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Cartels in Hong Kong

An interview with Natalie Yeung

Slaughter and May (Hong Kong)

Natalie Yeung is a partner and head of the Asian competition practice at Slaughter and May. She is based in the Hong Kong (HK) office.

Natalie is an experienced competition and regulatory lawyer who has worked on a wide range of matters involving HK, EU and UK competition law. She has recently advised on antitrust issues for clients including the HK Association of Banks (on HK’s first application for a decision), the HK Liner Shipping Association (on HK’s first block exemption application), MTR Corporation, multinational companies in relation to investigations by Chinese competition authorities, and the HK Communications Authority on various regulatory matters.

Natalie is listed as a leading lawyer in Chambers Asia-Pacific 2019, is a highly regarded lawyer in IFLR1000 Asia-Pacific 2019 and is on the elite ‘Leading Lawyers’ list in The Legal 500 Asia-Pacific 2019. Natalie is referred to as ‘one of the standout lawyers in Hong Kong’ and ‘one of the world’s foremost experts on Hong Kong’s competition legislation’.

Natalie speaks Chinese and English and is qualified in HK and England and Wales. She was appointed by the HK Competition Commission as a non-­governmental advisor to the International Competition Network.

1 What kinds of infringement has the antitrust authority been focusing on recently? Have any industry sectors been under particular scrutiny?

The Competition Commission (the Commission) has brought three cases before the Competition Tribunal (the Tribunal) in the three years since the competition law came into full effect. These cases all concern cartel conduct, which is consistent with the Commission’s Enforcement Policy and to be expected of any new competition regime. The first case, Competition Commission v Nutanix and others, alleges big-rigging behaviour by five information technology companies in a tender for the supply and installation of a new server, whereby the companies allegedly colluded via bilateral vertical agreements (orchestrated by Nutanix) and a trilateral ‘hub and spoke’ arrangement. The second case, Competition Commission v W Hing Construction Company Limited and others, alleges market-sharing and price-fixing agreements between 10 home decorating firms in the supply of renovation services to tenants of a public rental housing estate. The respondents allegedly agreed to allocate specific floors among themselves and to determine or influence prices by using joint promotional flyers containing the same package prices. The third case, Competition Commission v Kam Kwong Engineering Company Limited and others, has been brought against three companies and two individuals for alleged price fixing and customer allocation in the market for public housing renovations. While the conduct in question is very similar to Competition Commission v W Hing Construction Company Limited and others, this is the first case to be brought by the Commission against individuals for an alleged contravention of the Competition Ordinance (the Ordinance). In addition, the Commission is seeking a director disqualification order for one of the individuals.

The Commission has also indicated that it has a number of advanced investigations in the pipeline that could be brought before the Tribunal in the near future. Most of the complaints received by the Commission continue to be in relation to the First Conduct Rule, and most of those relate to alleged cartel conduct, which remains an area of focus for the Commission.

The Commission has received over 2,800 complaints since the full commencement of the Ordinance in December 2015, the majority of which relate to the First Conduct Rule, with cartel conduct and resale price maintenance being the major concerns. In its 2017/2018 annual report, the Commission stated that, among the sectors involved in the initial assessments and investigations it has conducted, real estate and property management, information technology and machinery and equipment are the top three sectors concerned.

The employment market has also been on the Commission’s radar. On 9 April 2018, the Commission issued an advisory bulletin setting out its concerns in certain practices in relation to hiring and terms and conditions of employment. The Commission highlighted that undertakings that compete with each other to hire employees are competitors, regardless of whether they compete in the same product or services market. The advisory bulletin was especially concerned about undertakings agreeing or exchanging their intentions regarding any aspect of compensation (which is not limited to salaries and wages but can include benefits and allowances) or the solicitation, recruitment or hiring of employees (including non-poaching arrangements), since such arrangements may amount to price-fixing and market-sharing.

More recently, on 19 January 2019, the Commission announced that it has opened an investigation into the Hong Kong Seaport Alliance, whereby certain container terminal operators in Hong Kong will jointly operate and manage their berths across certain terminals in Hong Kong. In particular, the Commission is investigating whether the agreement may constitute a contravention of the First Conduct Rule of the Ordinance.

