1. law, govt and politics

The Hong Kong
Competition Commission’s
draft guidelines:
the jigsaw starts to fall into place
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The Hong Kong Competition Commission’s draft guidelines:
the jigsaw starts to fall into place
The draft Guidelines and the
consultative process
The Hong Kong Competition Commission
(the Commission) and the Communications
Authority (the CA) have published draft
Guidelines that explain how they will
interpret and administer the Competition
Ordinance (the Ordinance). The Ordinance is
expected to come into force next year.
The draft Guidelines offer an early insight
into Commission policy and are to be
welcomed. According to the Commission, the
draft Guidelines draw on best practices from
other established competition law regimes.
Moreover, the draft Guidelines would appear
to be more extensive than those published by
other newly established authorities (and other
regulators in Hong Kong) and should assist
companies seeking to grapple with unfamiliar
competition law concepts.
This reflective briefing highlights our key
observations on the draft Guidelines and
identifies issues that are important for
businesses. The short windows for responses
to the drafts close on 10 November 2014 for
the procedural guidance and 10 December
2014 for the substantive guidance.
The six draft Guidelines – the latest
pieces of the jigsaw
The Commission has published six draft
Guidelines. Three documents interpret the
substantive rules:
• the First Conduct Rule, which prohibits
anti-competitive agreements and
concerted practices;
• the Second Conduct Rule, which prohibits
the abuse of substantial market power; and
• the Merger Rule.
The others address procedural issues:
• complaints to the Commission about
alleged anti-competitive behaviour;
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• the Commission’s conduct of investigations;
and
• whether and, if so, how companies can
apply to the Commission for exemption
decisions.
Two overarching points
The draft Guidelines should be reviewed
with two overarching points in mind.
First, important pieces of the jigsaw
are not yet in place. These include an
amending Ordinance, the guidance on
leniency procedures, enforcement policy
and institutional cooperation between
the Commission and the CA.
Second, the picture needs more clarity.
Multi-national companies familiar with
competition laws may view the draft
Guidelines as rather high level. The
Commission retains a wide margin of
discretion in its future enforcement activities.
This approach has resulted in the omission of
some important policy areas and a degree of
imprecision in respect of certain business
critical issues. The consultation process should
be used as an opportunity to seek clarification
of some of these issues in order to provide
greater legal certainty for businesses.
The Commission must be applauded for
publishing this extensive guidance. But,
there are key pieces of the jigsaw that
are missing. I would hope to see further
guidance emerge on, for example,
the leniency policy and cooperation
between the Commission and the
Communications Authority as soon as
possible to address some of the existing
gaps and questions that remain.
Ninette Dodoo
Counsel and Co Head of China Antitrust
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Key observations
Resale price maintenance –
automatically illegal?
Resale price maintenance (RPM) occurs
whenever a supplier establishes a fixed or
minimum resale price to be observed by its
distributor when the product is re-sold. The
draft Guidelines treat RPM as a restriction
of competition by object and it may amount
to “Serious Anti-competitive Conduct”. Its mere
existence is a serious infringement of the
Ordinance: the Commission does not need to
show that the practice leads to anticompetitive effects. However, the Commission
has recognised that RPM can sometimes lead
to efficiencies that could outweigh any
anti-competitive effects: certain RPM
arrangements will not infringe the First
Conduct Rule. So what should companies
draw from this guidance?
The Commission’s guidance closely resembles
that of the European Commission (EC). But,
the EC’s practice is instructive: RPM is more
or less prohibited per se in Europe – there is
no example of the EC deciding that an
efficiency outweighs the competitive harm
arising from RPM.
There is no single common thread on the
treatment of RPM between established
competition law regimes. For example, the US
Supreme Court has ruled that RPM should not
be prohibited per se (as had been the case up
until the late 90s) and an assessment is
necessary as to whether the benefits outweigh
the competitive harm. Meanwhile, in China,
the NDRC has to date treated RPM as a per se
restriction of competition and imposed
significant fines on the parties involved in
such conduct. Companies operating in Hong
Kong should be very cautious in adopting any
form of direct or indirect RPM.
