Competition Commission v Fungs E&M Engineering Co Ltd (馮氏機電工程有限公司) & Ors [2021] HKCT 1
By this subsequent decision dated 5 January 2021 ([2021] HKCT 1), the Competition Tribunal (“Tribunal“) ordered that the 1st to 8th respondents (“R1” to “R8” respectively) be fined a sum of HK$598,728, HK$469,086, HK$333,795, HK$388,983, HK$334,870, HK$341,072, HK$200,000 and HK$600,000 respectively.
On 14 October 2020, the Tribunal held that the 9th respondent was ordered to be disqualified as a director pursuant to s102 of the Competition Ordinance (“Ordinance“) ([2020] HKCT 8). On 30 October 2020, the 9th respondent was disqualified as a director for a period of 1 year and 10 months ([2020] HKCT 9).
R1 to R8 also admitted to liability at various stages of the proceedings. The Tribunal adopted the approach used in Competition Commission v W Hing Construction Co Ltd ([2020] HKCT 1) (“W Hing Case”):-
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
Step 1
The value of sales for R1 to R6 are not disputed. The Tribunal considers that a 20% Gravity Percentage is appropriate for R1 to R6 because their involvement, market share and Value of Sales are small compared to the W Hing Case. Therefore, the Base Amount for R1 to R6 are as follows:-
R1: HK$900,362;
R2: HK$1,042,414;
R3: HK$741,768;
R4: HK$864,406;
R5: HK$744,156; and
R6: HK$757,938.
Step 2
The Commission submitted that there were 2 aggravating factors. First, R5 was found to have contravened the Ordinance in the W Hing Case, and under s93(2)(d) of the Ordinance, the Tribunal should take this into account. The Commission however does not contend for any increase on this account. Second, the Commission submitted that there is evidence that the anti-competitive arrangements reflect long-running and widespread industry practice. The Tribunal agreed that widespread industry practice could be an aggravating factor, but the penalty itself is sufficient to act as a deterrence.
Hence, there are no aggravating factors applicable to R1 to R6.
R1 submitted that it has 5 mitigating factors:-
- R1 was not aware of the anti-competitive acts. R1 was liable because it was part of an undertaking under the Ordinance;
- R1 did not receive any economic benefit from the anti-competitive acts;
- R1 already instructed its representative not to commit anti-competitive acts. Moreover, R1 took steps to ensure compliance with the Ordinance;
- R1 agreed to the Statement of Facts;
- R1 became liable only as a result of letting their “licence” to a “subcontractor”, it should be entitled to a 1/3 discount.
As regards the first mitigating factor, the Tribunal accepted that R1 did not have knowledge, however it is not a victim, as omission of R1 resulted in its violation.
As regards the second mitigating factor, the letting of the “license” was to keep itself in the Housing Authority’s sub-contractor list, and to establish relationship with Pau (a third party) were benefits. The second mitigating factor is rejected.
As regards the third mitigating factor, the Tribunal held that whilst taking adequate steps to ensure compliance with the Ordinance could be a mitigating factor. However, R1’s act of reminding Pau not to participate in bid-rigging is not sufficient. Moreover, R1 sent a written reminder to Pau on 31 August 2017, but R1 did not investigate into whether Pau was acting in contravention of the Ordinance, or tell her to stop the renovation works, and by that time, it was already halfway into the contravention period. R1’s acts are close to omission. The third mitigating factor is rejected.
As regards the fourth mitigating factor, the Tribunal held that this cannot be separated from Step 4, hence no reduction of penalty will be given here.
As regards the fifth mitigating factor (this submission is applicable to R3 to R6), which is based on paragraph 103 of the W Hing Case, is currently being appealed by the Commission. The Commission submitted that:-
- There is no evidence that R1 (and R3 to R6) sought reimbursement from its sub-contractor.
