Competition law: Hong Kong’s first appeal on financial penalties

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On June 2, 2022, the Honorable Mr. Justice Poon CJHC, the Honorable Mrs. Justice Kwan VP and the Honorable Mr. Justice Au JA delivered the judgment of appeal in Competition Commission c. W. Hing Construction Co Ltd and others [2022] HKCA 786[1] (Judgement). This article discusses the first appeal heard in the Hong Kong Court of Appeal (To research) with respect to the imposition of pecuniary penalties for violation of the first rule of conduct[2]. This appeal hearing concerned two appeals brought by the Competition Commission (Commission) on the penalty judgments issued by the Hong Kong Competition Court (Court) in CTEA 2/2017[3] (W Hing) and CTEA 1/2019[4] (Mushrooms) respectively.

Introduction

The respondents in both cases (Respondents) were dismissed (Licence) by the Hong Kong Housing Authority (HA) and appointed under the HA Decorating Contractor Scheme (DC system). All respondents were found to have violated the first rule of conduct by engaging in market-sharing and price-fixing agreements (Breach) in previous judgments of liabilities[5]. Some respondents (Contractor respondents) had sub-leased their Licenses to subcontractors (Subcontractors), who committed the contravention on behalf of the subcontractor respondents.

In the sanction judgments rendered by the Tribunal in the W Hing and Fungs cases, the Tribunal considered that there should be a reduction of the Base Amount[6] to contractor respondents to reflect their roles within the business only[7] (Discounts), taking into account that they may not be able to recover some or all of the penalties from their respective subcontractors.

Appeal against the reduction of the basic amount

The Commission appealed the reductions on three grounds:

  1. Financial penalties should be specific to the company concernedand the persons making up the company are jointly and severally liable;
  2. It is contrary to public policy to allow contractor defendants to rely on their unlawful conduct (i.e. contracting in violation of DC system requirements and licenses) (Illegal driving) as a mitigating factor; and
  3. The contracting respondents had failed to discharge their burden of proof by invoking the inability to recover the penalties from their subcontractors as a mitigating circumstance.

(1) Company specific financial penalties

The Commission argued that the Tribunal erred in imposing monetary penalties on each Respondent because only part of the business and grant Discounts based on the individual role within the company. Instead, taking inspiration from EU case law, pecuniary sanctions should be imposed and determined on the basis of economic activities and behavior relevant company as a single unit. It follows that the persons making up the company must be jointly and severally liable for the pecuniary penalties imposed on the company.

The Court agreed with the Commission’s opinion and confirmed that:

  1. “Business” is a fundamental concept in Hong Kong competition law, modeled on EU case law. Accordingly, monetary penalties should be “imposed and remained determined with reference to economic activities and the conduct of company[8] (emphasis added) rather than referring to the separate offense committed by the legal or natural person that constitutes that business, although enforcement is in practice directed against such entities. It follows that no reduction should be granted to reflect the individual role of a defendant within the company infringing a competition rule.
  2. The Commission is free to pursue against any entities making up the undertaking, without it being necessary to bring all these entities before the Court, which would be very costly for the Commission. The entities making up the undertaking are jointly and severally liable for the pecuniary penalties imposed on that undertaking, and the Commission’s role in the procedure will cease once the payment has been made by the entities held liable. There is no inherent unfairness in this pro-enforcement approach to the extent that entities within a business are encouraged to seek compensation and/or contribution from any other liable entity.
  3. Similarly, any alleged failure to recover from other liable entities has no weight in determining monetary penalties. The organization of the company’s internal affairs and the allocation of responsibilities between joint and several parties are matters reserved for subsequent procedures for compensation and/or contribution, in which the Commission has little interest.

(2) Public Policy

Confirming the Commission’s assertion, the Court rejected the General Court’s earlier opinion that the unlawful conduct does not fall under competition law and is therefore not punishable by the General Court. Instead, since the public interest is engaged in the DC system and illegal conduct is contrary to public order, it is wrong to recognize illegal conduct as a mitigating factor.

(3) Inability to recover

Notwithstanding the assertion that the inability to recover has no bearing on the determination of penalties, the Court agreed with the Commission’s assertion that the onus was on the respondents to provide evidence or valid reasons to demonstrate their alleged inability to recover, and the respondents have not discharged said charge.

Accordingly, the Court allowed the Commission’s appeal with respect to the Reductions.

Conclusion

The Court upheld the relevance of EU case law in Hong Kong competition law and recognized the conduct of a company as the cornerstone of the determination of sanctions. The finding that entities within a company are jointly and severally liable for penalties imposed is not limited to outsourcing arrangements alone and may have wider implications for the potential legal liabilities of related companies organized into a single entity. company. The judgment also signaled a pro-enforcement approach in that the Commission has absolute discretion to prosecute any of the entities constituting a business.

*Any reference to “Hong Kong” or “Hong Kong SAR” should be interpreted as a reference to the “Hong Kong Special Administrative Region of the People’s Republic of China”.

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