Introduction

The Competition Commission (the “Commission”) recently decided to commence proceedings in the Competition Tribunal against an estate agency, 2 of its subsidiaries and several individuals allegedly involved in agreement with one of its competitor to fix the minimum net commission rate for estate agents for the sale of first-hand residential properties.

Interestingly, the proceedings were commenced against only 1 estate agency but not its competitors who were allegedly involved in the serious anti-competitive conduct of price fixing. The reason behind was that its competitor has submitted a leniency application under the Commission’s Leniency Policy for Undertakings Engaged in Cartel Conduct (“Leniency Policy”). This article will introduce the key elements of the Leniency Policy and the way to apply for leniency under this Leniency Policy.

Policy objectives and overview

Leniency Policy is a key investigative tool used by the Commission in combating against cartel conduct. Since cartels are usually organised and implemented in secret, it is difficult for the Commission to detect any cartel conducts without the Leniency Policy. The Leniency Policy aims to increase the chance of cartels being detected and therefore increase the risk and cost of participating in a cartel. This in turn deters the formation of cartels that would otherwise prevent, restrict or distort competition in Hong Kong.

In light of the above policy objectives, the Commission implements the Leniency Policy to accord leniency to an undertaking which is willing to terminate its participation in cartel conduct, report the conduct to the Commission and cooperate in the bringing of proceedings against other parties to the cartel. The Commission’s power to enter into a leniency agreement is expressly granted by section 80 of the Competition Ordinance (Cap. 619) (“CO”).

Leniency may be available regardless of whether the Commission has opened an investigation on the breach of the CO. However, leniency is only available under this Leniency Policy for the first cartel member who meets all the requirements for receiving leniency and enters into a leniency agreement. This provides further motivation to report the cartel conduct to the Commission as soon as possible to secure the place to enter into a leniency agreement with the Commission.

Key elements of the Policy

Scope of the Leniency Policy

First, the Leniency Policy applies only to engagement or involvement in cartel conduct which gives rise respectively to a contravention or involvement in a contravention of the First Conduct Rule of the CO. Cartel conduct refers to agreements and/or concerted practices between two or more undertakings which consist of (i) fixing, maintaining, increasing or controlling the price for the supply of goods or services, (ii) allocating sales, territories, customers or markets for the production or supply of goods or services, (iii) fixing, maintaining, controlling, preventing, limiting or eliminating the production or supply of goods or services, or (iv) bid-rigging.

Second, this Leniency Policy only relates to an application for leniency by undertakings (業務實體) i.e. any entity, regardless of its legal status or the way in which it is financed, engaged in economic activity. Individuals who are not undertakings, including employees of any undertakings, who wish to seek leniency should consider the Commission’s separate Leniency Policy for Individuals.

Third, leniency is not available under the Leniency Policy to undertakings that are the ringleader of the cartel conduct or that have coerced other parties to participate in the cartel conduct.

Available for the first only

Leniency is available only for the first cartel member that either:

1.       Discloses its participation in a cartel of which the Commission has not yet opened an initial assessment or investigation (“Type 1 Leniency”); or

 

2.       is able, in the Commission’s view, to provide substantial assistance to the Commission’s investigation and subsequent enforcement action of a cartel the Commission is already assessing or investigating (“Type 2 Leniency”);

 

and goes on to meet all the conditions for leniency.

Leniency agreement

If the undertaking meets all the conditions for leniency, the Commission will enter into a leniency agreement with the undertaking and agree not to take any proceedings against it in relation to the reported conduct.

Leniency will extend to the current (and possibly former) employees, officers, and partners of a successful leniency applicant provided that they fully and truthfully cooperate with the Commission.

A party to a leniency agreement is required to continuously fulfil its requirements under the leniency agreement, including cooperating with the Commission throughout the investigation and in any proceedings the Commission initiates before the Tribunal in relation to the reported conduct.

Applying for leniency

Stage 1: Requesting a leniency marker

The first step in obtaining leniency is to obtain a leniency “marker”. A leniency marker holds a leniency applicant’s place at the front of the queue for leniency for a period of time set by the Commission to allow the leniency applicant to conduct an internal investigation and gather information necessary to perfect its leniency application. Since only one leniency marker is available per cartel, no other undertaking can pass the leniency applicant and obtain leniency while the leniency applicant holds the leniency marker.