- Further sub-contracting is not allowed by the Housing Authority. Hence, R1 (and R3 to R6) cannot rely on a wrongful act as a mitigating factor.
- Hence, there should not be any discount.
The Tribunal disagreed with the Commission’s submissions. First, the main-contractor can wait and first see how much the penalty is before deciding whether the it should claim against a sub-contractor. Hence, it is not important if the former did not seek a claim against its sub-contractors during the hearing. Second, the role of the Tribunal is to penalise anti-competitive acts, not whether there was a breach of contract between the respondents and the Housing Authority.
The Tribunal held that it could give a discount depending on the actual participation of the respondents, and not just a blanket 1/3 discount.
In summary, R1 could obtain a 30% discount.
As regards R2 to R6, the fact that that was no pre-set return is not important, because price fixing arrangements and floor allocation arrangements are in itself contraventions, even though implementation of the same are by 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 adopt to changes of the law. The ‘agreement’ 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 50% discount.
R6 further submitted that it is a relatively large-scale company, the maximum penalty under the statute is higher and so they are required to pay a larger penalty despite the liability arises from the same facts. It sought the Tribunal to impose the same penalty as other respondents on the ground of fair and equal treatment. This submission was rejected by the Tribunal.
Therefore, after Step 2, the amount of penalty are as follows:-
R1: HK$630,240;
R2: HK$1,042,414;
R3: HK$370,884;
R4:HK$432,203;
R5: HK$372,078; and
R6: HK$378,969.
Step 3
S93(3)(a) of the Ordinance provides that the amount of a pecuniary penalty imposed in relation to conduct that constitutes a single contravention may not exceed in total 10% of the turnover of the undertaking concerned for each year in which the contravention occurred.
R2 and R4 did not provide sufficient information to the Commission, the Tribunal followed the decision in the W Hing Case and treated the value of sales as the turnover. As such, the turnover of R1 to R6 are as follows:-
R1: HK$>630,000,000;
R2: HK$521,207;
R3: HK$402,634;
R4: HK$432,203;
R5: HK$372,078; and
R6: HK$30,927,419.
R2’s penalty is limited to the statutory limit.
Step 4
In accordance with paragraph 37 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, but 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, the only have 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.
In summary, the penalty for R1 to R6 are as follows:-
R1: HK$598,728;
R2: HK$469,086;
R3:HK$333,795;
R4:HK$388,983;
R5:HK$334,870; and
R6:HK$341,072.
R7 and R8
The Tribunal held that the 4-step approach in the W Hing Case is equally applicable to R7 and R8.
For R7, the Base Amount under Step 1 is the same as R1. As to Step 2, as a 30% sub-contractor, it is given a 70% discount. As to Step 3, the Commission did not provide the relevant turnover of R7, hence, the value of sales shall be treated as the turnover. As to Step 4, R7 is entitled to 10% discount. The calculation should be as follows: HK$900,342 x 30% x 90% = HK$243,092. The amount of penalty is adjusted downwards to HK$200,000 to reflect the Commissions suggestion, which is 59% lower.
For R8, the Base Amount under Step 1 is the same as R5 and R6. As to Step 2, R8 is given a 50% discount. As to Step 3, the Commission did not provide the relevant turnover of R8, hence, the value of sales shall be treated as the turnover. As to Step 4, R7 is entitled to 10% discount. The calculation should be as follows:-
For receiving sub-contracting works from R5: HK$744,156 x 50% x 90% = HK$334,870
For receiving sub-contracting works from R6: HK$757,938 x 50% x 90% = HK$341,072
Total = HK$675,942. The amount of penalty is adjusted downwards to HK$200,000 to reflect the Commissions suggestion, which is 11% lower.
Tribunal also accepted that the R2 to R3, R5, R7 and R8 could pay the penalty by way of a 6-month instalment.
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 were already completed.
Comments
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.
This commentary is written by Kenneth Lee, William Tse, Edward K H Ng, and Kristy Wong.