Monday, 12 October 2015

The Hong Kong Competition Ordinance and its impact on the transportation industry

October 12, 2015.
The Hong Kong Competition Ordinance (Cap 619) (“Ordinance”) was gazetted on 14 June 2012 and is expected to enter into force later this year. With the publication by the Competition Commission of the Revised Draft Guidelines to the Competition Ordinance in July this year, it is now timely to consider the potential impact of the Ordinance on shipping.

The Competition Rules

The Ordinance is deceptively simple by referring to only three rules:-

  • The First Conduct Rule
  • The Second Conduct Rule
  • The Merger Rule

The Merger Rule presently only applies to the telecommunications sector. There is no indication that it will be extended to other industry sectors for the foreseeable future. Therefore the shipping sector needs only be aware of the First Conduct Rule and the Second Conduct Rule. But before launching into an analysis these two rules, it is important to first be familiar with terminology used in the Ordinance.

‘undertaking’: This is a defined term in the Ordinance and means any entity (regardless of its legal status and including a natural person) engaged in economic activity. Examples of undertakings include individual companies, groups of companies, individuals operating as sole traders, societies, business chambers, trade associations and non-profit organisations. The key question is whether it is engaged in economic activity.

‘economic activity’: This is not a defined term but is generally understood to refer to any activity consisting of offering products and/or services in a market regardless of whether the activity is intended to earn a profit.

‘agreement’: This is defined in the Ordinance to include any agreement, arrangement, understanding, promise, undertaking, whether express or implied, written or oral, and whether enforceable or intended to be enforceable. The key is whether there is a ‘meeting of minds’ between the parties concerned.

‘concerted practice’: This is a form of cooperation between undertakings, falling short of an agreement, where the parties concerned knowingly substitute practical cooperation for the risks of competition. A concerted practice typically involves an exchange of competitively sensitive information between competitors or parallel similar behaviour.

‘serious anti-competitive conduct’: Another defined term in the Ordinance and means any conduct that consists of (a) fixing, maintaining, increasing or controlling the price for the supply of goods or services; (b) allocating sales, territories, customers or markets for the production or supply of goods or services; (c) fixing, maintaining controlling, preventing, limiting or eliminating the production or supply of goods or services; and (d) bid-rigging. It is in essence what competition authorities call “hard core” restrictions.

The First Conduct Rule

The First Conduct Rule prohibits undertakings from making or giving effect to an agreement or engaging in a concerted practice, with the object or effect of preventing, restricting, or distorting competition in the relevant market. It applies both to horizontal (i.e agreements between competitors) and vertical agreements (i.e. agreements with suppliers and purchasers) and also to decisions of an association of undertakings (for e.g. a trade association) which have the object or effect of harming competition in Hong Kong. Unlike some other jurisdictions, the Ordinance does not provide for automatic or per se contraventions of the First Conduct Rule. It will have to be established that the agreement has an anti-competitive object or, alternatively, an anti-competitive effect (whether actual or inferred). However, once it is established that an agreement has the object or effect of harming competition, the question as to whether the conduct amounts to serious anti-competitive conduct will need to be considered. Activity which amounts to serious anti-competitive conduct (for e.g. cartel arrangements between competitors) will be subject to more serious penalties.

Complications arise because the Ordinance does not contain an exhaustive list of agreements which are presumed to have an anti-competitive object or effect. Each agreement will have to be considered in its specific circumstances. Determining whether an agreement has the object of harming competition will require an objective assessment of its aims, content, the way it is implemented and its context (both economic and legal). Whether an agreement has an anti-competitive effect will depend on whether it is likely to have an adverse impact on one or more of the parameters of competition (for e.g. price and output) and also the extent to which the relevant undertakings have market power in a relevant market. However, to assist in understanding the application of the Ordinance, the Draft Revised Guidelines provides examples of agreements that may contravene the First Conduct Rule:-

Horizontal Agreements

  • Price fixing
  • Market Allocation agreements
  • Output limitation agreements
  • Bid rigging
  • Joint purchasing agreements which facilitate downstream collusion or oligopsony effects in upstream markets
  • Information exchanges (in particular commercially sensitive information)
  • Group boycotts

Vertical Agreements

  • Resale price maintenance agreements

The Second Conduct Rule

The Second Conduct Rule targets undertakings with a substantial degree of market power. It prohibits relevant undertakings from abusing power by engaging in conduct that has as its object or effect the prevention, restriction of distortion of competition in Hong Kong. It is generally accepted that market power is a matter of degree and high market share is likely to be the basis of an undertaking having a substantial degree of market power. Other relevant factors to determining market power include an undertaking’s ability to profitably charge prices above competitive levels over a sustained period, and the barriers to entry to the market for prospective competitors.