2 What do recent investigations in your jurisdiction teach us?

In its first cases, the Commission has demonstrated its capabilities in conducting and completing investigations very efficiently by taking three cases to court within three years of the Ordinance coming into effect. For instance, in the Nutanix case, formal investigation commenced only eight days after receipt of the complaint, and proceedings before the Tribunal commenced after only nine months of investigation. The case also offers interesting insight into the Commission’s investigation methods: the investigation was prompted by a complaint and the Commission exercised its investigation powers to, inter alia, conduct dawn raids, seize documents and compel the attendance of interviews before the Commission. Apart from physical documents, the Commission seized employees’ personal mobile phones and computers and is relying on evidence from emails and WhatsApp messages. The Commission also issued notices to require employees to attend interviews.

In conducting its investigations, the Commission has continued to use its compulsory evidence-gathering powers under the Ordinance to request documents and information from companies and enter and search premises (dawn raids). The Commission has conducted a number of dawn raids across different investigations. In general, according to the Commission, businesses under investigation have shown a high degree of compliance with the Commission’s evidence-gathering requests.

In terms of case selection, the Commission has said it will continue to be driven by complaints, queries, whistle-blowers, leniency applications, referrals and other information it gains to identify potential contraventions of the Ordinance. In its press release dated 6 September 2018 to accompany the announcement of the third case being brought before the Tribunal, Mr Brent Snyder, CEO of the Commission, said that combating cartels is an enforcement priority for the Commission, and that those involved in such conduct should consider approaching the Commission for leniency.

3 How is the leniency system developing, and which factors should clients consider before applying for leniency?

According to the Commission’s Leniency Policy for Undertakings Engaged in Cartel Conduct, the Leniency Policy applies only in relation to cartel conduct under the First Conduct Rule (prohibiting anticompetitive agreements and concerted practices), despite the Ordinance itself being clear in section 80 that a leniency agreement can be entered into in respect of the First or Second Conduct Rules. The Commission has noted that it is not precluded from entering into leniency agreements in respect of other forms of conduct, but these would fall outside the scope of the Leniency Policy. It has been reported that the Commission has now started to receive leniency applications, and the Commission’s increased enforcement activities may trigger more applications.

The Leniency Policy provides that a leniency agreement will be made only with the first cartel member that reports a cartel to the Commission. Section 4 of the Leniency Policy provides that the Commission has enforcement discretion towards undertakings that have engaged in cartel conduct, but that do not qualify for leniency under the Leniency Policy (eg, an undertaking that is not the first to report the cartel). This may take various forms, such as considering a lower level of enforcement action (including recommending a reduced pecuniary penalty to the Tribunal), but it is ultimately for the Tribunal to decide on the appropriateness and level of a pecuniary penalty. As discussed in more detail below, the Commission, in April 2019, published a ‘Cooperation and Settlement Policy for Undertakings Engaged in Cartel Conduct’, which sets out a framework in which undertakings engaged in cartels that do not benefit from the Leniency Policy may choose to cooperate with the Commission in return for certain benefits.

An important consideration for potential leniency applicants is that the leniency applicant will be required under the leniency agreement to sign a statement of agreed facts admitting to its participation in the cartel conduct – to the satisfaction of the Commission. The Leniency Policy does not require the statement of agreed facts to be settled prior to entering the leniency agreement (at which point the full facts of the case may not yet be known), but, more importantly, this statement may be used to ask the Tribunal (jointly by the Commission and the leniency applicant) to make an order declaring that the leniency applicant has contravened the First Conduct Rule by engaging in the cartel. This order would effectively open the leniency applicant up to private third-party follow-on actions, as provided for under the Ordinance, and if the Commission does bring a case before the Tribunal but is unsuccessful, the leniency applicant may be the only undertaking against which the Tribunal makes an order declaring that it has contravened the First Conduct Rule (if the Commission does not commence proceedings against other parties to the cartel).

As is always the case with leniency applications, the requirement to admit to the cartel conduct and subsequent exposure to follow-on litigation are key considerations that must be weighed carefully against the prospect of a pecuniary penalty. The Commission is currently undertaking a review of the Policy, in order to clarify or improve aspects of the Policy (such as introducing a framework on the calculation of penalties).

