Competition Commission v Kam Kwong Engineering Co Ltd (金光工程有限公司) & Ors  HKCT 3
By decision dated 14 October 2020 ( HKCT 3), the Competition Tribunal (“Tribunal“) held that 6 renovation companies had contravened the first conduct rule by participating in price fixing and allocation of customers in the provision of renovation works in a public housing estate. By another decision dated 30 October 2020 ( HKCT 9), the Tribunal imposed a disqualification order against the 9th respondent, a director of one of the undertakings for a period of 1 year and 10 months.
By this further decision dated 5 January 2021 ( HKCT 1), the Tribunal dealt with the penalties for the 1st to 8th respondents (“R1” to “R8” respectively). R1 to R6 were the 6 renovation companies which contravened the first conduct rule. R7 and R8 were persons “involved” in the said contravention of the first conduct rule (s91).
The 4-Step Approach
R1 to R8 admitted to liability at various stages of the proceedings. The Tribunal holds that the approach used in Competition Commission v W Hing Construction Co Ltd ( HKCT 1) (“W Hing Case”) are applicable in the determination of pecuniary penalties for all the respondents. The approach involves 4 steps:-
Step 1 – determining the Base Amount;
Step 2 – making adjustments for aggravating, mitigating and other factors;
Step 3 – applying the statutory cap; and
Step 4 – applying cooperation reduction and considering plea of inability to pay, if any.
R1 to R6
In the W Hing Case, which involved similar acts of making and giving effect to a market sharing arrangement and a price fixing arrangement while providing decoration services to individual tenants at a public housing, the Tribunal held that the Gravity Percentage was 24% in the W Hing Case. The Commission suggested the same rate for this case.
However, the Tribunal disagreed and noted that the number of undertakings in the present case, market share, number of units involved and sales value were all fewer than in the W Hing Case. The Tribunal therefore held that a 20% Gravity Percentage was appropriate.
The anti-competitive conduct lasted for 5 months. The Tribunal held that the Duration Multiplier in the present case is 1.
The Commission submitted that there were 3 aggravating factors:-
First, R5 was already found to have contravened the Ordinance in the W Hing Case. The Commission however does not contend for any increase on this account as the pecuniary penalty for R5 has already reached the limit.
Second, the anti-competitive arrangements reflect a long-running and widespread industry practice. The Tribunal agrees that widespread industry practice could be an aggravating factor and 20% increase in penalty is appropriate in this case. However, it is not appropriate to impose an increase in penalty because all the relevant infringement decisions are close in time; it was too late for R1 to R6 to stop the infringement as the works were already completed prior to the commencement of the present proceedings; and there were no precedents for them to follow.
Third, the Commission requested for a specific increase for deterrence. In the EU, to ensure there is sufficient deterrent effect, the fine may be increased (1) on undertakings which have a particularly large turnover; and (2) in order to exceed the amount of gains improperly made. However, the Tribunal held that none of these apply.
Hence, there are no aggravating factors applicable to R1 to R6.
R1 submitted that it has 5 mitigating factors:-
1. R1 was not aware of the anti-competitive acts, which was committed by its sub-contractor Pau. R1 admitted to liability because it was part of an undertaking under the Ordinance. Although the Tribunal accepts that R1 did not have knowledge, the Tribunal does not accept R1 as a victim, as inaction was the cause of its violation.
2. R1 did not receive any economic benefit from the anti-competitive conducts. The Tribunal also rejects the second mitigating factor, because although R1 did not receive any actual monetary benefit, the letting of the “license” was to keep itself in the Housing Authority’s sub-contractor list, and to establish a relationship with the contractor who actually carried out the work (Pau), which are regarded as “benefits” by the Tribunal.
3. R1 took adequate steps to ensure compliance with the Ordinance. However, the Tribunal considers that R1’s act of reminding Pau not to participate in bid-rigging is not sufficient. This is because R1 was not aware of Pau’s background, and because R1 did not investigate nor tell Pau to stop when R1 became aware of the W Hing Case. R1’s conduct is similar to an omission.
4. R1 agreed to the Commission’s statement of facts. However, the Tribunal holds that this mitigating factor should not be separated from Step 4 below. Hence, no reduction will be made here.
5. There is no evidence that the main contractors can recoup what they have to pay from the sub-contractors. Further, it is appropriate to reflect their role as part only of the undertakings in question. The Tribunal considers that depending on the sub-contracting profit rate, the main contractors are entitled to a maximum of 50% discount. However, if there is no sub-contracting, there will be no discount because the main contractors will be entitled to all of the profits.
In summary, R1 could obtain a 30% discount based on the first mitigating factor.
