From cartels to the Second Conduct Rule: Insights from a wide-ranging discussion with the Hong Kong Competition Commission
In early March, Rasul Butt, Senior Executive Director of the Hong Kong Competition Commission (the Commission), was the keynote speaker on a webinar co-hosted by the British Chamber of Commerce and Freshfields. A panel discussion followed with Jindrich Kloub, Executive Director (Operations) of the Commission, William Robinson, Partner, Freshfields, and chaired by Alastair Mordaunt, Partner, Freshfields.
Insights covering settlement, cooperation, leniency, individual liability, and the abuse of a substantial degree of market power are summarised below:
A look at the Commission’s recent work
Mr. Butt highlighted a number of the Commission’s achievements in enforcement, policy and advocacy work in the past year:
- a significant increase in cases brought before the Competition Tribunal (the Tribunal). In 2020, the Commission has filed three new cases, bringing its total case count before the Tribunal to seven;
- the first abuse of substantial market power case before the Tribunal;
- the first set of proceedings resulting from a successful leniency application, which was also the first case where the Commission and the respondents reached a settlement agreement on both the liability and relief portions of the proceedings;
- the issuing of Infringement Notices to companies for facilitating a price-fixing cartel;
- the acceptance of commitments in two cases (online travel agents case and the Hong Kong Seaport Alliance);
- advising on approximately 30 public policies and initiatives concerning consumers and the business environment; and
- the issuing of relevant guidance and advice to the local business community during the Covid-19 pandemic.
- Mr. Butt said that this momentum will continue and predicted a variety of enforcement outcomes in the coming year.
The following topics were then covered in the panel discussion:
Settlement and cooperation before / after the commencement of Tribunal proceedings
- There has been a general trend for the Commission to settle with respondents either before or after Tribunal proceedings have commenced.
- The settlement mechanisms have involved the Commission either issuing an Infringement Notice and / or accepting commitments from the respondents before commencing Tribunal proceedings; or applying for a consent judgment by way of the Carecraft procedure after proceedings have been commenced.
- The Cooperation and Settlement Policy sets out an incentive structure incentivising early cooperation and offering penalty discounts of between 25% to 50% for parties that cooperate prior to the commencement of proceedings. Once proceedings begin, the cooperation and settlement discount is capped at 20%. Parties that opt only to settle (without cooperating) after proceedings have begun are likely to receive a settlement discount of 10% or less.
- Settling after the commencement of proceedings also entails foregoing the protection of an undertaking’s employees or officers. Unless an individual respondent cooperates independently with the Commission before proceedings are commenced (in which case it would be unlikely for them to be named as a respondent), the Commission is unlikely to drop its case against the individual after the relevant undertaking enters into a settlement.
- Respondents can still defend themselves in the course of cooperation with the Commission. It is possible for an investigated party to volunteer evidence whilst defending itself, for example by explaining how the law applies, challenging the Commission’s interpretation of evidence, or presenting mitigating factors.
- The Commission is aware of the risk of divergent outcomes between settling parties and contentious parties, but it is ultimately up to the parties to decide the likelihood of this occurring. The Commission will try to minimise this risk by only settling matters it is confident it could prove in the Tribunal.
- Cartelists should not assume that they will be issued Infringement Notices (instead of being taken to the Tribunal) if they are subject to an investigation - the Commission prefers to seek monetary penalties for hard-core cartels. In the hotels and tour counter operator case, early and active cooperation and the respondents’ involvement as facilitators led the Commission to issue Infringement Notices instead.
Revised Leniency Framework in 2020
- The Leniency framework was revised in April 2020 and now makes an important distinction between Leniency applications received before (Type 1 Leniency) and after (Type 2 Leniency) the Commission has opened an initial assessment or investigation of conduct.
- The revised Leniency framework excludes ringleaders from receiving leniency and clarifies that the Commission will not bring Tribunal proceedings against successful applicants.
- On the risk of follow-on actions disincentivising leniency applications, the revised Leniency framework seeks to provide some relief to successful leniency applicants without undermining the right of victims to recover damages. This is achieved by not issuing infringement proceedings or an Infringement Notice against Type 1 Leniency applicants, thereby excluding them from the possibility of follow-on actions. Type 2 applicants will nevertheless still face litigation risk in the event follow-on action is taken against other cartel members.
Individual liability and director disqualification
- The Commission places a high importance on individual liability to deter and prevent anticompetitive conduct in Hong Kong. This has been demonstrated in the Commission’s past five cases, each of which included at least one individual respondent.
- The Commission takes the following factors into account in its decision to name individuals as respondents:
- whether the individual was involved in the infringement; and
- the individual’s role in the contravention and his / her position within the relevant undertaking.
- The Commission prioritises individuals that hold an officer role (including directors or managers) but may pursue non-officer individuals that are voluntarily involved in the infringement.
- The Commission considers the following factors when seeking a director disqualification order against an individual:
- whether the individual is a director or is involved in the management of a company engaged in the infringement; and
- whether the individual’s conduct shows he / she is unfit to manage the company, due to he / she:
- contributing to the infringement;
- having grounds to suspect that the conduct is an infringement but taking no steps to prevent it; or
- should have known that the conduct of the company constituted the contravention.
- Absent exceptional circumstances, the Commission would not name an individual as a respondent to Tribunal proceedings if the individual cooperates either in his / her individual capacity or as part of the relevant undertaking’s cooperation. Successful individual leniency applicants will be given absolute protection.
The Commission’s approach to the Second Conduct Rule (SCR)
- In December 2020 the Commission commenced its first SCR case. The case concerns a medical gas supplier, Linde, allegedly leveraging its de facto monopoly position in the medical gases supply market into the downstream medical gas pipeline system maintenance market. The allegations include engaging in exclusionary conduct and imposing various arbitrary or unreasonable trading terms towards a potential competitor.
- This case signifies the ‘maturing’ of Hong Kong’s competition regulator rather than a shift in its enforcement focus. Cartel enforcement remains one of the Commission’s top priorities and will still comprise the bulk of the Commission’s enforcement.
- On what constitutes ‘substantial degree of market power’ under the SCR, businesses may refer to either EU precedents or the European Commission’s Art.102 TFEU guidance when assessing the dominance threshold, keeping in mind the different economic context of the Hong Kong markets. It is possible the upcoming judgment for the Linde case may not offer material guidance since the Commission pleads a near monopoly position on Linde’s part in the relevant market.
- Certain sectors are more susceptible to SCR breaches by virtue of their market structure and characteristics.
- Despite the global trend of antitrust scrutiny in the tech sector, the Commission is unlikely to pursue global conduct already investigated in other larger jurisdictions, since those investigations may result in remedies that address the conduct producing effects in Hong Kong.
- Nevertheless, the Commission will continue to focus on conduct in the tech sector where there is a strong HK nexus or a distinct impact on the HK market. One example would be the online travel agents case, where remedies against the online travel agents in other jurisdictions did not result in a corresponding conduct change in Hong Kong. Another example would be the hotels and tour counter operator case, where the aim of the infringing conduct was to blunt the positive effects of a tech disruptor against an incumbent business.
Informal Guidance from the Commission
- Outside the Commission’s informal guidance process for cooperative measures necessitated by the Covid-19 pandemic, the Commission allows parties to seek guidance through the formal process of an application for a decision.
- The Commission is considering possible methods of providing general informal guidance to prevent anticompetitive conduct in Hong Kong, a development that would no doubt be welcomed by the business community.