Competition Law

- Know it technically!

Mohan Datwani, Solicitor

LLM MBA (Distinction) CAMS, FHKIOD, FCIS FCS(PE)

All Rights Reserved. July 2016

 Overview
Conduct that prevents, restricts or distorts competition
(i.e. harms competition) violates the conducts rules

The First Conduct Rule (FCR) relates to agreement

(including concerted practice and association
decisions) that harms competition, with serious anti-
competitive conduct (SAC) being the most
reprehensible

The Second Conduct Rule (SCR) relates to conduct that

amounts to abuse of substantial market power (SMP)
to harm competition

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 Common Themes
For the consumer, lower
prices and innovative
goods and services

Therefore, restrictive
For the market place
practices generate
generate economic
countervailing
efficiencies
economic efficiencies

Lead to consumer
benefits and other
efficiencies
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 Case Study

There are certain European manufacturers of a new

novel LED lights that agree in Europe, that:

Asia should be split amongst them with Hong Kong

going to 2 of them, Manufacturer A and B. The rest of
Asia is to go to others

The 2 manufacturers should then co-ordinate a

delivery schedule of different light colours and not
infringe on each others colours for the initial two
years

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 This allows for better coordination in breaking into the
market and makes economic sense in terms of
production and distribution efficiencies

The storage facilities in Hong Kong should be jointly

developed for distribution of the LED lights as the
storage costs will be around 10% of the costs

The sales price of the LED lights should be within a

broad range and colour dependent, and information
should be share amongst the manufacturer on
production costs as different colours costs differently.

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 There will be both agency agreements and exclusive
distributorship agreement with agents and
distributors.

All agents and distributors would know the

coordination in terms of colour and should agree not
sell each others colour lights.

The parties also agree that they will not sell using the
internet, at least initially for 2 years, and any agents or
distributors selling other brands will be punished with
revocation of their contracts

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 They also agree that to ensure long term supply and
profitability, which is good for the market place that
there should be a minimum resales price by the
agents and distributors

There will be both agency agreements and exclusive

distributorship agreement with agents However, for
the initial 6 months, the lights would be sold at a price
below variable production costs to change customer
preference to existing LED lights (which the new novel
LED lights are a substitute for)

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 Basic Questions

Assuming that there are competition concerns, who will

investigate and determine if there is violation of the FCR?

The Competition Commission will investigate according to the

FCR Guideline and other published policy documents

The Communications Authority will not as it has concurrent

(lead) jurisdiction over telecoms and broadcasting only

On the Competition Tribunal and other courts could determine

competition law.

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 The Guidelines
In fact, the Court may admit the Guidelines as evidence in
proceedings

The proof that a person contravened or did not contravene

the guideline may be relied on by any party to the
proceedings as tending to establish or negate the matter

However, the Guidelines and all amendments made to

them are not subsidiary legislation

(s.35 of the Ordinance)

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 Discussion

What if the turnover of Manufacturer A (or B) is less than

HK$200M

There is an exclusion for agreement for lesser economic

significance of HK$200M

But serious anti-competitive conducts are excluded. There seems

to be price fixing, output limitation and market sharing on the
facts. So HK$200M is not relevant

For SCR, the threshold is HK$40M

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 The Penalties

On the facts, what is the worse that could happen to Manufacturer A

(or B)?

The Commission could commence proceedings at the Tribunal and ask

for a penalty of 10% of the HK turnover for the highest three out of
five years during which the conduct subsisted
Any persons affected by the anti-competitive conduct could take
follow on actions

The Tribunal could order up to 5 years disqualification among other

orders

There could be criminal consequences for obstructing investigations

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 The Process
Before the Commission gets the case to the Tribunal,
Manufacturer A (or B)

Would probably have a chance to offer a commitment under

s.60 to cease and desist the anti-competitive conduct

If not, the Commission may (but not obliged) to issue an

infringement notice under s.66 to require ceasing and desisting
of the anti-competitive conduct

If the case does not involve SAC, then the Commission must
issues a warning notice to cases and desist the anti-competitive
conduct before going to the Tribunal

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 In between, Manufacturer A (or B) could race
to be the first to whistleblow on the other for
leniency

Lets move on from the case study to other

examples, including those from the
Commission

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 The Sources
Primary Source Subsidiary Guidelines Policy
Legislations Documents/Others
Ordinance Competition Guideline on the First Enforcement Policy
(Application of Conduct Rule
Provisions) Regulation
Competition Guideline on the Leniency Policy for
(Disapplication of Second Conduct Rule Undertakings
Provisions) Regulation Engaged in Cartel
Conduct

