Hong Kong Competition Commission brings first court case on resale price maintenance

Background

For the first time since the Competition Ordinance (the Ordinance) came into effect, the Hong Kong Competition Commission (HKCC) has brought proceedings in the Competition Tribunal for resale price maintenance (RPM) as a form of contravention of the First Conduct Rule. This is also the first time that the HKCC has pursued any vertical arrangement in court. Almost all of the HKCC's previous court cases were focused on hard-core cartels, with one case relating to the abuse of a substantial degree of market power.

This case is relevant for nearly all businesses as it touches upon resale pricing and distributor relations, and will have important compliance implications as vertical arrangements increasingly come under the HKCC's enforcement radar.

About this case

The HKCC alleged that Tien Chu (Hong Kong) Company Limited (TCHK) had contracted with its two main local distributors to set minimum resale prices for a certain MSG powder called Gourmet Powder. Upon investigation, the HKCC found it has reasonable cause to believe that TCHK's conduct amounted to RPM. The HKCC also believes that the RPM conduct constituted "serious anti-competitive conduct" under the Ordinance.

According to the HKCC:

• TCHK's distribution agreements obliged distributors to "avoid improper price competition".
• TCHK also entered into agreements with its distributors which stipulated the minimum resale price to be charged by them and which must not be changed without TCHK's consent.
• TCHK issued letters and instructions to the distributors to update the minimum resale prices, observe these prices and/or to refrain from discounting.
• When one distributor complained against the other distributor's discounting, TCHK used disincentives, threats and/or penalties to secure compliance with the resale prices set by TCHK.

The HKCC sought to resolve the alleged contravention by way of an infringement notice, i.e. an offer not to bring proceedings on the condition that TCHK commit to certain requirements (which may, and often, contains a requirement to admit to a contravention of the relevant conduct rule). However, TCHK declined to offer commitments, and the HKCC subsequently brought proceedings in the Competition Tribunal.

What does this mean for businesses?

With the HKCC bringing its first court case on RPM and suggesting that it does not exclude bringing RPM enforcement actions against distributors in the future, RPM may become an enforcement priority for the HKCC. Businesses should therefore review their current agreements for any potential RPM arrangements, even if such agreements were signed before the Ordinance came into effect. 

RPM was a commonly accepted practice in Hong Kong before the Ordinance came into full effect on 14 December 2015. In the current case, the alleged RPM conduct began before the Ordinance came into full effect and continued thereafter. Anti-competitive acts which span the periods before and after the Ordinance taking effect can be subject to investigation.

The present proceedings are still ongoing and may be subject to further developments. However, it appears that the HKCC treats RPM in a similar manner to hard-core cartels in light of the allegations against TCHK:

• The HKCC considers that the RPM conduct by TCHK had the object of harming competition (i.e. the conduct itself is considered illegal without the need to look at its effects).
• In practical terms, this means that the HKCC does not then need to substantiate with evidence that the conduct has the actual or likely effect of harming competition in Hong Kong.
• In addition, the HKCC's case is that the RPM conduct constituted "serious anti-competitive conduct" as defined in the Ordinance. The consequence of this categorisation is that a party engaging in RPM may find itself pursued by the HKCC in a Competition Tribunal case without any warning.
• Without such a categorisation, a party will otherwise be given a warning notice allowing it a chance to fix the conduct.

What should businesses do to minimise RPM risks?

Businesses should conduct a wholesale review of their agreements with parties on different levels of the supply chain to identify any potential RPM issues. The fact that proceedings may potentially be brought without warning in RPM cases makes it even more important for businesses to review their current dealings with their partners.

Apart from reviewing agreements, businesses should also review the actual pricing practices and actual conduct by the sales team on the ground, as pricing practices otherwise acceptable may sometimes be used to disguise RPM. For example, in the HKCC's Guideline on the First Conduct Rule, the HKCC distinguishes genuine "recommended resale prices" from situations where "recommended resale prices" function in reality as RPM.

In particular, suppliers and distributors should avoid:

• Packaging RPM schemes into "recommended resale prices", for instance by threats of retaliation if the recommended resale prices are not followed by distributors.
• Granting/accepting rebates or other incentives subject to a distributor's observance of a certain price level, as this may also be seen as a form of RPM.

Finally, as part of their overall competition compliance strategy, businesses should arrange regular compliance training for staff (in particular for marketing and sales employees) to increase awareness on RPM issues.

Authored by Adrian Emch, PJ Kaur, and Stephanie Tsui.