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Competition Law

- Know it technically!

Mohan Datwani, Solicitor
LLM MBA (Distinction) CAMS, FHKIOD, FCIS FCS(PE)

All Rights Reserved. July 2016

Overview
• Conduct that prevents, restricts or distorts competition
(i.e. harms competition) violates the conducts rules

• The First Conduct Rule (FCR) relates to agreement
(including concerted practice and association
decisions) that harms competition, with serious anti-
competitive conduct (SAC) being the most
reprehensible

• The Second Conduct Rule (SCR) relates to conduct that
amounts to abuse of substantial market power (SMP)
to harm competition

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Common Themes
For the consumer, lower
prices and innovative
goods and services

Therefore, restrictive
For the market place
practices generate
generate economic
“countervailing
efficiencies
economic efficiencies”

Lead to consumer
benefits and other
efficiencies
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Case Study

There are certain European manufacturers of a new
novel LED lights that agree in Europe, that:

– Asia should be split amongst them with Hong Kong
going to 2 of them, Manufacturer A and B. The rest of
Asia is to go to others

– The 2 manufacturers should then co-ordinate a
delivery schedule of different light colours and not
infringe on each other’s colours for the initial two
years

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– This allows for better coordination in breaking into the
market and makes economic sense in terms of
production and distribution efficiencies

– The storage facilities in Hong Kong should be jointly
developed for distribution of the LED lights as the
storage costs will be around 10% of the costs

– The sales price of the LED lights should be within a
broad range and colour dependent, and information
should be share amongst the manufacturer on
production costs as different colours costs differently.

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– All agents and distributors would know the coordination in terms of colour and should agree not sell each other’s colour lights. at least initially for 2 years. – The parties also agree that they will not sell using the internet.– There will be both agency agreements and exclusive distributorship agreement with agents and distributors. and any agents or distributors selling other brands will be punished with revocation of their contracts 6 .

the lights would be sold at a price below variable production costs to change customer preference to existing LED lights (which the new novel LED lights are a substitute for) 7 .– They also agree that to ensure long term supply and profitability. which is good for the market place that there should be a minimum resales price by the agents and distributors – There will be both agency agreements and exclusive distributorship agreement with agents However. for the initial 6 months.

who will investigate and determine if there is violation of the FCR? The Competition Commission will investigate according to the FCR Guideline and other published policy documents The Communications Authority will not as it has concurrent (lead) jurisdiction over telecoms and broadcasting only On the Competition Tribunal and other courts could determine competition law. 8 . Basic Questions Assuming that there are competition concerns.

35 of the Ordinance) 9 . the Court may admit the Guidelines as evidence in proceedings The proof that a person contravened or did not contravene the guideline may be relied on by any party to the proceedings as tending to establish or negate the matter However. The Guidelines In fact. the Guidelines and all amendments made to them are not subsidiary legislation (s.

the threshold is HK$40M 10 . output limitation and market sharing on the facts. There seems to be price fixing. Discussion What if the turnover of Manufacturer A (or B) is less than HK$200M There is an exclusion for agreement for lesser economic significance of HK$200M But serious anti-competitive conducts are excluded. So HK$200M is not relevant For SCR.

what is the worse that could happen to Manufacturer A (or B)? The Commission could commence proceedings at the Tribunal and ask for a penalty of 10% of the HK turnover for the highest three out of five years during which the conduct subsisted Any persons affected by the anti-competitive conduct could take follow on actions The Tribunal could order up to 5 years disqualification among other orders There could be criminal consequences for obstructing investigations 11 . The Penalties On the facts.

66 to require ceasing and desisting of the anti-competitive conduct If the case does not involve SAC. then the Commission must issues a warning notice to cases and desist the anti-competitive conduct before going to the Tribunal 12 .60 to cease and desist the anti-competitive conduct If not. The Process Before the Commission gets the case to the Tribunal. the Commission may (but not obliged) to issue an infringement notice under s. Manufacturer A (or B) Would probably have a chance to offer a commitment under s.

Manufacturer A (or B) could race to be the first to whistleblow on the other for leniency • Let’s move on from the case study to other examples. including those from the Commission 13 .• In between.

