Hong Kong Competition Commission Considers Request to Exempt Trade Association Survey from Competition Ordinance
May 6, 2019
The Hong Kong Association of the Pharmaceutical Industry (HKAPI), a trade group made up of the world’s largest pharmaceutical companies, recently asked the Hong Kong Competition Commission to exempt its quarterly sales survey from Hong Kong’s Competition Ordinance.[1] The Association suspended its long-running survey—which aims to collect and distribute data regarding prescription and over-the-counter (OTC) drug sales in Hong Kong and Macau—when the Competition Ordinance took effect in December 2015. The Association argues that reinstating the survey will enhance economic efficiency, making it easier to allocate stock and introduce new products, among other benefits. While the application is still pending, Hong Kong’s Consumer Council, the government’s consumer watchdog, has raised concerns about the request.
I. The Association’s Application
For many years, the Association conducted a survey in which it collected and distributed information regarding pharmaceutical sales in Hong Kong and Macau. Its application seeks to reinstate the practice, collecting data on a quarterly and voluntary basis from participating companies—both member and non-member companies—regarding (1) total sales by individual company; (2) total sales by individual company for “prescription” drugs; (3) total sales by therapeutic class, sub-divided by categories, “prescription” and OTC; (4) sales by individual company for particular therapeutic classes; and (5) sales by individual company for particular products. The resulting data would be compiled, processed, and aggregated, and then distributed for a fee.[2] Notably, the data would be historic and would not contain prices, volumes, stock keeping units, or patient numbers, only sales data by value.
The Association contends that the survey should be exempted from the Competition Ordinance because it will allow for a number economic efficiencies, including (1) better, more efficient allocation of stock for existing products; (2) easier introduction of new products; (3) enhanced marketing and distribution efforts; (4) greater investments in activities that will enhance patient welfare; and (5) development of public policy, academia, and research and development.
Hong Kong’s Consumer Council, however, has raised concerns about the survey. It argued that the “exchange and disclosure of sales value information at individual compan[ies] by name” warrants “competition concerns.”[3] The Council explained that, “Company sales value information should be competitively sensitive information because it could help companies identify competitively useful information.” Accordingly, any claimed benefits from the exchange of such information “should be more concrete,” including “quantifiable analyses and justifications” of consumer benefits.
II. Industry Surveys and Competition Law
The exchange of competitively sensitive information between competitors, including sales data, is generally prohibited under the Competition Ordinance. (First Conduct Rule (FCR) Guideline ¶ 6.39). If competitors exchange forward-looking prices and volumes, for example, the Commission would likely deem the exchange a violation having the object of harming competition. (FCR Guideline ¶6.40). But an exchange of less sensitive information can also have the effect of harming competition, and its lawfulness will depend on a number of factors, including the characteristics of the market, how the exchange occurs, and the type of information exchanged. The FCR Guideline, for example, explains that, “The exchange of historical, aggregated and anonymised data is less likely to harm competition, since the exchange of such information is unlikely to reduce independent decision-making by undertakings with regard to their actions in the market.”[4]
Importantly, the exchange of information between competitors need not be direct to violate the Competition Ordinance; it can also occur through a third party acting as a conduit (e.g. a trade association). And while the FCR Guideline recognises the legitimate and positive role trade associations can play, it also acknowledges their potential to facilitate unlawful activity when they “make or give effect to a decision of the association of undertakings which has the object or effect of harming competition.”[5] Absent an exemption, the Association’s sales survey would be a decision of an association of undertakings.
To this end, the FCR Guideline includes a hypothetical example that is relevant to the Association’s proposed sales survey. The Guideline explains that if competing firms hire an independent market research company to collate and publish aggregated information regarding unsold products, the Commission is unlikely to consider the agreement one with the object or effect of harming competition. (FCR Guideline #12, at ¶6.49). In its application, the Association insists that the data it will collect and disseminate is similarly innocuous.
III. Applications for Exclusion
When companies believe their conduct is legal or otherwise falls within the scope of an exclusion or exemption to the Competition Ordinance, they need not seek an opinion from the Commission. When companies are uncertain, however, Section 9 of the Competition Ordinance allows them to seek a Commission decision.[6] The Commission has published a Guideline[7] that provides detailed information on the application process.[8]
As relevant here, one of the general exclusions for which companies can seek a Commission decision relates to “agreements enhancing overall efficiencies.” To qualify, a number of cumulative conditions must be met. Indeed, the Commission will assess whether the relevant conduct: “(a) contributes to– (i) improving production or distribution; or (ii) promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit; (b) does not impose on the undertakings concerned restrictions that are not indispensable to the attainment of the objectives stated in paragraph (a); and (c) does not afford the undertakings concerned the possibility of eliminating competition in respect of a substantial part of the goods or services in question.” [9]
The Commission, however, need not address all applications raising this exclusion. Only applications that meet certain suitability factors—novel and unresolved questions as well as issues for which there is no clarification in the case law—must be addressed.[10] Ultimately, the onus to prove that the conditions for an exclusion are met rests on the applicant. In the case of the HKAPI, its application argues each factor is satisfied and sets out the key characteristics of the pharmaceutical industry in Hong Kong, which generally does not benefit from easily-available market data. The Commission is considering input from interested parties, and its decision will likely influence both future enforcement activities and trade association behaviour.[11]
[1] Available here.
[2] In particular into different sectors, namely government, private, trade and Macau.
[3] Available here.
[4] FCR Guideline ¶6.47. This guidance is similar to the approach in other jurisdictions, particularly the EU. See Communication from the Commission — Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements, OJ C 11, 14.1.2011, ¶55 and seq.
[5] FCR Guideline ¶6.54.
[6] The Commission previously rejected an application in which fourteen banks sought exclusion from FCR. See our alert, available here.
[7] Guideline on Applications for a Decision under Sections 9 and 24 (Exclusions and Exemptions) and Section 15 Block Exemption Orders, available here.
[8] All relevant documentation is availalbe here.
[9] Section I of Schedule I CO.
[10] See Exclusion or Exemption Guideline ¶6.4.
[11] The Hong Kong Competition Tribunal may also shed light on the efficiency defense, as defendants in two cases have argued that their purportedly unlawful conduct resulted in economic efficiencies. See CTEA2/2017, Competition Commission v. W. Hing Construction Company Limited and Others;CTEA1/2018, Competition Commission v. Kam Kwong Engineering Company Limited, Goldfield N & W Construction Company Limited, Pacific View Engineering Limited, Chan Kam Shui and Lam Po Wong.
This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Philip Monaghan, an O'Melveny partner licensed to practice law in England & Wales, Ireland, and Hong Kong, Scott Schaeffer, an O'Melveny counsel licensed to practice law in California and the District of Columbia, and Charles Paillard, an O'Melveny associate licensed to practice law in France and a registered foreign lawyer in Hong Kong, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.
© 2019 O’Melveny & Myers LLP. All Rights Reserved. Portions of this communication may contain attorney advertising. Prior results do not guarantee a similar outcome. Please direct all inquiries regarding New York’s Rules of Professional Conduct to O’Melveny & Myers LLP, Times Square Tower, 7 Times Square, New York, NY, 10036, T: +1 212 326 2000.