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Lift off for Hong Kong’s Competition Regime

  • Hong Kong

    23-05-2019

    Competition Tribunal issues its first judgments on liability in first two Competition Ordinance enforcement actions

    Hong Kong – Justice Godfrey Lam, President of the Competition Tribunal, handed down judgments on 17 May 2019 (Friday) in each of the first two cases brought by the Competition Commission relating to alleged contraventions of the First Conduct Rule of the Competition Ordinance, which prohibits companies from entering into anti-competitive agreements.

    In the first case, Justice Lam held that Nutanix Hong Kong and three of its distributors (namely, BT, Innovix and Tech-21) contravened the law by seeking to arrange for “dummy bids” to be submitted in response to a tender organised by the Hong Kong Young Women’s Christian Association (YWCA) in 2016 for the supply and installation of an IT server system. A further distributor, SiS, was held not liable.

    In the second case, ten renovation contractors were found liable for agreeing to allocate contracts for decoration of flats at the On Tat estate in Kwun Tong between themselves and for fixing the price of the renovation services offered.

    The decisions underline the reality that all businesses (large or small) operating in Hong Kong are subject to the rules. It also demonstrates that the Competition Commission is prepared to take enforcement action to tackle any potentially serious contravention of the Ordinance, even where there may have been little or no actual impact on the market.

    Key Findings

    The judgments clarify a number of fundamental questions about the application of the Competition Ordinance, which were contested in the Tribunal proceedings. Specifically, the decisions confirm that: 

    • The Competition Commission, which has power to prosecute companies for alleged contraventions of the Competition Ordinance, is required to prove its case beyond reasonable doubt (i.e. to the standard applied in the criminal cases) rather than on the “balance of probabilities”.
    • The Commission is not required to prove that conduct in question had an actual effect on competition if the conduct has “by its nature” an anti-competitive object.
    • Agreements involving bid rigging, market allocation and price fixing all have an anti-competitive object.
    • A company will be liable for the actions of employees where there is “a sufficient connection between the acts of the employee in question and the undertaking so that the former can properly be regarded as part of the latter in the relevant context.”
    • The Commission is not obliged to issue a warning notice before issuing proceedings in cases of this type so long as, immediately prior to it bringing proceedings, it has a reasonable cause to believe that a contravention involving “serious anti-competitive conduct” has occurred.

    In the Nutanix case:

    • The Commission found on the facts that there was a trilateral agreement between BT, Nutanix and Innovix, whereby (i) Nutanix and BT agreed that Nutanix would approach Innovix to invite it to submit a so-called “dummy bid” (that is, a bid which was not intended to win the tender) to YWCA and (ii) Innovix agreed with Nutanix that it would submit a bid and knew it was intended to help BT win the YWCA tender.
    • This agreement had the object of restricting competition, meaning the Commission did not have to establish that the arrangement actually affected competition. (This is in line with judgments in previous “hub and spoke” cases in other jurisdictions, such as the UK and Belgium).
    • The Tribunal also concluded that Nutanix had entered into a further bilateral agreement with Tech-21, whereby Tech-21 agreed to submit a dummy bid, while intending that YWCA would receive its bid as an independent, genuine bid.
    • The Tribunal did not find that Tech-21 knew the identity of the distributor its dummy bid was intended to help (and therefore there was no understanding reached as between Tech-21 and BT). However, this did not prevent the Tribunal from concluding that the agreement between the manufacturer (Nutanix) and its reseller (Tech-21) also had an anti-competitive object. This aspect of the Judgment is novel, as it is the first time a vertical agreement between a manufacturer of products and a reseller to facilitate bid rigging has been found to result in an infringement. The case therefore underlines the fact that the category of so-called “object restrictions” is not closed and that reaching any arrangement with any business to submit a bid that is not intended to be competitive (even though that business may not be a competitor) carries significant competition law risk.
    • The Tribunal found that there was a similar bilateral agreement between Nutanix and an employee of SiS. However, SiS was not held liable for that employee’s conduct.
    • In a departure from the EU and Australian principles (whereby actions of an employee carried out in the course of his or her employment is generally attributed to the employer), Lam J concluded that, in order to attribute the actions of an employee to a company, there need only be “a sufficient connection” between the acts of the employee in question and the undertaking “…so that the former can properly be regarded as part of the latter in the relevant context”.
    • In this case, Lam J concluded that there was insufficient connection. While the employee entered the agreement in question within his working hours, he was not acting in the course of his employment on the basis that:
      • SiS did not compete in the market of supplying to end users such as YWCA, had never submitted a tender at the invitation of an end-user and had already indicated to YWCA that it would not be submitting a bid;
      • it was not part of the employee in question’s general responsibility to deal with end-users or to submit tenders to them or to anyone else;
      • the employee involved acted at the request of one of SiS’s major vendors (i.e. Nutanix), whom he felt obliged to obey; and
      • the employee involved accepted he had no authority to commit SiS to liability, or to sign documents on the company’s behalf and, in submitting a bid to the YWCA, acted outside his authority and concealed his actions from his employer.

    In the renovation services case:

    • The Commission succeeded in proving there was an agreement between ten renovation contractors to allocate specific floors of four multi-storey buildings, comprising Phase 1 of the On Tat public housing development. The arrangement involved each of the contractors agreeing not to actively seek business from tenants on floors allocated to others, to direct tenants to the respondents who had been allocated the relevant floors, and to decline business from those tenants, unless the tenant insisted otherwise.
    • The Tribunal also concluded that the ten contractors had entered into an agreement to fix the prices of renovation services set out in the flyers jointly produced by them. The Tribunal concluded that prices in the flyers served as a starting point or anchoring reference point for negotiations with many if not all customers, which was sufficient for this to amount to prohibited price fixing.
    • Both the floor allocation agreement and the package price arrangement had the object of restricting competition and therefore the Commission did not have to prove that the arrangements actually adversely affected competition.
    • A number of the contractors ran an argument that the agreements resulted in savings in time and costs, which outweighed the alleged anti-competitive effects. There was a significant amount of debate at trial about whether it was for the parties to prove the existence of these efficiencies or whether the Competition Commission was required to show that the agreement was not capable of enhancing overall efficiency.
    • In line with EU practice, the Tribunal concluded that it is for the respondents to establish the “efficiency defence” on the balance of probabilities.
    • Ultimately, the efficiency defence failed. The Tribunal, applying the four-pronged test set out in Schedule 1 of the Competition Ordinance, was not satisfied that the agreements:
      • generated efficiencies which would be capable of compensating for the resulting harm to competition;
      • would have allowed customers a fair share of the benefits (because there was little evidence the efficiencies would in fact have been passed on to customers);
      • only imposed restrictions that were indispensable to the attainment of the efficiencies claimed; or
      • did not afford the respondents the possibility of eliminating competition in respect of a substantial part of the services in question.
    • The Tribunal rejected the first and ninth respondents’ argument that they should not be liable on the basis that they had subcontracted the works. The Tribunal concluded that their respective subcontractors had acted on behalf (and in the name) of the first and ninth respondents. Accordingly, these respondents should be held liable for the actions of their subcontractors.

    Comment

    These are both landmark cases for Hong Kong’s competition regime. The Tribunal has resolved many open questions posed by the Competition Ordinance. In the process it has served notice that the categories of anti-competitive conduct are not closed and that it is prepared to push the boundaries of competition law.

    See judgments:

    Competition Commission v Nutanix Hong Kong Limited and others (CTEA 1/2017) [2019] HKCT 2

    Competition Commission v W. Hing Construction Company Limited and others (CTEA 2/2017) [2019] HKCT 3

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