Marketing Ethics in Hong Kong: Consumer Rights and Trade Practices

1. 6 Lecture Marketing, Advertising and Product Safety IBBA361 Business Ethics and Corporate Governance Department of Business AdministrationS.Chan Reference: Chapter 10, “Ethics and the Conduct of Business”,John R. Boatright Consumer Council website

2. Marketing Ethics Ethical framework for marketing in American society (bill of rights for consumer): Fairness: The right to be provided with adequate information about products Freedom: The right to have a voice in the marketing of major marketing decision; Well-being:The right to be protected from harmful products Freedom & well-being: The right to be offered a choice that includes the products that consumers truly want.

3. Marketing Ethics in Hong Kong I Consumer rights in Hong Kong: The right to satisfaction of basic needs; The right to safety The right to be informed The right to choose The right to be heard The right to redress The right to consumer education The right to a healthy and sustainable environment

4. Marketing Ethics in Hong Kong II http://www.consumer.org.hk/website/ws_en/competition_issues/model_code/2006100401.pdf Trade Practice Rules Complaint Handling Rules Fair Competition Rules

5. Marketing Ethics in Hong Kong II I) Trade Practice Rules false trade descriptions (虛假或誤導性商品說明) misleading omissions (誤導性遺漏), aggressive commercial practices (具威嚇性的營業行為), bait advertising (餌誘式廣告宣傳), bait-and-switch (先誘後轉銷售行為), and wrongly accepting payment (不當地接受付款)

6. False Trade Descriptions(虛假或誤導性商品說明) • It is an offence if traders supply or offer to supply any goods or services to which a false trade description is applied, or apply a false trade description to any goods or services that are supplied or offered to be supplied to consumers.

7. Misleading omissions (誤導性遺漏) • It omits or hides material information, or provides material information in a manner that is unclear, unintelligible, ambiguous, or untimely, or fails to identify its commercial intent (unless this is already apparent from the context); and as a result, it causes or is likely to cause, the average consumer to make a transactional decision that he would not have made otherwise.

8. Aggressive commercial practices (具威嚇性的營業行為) • A commercial practice engaged by a trader in relation to a consumer is aggressive if, in its factual context, it significantly impairs or is likely significantly to impair the average consumer’s freedom of choice or conduct in relation to the product concerned through the use of harassment, coercion or undue influence; and it therefore causes or is likely to cause the consumer to make a transaction decision that consumer would not have made otherwise. • E.g. “We will not let you go unless you have paid for them!”

9. Bait advertising (餌誘式廣告宣傳)http://www.legislation.gov.hk/blis_ind.nsf/CurChinOrd/54A907FC21D1E1F048257BAC002A556F?OpenDocument • Advertising by a trader of products for supply at a specified price is bait advertising if (having regard to the nature of the market in which the trader carries on business and the nature of the advertisement) there are no reasonable grounds for believing that the trader will be able to offer for supply those products at that price in reasonable quantities and for a reasonable period; or the trader fails to offer those products for supply at that price, for a reasonable period, and in reasonable quantities. • E.g. advertisement on the display window stating, “Huge sale on plane tickets, HK$999 direct flight to Hokkaido, for today only.” “We want to purchase the HK$999 direct flight ticket to Hokkaido.” The staff replied, “We’re sorry, the ticket was sold out.” “The travel agency has just opened for business for 5 minutes, the tickets run out this quickly?” The staff responded, “Well, that’s the case. We only offer 1 ticket at each outlet.”

10. Bait-and-switch (先誘後轉銷售行為) • The making by a trader of an invitation to purchase a product at a specified price is a bait and switch if, having made the invitation, the trader then, with the intention of promoting a different product, refuses to show or demonstrate the product; refuses to take orders for the product or deliver it within a reasonable time; or shows or demonstrates a defective sample of the product.

11. Wrongly accepting payment (不當地接受付款) • A trader wrongly accepts payment if at the time of accepting payment for the product, he intends not to supply the product or intends to supply a product that is materially different from the product, or there are no reasonable grounds for believing that the trader would be able to supply the product within the specified period or a reasonable period.

