Competition Law-Anti Competitive Agreements and Abuse of Dominant Position

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June 19, 2019

The article discusses the important aspects and tenets of Competition Law. The Competition Law in India is envisages under the Competition Act, 2002.

ANTI- COMPETITIVE AGREEMENTS

The Act under Section 3(1) prevents any enterprise or association from entering into any agreement which causes or is likely to cause an appreciable adverse effect on competition (AAEC) within India. The Act clearly envisages that an agreement which is contravention of Section 3(1) shall be void.

How to determine AAEC?

The Act provides that any agreement including cartels, which-

  • Directly or indirectly determines purchase or sale prices;
  • Limits production, supply, technical development or provision of services in market;
  • Results in bid rigging or collusive bidding

Shall be presumed to have an appreciable adverse effect on competition in India

Proviso to Section 3 provides that the aforesaid criteria shall not apply to joint ventures entered with the aim to increase efficiency in production, supply, distribution, acquisition and control of goods or services.

Anti-competitive agreements are further classified into Horizontal agreements and Vertical agreements:

HORIZONTAL AGREEMENTS- Horizontal agreements are arrangements between enterprises at the same stage of production. Section 3(3) of the Competition Act, 2002 provides that such agreements includes cartels, engaged in identical or similar trade of goods or provision of services, which-

  1. Directly or indirectly determines purchase or sale prices
  2. Limits or controls production, supply
  3. Shares the market or source of production
  4. Directly or indirectly results in bid rigging or collusive bidding

Under the Act horizontal agreements are placed in a special category and are subject to the adverse presumption of being anti-competitive. This is also known as ‘per se’ rule. This implies that if there exists a horizontal agreement under Section 3(3) of the Act, then it will be presumed that such an agreement is anti-competitive and has an appreciable adverse effect on competition.

VERTICAL AGREEMENTS- Vertical agreements are those agreements which are entered into between two or more enterprises operating at different levels of production. For instance between suppliers and dealers. Other examples of anti-competitive vertical agreements include:

  1. Exclusive supply agreement & refusal to deal
  2. Resale price maintenance
  • Tie-in-arrangements
  1. Exclusive distribution agreement

The ‘per se’ rule as applicable for horizontal agreements does not apply for vertical agreements. Hence, a vertical agreement is not per se anti-competitive or does not have an appreciable adverse effect on competition.

The Act under Section 3 also prohibits any agreement amongst enterprises which materialize in:

  • Tie-in arrangement– According to the Statute it includes any agreement requiring purchaser of goods, as a condition of purchase, to purchase some other goods. In the case of Sonam Sharma v. Apple & Ors., the CCI stated that in order to have a tying arrangement, the following ingredients must be present:
  1. There must be two products that the seller can tie together. Further, there must be a sale or an agreement to sell one product or service on the condition that the buyer purchases the other product or service. In other words, the requirement is that purchase of a commodity is conditioned upon the purchase of another commodity.
  2. The seller must have sufficient market power with respect to the tying product to appreciably restrain free competition in the market for the tied product. That is, the seller has to have such power in the market for the tying product that it can force the buyer to purchase the tied product; and
  • The tying arrangement must affect a “not insubstantial” amount of commerce. Tying arrangements are generally not perceived as being anti- competitive when substantial portion of market is not affected.
  • Exclusive supply agreement- The Act defines such agreements to include any agreement restricting in any manner the purchaser in the course of his trade from acquiring or otherwise dealing in any goods other than those of the seller or any other person.
  • Exclusive distribution agreement- This includes any agreement to limit, restrict or withhold the output or supply of any goods or allocate any area or market for the disposal or sale of goods.
  • Refusal to deal- The Act states that this criteria includes agreement which restricts by any method the persons or classes of persons to whom the goods are sold or from whom goods are bought.

