5 October 2012
Competition Ordinance 2012
After years of consultation, some hesitation, and notwithstanding continued opposition from many in the business sector, Hong Kong finally enacted a general competition law on 14 June 2012.
The Competition Ordinance which has now received the approval of Hong Kong's legislators is a very different creature from the version first presented to the Legislative Council in July 2010, but even so the law will significantly impact the way business is conducted in Hong Kong going forward and not least the hotel and leisure sector. And with significant penalties for infringements, including possible fines of up to 10 percent of corporate group turnover in Hong Kong, it demands to be taken seriously. Whether it comes to making price-related decisions, undertaking contractual negotiations, structuring joint ventures, participating in trade association meetings, communicating with competitors, or imposing exclusivity or pricing obligations on distributors, a multitude of day-to-day commercial activities stand to be affected.
We summarise below key aspects of the new Ordinance before looking at competition cases in the hotel and leisure sector overseas by way of example of what the future might hold for Hong Kong.
Transitional Period: The Ordinance while enacted in June will only come into operation on a day to be appointed by the Secretary for Commerce and Economic Development by notice published in the Hong Kong Government Gazette. However, while it is expected that steps will be taken to ensure some parts of the law become operational quite quickly (such as those providing for the establishment of the Competition Commission), actual enforcement of the key prohibitions will not commence for some time. The Administration has committed to a transitional period of at least one year.
Extra-territorial effect: The Ordinance will apply to conduct that takes place outside Hong Kong where it produces effects in Hong Kong. For example, were a group of hoteliers to meet on the Chinese mainland to agree price-fixing terms applicable in Hong Kong, such conduct would be caught by the new law.
Key prohibitions: The key prohibitions take the form of two ‘Conduct Rules’.
The First Conduct Rule prohibits agreements and 'concerted practices' (cooperation between parties falling short of an agreement) that have the object or effect of restricting competition in Hong Kong. The enforcement focus here is expected to be serious anticompetitive activity amongst competitors, which includes agreeing on customer prices or discounts or price ranges, market-sharing amongst competitors such as by customer type, bid-rigging or agreeing with competitors to limit production or sales output. Hard-core infringements of this kind can expect to be dealt with severely and will attract the highest penalties. Other infringements, may potentially include vertical price fixing and other vertical restraints although it is unclear as yet how the new Commission will approach vertical arrangements which are often less of a concern for competition authorities.
The Second Conduct Rule prohibits a business with substantial market power from abusing that power by engaging in conduct that has the object or effect of restricting competition in Hong Kong. The Commission will publish guidance on how it will identify businesses with the requisite market power, and which types of conduct might be considered an ‘abuse’.
Enforcement: The new Competition Commission will be empowered to open an investigation if it has a reasonable basis to believe that an infringement has occurred. The Commission can then prosecute cases before a new Competition Tribunal, which will determine whether an infringement has in fact occurred and impose penalties. Note, however, that the Commission may only issue a ‘warning notice’ in relation to less serious types of infringements of the First Conduct Rule. Additionally, the Commission may at its discretion negotiate with a business that it believes may have infringed the law and accept undertakings from that business to cease/remedy the relevant conduct in exchange for a commitment not to prosecute. Private actions may be instigated only after a prior finding of infringement by the Competition Tribunal. There will be no right to 'stand-alone' private action in the courts.
Penalties: A business found to have infringed a Conduct Rule can be fined up to 10 percent of its Hong Kong turnover. Note that the turnover on which this is based will not necessarily be limited to the company that has directly engaged in the violation, but may extend to broader corporate group turnover. Additionally, it is pertinent to note that the turnover concerned is not only that derived from sales of products or services concerned by an infringement - all Hong Kong turnover from any sector/products/services is included. The Tribunal also has other broad powers to punish the infringing party, including powers to disqualify directors and impose other penalties on individuals.
