The Hong Kong Competition Commission (“HKCC“) , together with the Communications Authority, today published six long-awaited draft guidelines (“Guidelines“) on how it intends to enforce the Hong Kong Competition Ordinance (“Ordinance“), which was enacted in June 2012. Three of the Guidelines set out substantive aspects on how to interpret the Ordinance and three relate to procedural aspects.

HKCC is now requesting comments from all interested parties. The deadlines for submission of comments are 10 November and 10 December 2014 for the procedural and substantive Guidelines, respectively.

After receiving comments, HKCC will amend the Guidelines if appropriate and will consult with the Legislative Council and other stakeholders on the amended drafts. Once the consultation process has concluded, HKCC will look to finalise the Guidelines in the first half of 2015.

Scope Of The Guidelines

On the substantive side, HKCC released guidelines on how it expects to interpret the First Conduct Rule (which concerns agreements between one or more undertakings), the Second Conduct Rule (which relates to the conduct of a single undertaking with a substantial degree of market power) and the Merger Rule (which applies only to telecommunications licensees).

The documents issued on procedural aspects are the Guideline on Complaints, the Guideline on Investigations and the Guideline on Applications (on exclusions and exemptions).

In addition to the Guidelines themselves, HKCC published an overview document which includes FAQs, as well as a press release explaining some of the background to the consultation and drafting process.

Initial Assessment

A first reading of the Guidelines indicates that HKCC intends to provide clarity where needed, yet also tries to stay close to the text of the Ordinance. In many instances, the authority is successful in this attempt. On other occasions, the effect of the guidance provided is more mixed.

Undertakings

The Guidelines attempt to provide clarifications on the concept of “undertaking,” to which the substantive rules of the Ordinance apply. The Guidelines explain that “undertaking” is a broader concept than “company,” and may encompass a variety of legal entities within a “single economic unit.”

On the upside, the Guideline on the First Conduct Rule explains that the Ordinance does not apply to agreements between companies in the “same economic unit,” such as parent and subsidiary. On the downside, however, the fines that can be imposed may be calculated by reference to the turnover of the “undertaking” in question – the maximum fine is expressed as a percentage (10%) of the undertaking’s Hong Kong turnover. 

Logically, this cap is higher if calculated by reference to the turnover of a group of companies rather than a single company. In European Union law, it is precisely this aspect of the “undertaking” concept – or the European Commission’s interpretation of it – that is hotly debated. Here, learning from European Union law is not without controversy.

Vertical Agreements And RPM

Resale price maintenance (“RPM“) is another area where the Guidelines may draw attention. RPM occurs where a manufacturer sets the price that its distributor can charge to the latter’s customers. The Ordinance does not explicitly mention RPM, nor other types of potentially illegal clauses in vertical agreements. Yet the Guideline on the First Conduct Rule seems to take a tough stance on RPM. HKCC goes as far as stating that “[a]s a general rule, the Commission will consider that RPM arrangements are by their nature harmful competition.” This approach could lead to a de facto presumption of illegality of RPM. Further, the Guidelines state that RPM may in certain cases amount to “serious anti- competitive conduct,” for which the Ordinance foresees different procedural steps than for other agreements.

Beyond RPM, the Guidelines do not exclude that other types of clauses in vertical agreements fall foul of the Ordinance –the Guidelines mention exclusive distribution or customer allocation, and recommended and maximum resale price restrictions, as “examples of conduct which may have the effect of harming competition.”

Market Share

In the Guideline on the Second Conduct Rule, HKCC resisted calls by numerous stakeholders to provide market share thresholds above which a company will be presumed to have “substantial degree of market power” – triggering the application of the Second Conduct Rule – or below which the company could benefit from a safe harbour. Instead, HKCC states that it intends to assess substantial market power on a case-by-case basis. This is an instance where HKCC follows a more cautious approach.

Way Forward

Overall, the Guidelines issued today in draft form for public comment provide very useful and welcome clarifications on how HKCC intends to enforce the Ordinance. To the authority’s credit, the Guidelines are drafted in clear language, with numerous illustrative hypothetical case studies, which seek to provide helpful pointers. The publication is likely to serve as a further prompt to companies operating in Hong Kong markets to work towards implementing effective compliance procedures.

Interested parties are invited to provide comments on the Guidelines, though HKCC’s intention to make public the submissions made by stakeholders may deter some.
HKCC notes that the content of the Guidelines circulated today already reflects input given by stakeholders up to now, for example in relation to the quite detailed guidance on information sharing between competitors. With this, HKCC gives a signal to stakeholders that their participation matters, which should boost further input by interested parties.

HKCC has also signalled that it will be publishing additional guidance materials, including education materials such as leaflets and booklets, to further assist businesses before the substantive sections of the Ordinance come into force in 2015. Furthermore, the authority also promises guidance on additional areas, including on its leniency policy for cartel whistle-blowers and a statement of enforcement priorities, alongside additional clarification materials targeted at small and medium enterprises.

Although the Guidelines, once finalised, will not have the power of legislation and will not be binding on the Competition Tribunal or the Hong Kong courts, they could prove to be influential in practice. Today’s issuance of the first round of drafts of the Guidelines is a substantial step in Hong Kong’s march to a fully-fledged competition regime.

For further information, please contact:

Adrian Emch, Partner, Hogan Lovells