Disgruntled Employee; Exposed Company? Implications of the Hong Kong Competition Commission’s Revised Leniency Framework

On 16 April 2020, the Hong Kong Competition Commission (“Commission”) released:

  • a revised leniency policy for undertakings involved in cartel conduct (“Leniency Policy for Undertakings”); and
  • a new leniency policy for individuals involved in cartel conduct (“Leniency Policy for Individuals”).

This development introduces fundamental changes to the leniency framework under Hong Kong’s Competition Ordinance (“CO”), and will impact on the decision as to whether to approach the Commission for leniency. Importantly, the changes now allow individuals to unilaterally approach the Commission for leniency, which gives rise to concerns that nervous or disgruntled employees may expose their employers in order to secure individual leniency protection for themselves. We highlight the key changes to the leniency framework in this article, and discuss the implications that it has for businesses and individuals.

  1. WHAT IS A LENIENCY POLICY?

The Commission’s leniency policies are meant to incentivize cartel members to cease their cartel conduct and report it to the Commission. Cartel conduct generally refers to agreements or concerted practices amongst competitors to fix price, share markets, restrict output or rig bids.

In exchange for cooperation, the Commission will not commence proceedings for a financial penalty against the successful leniency applicant. It is designed to be an investigative tool to uncover and combat cartels by incentivizing cartel members to report their cartels. In most jurisdictions worldwide, most of the cartel behavior is discovered via successful leniency programmes. The addition of direct leniency for individuals is designed to increase the efficacy of the leniency programme in Hong Kong, by incentivizing individuals involved in cartel activity to come forward, even if their companies do not.

  1. KEY CHANGES TO THE LENIENCY POLICY FOR UNDERTAKINGS

The Leniency Policy for Undertakings only applies to entities or persons engaged in economic activity. The latest amendment introduces several key changes to the Commission’s 2015 Leniency Policy for Undertakings:

2015 Leniency Policy for Undertakings

2020 Leniency Policy for Undertakings

  • An undertaking that has coerced others to participate in the cartel will not enjoy leniency. No mention of ringleaders being excluded from leniency.
  • An undertaking that is clearly the single ringleader of a cartel, or that has coerced other parties to participate in the cartel, will not enjoy leniency.
  • Leniency only available to the first undertaking that reports the cartel to the Commission.
  • Available even if the Commission has started an investigation or has exercised its compulsory information gathering powers pursuant to an investigation.
  • Expressly distinguishes between two types of leniency applicants:
    • “Type 1 Leniency Applicant”: Leniency applicant is the first cartel member that discloses its participation in a cartel of which the Commission has not opened an initial assessment or investigation.
    • “Type 2 Leniency Applicant”: Leniency applicant is the first cartel member that provides substantial assistance to investigations and enforcement against a cartel which the Commission is already assessing or investigating.
  • Successful leniency applications will not be subject to Commission proceedings before the Competition Tribunal, other than an order declaring that the party had contravened the CO.
  • The Commission will not bring proceedings for an order declaring that a successful leniency applicant (both Type 1 and Type 2) has contravened the CO.
  • However, if a follow-on private action for damages is brought against a Type 2 Leniency Applicant, the Commission may issue an infringement notice requiring that leniency applicant to admit a contravention of the CO, in order for private action to be brought.

Importantly, the above changes now afford more protection to leniency applicants that report their cartel involvement before the Commission opens an initial assessment or investigation (i.e. Type 1 Leniency Applicant).

Before the amendments, a successful leniency applicant had to admit to its participation in a cartel, which could result in an order declaring that the applicant had contravened competition laws. This declaration exposed the leniency applicant to follow-on private action by persons who suffered loss or damage as a result of the cartel. Under the old framework, even though they may enjoy immunity from financial penalties, potential leniency applicants had to carefully consider the risk that applying for leniency may subsequently open them up to further private action.

Following the amendments, the Commission will not require Type 1 Leniency Applicants to admit to a competition contravention. Given that private actions for damages in Hong Kong can only be brought against parties who have contravened competition law (i.e. follow-on private action), Type 1 Leniency Applicants will in practice enjoy immunity from private actions as no such admission will be made. However, Type 2 Leniency Applicants remain exposed to private actions as the Commission may issue an infringement notice requiring them to admit to a competition law contravention. In other words, more protection is afforded to leniency applicants who report their cartel before the Commission has started looking into the case. 

These new leniency benefits appear generous compared to leniency programs in other major competition law jurisdictions. In the US and UK for example, leniency applicants who enjoy full immunity from criminal liability and/or administrative financial penalties may still be sued by injured parties who can bring stand-alone private action without having to piggy-back off an infringement finding. Even in jurisdictions like Singapore that only allow follow-on private damages actions, successful leniency applicants are required to admit to the conduct for which leniency is sought, which exposes them to private action claims. The level of protection against private action afforded to Type 1 Leniency Applicants under Hong Kong’s revised leniency policy appears to be comparatively more expansive, and should incentivize more entities to come forward to report their involvement in cartels.

  1. FEATURES OF THE LENIENCY POLICY FOR INDIVIDUALS

The new leniency framework introduces a new Leniency Policy for Individuals. Individuals that are not undertakings (i.e. not engaged in economic activity), but who are involved in cartel conduct, can now apply for leniency directly. Leniency is only available to the first individual who reports the cartel to the Commission, and before an undertaking approaches the Commission with information about the same cartel. Individuals who are clearly the single ringleader of, or who coerced other to participate in the cartel will not qualify for leniency.