The ‘Cooperation and Settlement Policy for Undertakings Engaged in Cartel Conduct’, published in April 2019, provides for a Leniency Plus programme, under which companies that cooperate with the Commission in a cartel investigation and come forward first to disclose the existence of another separate cartel can receive an additional discount of up to 10 per cent off the recommended pecuniary penalty for the first cartel. The level of discount will depend on a number of factors including the significance of the separate cartel and the strength of relevant evidence provided.

4 What means exist in your jurisdiction to speed up or streamline the authority’s decision-making, and what are your experiences in this regard?

Various options are available to the Commission to conclude an investigation without it having to bring proceedings before the Tribunal. The Ordinance allows the Commission to accept a party’s commitment to take, or refrain from taking, any action that the Commission considers appropriate to address its concerns about a possible contravention of the First Conduct Rule. If the Commission accepts the commitment, it may decide not to commence or continue an investigation, or not to bring proceedings in the Tribunal, in relation to any alleged contravention. However, any admission contained in the commitment can form the basis of a follow-on action (as discussed above).

Parties can also take more informal steps to assuage concerns the Commission might have in relation to certain conduct. For example, on 31 May 2016, the Commission announced that the Hong Kong Newspaper Hawker Association had agreed to withdraw a letter and other communications sent to its members recommending a price increase for certain branded cigarette products. The Commission had investigated these communications and concluded that the recommendation of prices in this way was likely to be a serious contravention of the Ordinance. As a result of the Association’s rectifying action, the Commission proposed not to take any further action in the case.

Further, in relation to cartel activity, the Commission has the discretion to issue an ‘infringement notice’ instead of bringing proceedings in the Tribunal, provided the undertaking makes a commitment to comply with the requirements of the notice. These requirements may include: refraining from specified conduct, or taking any specified action that the Commission considers appropriate; and admitting to a contravention of the conduct rule. It remains to be seen in what circumstances the Commission will choose to issue an infringement notice instead of bringing proceedings before the Tribunal.

The ‘Cooperation and Settlement Policy for Undertakings Engaged in Cartel Conduct’, published by the Commission in April 2019, sets out a framework in which undertakings engaged in cartels that do not benefit from the Leniency Policy may choose to cooperate with the Commission in its investigation. The ultimate goal of the Cooperation Policy is for the cooperating undertaking and the Commission to apply jointly to the Tribunal for an order made by consent that the undertaking has contravened or been involved in the contravention of the First Conduct Rule. The Cooperation Policy sets out details of a cooperation procedure and the potential benefits of such cooperation. In particular, in return for cooperation provided by the undertaking, the Commission will agree to apply a discount to the pecuniary penalty it would otherwise recommend to the Tribunal. The Cooperation Policy sets out the three ‘bands’ of recommended discounts a cooperating undertaking can expect to receive: Band 1 receives a recommended discount of between 35 per cent and 50 per cent; Band 2 receives a recommended discount of between 20 per cent and 40 per cent; and Band 3 receives a recommended discount of up to 25 per cent. The Commission states that it will ordinarily indicate Band 1 to the first undertaking to express its interest to cooperate. Undertakings that come forward after the first undertaking will be identified as falling into Band 2 or 3 depending on the order in which they come forward. The Commission notes that it may decide, on a case-by-case basis, to include more than one undertaking in each band. The Commission will determine the actual cooperation discount within the applicable band, having regard to the timing, nature, value and extent of cooperation provided by the undertaking.

5 Tell us about the authority’s most important decisions over the year. What made them so significant?

The Commission issued one decision over the course of the year. On 19 October 2018, the Commission issued its Decision that the Code of Banking Practice is not excluded from the application of the First Conduct Rule of the Ordinance by or as a result of the legal requirement exclusion in section 2 of Schedule 1 to the Ordinance. Banks’ compliance with the Code is therefore subject to the Ordinance. The Commission published a Statement of Reasons to accompany the Decision. In the Statement of Reasons, the Commission confirmed that it has no current intentions to pursue any investigation or enforcement action in respect of the Code of Banking Practice, on the basis that, among other reasons, the Code is intended to promote good banking practices, was formulated with the input and support of the Hong Kong Consumer Council, as well as other public bodies, is endorsed by the Hong Kong Monetary Authority, and is not clearly harmful to competition and consumers in Hong Kong. This application was the first application for a decision in Hong Kong.

