On 17 May 2019 the Competition Tribunal (“Tribunal”) issued two much anticipated decisions in relation to the first and second cases brought before it by the Hong Kong Competition Commission (“Commission”). These judgments are noteworthy because, in addition to establishing the very first contraventions of the Competition Ordinance (“Ordinance”), they clarify a number of key issues, including:
- The approach taken by the Tribunal to the attribution of an employee’s acts to their employer;
- The approach that should be taken by the Commission when considering whether to issue a warning notice;
- The standard of proof to be applied to proceedings before the Tribunal;
The approach the Tribunal takes towards defences based on sub-contracting and economic efficiencies.
CTEA1/2017 (YWCA IT tender case)
In June 2018 the Commission brought its first case before the Tribunal in a lawsuit against BT Hong Kong, Nutanix Hong Kong, SiS International, Innovix Distribution and Tech-21 Systems for infringement of the First Conduct Rule (which prohibits anti-competitive agreements). As reported in our previous competition law updates, the Commission alleged that the companies rigged bids in relation to a tender to install a new computer server for the Young Women’s Christian Association (“YWCA”).
The Tribunal has now ruled that Nutanix, BT, Innovix and Tech-21 did in fact contravene the Ordinance by engaging in bid-rigging.
However, the Commission was unsuccessful in its case against SiS International (“SiS”) as it was held that the employee that was complicit in the relevant bid submission had no authority to bind SiS and that the employee’s seniors were not aware of his arrangements with other bidding parties.
Attribution of liability for an employee’s acts
In concluding that the acts of SiS’s employee did not bind the company itself the Tribunal has shed light on how employee attribution will be treated in future cases. The Commission’s primary position on this issue was that an undertaking is responsible for acts of employees carried out during their employment. In response, the Tribunal acknowledged that while this principle would serve to promote the objects of the Ordinance and encourage greater vigilance by businesses, attributing all acts of all employees to an undertaking solely because they were done during working hours is neither just or necessary for effective enforcement.
In this case, while the SiS employee committed certain acts within his working hours he was not acting in the course of his employment as he was relatively junior and did not have authority to submit tenders. Essentially he had, in the words of the Tribunal, “gone rogue”.
The parties in this case essentially argued that the conduct in question did not amount to bid-rigging and therefore it did not constitute serious anti-competitive conduct. Under the Ordinance, parties engaged in conduct which is not serious anti-competitive conduct must first be issued with a “warning notice” before the Commission starts proceedings against them in the Tribunal.
Bid-rigging, for the purposes of serious anti-competitive conduct, has a specific definition in the Ordinance. The definition does not include cases where the persons calling for or requesting bids or tenders knows about the collusion and it was argued that the YWCA, the party who had issued the tender in question, did in fact know about the collusion.
The Tribunal considered the question of when, for the purposes of issuing a warning notice, the existence of serious anti-competitive conduct should be assessed – is it at the time of commencement of proceedings or at trial? The Commission maintained that it was the former while certain of the defendants held that it was the latter.
Ultimately the Tribunal agreed with the Commission, stating that as a warning notice has to be issued before the commencement of proceedings the time for deciding whether a warning notice is necessary is at this point in time. It was acknowledged that at commencement of proceedings the Commission did not have reasonable cause to believe YWCA knew of the collusion and that it was correct not to issue a warning notice.
On the facts of the case the Tribunal also held that the YWCA did not know of the collusive conduct and that it amounted to bid-rigging and therefore serious anti-competitive conduct.
Standard of proof
The Tribunal has also clarified that the standard of proof that is to be discharged by the Commission and applied in Tribunal proceedings is that of beyond reasonable doubt. In coming to this decision the Tribunal referred to the fact that the proceedings involved the Commission seeking orders for pecuniary penalties which involve the determination of a criminal charge within the meaning of Art. 11 of the Bill of Rights.
The Commission had argued that such a standard might frustrate the effective application of competition laws. However, in a nod to jurisprudence from the EU, the Tribunal helpfully clarified what the application of this standard involved.