Competition Guideline on the Brochures/Decision

(Turnover) Regulation Merger Rule s/Market Survey,
Toolkit, etc.
Tribunal Rules Guideline on
Complaints
Tribunal Suitors Guideline on
Funds Rules Investigations
Competition (Fees) Guideline on
Rules Applications for a
Decision and Block
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Exemption Order
 The Ordinance
Applies to undertaking means any entity, s.2
undertakings regardless of its legal status or the way
in which it is financed, engaged in
economic activity, and includes a natural
person engaged in economic activity

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 The Ordinance
Exempts statutory a body of persons, corporate or s.3
bodies unincorporate, established or constituted
by or under an Ordinance or appointed
under an Ordinance, but does not include a
company; a corporation of trustees
incorporated under the Registered Trustees
Incorporation Ordinance (Cap 306); a
society registered under the Societies
Ordinance (Cap 151); a co-operative
society registered under the Co-operative
Societies Ordinance (Cap 33); or a trade
union registered under the Trade Unions
Ordinance (Cap 332)

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 Discussion on Undertaking

Is a charity an undertaking?

Is the Government a statutory body? But is it an

undertaking?

If you appoint an agent, is it a separate undertaking or a

single economic entity with you?

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 Discussion (HE1)
An Undertaking or single economic entity?

There is a Hi-Fi Manufacturer It sells its products in Hong

Kong to consumers through its website. It also sells
through retail stores owned by independent third parties
under "Agency Agreement" as its "agent. Is the agent
regarded as an agent or a separate economic entity?

Is there a difference if the agent shares or does not share

risks?

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 Discussion

There are two competitors, and they are both suffering.

They attended a lecture and know that they have to be
really careful not to agree to anything that harms
competition, or the violate the FCR. Instead of agreeing,
they nod heads. Is there an issue?

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 Agreement
Agreement Concerted practice Decisions
An agreement includes This something short of Decisions of for example
any agreement, an agreement but will associate of
arrangement, still be caught as an undertakings, like a trade
understanding, promise agreement under the association will be
or undertaking, whether Ordinance caught as an agreement
express or implied, under the Ordinance
written or oral, and The Commission has
whether or not issued a pamphlet to
enforceable or intended educate the market
to be enforceable by upon this.
legal proceedings

An agreement could be
ascertained by inference
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 Other Issues
Object and Effect Territorial Application Serious Anti-Competitive
Conduct
If an agreement, The Ordinance applies to Price-fixing
concerted practice or any agreement,
decision has more than concerted practice or Market- sharing
one object, then as long decision that has the
as one of its objects is to
object or effect of Output Limitation
prevent, restrict or preventing, restricting or
distort competition distorting competition in Bid-rigging
Hong Kong even if made
the object could be outside Hong Kong, or if Note: The HK$200 million
ascertained by inference any party or undertaking turnover threshold does
or association of not apply!
undertakings is outside
Hong Kong 21
First Conduct Rule

Concerted
Agreement
practice

Object or Effect:
Decision of an prevent, restrict
association or distort
competition in
Hong Kong
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 Can you give some example of concerted
practice or decision of association of
undertakings?

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 Discussion (HE2)
(Concerted practice)

Each calendar quarter a language school surveys and

distributes to other schools detailed information on
named basis for proposed fee increases amongst schools.

Is there any difference if the schools, districts and names

are not know, but only aggregated data?

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 Discussion HE3
(concerted practice)

The sales directors of three providers of a specialised

insurance products in Hong Kong attended a corporate
golf tournament. The plan by one of them to lower
broker commission was shared amongst them on
confidential basis. Is there an issue? What should you do
if you are one of the sales directors?

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 Discussion HE4 (Decision of an
association of undertakings)

The mooncake bakers association proposes a non-binding

resolution to encourage its members to increase mooncake
prices by HK$10 before the Mid-Autumn Festival to show
their "premium" nature and to protect members' profit
margin. The price increase is implemented generally. Is there
an issue?

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 How about Serious Anti-Competitive Conduct?
Are there any examples? The HK$200M
turnover exclusion does not apply?

