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Competition Tribunal adopts “structured methodological approach” to penalties

  • Hong Kong
  • Competition, EU and Trade
  • Litigation and dispute management

06-05-2020

Introducing Hong Kong’s four-step fining framework…

On 29 April 2020, Justice Godfrey Lam, President of the Competition Tribunal, handed down judgment in relation to the fines to be imposed on the parties in the W. Hing and Others case. The judgment also gives an indication of the Tribunal’s likely approach to investigation and litigation costs.

Lam J’s judgment follows his earlier ruling on contravention of the Competition Ordinance, in which all ten respondents were found to have made or given effect to a market sharing arrangement and a price fixing arrangement when providing property renovation services to tenants at a public housing estate in Kwun Tong, On Tat Estate (Phase I). (For an analysis of the judgment on liability, see our briefing here).

Key issues

In its judgment on liability in the W. Hing case, the Tribunal found that the ten respondents agreed to allocate amongst themselves the contracts for decoration of flats and to fix the price of the services offered at One Tat Estate. In this judgment, the Tribunal was required to decide:

  • the amount of pecuniary penalties that should be imposed on each respondent; and
  • whether and, if so, the extent to which the respondents should be ordered to pay the costs of proceedings and the costs of investigation of the Commission.

Framework for assessing penalties

Under the Competition Ordinance, the determination of the level of penalties to be imposed for a competition rule breach is largely a matter of discretion for the Tribunal, subject to sections 93(2) and (3) of the Ordinance, which set out, respectively:

  • the matters which the Tribunal must have regard to in determining the amount (which include (a) the nature and extent of the conduct that constitutes the contravention; (b) the loss or damage, if any, caused by the conduct; (c) the circumstances in which the conduct took place; and (d) whether the person has previously been found by the Tribunal to have contravened the Ordinance); and
  • the maximum level of penalty that can be imposed for a contravention, namely, 10% of the Hong Kong group turnover of undertaking concerned for up to three years of the contravention.

Given the degree of discretion afforded to the Tribunal in determining penalties, it was first necessary to settle upon the appropriate approach to calculating the appropriate penalties. Specifically, Lam J was asked to choose between a structured approach proposed by the Competition Commission, which resembles the methodology adopted by the UK and EU competition authorities and the more holistic “instinctive synthesis” approach adopted by Australian courts (and advocated by the 2nd, 3rd and 9th respondents). In doing so, Lam J rejected the 2nd and 3rd respondents’ argument that the Commission should be precluded from making submissions to the Tribunal (and thereby influencing it) in relation to the quantum or ranges of penalties to be imposed and ultimately considered that a methodological approach would better provide the desirable level of certainty, clarity and transparency required to create deterrence.

Lam J set out the following 4-step approach to establishing the appropriate amount of any pecuniary penalty:

Step 1

Determining the “Base Amount”

The "Base Amount" is arrived at by taking the undertaking’s Value of Sales directly or indirectly related to the contravention in the relevant geographical area in Hong Kong in the financial year in question.

The Base Amount is then multiplied by:

  • a "Gravity Percentage" (of up to 30%), the precise amount applied reflecting the gravity and blameworthiness of the conduct (but which, for serious anti-competitive conduct, is in the range of 15-30%); and 
  • a "Duration Multiplier" reflecting the number of years of the undertaking’s participation in the contravention.

Step 2

Adjusting for aggravating, mitigating and other factors

This involves consideration of all surrounding circumstances that may have a bearing on the penalty, including the circumstances in which the conduct took place and factors that may justify an increase or decrease of the Base Amount. As well as the mandatory considerations set out in section 93(2)(b) and (d) of the Competition Ordinance (the extent of loss or damage caused by the conduct and previous contravention of the Ordinance), the Competition Commission submitted that:

  • aggravating factors could include: (i) where an undertaking acts as a leader or instigator of the contravention; or (ii) takes coercive or retaliatory measures against other persons; (iii) where directors or senior management are involved in the contravention; (iv) where conduct is egregious; or (v) reflective of a widespread industry practice, creating a need for general deterrence; (vi) continuing serious anti-competitive conduct after being aware of a Competition Commission investigation; or (vii) obstruction of a Commission investigation; and
  • mitigating circumstances could include (i) where there is genuine uncertainty as to lawfulness of the conduct; and (ii) where the undertaking in question had only limited participation.

Another possible consideration submitted by the Competition Commission is “specific deterrence” (i.e. whether the Base Amount is sufficient to deter an undertaking from engaging in further anti-competitive practices).

In addition, the Tribunal stated that an overall sense check should be applied at this stage to see whether, subject to Steps 3 and 4, the amount arrived at would be a “just and proportionate” penalty in the circumstances.

Step 3

Applying the statutory cap in s. 93(3) of the Ordinance

The cap is to be calculated by reference to the total Hong Kong turnover of the undertaking, not the value of the kind of sales affected by the contravention. As this figure has no intrinsic relationship with the scale and impact of the contravention, the cap, as a jurisdictional limit, should be applied only towards the end of the assessment. Lam J rejected the argument that it should be treated as a “maximum sentence” to be reserved for a case that is “worst of its kind”.

Step 4

Applying cooperation reduction and considering plea of inability to pay (if any)

Lam J noted that, as a matter of principle, the Tribunal is not bound by any recommendation of the Commission on the appropriate reductions. However, the Tribunal may properly have regard to the Commission’s recommendation bearing in mind the policy justifications. Any reduction should be dealt with after applying the statutory cap, to ensure there would be a real benefit for someone to offer cooperation. In addition, any reduction of penalty on the account of inability to pay should only be an exceptional measure.