12. Marketing Ethics in Hong Kong II II ) Handling Consumer Complaints Independency and Impartiality Transparency Visibility Affordability Speed and Timeless Competence of Appropriate Officers Accessibility/ Ease of use Security

13. Marketing Ethics in Hong Kong II III ) Fair Competition Rules 甚麼是競爭法？ 競爭法的主要目的為禁止妨礙、限制或扭曲在香港的競爭的行為；提高經濟效益和促進自由貿易為目的，從而保障消費者利益。在2014年，競爭法草擬指引出現，指引主要針對行業協會的反競爭行為，包括組織的章程及決議，甚至無約束力建議。當中提到專業機構和行業協會等組織，如果提出影響會員市場行為，例如價格的決定，即使不是強制性，亦有機會違反《競爭法》。而在2012年通過的競爭法中，則主要禁止三大類反競爭行為，禁止業務實體之間直接或通過行業協會或貿易協會作出任何具有妨礙、限制或扭曲競爭的目的或效果的協議及其他經協調做法，濫用市場權勢，以及只適用於電訊行業的反競爭行為。

14. Reference • Competition Commission http://www.compcomm.hk/en/index2.html 概覽 • 立法會在2012年6月14日通過《競爭條例》（《條例》）。 • 《條例》旨在禁止和阻遏各行業的業務實體作出其目的或效果是妨礙、限制或扭曲在香港的競爭的反競爭行為。《條例》訂有概括條文，禁止三大類反競爭行為，《條例》稱之為第一行為守則、第二行為守則和合併守則，三者統稱為「競爭守則」。 • 第一行為守則禁止業務實體之間訂立或執行其目的或效果是妨礙、限制或扭曲在香港的競爭的協議、決定或經協調做法。 • 第二行為守則禁止在市場中具有相當程度市場權勢的業務實體，藉從事目的或效果是妨礙、限制或扭曲在香港的競爭的行為，而濫用該權勢。

15. Fair Competition Rules • First Conduct Rule (Conduct substantially lessening Competition) • Second Conduct Rule (Abuse of Dominant Position)

16. First Conduct Rule(第一行為守則) • An undertaking (業務實體) must not: • Make or give effect to an agreement; • Engage in a concerted practice (經協調做法); or • As a member of an association of undertakings, make or give effect to a decision of the association, If the object or effect is to prevent (妨礙), restrict (限制) or distort (扭曲) competition in HK

17. First Conduct Rule(第一行為守則) • Captures agreements/conduct and businesses outside HK if there is an object/effect in HK • Object restriction: the type of agreement is so harmful that it is not necessary to prove any effect on competition (e.g. “serious anti-competitive conduct”)

18. First Conduct Rule – Non-Price Vertical Restraints Restrictions on distributors • Non-price vertical restraints include • Product • Customers • territories • Distribution arrangement often include one or more of these restraints • These types of vertical restraints are generally not per se illegal – require assessment • High risk where company is dominant Restrictions on suppliers • Vertical restraints may sometimes be imposed on a supplier by a customer • Restraints on selling to other customers at all • More limited restraints preventing supply to a customer’s competitors • Most likely to raise concerns where • Customer is in a dominant position • Access to supply of relevant product is limited

19. First Conduct Rule – Territorial Restrictions • Brand owner wants to appoint exclusive distributor for different territories or for different customers/sales channels

20. First Conduct Rule – 4 Cardinal Sins – Serious Anti-Competitive Conducts 嚴重反競爭的行為

21. First Conduct Rule – Pricinghttp://www.compcomm.hk/tc/usefulresources_competition_1.html • Price fixing is when competitors agree on pricing rather than competing against each other. This includes agreeing to prices, a formula to calculate prices / margin or elements of a price such as  discounts, rebates, promotions or credit terms. • Price fixing can occur verbally or in writing – agreement can be by a 'wink and a nod', made over a drink, price fixing can occur at an association meeting or at a social occasion. • In a competitive market, each competitor should make price decisions independently. Anything that removes price uncertainty between competitors risks being a form of price fixing which hurts consumers and other businesses. • Price fixing increases prices and reduce quality of the products sold.  Under the Competition Ordinance, it is a serious anti-competitive conduct.

22. First Conduct Rule - Pricing • Brand owner wants to tell its distributors/franchisee/retailers that they should sell at the “recommended retail price” or include a provision allowing for termination in the event that they do not comply • Effect on franchise, direct marketing?, e.g. 7-11 , Herbxlxfe, NxSkin… etc

23. First Conduct Rule • If conduct is classified as “serious anti-competitive conduct”: • The exclusion from the First Conduct Rule for agreements of lesser significance does not apply. The exclusion would otherwise apply to: • Arrangements between undertakings whose combined annual worldwide turnover for the turnover period does not exceed HK$200M • Decisions of associations of undertakings if the turnover of the association for the turnover period does not exceed HK$200M

24. First Conduct Rule • The Commission does not have to issue a Warning Notice before bringing proceedings in the Tribunal. • If the Commission believes the First Conduct Rule has been contravened and the conduct is not serious anti-competitive conduct, the Commission must issue a Warning Notice to the undertaking, giving it an opportunity to alter the conduct within a specified period.

