Putting a “Price on Contravention” of Competition Rules

In Competition Commission v W Hing Construction Co Ltd and Others [2020] HKCT 1 (29 April 2020) (“the judgment”), the Competition Tribunal (Godfrey Lam J, President) granted a declaration that all 10 respondents had contravened “the First Conduct Rule” (defined in s 6 of the Competition Ordinance); specifically, by engaging in market sharing and price fixing arrangements while providing decoration services to individual tenants at a public housing estate (see [2019] 3 HKLRD 46 for the Tribunal’s earlier judgment on liability).

The Tribunal also, for the first time, exercised its power under s. 93(1) of the Ordinance to impose “pecuniary penalties” – the “price on contravention” of a competition rule (referred to in [36] and [37] of the judgment). But what exactly did the Tribunal say on this 
issue?

Two key findings

  1. The Competition Commission may make submissions to the Tribunal on, inter alia, the appropriate penalties, which includes recommending the amount of any pecuniary penalty to be imposed.
  2. In assessing the pecuniary penalty, a “structured methodological approach” should be adopted. There is to be a “broadly based scheme”, comprising four steps:

Step 1: determining the “Base Amount”

Step 2: making adjustments for aggravating, mitigating and other factors

Step 3: applying the statutory cap

Step 4: applying cooperation reduction and considering a plea of inability to pay, if any

Note: The scheme draws on the UK/EU multi-step approach, which was said to be “not inconsistent with the judicial function of the Tribunal in determining the amount of penalties under the judicial enforcement model in Hong Kong” (see [19]-[22] and [43] of the judgment); the Australian “instinctive synthesis” approach was not followed (see [26], [27] and [44] of the judgment).

A closer look at each step

At step 1 (which reflects the mandatory consideration at s. 93(2)(a) of the Ordinance), the Base Amount must be determined. The relevant calculation is: “Value of Sales” x “Gravity Percentage” x “Duration Multiplier”. The Value of Sales is the value of the undertaking’s sales directly or indirectly related to the contravention in the relevant geographical area within Hong Kong in the financial year in question; the Gravity Percentage is to reflect the seriousness and blameworthiness of the conduct, and is between 15% to 30% for “serious anti-competitive conduct” (defined in s. 2 of the Ordinance); and the Duration Multiplier is the number of years of the undertaking’s participation in the contravention.

Once the Base Amount has been determined, step 2 requires the Tribunal to consider making adjustments for various factors (reflecting the mandatory considerations at s. 93(2)(b)-(d) of the Ordinance). The Base Amount may be increased or decreased on account of aggravating or mitigating circumstances respectively. There may be an increase where specific and concrete loss or damage is evident. A previous contravention may also attract an increase. Finally, at this step, the Tribunal will conduct an “overall sense check” to see if “the amount arrived at would be a just and proportionate penalty for the contravention by the undertaking in the circumstances”.

Next is step 3, where the statutory cap is to be applied. This is provided for in s. 93(3) of the Ordinance, ie it is 10% of the turnover of the undertaking for each year in which the contravention occurred, or if the contravention occurred in more than three years, the cap is 10% of the turnover of the undertaking for the three years in which the contravention occurred that saw the highest, second highest and third highest turnover (note: “turnover” is confined to total gross revenues obtained in Hong Kong, as opposed to worldwide turnover).

After the statutory cap has been applied, the Tribunal will move to step 4. Here, a question may arise as to whether there should be a reduction for cooperation with the Commission; in which case the Tribunal may properly have regard to, but is not bound by, any recommendation made by the Commission in accordance with its Cooperation and Settlement Policy for Undertakings Engaged in Cartel Conduct (April 2019). Further, in exceptional cases, an undertaking’s financial inability to pay may be taken into account to justify a reduction of the amount assessed. “Clear and comprehensive” evidence of the undertaking’s financial position should be provided to the Tribunal.

Additional findings on penalties

The Tribunal’s application of the above approach to the respondents contains the following findings of note:

  1. 24% was held to be the appropriate Gravity Percentage in the circumstances of the case (namely, the cartel arrangements in question “represent some of the most serious kind of collusive conduct that directly strikes at how competitive markets are supposed to work” and all of the respondents were “primary contravenors as opposed to persons involved in contravention by others”).
  2. A Duration Multiplier of 1 was considered to be appropriate, instead of O. 42 based on a period of five months (June to October 2016) in which the contravention in the case took place (so the effect of time, with reference to the Value of Sales, would not be double-counted).
  3. The absence of evidence of specific quantifiable loss was not a mitigating factor.
  4. The Base Amount was reduced by one-third for two respondents to reflect their role as part only of the undertaking in question. Two other respondents were given a similar reduction: one had “passed” the project to another party with a profit-sharing agreement in place, and the other had another party carry out the renovation works in its name.
  5. On inability to pay, the Tribunal said, with reference to cases from the UK’s Competition Appeal Tribunal, that it was not necessarily enough just to disclose the audited financial statements; and that it may, for example, be necessary to look at related entities within the group, directors’ emoluments and shareholders’ resources.