On 1 February 2019, the Commission announced that it had received an application from the Hong Kong Association of the Pharmaceutical Industry for a decision that its proposed market sales survey is excluded from the application of the First Conduct Rule. The subject of the application is the Association’s proposed market sales survey to collect and distribute aggregated, non-price sales data regarding prescription and over-the-counter pharmaceutical products in Hong Kong and Macau. This is the second application for a decision under section 9 of the Competition Ordinance, after the application relating to the Code of Banking Practice. The Commission is currently considering the application, and representations received in a public consultation that ended on 29 March 2019.

Although the Tribunal has yet to hand down a final judgment in any of the cases brought by the Commission, it has handed down a number of rulings to date relating to procedural issues. For example, on 14 March 2018, in relation to the Nutanix case, the Tribunal issued a decision regarding the Commission’s obligations in discovery and when it may oppose the production of documents on grounds such as without prejudice privilege and public interest immunity. Justice Godfrey Lam ruled that communication between the Commission and respondents in relation to the Commission’s Leniency Policy (including those resulting from unsuccessful leniency applications), and communications between the Commission and any respondents where an agreement has not been reached, are covered by without prejudice privilege (the former is also covered by informer privilege). The Tribunal’s treatment of the leniency and settlement processes with strict confidentiality is reassuring to potential leniency applicants and those companies considering to settle with the Commission. In addition, and among other matters, it was held that the Commission’s internal documents cannot as a class be said to be irrelevant or be protected by public interest immunity simply because they are internal. Instead, ‘relevance has to be judged by content’. Justice Godfrey Lam concluded that two narrow types of internal documents would likely be covered by public interest immunity, namely: (1) reports to and minutes of the Commission concerning the results of the investigation and the enforcement steps to be taken; and (2) certain internal communications and notes relating to the execution of search warrants showing the methods, procedures and tactics of the Commission. For other kinds of internal materials, such as intermediate drafts of statements of cooperating witnesses, the Commission would have to justify its claim of public interest immunity by content following the proper procedures.

The substantive hearing for the Nutanix case was conducted before the Tribunal in June and July 2018 (with closing arguments in September 2018), and the substantive hearing for the second case was conducted in November and December 2019 (with closing arguments in December 2018). No definitive timetable has yet been set for the Commission’s third case. The outcomes of these cases will edge us towards more clarity in the interpretation of the Ordinance and will be crucial to the public’s perception of the effectiveness of the Commission’s enforcement of the Ordinance. Judgments in respect of the first two cases are expected in the first half of 2019.

6 What is the level of judicial review in your jurisdiction? Were there any notable challenges to the authority’s decisions in the courts over the past year?

The Commission has issued two decisions to date (the block exemption order for certain liner shipping agreements, and the decision in respect of the Code of Banking Practice), and the Tribunal has handed down a number of rulings to date relating to procedural issues. There has been no judicial review so far.

7 How is private cartel enforcement developing in your jurisdiction?

It is likely to be some time before we see any private cartel enforcement in Hong Kong. Stand-alone actions are not permitted in Hong Kong: private claims may only follow from a determination of a contravention of a conduct rule (whether determined by the Tribunal, another court or through an admission by an infringing party). As such, we may see follow-on actions if the Commission is successful is its first cases, or if it otherwise seeks admissions from infringing parties pursuant to its enforcement powers.

From the Commission’s Leniency Policy, successful leniency applicants are required to enter into a leniency agreement requiring the applicant to (among other things) make an admission as to its contravention of the First Conduct Rule. This admission may, in turn, be the basis for the Commission to seek an order of the Tribunal to the effect that the leniency applicant has contravened the First Conduct Rule, which will have the effect of opening the leniency applicant to follow-on actions. Aside from leniency, an admission made in an undertaking’s commitments to the Commission (eg, to comply with an infringement notice under the Ordinance) could also form the basis for third-party follow-on actions.

Parties contemplating bringing follow-on actions will wish to understand the extent to which they will have access to the Commission’s file. The Leniency Policy indicates that it is the Commission’s policy to protect any confidential material provided to the Commission by the leniency recipient and its records of the leniency application process, including by firmly resisting requests for disclosure of such confidential material on public interest or other applicable grounds. Nonetheless, the statement of agreed facts that the leniency recipient is required to agree to (and that may form part of the Competition Tribunal’s order confirming contravention by the leniency recipient) may go to support a follow-on action.