Exclusive distribution – the need for a
“safe harbour”
The draft Guidelines mention that exclusive
distribution agreements may present risks to
competition and the effects of such agreements
will need to be assessed in order to determine
whether they infringe the law.
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The draft Guidelines provide very little
guidance, however, as to how such agreements
are to be assessed, it would seem that
companies should undertake their own full
competitive effects analysis for every
distribution agreement. This is unrealistic:
it is both time-consuming and costly.
The present guidance risks creating an
environment where businesses have to adopt
an overly cautious approach to the negotiation
of distribution agreements which are broadly
recognised in other regimes not to create
competition concerns in many situations.
Given the prevalence of such exclusive
distribution agreements in supplier/
distributor relationships, the Commission
could usefully provide a market share
threshold below which such agreements
would be presumed exempted from the First
Conduct Rule – in effect a “safe harbour”.
Information exchanged via
customers and suppliers –
clarifying “hub and spoke”
Anti-competitive exchanges of information
can take place between competitors (A + B)
through the intermediary of a common
supplier or customer (S). In such a scenario,
S might be considered to be a “hub”, collating
and relaying commercially sensitive
information between the spokes (A + B).
The draft Guidelines provide no guidance
on the elements needed for a breach of the
Ordinance. The Commission could remedy
this by setting out the test established by, for
example, the leading UK case law regarding
intention and use of the relevant information.
Without this additional guidance, the draft
Guidelines risk capturing conduct which
should be considered as legitimate across
supplier/customer relationships.
Substantial degree of market power:
no market share threshold
The Second Conduct Rule prohibits the abuse
of a substantial degree of market power.
Businesses with a “substantial degree of market
power” will have “special responsibilities”, a
The Hong Kong Competition Commission’s draft guidelines, October 2014
concept borrowed from the EU. However, the
draft Guidelines do not provide any indication
of the level of market share at which a company
might be viewed as holding such power.
This silence confers discretion on the
Commission. It also creates business
uncertainty as a market share threshold of
25% (possibly even lower) was debated during
the legislative passage of the Ordinance and
gained some traction. So, the 25% figure
remains in play. This would leave the
Commission at odds with most established
and mature antitrust regimes, which
typically provide a higher indicative
market share threshold.
A reasonable indicative market share
threshold would serve as a useful screening
device for companies to determine whether or
not they are more or less likely to be subject
to the “special responsibilities” imposed by the
Second Conduct Rule.
An emphasis on exclusionary abuses of
market power?
The draft Guidelines address exclusionary
abuses of market power. These include
predatory pricing, tying and bundling, margin
squeeze, refusal to deal and exclusive dealing.
These abuses are considered to be exclusionary
in nature as the relevant conduct aims
unjustifiably to exclude competitors from the
market. The Commission has not discussed
exploitative conduct (e.g. excessive pricing) in
the draft Guidelines. Nor was exploitative
conduct a feature of the legislative discussions
on the Ordinance. This may suggest a keen
enforcement focus on exclusionary abuses.
This focus mirrors other established
competition authorities, such as the EC. But
even without guidance, it is premature to
conclude that the Commission will not
concern itself at all with exploitative abuses as
a matter of policy.
When can the Commission refuse to
investigate complaints?
The draft Guidelines lack many
‘bright lines’ that would be helpful for
companies. The absence of an indicative
market share threshold for the
assessment of substantial market power
and the absence of a clear policy line on
exclusive distribution agreements may
be particularly problematic.
Nicholas French
Partner and Co Head of China Antitrust
Complaints will be a key source of business
for the Commission. Along with leniency
applications (for which draft guidelines are
yet to be produced), complaints are a
straightforward way for the Commission to
identify possible infringements of the
Ordinance. The draft Guidelines encourage
the making of complaints by “any person”,
including anonymously, and in “any form”.
This is broader than the approach in the EU,
for example, where the complainant must
demonstrate a “legitimate interest” in relation
to the subject matter of the complaint.