Toolkit. Tribunal Rules Guideline on Complaints Tribunal Suitors’ Guideline on Funds Rules Investigations Competition (Fees) Guideline on Rules Applications for a Decision and Block 14 Exemption Order . The Sources Primary Source Subsidiary Guidelines Policy Legislations Documents/Others Ordinance Competition Guideline on the First Enforcement Policy (Application of Conduct Rule Provisions) Regulation Competition Guideline on the Leniency Policy for (Disapplication of Second Conduct Rule Undertakings Provisions) Regulation Engaged in Cartel Conduct Competition Guideline on the Brochures/Decision (Turnover) Regulation Merger Rule s/Market Survey. etc.

and includes a natural person engaged in economic activity 15 . The Ordinance Applies to undertaking means any entity. engaged in economic activity.2 undertakings regardless of its legal status or the way in which it is financed. s.

established or constituted by or under an Ordinance or appointed under an Ordinance.3 bodies unincorporate. a co-operative society registered under the Co-operative Societies Ordinance (Cap 33). corporate or s. but does not include a company. a society registered under the Societies Ordinance (Cap 151). or a trade union registered under the Trade Unions Ordinance (Cap 332) 16 . The Ordinance Exempts statutory a body of persons. a corporation of trustees incorporated under the Registered Trustees Incorporation Ordinance (Cap 306).

is it a separate undertaking or a single economic entity with you? 17 . Discussion on Undertaking Is a charity an undertaking? Is the Government a statutory body? But is it an undertaking? If you appoint an agent.

Is the agent regarded as an agent or a separate economic entity? Is there a difference if the agent shares or does not share risks? 18 . Discussion (HE1) An Undertaking or single economic entity? There is a Hi-Fi Manufacturer It sells its products in Hong Kong to consumers through its website. It also sells through retail stores owned by independent third parties under "Agency Agreement" as its "agent“.

and they are both suffering. Discussion There are two competitors. Is there an issue? 19 . Instead of agreeing. They attended a lecture and know that they have to be really careful not to agree to anything that harms competition. or the violate the FCR. they nod heads.

Agreement Agreement Concerted practice Decisions An agreement “includes This something short of Decisions of for example any agreement. promise agreement under the association will be or undertaking. under the Ordinance written or oral. still be caught as an undertakings. an agreement but will associate of arrangement. legal proceedings An agreement could be ascertained by inference 20 . like a trade understanding. whether Ordinance caught as an agreement express or implied. and The Commission has whether or not issued a pamphlet to enforceable or intended educate the market to be enforceable by upon this.

sharing one object. restrict or preventing. restricting or distort competition distorting competition in Bid-rigging Hong Kong even if made the object could be outside Hong Kong. or if Note: The HK$200 million ascertained by inference any party or undertaking turnover threshold does or association of not apply! undertakings is outside Hong Kong 21 . decision has more than concerted practice or Market. The Ordinance applies to Price-fixing concerted practice or any agreement. then as long decision that has the as one of its objects is to object or effect of Output Limitation prevent. Other Issues Object and Effect Territorial Application Serious Anti-Competitive Conduct If an agreement.

First Conduct Rule Concerted Agreement practice Object or Effect: Decision of an prevent. restrict association or distort competition in Hong Kong 22 .

• Can you give some example of concerted practice or decision of association of undertakings? 23 .

Discussion (HE2) (Concerted practice) Each calendar quarter a language school surveys and distributes to other schools detailed information on named basis for proposed fee increases amongst schools. districts and names are not know. Is there any difference if the schools. but only aggregated data? 24 .

Is there an issue? What should you do if you are one of the sales directors? 25 . The plan by one of them to lower broker commission was shared amongst them on confidential basis. Discussion HE3 (concerted practice) The sales directors of three providers of a specialised insurance products in Hong Kong attended a corporate golf tournament.

The price increase is implemented generally. Discussion HE4 (Decision of an association of undertakings) The mooncake bakers association proposes a non-binding resolution to encourage its members to increase mooncake prices by HK$10 before the Mid-Autumn Festival to show their "premium" nature and to protect members' profit margin. Is there an issue? 26 .

• How about Serious Anti-Competitive Conduct? Are there any examples? The HK$200M turnover exclusion does not apply? 27 .

and these arrangements are not known to the party calling for bids 28 . maintaining. Serious Anti-Competitive Conduct Price-fixing Market-sharing Output Bid-rigging limitations the fixing. territories. undertakings price for the production or limiting or whereby one or supply of goods supply of goods eliminating the more of them or services or services production or undertakes not to supply of goods submit or or services withdraws a bid. sales. more controlling the markets for the preventing. an agreement maintaining. between two or increasing or customers or controlling. the allocating the fixing. or there is some sort of controlled entities amongst them.

