As part of the implementation of the Competition Ordinance (Cap 619), the Hong Kong Competition Commission (“Commission”) is required to issue guidelines on how it expects to interpret and enforce the Ordinance (Section 35). For that reason, the Commission together with the Communications Authority on 9 October 2014 jointly published 6 draft guidelines (“Guidelines”) for public consultation.
The Guidelines are based on the general principle or hope that a competitive environment will provide incentives for businesses to offer better quality and a wider variety of products, improved services and lower prices, all for consumers¡¦ benefit. The Guidelines address how the First Conduct Rule (anti-competitive agreements between undertakings), the Second Conduct Rule (abuse of market power) and the Merger Rule (mergers in the telecommunications sector) will be applied. They also set out certain procedural aspects of the Ordinance including complaints, investigations and application of exemptions.
Meaning of “Undertakings”
A large part of the Ordinance applies to “undertakings”, which is defined in section 2(1) of the Ordinance as any entity engaged in economic activity regardless of legal status or method of financing. The Guidelines explain that an “undertaking” is a broader concept than a “company” under the Companies Ordinance (Cap 622) and may include individual companies, groups of companies, partnerships, sole proprietorships, co-operatives, societies, business chambers, trade associations and non-profit organisations etc.
First Conduct Rule – Single Economic Units
The First Conduct Rule relates to anti-competitive arrangements between two or more undertakings that may harm competition in Hong Kong. Therefore, the arrangements should involve more than one undertaking. Since an undertaking may comprise a single or multiple entities, the question is whether arrangements between multiple entities within the same undertaking would fall outside the First Conduct Rule since not more than one undertaking is involved.
The Guidelines suggest that the Commission will assess whether multiple entities could be considered as a “single economic unit” and the relevant factor being whether an entity exercises decisive influence over the commercial policy of the other through legal or de facto control. For example, dealings between parent-subsidiary companies or sister subsidiary companies (ie. sharing the same parent company) would be within “single economic units” and therefore, are in the same undertaking and do not fall within the First Conduct Rule.
First Conduct Rule – Vertical and Horizontal Arrangements
The Guidelines suggest that certain arrangements have the objective of harming competition. In relation to horizontal arrangements (ie. between competitors), they include price-fixing, market-sharing, output restrictions, bid-rigging and group boycotts. In relation to vertical arrangements (ie. between buyers/sellers or purchasers/suppliers), they include resale price maintenance (“RPM”).
The Commission’s view is that vertical arrangements are generally less harmful to competition than horizontal arrangements. However, the Guidelines single out RPM as a vertical arrangement that may have serious anticompetitive effect. RPM occurs where a supplier sets a minimum or fixed resale price for its products but the Commission may allow a supplier to set recommended or maximum resale prices if such practice would not have anticompetitive effects.
Other arrangements such as exclusive distribution, exclusive customer allocation, exchange of information at trade associations and promotion of fee scales by professional bodies may also be subject to scrutiny under the First Conduct Rule. The Guidelines note that the First Conduct Rule captures “contractual conduct” which may or may not involve an actual contract. Thus, non-binding or not legally enforceable cooperation between undertakings may still be caught under the Rule.
Second Conduct Rule – Substantial Market Power
The Second Conduct Rule applies where an undertaking with substantial market power abuses its market power with anticompetitive effects. The Commission does not intend to rely on a predefined threshold (eg. 40% of market share) to determine whether an undertaking enjoys substantial market power. Instead, the Commission will take an economic approach and consider factors such as market share, countervailing buyer power, barriers to entry or expansion and other market-specific characteristics.
The Guidelines also discuss other examples of abusive behaviour that may fall foul of the Second Conduct Rule including predatory pricing, tying and bundling, margin squeeze conduct and exclusive dealing.
Second Conduct Rule – Intellectual Property Rights (“IPRs”)
Due to the exclusive nature of IPRs, the Guidelines recognize that IPRs may act as legal barriers to entry or expansion, prevent competition and thereby breach the Second Conduct Rule. However, IPRs do not automatically imply substantial market power as (potential) competitors may be able to invent around the relevant IPR. Even where the IPR owner refuses to license its IPR to third parties, the Commission considers this would be a breach of the Second Conduct Rule only in very exceptional circumstances. Such circumstances would include where a refusal to licence prevents the development of a secondary market or new product or otherwise limits technical development.
In cases where a firm holds an IPR that is essential to an industry standard, the Guidelines suggest that a refusal to honour the industry commitment to licence the IPR on fair, reasonable and non-discriminatory terms (“FRAND terms”) may constitute abuse.
Merger Rule – Telecommunications Sector Only
The Merger Rule only applies to mergers involving holders of carrier licences under the Telecommunications Ordinance (Cap 106). The Guidelines suggest two safe harbours for such mergers and also describe how undertakings may seek informal advice prior to carrying out the mergers.
The remaining Guidelines address procedural matters of the Ordinance. The Commission will have a 3-stage investigative process. It will have the right to obtain a search warrant to search the premises of an undertaking and the premises of the undertaking’s suppliers or customers.
Implementing the Ordinance
The Guidelines are a step towards providing much needed clarification on the effects of competition law in Hong Kong. They are expected to be finalized in 2015. The Commission also expects to release further guidelines regarding leniency policies to “whistle-blowers”, application of the Ordinance to SMEs, and enforcement priorities of the Commission soon. The Ordinance itself is generally expected to be fully implemented sometime during 2015.
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