Hong Kong Competition Tribunal establishes four-step approach to assess pecuniary penalties for contraventions of competition rules in recent judgment

Case History

Competition Commission v W Hing Construction & others CTEA 2/2017 is the second case brought to the Tribunal after the Ordinance came into effect on 14 December 2015. This case concerns the cartel conduct of ten contractors approved ^[1] for carrying out decorative works in a new public housing estate in Hong Kong. The contractors agreed to “allocate” the floors of the new buildings among themselves and jointly to produce flyers which set out the service packages and prices for the different types of flats in the housing estate.

On 17 May 2019 ^[2], the Tribunal ruled that the agreement constituted market- sharing and price-fixing arrangements and that the ten contractors had contravened the First Conduct Rule in the Competition Ordinance. The First Conduct Rule prohibits businesses from making or giving effect to an agreement, or engaging in a concerted practice, if the object or effect is to prevent, restrict or distort competition in Hong Kong.

For the first time on 29 April 2020 ^[3], orders sought by the Competition Commission for pecuniary penalties (s 93 ) were considered by the Tribunal.

Approach to assessment of pecuniary penalties

Regulators in the European Union, the United Kingdom and Singapore adopt a “principled methodological approach” in assessing criminal damages partly because they lack judicial powers. In the Tribunal’s view, although Hong Kong’s competition law regime is set up under the judicial enforcement model, the principled methodological approach is appropriate also in Hong Kong because it provides “the desirable level of certainty, clarity and transparency ” which will deter anti-competitive conduct and promote cooperation with the regulator.

After considering the UK’s Guideline as to the Appropriate Amount of a Penalty, the EU’s Guidelines on the Method of Setting Fines Imposed Pursuant to Article 23(2)(a) of Regulations No. 1/2013 and the mandatory considerations in s 93(2), the Tribunal laid down a four-step framework for assessing pecuniary penalties, as follows:

(1) determine the Base Amount;

(2) make adjustments for aggravating, mitigating and other factors;

(3) apply the statutory cap; and

(4) apply cooperation reduction and consider any plea of inability to pay.

THE FOUR STEP APPROACH

Step-1: Determine the Base Amount

The formula

The Base Amount will represent the nature and extent of the contravention and the loss or damage caused by the conduct (mandatory considerations under s 93(2)(a) and (b) ). It is calculated in accordance with the following formula:

Base Amount = Value of Sales x Gravity Percentage x Duration Multiplier

Value of Sales refers to the revenue arising from the undertaking’s anti-competitive conduct. In calculating the Value of Sales, the Tribunal will take the relevant geographic area and period of the contravention into account.

Gravity Percentage is determined by reference to a broad scale which reflects the seriousness and blameworthiness of the contravention. The range of 15% to 30% is considered appropriate for serious anti‑competitive conduct (as defined in s 2 ).

Duration Multiplier reflects the number of years of the contravention. If the period of contravention is one year or less, the multiplier of one (rather than a fractional number) will be used.

How should Value of Sales be assessed in the case of sub-contract and partnership arrangements?

Some of the Respondents in W Hing Construction argued that the Value of Sales should be the amount actually received by the individual respondent for the renovation works.

The First Respondent (“R1”) sub-contracted the renovation works to a third-party contractor, who paid R1 a lump sum in return. R1 argued that its Value of Sales should be the lump sum R1 received from the sub-contractor. Likewise, salaried partners of the Fourth Respondent ^[4] (“R4”) argued that, because they did not receive any share of the profits from the renovation works in R4’s name, they should not be liable for pecuniary penalties.

The Tribunal rejected these arguments and held that Value of Sales should be the amounts paid by customers to the Respondents for the renovation works. According to the Tribunal, pecuniary penalties are imposed on the Respondents’ participation in the anti-competitive conduct. As a result, the fact that the Respondents were only able to retain parts of the price as a result of their sub-contract or partnership arrangements is irrelevant for the purpose of assessing the Value of Sales (although it may be a mitigating factor – discussed below).

Gravity Percentage

The W Hing Construction case concerned market sharing and price fixing arrangements, which the Tribunal said are “amongst the most serious kind of collusive conduct ”. Collectively, the Respondents renovated 38% of the flats in the new public housing estate. These flats, being in  a public housing estate, are rented to low‑income tenants. The Tribunal noted that the Respondents did what they did in defiance of express warnings given by the Housing Authority against “pie-sharing”. Therefore, the Tribunal accepted the 24% gravity percentage which had been recommended by the Competition Commission.

