Legal update: The Competition Ordinance – Leniency Policy16Dec2015
The Competition Ordinance (Cap 619) (the “Ordinance”) came into force on 14 December 2015. Since our previous overview of the Ordinance (click here), the Competition Commission (the “Commission”) and the Competition Tribunal (the “Tribunal”) have been formally established. The Enforcement Policy published by the Commission on 19 November 2015 states that the Commission will focus its resources during the initial years of operation on compliance with the Ordinance. The Commission will accord priority to those cases which involve one or more of the following types of conduct:
- Cartel conduct which includes price fixing, market sharing, output restriction and bid-rigging;
- Other agreements contravening the First Conduct Rule causing significant harm to competition in Hong Kong; and
- Abuses of substantial market power involving exclusionary behaviour by incumbents operating on markets in Hong Kong.
Cartel conducts are universally condemned as economically harmful while being more difficult to detect due to their secretive nature. To encourage combating cartel conducts, section 80 of the Ordinance provides that the Commission may make leniency agreements with a person that it will not bring or continue proceedings in the Tribunal for a pecuniary penalty in exchange for the person’s co-operation in an investigation or proceedings under the Ordinance. On 19 November 2015, the Commission published the Leniency Policy for Undertakings Engaged in Cartel Conduct (the “Policy”) detailing such leniency agreements which this article will discuss.
SCOPE OF THE POLICY
First Conduct Rule
Leniency is only applicable to cartel conduct contravening the First Conduct Rule. As a quick refresher, cartel conduct includes any agreement or even “meeting of minds” between separate undertakings (i.e. not between companies of a “single economic unit” or principal and agent) whether horizontal (e.g. competitors or potential competitors) or vertical (e.g. supplier and retailer) to give effect to conduct which involve price fixing, market sharing, bid-rigging or limiting output, capacity or supply. Depending on circumstances, resale price maintenance, information exchange or group boycotts may also be considered cartel conduct.
Only an Undertaking May Apply
Only an undertaking, as defined under section 2 of the Ordinance as “any entity, regardless of its legal status or the way in which it is financed, engaged in economic activity, and includes a natural person engaged in economic activity”, may apply for leniency under the Policy. This includes individual companies, groups of companies, partnerships, sole traders, individual subcontractors, co-operatives, societies, business chambers, trade associations and non-profit organisations.
First to Report
Save for exceptional circumstances, the Commission would only enter into a leniency agreement with the first undertaking that reports the cartel conduct to the Commission and meets all the requirements for leniency (see below).
If an undertaking meets the requirements below, reports the cartel to the Commission, cooperates in the investigation and undertakes to stop its cartel conduct, then the Commission will undertake not to bring proceedings in the Tribunal or other courts save for a declaration under section 94 of the Ordinance that the cartel member has contravened the First Conduct Rule.
The leniency extends to (1) current officers and employees of the cartel members, (2) specifically named former officers or employees and (3) current and former agents of the cartel member who cooperate with the Commission.
Statement of Agreed Facts
The undertaking receiving leniency will agree to and sign a statement of agreed facts admitting to its participation in the cartel. The undertaking acting as the applicant and the Commission may jointly apply to the Tribunal under rule 39 of the Competition Tribunal Rules (Cap 619D) (the “Rules”) for an order for the declaration under section 94 of the Ordinance as mentioned above.
APPLICATION PROCEDURE FOR LENIENCY
The Commission uses a marker system to record the date and time when undertakings contact the Commission in relation to cartel conduct. This establishes a queue to determine the first undertaking that reports to the Commission and meets the requirements for leniency.
To determine if a marker is available for particular conduct, the undertaking or its legal representative can call the Commission on an anonymous basis. If a marker is available, the Commission can only grant a marker if at least the following information is given:
- the identity of the undertaking applying for the marker;
- the contact details of the caller;
- information on the nature of the cartel (e.g. the products or services involved); and
- the main participants in the cartel conduct.
