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21 Aug 2017

Hong Kong anti-trust regulator launching its second proceedings against price fixing and market sharing

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The Competition Commission (the “Commission”) has brought proceedings against ten construction and engineering companies on 14 August 2017 for anti-competitive price fixing and market sharing.

The Commission alleges that the ten companies have breached the First Conduct Rule through price fixing, market sharing and/or engaging in concerted practices of the same nature when providing renovation services at a newly built public housing estate. The Commission alleges that the companies had agreed among themselves to allocate floors, not to seek business from tenants on another floor, and to refer tenants on another floor to the responsible company if such tenants approach them.

Price fixing means market players agreeing on certain arrangements such that the price can be fixed, maintained, increased or otherwise controlled; while market sharing refers to arrangements to allocate sales, territories, customers or markets for the production or supply of particular products, i.e. renovation services in the present case. Both price fixing and market sharing are regarded as a serious anti-competitive conduct under the Ordinance.

Under the First Conduct Rule, the Commission has to show that either the object or effect of the conduct in question is to prevent, restrict or distort competition in Hong Kong.

The object of the conduct is viewed objectively in its context and in light of the way it is implemented, and does not merely refer to the subjective intentions of the parties. Agreements to fix prices, share markets, restrict output or rig bids are commonly known as “cartel agreements” and are by their nature generally considered to have the object of harming competition. Therefore, the Commission will probably have little difficulty showing that the conduct of the ten companies was done with the object to harm competition in Hong Kong.

The effect of the conduct will be regarded as anti-competitive if there is an adverse impact on one or more of the parameters of competition in the market, such as price, output, product quality, product variety or innovation. Rather than merely focusing on the actual effects of the conduct, the Commission will also consider the effects that are likely to flow from the conduct. It is also sufficient as long as one of the effects of the conduct is anti-competitive. In the present case, the alleged price fixing and market sharing would have an adverse effect on the customers’ choice of price and service, and probably the quality of renovation services, because the companies no longer needed to compete with each other and attract customers based on the quality of work. As a result, it may not be too difficult for the Commission to prove a contravention of the First Conduct Rule, as long as the alleged facts could be proved.

It is likely that the alleged misconduct was reported by either the tenants or competitors, who are third parties to the alleged improper arrangements but are directly affected by the misconduct. Under the complaint system of the Commission, a person could make complaints or queries in any form directly, anonymously or through an intermediary to the Commission.

The investigatory powers of the Commission is wide, including obtaining documents and information from any person who may have possession or control of relevant documents or may otherwise be able to assist, and requiring any person to attend before the Commission to answer relevant questions. Not surprisingly, the Housing Authority, being an independent third party who has the public duty to ensure a proper housing system in Hong Kong, would be willing to provide assistance to the Commission in the investigation.

In addition, a cartel member may apply to the Commission for “leniency” by offering to give evidence in exchange for the Commission’s agreement not to bring or continue proceedings against him for pecuniary penalties. This is a commonly-used tool by the European Commission. Given the leniency agreement is only available to the first cartel member who meets all the requirements for receiving leniency, there is a strong incentive for the cartel members to apply for it as soon as possible. While at the moment there is no indication as to whether any of the ten companies has applied for or entered into a leniency agreement with the Commission, we may wait to see which of them is able to win such “battle”.

In just 20 months since the full commencement of the Ordinance, the Commission has commenced two proceedings concerning different cases of anti-competitive conducts. We could foresee more frequent enforcement actions to be taken. The first two cases are concerned with the contravention of the First Conduct Rule, it remains to be seen as to how the Commission will enforce against market players who are in breach of the Second Conduct Rule.

Market players should not underestimate the potential consequences for breach of a competition rule. Pecuniary penalties could amount up to 10% of the turnover of the infringing market player for each year in which the contravention occurred, or if the contravention occurred in more than 3 years, 10% of the turnover concerned for the 3 years in which the contravention occurred that saw the highest three turnover. Other than pecuniary penalties and declarations of contravention to the competition rule, the Tribunal may of its own motion or on application make a variety of orders, including injunctions, orders requiring the infringing market players to pay damages to persons who have suffered loss or damage, or to pay to the Government or any other specified person an amount not exceeding the amount of any profit gained or loss avoided as a result of the breach of the competition rule. The Commission may also make disqualification orders against directors of the corporate cartel members for up to five years (as against fifteen years in the UK). However, in the present case, it seems that no application has been made to disqualify any directors of the companies.

In addition, affected third parties, such as the tenants in the present case, would have a right of action to claim for damages, which is known as a “follow-on action”. However, liability under this limb might be limited in Hong Kong because not all affected third parties would be aware of such rights or be willing to bring a claim if the amount involved is not substantial. Different from Hong Kong, the US allows class actions and has recently in the case of Fond du Lac Bumper Exchange Inc. v Jui Li Enterprise Co. Ltd., et al., 2:09-cv-00852 (E.D. Wis.) recognised 17 classes of indirect purchaser plaintiffs, who alleged to have suffered loss indirectly through paying or reimbursing others for the purchase of aftermarket sheet metal auto parts due to price-fixing by four Taiwanese manufacturers. In the absence of class actions in Hong Kong, it is open to the Tribunal to make orders such as pecuniary penalties or to pay damages, so that the affected third parties, such as the tenants, could be better protected.

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