First Two Judgements In The History Of Hong Kong Competition Law - Four It Firms And Ten Renovation Contractors Found Guilty.
Legal News & Analysis - Asia Pacific - Hong Kong - Competition & Antitrust
20 May, 2019
On May 17, 2019, the Competition Tribunal handed down judgements for its first two cases. Four of the five respondents in the first case (“YWCA Case”), and all ten respondents in the second case (“Renovation Contractor Case”) were found to have violated the First Conduct Rule under the Competition Ordinance (“Ordinance”), which came into full operation in December 2015.
The First Conduct Rule prohibits any undertaking from entering into an agreement or engaging in a concerted practice that has the object or effect of preventing, restricting or distorting competition in Hong Kong.
The YWCA Case (CTEA 1/2017)
On March 23, 2017, the Hong Kong Competition Commission (“HKCC”) took its first legal action and filed a complaint against five IT firms with the Competition Tribunal. The complaint alleged that Nutanix Hong Kong Limited (“Nutanix”), BT Hong Kong Limited (“BT”), SiS International Limited (“SiS”), Innovix Distribution Limited (“Innovix”), and Tech-21 Systems Limited (“Tech-21”) participated in a bid-rigging scheme in connection with a tender conducted by the Young Women’s Christian Association (“YWCA”) in July 2016 for the supply and installation of a “hyper-converged” IT server system based on Nutanix technology, in violation of the First Conduct Rule under the Ordinance.
BT, SiS, Innovix, and Tech-21 are distributors of Nutanix products who sell directly to final customers such as YWCA. While YWCA’s procurement policy required a minimum of five bids for the tender, only BT was interested in bidding for the tender. To assist BT in winning the tender, Nutanix agreed with BT to obtain “dummy bids” (i.e., non-genuine bids which the tenderer had no intention of winning) from other Nutanix channel partners. The alleged bid-rigging scheme, considered a “serious anti-competitive conduct” under the Ordinance, involved a series of “vertical” arrangements between Nutanix and each of the four distributors.
Ruling of the Competition Tribunal:
The Competition Tribunal dismissed the claim against SiS on the reasoning that the Product Manager of SiS, who submitted the bid, had gone rouge, was not acting primarily with SiS’ interest in mind, and did not have the authority to submit the bid on SiS’ behalf.
The Competition Tribunal ruled that the agreements to submit “dummy bids” had the object of preventing, restricting or distorting competition, and found the remaining four respondents guilty of contravening the First Conduct Rule.
The Renovation Contractor Case (CTEA 2/2017)
On August 14, 2017, the HKCC filed its second legal action with the Competition Tribunal against ten residential renovation contractors, alleging that the contractors violated the First Conduct Rule by participating in a scheme by which each of them was allocated designated floors in each of the three buildings in On Tat Estate, Kwun Tong, to carry out decoration work for individual tenants (Floor Allocation Arrangement). The complaint also alleged that the ten contractors agreed on the package prices for certain renovation work items that were printed on a joint promotional flyer distributed to the tenants (Package Price Arrangement).
The Commission contended that the above arrangements amounted to “serious anti-competitive conduct” in the form of market sharing and price-fixing, and contravened the First Conduct Rule.
Ruling of the Competition Tribunal:
The Competition Tribunal held in favour of the Commission that both the Floor Allocation Arrangement and the Package Price Arrangement had the object of preventing, restricting or distorting competition in Hong Kong, and thus contravened the First Conduct Rule.
Eight of the ten renovation contractors contented they should not be held liable for contravening the First Conduct Rule because the arrangements were economically efficient (“efficiency defence”). The Competition Tribunal however was not satisfied with the evidence in support of their efficiency defence.
Key takeaways from the two Judgements:
- The Judgements affirm that bid rigging, market sharing and price fixing agreements among undertakings are “serious anti-competitive conducts”, each has the object of preventing, restricting, or distorting competition in Hong Kong. Where it is established that an agreement has the object of harming competition, it can be concluded there is an infringement of the First Conduct Rule without having to consider the actual effects of the agreement on competition.
- The Competition Tribunal held that given the pecuniary penalties that it was invited to impose on the respondents, the proceedings involved the determination of a criminal charge and thus the applicable standard of proof required of the Commission was the criminal standard of proof beyond reasonable doubt.
- The dismissal of the claim against SiS in the YWCA Case clarifies that an employer would not be bound by the acts of a rouge and unauthorized employees as far as the entering into an anti-competitive agreement is concerned.
- Although recognising that horizontal agreements among competitors are generally more suspicious than vertical agreements, the Competition Tribunal affirms that a bid rigging scheme facilitated by a series of bilateral vertical agreements can also be held to have an anti-competitive object.
- The Competition Tribunal clarified that to rely on the efficiency defence, the respondents, and not the HKCC, had the burden of proof to present cogent and compelling evidence and arguments in support of the defence.
The Judgements marked an important milestone for the relatively nascent cross sector competition law in Hong Kong. With two simultaneous favourable rulings from the Competition Tribunal, we anticipate the HKCC will intensify its efforts in investigating suspected violations of the competition law, and in bringing more legal actions against those who have engaged in anti-competitive conduct. Companies in all sectors should be vigilant about how they conduct their business, and to make sure they are in compliance with the competition law when dealing with competitors, suppliers, customers and business partners.
For further information, please contact:
Machiuanna Chu, Partner, Deacons