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Keeping your dawn raid guidance current
Unannounced inspections or ‘dawn raids’ are used by antitrust authorities to obtain evidence when there are suspicions that individuals or businesses have infringed the antitrust rules.
Global | Publication | October 2016
On September 14, 2016, the Hong Kong Competition Commission released a proposed block exemption order for public consultation. The Commission proposes to confirm that vessel sharing agreements among shipping lines are excluded from the application of the first conduct rule under the Hong Kong Competition Ordinance (Cap 619), subject to a number of conditions, including: (i) that the parties do not collectively have a share of more than 40 per cent in the relevant market; and (ii) that the agreements do not include any pricing coordination. The Commission also published a Statement of Preliminary Views outlining its rationale for the proposed order based on information collected to date. In the same document, the Commission explains why it does not propose to include voluntary discussion agreements among shipping lines within the scope of the proposed order.
Interested parties are invited to submit comments before December 14, 2016, following which a final decision on the issuance of a block exemption order will be made. If adopted, the order would be valid for a period of five years.
The Commission’s proposal follows an application made by the Hong Kong Liner Shipping Association on behalf of the shipping industry shortly after the Ordinance entered into force last year. The shipping lines sought a formal order from the Commission that would confirm that two categories of cooperation arrangements do not infringe the Ordinance’s first conduct rule on account of the economic efficiencies they produce. The first category relates to vessel sharing agreements, by which shipping lines agree to exchange space on their respective vessels and to coordinate sailing schedules, capacity and other operational matters. The second relates to so-called “voluntary discussion agreements” pursuant to which shipping lines discuss certain commercial matters relating to particular shipping routes, including pricing.
The Commission’s provisional views are that vessel sharing agreements, while potentially restrictive of competition, produce sufficient benefits to justify their exclusion from the prohibition on restrictive agreements under the first conduct rule if certain conditions are met. However, based on information so far received, the Commission cannot find sufficient benefits arising from voluntary discussion agreements that would justify their exclusion, particularly in view of the very significant competition restrictions which can arise as a result of pricing discussions among competitors.
The public consultation offers an opportunity for shipping lines and their customers and suppliers to provide views to the Commission on the text of the proposed block exemption order. The Commission's very detailed statement of reasons supporting its proposal should help these stakeholders frame their representations. It also signals to parties from other sectors of the economy that any application for similar orders will likely lead to a protracted, in-depth engagement with the Commission that would include an intensive public consultation process. Depending on the results of the public consultation, it appears unlikely that any order in the liner shipping case would be adopted before the first quarter of 2017.
The Statement of Preliminary Views is the most detailed substantive analysis released by the Commission since the adoption of its guidelines on the enforcement of the Ordinance last year. It provides insight into the authority’s interpretation of the law and into its enforcement policy.
Restriction of competition. The Statement only briefly discusses whether the relevant agreements would lead to restriction of competition caught by the first conduct rule. This brief discussion however provides some useful insights, particularly as regards vessel sharing agreements.
Overall economic efficiency analysis. Where agreements and practices have the object or effect of restricting competition, an infringement of the first conduct rule can nonetheless be avoided if efficiency benefits outweigh the competition restrictions. The bulk of the analysis in the Statement of Preliminary Views is devoted to the conditions for the overall economic efficiency exclusion, being the main purpose of the proposed block exemption order.
Other matters of broad relevance. Other matters which may be of relevance beyond the shipping sector include the following.
Vessel sharing agreements. If the order is adopted in its current form, parties to such agreements will be able to continue operating provided that they meet certain conditions. The Commission recognises that vessel sharing agreements may differ in scope. Accordingly it lists a certain number of activities which would benefit from the exclusion. All of these activities would be excluded if certain conditions are met.
Where the conditions set out in the proposed order are not met, parties have a choice among several options, some of which are outlined below.
Voluntary discussion agreements. As mentioned, the Commission is so far unconvinced that this type of agreement should benefit from a block exemption. While the Commission does not expressly rule out the possibility, the analysis contained in the Statement of Preliminary Views suggests that the Commission will be unlikely to find room to apply the economic efficiency exclusion to any agreement or practice that contemplates pricing recommendations or discussions on prices and commercial terms among independent operators. The Commission’s approach to voluntary discussion agreements differs from that adopted in Singapore, but reflects the same view as those held by competition authorities in the EU and Malaysia.
With little prospect of convincing the Commission that discussions of prices and commercial terms among independent operators would not fall foul of the Competition Ordinance, parties have few options other than to cease their involvement in such discussions, at least to the extent they have the object or effect of restricting competition in Hong Kong markets.
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Unannounced inspections or ‘dawn raids’ are used by antitrust authorities to obtain evidence when there are suspicions that individuals or businesses have infringed the antitrust rules.
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