They agree minimum interest rates for car finance packages. Discussion HE5 (Price Fixing) Car dealers meet to discuss car-financing options to avoid supposed consumer confusion. and to limit Chinese New Year discount to 5%. Is there an issue? 29 .

Discussion HE6 (Market Sharing) A group of coach companies meet to discuss and agree to divide themselves up to serve different buildings based on projected customers to make reasonable profit. They agree not to pursue each other's customers or launch new services without consulting each other. Is there any issue? 30 .

A scheme was agreed to encourage withdrawal by certain producers from production with refocus on other business areas for a period. They will be paid compensatory payments by those in continued operations and. including for decommissioning relevant production lines. The main suppliers meet to discuss restructuring the industry to rationalise the over- capacity. Is there any issue? 31 . Discussion HE7 (Output Limitation) The local salted fish producers are in financial difficulty as supply outstripped demand.

second will withdraw a submitted bid. The company calling for the bid was unaware of these arrangements. and awards the bid to the fourth company which was the most "competitive" bid. Discussion HE8 (Bid-rigging) A large company desired to outsource its catering services. and third would submit a higher price "cover bid“. Is there an issue? 32 . One will decline. The sales representative of the four major caterers by chance discussed the tender at a charity football match.

• There are so many rules and examples. are there any exclusions or exemptions? 33 .

million) Public Policy and International Obligations Exemptions 34 . General Exclusions Agreements enhancing overall Block Exemption Compliance with economic Orders legal requirements efficiency Agreements of Services of general lesser significance economic interest Mergers (Turnover HK$200 etc.

Agreement enhancing overall economic efficiency First condition Second condition Third condition Fourth condition The agreement Consumers The agreement The agreement contributes to receive a fair does not impose does not afford improving share of the on the the undertakings production or efficiencies undertakings concerned the distribution or concerned possibility of promoting restrictions that eliminating technical or are not competition in economic indispensable to respect of a progress the attainment of substantial part the relevant of the goods or efficiencies services in question 35 .

Discussion HE24 (Third condition) A producer of soft drinks with large (60%) market share concludes customer supply agreements for 50% of Hong Kong's demands for 7 years exclusively in its favour. and therefore certain economic efficiencies. Is there an issue? 36 . Its defence is that this allows for more accurate demand predictions and better production plan. reducing raw material storage and warehousing costs and avoiding supply shortages.

The airlines agree to coordinate schedules and certain tariffs on a codeshare arrangement. Is there an issue? 37 . There are three other airlines including a low cost carrier with about 15%. HE25 (Fourth condition) There are two airlines with market share of more than 70% of passenger traffic on a destination to and from Hong Kong.

Joint selling. Other Hypothetical Examples Joint buying/SMEs Exchange of Exchange of Exchange of (9) information (10) information Information with through third effect of harming parties (11) competition (12) Group boycott (13) Trade associations Standard Terms Resale Price and Industry (Insurance Policy) Maintenance (16) bodies (14) (15) Retail Price Retail Price Exclusive Production Joint Maintenance (17) Maintenance (18) Distribution/Custo Venture (20) mer Allocation (19) Joint tendering Joint selling. (21) distribution and distribution and marketing (22) marketing (23) 38 .

The RPM Concerns • RPM by multiple suppliers or common in the market as price transparency facilitates coordination by competing suppliers • reduce incentives to lower process by suppliers to distributors and distributors to lower wholesale prices • where the RPM is distributor driven would reduce “intra- brand” competition by restricting ability to lower prices and facilitating downstream distributors’ coordination 39 .

smaller suppliers could be excluded from the market. like discounter distributors • where the supplier has market power. The RPM Concerns • it hinders new market participants at the distributor level and distribution models expansion based on low prices. 40 . and distributors are incentivised to promote RPM affected products causing harm to consumers.

specialist stores and smaller shops. It has concern of lower prices being offered by other large chain stores and smaller independent stores. Is there an issue? 41 . It pressurises the supplier to require fixed retail price or RPM. HE16 (Resale Price Maintenance) A retail household goods shop owner is significant customer of a daily use product available in supermarkets. convenience stores.

