India: Competition Law And E-Commerce: A Concern For The Future

Last Updated: 27 May 2015
Article by Divye Sharma

E-commerce sector, although in its nascent stage in India, has already been brought under the microscope of the Competition Commission of India (CCI). In the recent past, informations/complaints against various online retail portals (ORP/ORPs) have been filed, claiming that activities of these portals are in contravention of the provisions of the Competition Act, 2002 (Act). Recently the CCI has passed orders in the cases of SanDisk1, Kaff Appliances2 and Mohit Manglani3, wherein the activities of ORPs were in question. This article focuses on highlighting the various issues relating to the activities conducted by ORPs vis-à-vis their compliance with the competition law.

Relevant Market:

CCI, prior to initiating an investigation in matters relating to abuse of dominance and vertical restraints, would first establish the relevant market in which the competition has been affected. The CCI in the SanDisk case4 held that e-commerce portals and brick and mortar retail outlets formulate a part of the same relevant market. It was stated in the aforementioned order that the online and brick and mortar markets are different channels of distribution of the same products and are not two different relevant markets.5 The CCI took the view that since the products available online and at any brick and mortar outlet shall be the same, to the consumer, the two act as separate channels of the same relevant market and not separate relevant markets altogether and are therefore substitutable to one another.

Since, on the basis of the aforementioned order, e-commerce sector is a channel of distribution to the relevant market of the retail, inclusive of the brick and mortar outlets (in both organized and un-organized sector), the market share of e-commerce itself is substantially low, i.e. 0.5% of the entire retail market in India.6

Exclusivity Arrangements:

Another issue that has been brought into light before the CCI regarding anti-competitive conduct of ORPs is the exclusive distribution agreement between sellers/distributors and these portals. In the Mohit Manglani case7, information was filed against Flipkart, Amazon, Snapdeal and various other portals for entering into exclusive distribution agreement of certain products with their distributors. The complaint was on the lines that certain products were exclusively available on certain online portals and were not made available any place else including brick and mortar outlets.

Exclusive distribution agreements are anti-competitive to the extent that such arrangements result in an appreciable adverse effect on competition (AAEC) in India.8 By itself exclusivity is not anti-competitive as the same may be instituted to circumvent issues such as free-rider, player entering or opening new markets, or economies of scale in distribution.9 In such situations a distributor, in order to protect its interest and to further maximize its sales in the market, may enter into exclusive distribution agreements. Therefore any exclusive arrangements entered into between a distributor and an ORP, by itself is not anti-competitive but must be viewed under the lens of Section 19(3) of the Act. Hence, to determine the anti-competitive nature of such arrangements, factors such as creation of entry barriers, foreclosure of competition in the market, accrual of benefits to consumers etc. must also be taken into consideration.

Furthermore, in a situation where a particular product is only available on a single ORP, and cannot be procured from any other ORP or any of the brick and mortar outlets, the substitutability of that product is to be determined vis-à-vis other products that can be categorized in the same relevant product market.

For example, the smart phone OnePlus One is solely available for purchase on Amazon.in in India, and is not available on any other ORP or through any brick and mortar retail outlet. In the event any of the ORPs or an owner of any of the brick and mortar retail stores that sell smart phones approaches the CCI alleging that Amazon.in has entered into an anti-competitive agreement with OnePlus, they shall have to establish that by denying access to the market of sale of OnePlus One smart phones, an AAEC has been caused. In order to substantiate AAEC, the CCI shall first determine the market share of OnePlus One. If the market share of a product is high in comparison to the entire relevant market, then the chances of it causing AAEC shall be greater as that product will be dominant. The market shares of that particular smart phone needs to be indexed against the market share of the other smart phones available in the market with similar features that can be considered as substitutable by the consumers. Therefore not being allowed distribution rights of a single product in itself is not necessarily anti-competitive in nature but the market share of the same has to be pegged against the market share of other substitutable products in the relevant product market, in order to determine AAEC, and thereby construing the exclusive distribution agreement as anti-competitive.

