Competition Tribunal Sets Out Structural Framework for Pecuniary Penalty Assessment in Landmark Judgement
On 29 April 2020, the Hong Kong Competition Tribunal (Tribunal) handed down its first ever judgment on pecuniary penalties against ten decoration contractors (Penalty Judgment) who were found to have violated the First Conduct Rule under the Competition Ordinance (Ordinance), which prohibits undertakings from entering into an agreement or engaging in a concerted practice that has the object or effect of harming competition in Hong Kong.
The Tribunal ruled in May last year that the ten contractors participated in a market sharing and price fixing arrangement in connection with the provision of decoration work in a newly constructed public housing estate in Kwun Tong. Market sharing and price fixing agreements among competitors are deemed “serious anti-competitive” conduct under the Ordinance.
Pecuniary penalty is a primary sanction provided for in the Ordinance that serves the principal purpose of deterring businesses and individuals from engaging in anti-competitive conduct. In the Tribunal’s view, the goal of deterrence can be best served by a “structured and methodological” approach, which provides certainty, clarity and transparency to the pecuniary penalty determination process.
The Penalty Judgment sets out a multi-stage framework which the Tribunal adopts in determining the pecuniary penalties. While it focuses on the assessment of penalties for each of the ten respondents in the present case, the step-by-step approach detailed in the Penalty Judgment lays out the fundamental elements of a general methodology of pecuniary penalty assessment that is applicable to other competition cases.
Analytical framework in the assessment of pecuniary penalties
The Tribunal’s approach consists of four basic steps:
Step 1: Determination of the Base Amount
The analysis starts with determining a “Base Amount” that reflects the value of commerce affected by the contravention, which also takes into account the likely gain to the undertaking from engaging in the anti-competitive conduct and the harm to consumers as a result of the conduct. This is a practice also used in a number of other jurisdictions, including the European Union, the United Kingdom, the United States, Singapore, Japan and Korea.
The Base Amount is calculated as the product of three components:
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i.
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“Value of Sales”, which reflects the undertaking’s sales related to the contravention in the relevant geographic market in Hong Kong during the financial year in which the anti-competitive conduct took place. The Value of Sales is a metric that attempts to capture the magnitude of the infringement, which in turn is relevant to an assessment of its potential impact on consumers.
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ii.
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“Gravity Percentage”, which reflects the “gravity” and “blameworthiness” of the contravention.
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iii.
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“Duration Multiplier”, which is the number of years in which the undertaking has engaged in the contravention.
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Step 2: Adjustments for aggravating, mitigating and other factors to the Base Amount
The next step involves a consideration of aggravating and mitigating circumstances under which the contravention takes place, which may lead to an increase or decrease of the Base Amount calculated in Step 1.
Examples of aggravating circumstances to be considered in applying an uplift to the Base Amount in the assessment of pecuniary penalties are as follows: the undertaking acts as a ringleader or takes coercive or retaliatory measures against others to implement or conceal the anti-competitive practice; the anti-competitive arrangement is a widespread industry practice such that there is a need for general deterrence; the undertaking obstructs the Hong Kong Competition Commission’s (Commission) investigation; and where the undertaking has engaged in previous contravention of competition law.
Examples of mitigating circumstances to be taken into account in applying a reduction to the Base Amount include: limited participation of the undertaking in the contravention; there was uncertainty as to the legality of the conduct at issue; and the undertaking has taken steps to ensure genuine corporate commitment to competition law compliance.
Step 3: Application of the statutory cap
The Ordinance imposes a maximum ceiling which a pecuniary penalty may not exceed. The statutory cap equals 10% of the gross revenues the undertaking derived (from all economic activities) in Hong Kong for each year during which the contravention took place (Turnover); if the contravention occurred in more than three years, the statutory cap is 10% of the undertaking’s Turnover during the three years that generated the highest, second and third highest Turnovers.
Step 4: Application of cooperation reduction and consideration of plea of inability to pay
The Tribunal may consider applying a cooperation reduction on the pecuniary penalty to provide an incentive for undertakings to cooperate with the Commission. Further, for the cooperation reduction to reflect a “real benefit” for an undertaking to cooperate, the Tribunal determines that the reduction should be offered after the statutory cap is applied. In this final step, the Tribunal may also consider a reduction of the penalty assessed on the grounds of an undertaking’s financial hardship rendering it unable to pay the penalty.