A marker which identifies the time and date of the call will be given to the applicant having satisfied the above conditions.
Invitation to Apply for Leniency
Based on the information of which the Commission is made aware whether by way of the applicant or investigation, the Commission will make a preliminary determination on whether there is cartel conduct and whether leniency is available. If the Commission decides to issue an infringement notice under section 67 of the Ordinance rather than bringing proceedings in the Tribunal, leniency will not be available save for in exceptional circumstances.
If the Commission’s preliminary determination finds that there is cartel conduct and leniency is available, the Commission will invite the highest ranking marker to make an application for leniency with a date and time by which the application must be submitted. If the highest ranking marker fails to submit an application within the specified period or any extension granted by the Commission, the marker will lapse and the next undertaking in the marker queue will be invited by the Commission.
As a condition precedent to the application for leniency, the applicant must agree to a non-disclosure agreement with the Commission in relation to:
- the fact that the applicant is submitting an application for leniency; and
- the information the applicant has provided or will provide to the Commission.
Application for Leniency
The application for leniency is done by way of a “proffer” where the applicant provides:
- a detailed description of the cartel;
- the entities involved;
- the applicant’s involvement;
- a chronology of the cartel conduct;
- the evidence which the applicant can provide;
- how the cartel conduct affects or relates to competition in Hong Kong; and
- an estimation of the value or volume of sales affected by the cartel in Hong Kong.
The proffer can be made orally or in writing, in hypothetical terms and/or through a legal representative on a “without prejudice” basis.
The Commission will consider the proffer and may request the applicant to provide access to supporting documentary evidence and/or to make available witnesses to be interviewed by the Commission. Based on the information provided by the applicant in the proffer, if the Commission finds that the applicant can provide full and truthful cooperation and has fully satisfied the requirements under the Policy, the Commission will make an offer to enter into a leniency agreement.
Although the Commission states in the Policy that information provided at the proffer stage will not be used as evidence in proceedings against the applicant or any other person for contravention of the First Conduct Rule and that such information will be returned to the undertaking if a leniency agreement is not entered into, in principle, the Commission has the power to obtain such returned documents under section 41 of the Ordinance. Further, section 45(1) of the Ordinance states that a person is not excused from giving any explanation or further particulars about a document or from answering any question on the grounds that to do so might expose the person to (a) proceedings in which the Commission applies for an order for pecuniary penalty or financial penalty or (b) criminal proceedings other than for providing false or misleading documents or information or perjury.
Thus, there is a risk to the undertaking if it is unsuccessful in getting a leniency offer that this proffer process may flag to the Commission documents to subsequently obtain from the undertaking using section 41 of the Ordinance.
The applicant being offered leniency will be asked to sign a leniency agreement based on the standard form template which includes representations and warranties that:
- “[the applicant] has not, without the express written consent of the Commission, disclosed to any third party the [confidential leniency information] except to its legal advisors for the purposes of making or advising the [leniency application] or the terms of [the leniency agreement]”;
- “except as otherwise expressly authorised by the Commission, [the applicant] has refrained from further participation in the [cartel] from and including [the date of the application for leniency] and shall continue to do so”;
- “neither [the applicant nor any of the applicant’s] current or former officers, employees or agents has taken steps to coerce any other undertaking to participate in the [cartel]”;
- “the information provided to the Commission prior to entering into [the leniency agreement] as part of the [leniency application] was, and still is, neither false nor misleading in any material particular”; and
- “any opinion provided to the Commission with respect to the cartel was, and still is, honestly held.”
The leniency agreement will be subject to conditions, including:
- “[the applicant] will maintain continuous and complete cooperation with the Commission”;
- “[the applicant] will make full and truthful disclosure to the Commission throughout the investigation and any ensuing proceedings relating to the [cartel]”; and
- “[the applicant] will, to the satisfaction of the Commission, agree to and sign a statement of agreed facts admitting to its participation in the [cartel] on the basis of which the [Tribunal] may be asked jointly by the [parties] under rule 39 of the [Rules] to make an order under section 94 of the Ordinance declaring that [the applicant] has contravened the First Conduct Rule by engaging in the [cartel].