Unlike other jurisdictions ( for e.g. Singapore presumes 60% market share to amount to “dominance” and the EU uses a 40% threshold for presumption of dominance), the Competition Commission has rejected calls to include some form of market share based threshold in the Revised Draft Guidelines. This raises difficult questions as to what amounts to a ‘substantial degree’ of market power and what is the relevant market. Previous statements by the Hong Kong Government have suggested a threshold as low as 25% may be sufficient to trigger the application of the Second Rule).

The Draft Revised Guidelines suggests that the following conduct may constitute an abuse of market power:-
  • Predatory behaviour towards competitors
  • Tying customers and bundling
  • Limiting production, markets or technical development to the prejudice of consumers
  • Margin squeezing by vertically integrated undertakings
  • Refusals to deal and exclusive arrangements

Exclusions and Exemptions

The Ordinance provides for exclusions and exemptions from compliance with the conduct rules in limited circumstances. A distinction is drawn between general and specific exclusions and exemptions. This table, which is reproduced by the Revised Draft Guidelines, summarises these exclusions and exemptions as they apply to each conduct rule.

It is up to an undertaking to assess for itself whether it complies with the conduct rules. This is referred to as self-assessment. There is no obligation on an undertaking to first obtain a decision or a block exemption order before it can rely on an exclusion or exemption. If an undertaking requires greater legal certainty, it can apply to the Competition Commission for a decision or a block exemption order. However, the decision to refer to the Competition Commission should not be taken lightly. If the information provided to the Competition Commission suggests that the agreement/ conduct concerned is anti-competitive, the Competition Commission has the power to investigate further and prosecute the relevant undertakings if a breach is established.

Considerations for the transportation industry

The transportation industry is no stranger to anti-competition legislations. In particular, the container liner trade has benefited from block exemptions in being granted to such undertakings in most jurisdictions. The EU Consortia Block Exemption prohibits price fixing arrangements but allows liner shipping consortia to operate joint services, take joint capacity decisions in response to fluctuations of demand and supply, pursue pooling arrangements, jointly operate and use port terminals, co-ordination of timetables and ports of call and cross chartering of slots. This is subject to the consortia having a market share no greater than 30%. The Singapore approach permits co-operation on price, remuneration and technical operations, and commercial arrangements, provided that market share does not exceed 50%. South Korea and Taiwan exempt all types of co-operative carrier agreements. These are Conferences which allows members to set common tariffs and not Consortia.

However, the Ordinance applies to all undertakings and not only the container trade and liner arrangements. Maritime operators in all segments including logistics, terminal operators, tankers, dry bulk carriers and tramping have to abide by the conduct rules. In October 2006, the EU lifted the exclusions for tramp shipping leading to questions being asked about whether shipping pools fall foul of the laws that protect competition but it is accepted in EU law that pools, while not being Consortia can be EU compliant cooperation joint ventures provided they satisfy EU exemption criteria (e.g. they guarantee efficiency gains and consumer benefits). There is no indication if this has been considered in Hong Kong. 

It is commonly argued in various jurisdictions that cooperative arrangements (whether by way of pooling or liner services) which have been an integral part of the transportation industry for centuries, are necessary in order to maintain economic efficiencies and maintain the level of services provided to consumers. The question is whether such arguments will be accepted by the Competition Commission. Although the Ordinance fuses principles derived from EU, Australian, UK and Singapore competition law, the Competition Commission has been reticent on applicability of precedents from these other jurisdiction to decisions under the Ordinance. This gives rise to a lack of legal certainty on key issues for example market definition, market power thresholds and sector specific block exemptions, pending development of local case law. Undoubtedly, self-assessment which in itself is a complex and not straight forward procedure, will be complicated by this lack of legal certainty. 

In summary, the introduction of the Ordinance will have a significant impact on the transportation industry especially so when business are looking to consolidate or pool their assets together in response to tough market conditions. Given the significant penalties that can be imposed in the event of non-compliance, the importance of being compliant should not be underestimated. Risk can be minimised by putting in place effective compliance procedures and training programmes.



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