Predatory Pricing10:

Along with the comfort of delivering the products so purchased via an ORP right at your doorstep, another reason why the crowd has turned towards such forums is on account of the heavy discounts that are available on almost all the products. Events such as Big Billion Day Sale and End of Season Sale are heavily advertised a week in advance so that the public could be prepared to take advantage of such sales. Although such discounts are desirable to the consumer, the same can be considered as anti-competitive by the other players in the market.

The All Delhi Computer Trader Association (ADCTA) for example filed a complaint against various ORPs, wherein it was alleged by them that these portals have been selling products at very low prices.11 It was further alleged that such methods were practiced by ORPs in order to eliminate competition from the relevant product market, as brick and mortar retail outlets will not be able to compete as they cannot offer the product at such cut prices. Although the CCI in its order dated April 23, 2015 had not addressed this part of the complaint as it prima facie held that ORPs are not dominant in the retail market and therefore their conduct cannot be held to be anti-competitive in terms of Section 4 of the Act, there are various lacunae in the allegations for the CCI to even consider such allegations.

At the outset it is stated that giving discounts by itself is not anti-competitive in nature, as it promotes competition in the market and drives other players to also provide similar terms at the time of sale. It is only when the price at which the dominant player in the market sells product, is lower than the cost of production of the product itself, with the intention to foreclose the competition in the market, that heavy discounts can be considered as predatory and anti-competitive in nature.12 Keeping in mind these parameters, in order to prove allegations of predatory pricing, firstly the informant will have to prove intent of ORPs to foreclose the market and create entry barriers in order to restrict new players to enter the retail market in India, which cannot be established as the retail market itself is so vast and broad that it shall be impossible to comprehend the AAEC on competition in India effectuated due to the discounts offered by ORPs. Secondly, it is reiterated that e-commerce channel of distribution itself constitutes 0.5%13 of the entire retail market in India. With such a low market share ORPs cannot be said to be dominant in the market. Therefore any allegations made under Section 4 of the Act are not likely to pose a concern as the prerequisite for such allegations is the dominance of the player in the specific relevant market. In light of the above, it is submitted that any allegations of predatory pricing shall not sustain before the CCI as they do not constitute to be a dominant player in the relevant market.

Market Operating Price:

Recently, many manufacturers of products have started issuing "Caution Notices" on their websites and have been advertising through newspapers, claiming that ORPs are not a part of their authorized distribution channel, and therefore authenticity of such products is questionable. The Kaff Appliances14 matter was brought before the CCI, in light of a caution notice that was issued by the manufacturers of Kaff appliances, wherein they had stated that any products that are purchased from Snapdeal.com are counterfeit and therefore the warranties on products so procured shall not be honored. Through communications between the manufacturer and Snapdeal, it was brought to light that the reason for issuing such notice was because Snapdeal was listing the products at prices below the market operating prices.

Snapdeal filed a complaint before the Commission, stating that by issuing such notices, the manufacturer is attempting to limit its authorized distributor from selling their products through the e-commerce channel. Furthermore, it was contended that the manufacturer was imposing anti-competitive conditions on the authorized distributors by not allowing them to sell the products at a discounted price without prior permission of the manufacturers, thereby violating the provision under Section 3(4)(e)15 of the Act. The Commission prima facie observed that the manufacturer cannot dictate the prices at which its products are to be sold by the authorized distributor, as that would hinder competition and the distributors would not be able to compete with the authorized distributors of other manufacturers in the market. In light of the same the Commission issued an order initiating investigation into the conduct of the manufacturer, so as to construe whether its acts were anti-competitive in nature.