Only an officer of the undertaking can execute the leniency agreement. Once entered into the leniency agreement, the undertaking must provide to the Commission all non-privileged information and evidence relating to the cartel conduct forthwith. Unlike the proffer stage, information and evidence provided under the leniency agreement may be used in investigations and proceedings.
The Commission is bound by the leniency agreement not to commence proceedings in the Tribunal for a pecuniary penalty against the undertaking that has contravened the First Conduct Rule (or any other persons covered by the leniency agreement). The leniency agreement will also restrict the Commission to commence proceedings relating to the undertaking only for a declaration under section 94 of the Ordinance that the undertaking has contravened the First Conduct Rule.
Although the Commission may not commence proceedings under the leniency agreement, the undertaking’s declaration of contravening the First Conduct Rule exposes the undertaking to the risk of potential follow-on actions by parties that have suffered loss or damage as a result of the cartel.
The leniency agreement may be terminated by the Commission under section 81 of the Ordinance if:
- “the other party to the agreement agrees to the termination;
- [the Commission] has reasonable grounds to suspect that the information on which [the Commission] based its decision to make the agreement was incomplete, false or misleading in a material particular;
- [the Commission] is satisfied that … [the] undertaking has been convicted of an offence under Part 3 [complaints and investigations of the Ordinance]; or
- [the Commission] is satisfied that … [the] undertaking has failed to comply with the terms of the agreement”.
The Commission will orally warn the undertaking to take the necessary steps to remedy the situation within 7 calendar days failing which the Commission will issue a written notice for termination. The undertaking will have at least 30 days to given representations to the Commission about the termination. The Commission must consider such representations before terminating the leniency agreement.
If the leniency agreement is terminated, the Commission has the discretion to commence proceedings against the undertaking and/or any persons previously covered by the leniency agreement. Similarly, information given to the Commission under the leniency agreement may be used as evidence against the undertaking and/or any other persons.
Once the leniency agreement is terminated, the Commissioner will consider offering a leniency agreement to the undertaking with the next highest ranking marker.
UNDERTAKINGS THAT ARE NOT OFFERED LENIENCY
If an undertaking is not invited to apply for leniency (e.g. due to a higher ranking marker), it will be informed that it is not currently eligible to apply for leniency. As discussed above, if the highest ranking marker lapse or the leniency agreement is terminated, the next highest ranking marker may then be invited to apply for leniency.
Undertakings which have engaged in cartel conduct but not invited to apply for leniency may still consider cooperating with the Commission. The Commission may exercise its discretion for a lower level of enforcement action, including recommending to the Tribunal a reduced pecuniary penalty or an appropriate order under Schedule 3 of the Ordinance, noting that the Tribunal and other courts ultimately decides on the penalties and orders imposed.
As authorities in multiple jurisdictions may cooperate with each other, undertakings that cooperate with the Commission whether under a leniency agreement or voluntarily are expected to provide to the Commission details of the other jurisdictions where they have applied for immunity or leniency. Accordingly, the Commission may also require a leniency applicant to authorise the Commission to exchange confidential information with authorities in other jurisdictions.
Before rushing off to obtain the first marker from the Commission, undertakings must carefully consider the benefits and risks of the Policy.
On one hand, with the Commission focusing its efforts in the initial years on cartel conducts, leniency under the Policy appears attractive to undertakings which may involve price fixing, sharing markets, restricting output or bid riggings.
On the other hand, the Policy may deter undertakings from coming forward at all as undertakings which are unsuccessful at the proffer stage are exposed to the risk of flagging documents to the Commission to obtain for use in proceedings against that undertaking while undertakings which are successful in obtaining leniency remain exposed to follow-on actions from cartel victims.
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Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.