What may be the discounts in penalty where there is a settlement with the Competition Commission on competition law breach?
Introduction
We have previously written an
article on the Competition Tribunal’s (“Tribunal”) decision in 2020 about disposing of proceedings by consent
following a settlement between the Competition Commission (“Commission”) and the Respondents.
Recently on 22 July 2022, the Tribunal handed
down the decisions on the issue of penalties on the respective Respondents in Competition
Commission v Kam Kwong Engineering Company Ltd and Others [2022] HKCT 1,
taking into account the Court of Appeal’s recent decision in Competition
Commission v W Hing Construction Co Ltd & Ors (No.3) (“W
Hing No 3”).
Background
The 1st, 2nd
and 3rd Respondents have entered into an illicit market allocation
and price fixing arrangement, with the profits from this anti-competitive
agreement to be shared between them. This constituted a contravention of the First Conduct Rule (“FCR”) under section 6 of the
Competition Ordinance (Cap 619) (“Ordinance”).
The 4th and 5th Respondents are individuals involved with
the contracted works, and hence fall under Section 91 of the Ordinance as
persons involved in contravention of the FCR.
In 2020, the Tribunal
determined that the Respondents have contravened relevant competition rules
under the Ordinance, and decided to dispose of the complaints against the
Respondents by consent.
Such procedure mirrors the Carecraft Procedure that originates in the English
case Re Carecraft Construction Co
Limited [1994] 1 WLR 172. In the most recent developments, the Tribunal
has handed down the decisions made concerning the penalties against the
Respondents.
4-step approach for assessing penalties
In assessing the penalties, the Tribunal employed the 4-step approach introduced in W Hing No 3, namely:-
1. determining the base amount, calculated with the value of sales
applying the gravity percentage, and multiplied by the duration multiplier;
2. adjusting for aggravating, mitigating, or
any other factors;
3. applying the statutory cap; and
4. applying any cooperation reduction and any
pleas of inability to pay.
In the present case, calculation of step 1 and step 3 are not disputed
by the Respondents.
Step 2
Regarding the adjustment
for aggravation/mitigation in Step 2, the Commission submitted that a 25%
uplift in the penalty should be imposed since deterrence is a primary objective
of the statutory penalty. The
Tribunal rejected this submission and agreed with the 2nd Respondent’s
arguments on the three grounds: (i) there was no evidence that the ‘pie
sharing’ practice was long running and wide-spread; (ii) the case bore close
resemblance to the facts in W Hing No 3
where there was no uplift in that case and; (iii) there was no case law authority
for imposing an uplift. The Judge also pointed out that that the Tribunal should
develop the firm principles on which it acts when assessing penalties.
Another issue that arose
was whether a discount could be
given to the Respondents who had not directly participated in the
anti-competitive conduct. The 2nd Respondent requested a one-third
‘sub-contractor’ discount as seen in W
Hing No 3, as well as a further 5% discount due to an apparent lack of
knowledge of its management of the anti-competitive conduct and no payment from
the 1st Respondent. Given that the 2nd Respondent
“flagrantly” broke their undertaking to the Housing Authority not to
subcontract any works and provided no supervision of the 1st
Respondent’s work when doing so, the Tribunal considered that treating such
indifference to contractual obligations and proper business practice as
mitigating factors would conflict with the purpose of deterring people from
contravening the Ordinance by imposing penalty. The Tribunal also dismissed the
2nd Respondent’s other claims for mitigating factors on the facts.
Step 4
As for Step 4, the
Tribunal considered the findings in W
Hing No 3 that the sum of the final discount should be in accordance
with the Commission’s Cooperation and Settlement Policy for Undertakings
Engaged in Cartel Conduct (April 2019) (“Cooperation
Policy”). Under this policy, a discount of up to 20% could be given where the Respondent
begins to cooperate only after enforcement proceedings have commenced. The
amount of reduction is linked to the progress of the proceedings, and the closer
to the trial the less discount would be provided. The discount would be halved
to only 10% upon the trial date has been fixed. The Judge was of the view that
the Tribunal should generally be guided by the Cooperation Policy in
determining what discounts to give for cooperation.
In the present case, the
cooperation reduction is relevant to 1st and 2nd
Respondents as they have elected to settle with the Commission well before the
trial but after the pleadings had closed. The Commission submitted that a 10%
reduction would be appropriate, while the 2nd Respondent argued that
the concession should be closer to 20%,
namely 15% to 18%. The Judge considered that the sliding scale of the discount
under the Cooperation Policy is of a non-linear scale, and a simple
arithmetical formula could not be the best approach. Rather, the Judge was
reluctant to formulate at this stage sign posts or an agenda of matters to be
taken into account in determining where on the scale any particular case might
be.
As such, considering the
fact that the Commission would still have to deal with the defence filed before
settlement was reached, the Tribunal found 12% an appropriate discount
regarding the 2nd Respondent’s case.
Disqualification order
The Commission also sought a disqualification
order pursuant to section 101 of the Ordinance against the 4th
Respondent’s involvement in the 1st Respondent’s contravention which
is granted by the Tribunal.
Section 102 of the Ordinance
Section 102 of the
Ordinance outlines two conditions precedent for the Tribunal’s jurisdiction to
impose a disqualification order: (i) the company of which the person is a
director has contravened a competition rule and (ii) the person’s conduct as a
director makes the person unfit to be concerned in the management of a company.
For the purpose of section
102(b), the Tribunal must take into account the followings when deciding
whether a person is unfit
to be concerned in the management of a company:
1. the person’s conduct contributing to the
contravention;
2. if the person had reasonable grounds to
suspect that the conduct of the company constituted a contravention but took no
steps to prevent it; or
3. the person did not know but ought to have
known that the conduct of the company constituted the contravention.
It was accepted that the
approach to be taken when applying the legislation is primarily a protective
one, paralleling the approach in UK competition law.
The Tribunal cited the three bands of length
of disqualification summarised in the case of SFC v Tong Shek Lun &
Ors [2020] HKCFI 435:
1. Top tier of 4 to 5 years: where the
respondent (i) knowingly contributed to a company’s contravention of
competition rules and (ii) was previously disqualified under section 101 of the
Ordinance or connected with any other contravention of competition rules as a
director of a company;
2. Middle band of 2 to 4 years: where (i) the
respondent has knowingly contributed to a company’s contravention of
competition rules or (ii) although the respondent’s conduct did not contribute
to the contravention, he had reasonable grounds to suspect that the conduct
constituted a contravention yet took no steps to prevent it; and
3. Minimum tier of up to 2 years: where the
respondent did not know, but ought to have known, that the conduct of the
company constituted a contravention.
The Tribunal considers
that the 4th Respondent’s conduct falls into the middle band and
justifies disqualification of three years, taking into account the fact that
this is the first disqualification order imposed on the 4th Respondent, and that he had
agreed to reach an early settlement with the Commission.
Key takeaways
This decision clarifies
how penalties for contravention of competition rules will be calculated. Building
on the 4-step approach in W Hing No 3
which serves as a useful framework in assessing penalty, this case further
sheds light on cooperation discount to be given to Respondents that is largely
dependent on the timing of settlement reached with the Commission. It should be
noted that each step of the W Hing No 3
approach involves fact-finding exercise and therefore the penalty
eventually imposed in each case would turns on its own facts.
For enquiries,
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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. |
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Published by ONC Lawyers © 2022 |