Despite this apparent encouragement, the
draft Guidelines stress that the Commission
retains the discretion not to investigate
complaints. The ability for the Commission to
prioritise is sensible from a policy perspective,
and in keeping with the position in the EU.
However, the Hong Kong regime is
structurally different from the EC’s regime
and the guidance on this discretion is likely to
prove contentious. This is because the
Commission has the exclusive right to address
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potential infringements of the Ordinance:
businesses that believe that they have been
the victim of anti-competitive practices
cannot initiate court proceedings to seek a
remedy, as they would be able to in the EU or
the US.
The Commission is the “gatekeeper” for all
actions under the Ordinance, and this will
make its choices subject to particular scrutiny.
Cooperation with foreign authorities
As a new competition authority in a global
economic hub, it is likely that the Commission
will be keen to cooperate with overseas
competition agencies, and companies will be
keen to understand the extent to which the
Commission intends to cooperate with other
agencies. Both the Ordinance and the draft
Guidelines are silent on this issue.
The Commission is in the difficult
position of having to publish detailed
guidance before it has really grappled
with its powers under the Ordinance.
It has understandably sought to avoid
unduly fettering its discretion but
that may give rise to concerns that,
in some areas, business certainty has
been compromised.
Terry Calvani
Of Counsel
The circularity of applying
for exemptions
The Commission is a member of the
International Competition Network (ICN).
The critical issue is sharing confidential case
material in international investigations. The
draft Guidelines are silent even as to whether
this is possible, and give rise to uncertainty
on some key issues. More specifically, it is
unclear how and when contact between the
Commission and overseas agencies will take
place, what type of information may be
exchanged and how the Commission will treat
confidential information it may receive from
those overseas agencies. Further guidance
would be welcomed.
Various exclusions and exemptions from
the Conduct Rules are provided for in the
Ordinance, notably for agreements that
generate economic efficiencies. According to
the draft Guidelines, companies can either
self-assess the legality of their conduct
according to this test or they can apply to the
Commission to that effect if they require
“greater legal certainty”, i.e. to confirm the
application of the general exclusion. Before
rushing to the Commission, however,
companies should appreciate that the draft
Guidelines anticipate that the Commission
can rely on information and evidence received
during the course of a company’s application
for a decision to initiate enforcement action
against any company. The application itself
does not grant any form of immunity to a
company making the application.
Businesses need to realise that the
Commission will be amongst the most
powerful regulators in Hong Kong.
In light of the above, companies would be well
advised to proceed with caution before
seeking confirmation from the Commission
that the relevant agreement or conduct is
exempt/excluded from the application of the
Ordinance. That cautious approach seems to
be endorsed by the Commission itself which
suggests that companies should seek legal
advice before making any relevant application.
William Robinson
Partner
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The Hong Kong Competition Commission’s draft guidelines, October 2014
Our Asia contacts
Hong Kong / China
Japan
Jenny Connolly
Partner
T +852 2846 3396
E [email protected]
Takeshi Nakao
Partner
T +81 3 3584 8332
E [email protected]
Nicholas French
Partner, Co-head of China Antitrust
T +852 2913 2710
E [email protected]
Akinori Uesugi
Senior Consultant
T +81 3 3584 8280
E [email protected]
William Robinson
Partner
T +852 2846 3336
E [email protected]
Katherine Wilson
Associate
T +81 3 3584 8507
E [email protected]
Ninette Dodoo
Counsel, Co-head of China Antitrust
T +86 10 6535 4525
T +852 2846 3300
E [email protected]
Kaori Yamada
Associate
T +81 3 3584 8512
E [email protected]
Vivian Cao
Associate
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T +44 20 7427 3463
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Associate
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Vietnam
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Partner
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E [email protected]
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Partner
T +49 211 49 79 223
E [email protected]
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Associate
T +86 10 6535 4545
E [email protected]
Alex Potter
Partner
T +44 20 7832 7541
E [email protected]
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