Submission on 'Detailed Proposals for a Competition Law'

Introduction

1. The Consumer Council (CC) strongly supports the enactment of a cross-sector competition law for Hong Kong and is pleased that Hong Kong Government is determined to have in place a basic set of rules, in the form of cross sector general competition laws, to protect the integrity of the free market system so as to facilitate economic efficiency and benefit consumer interest.
    
2. CC welcomes the proposal in the latest consultation document and would like the Government to consider CC's view on the following matters:
   1. Purpose of the Legislation (Proposal 1)
   2. Composition of Competition Commission (Proposal 4)
   3. "Effect of substantially lessening competition" in the general prohibition on anti-competitive agreements (Proposal 24)
   4. Mergers Regulation (Chapter 3 paragraph 25)
   5. Private Actions (Proposal 33)
   6. Representation Actions (Proposal 40)
   7. Exemptions (Proposal 26, 48, 49 and 50)

Purpose of the Legislation

3. The Government proposes the Competition Bill to include at the outset a short clause outlining the purpose of the legislation that the objective of the Competition Ordinance should be to enhance economic efficiency and thus the benefit of consumers through promoting sustainable competition .
    
4. CC welcomes the proposed statutory objective that could be used for deciding whether or not the conduct in question should be sanctioned when the legislation is being interpreted either by the competition authority, the tribunal or the Court of Appeal. However CC finds the objective of the law should not focus only on "sustainable competition" but "competition" in general then there will be no misunderstanding that some economic efficiency justifications should not be considered unless it is able to demonstrate its benefit to consumers through any competition in the market place.

Composition of the Competition Commission

5. The proposed law is aimed at protecting the competition process thus benefiting consumers not protecting the competitors including the small and medium enterprises (SMEs). CC has reservations on the current proposal that the Competition Commission should at least have one of the members with experience in matters relating to SMEs addressing the concerns of the SMEs but does not guarantee that the Commission would have a member with experience in consumer protection to safeguard the consumer interests.

Substantially Lessening Competition

6. CC finds that the test of "substantially lessening competition" in proposed provision against anti-competitive agreements in Proposal 24 is too difficult to meet and is not common in competition provisions against anti-competitive agreements in EU, UK and US jurisdictions. CC suggests that "materially affecting competition" may be a more appropriate test for Hong Kong market environment.

Mergers Regulation

7. The Government has proposed three options regarding the question of mergers and acquisitions. CC considers that mergers and acquisitions provisions should be included in the body of the competition law when it exists. Delaying the insertion of mergers and acquisition provisions in the proposed competition law would also seem to be prolonging what is inevitable, given the fact that mergers and acquisition provisions are an inseparable part of competition laws in other advanced economies.
    
8. CC believes that in the interests of efficient administration of competition policy, and adoption of 'world's best practice', the provisions should be included in the law from the outset. If the Government considers it necessary to have some control over the introduction of the provisions, then the more efficient approach would seem to be having the provisions in place, but having use of the provisions subject to approval by the Chief Executive. This approach would serve both the need for prompt action by the Competition Commission, and the need by Government to have some say in its application.

Private Actions

9. CC welcomes the proposal that apart from public enforcement by the Competition Commission, private actions are allowed to be brought before the Competition Tribunal. CC understands that private rights of action may magnify the role of the courts in implementing the law. In a world of multiple potential prosecutors, public and private, the courts probably will become the leading vehicle for defining the law's content reinforcing the rule of law image of Hong Kong that the rulings of adjudicatory tribunals, not the administrative choices of public competition authorities, assume greater importance in shaping the enforcement of competition policy.

Representative Actions

10. In previous submission, CC has recommended the UK approach of representative actions should be considered in allowing some selected consumer organization to claim on behalf of consumers to seek redress in those circumstances where the regulatory authority has made a decision (subject to appeal to a higher tribunal) that the conduct in question constitutes an infringement of competition law. CC welcomes the current proposal that representative actions, such as on behalf of consumers or SMEs, with the permission of the Tribunal, are permitted.
     
