Expert commentary: The balance between co-operation and competition: how the shipping industry responds to the Hong Kong Competition Ordinance
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This article, written by partner Yvette Yu and legal director Kelly Kim of Hill Dickinson Hong Kong, was first published in The Asian Business Lawyer, [Volume 27, Spring 2021], published by The Korea University Legal Research Institute, and is produced in part here. This article is based on the writer’s presentation at the 7th Asia Business Lawyer (ABL) Symposium held on February 24, 2021.
Introduction
In a free market economy, businesses are expected to compete and attract customers by providing the best range of products and services at the best prices. The Competition also motivates businesses to improve the efficiency of their operations and innovate. Competition law aims to protect businesses and consumers from unfair pricing, lack of choices and economic inefficiency by prohibiting anti-competitive mergers and activities and restraining monopolistic behaviour.
In Hong Kong, the Competition Ordinance (Cap 619, the Ordinance) and its related subsidiary legislation are the primary sources of competition law.
This article will first provide readers with a brief introduction of the Ordinance and its enforcement mechanism, followed by a discussion about two instances in which the shipping industry sought clarification and permission from the competition regulator for their existing practices.
The Hong Kong Competition Ordinance
The Ordinance is the first cross-sector competition law in Hong Kong, which came into force on 14 December 2015. As the main competition legislation in Hong Kong, the Ordinance is enforced by the Competition Commission (the Commission) and the Competition Tribunal (the Tribunal). The Ordinance adopts a judicial enforcement model to separate the powers of investigation, prosecution and adjudication.
The Commission is an independent statutory body established under the Ordinance, with the power to conduct investigations on suspected contravention of the Ordinance and issue a warning and infringement notices. The Commission is the principal competition authority responsible for enforcing the Ordinance through enforcement proceedings before the Tribunal. The functions of the Commission include providing guidelines on the interpretation of the competition rules, promoting and educating the public regarding the Ordinance and advising the government on competition-related matters.
The Tribunal is a dedicated superior court that handles legal proceedings regarding competition matters. The jurisdiction of the Tribunal includes hearing and determining applications made by the Commission with regard to alleged contraventions of the competition rules, private follow-on actions, applications for the disposal of property, granting of equitable and legal remedies, and cases concerning competition issues transferred from the High Court.
The Ordinance applies generally across industries in Hong Kong and prohibits agreements that prevent, restrict or distort competition and the abuse of market power. The Ordinance also includes provisions regarding the control of mergers, which, however, currently only apply to mergers involving carrier licence holders within the meaning of the Telecommunications Ordinance (Cap. 106).
The Ordinance prohibits three main areas of anti-competitive conduct under the First Conduct Rule, the Second Conduct Rule and the Merger Rule (collectively known as the competition rules).
The First Conduct Rule
The First Conduct Rule prohibits anti-competitive agreements and arrangements between undertakings. An undertaking must not:
- make or give effect to an agreement;
- engage in a concerted practice; or
- as a member of an association of undertakings, make or give effect to a decision of the association, if the object or effect of the agreement, concerted practice or decision is to prevent, restrict or distort competition in Hong Kong.
The term ‘agreement’ is broadly defined in the Ordinance to include any agreement, arrangement, understanding or promise, whether in oral or written form, whether express or implied, and whether it was intended to be enforceable. The agreement must or likely have an adverse impact on the parameters of competition in the market, such as price, output, product quality, product variety or innovation.
The First Conduct Rule applies where the object or effect of an agreement is to harm competition in Hong Kong. The Commission considers certain types of agreement, by their very nature, to be so harmful to competition that there is no need to examine their effects. These agreements, including both horizontal agreements (between competitors) and vertical agreements (between different levels of the supply chain), are considered to have the object of harming competition. Examples of such agreements include cartel, price fixing, market sharing, resale price maintenance, etc. If an agreement does not have an anti-competitive object, it may nevertheless contravene the First Conduct Rule if it has an anti-competitive effect. When assessing whether an agreement has an anti-competitive effect, the Commission may consider not only actual effects but also effects that are likely to flow from the agreement. Anti-competitive effects may include reduction of output, product quality and variety or innovation. For an agreement to have the effect of harming competition, the relevant effect must be more than minimal.
