Occasional Papers | Public administration and legal system | 2016-03-09

Is Hong Kong ready to enact consumer class actions?

The monopoly of retail giants, leaving consumers without too many options but obligations, is a phenomenon some citizens in the city are facing every day. The Competition Ordinance came into full effect in December 2015 might help, but to what extent?

The Bauhinia Foundation Research Centre (the Centre) today released a new edition of Occasional Paper ‘Can David Police Goliath? Effects of Consumer Class Action on Market Competition in Hong Kong’, which aims to preview the effects of the proposed class action reform on enforcing competition law in Hong Kong. It will explore the legal, economic, and social factors that may impact a consumer’s and, in turn, a class’s decision to sue a business for anticompetitive behaviour.

The Competition Ordinance limits the scope of private class actions

In May 2012, the Law Reform Commission proposed that an opt-out approach of class actions could be adopted in Hong Kong, and recommended phasing the implementation of a class action regime by starting with consumer cases. However, the final decision has been pending for more than three years even after the Competition Ordinance came into full effect.

The opt-out system of class actions is supposed to grant greater power to individual consumers as they can aggregate smaller claims into one large lawsuit without seeking approval from each and every member of the class.

Under the current Competition Ordinance, private class action is permitted in a very narrow set of circumstances. Individual consumers are banned from initiating stand-alone competition lawsuits. Besides, the Competition Commission has the sole authority to file lawsuit on grounds of anticompetitive behaviour. In addition, the Ordinance explicitly states that this limitation could not be altered by the proposed class action reform.

What private plaintiffs can do within the present legal framework is to bring follow-on actions, but only if the Competition Tribunal determines or the defendant admits that it violated the competition law. The Centre’s Chairman Dr Donald Li said, “Free competition is one of the cornerstones of Hong Kong’s social and economic development. Nonetheless, as the Competition Ordinance forbids most forms of private competition law claims, we doubt that private class action will happen. Even if it does, it will only have the effect of increasing penalties for an already guilty defendant but not police other types of potentially anticompetitive conduct.”

David needs funding to beat Goliath

Litigation in Hong Kong is comparably more expensive than other common law countries. In bringing private class action for competition claims, consumers will likely risk facing heavy litigation costs in return for meager and uncertain returns. Even if the class wins as a whole, some individuals may lose when the class members distribute the final reward among themselves. Conversely, the defendants are in a better position to make informed, well-calculated decisions about their litigation spending.

Admittedly, consumers may have access to existing legal aid systems and public legal funds to fund their litigation. However, the Consumer Legal Action Fund cannot adequately support impecunious consumers in large and expensive competition class action. This situation becomes more evident when compared with other public litigation financing funds in nearby legal systems.

Dr Donald Li said, “For example, the Securities and Futures Investors Protection Center (SFIPC) in Taiwan, a successful model for public litigation funds, is valued at 1.75 billion Hong Kong Dollars, over 80 times larger than that of the Consumer Legal Action Fund. This difference is especially striking given that litigation in Taiwan is not as expensive in Hong Kong owing to its civil law system. This endowment enables the SFIPC to effectively pursue class actions claims. ” By the end of 2014, the SFIPC was funding 84 pending class action litigations, covering over 93,000 investors. 

A lack of local expertise and deterrence

Hong Kong has not historically had competition law or class action system. While some large international law firms house few competition lawyers, they only deal with foreign competition law. The lack of experienced lawyers in competition law or class action will be a big concern. On the other hand, the public response on class action is still unclear since it is new in the public sphere.

Some firms may be very sensitive to reputational damages of a large-scale class action, and may want to avoid the risk of consumer litigation by any means. Such defendants are more likely to pay for settlement funds to the Competition Commission than explicitly admit to guilt. In virtue of a very low probability of facing class actions, the threat of private competition class actions will not serve as a big deterrence nor play a big role in the businesses’ defense strategy.

Whilst the legal reforms are loud, they are effectively toothless. Hong Kong is generally not considered to be a litigious society where mediation is severely preferred over litigation. The paper previewed that private competition class action is very unlikely to happen, since socioeconomic constraints strongly discourage it and the Competition Ordinance forbids most forms of private competition law claims. Consumers will have a marginal impact on firm behaviour even when armed with the proposed class action reform.

It is yet unclear if and what kind of class action system will be adopted in Hong Kong. The current proposals, however, may not do much. Hong Kong should further explore ways to encourage market participants to take better ownership over competition law enforcement rather than totally rely on the Competition Commission to take a proactive approach on the subject. More resources should also be allocated to the Consumer Legal Action Fund to enhance its legal assistance for local consumers.

Please refer to the Paper for details.


Occasional Paper