In the case of Shri Shamsher Kataria v. Honda Siel Cars India Ltd. & Ors concept of vertical agreements including exclusive supply agreements, exclusive distribution agreements and refusal to deal were deliberated by the Commission. The informant in the case had alleged anti-competitive practices on part of the Opposite Parties (OPs) whereby the genuine spare parts of automobiles manufactured by some of the OPs were not made freely available in the open market and most of the OEMs (original equipment suppliers) and the authorized dealers had clauses in their agreements requiring the authorized dealers to source spare parts only from the OEMs and their authorized vendors only. The Commission held that such agreements were in the nature of exclusive supply, exclusive distribution agreements and refusal to deal under Section 3(4) of the Act and hence the Commission had to determine whether such agreements would have an AAEC in India. The Commission held the impugned agreements in contravention of Section 3 of the Act and remarked that the network of such agreements allowed the OEMs to become monopolistic players in the aftermarkets for their model of cars, create entry barriers and foreclose competition from the independent service providers. The Commission further stated that such a distribution structure allowed the OEMs to seek exploitative prices from their locked-in consumers, enhance revenue margin form the sale of auto component parts as compared to the automobiles themselves besides having potential long term anti-competitive structural effects on the automobile market in India.

  • Resale price maintenance- It includes any agreement to sell goods on condition that the prices be charged on the resale by the purchaser shall be the prices stipulated by the seller unless it is clearly stated that prices lower than those prices may be charged.

In the case, Fx Enterprise Solutions India Pvt. Ltd. v. Hyundai Motor India Limited, the Informant had alleged that according to the agreement with Hyundai, dealers were mandated to procure all automobile parts and accessories from Hyundai or through their vendors only. While collaborating on alleged anti-competitive practices of Hyundai, the Informant stated that Hyundai imposed a “Discount Control Mechanism”, whereby dealers were only permitted to provide a maximum permissible discount and dealers were also not authorized to give discount beyond a recommended range, thereby amounting to “resale price maintenance” in contravention of Section 3(4)(e) of the Act. The CCI in the case observed that Hyundai through exclusive agreements and arrangements contravened provisions of Section 3(4)(e) read with Section 3(1) of the Act through arrangements which resulted into Resale Price Maintenance. The CCI while imposing penalty of INR 87 Crore on Hyundai noted that the infringing anti-competitive conduct of Hyundai in the case included putting in place arrangements, which resulted into Resale Price Maintenance by way of monitoring maximum permissible discount level through a Discount Control Mechanism and also a penalty mechanism for non-compliance of the discount scheme.

ABUSE OF DOMINANT POSITION

Section 4 of the Act prevents any enterprise or group from abusing its dominant position. The Act also provides circumstances under which there is abuse of dominant position. Section 4(2) prevents following acts resulting in abuse of dominant position:

  1. Impose unfair or discriminatory condition or price in sale and purchase of goods or services;
  2. Limit or restrict;
  • Production of goods or services
  1. Technical or scientific development relating to goods or services to the prejudice of consumers;
  • Indulges in practice resulting in denial of market access;
  1. Make conclusion of contracts subject to acceptance by other parties;
  2. Use its dominant position in one market to enter into other relevant market;

The Act also defines the concepts of dominant position and predatory pricing.

According to the Act, dominant position means a position of strength, enjoyed by an enterprise in the relevant market in India which enables it to:

  1. Operate independently of competitive forces in relevant market
  2. Affect competitors, consumers or relevant market in its favour

Predatory price means sale of goods or services at a price which is below the cost as may be with the view to reduce competition or eliminate competitors.

The term abuse of dominant position refers to anti-competitive business practices in which a dominant firm may engage in order to maintain or increase its position in the market.

Judicial Dicta 

What does dominant position imply?In the case of, Shri Neeraj Malhotra, Advocates v. North Delhi Power Ltd.  the CCI observed that Section 4 of the Act does not prohibit an enterprise from holding a dominant position in a market, it does place a special responsibility on such enterprises, in requiring them not to abuse their dominant position. The CCI further held that Section 4 does not contain an exhaustive list of activities that would amount to contravention of its provisions. The actions, practices and conduct of an enterprise in a dominant position have to be examined in view of the facts and circumstances of each case to determine whether or not the same constitutes an abuse of dominance in terms of Section 4 of the Act.

In substance, `dominant position’ means the position of strength enjoyed by an enterprise that enables it to act independently of competitive forces prevailing in the relevant market. Such an enterprise will be in a position to disregard market forces and unilaterally impose trading conditions, fix prices, etc. The abuse may result in the restriction of competition, or the elimination of effective competition.

How to examine dominant position of an enterprise?