Key rulings on penalties in this case

Ultimately, the Tribunal ordered the respondents to pay the following fines:

Respondent

Penalty Amount (but for application of Statutory Cap) (HKD)

Statutory Cap (HKD)

Adjusted Amount (after Statutory Cap, rounded down to the nearest thousand HKD)

1st Respondent 670,000 37,800,033 670,000
2nd Respondent 267,000 132,441 132,000
3rd Respondent 460,000 318,940 318,000
4th Respondent 420,000 1,825,263 420,000
5th Respondent 903,000 397,452 397,000
6th Respondent 299,000 145,548 145,000
7th Respondent 703,000 313,859 313,000
8th Respondent 946,000 415,332 415,000
9th Respondent 740,000 2,417,376 740,000
10th Respondent 958,000 420,381 420,000

With the exception of the 1st, 4th and 9th Respondents, the penalties payable by all the other respondents were in effect capped by the statutory limit (and in most cases, without the limitation, would have been significantly higher).

In arriving at these amounts, the Tribunal confirmed that:

  • The Base Amount was the relevant value of sales of the undertaking responsible in the relevant activity (which included, for example the relevant revenues of a subcontractor). The Tribunal rejected the 1st Respondent’s contention that the relevant value of sales comprised only the lump sum it received from its subcontractor for the right to work in its name (HK$200,000), rather than the value of the renovation works undertaken. As the infringement was committed in the name of W. Hing as a single undertaking, its Base Amount should be the value of works done in its name (HK$ 4.5 million). The same applied to 9th Respondent.
  • For similar reasons, the Tribunal rejected the 4th Respondents’ argument that the works were carried out by another individual in the name of the partnership and not by them as individual partners.
  • The appropriate Gravity Percentage was 24%, as proposed by the Competition Commission. The Tribunal rejected the respondents’ contention that the applicable percentage should be lower, on the basis that the conduct was not the worst of its kind. The Tribunal’s view was that the contravention concerned serious anti-competitive conduct. While the respondents were relatively small enterprises the breaches were not trivial, cartel arrangements, it said, “represent some of the most serious kind of collusive conduct that strikes directly at how competitive markets are supposed to work”. In addition, the respondents accounted for a substantial combined market share for renovations at the On Tat Estate and colluded with their closest rivals. The conduct was also targeted at, and affected, low-income public housing tenants and was engaged in notwithstanding express warning from the Housing Authority.
  • Even though the contravention lasted for five months in this case, a Duration Multiplier of 1 was applied (as the Base Amount only accounted for the value of sales limited to those five months).
  • In a case such as this which involves an object infringement, the absence of evidence of quantifiable loss was not a mitigating factor.
  • As the 1st and 9th Respondents did not directly participate in the conduct and each of them was liable only as a result of “letting their licence” to their “subcontractors”, to reflect their role as “part only of the undertaking in question”, the Tribunal reduced their respective Base Amounts by one-third. The Tribunal offered a similar reduction to the 3rd and 4th Respondents based on their lack of involvement in the conduct.
  • The Tribunal rejected most of the mitigating factors proposed by the other respondents, including the fact they were small corporations with low turnovers, or that the registered statuses of some of the respondents as approved contractors had been given up, suspended or terminated. Lam J also refused to accept as a mitigating factor that the Ordinance was new law and there was uncertainty about its application, especially as the issues in question were not novel.
  • Finally, the Tribunal refused to reduce the 5th Respondent’s penalty by reason of financial hardship, in the absence of clear and compelling evidence that its viability would be undermined by the penalty proposed.

Liability to pay litigation and investigation costs

In relation to litigation costs, the Tribunal decided as follows:

  • The civil approach on costs should be applied, even though the Tribunal had held that these proceedings, because of the order for pecuniary penalties sought, involved the determination of a criminal charge. This is consistent with the costs approach adopted in all the interlocutory applications heard in the Tribunal so far, which followed the civil procedure.
  • Whilst acknowledging that the “efficiency defence” raised by the relevant respondents was “highly unsatisfactory”, the Tribunal did not consider that it warranted an order for indemnity costs and decided that it should be taxed on the party and party basis. However, as the defence had formed a “separate, large and fairly self-contained topic” with expert evidence adduced on both sides, costs relating to it should fall only on the respondents who had run it. Accordingly, the respondents are each liable to an equal share of 80% of the Commission’s costs of and relating to the defence (for the 4th Respondent, up to the point it had abandoned the relevant line of argument).

As regards investigation costs, notwithstanding its power to do so under section 96 of the Ordinance, the Tribunal declined to make an award in favour of the Commission. In this respect, the Tribunal expected submissions in advance of the hearing showing the details of the heads of costs claimed, how they constituted costs of and incidental to the investigation into the conduct or affairs of the respondents and why they should be regarded as having been reasonably incurred by the Commission in connection with the proceedings, but no such submissions were made.

Comment

This is a landmark decision for Hong Kong’s evolving competition law. Lam J’s judgment sets out a clear methodology for the calculation of fines, which is broadly in line with international norms (specifically approaches of the EU and UK authorities). The approach to the calculation of the Base Amount (and specifically the application of substantial gravity percentages of up to 30%) is likely to result in very substantial fines for businesses involved in serious anti-competitive conduct. While it remains to be seen how lesser breaches of competition law will be approached, the judgment gives businesses welcome visibility of the potential impact of non-compliance.

In addition, Lam J has indicated that the Tribunal will have proper regard to the Competition Commission’s recommendations as to fines and reductions offered for co-operation. This is essential to the operation of a successful co-operation policy and arguably to the functioning of the competition regime as a whole.

 

The full judgement is accessible here:

Competition Commission v W. Hing Construction Company Limited and Others [2020] HKCT 1