25. First Conduct Rule Object restrictions • The four types of serious anti-competitive conduct • Resale Price Maintenance (RPM) • Supplier sets fixed or minimum resale price charged by reseller • “You must charge HK$100” • “You must charge at least HK$100” • Information exchange – future price and quantities • Group boycotts Effect restrictions • Does the conduct in question have an anti-competitive effect? As a result of the agreement, can the parties profitably increase price, or reduce output, product quality, product variety or innovation?

26. First Conduct Rule - RPM • Resale price maintenance (RPM) is illegal in nearly all countries • General rule is that resellers must be free to set their own resale prices • Recommended resale prices are usually allowed BUT: • Must not be binding; and • No pressure or incentive or “penalty” on reseller to comply • Monitoring a distributor’s prices legitimate: but cannot be used to implement indirect RPM

27. First Conduct Rule Example : Fixing resale prices • NailCo, a manufacturer of nails and screws sells its products in HK through independent retail stores • It requires each of the stores to sell its products at a price stipulated by NailCo • Reason: this ensures an orderly market and avoids customer confusion as a result of differing prices across HK. • NailCo claims the arrangement affords retailers a healthy profit margin

28. First Conduct Rule Assessment • The Commission considers this to have the object of harming competition. • NailCo’s justifications would be unlikely to satisfy the Ordinance’s requirements for the economy efficiency exclusion to apply. • Price is the key parameter of competition and price competition is central to the regime established by the Ordinance.

29. First Conduct Rule Practical tips on pricing • Remember the rule covers: • Agreements and discussions • On prices, margins, discounts and rebates • Discussion of pricing information with competitors • Reach any agreement/informal understanding with competitors on any aspect of price policies • Impose fixed or minimum resale prices Issue to be aware of: • Procurement (joint buying/selling) • Joint venture agreements

30. First Conduct Rule Example : Information exchange • A trade association for junk owners collects and circulates information to its members on their respective proposed future prices. • This includes information as to the proposed prices for specific journeys. • The information is not made available to the public and is circulated in advance of a seasonal price review by the association members.

31. First Conduct Rule Assessment • The Commission would consider this arrangement as either an agreement or concerted practice with the object of harming competition. • The information exchange allows the junk owners to adjust their future pricing to reflect the proposed pricing of competitors and thus reduces price competition in the market. • The information exchange arrangement is an indirect form of price fixing.

32. First Conduct Rule • In determining whether there is an agreement, the Commission will generally seek to determine whether there is a “meeting of minds” between the parties concerned. • Agreement under the First Conduct Rule may exist no matter whether there has been a physical meeting of the parties. • An agreement may be formed through, for example, an exchange of letters, emails, SMS, instant messages or telephone calls.

33. First Conduct Rule • An undertaking may be found to be party to an agreement or, in the alternative a concerted practice, if it attended a meeting at which an anti-competitive agreement is reached and it failed to sufficiently object to, and publicly distance itself from, the agreement or the discussions leading to the agreement. • This may be the case regardless of whether it played an active part in the meeting or intended subsequently to implement the agreement.

34. First Conduct Rule • A concerted practice is a form of cooperation, falling short of an agreement, where undertakings knowingly substitute practical cooperation for the risks of competition.

35. First Conduct Rule • The Commission will likely conclude that there exists a concerted practice with the object of harming competition where competitively sensitive information such as an undertaking’s planned prices or planned pricing strategy is exchanged between competitors in circumstances where: • The information is given with the expectation or intention that the recipient will act on the information when determining its conduct in the market; and • The recipient does act or intends to act on the information.

36. First Conduct Rule Example for concerted practice • Each calendar quarter, a number of private language schools in Hong Kong complete a survey, organised by one of the schools, which requests the schools to provide detailed information on their intended fee increases for the following quarter. • The results of the survey are then distributed to each school that participated in the survey before the schools finalising their respective fee arrangements for the next quarter. • The results of the survey show the proposed future fees for all participating schools by name.

37. First Conduct Rule • Assuming there is no evidence of an agreement, the Commission would consider the language schools’ behaviour as evidence of a concerted practice. • In a competitive market, each language school would make its fee decisions independently. • Independence would result in a range of fee levels at the different schools, and a variety of options for students in terms of price. • But the concerted practice has the effect of removing all uncertainty between the schools as to their respective fee-setting policies. This conduct harms competition and leads to higher prices.