HE17 (Resale Price Maintenance) A DIY nails and screw manufacturer proposes to sell through independent retail stores at prices stipulated by it to ensure orderly market and avoid customer confusion from differing price offerings. Is there an issue? 42 . This would also allow retailers healthy profit margin.

It has less than a 5% market share and as a one month long campaign in Hong Kong requires retailers to sell at a price lower than those of other competing brands. HE 18 (Resale Price Maintenance) A candy producer wishes to introduce a new range of candy products successful elsewhere in Asia. Is there an issue? 43 .

However. HE 9 (Joint Buying) 100 small snack food retailers and stall holders form a joint buying group. and they must buy half of their snack food products through the buying group. they remain a small portion of the buying and selling markets in comparison to large wholesalers and supermarket chains. Is there an issue? 44 .

including for specific journey in private before members' seasonal price review. Is there an issue? 45 . HE10 (Exchange of Information) A trade association for junk owners collects and circulates to its members information on their respective proposed future prices.

A supplier supplies all three retailers A main retailer emails the supplier that it will raise price if the other two other main retailers does the same and that the supplier should make sure that "this message is understood“. Is there an issue? 46 . HE11 (Exchange of Information through third parties) There are three main retailers for cosmetics in Hong Kong.

Is there an issue? 47 . The results are published weekly at the researcher's website with location break down. Demands are unstable leading to high waste food products. The suppliers hire an independent research company to collate information on unsold fruit on daily basis. HE12 (Exchange of Information with effect of harming competition ) There are five pre-packaged fresh fruit suppliers to Hong Kong grocery retailers.

HE 13 (Group Boycott) There is need to hire overseas staff by specialist recruitment agencies for a particular manufacturing industry in Hong Kong. Is there an issue? 48 . A new entrant agency acts as intermediary and consolidates the specialist agency services into a "one stop shop" thereby avoiding the need to deal with different agencies. The incumbent boycotts the new entrant.

This is a key consideration of customer in choosing service provider. The professional body changes membership requirements to include turnover threshold at the behest of a few larger members at a meeting over "low quality" services and "low pricing" conduct of certain smaller members. Is there an issue? 49 . HE14 (Trade association and industry bodies) A local professional body organises certification for many years and members could advertise that they were "endorsed' . This results in smaller members losing a significant portion of their existing customers.

The standards terms are widely used but tailored to individual client needs. HE15 (Standard terms (insurance policy)) An insurance trade association circulates non-binding standard policy terms for pleasure boat to members. The extent of coverage and premium are not covered. Is there an issue? 50 .

and the sports brand does not restrict online retailers outside Hong Kong from selling in Hong Kong. HE 19 (Exclusive Distribution/Customer Allocation) A global sports brand is a medium sized supplier in Hong Kong. It would be partially reimbursed for costs. It appoints an exclusive distributor for Hong Kong in line with its business model. Is there an issue? 51 . The distributor could only sell its products and would be responsible for promotional activities. There are other competitors in the market along with related non-exclusive distributorships for the brand which distribute other brands. including related to promotion and staff trainings.

52 . HE20 (Production joint venture) The two leading suppliers of industrial chemical product in Hong Kong are to close down their independent production facilities for a more efficient joint plan for their joint sole use The agreed terms relate solely to the running of the facility and nothing else.

Two small construction companies. Is there an issue? 53 . HE21 (Joint tendering) There is a tender for a high-rise office building. They won over larger construction companies which have won the vast majority of bids in the last 5 years. This needs significant manpower and financial resources for liquidity throughout the project. which could not have independently submitted a bid for the tender submitted a joint bid allowing them to combine their resources.

They form a joint venture to rationalise their resources and reduce freight costs. The parties all agree to make their export sales under a unified brand. The joint venture will decide on products and volumes to be sold. distribution and marketing) There are a number of European flower producers who sold their products to Hong Kong through individual distributor's contract. HE22 (Joint selling. the customer choices and prices charged. Is there an issue? 54 .

Hypothetical Example 23 (Joint selling. distribution and marketing) A group of microbreweries agree to set up a single distribution and delivery centre. Is there an issue? 55 . and each brewery contributes its delivery staff and vehicles to the centre.

Q&A .

Thank You. .