The Proposed Hong Kong Competition Law: Principle Provisions and Problematic Issues

1. The Proposed Hong Kong Competition Law: Principle Provisions andProblematic Issues Professor Mark Williams 12 December 2008

2. Outline • Competition problems in Hong Kong • Proposed Substantive Provisions • Unresolved Issues • Threats • Opportunities • Conclusion

3. Competition Problems in Hong Kong • Government land monopoly – the Faustian Pact with the developers. • Government intervention in the market – housing, part ownership of some enterprises, public sector ‘mission creep’. • Mainland economic influence both direct and indirect – positive and negative effects. • Utility and transport sectors, cartels, conglomerates and high concentration ratios. • Non-traded services – the professions?

4. Proposed Substantive Provisions • HKSARG Detailed Proposals May 2008 • Application to ‘Undertakings’ • Anti-competitive agreements and concerted practices – general prohibition with examples • No definitive list • No per se prohibitions rather a requirement to show the purpose or effect is to substantially lessen competition • Application to horizontal agreements or practices only • Hardcore cartel activities – price fixing, market allocation, bid rigging – almost a presumption • Guidance to be issued

5. Abuse of Substantial Market Power • General prohibition with examples • No definitive list of banned conduct • Guidance to be issued • Threshold lower to find SMP than ‘dominance’ as in the EU. AUS/NZ adopt SMP. But note SG has adopted the EU/UK standard. • Why? • Application to vertical agreements – distribution agreements, RPM. Need to show holder of SMP uses vertical agreements to substantially lessen competition (SLC) • Required to prove that the purpose or effect of the conduct is to SLC

6. Public enforcement • Competition Commission and Tribunal • Independent statutory body • Corporate Board structure to be the decision maker cf. with UK OFT • Chair + 6 Commissioners appointed by CE • CEO and executive to investigate and ‘prosecute’ infractions • Wide powers of competition advocacy, sectoral investigation and international co-operation

7. Investigation and Adjudication • Formal separation between investigation and adjudication • Power to require delivery of documents and information • Powers of search and seizure when authorized by judicial warrant • Protection of due process rights very important given the CFA decision in Koon v Insider Dealing Tribunal FACV(No.10 of 2007) • Greg So mentioned that this structure is under reconsideration; HKSARG may adopt the a modified Irish/Aust or NZ approach rather than the EU/UK enforcement model or some variation.

8. Penalties • Civil ‘penalties’ not criminal but Koon decision; are all ‘penalties’ criminal in nature? • Commission power to order cessation or rectification of effects of conduct • Interim orders obtainable from Tribunal • Commission power to impose a ‘fine’ for breaches of conduct rules of up to HK$10 million • Tribunal on application by Commission to impose ‘fine’ of up to 10% of total turnover • Individual disqualification from holding a directorship or being involved in management for up to 5 years • Adoption of a leniency programme – useful tool in ‘cartel busting’

9. Competition Tribunal • Composition and appointment • Powers • On Commission’s application, can impose more severe penalties. • On parties appeal, review of the Commission findings • Approve, substitute or vary a Commission decision on breach and/or penalty • Hear and determine stand alone or following private actions • Further appeal to CA and CFA on point of law or penalty only

10. Private Enforcement • Stand alone private right of action for damages and injunction • Safeguards to prevent nuisance cases • Mechanism to deal with ‘composite’ cases • Representative actions • Right of Commission intervention • Grant of leniency would not immunize against private claims

11. Unresolved issues (1) • Jurisdiction - Will the law apply only to actors present in Hong Kong or should agreements or conduct undertaken outside Hong Kong that has an economic effect in a Hong Kong market be caught? Cf. Singapore • China– How will the Hong Kong Ordinance interface with the Anti-Monopoly Law? • Guidance– to be issued with the Bill or would that unduly constrain the Commission? • Structural powers– no powers to require divestiture cf. BAA case • Mergers– Will a merger regime be included in the Ordinance? • Pros and Cons

12. Unresolved issues (2) • IPRs • How will the exploitation of IP rights interface with the new Ordinance? • Exemptions • De minimis and SMEs • Vertical agreements except where undertaking has SMP • Individual agreements – net economic benefit • Block Exemptions

13. Unresolved issues (3) • Exclusions • Public interest – general economic interest Gas, electricity, water supply, public transport, postal services (?) Who will decide? What criteria will be used? Can this be justified if a private monopoly exists without a regulatory framework? • Public Policy Overriding political considerations – government land monopoly (?) Mechanism for exercise of the power by CE. • Government and statutory bodies Will the law extend to government provided services (health, education, exhibition services) statutory monopolies (gambling) or other statutory bodies the Law Society, HKIPA etc – Now under reconsideration – Greg So. • Political considerations– new Legislative Council

14. Threats • Cartel operators need to reconsider • Parties to restrictive agreements such as co-operation or joint ventures, or specialization agreements • Firms with SMP who use that power to prevent market entry or to eradicate new entrants or impose vertical restrictions or tie sales of products or the provision of services • Prohibition of parallel imports? • Merger and acquisition activity

15. Opportunities • Aggrieved consumer, commercial or public sector parties who have suffered damage from anti-competitive activities • Actual or potential market entrants • Nimble law firms • Aspiring cartel busters, competition lawyers and competition judges!

16. Conclusion (1) • Need to keep up to date with developments in the passage of the Ordinance especially during the committee stage • Devise or outsource competition law awareness training for appropriate staff especially sales, marketing and corporate affairs employees of clients • Advise the commercial clients on strategic acquisitions, assets swaps or mergers before the new Ordinance comes into effect thereby removing or reducing regulatory risk • Advise industry/professional association clients about the impact of the law

17. Conclusion (2) • Update compliance procedures and ensure you undertake an ‘antitrust audit’ of client activities • Review existing client conduct especially if they have SMP • Review commercial agreements especially restrictive covenants and cartel-like arrangements for compliance with the new law • Consider whether any clauses might be rendered void • Prepare to use the new Ordinance as a shield as well as a sword in negotiations and litigation

18. Conclusion (3) • Educate yourself about competition law and the issues likely to affect your clients • See me and ACLEC Asian Competition Law and Economics Centre www.af.polyu.edu.hk/aclec/index.html

19. Thank you! Professor Mark Williams afmarkw@polyu.edu.hk