For another occasion…

The Tribunal unfortunately (but rightly) left unanswered the following questions:

  1. For the Duration Multiplier, should the Tribunal round up the duration of the infringement, if more than one year, to the nearest whole year?
  2. What aggravating circumstances may be relied on by the Commission to increase the penalty?
  3. Should there be an adjustment for “specific deterrence” (ie to deter those persons who have been found to have contravened or been involved in a contravention of a conduct rule from engaging in further anti-competitive practices)?
  4. In calculating the turnover of an undertaking that comprises more than one entity, for example where there is a sub-contractor in addition to the respondent, should the turnover of the sub-contractor be included?
  5. What is the effect of, or the weight to be placed on, any recommendation of reduction of penalty by the Commission?
  6. What are the principles applicable to “inability to pay?”

Costs

The final matters dealt with by the Tribunal concerned investigation costs (claimable by the Commission under s. 96 of the Ordinance) and the costs of the proceedings. In relation to the former, the Tribunal held that it was for the Commission to justify why an order for investigation costs should be made, and that whilst the threshold might not be very high, there had to be some evidential basis for the exercise of discretionary power (see [143] of the judgment for what the materials should show), and the respondents should be given an opportunity to contest it. As to the latter, the Tribunal clarified that the civil approach on costs should be applied, notwithstanding that the proceedings involved the determination of a criminal charge within the meaning of Art 11 of the Bill of Rights (as accepted by the Commission) and that the applicable standard of proof was proof beyond reasonable doubt. Also note the Tribunal’s ruling: “Given that this is one of the first cases in the Tribunal, and that more costs would have been incurred because of the novelty of the law than otherwise, I consider it appropriate for there to be a general reduction, by 20%, of the costs payable by the respondents to the Commission”.

Final thoughts

W Hing Construction (29 April 2020) is a seminal judgment in the city’s competition law regime. By the “four-step approach”, the Tribunal has now provided (to quote from [39] of the judgment) “a desirable level of certainty, clarity and transparency in the assessment of the pecuniary penalty” under s. 93 of the Ordinance; though, obviously, some questions remain unanswered. It is also plain that those who engage in “serious anti-competitive conduct”, such as market sharing and price fixing, will be required to pay a hefty price. Indeed, the pecuniary penalties imposed by the Tribunal in the case reached the statutory cap for seven out of the 10 respondents; and for the remaining three respondents, their penalties were the heaviest out of all the respondents, with the highest amount being HK$740,000. There is also the (not insignificant) matter of costs.

After the judgment was delivered, the Commission issued a press release calling for “market participants in all sectors to steer clear from cartel conduct, while those already involved should approach [it] for leniency or cooperation”. The first part of this quote goes without saying. As to those “already involved”, a gentle word of warning: leniency—where available under the Commission’s Leniency Policy for Undertakings Engaged in Cartel Conduct / Leniency Policy for Individuals Involved in Cartel Conduct (April 2020) and accepted by the Commission via a “leniency agreement” (see s. 80of the Ordinance)—should not be regarded as a panacea to the relevant undertaking or individual. The Tribunal retains a discretion under s. 94 of the Ordinance to “make any order it considers appropriate” (such wording appears to be sufficiently broad to allow for the imposition of a pecuniary penalty, even if it has not been sought by the Commission), and “follow-on action” under s. 110 of the Ordinance may be brought by persons who can prove they have suffered loss or damage as a result of a cartel. As for cooperation, it remains to be seen how the Tribunal will treat any recommendation by the Commission for a reduction in penalty.

Finally, although the Commission will generally apply the methodology set out in its Policy on Recommended Pecuniary Penalties (June 2020) when determining a pecuniary penalty recommendation for undertakings and associations of undertakings, the Commission may depart from the policy according to the particularities of each case.

Robert G.M. Chan, Barrister-at-law, Parkside Chambers; and Lecturer, The University of Law (Hong Kong)

Jurisdictions: 

Barrister-at-law, Parkside Chambers; and Lecturer, The University of Law (Hong Kong)