The Diesel Cases: Hiving Off a Competition Defence to the Competition Tribunal? Procedural Considerations at the Case Management Stage

14 June 2019

Taching Petroleum Company Limited v Meyer Aluminium Limited (unreported, CTA 1/2018 & CTA 2/2018, [2019] HKCT 1, 22.2.2019)

and

Taching Petroleum Company Limited v Meyer Aluminium Limited (unreported, HCA 1929/2017 & HCA 1069/2018, [2019] HKCFI 515, 22.2.2019)

This is the first case in which a competition law defence was raised in a civil litigation, culminating in interesting and novel issues on both procedural and substantive fronts.

Background

The Plaintiffs in CTA 1/2018 and CTA 2/2018 are Taching Petroleum Company Limited (“Taching”) and Shell Hong Kong Limited (“Shell”) respectively. Taching and Shell respectively sold industrial diesel oil to the defendant, Meyer Aluminium Limited (“Meyer”). Each commenced a High Court Action (the “HCAs”) against Meyer for the outstanding price for the industrial diesel oil supplied. Meyer’s defence in the HCAs was that Taching and Shell  breached the First Conduct Rule under the Competition Ordinance, Cap. 619 (“CO”), by colluding to fix prices and/or, exchange pricing information.

Since Meyer’s defence raised a competition law issue, the issue was transferred to the Competition Tribunal (the “Tribunal”) for determination in CTA 1/2018 and CTA 2/2018 (the “CTAs”).

The parties, in October 2018, submitted a draft confidentiality protocol (the “Confidentiality Protocol”) but could not agree on whether Meyer’s in-house non-legal representatives should be included in the confidentiality ring.

Upon the Tribunal’s direction, Meyer issued a series of summonses asking that (a) no confidentiality ring be established, or (b) Meyer’s non-legal representatives be included in the confidentiality ring. At the hearing, Counsel for Meyer clarified that Meyer was only seeking an order in terms of item (b).

Shell sought a redaction of part of Shell’s points of reply (“POR”) concerning Shell’s confidential list price policy as against both Meyer and Taching, so as to prevent such confidential information from getting into the market.

The applications were heard before the Honourable Madam Justice Au-Yeung (Deputy President of the Competition Tribunal) at a recent CMC hearing, during which the issue of whether the HCAs should be stayed pending resolution of the CTAs was also ventilated.


Issues Arising at the Case Management Stage

After the CMC hearing, the Hon Au-Yeung J handed down two judgments relating to the following issues:

1. The redaction of part of the Plaintiff’s POR in CTA 2/2018;

2. The Defendant’s application to have 2 of its in-house non-legal representatives included in the confidentiality ring;

3. Whether the HCAs should be stayed pending resolution of the CTAs.

Members of the Confidentiality Ring

The Tribunal examined the relevant authorities and summarised the legal principles governing the establishment and membership of a confidentiality ring.

There is no dispute that the Tribunal has power to impose a confidentiality ring, but confidentiality rings are the exception rather than the rule.

The onus is on the party seeking to show that the case is sufficiently exceptional to justify restrictions on disclosure to the litigant on the other side, notwithstanding onerous undertakings as to confidentiality and the like, rather than on the party, who is prima facie entitled to see the documents, to justify its entitlement to access.

Zero Sum Game?

It is recognized in competition law that one man’s market advantage is invariably another’s market disadvantage. In other word’s it can be zero sum game. If employees of the parties (including in-house legal advisers) or experts engaged by them have access to confidential information of an opponent, it would be extremely difficult, if not impossible for them to “unlearn” it.  It would create a serious risk of such confidential information getting into the market to the detriment of the party disclosing it.

If a confidentiality ring is necessary, a staggered approach should be adopted so that the disclosure of confidential information may initially be made to external legal advisers and, if appropriate, to experts. Typically, the interested person, including in-house lawyers, will be excluded from membership.  Signed undertakings will be given by members of the ring to maintain confidentiality of the information and/or provide an undertaking to pay damages for breach of the undertaking.

The Tribunal also recognized the benefit of setting up a confidentiality ring: “After the disputed issues are fully crystallized and the lawyers have inspected the documents, the relevance of the documentary evidence emerges with greater clarity. The lawyers can form a view as to whether individuals from the clients need to see some or all of the documents and make a ‘much more focused application for disclosure’ at a later stage.” (para 27)

Further, the Tribunal should also be vigilant in respect of the following:

1. Confidentiality undertakings are difficult to police and enforce.  It would be difficult for a party to prove that an undertaking was breached when market rumours are frequently spread around by industry players in private.