As regards R2 to R6, the fact that they did not receive the anticipated return is irrelevant, because price fixing arrangements and floor allocation arrangements are in itself contraventions, even though implementation of the same are by the sub-contractors. The explanations given by R2, R3, R5 (and R8) in their defence and written submissions all confirm the existence of a price fixing agreement, and are not mitigating factors.
A number of mitigation factors submitted by R2, R3, R5 (and R8) were already rejected by the Tribunal in the W Hing Case. However, the Tribunal considers that R2 to R6 did not deliberately contravene the law. They were merely following years of practice, and were not able to adapt to changes of the law. The ‘agreements’ between the respondents were not sophisticatedly designed, and no discussions were held to formulate the agreements.
In summary, there are no aggravating nor mitigating factors for R2 to R6. However, in accordance to the fifth mitigating factor raised by R1, the discounts given are as follows:-
R2 did not sub-contract, no discount is given;
As to R3 to R6, they are entitled to a 50% discount.
S93(3)(a) of the Ordinance provides that the amount of a pecuniary penalty imposed in relation to conduct that constitutes a single contravention may not exceed in total 10% of the turnover of the undertaking concerned for each year in which the contravention occurred.
R2 did not provide sufficient information to the Commission. In the absence of any sub-contracting, it is unclear why the value of sales is significantly lower than turnover. Following the W Hing Case, the Tribunal treated R2’s value of sales as the turnover.
As to R4, it only admitted to receiving $200,000 as licensing commission. However, following the W Hing Case, the contravention is not the transfer of the “licence”, but by a single undertaking that carried on renovation business in the estate in the name of the main contract, in the form of making and giving effect to the relevant arrangements. The correct focus is on the value of sales in relation to the contravention found of the undertaking responsible, and to treat this as the turnover.
In accordance with paragraph 3.7 of the Cooperation and Settlement Policy for Undertakings Engaged in Cartel Conduct (issued by the Commission in April 2019) (“Cooperation Policy”), the Commission may suggest a maximum of 20% reduction, but a 10% is usually suggested. As such, the Commission suggested a 10% reduction to R4 and R6 for their indication to settle the matter as soon as possible. Meanwhile, the Commission suggested a 5% reduction to R1 to R3, and R5, as they only agreed to settlement after the Commission prepared all the relevant documents and evidence for trial.
R1 suggested that an extra 5% reduction should be given because they agreed to the statement of facts. Meanwhile, R4 and R6 suggested that a 1/3 discount should be given, just like in criminal cases.
The Tribunal held that agreeing to the facts should not constitute different factors, as agreeing to a contravention but not agreeing to the facts will not assist the Tribunal in determining the penalty. Moreover, the present case is not criminal in nature, the Cooperation Policy also clearly disclosed the factors and maximum reduction that could be given. Whilst the Cooperation Policy is not binding to the Tribunal, the Tribunal accepts the application of the same in the present case.
R1 claimed that it cooperated with the Commission at all times. However, R1 only cooperated after objecting to using the procedure used in the W Hing Case, and after it failed to join Pau as a third party. This caused delays to other respondents.
The Tribunal held that for R1, the 5% reduction is unchanged. As to R2 to R6, they are given a 10% reduction. The Tribunal also held that R2 to R3 and R5 failed to adduce compelling evidence that there will be hardship if the penalty is imposed. No reduction is therefore given.
R7 and R8
Although, unlike other respondents, R7 and R8 contravened s91 of the Ordinance, the imposition of penalties is also premised upon s93. Therefore, the Tribunal held that the 4-step approach in the W Hing Case is equally applicable to R7 and R8.
In replacing the role of the main contractors, these sub-contractors/representatives are directly responsible for the main contractor’s contravention of the Ordinance. Their existence allows the main contractors to ignore their obligations under the Ordinance in the course of lending their “licences” or sub-contracting. Although R7 and R8 played an important role in the present case, the Tribunal considers that they were merely following the usual practice, and cannot be considered to be the masterminds, and did not deliberately contravene the law.
The Commission also sought for an injunctive relief to enjoin the respondents from further contravening the Ordinance. However, the Tribunal held that an injunctive relief was not appropriate as the relevant renovation works have already been completed. If the respondents contravene the law again, the Commission should apply for injunctive relief in the new case.
This is yet another case involving a cartel between renovation companies. The Tribunal not only re-affirmed the use of the 4-step approach in the W Hing Case in determining the level of penalty for undertakings who violate competition law, it also clarified the steps that undertakings need to take in order to use the same as a grounds of mitigation.
Specifically, an undertaking’s act of reminding its employees or agents not to participate in anti-competitive acts is not in and of itself sufficient in releasing the undertaking from liability under the Ordinance. Rather, the undertaking may be required to take proactive steps to investigate or even stop the particular employees or agents from contravening the Ordinance.