Resale Price Maintenance Under the Hong Kong Competition Ordinance—An Uneasy Compromise

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Mark Jephcott, Adelaide Luke, Lisa Geary, Molly Herron, Sep 30, 2015

The treatment of resale price maintenance under Hong Kong’s soon-to-be operational competition regime is a hot topic in the region.

RPM, the practice under which a manufacturer/supplier establishes fixed or minimum (or, in certain circumstances, maximum or recommended) resale prices that a distributor/retailer must observe when reselling the contract goods or services, is reported to be commonplace in Hong Kong. RPM can be achieved directly (for example, via a clause in a distribution agreement) or indirectly (for example, by fixing the level of discounts which a distributor may grant from a particular price level, applying penalties for failure to adhere to a prescribed resale price, and/or tying rebates or other benefits to adherence to a recommended resale price).

RPM is a subject that has engendered significant debate in recent years and has been subject to considerable scrutiny from competition authorities globally. However, the treatment of RPM and the level of enforcement activity do vary from jurisdiction to jurisdiction. In Taiwan, for example, RPM was considered to be per se illegal and has been the subject of extensive enforcement action in recent years. This hard-line stance can also be seen at the EU level, where RPM remains presumptively problematic (albeit with little enforcement activity by the EU Commission itself). At the other end of the spectrum, Singapore’s competition law contains a broadly worded exemption from the prohibition on anticompetitive agreements for vertical arrangements including RPM (albeit that this exemption is not absolute). Many other jurisdictions, such as the United States (at least at the federal level), adopt a “middle-ground” by subjecting RPM arrangements to a “rule of reason” effects-based assessment.

Hong Kong currently stands out as possibly the most developed economy in the world not yet to have a comprehensive competition law in force. Barring any last-minute legislative delays, this is expected to change on December 14, 2015 when the Hong Kong Competition Ordinance (“Ordinance”), which has been on the statute books for over three years, comes into full force.

Considerable interest has surrounded the treatment of RPM under the Ordinance’s prohibition on anticompetitive agreements (the First Conduct Rule) and the accompanying guidelines including the Guideline on the First Conduct Rule issued by the Hong Kong Competition Commission. During its consultations on earlier drafts of the Guideline, the Commission received numerous submissions expressing views on the appropriate treatment of RPM under the Guideline and the Commission has also apparently received a number of queries and complaints regarding RPM ahead of full implementation of the Ordinance.

The level of debate is broadly reflective of the multitude of views that exist among competition authorities, businesses, and legal/economic practitioners regarding RPM. It also demonstrates the importance of RPM in a small economy such as Hong Kong, which has a substantial focus on retail and distribution.

The purpose of this article is to outline the Commission’s stated approach to the assessment of RPM practices and to assess where the Hong Kong regime (as reflected in the Guideline) would appear to sit on the worldwide spectrum of RPM enforcement. It also considers the practical implications of this approach for Hong Kong businesses, and businesses that operate regionally in Asia Pacific.