Step 2: Make adjustments for aggravating, mitigating and other factors

In Step 2, the Tribunal will consider the circumstance of the contravention and any previous contravention (mandatory considerations under s 93(2)(c) and (d) ). These include (a) any aggravating and mitigating factors, (b) the number and nature of previous contraventions, the time lag between the present and previous contraventions, and any connections with the individuals involved in the previous contraventions, and (c) the need for specific deterrence.

The Tribunal ruling identified several aggravating and mitigating factors from a general perspective (first and second columns in the below table). In addition, the Tribunal considered specific mitigating factors which had been put forward by the Respondents, but ruled that they were irrelevant (third column). These are summarised in the table below:

Notes:

¹        Because the Respondents were small organisations, the directors and senior management would normally be involved in the undertaking’s daily operations, this was not an aggravating factor.

²        A one-third reduction was given in recognition of the indirect participation in the anti-competitive conduct and on the assumption that the Respondents have no recourse against the subcontractors or partners for the pecuniary penalties ordered against them.

³        Though not a mitigating factor, the Respondents’ loss of approved renovation contractor status removed the need for specific deterrence.

Having carried out the above, the Tribunal will then carry out a sense check to ensure that “subject to the subsequent steps, the amount arrived at would be a just and proportionate penalty for the contravention by the undertaking in the circumstances ”.

Step 3: Apply the statutory cap

The maximum amount of pecuniary penalties allowable under the Competition Ordinance is 10% of the turnover for each year in which the contravention occurred, or if the contravention occurred in more than 3 years, 10% of the turnover in the years of the highest, second highest and third highest turnovers (s 93(3) ) (“statutory cap”).

In the Tribunal’s view, the intent of the legislation is to provide a ceiling to the pecuniary penalties, rather than to create a scale for measuring the seriousness of the contravention (as one would expect in the case of criminal sentencing). Therefore, the statutory cap will be applied mechanically, by reference to the turnover figures calculated based on the information available to the Tribunal.

Step 4: Apply any co-operation reduction if appropriate and consider any plea of inability to pay

Though not a mandatory factor under s 93, a co-operation reduction is an accepted international practice and is in line with the spirit of the Ordinance which empowers the Competition Commission to enter into leniency agreements with persons under investigations for anti-competitive conduct (s 80 ).

While the Competition Commission may make recommendations to the Tribunal regarding the co-operation reduction, the Tribunal may have regard to but is not bound by any such recommendations.

In W Hing Construction, the Tribunal noted that the Competition Commission’s Cooperation and Settlement Policy for Undertakings Engaged in Cartel Conduct (April 2019) recommended a gradation of discounts based on the order in which the interest to co-operate was indicated to the Competition Commission.  However, the ruling in the W Hing Construction case did not consider the effect or weight of such recommendations. In fact, guidance on this will need to come in subsequent Tribunal rulings.

Though not a factor set out in the Competition Ordinance, the Tribunal held that, exceptionally, it may take a firm’s financial inability to pay into account and reduce the amount of the pecuniary penalties. The party applying for such a reduction bears the evidential burden to demonstrate the effect of the assessed pecuniary penalties on the firm’s viability. The resources of shareholders, group companies and affiliates, as well as directors’ emoluments, will be taken into consideration.

What's next?

The competition law regime in Hong Kong is relatively new and is being developed, as one would expect. The Tribunal’s ruling in Competition Commission v W Hing Construction & others provides helpful practical guidance around the assessment and fixing of pecuniary penalties.

Specifically, the Tribunal fleshed out its four-step framework and analysis. However, despite the level of detail contained in this ruling, we expect that the four-step framework will continue to develop, adapt and evolve as new cases bring new considerations and legal challenges to light in this exciting and developing area of law in Hong Kong.

Subsequent to the publication of this article, the judgment discussed in this article was partly overturned by the Court of Appeal. The subsequent appellate judgment is discussed in our article https://www.bclplaw.com/en-GB/insights/hong-kong-court-of-appeal-rules-that-entities-in-the-same-undertaking-are-liable-jointly-and-severally-for-the-pecuniary-penalties-imposed-for-the-undertakings-contraventions-of-competition-rules.html.

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^{[1]                   There are 217 contractors on the Reference List of Decoration Contractors maintained by the Hong Kong Housing Authority as at March 2018. License to carry out decorative works in new public housing estates are granted to the Contractors on the Reference List on rotary basis.}

^{[2]                   Competition Commission v W Hing Construction & others [2019] HKCT 3}

^{[3]                   Competition Commission v W Hing Construction & others [2020] HKCT 1}

^{[4]                   Individual partners trading in the name of R4 were named as Respondents.}