Navigating the Hong Kong Competition Law – Refusal to deal

27 November 2015

Richard Keady, Kathryn Edghill, Zhaofeng Zhou, Amita Kaur, Cicely Sylow

Refusal to deal

Firms are generally entitled to choose with whom and on what terms they will do business. However a refusal to deal can breach the Competition Ordinance in two instances: (a) where a firm uses its substantial market power to force a competitor out of the market, or (b) where a group of firms agree not to do business with particular individuals or firms.

When will a refusal to deal be an abuse of substantial market power?

A refusal to deal may breach the Second Conduct Rule (SCR) where a firm which is active in two levels of a supply chain (a vertically integrated firm) controls an important input to the finished product or service and uses this control to withhold the input from a competing firm. A refusal to deal in these circumstances may breach the Ordinance if it threatens the survival of, or drives out, competing firms that sell the finished product.

Similarly, a firm that controls a distribution channel and uses this control to prevent a firm from accessing the distribution channel is also likely to breach the SCR.

Some legitimate reasons to not deal

There are many legitimate reasons why you might not want to deal with certain individuals or firms. For example, they may have a bad credit risk, poor quality and safety controls, or provide poor customer service. A decision to not deal with a firm for these sorts of reasons is not problematic but a legitimate reason should not be used to disguise an anticompetitive reason not to do business.

When refusing could get you into hot water

Context is really important. The history of your dealings or relationship with a competing firm or the terms on which you supply other like firms will be relevant. A decision to suddenly terminate your relationship with a competing firm that relies on an input you supply without a legitimate reason will likely raise concerns. As will a decision to supply the input to a competing firm on much less favourable terms compared with your own business or another firm that uses the input for another purpose and is not in competition with you.

Duty to deal on non-discriminatory terms

If the input you control is so important that other firms cannot compete without access to this input, you may have a duty to deal on non-discriminatory terms.

An example of this is standard essential patents (SEPs). FRAND – fair, reasonable, and non-discriminatory terms – is an obligation that is commonly found in licensing in the intellectual property context and applies to SEPs. FRAND terms are intended to prevent firms from engaging in abuse where they have a monopoly as a result of their intellectual property rights.

When will a refusal to deal amount to cartel conduct?

A refusal to deal may also breach the First Conduct Rule (FCR) where it amounts to a group boycott. A group boycott occurs where two or more competitors agree not to do business with certain individuals or firms. This conduct is prohibited outright.

A boycott can also be evidence of a wider cartel agreement, such as a price-fixing agreement where the members of the cartel take action to prevent market entry or to punish a competitor who refuses to take part in the cartel or is cheating. It could also be evidence of a market sharing agreement where there is a refusal to supply goods or services to a customer whom you have agreed with your competitor not to supply.

Do any exemptions or exclusions apply to this prohibition?

The Ordinance provides some general exclusions and exemptions to the FCR and SCR. Your refusal to deal will not breach the Ordinance if you are complying with a Hong Kong law or are an exempt statutory body. If the conduct concerns a breach of the SCR, and you are a smaller firm that has an annual gross global turnover of not more than HK$40 million, you can benefit from the "conduct of lesser significance" exclusion. The other available exceptions have little practical relevance to conduct involving cartels as this type of conduct is classed as "serious anti-competitive conduct".

What are the consequences if your refusal to deal breaches the Ordinance?

There are a number of enforcement approaches the Competition Commission can take where it has reasonable cause to believe a firm has engaged in an illegal refusal to deal:

  • issue a draft infringement notice, providing the firm with an opportunity to respond;
  • after considering the response it may decide not to press the matter or issue a final infringement notice, providing the firm with an opportunity to refrain from the conduct and /or to take specified action; or
  • institute proceedings in the Competition Tribunal.

If the Competition Tribunal finds committed firm has breached either the FCR or SCR, it can issue a fine up to 10 per cent of the firm's group turnover in Hong Kong for the duration of the infringement (with a three-year cap) for each offence.

This alert discusses a particular type of conduct that could breach the FCR and SCR. For a comprehensive discussion of these rules more generally, you can read our alerts here and here.

COMING NEXT

Next week we will discuss mergers and the extent to which they are covered by the Ordinance and the extent to which mergers are regulated in Hong Kong in the telecommunications market.

You may also wish to read our 'Are you ready for the Hong Kong Competition Ordinance check list' to see how prepared you are for the new law, which you can find here.

Authors

Kathryn Edghill

Partner
Australia

Call me on: +61 2 9226 9888
Cicely Sylow

Cicely Sylow

Associate
Australia

Call me on: +61 2 9226 9888
Keady-Richard

Richard Keady

Partner
China and Hong Kong

Call me on: +852 2248 6000