38. First Conduct Rule Group Boycott • A group boycott is a type of secondary boycott in which two or more competitors in a relevant market refuse to conduct business with a firm unless the firm agrees to cease doing business with another competitor. • It is a form of refusal to deal, and can be a method of shutting a competitor out of a market, or preventing entry of a new firm into a market. • Any company may, on its own, refuse to do business with another firm, but an agreement among competitors not to do business with targeted individuals or businesses may be an illegal boycott, especially if the group of competitors working together has market power. • E.g. rumours among Coca Cola, Park’n, 759 Shop

39. First Conduct Rule Practical tips on information exchange • Confidential and commercially sensitive information should not be revealed to a competitor • Pricing and volume data (future particularly sensitive) • Capacity • Costs • Commercial strategy • You can gather publicly available data • Certain types of information considered less sensitive: • Historic, aggregated or anonymized data • Issues of general industry interest • Information on lobbying

40. First Conduct Rule Practical tips on trade associations • Trade associations should have a well-defined items in the agenda • Consider the agenda before attending • Make sure minutes are kept • Do not volunteer any information regarding your likely future conduct to a competitor • If a competitor reveals competitively sensitive information to you: • Stop the meeting and note your concerns • If the conversation continues, leave and ask that your absence be noted • Inform the company secretary/legal team of your concerns

41. First Conduct Rule EU example: Bananas • Bilateral weekly calls between importers on current market conditions • Forward looking information including quotation prices, weather conditions, and stocks • Dole - €45.6M fine; Del Monte - €14.6M fine • Appeal rejected (arguing this was merely market gossip, not part of broader price-fixing cartel and not serious restriction of competition) UK example: RBS/Barclays • RBS unilaterally disclosed generic/specific future pricing information (relating to loan pricing) to Barclays employees over 6 month period • Barclays ‘blew the whistle’ • £28.59M fine for RBS

42. Second Conduct Rule(第二行為守則) An undertaking (業務實體) that: • Has a substantial degree of market power (具有相當程度市場權勢) • In a market Must not • Abuse (濫用) that power • By engaging in conduct That has as its object or effect the prevention (妨礙), restriction (限制) or distortion (扭曲) of competition in HK. • Market definition: each market has a product and geographic dimension

43. Second Conduct Rule - Assessment of SMP • A substantial degree of market power (SMP) arises where an undertaking does not face sufficiently effective competitive constraints in the relevant market. • Substantial market power may also be the ability profitably to charge prices above competitive levels, or to restrict output or quality below competitive levels, for a sustained period of time (2 years). • However, the relevant period may be shorter or longer depending on the facts, in particular with regard to the product and the circumstances of the market in question.

44. Second Conduct Rule - Assessment of SMP • The definition of a substantial degree of market power does not exclude the possibility of more than one undertaking having a substantial degree of market power in a relevant market, particularly if the market is highly concentrated with only a few large market participants.

45. Second Conduct Rule - Assessment of SMP • An undertaking in a competitive market may be able temporarily to raise its price above the competitive level, but it will be unable to sustain such a price increase because customers will switch to cheaper suppliers or additional suppliers will enter the market. • If an undertaking can profitably charge prices above competitive levels over a sustained period (i.e. 2 years), it can be considered to have a substantial degree of market power.

46. Second Conduct Rule – Assessment of SMP • Market power is a matter of degree. • The degree of market power possessed by an undertaking will be assessed based on the circumstances of the case. • An undertaking does not need to be a monopolist (壟斷者) to have a substantial degree of market power. • When assessing whether an undertaking has a substantial degree of market power, the Commission will consider the extent to which that undertaking faces constraints on its ability profitably to sustain prices above competitive levels.

47. Second Conduct Rule – Assessment of SMP • The Ordinance considers the following non-exhaustive list in determining whether an undertaking has a substantial degree of market power: • The market share of the undertaking; • The undertaking’s power to make pricing and other decisions; • Any barriers to entry to competitors into the relevant market; and • Any other relevant matters.

48. Second Conduct Rule – Market Share • Turnover or sales value data. • Sales volume data. • Capacity. Market shares may be determined by measuring an undertaking’s capacity to supply the relevant market. • Other indicators. Market share might also be calculated by reference to, for example, product reserves held, customer base or share of new customers.

49. Second Conduct Rule – Potential Entry or Expansion • Regulatory and legal barriers (such as licensing requirements); • Structural barriers (such as significant economies of scale and/or scope, or network effects); and • Strategic barriers intentionally created or enhanced by incumbent undertakings in the market.

50. Second Conduct Rule • Competition rules apply to unilateral conduct by an undertaking with substantial market power (SMP) • No need for agreement with another party • Companies in a strong market position may be regarded as having substantial market power if they have the ability profitably: • To charge prices above competitive levels; or • To restrict output or quality below competitive levels for a sustained period of time (normally 2 years) • In EU, a company is unlikely to have SMP if their market share is below 40% (no indicative thresholds in HK) • Have SMP is not itself unlawful but imposes special responsibilities