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Competition Tribunal Endorses Lump-Sum Approach for Penalty in First Bid Rigging Case

29 Jan 2021

On 16 December 2020, Mr. Justice Godfrey Lam, President of the Competition Tribunal, handed down a judgment in relation to the pecuniary penalties to be imposed on the parties in Competition Commission v Nutanix Hong Kong Ltd & Ors [2020] HKCT 11.

This judgment follows an earlier ruling in May 2019 ([2019] HKCT 2) where the Tribunal found that 4 IT firms (Nutanix, BT, Innovix and Tech-21) had contravened the First Conduct Rule by engaging in bid-rigging in connection with a tender exercise conducted by the YWCA for the supply and installation of a Nutanix hyper-converged server system.

The Commission had reached agreement with Nutanix, BT and Innovix pursuant to the procedure used in Competition Commission v Kam Kwong Engineering Co Ltd & Ors [2020] HKCT 3 in relation to the terms of the orders sought from the Tribunal. No agreement had been reached with Tech-21.

Key rulings

• The Tribunal emphasized that under the “Kam Kwong procedure”, the parties’ consent does not remove the need for the Tribunal to be satisfied that the penalty agreed is appropriate having regard to the circumstances of the case including the matters specified under section 93(2) of the Competition Ordinance. Once satisfied, however, the Tribunal should exercise a degree of restraint when scrutinizing the proposed settlement terms, particularly when both parties are legally represented and are able to evaluate the desirability of the settlement.

• While the 4-step “structured approach” laid down in Competition Commission v W Hing Construction Co Ltd & Ors [2020] HKCT 1 was adopted in determining the appropriate penalties to be imposed, the Tribunal departed from the previous methodology used by endorsing a “lump-sum approach” in determining the Base Amount for BT under Step 1, instead of using the Value of Sales (i.e. the value of the undertaking’s sales directly or indirectly related to the contravention in Hong Kong in the financial year in question).

• Two reasons were cited to justify the conclusion that it would not be practicable to use the Value of Sales in determining the Base Amount for BT: (1) BT did not generate any turnover from sales of any Nutanix hyper-converged server system and related services in the financial year in question; and (2) the Commission had examined BT’s Value of Sales in the preceding year but took the view that it did not reflect the actual scale of BT’s activities in the relevant product.

In determining the Base Amount under Step 1, the Tribunal accepted:

(a) A Gravity Percentage of 17%, a figure towards the lower of the range of 15% to 30% for serious anti-competitive conduct, having regard to the fact that the conduct was a “one-off” relating to a single tender and the overall circumstances of the case, including that there was no price inflation between the first and second tenders and there was no direct financial reward for the firms who put in the dummy bids.

(b) A Duration Multiplier of 1 because bid-rigging by its nature will often be very short in duration, while its harmful effects on competition may potentially last much longer. If the number of days on which the relevant conduct occurred is turned into a fraction of a year to be applied as a multiplier, the Base Amount will end up being inordinately small.

• For Step 2:

(a) An uplift of 40% was applied to the Base Amount for Nutanix to reflect its role as the leader or instigator in the contravention, in the sense that it took part in formulating the bid-rigging scheme and coordinated the dummy bids from the other respondents.

(b) A downward adjustment of 20% to the Base Amount was applied for Nutanix, Innovix and Tech-21 to take into account the fact that YWCA did not ultimately award a contract pursuant to the tainted tender.

(c) An uplift of 50% was applied to the Base Amount for Innovix as the resultant amount, if not further adjusted, would represent only a very small percentage of its total turnover for the relevant year. To ensure the effectiveness of the competition regime, the Tribunal accepted that specific deterrence was called for to deter Innovix from engaging in further anti-competitive practices.

• A Cooperation Discount was given to Nutanix, BT and Innovix at Step 4 on account of their cooperation at the penalty / costs stage of the proceedings by providing financial documents and information on a voluntary basis and agreeing to make a joint application to the Tribunal pursuant to the Kam Kwong procedure. BT received an additional discount for its cooperation during the investigation stage by assisting the Commission to access devices seized from BT’s premises and making submissions on factors such as relevant market structure.

Catrina Lam (led by Mark Hoskins QC) acted for the Competition Commission.