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 Serious Anti-Competitive Conduct
Price-fixing Market-sharing Output Bid-rigging
limitations
the fixing, the allocating the fixing, an agreement
maintaining, sales, territories, maintaining, between two or
increasing or customers or controlling, more
controlling the markets for the preventing, undertakings
price for the production or limiting or whereby one or
supply of goods supply of goods eliminating the more of them
or services or services production or undertakes not to
supply of goods submit or
or services withdraws a bid,
or there is some
sort of controlled
entities amongst
them, and these
arrangements are
not known to the
party calling for
bids 28
 Discussion HE5
(Price Fixing)

Car dealers meet to discuss car-financing options to avoid

supposed consumer confusion. They agree minimum
interest rates for car finance packages, and to limit
Chinese New Year discount to 5%. Is there an issue?

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 Discussion HE6 (Market Sharing)

A group of coach companies meet to discuss and agree to

divide themselves up to serve different buildings based on
projected customers to make reasonable profit. They
agree not to pursue each other's customers or launch new
services without consulting each other. Is there any issue?

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 Discussion HE7 (Output Limitation)

The local salted fish producers are in financial difficulty as

supply outstripped demand. The main suppliers meet to
discuss restructuring the industry to rationalise the over-
capacity. A scheme was agreed to encourage withdrawal
by certain producers from production with refocus on
other business areas for a period. They will be paid
compensatory payments by those in continued
operations and, including for decommissioning relevant
production lines. Is there any issue?

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 Discussion HE8 (Bid-rigging)

A large company desired to outsource its catering

services. The sales representative of the four major
caterers by chance discussed the tender at a charity
football match. One will decline, second will withdraw a
submitted bid, and third would submit a higher price
"cover bid. The company calling for the bid was unaware
of these arrangements, and awards the bid to the fourth
company which was the most "competitive" bid. Is there
an issue?

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 There are so many rules and examples, are
there any exclusions or exemptions?

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 General Exclusions
Agreements
enhancing overall Block Exemption Compliance with
economic Orders legal requirements
efficiency

Agreements of
Services of general
lesser significance
economic interest Mergers
(Turnover HK$200
etc.
million)

Public Policy and

International
Obligations
Exemptions
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 Agreement enhancing overall
economic efficiency
First condition Second condition Third condition Fourth condition
The agreement Consumers The agreement The agreement
contributes to receive a fair does not impose does not afford
improving share of the on the the undertakings
production or efficiencies undertakings concerned the
distribution or concerned possibility of
promoting restrictions that eliminating
technical or are not competition in
economic indispensable to respect of a
progress the attainment of substantial part
the relevant of the goods or
efficiencies services in
question
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 Discussion HE24
(Third condition)

A producer of soft drinks with large (60%) market share

concludes customer supply agreements for 50% of Hong
Kong's demands for 7 years exclusively in its favour. Its
defence is that this allows for more accurate demand
predictions and better production plan, reducing raw
material storage and warehousing costs and avoiding supply
shortages, and therefore certain economic efficiencies. Is
there an issue?

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 HE25 (Fourth condition)

There are two airlines with market share of more

than 70% of passenger traffic on a destination to and
from Hong Kong. The airlines agree to coordinate
schedules and certain tariffs on a codeshare
arrangement. There are three other airlines including
a low cost carrier with about 15%. Is there an issue?

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 Other Hypothetical Examples
Joint buying/SMEs Exchange of Exchange of Exchange of
(9) information (10) information Information with
through third effect of harming
parties (11) competition (12)

Group boycott (13) Trade associations Standard Terms Resale Price

and Industry (Insurance Policy) Maintenance (16)
bodies (14) (15)

Retail Price Retail Price Exclusive Production Joint

Maintenance (17) Maintenance (18) Distribution/Custo Venture (20)
mer Allocation (19)

Joint tendering Joint selling, Joint selling,

(21) distribution and distribution and
marketing (22) marketing (23)

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 The RPM Concerns
RPM by multiple suppliers or common in the market as price
transparency facilitates coordination by competing suppliers

reduce incentives to lower process by suppliers to distributors

and distributors to lower wholesale prices

where the RPM is distributor driven would reduce intra-

brand competition by restricting ability to lower prices and
facilitating downstream distributors coordination

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 The RPM Concerns
it hinders new market participants at the distributor level
and distribution models expansion based on low prices,
like discounter distributors

where the supplier has market power, smaller suppliers

could be excluded from the market, and distributors are
incentivised to promote RPM affected products causing
harm to consumers.

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 HE16 (Resale Price Maintenance)

A retail household goods shop owner is significant

customer of a daily use product available in supermarkets,
convenience stores, specialist stores and smaller shops. It
has concern of lower prices being offered by other large
chain stores and smaller independent stores. It
pressurises the supplier to require fixed retail price or
RPM. Is there an issue?