Exemptions and exclusions: Most statutory bodies receive an automatic exemption. SMEs are exempt if they fall below certain annual turnover thresholds - although this exemption does not apply to their involvement in price-fixing, market-sharing, bid-rigging or output-restriction activities. Further exemptions may apply on a case-by-case basis or by application to/decision of the Commission or Chief-Executive in Council.
The Competition Ordinance and the Hotel & Leisure Sector
While the prohibitions in the Competition Ordinance will not likely enter into force before early 2014, and while there is as yet no Competition Commission in place, it is nonetheless possible to anticipate how the Ordinance might be applied in the hotel and leisure sector by looking at some recent cases in Europe - the Ordinance itself being very largely based on an EU model and particularly UK precedents. The following cases could well serve as indicators of what the future holds for Hong Kong.
Luxury hotels in Paris: In a decision dated 25 November 2005, the French Conseil de la Concurrence fined the top six luxury hotels in Paris for exchanging 'competitively' sensitive information. The information exchanged included the following:
- Information on occupancy rates
- Information on average prices per room
- Information on average revenues per available room
- Information on the geographical origin of customers
- Information on marketing plans.
While the case was not classed as a price fixing cartel (this might have been possible had future pricing information been exchanged), the Conseil nonetheless concluded that the frequent exchange of precise information of the kind at issue was likely to have significant adverse effects on competition in the highly concentrated 'oligopolistic' market for luxury hotels in the French capital.
HRS-Hotel Reservation Service Robert Ragge GmbH: In February 2012, the German Bundeskertellamt issued a statement of objections to HRS alleging that HRS' 'most favoured nation' clause with hotel partners infringed German competition law. In that respect, the MFN clause prohibited HRS' hotel partners from offering better conditions to other on-line travel agents (OTAs) in terms of room prices, room availability, booking and cancellation conditions. Furthermore, as of March 2012, HRS had plans to extend the MFN clause so that hotels were prohibited from offering at the hotel reception desk better terms than those offered to HRS. In its press release announcing that it has issued a statement of objections, the Bundeskertellamt noted that HRS had in the past repeatedly withdrawn booking services from hotels refusing to comply with the MFN obligation. Further, the authority noted that as HRS was the leading OTA in Germany with significant market power, the MFN clause prevented competitors from gaining market share and acted as a barrier to would-be new market entrants.
Booking.com, Expedia and Intercontinental Hotels Group / Turik et al. v. Expedia Inc. et al.: MFN clauses are also a feature of two on-going antitrust cases involving Expedia - one a class action in the US, the other an investigation by the UK competition regulator, the Office of Fair Trading (OFT). The UK case was initiated following a complaint by Skoosh, a small UK based OTA which had previously lodged a complaint in respect of the same facts with the US Department of Justice but which was rejected. Skoosh has fared somewhat better in the UK where the OFT issued a statement objection in July 2012 alleging that Booking.com, Expedia and Intercontinental Hotels Group (IHG) had infringed competition law in relation to the online supply of room only hotel accommodation by OTAs. In particular, the statement of objections alleges that Booking.com and Expedia each entered into separate arrangements with IHG which restricted the online travel agent's ability to discount the price of room only hotel accommodation - a form of vertical resale price maintenance. Booking.com "disputes the allegations" and intends to contest them noting that it "runs an agency model hotel reservation platform in which hotels have complete discretion and control over setting the prices". Be that as it may, given that one party to the alleged infringement (Expedia) is understood now to have applied for immunity and will therefore have accepted its wrong-doing in that context, the OFT case would seem likely to conclude with the establishment of an infringement. It is still too early to say how the US class action will fare though one might expect the plaintiffs in the case to take considerable comfort from developments to date before the OFT. [Note - these cases are the subject of another article in this newsletter, entitled "Update on the online travel agency battle"]
The above cases are a sample of what might be in store for the hotel and leisure sector in Hong Kong once the prohibitions in the Competition Ordinance come into force. While some uncertainties remain as regards the enforcement priorities of the new Competition Commission, cases such as these will very likely serve as precedents in the Hong Kong context ensuring that the impact of the Ordinance will be far reaching.