  1. NERVOUS/DISGRUNTLED EMPLOYEE, EXPOSED COMPANY?

The introduction of a Leniency Policy for Individuals potentially gives rise to a conflict of interest between companies and their employees: a whistleblowing employee could report his company’s involvement in a cartel in a bid to escape individual liability. This is a real risk given that the Commission has increasingly been bringing enforcement action against individuals. There have been at least three publicly reported cases to date where the Commission has pursued director disqualification orders and financial penalties against individuals. It is therefore important to consider how the Leniency Policy for Undertakings and the Leniency Policy for Individuals function alongside each other and interact, to properly understand the risks arising from seeking leniency.

Firstly, the rules surrounding the granting of “markers” give companies a distinct advantage. Leniency is only provided to the first successful applicant. Potential applicants are ranked in sequence of time – they can approach the Commission with certain high-level details about the cartel conduct to receive a “marker” which reserves their position in the leniency “queue”. Thereafter, the potential applicant who is first in the queue will be given some time to “perfect the marker” by providing the Commission with further details about the cartel, thereby securing their leniency.  If the first in the queue is unable to perfect its marker adequately or in time, the next in the queue will be given the opportunity to do so.

Under the revised leniency framework, if a leniency marker has already been given to an undertaking, leniency or a marker cannot be granted to an individual for the same cartel. In contrast, if an individual has been granted a leniency marker, undertakings can still be subsequently granted a marker, and can perfect it ahead of the individual, thereby “jumping” the queue ahead of the individual.

This asymmetry is significant for companies: even if an employee approaches the Commission to report a cartel, a company that discovers this can still protect itself by immediately applying for a marker, and quickly perfecting the marker ahead of the employee by providing the Commission with detailed information about the cartel. The company would then be able to enjoy leniency ahead of the employee. In many ways, it is oftentimes easier for a company to perfect the marker ahead of the employee because the company tends to be in possession of more information and materials that shed light on the cartel. It is key for companies to understand this dynamic, to strategically respond in a situation where an employee has unilaterally disclosed a cartel.

However, while the above steps can minimize the exposure from the acts of employees, failing to make the first move in reporting the cartel may nevertheless cost the company. Importantly, if the employee reports the cartel and obtains a marker, this could already trigger an initial assessment by the Commission, which may disqualify the company from qualifying as a Type 1 Leniency Applicant and enjoying the greater protection that affords. Further, it is currently not clear if a company can enjoy leniency once leniency has been granted to an individual. While the Leniency Policy for Undertakings states that leniency is only available to “the first cartel member”, it is not entirely clear if an individual could be considered a “cartel member” – if so, leniency may not be available for the company once it has been granted to an individual. The crux is that there are various risks and disadvantageous that arise if an employee were to report a cartel ahead of a company. It is therefore generally more advantageous for companies, rather than their individual employees, to be the ones reporting the cartel.

For individuals, it is important to realize that the revised leniency framework allows their employers to perfect the marker ahead of the individual, in which case, leniency will no longer be available for the individual. While the Commission may offer not to initiate proceedings against the individual in such circumstances, this is made on a discretionary basis and does not provide full comfort. It is therefore critical for individuals to ensure that their leniency application to the Commission remains confidential, such that they can enjoy the full benefits of leniency instead of being overtaken by their employers in the leniency queue.

  1. WHAT CAN COMPANIES DO TO MINIMIZE THE RISK OF UNILATERAL REPORTING BY EMPLOYEES?

Given that it is in the interest of companies to avoid having employees unilaterally report a cartel to the Commission, it is critical to establish a robust internal whistleblowing mechanism to ensure that employees’ concerns and grievances are fully heard and effectively addressed internally.

Amongst others, companies can consider:

  • Setting up anonymous whistleblowing mechanisms for employees to raise concerns without divulging their identity;
  • Establishing grievance handling protocols with various reporting channels apart from employees’ immediate supervisors so employees have various options to raise concerns;
  • Ensuring that non-interested parties are involved in looking into whistleblowing or grievance reports; and
  • Having internal avenues to appeal any decision or resolution made internally.

It is also crucial to highlight to employees, directors, managers and other officers of the company that, in general, they will benefit from the company’s successful leniency application (so long as they are not ringleaders or coercers). This will remove any misconception that these individuals will be unduly exposed should they fail to unilaterally approach the Commission for individual leniency or that they are somehow in a “race” with the company to get to the Commission first.

Of course, once the individual has informed the Company of the existence of the cartel, it is incumbent on the company to take the necessary steps to apply for leniency itself, or face the risk that the individual will do so.

Notwithstanding the above, it is important that companies should not have a policy of discouraging or punishing whistleblowers who approach the Commission. Section 173 of the CO makes it an offence for an employer to terminate, discriminate against, intimidate, harass, or otherwise cause injury, loss or damage to employees who report cartels to the Commission.

Ultimately, the new leniency policies are to be welcomed for providing greater clarity to businesses and individuals.  However, the way the two regimes co-exist alongside each other, and the instances in which they may overlap or impinge on each other makes it more crucial than ever for businesses and individuals to seek detailed legal guidance on their internal policies and the decision and timing of any leniency application. 

Registered Foreign Lawyer, Fangda Partners

Partner, Fangda Partners