿易或商業」(商業活動)。即使該等收費表屬自願性質或是建議的，它亦可能被視為以限制或扭曲競爭作為其目標或造成此類影響。此外，實習律師的最低薪酬水平可能須通過競爭法審議。2012年5月17日，英國律師監管局宣佈，自2014年1月起，實習律師的國家最低工資將會被廢除。雖然其他司法管轄區的事務律師曾辯稱法律是專業而非商業，但該等論據並未取得成功。同樣，有關確保最低或標準服務水平的最低收費及／或薪酬的論據已被斷然駁回。
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