04 December 2002

Edward Alder

War is diplomacy by other means” Clausewitz once famously said. Legal wags often render this as “Litigation is business by other means”. What these quips mean is that as players jostle for position in both international relations and business, force is not the first resort but can be a useful means of getting one’s way where appropriate.

There are many ways of battling encroaching business competitors. Cutting price can restore market share, but it won’t return profit to previous levels. Reducing production cost helps profits, but won’t reverse loss of market share. Improving the products can restore market share, but will also probably increase costs. Advertising might restore some market share, but again at the expense of profit.

Besides these possibilities there may be legal levers that can be pulled. A new market entrant may be passing off its goods as those of an incumbent with similar packaging, or may be using a confusingly similar trade mark. The sale of a competitor’s products may constitute an offence, for example under trade descriptions or product safety legislation. The rival may also be engaging in misleading conduct of some sort in the market place. Taking legal action in any of these scenarios can cut across competitors’ bows and cause them problems in the market or at least significant unforeseen costs.

The legal remedies available in Hong Kong for losses suffered due to the misleading conduct of business competitors are somewhat inflexible. The principal avenues for redress are, as described above, to sue for the traditional torts of passing off and defamation or for trade mark or copyright infringement. Remedies for misrepresentation exist but are only available to the misled “representee”, not the parties which are the subjects of, or otherwise caused loss by, the representation.

Last month Hong Kong Broadband Network Limited sued PCCW Limited over a comparative advertisement published in May this year in PC Market magazine. Hong Kong Broadband alleges in its Writ that the advertisement was defamatory of it in no less than 15 respects, mostly related to assertions concerning the technical quality of its broadband services.

Why would one company sue another for defamation? After all, a company cannot have hurt feelings. Although not an ideal vehicle for resolving business grievances about misleading conduct, defamation law does enable damages to be recovered where a company has suffered economic loss due to a defamatory publication. The majority of defamation actions, particularly those brought by companies rather than individuals, settle well before trial. In reality defamation litigation between commercial organisations is usually part of the greater game of market tactics.

What Hong Kong law currently lacks is a general remedy for economic loss caused by the misleading conduct of others which does not fall within the four corners of passing off, defamation or intellectual property infringement.

A general prohibition on “misleading or deceptive conduct”, and a right for all affected parties to seek damages and injunctions in respect of loss caused by such conduct, has been on the statute book in Australia for many years in the form of Section 52 of the Trade Practices Act. The action for misleading or deceptive conduct now forms a third core plank of the Australian law of remedies alongside traditional remedies under contract and tort law.

In Hong Kong a diluted version of Section 52 appears in Section 7M of the Telecommunications Ordinance. The conduct prohibited is that which “in the opinion of the [Telecommunications] Authority” is misleading or deceptive, rather than just misleading or deceptive per se, so a subjective hurdle stands in the way of those seeking a remedy under this provision.

The telecommunications business tends to be highly competitive and dominated by an incumbent in each market. The Hong Kong Broadband action demonstrates the sorts of ends to which newer entrants resort as they struggle to establish market share. The dominance of legacy incumbents is sometimes a valid justification for singling out the industry for special treatment in the law. But it is to be hoped that in the not too distant future a remedy for misleading conduct will be enacted in Hong Kong as part of a package of competition and fair trading legislation applicable across all industries.

First published in the South China Morning Post.