There are a few exceptions where the First Conduct Rule will not apply. The First Conduct Rule is not applicable to undertakings between two entities which are considered as a single economic unit. Accordingly, agreements between employees and the employing company within the framework of a single economic unit are outside the scope of the First Conduct Rule. The same applies to the situation where a trade union acts on behalf of its members in collective bargaining since the Commission believes that the trade union is not engaging in economic activity.
The Ordinance also provides for the economic efficiency exclusion, which will be discussed in further detail below.
The Second Conduct Rule
The Second Conduct Rule prohibits undertakings with a substantial degree of market power from abusing that power by engaging in conduct that has the object, effect or harming competition in Hong Kong.
Unlike the First Conduct Rule which requires agreement or concerted practices between two or more undertakings, the Second Conduct Rules is applicable to conduct of unilateral abuse by a single entity, provided that the undertaking has a substantial degree of market power.
The Ordinance sets out a few factors that the Commission may consider in determining whether an undertaking has a substantial degree of market power, including:
- the market share of the undertaking;
- the undertaking’s power to make pricing and other decisions;
- any barriers to entry to competitors in the relevant market; and
- any other matters considered relevant by the Commission.
An undertaking is regarded as having a substantial degree of market power if it has the ability to charge prices above competitive levels, to restrict output or quality below standards of other competitors for a sustained period of time (generally accepted as two years by the Commission). In reality, only a small number of businesses are likely to be regarded as having substantial market power.
Abusive conduct may result in higher prices, a restriction in output, a reduction in product quality or variety, and/or anti-competitive foreclosure. Anti-competitive foreclosure occurs when actual or potential competitors are denied access to buyers of their products or to suppliers as a result of the conduct of the undertaking with a substantial degree of market power. Examples of conduct which may constitute abuse by an undertaking with a substantial degree of market power include:
- predatory pricing;
- tying and bundling;
- margin squeeze conduct;
- refusals to deal; and
- exclusive dealing.
While the Ordinance makes provision for a general exclusion from the application of the First Conduct Rule for agreements enhancing overall economic efficiency, there is no comparable efficiency-based exclusion for conduct within the scope of the Second Conduct Rule.
The Merger Rule
The Merger Rule prohibits mergers between businesses which substantially lessen competition in Hong Kong. It currently only applies to mergers involving ‘carrier license’ holders under the Telecommunications Ordinance.
While the Commission is the principal authority enforcing the Ordinance, it shares concurrent jurisdiction with the Communications Authority in relation to the telecommunications and broadcasting sectors.
Investigations, complaints and enforcement by the Commission
In terms of statistics, there were a total of 674 enforcement contacts received by the Commission between 1 April 2019 and 31 March 2020. Since the full commencement of the Ordinance in December 2015, the accumulated contacts up to March 2020 were 4277. These contacts mainly concern cartel conduct, resale price maintenance, and exchange of information in relation to the First Conduct Rule. For contacts with issues under the Second Conduct Rule, the majority were related to exclusive dealing, tying, and bundling.
The Commission and the Communications Authority have issued various Guidelines under the Ordinance to provide guidance on how the Commission intend to interpret and give effect to the provisions of the Ordinance. Pursuant to the Guideline on Complaints, Guideline on Investigations, and Enforcement Policy, the Commission will consider all complaints and queries it receives. It will then raise those matters for further assessment or investigation to the Initial Assessment phase and Investigation phase respectively. Between 1 April 2019 and 31 March 2020, the Commission escalated 18 cases to these two phases.
In accordance with its Enforcement Policy, the Commission accords priority to cases which involve one or more of the following types of conduct: cartels, other agreements contravening the First Conduct Rule causing significant harm to competition in Hong Kong, and abuses of substantial market power involving exclusionary behaviour by incumbents. It is the Commission’s aim to focus on enforcement actions against contraventions causing significant harm to competition in Hong Kong.
The Commission will proceed to the Investigation Phase only where it has reasonable cause to suspect a contravention of a conduct rule. During the Investigation Phase, the Commission is vested with wider investigative powers. It may require relevant parties under investigation to provide documents and information and/or to give evidence before the Commission.
The Commission is also empowered to obtain search warrants to enter and search specific premises.
To read the full article, visit the he Korea University Legal Research Institute website.
