Hong Kong Competition Tribunal issues first penalties, fining 10 contractors for market sharing and fixing prices on decorating public housing flats

Hong Kong’s Competition Tribunal handed out its first penalties on Wednesday, fining 10 contractors for “serious anticompetitive conduct” through market sharing and fixing prices for home renovations on a public housing estate four years ago.

Tribunal president Godfrey Lam Wan-ho said the contractors had broken the rules by restricting competition, and ordered each to pay a fine of between HK$132,000 (US$16,900) and HK$740,000 to the government within 28 days.

The respondents were also required to share the Competition Commission’s costs in taking enforcement action. However, Lam gave them a 20 per cent discount as it was one of the first cases and more costs would have been incurred because of the novelty of the law.

Lam previously found the contractors had made and implemented agreements to each decorate four floors in each of the three buildings at Phase 1 of On Tat Estate in Kwun Tong, and to fix the prices of their services, between June and November 2016.

Tenants were directed to designated contractors and provided fliers printed with pricing packages – collectively agreed by the respondents – as the starting point of negotiations.

It was not clear how many tenants moved in without decorating, decorated their own flats or engaged companies other than the 10 respondents, who represented the full list of contractors appointed by the Housing Authority to work on the three buildings.

Collectively they decorated 867 out of 2,582 flats in the project, or 38 per cent of the tenants who engaged decorators and 100 per cent of those who used the authority’s appointed contractors.

“On either view this represents a substantial market share,” Lam said.

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He concluded that such practices were “serious anticompetitive conduct”, in contravention of the first conduct rule of the Competition Ordinance, which prohibits any agreement or concerted practice with the objective or effect of preventing, restricting or distorting competition.

The fines were the first penalties meted out by the tribunal, which had received six cases since the ordinance came into effect in December 2015.

The commission welcomed the judgment, as the watchdog’s CEO Brent Snyder said there was a prevalent practice of market sharing and price fixing in the sector for renovating public flats, which was “particularly egregious because the people targeted are some of Hong Kong’s most vulnerable consumers”.

“The decision has set an important early precedent providing guidance and clarity on the determination of fines in competition cases,” Snyder said in a statement. “The penalties come as a warning to businesses that engaging in cartel conduct will be subject to the commission’s action and potentially result in serious consequences.”

Financial penalties are the primary sanction provided by the ordinance. The maximum penalty for a single contravention is capped at 10 per cent of the entity’s turnover – or revenues – obtained in Hong Kong for each year of infringement.

Lam adopted a structured four-step approach, which involved first determining a base amount with reference to the scale of infringement – as reflected by the value of sales related to the contravention – the seriousness of the conduct, and the duration of the entity’s participation.

The figure was then adjusted to account for aggravating and mitigating factors, the statutory cap and further reductions for cooperation – which was absent in the present case – and pleas of inability to pay.

A number of contractors told the tribunal they were small entities, both in terms of size and turnover, and that construction was a relatively low-margin business compared with some other sectors.

They also submitted that the ordinance was a new law and there was genuine uncertainty about its application.

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But Lam observed there was considerable gross profit margin for at least some of respondents.

“The respondents had been warned by the Housing Authority not to engage in pie-sharing,” he wrote in a 65-page judgment. “Their conduct was calculated to and did eliminate competition among themselves who were mutually their closest direct rivals.”

According to the commission, seven of the 10 contractors were ordered to pay the maximum penalty allowed under the ordinance.

While it was unclear how much money was spent on the enforcement action, the judgment revealed that translation fees alone cost the antitrust regulator HK$670,000.

The tribunal, however, refused to exercise its discretionary power to award any investigation costs after observing that the commission had failed to justify its claim with evidence.