Hong Kong Competition Commission Publishes Draft Guidelines: A Key Step Toward Bringing the Competition Ordinance into Full Force

Dr. Jing Wen Zhu, Registered Foreign Lawyer, DLA Piper

The Hong Kong Competition Commission (the “Commission”) published a set of draft guidelines (the “Guidelines”) on 9 October for public consultation. These guidelines, upon finalisation, will be submitted to the Legislative Council for consultation and adoption. The Commission expects that this process will be complete in the first half of 2015, and then the Hong Kong Competition Ordinance (the “Ordinance”), passed in June 2012, will come into full force.

The draft package includes three procedural guidelines addressing complaints, investigation, exclusions and exemptions, and three substantive guidelines addressing agreements, abuse of dominance and telecommunication sector specific mergers. The Guidelines show lots of commonality with competition rules and practices of other jurisdictions with long established competition regimes. The Commission recognises the benefits resulting from a competition regime that is consistent with international best practices. Below are a few highlights of the guidelines.

Investigations

The Commission can launch an investigation on its own initiative, upon complaints, or upon referrals. Investigations will be conducted in two phases: (1) the initial assessment phase, during which the Commission determines the sufficiency of the evidence and the worth of further investigation; it will seek information on a voluntary basis; and (2) the investigation phase, which is triggered when the Commission has reasonable cause to suspect a contravention of competition rules. During this second phase, the Commission may exercise its power to compel the production of evidence. To enter and search specific premises, the Commission will first have to obtain a search warrant from the Court of First Instance. The premises can include those of a supplier or customer of the firm under investigation. Similar on-site inspections and searches are usually referred to as dawn raids in the European Union; note that the Commission undertakes that in Hong Kong such searches will normally start during usual office hours. Detailed rules are provided to specify the scenarios in which the Commission may conduct a dawn raid, how such a raid should be carried out, and protections regarding confidentiality and legal privilege. The Hong Kong procedural guides should help ease concerns in the business community over the future conduct of such raids in Hong Kong following a recent storm of raids carried out by competition regulators in mainland China.

Complaints

Although anyone can make a complaint to the Commission of a suspected violation of the Ordinance, the Commission will have the discretion to decide which cases to pursue. This will ensure that the Commission’s resources focus on protecting the public interest instead of the interest of the complainant. The Guideline on Complaints sets out a range of factors that the Commission will consider when making such a decision.

Exemptions and Exclusions

The Guideline on Exemptions and Exclusions sets out criteria and procedures for application of an exemption or exclusion order. Notably, obtaining a prior decision or (block) exemption order from the Commission is not a precondition for asserting the benefit of an exemption or exclusion provided in the Ordinance. The Commission encourages firms and industries to conduct a self-assessment on the compatibility of their conduct with the Ordinance. The Commission sees a sector-specific block exemption order (exempting certain categories of agreements) as an exceptional measure and will grant one only in limited cases.

Resale Price Maintenance

In a vertical agreement (typically a distribution agreement), if a supplier imposes a fixed or minimum resale price onto its distributors or retailers (“resale price maintenance” or “RPM”), the Commission has indicated that it views such arrangements as having an illegal object. In such cases, whether the arrangement causes any anti-competitive effects in the market is irrelevant. Possible scenarios in which efficiencies may arise include, among others, the introduction of new products, launch of a promotion campaign and prevention of free rides. However, the Commission’s assessment will be made on a case-by-case basis. The Commission notes that RPM may in certain cases amount to serious anti-competitive conduct under the Ordinance, with the consequence that (1) the Commission may commence proceedings before the Competition Tribunal without issuing a warning notice to the parties and (2) the de minimis threshold (exempting companies whose combined turnover does not exceed HK$200 million) does not apply.

RPM practices in sectors such as liquor, baby milk formula, optical and autos has been vigorously enforced in mainland China for the past two years, as driven by a series of complaints from disgruntled distributors and facilitated by the availability of evidence. Hong Kong, where retail and consumer business accounts for an important part of the city’s economy, seems to plan to prioritise enforcement of RPM right at the beginning. In a radio interview in Hong Kong on 17 October 2014, a member of the Commission indicated that the Commission will take an active enforcement approach towards RPM practices in Hong Kong.

Substantial Market Power

The Second Conduct Rule of the Ordinance addresses the abuse of substantial market power by engaging in anti-competitive conduct. Examples of such abusive behaviour include predatory pricing, tying and bundling, margin squeezes, refusal to deal, and exclusive dealing. The Guidelines do not set a market share threshold for determining substantial market power. The Commission wants to take an economic approach to defining substantial market power, and market share is only one factor in the assessment of market power. The Commission will further consider a set of factors, among them the firm’s pricing power and market entry barriers. As the new competition regime begins, this approach is likely prudent for an economy which is dynamic and open to international businesses.

Next Steps for Business in Hong Kong

Businesses and industry associations can submit comments on the procedural guidelines before 10 November 2014 and those on the substantive guidelines before 10 December 2014. They can also utilise the time before mid-2015 to review and adjust their current business practices, build up a competition compliance programme, provide training to staff and thus get ready for the Hong Kong competition law.