Firstly, it is not necessary for every item of evidence to satisfy the standard of proof in relation to every aspect of the contravention. It is sufficient that the body of evidence viewed as a whole satisfies the burden. Secondly, when looking at the facts, the Tribunal is able to draw appropriate inferences. This reasoning acknowledges the reality that evidence of anti-competitive conduct, particularly secret cartels, can be fragmentary and sparse.
The Tribunal had previously ruled in March 2018 that discovery in Tribunal proceedings should approach the standard applicable to the prosecution in criminal proceedings, which required the Commission to disclose relevant material which could undermine its case or advance a respondent’s case.
CTEA2/2017 (First decorating contractor case)
The Commission’s second case went to trial in late November 2018. The Commission alleged that ten local decorating contractors entered into market sharing and price fixing agreements involving decoration services at a public housing project.
The Tribunal has now agreed with the Commission, holding that the respondents engaged in serious anti-competitive conduct by allocating 4 floors to each other in each of the three buildings they were working in. Moreover each contractor agreed that it would not actively seek business from tenants on floors allocated to other contractors.
The contractors also jointly agreed to the prices of decorating packages that were then printed on flyers and distributed on the estate. These prices acted as an anchoring reference point for price negotiations with customers and led to price fixing.
Two of the defendants argued that they were not liable for any contravention of the Ordinance as the renovation works were not carried out by them but by their sub-contractors. In assessing this argument the Tribunal considered the approach taken in the EU to deciding questions regarding whether or not separate entities form a “single economic entity” and therefore one undertaking.
In the EU this approach can involve looking at whether one entity has “decisive influence” over another entity or, in the context of principal and agent, whether the agent bears any financial risk (if it does then it will likely be considered a separate undertaking).
Departing from these approaches the Tribunal held that notions of control and financial risk were not the focal point of the enquiry in this case. Rather, it was appropriate to ask whether or not there was unity in the conduct of the relevant entities in the market.
After taking into account a range of different factors it was held that there was unity between the contractors and their sub-contractors and that therefore they were part of the same undertaking. These factors include the fact that while the sub-contractor carried out the work it did so in the name of the respondent and in discharge of the respondents’ obligations to the tenants and to the Hong Kong Housing Authority, which had licensed the contractors to carry out the work.
Economic efficiency defence
During trial the defendants adduced expert economic evidence which set out the supposed efficiencies generated by the allocation of floors between the contractors, for example reducing elevator waiting time and labour costs. They argued that such efficiencies satisfied the exclusion provided for in Schedule 1 of the Ordinance, which means the First Conduct Rule does not apply to agreements enhancing overall economic efficiency.
The Tribunal confirmed that the undertakings seeking to rely on this defence have the burden of proving this defence on the balance of probabilities. While this engages the constitutionally recognised presumption of innocence it was held that such an approach was proportionate in this case.
Having assessed the evidence the Tribunal maintained that the respondents fell very far short of satisfying the conditions of the economic efficiency defence. These conditions include establishing that consumers receive a fair share of the resulting benefits of the efficiencies and that the conduct is indispensible to the attainment of the efficiencies.
It is clear that in Hong Kong, just as in jurisdictions such as the EU, there is a high threshold for success in relation to economic efficiency justifications for anti-competitive conduct. Such arguments are particularly unlikely to be successful in cases of cartel conduct.
On the whole these judgments can be considered a success for the Commission. While it has not been successful in every argument it has put forward, the Commission has now established a number of contraventions of the First Conduct Rule. However, the orders to be made consequent to the Tribunal’s findings in both cases, such as those relating to pecuniary penalties, will be determined following further hearings and it remains to be seen what level of fines will be imposed.
Both these cases involved cartel conduct and contraventions of the First Conduct Rule. One of the challenges for the Commission in the future will be succeeding in more complex cases, such as those involving abuse of dominance. These cases, which typically involve complex economic evidence, will be made more difficult for the Commission given that it will now have to prove its cases beyond reasonable doubt.