In a recent case, the CCI while determining whether the OP (OLA) held a dominant position in relevant market or not remarked that abuse of dominant position under Section 4 would be attracted only when the entity under scrutiny holds a dominant position in the relevant market. CCI also elaborated on the concept of dominant position and stated dominant position as a position of economic strength enjoyed by the enterprise in the relevant market, which enables it to operate independently of competitive forces prevailing in the relevant market or affect its competitor or consumer or the relevant market in its favour. Such ability of the enterprise to behave independently of competitive forces needs to be assessed in light of all relevant circumstances and the factors enlisted under Section 19(4) of the Act. The CCI in the case while determining dominance of OLA took the following factors into consideration:

  • Market shares of OLA;
  • Its competitors in relevant markrt;
  • Annual and monthly number of trips in the relevant market during the period of investigation;

What is relevant market? 

While discussing the concept of dominant position, one of the most intriguing questions which lingers our minds what does relevant market connote? ‘Relevant market’ is one of the primary concerns while determining dominant position as well as abuse of dominant position by an enterprise.

Section 2(r) of the Act renders an exclusive definition for the term ‘relevant market’. It states that it means the market which may be determined by the Commission with reference to the relevant product market or the relevant geographic market or with reference to both markets.

Relevant product market is defined as a market comprising all those products or services which are regarded as interchangeable or substitutable by the consumer, by reason of characteristics of the products or services, their prices and intended use.

Relevant geographic market refers to a market comprising the area in which the conditions of competition for supply of goods or provision of services or demand of goods or services are distinctly homogenous and can be distinguished from the conditions prevailing in the neighboring areas.

M/s Saint Gobain Glass India Ltd. v. M/s Gujrat Gas Company Limited-  In this case, the CCI in order to determine the ‘relevant market’ took note of factors to be considered while determining relevant product market and relevant geographic market. The CCI stated that to determine the “relevant product market”, the Commission is to have due regard to all or any of the following factors viz., physical characteristics or end-use of goods, price of goods or service, consumer preferences, exclusion of in-house production, existence of specialized producers and classification of industrial products, in terms of the provisions contained in Section 19(7) of the Act.To determine the “relevant geographic market”, the Commission shall have due regard to all or any of the following factors viz., regulatory trade barriers, local specification requirements, national procurement policies, adequate distribution facilities, transport costs, language, consumer preferences and need for secure or regular supplies or rapid after-sales services, in terms of the provisions contained in Section 19(6) of the Act.

Section 19(6) enlists the factors to be considered by CCI while determining ‘relevant geographic market’:

  1. Regulatory trade barriers;
  2. Local specification requirements;
  • National procedure policies;
  1. Adequate distribution facilities;
  2. Transport costs;
  • Language;
  • Consumer preferences;
  • Need for secure or regular supplies

Section 19(7) of the Act enlists the factors to be considered by the CCI while determining ‘relevant product market’:

  1. Physical characteristics or end-use of goods;
  2. Price of goods or services;
  • Consumer preferences;
  1. Exclusion of in-house production;
  2. Existence of specialized producers;
  • Classification of industrial products;

When does an enterprise engage in an abusive conduct or abuse its dominant position?

An undertaking in a dominant position is entitled also to pursue its own interests. However, such an undertaking engages in abusive conduct when it makes use of the opportunities arising out of its dominant position in such a way as to reap trading benefits which it would not have reaped if there had been normal and sufficiently effective competition. For the purposes of this section, the conduct of a party would be tested on the basis of the end effect i.e. whether access to a market has been denied not. In other words, the same conduct by different parties may attract provisions of  Section 4(2)(c) of the Act depending on whether the conduct of the parties results into denial of market access in any manner. As per  Section 4(2)(c) of the Act, there shall be an abuse of dominant position if any enterprise indulges in a practice resulting in denial of market access in any manner.

In the case of Jupiter Gaming Solutions case, the CCI while determining alleged abuse of dominance by Government of Goa stated that dominance per se is not bad, but its abuse is bad in Competition Law in India. CCI further opined that abuse is said to occur when an enterprise uses its dominant position in the relevant market in an exclusionary or /and an exploitative manner.  In the case the Government’s tender bid of lottery contained certain conditions which apparently restricted the size of bidders such as, minimum gross turnover of the participating entity, participating entity should have experience of at least three years. The CCI held that the Government of Goa by imposing such conditions abused its dominant position denial/restriction of market access to the other parties in the relevant market.