11. In its 2008 White Paper, the European Commission considers that there is a clear need for mechanisms allowing collective redress of the individual claims of victims of antitrust infringements and suggests a combination of two complementary mechanisms of collective redress to address effectively those issues in the field of antitrust:
    1. First, the representative actions, which are brought by qualified entities, such as consumer associations, state bodies or trade associations, on behalf of identified or, in rather restricted cases, identifiable victims. These entities are either (i) officially designated in advance, or (ii) certified on an ad hoc basis by a Member State for a particular antitrust infringement to bring an action on behalf of some or all of their members.
        
    2. Secondly, an "opt-in" collective action in which victims expressly decide to combine their individual claims for harm they suffered into one single action. Considering that qualified entities will not be able or willing to pursue every claim, it is necessary that these two types of action complement each other to ensure effective collective redress for victims of antitrust infringements.


12. CC suggests Government that similar dual mechanisms be considered in the new law, to strengthen collective redress mechanisms in Hong Kong. It is also worth considering the following means to facilitate greater flexibility and allow the system to be responsive to consumer needs, thus serving the objective of the law in enhancing consumer welfare:
    1. representative actions taken by non-profit consumer groups should be eligible for legal aid;
    2. a special fund should be created to finance actions where this is unavailable or insufficient;
    3. * sensitive costs rule should apply, which should be made clear by the guidance notes;
    4. * a written agreement of how damages will be distributed should be signed at the outset and the representative body should be able to take a slice of the damages to cover costs; and
    5. * there should be provision for cy-pres distribution of settlements distributions that indirectly benefit consumers as a whole in some way relating to the purposes of the case.

Exemptions

Vertical Restraints

13. CC has reservations whether the focus of the prohibition on agreements should be horizontal agreements and vertical agreements should only be addressed in the context of abuse of substantial market power. In situation that upstream firms (individual firm does not have a substantial degree of market power) have concerted practices to impose vertical restrictions in trading agreements with their downstream firms, for instance not allowing them to trade beyond some geographical boundary so as to limit the competition in the downstream market. The authority may find it difficult to investigate the concerted practices amongst the upstream firms if vertical agreements are exempted.
     
14. CC would prefer the EU approach which vertical agreements that meets certain conditions are granted a block exemption order. The conditions could include
    1. The collective market share of upstream firms concerned does not exceed certain percentage of market share.
    2. * Any "non-compete" terms of the vertical agreements do not exceed certain time limit.

Economic Benefits and General Economic Interests

15. The Government states that the proposed law will grant exemptions for anti-competitive agreements if it yields economic benefits that outweigh the potential anti-competitive harm or demonstrates general economic interest. CC urges the Government that the process through which exemptions are granted should be made transparent, and subject to a clear test that is tied to wider economic benefit.
     
16. In its previous submission to the Government, CC considered that clear indication as to what might constitute an "economic benefit" or "general economic interest" should be given in the law, to provide direction for market participants. Although the "economic benefits" or "general economic interest" should be viewed as benefits that can ensure efficiency in the market place, CC suggests that "consumer interest" should be considered as an important component that would be in line with the objective of the law aimed at protecting the competition process thus benefiting consumers.

Government and Statutory Bodies

"The Government is committed to pro-actively nurture and sustain competition for the purpose of enhancing economic efficiency and free trade. ... will invite all government entities to adhere to the Statement, propose initiatives for furthering the policy objective, examine the impact of all new proposals on competition and, where appropriate, bring this to the attention of the Executive Council and the Legislature. They are also expected to ensure that all statutory bodies under their charge pay heed to the Statement as well."

17. The Government has indicated in the consultation paper that it does not intend to include Government and statutory bodies within the range of 'undertakings' that will be regulated by the law (Proposal 50). The qualification to this is that the Government proposes to conduct a review of the issue in the light of actual experience in implementing the competition law.
     
18. Statutory bodies such as MTR and Hospital Authority compete with others in the marketplace. It would be unfair to other competitors if exemptions are granted to them. Whether the statutory bodies should be exempted should be based upon the conduct, operation or its competitive effect to the market.
     
19. In Government 1998 Competition Statement, it is stated that


20. CC does not think that a full exemption of any conducts of the Government or statutory bodies is in line with principle of the competition statement. CC suggests a positive listing approach that any Government and statutory bodies can seek exemption with sound reasons of public policy during the legislation, or apply for exemption in particular circumstances, by the Chief Executive in Council upon the advice of the Competition Commission after the law is enacted.