An undertaking may make an initial enquiry with the Commission to ascertain the availability of the leniency marker. These initial enquiries may be made on an anonymous and/or hypothetical basis. Still, to allow the Commission to ascertain whether a marker is available, information on the broad nature of the cartel conduct such as the affected industry, the general nature of the conduct and the time period will need to be disclosed.

Upon the Commission conducting preliminary assessment whether the reported conduct is cartel conduct and whether a leniency marker / leniency is available, it will approach the applicant and confirm whether a marker is available. Upon being informed that a marker is available, an applicant can confirm its acceptance and will need to provide more details including its identity, the identities of other undertakings participating in the cartel conduct, the time period, geographic scope and a general description of the cartel conduct etc.

The Commission will then confirm that a marker has been granted and determine the timeframe in which the applicant has to perfect it.

Stage 2: Perfecting a marker

To perfect a marker, the applicant will be required to provide a detailed description of the cartel conduct and its functioning, including information about its duration and participants, the products or services affected by it, the names of persons involved in the conduct including those involved on the applicant’s behalf, and to describe the evidence it can provide in respect of the cartel. The Commission may also ask the applicant to provide access to evidence in support (e.g. documentary evidence relating to the cartel) and/or to make available witnesses to be interviewed by the Commission.

Where the applicant and the Commission do not proceed to enter into a leniency agreement, information provided by the applicant when applying for a marker will be returned to the applicant and will not be used as evidence in the Commission’s investigation or any subsequent proceedings. The Commission, however, reserves its ability to subsequently request that same information pursuant to section 41 of the Competition Ordinance or to otherwise use its powers under the Competition Ordinance to obtain the information.

Stage 3: Entering into a leniency agreement

Based on the information provided by the applicant, the Commission will determine whether to make an offer to enter into a leniency agreement.

The leniency agreement will contain a description of the cartel conduct and will ordinarily require the applicant to confirm, among others, that:

1.       it has provided and will continue to provide full and truthful disclosure to the Commission;

 

2.       it has not coerced other parties to participate in the cartel conduct or acted as the clear single ringleader of the cartel conduct;

 

3.       it has, unless instructed by the Commission otherwise, taken prompt and effective action to terminate its participation in the cartel conduct;

 

4.       it will keep confidential all aspects of the leniency application and the leniency process unless the Commission’s prior consent has been given or the disclosure of information is required by law;

 

5.       it will provide continuing full and truthful cooperation, at its own cost, to the Commission including in enforcement proceedings against other undertakings that engaged in the cartel conduct or against other persons involved in the cartel conduct; and

 

6.       it is prepared to continue with, or adopt and implement, at its own cost, a corporate compliance programme to the reasonable satisfaction of the Commission.

 

Stage 4: Ongoing compliance, follow-on litigation
and issuance of a final letter

Where the Commission has in place a leniency agreement with an undertaking in respect of particular cartel conduct, the Commission agrees not to commence any proceedings in the Tribunal against the undertaking in respect of that conduct. This agreement extends to any current officer or employee of the undertaking as long as the relevant individual provides complete, truthful and continuous cooperation with the Commission throughout its investigation and any ensuing enforcement proceedings before the Tribunal or other courts in relation to that conduct. At the Commission’s discretion, leniency will also extend under the same conditions to any current and former agents, former officers, employees and partners.

In the event that follow-on litigation is initiated under section 110 of the Competition Ordinance in relation to the cartel conduct covered by the leniency agreement by victims of the conduct, the Commission may issue an infringement notice to a party to a Type 2 leniency agreement containing a requirement to admit a contravention, in order to permit the initiation of follow-on proceedings against that party under section 110(3)(e) of the Ordinance.

At an appropriate stage, the Commission will issue a final letter to the undertaking to confirm that all conditions under the leniency agreement have been fulfilled. This will usually be at the end of any proceedings by the Commission before the Tribunal or other courts against other participants in the cartel conduct, or after the issuance of an infringement notice.

Conclusion

The Leniency Policy is designed to provide a strong, transparent and predictable incentive for a cartel member to stop its cartel conduct and to report the cartel to the Commission. As shown in the estate agencies price-fixing saga, the Leniency Policy provides an incentive for one of the cartel member to reveal the cartel agreement and lead to the revelation of the alleged contravention of the First Conduct Rule.

 

For enquiries, please feel free to contact us at:

E: competition@onc.hk                                                      T: (852) 2810 1212 W: www.onc.hk                                                                    F: (852) 2804 6311 19th Floor, Three Exchange Square, 8 Connaught Place, Central, Hong Kong

Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

Published by ONC Lawyers © 2023