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Hong Kong will Legislate against Anti-competition Trade Practices

In March 2007, the Commerce and Economic Development Bureau published the Report on Public Consultation on the Way Forward for Hong Kong's Competition Policy. The Report utters that the results of its public consultation in 2006 revealed that competition legislation iss broadly welcomed by the community. On 6th May 2008, the Bureau released a public consultation paper setting out detailed proposals for developing a anti-competition statute universally applicable to all trade and service sector. A summary of the major proposals for such an anti-competition law are set out below.

Summary of Recommendations

The main recommendations are summarised as follows:-

New Legislation - General

  1. New legislation should be introduced to guard against anti-competitive conduct that would have an adverse effect on economic efficiency and free trade in Hong Kong.
  2. Rather than target individual sectors of the economy, the legislation should apply to all.
  3. Provision should be included in the legislation to allow the Government to grant exemptions to the application of the law in defined circumstances on public policy or economic grounds.
  4. The regulatory authority should have the discretion to disregard inappropriate complaints, so as to guard against the new law being used to stifle legitimate competitive business activities.
  5. The new law would not target market structures, nor seek to regulate “natural” monopolies or mergers and acquisitions.

New Legislation – Broad Provisions

  1. The new legislation should cover the following types of anti-competitive conduct :
    • Price-fixing
    • Bid-rigging
    • Market allocation
    • Sales and production quotas
    • Joint boycotts
    • Unfair or discriminatory standards
    • Abuse of a dominant market position.
  2. Such conduct should not be an offence per se, but rather, the particular conduct must be proven :
    a) to have been carried out with the intent to distort the market; or
    b) to have the effect of distorting normal market operation.
  3. There should not be lengthy and detailed descriptions of these types of conduct in the law as such. Appropriate guidelines should be drawn up by the regulatory authority in consultation with relevant stakeholders that would include :
    • detailed descriptions and examples of the types of anti-competitive conduct listed in the law;
    • an indication as to how intent and effect in relation to market distortion might be assessed; and
    • reference to cases dealt with under existing local sector-specific laws and related overseas legislation.

Regulatory Framework

  1. A regulatory authority, to be known as the Competition Commission should be established under the new law. The Commission should have a “two-tier” structure, comprising a governing board underpinned by an executive arm that would include staff with relevant expertise.
  2. The Competition Commission should have an advocacy role, and should be tasked with keeping the scope and application of the new law under review.
  3. The Competition Commission should have sufficient powers to allow it to investigate thoroughly any suspected anti-competitive conduct prohibited by the new legislation.
  4. The Government should seriously consider the merits of establishing a Competition Tribunal to hear cases brought by the Competition Commission and to hand down sanctions.
  5. With regard to sanctions, civil penalties should apply in cases where anti-competitive conduct is found to have occurred.
  6. The Competition Commission should be able to apply for an order from the Competition Tribunal (if established) to require an offender to cease and desist from anti-competitive conduct, pending a decision on the case.

Exclusive Rights

Exclusivity

Frequently, distributors, wholesalers, sales representatives and others in the product distribution chain will request an "exclusive" territory or "exclusive distributorship" from a manufacturer or supplier. In this type of arrangement, the manufacturer or seller agrees not to appoint or sell to another dealer in the same area. This greatly assists the distributor or sales representative because it need not then worry about competition in the sale of the same products.

Exclusive Distributorships

In Hong Kong, the grant of an exclusive distributorship is generally permissible. Although these arrangements could result in a "refusal to deal" by the manufacturer with other distributors, they are not prohibited by the laws as Hong Kong does not have any anti-trust or anti-competition legislations. The Consumer Council has been strongly advocating to outlaw certain restrictive trade practices but the Hong Kong Government is not responsive on that; nor the business enterprises in Hong Kong would like to witness that to happen.


Exclusive Dealings

The term "exclusive dealing" is generally used to refer to the agreement between a supplier or manufacturer and its customer ( such as a distributor or wholesaler) where the customer is restrained from dealing with any of the supplier's competitors. The term generally includes express agreements, and also arrangements that the have the same exclusionary effect on competitors. For example, some manufacturers use "tie-ins", a requirement that a customer purchase all its needs from the manufacturer, forcing the customer to purchase the manufacturer's "full line." Competitors of the manufacturer then may be foreclosed from selling the customer all of the "tied-in" products.

Arrangements Restricting Competition

There is no general law in Hong Kong outlawing anti-competition practices. There are legislations or regulations restricting anti-competition measures. The best example is the telecommunication services in Hong Kong. The regulating body, the Telecommunication Authority regulates restrictive trade practices of telecommunication licencees through the powers given to him under the Telecommunications Ordinance and also through licensing conditions.

Refusing to Sell

The law does not outright condemn a supplier's refusal to sell or lease a product. This subject area is governed by the market rather than through the law. Henceforth, exclusive purchase right of a party can legitimately happen by virtue of a exclusive right provision under a contract. But care must be given to specific industry like telecommunication services.


Franchise

Franchising is a system of distributing a product or delivering a service in return for a fee. The company that manufactures the product or originally developed the service and that appoints others to use its name and sell the products or service is called the "franchisor". The person that contracts with the franchisor and is granted the right to market the goods or services, according to the franchisor's established practices and upon paying franchise fees, is called the "franchisee".