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 HE17
(Resale Price Maintenance)

A DIY nails and screw manufacturer proposes to sell

through independent retail stores at prices stipulated by it
to ensure orderly market and avoid customer confusion
from differing price offerings. This would also allow
retailers healthy profit margin. Is there an issue?

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 HE 18
(Resale Price Maintenance)

A candy producer wishes to introduce a new range of

candy products successful elsewhere in Asia. It has less
than a 5% market share and as a one month long
campaign in Hong Kong requires retailers to sell at a price
lower than those of other competing brands. Is there an
issue?

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 HE 9
(Joint Buying)

100 small snack food retailers and stall holders form a

joint buying group, and they must buy half of their snack
food products through the buying group. However, they
remain a small portion of the buying and selling markets
in comparison to large wholesalers and supermarket
chains. Is there an issue?

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 HE10
(Exchange of Information)

A trade association for junk owners collects and circulates

to its members information on their respective proposed
future prices, including for specific journey in private
before members' seasonal price review. Is there an issue?

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 HE11 (Exchange of Information
through third parties)

There are three main retailers for cosmetics in Hong Kong.

A supplier supplies all three retailers A main retailer
emails the supplier that it will raise price if the other two
other main retailers does the same and that the supplier
should make sure that "this message is understood. Is
there an issue?

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 HE12
(Exchange of Information with effect of
harming competition )

There are five pre-packaged fresh fruit suppliers to Hong Kong

grocery retailers. Demands are unstable leading to high waste
food products. The suppliers hire an independent research
company to collate information on unsold fruit on daily basis.
The results are published weekly at the researcher's website
with location break down. Is there an issue?

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 HE 13 (Group Boycott)

There is need to hire overseas staff by specialist recruitment

agencies for a particular manufacturing industry in Hong
Kong. A new entrant agency acts as intermediary and
consolidates the specialist agency services into a "one stop
shop" thereby avoiding the need to deal with different
agencies. The incumbent boycotts the new entrant. Is there
an issue?

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 HE14
(Trade association and industry bodies)

A local professional body organises certification for many

years and members could advertise that they were
"endorsed' . This is a key consideration of customer in
choosing service provider. The professional body changes
membership requirements to include turnover threshold
at the behest of a few larger members at a meeting over
"low quality" services and "low pricing" conduct of certain
smaller members. This results in smaller members losing a
significant portion of their existing customers. Is there an
issue?

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 HE15 (Standard terms (insurance policy))

An insurance trade association circulates non-binding

standard policy terms for pleasure boat to members. The
extent of coverage and premium are not covered. The
standards terms are widely used but tailored to individual
client needs. Is there an issue?

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 HE 19 (Exclusive
Distribution/Customer Allocation)
A global sports brand is a medium sized supplier in Hong
Kong. It appoints an exclusive distributor for Hong Kong in
line with its business model. The distributor could only
sell its products and would be responsible for
promotional activities. It would be partially reimbursed
for costs, including related to promotion and staff
trainings. There are other competitors in the market
along with related non-exclusive distributorships for the
brand which distribute other brands, and the sports
brand does not restrict online retailers outside Hong Kong
from selling in Hong Kong. Is there an issue?

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 HE20
(Production joint venture)

The two leading suppliers of industrial chemical product

in Hong Kong are to close down their independent
production facilities for a more efficient joint plan for
their joint sole use

The agreed terms relate solely to the running of the

facility and nothing else.

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 HE21 (Joint tendering)

There is a tender for a high-rise office building. This needs

significant manpower and financial resources for liquidity
throughout the project. Two small construction
companies, which could not have independently
submitted a bid for the tender submitted a joint bid
allowing them to combine their resources. They won over
larger construction companies which have won the vast
majority of bids in the last 5 years. Is there an issue?

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 HE22 (Joint selling, distribution
and marketing)

There are a number of European flower producers who

sold their products to Hong Kong through individual
distributor's contract. They form a joint venture to
rationalise their resources and reduce freight costs. The
parties all agree to make their export sales under a unified
brand. The joint venture will decide on products and
volumes to be sold, the customer choices and prices
charged. Is there an issue?

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 Hypothetical Example 23
(Joint selling, distribution and
marketing)

A group of microbreweries agree to set up a single

distribution and delivery centre, and each brewery
contributes its delivery staff and vehicles to the centre. Is
there an issue?

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Q&A
Thank You.