Application of the framework to the present case
The table below summarises the result of the Tribunal’s application of the four-step approach set out above in its assessment of the respective penalties for each respondent in this case:
Summary of Pecuniary Penalties for the Respondents (in HK$)
| Respondents |
Value of Sales (1) |
Base Amount (2) |
Mitigating Factor (3) |
Amount After Step 2 Adjustments (4) |
Statutory Cap |
Pecuniary Penalty |
Penalty as % of Value of Sales |
| 1st |
4,502,740 |
1,080,658 |
0.33 |
670,438 |
37,800,033 |
670,000 |
14.9% |
| 2nd |
1,324,410 |
317,858 |
|
267,858 |
132,441 |
132,000 |
10.0% |
| 3rd |
3,189,400 |
765,456 |
0.33 |
460,304 |
318,940 |
318,000 |
10.0% |
| 4th |
2,943,630 |
706,471 |
0.33 |
420,981 |
1,825,263 |
420,000 |
14.3% |
| 5th |
3,974,520 |
953,885 |
|
903,885 |
397,452 |
397,000 |
10.0% |
| 6th |
1,455,480 |
349,315 |
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299,315 |
145,548 |
145,000 |
10.0% |
| 7th |
3,138,588 |
753,261 |
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703,261 |
313,859 |
313,000 |
10.0% |
| 8th |
4,153,318 |
996,796 |
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946,796 |
415,332 |
415,000 |
10.0% |
| 9th |
4,938,040 |
1,185,130 |
0.33 |
740,086 |
2,417,376 |
740,000 |
15.0% |
| 10th |
4,203,810 |
1,008,914 |
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958,914 |
420,381 |
420,000 |
10.0% |
Notes to summary table
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(1)
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Value of Sales: The Value of Sales reflects the gross revenues each contractor generated from the work it had performed at the public housing estate at issue.
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(2)
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Base Amount: The Base Amount is the product of the Value of Sales, Gravity Percentage, and Duration Multiplier. As the contravention involved “serious anti-competitive” conduct, the Commission suggested a range of 15% to 30% for the Gravity Percentage, which in the Tribunal’s views is consistent with international practices regarding similar cartel conduct. The Commission recommends, and the Tribunal determines that a 24% Gravity Percentage is appropriate in the present case. The contravention took place over a five-month period, and thus a Duration Multiplier of 1 was applied in this case.
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(3)
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Mitigating Factor: The Commission did not contend for, and the Tribunal decided not to apply upward adjustments to the Base Amount related to any aggravating circumstances in the present case. The Tribunal granted a one-third reduction of the Base Amount to four of the respondents to reflect their role in question as the respondents did not directly participate in the conduct. These four respondents became liable only as a result of subletting their “license” to undertake the decoration work at the public housing estate at issue to their respective “subcontractor”, and it was the “subcontractor” who engaged in conduct that violated competition law.
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(4)
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Amount after Step 2 Adjustments: Two downward adjustments were made to the Base Amount: first, an adjustment due to the mitigating factor (if applicable) as discussed above, and then a further reduction of HK$50,000 as a “buffer”.
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Key Takeaways
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1.
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The Tribunal sets out in its Penalty Judgment a detailed multi-stage framework by which pecuniary penalties are assessed. The structured approach provides more predictability of the likely penalty outcome for undertakings who are found to have violated the Ordinance. The Penalty Judgment also lays out the factors that the Tribunal took into consideration in each step of the assessment.
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2.
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Despite the Tribunal’s recognition of the seriousness of the contravention as reflected by the Gravity Percentage applied in its assessment, owing to each respondent’s relatively small size, the pecuniary penalties imposed on the majority of the respondents were limited by the maximum amount allowed under the Ordinance.[1] As such, as shown in the summary table above, the pecuniary penalty imposed on each of the respondents amounted to 10% to 15% of its respective revenues generated from the decoration work undertaken at the public housing estate at issue. However, in addition to pecuniary penalties, the Tribunal also ordered each respondent to pay a significant portion of the Commission’s costs of the legal action, the exact amounts of which are not specified in the Penalty Judgment.
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3.
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It is also worth noting that the contravention in the present case occurred during a five-month period within the same year. For those cases involving a violation that takes place over multiple years, it remains to be clarified how the Duration Multiplier should be applied in relation to the Value of Sales in determining the Base Amount during the first step of pecuniary penalty assessment as set out in the Penalty Judgment.
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4.
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Finally, while the Penalty Judgment clearly and systematically sets out the relevant factors the Tribunal considers at each step of its assessment, the magnitude of the pecuniary penalties imposed on each undertaking found to have contravened competition law will remain uncertain, as the determination of pecuniary penalties is a complex process and the penalty outcome will depend on a myriad of factors.
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[1] In fact, the Turnover disclosed by seven of the ten respondents were the same as their respective Value of Sales, and each claimed that it did not have any other revenue apart from the decoration work conducted at the public housing estate at issue. In the absence of contrary evidence, the Tribunal proceeded with its assessment treating each of these seven contractors’ Turnover as being limited to its respective Value of Sales. As such, the statutory cap equals 10% of the revenues that each generated from the decoration work it conducted at the public housing estate at issue in the case of these seven contractors.