8 What developments do you see in antitrust compliance?

The full implementation of the Ordinance has significantly increased awareness of, and focused the attention of companies on, competition compliance. The guidelines and policies issued by the Commission have allowed companies to better align their compliance and risk assessment systems with the Commission’s policies. We would expect Hong Kong companies to refine and update their compliance regimes as the Commission publishes further guidance, continues to strengthen its enforcement activity, and as the first judgments of the Tribunal are handed down. As an example of the growing importance of competition compliance, the Commission’s Cooperation Policy requires an undertaking to confirm that it is prepared to continue with, or adopt and implement, a compliance programme to the reasonable satisfaction of the Commission in order to benefit from the cooperation discount.

Any state-of-the-art compliance system must (1) be easy to understand; (2) involve commitment at the senior executive level; (3) be tailored towards the culture and requirements of the particular market and company; (4) involve ongoing training; and (5) feature an effective internal monitoring and reporting regime. In our experience, clients generally find employee guidelines that focus on issues of particular relevance to the company to be more useful and easier to use and understand, as they bring specific problem areas to employees’ attention. We have also found that clients appreciate having user-friendly documents such as checklists and FAQs to supplement the guidelines.

Ongoing training is essential to ensure that a ‘compliance mentality’ remains a part of the company’s culture in the long term. This may take the form of talks, mock dawn raid exercises, Q&A sessions and e-learning. Employees should be kept informed of relevant developments in enforcement so that competition law enforcement is not seen as being merely theoretical.

Lastly, a systematic monitoring and reporting process must be enforced. Each employee should know to whom they can refer compliance issues for consultation and further advice. A clear chain of command is particularly relevant to dawn raids and other investigations where the company will need to have an early warning system in place and be able to respond quickly.

9 What changes do you anticipate to cartel enforcement policy or antitrust rules in the coming year? What effect will this have on clients?

As the judgments in respect of the first two cases to be brought by the Commission are expected to be handed down in 2019, we should see the Tribunal clarify various important legal issues, including the standard of proof for establishing a contravention of the First Conduct Rule, as well as what constitutes an ‘agreement’ and ‘bid-rigging’ (we would expect the Commission to persuade the Tribunal to follow the approach in the Commission’s guidelines and EU/UK jurisprudence). As a result of these cases, we may even see the first follow-on cartel claims in the Hong Kong courts. This will give companies and the legal community much more clarity regarding the interpretation of the Ordinance.

The Commission has brought its first proceedings against individuals for alleged contravention of the Ordinance. In its press release to accompany the announcement of the proceedings, the Commission noted that the proceedings drive home the deterrent message that not only companies, but also individuals who engage in cartels, may expect to face the full force of the law. We expect more actions against individuals to be brought in the future.

The Commission is currently undertaking a review of the Leniency Policy, with a view to introducing possible changes in the near future. The Commission is reported to be working on a separate set of guidelines relating to the calculation of pecuniary penalties that the Commission recommends to the Tribunal. It is expected that these guidelines will set out some of the factors the Commission will take into consideration when making such recommendations.

The Inside Track

What was the most interesting case you worked on recently?

We advised the Hong Kong Association of Banks on an application for a decision under the Ordinance that the Code of Banking Practice (Code) be excluded from the First Conduct Rule. Although the Commission decided that the relevant exclusion does not apply to the Code, the application helped to develop a framework in defining what constitutes a ‘legal requirement’ for the purposes of the Ordinance. In addition, the Commission confirmed that it has no current intentions to pursue any investigation or enforcement action in respect of the Code, given, among other things, the consumer protection rationale behind the Code.

If you could change one thing about the area of cartel enforcement in your jurisdiction, what would it be?

We have yet to see a cartel case decided in Hong Kong. Therefore, there are areas of uncertainty in our Ordinance that cannot be resolved until the Tribunal issues more decisions. In my view, one of the important areas is leniency, which will have the knock-on effect of facilitating more investigations by the Commission. In particular, the status of parties that are second or third to apply has, to date, been uncertain. Publication of the Cooperation Policy is a helpful step forward, and I hope that the Commission’s review of the Leniency Policy will help to clarify other uncertainties.

Natalie Yeung

Slaughter and May - Hong Kong -

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