Franchising can be an attractive alternative if you are interested in starting a business. If you are a small business owner interested in expanding your distribution, franchising may also be a valuable option. There are advantages and disadvantages for both franchisors and franchisees using this system.

Advantages and Disadvantages of Franchises

For franchisors, the advantage is gaining additional outlets for the distribution of products and services without many costs associated in establishing new facilities, such as hiring employees and acquiring facilities and equipment. Also, a franchisor may require the payment of an up front franchise fee, providing immediate revenue. The disadvantages for the franchisor include compliance with complex and time consuming federal and state regulations. To establish a franchise operation, it is important to seek out a lawyer who is familiar with this area. Most importantly, the franchisor must disclose much historical and financial information about the franchise business.

There are many benefits for franchisees. Buying a franchise allows you to acquire an interest in an established business, usually with a recognised name and the benefit of national or local advertising. Franchisors usually provide training and purchasing benefits not normally available to independent small businesses. Often, the franchisor will grant the franchisee the right to use a recognized trademark and will advertise it nationally or locally. On the other hand, a franchise business takes a high degree of personal involvement by the franchisee. The franchisee is also restricted in many ways because he will be subject to the dictates of the franchisor in terms of many facets of the operation of the business. The franchisee may define opening and closing times, product standards, service standards, warranty standards and place restrictions on the franchisee's territory and ability to sell the business. While success will depend in large part upon the abilities of the franchisee, the most important factor is usually the size of the market or value of the service developed by the franchisor.

Considerations for Franchisees

If you are considering buying a franchise, use great caution. Make sure that you carefully read the circular provided by the franchisor. Also, carefully review the proposed franchise agreement.

Are you provided a territory exclusively so that new franchises can't take your business?

Must you participate actively in the business or can you be an "absentee owner"?

Can you transfer the franchise to someone else?

What are the conditions for terminating and renewing the agreement?

Does the franchisor have a recognised, protected trademark that you can use?

Talk to other franchisees about the pros and cons of the business and what it is like to deal with the franchisor. Be particularly wary of promises of great earnings.


Product Marketing

Product marketing is to establish and maintain the most cost effective, efficient and profitable method of distributing products to customers. Determining the best channel of distribution for a product involves an analysis of start-up costs, size of the potential customer base, potential sales volume, cost of shipping and size of the geographic territory. Finding the best method may involve a process of trial and error, or modeling the method of distribution after an industry leader.

Sales Force

The simplest method for selling products to customers is to employ a sales force that deals directly with the ultimate customer, and then to ship the goods and bill directly to that customer. Unfortunately, this method involves a substantial investment in a direct sales force. If there are many potential customers, the large geographic area and/or broad product lines, a direct sales force may not be possible. When involving in direct marketing , the relevant provisions namely S.34 under the Personal Data (Privacy) Ordinance has to be observed.

Distributors and Independent Sales Representatives

Many small businesses instead elect to market their products through independent firms. These independent firms can roughly be divided into two groups: A distributor is an individual or company that purchases goods from a manufacturer and then resells them to another company in the chain of distribution, such as a dealer or retailer. The other channel is through an independent sales representative (sometimes called a sales agent or manufacturer's representative). Unlike the distributor, the sales representative does not purchase the manufacturer's product. Instead, the sales representative calls on customers, solicits orders, and is paid a commission when the sale is completed.

Because a distributor actually purchases the goods from the manufacturer and carries an inventory, the credit worthiness of the distributor is extremely important. An independent representative, on the other hand, does not purchase the goods or maintain an inventory. Because the sales representative simply solicits the orders from the ultimate customer, the customer's ability to pay becomes more important than the sales representative's.

There are many variations on these two basic methods of product marketing. Most commonly, there are often additional parties involved in the chain of distribution. Many manufacturers of consumer goods sell to distributors, who in turn sell to dealers or retailers. In some cases, particularly with high tech hardware and software products, a distributor may modify or enhance the product before resale. Dealings with these "value-added resellers" can become complicated, as issues of protection of intellectual property and responsibility for defective products come into play.


Restrictions on Resale of Goods

Restricting Distributors

Frequently, a manufacturer or supplier desires to place restrictions on its distributor's ability to freely resell the manufacturer's or supplier's goods. For example, a manufacturer may insist that a distributor sell or not sell to certain customers, in certain areas, at certain locations, or in a "primary area of responsibility". These restrictions can be enforced by the manufacturer through cutting off supplies of goods, terminating the distributor or dealing more favourably with other distributors.

Like exclusive distributorships, the law generally permits restrictions on the distributor's ability to resell the products.

Resale Price Maintenance is not Prohibited

"Resale price maintenance" is not unlawful in Hong Kong. Resale price maintenance involves the direct or indirect requirement by a manufacturer that its distributor or dealer resell the goods at a minimum set price or price level.


Restrictive Trade Practices in General

The management of whatever scale and nature of business has to be minded about the legal aspects in respect of the operation of the business.

Several legal concepts are particularly relevant to technology oriented enterprises, such as Internet platform solutions providers, supplier of proprietary contents. A valuable part of the business of a technology enterprise is based on its intellectual capital. Intellectual capital is characterised by its intangible nature. Protection of such intellectual capital requires a clear understanding of various trade or business protection concepts. These concepts are like exclusive dealings, exclusive rights underlying exclusivity and matters on business arrangement like franchising.