2. The commercial harm is often difficult to quantify, for it is virtually impossible for the harmed party to estimate the extent of advantage gained by other market players.

3. The party in breach of the confidentiality undertaking may be a relatively small enterprise who may not have sufficient resources to meet any claim for damages.

In the present case, the Tribunal was not satisfied that Shell had discharged its burden of showing why Meyer’s suggested restriction on access to 2 non-legal in-house representatives was not sufficient. Shell has not filed an affidavit to show eg why the 2 employees of Meyer were not appropriate persons to have access, or what potential and significant harm could be caused to Shell if any employee of Meyer were included in the ring, or that Meyer would not be able to meet a claim for damages for breach of the undertaking as to confidentiality. Shell had not even alleged that all documents claimed to be confidential fell within the List Price Policy.

In the circumstances, the Tribunal granted Meyer’s request to include 2 named employees as members of the confidentiality ring.

The Tribunal also made it clear that the decision would not affect the confidentiality of any specific document. This meant that the parties were free to apply for or contest confidentiality treatment in respect of specific documents in the future.

Redaction of Shell’s POR

Shell was concerned that the widening of the confidentiality ring may cause its confidential list price policy to be disclosed to Taching and Meyer, culminating in further disclosure by Taching and Meyer to other market players, which would have a significant adverse impact on Shell’s legitimate commercial interests.

Having read the unredacted POR in full, the Tribunal was of the view that Shell’s concern was justified as against Taching, a competitor. However, the Tribunal was not satisfied that Shell had made out its case as against Meyer, who was not a competitor.

Counsel for Shell submitted that it was not sufficient just to say that Meyer was not a competitor - as Meyer might disclose the confidential information to Shell’s competitors in the market. It was argued that there was a need to prevent the confidential information from getting into the market.

The Tribunal rejected Shell’s arguments. The Tribunal did not consider it likely that Meyer’s in-house non-legal representatives would be put in a position to exploit the relevant information to Meyer’s advantage.

The Tribunal placed weight on the fact that Meyer had voluntarily limited itself to having only 2 employees within the confidentiality ring, with an express undertaking as to confidentiality. In addition, Shell had not discharged its onus to show why it was necessary to further restrict a party’s access to the pleading.

In the circumstances, the Tribunal gave retrospective leave to Shell to redact the POR as against Taching, but not Meyer.

No Stay of the HCAs

In a separate judgment handed down in the HCAs, Hon Au-Yeung J dealt with the procedural issue of whether there should be a stay of the HCAs pending resolution of the competition issue in the Tribunal.

The Court considered the general rule that all issues in a case should be tried at the same time, which should apply notwithstanding the fact that competition issues are involved and are hived off to the Tribunal.

The pleadings in this case disclosed that the only issue on liability was whether, by reason of the breach of the First Conduct Rule in the CO, the relevant agreements for supply of industrial diesel oil between Shell/Taching and Meyer was tainted with illegality and unenforceable against Meyer.

The Court found that the issues of illegality and unenforceability in the HCAs had no independent existence from the competition defence in the Tribunal. The Court therefore considered that all issues on liability must be tried together with the CTAs.

On the issue of quantum, Meyer argued that it should be tried separately because it would only have a cause of action after the Tribunal had found a contravention of the First Conduct Rule.

The Court refused such an argument on the basis that, as a matter of law, a future cause of action cannot support a defence to a present claim. There was therefore no basis for ordering a split trial.

In the premises, the Court ordered that the HCAs and the CTAs should be tried together before the same judge constituting the Tribunal.

Key Takeaways

     The Court will take a flexible and practical approach to solving procedural issues at the case management stage. Where the competition issue is hived off from a High Court action, the Court may order that the High Court action be tried together with the competition proceedings unless there are good reasons not to do so.

     The Tribunal recognizes the usefulness of the mechanism of the confidentiality ring. The Tribunal will take a practical and staggered approach to the setting up and composition of a confidentiality ring. The issue of whether employees of a party should be included in the confidentiality ring is a fact-sensitive issue that has to be determined in light of all the relevant circumstances.

     If a party wishes to restrict access to its pleading and/or certain documents on the basis of confidentiality, it is important for that party to show the justification for such confidential treatment by way of affidavit evidence.

 

This case note is authored by Catrina Lam and Cherry Xu.

Catrina Lam and Cherry Xu appeared on behalf of Taching, the Plaintiff in CTA 1/2018 and HCA 1929/2017.

 

 

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