Similar caution notices have been issued by various manufacturers who are not pleased with the discounts that are available on their products sold through ORPs. It can be argued that such tactics have been resorted to by the manufacturers in order to protect their brand image, or to promote sales through brick and mortar outlets. However, through the aforementioned order, the CCI has observed that any conduct that in turn restricts sales over a distribution channel is in direct violation of competition law, and the same needs to be investigated into further. Therefore the products sold through ORPs must be treated at par with the products sold by authorized distributors through brick and mortar outlets and the manufacturer cannot deny warranty or other post-sale services to the consumers who procure the products through such ORPs.

Conclusion:

E-commerce is a new channel of distribution of products to the consumers and is going to grow exponentially over the years to come. As it is where ORPs such as Flipkart was only selling books, it has now expanded its range of products to home appliances, electronic gadgets, health supplements etc. There are more than 35 ORPs operating in India and this number has been on a constant rise over the recent years. With the growth of this channel of distribution, many brick and mortar retailers have and will continue to file objections and complaints against the functioning of this channel. The increasing popularity coupled with the media attention that these ORPs seem to gather, will always manage to put the metaphorical bull's eye on their back.

So far, the only issues that have been raised against the ORPs are predatory pricing and anti-competitive arrangements by way of exclusive distribution agreements with the distributors. Fortunately, for the ORPs, the CCI for now has been of the opinion that these alleged activities are not anti-competitive in nature. Most of the success before the CCI can be attributed to the fact that e-commerce sector is still a growing market and therefore does not have a significant presence in retail sector in India. Simultaneously, the fact that 93% of the retail market in India falls under the unorganized sector16, therefore it is unlikely that any AAEC could be caused by arrangements entered into by ORPs.

However, It has been observed that after originally stating in the SanDisk17 order that online and brick and mortar are separate channels of the same relevant market, recently in the Mohit Manglani18 order, CCI refused to opine conclusively by stating that "[I]rrespective of whether we consider e-portal market as a separate relevant product market or as a sub-segment of the market for distribution, none of the OPs seems to be individually dominant". Such statements suggest that CCI has still not decided whether ORPs do in fact formulate a separate relevant market or not. Therefore, on the touchstone of competition law, it is relevant for every ORP to assess whether the arrangements entered into by them do in fact cause AAEC.

Footnotes

1. Ashish Ahuja v. Snapdeal.com through Mr. Kunal Bahl, CEO & Ors., Case No. 17/2014

2. M/s Jasper Infotech Private Limited v. M/s Kaff Appliances (India) Private Ltd., Case No. 61/2014

3. Mohit Manglani v. Flipkart India Private Limited & Ors., Case No. 80/2014

4. Supra n.1

5. ibid, para 16

6. Please see, CRISIL Opinion, Online retail heat altering brick & mortar models, February 2014, available at http://www.crisil.com/pdf/research/CRISIL-Research-Article-Online-Retail-Feb14.pdf.

7. Supra n.3

8. Section 3(4) read with Section 19(3) of the Act

9. Please see Para 107, EU Guidelines on Vertical Restraints 2010

10. Section 4 of the Act, 'Explanation (b):"predatory price" means the sale of goods or provision of services, at a price which is below the cost, as may be determined by regulations, of production of the goods or provision of services, with a view to reduce competition or eliminate the competitors.'

11. Supra n. 3

12. Please see, MCX Stock Exchange Ltd. & Ors. vs National Stock Exchange of India Ltd. & Ors., Case No. 13/2009

13. Please refer Supra n.5

14. Supra n.2

15. "Resale price maintenance " includes any agreement to sell goods on condition that the prices to 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.

16. Please refer Supra n.5

17.Supra n.1

18. Supra n.3

Divye Sharma is an Associate in the Competition Law Practice Group at the Firm. He graduated from National Law University, Delhi in 2014 with a degree in B.A.,LL.B. (Hons.). He has been engaged in various cases involving complicated competition law issues including the use of economic theory to put forth arguments before the Competition Commission of India and the Competition Appellate Tribunal, in addition to making merger filings before the Competition Commission of India. Divye has acted for clients engaged in various fields, including, e-commerce, chemicals and drugs, real estate and food service industry.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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