India: A Done Deal? Comment On Snapdeal v. Kaff

Last Updated: 12 October 2015
Article by Anand & Anand

E-tailers are more often than not unwilling to maintain resale price according to what the manufacturer expects. So much so that, along with the ease of 'cash on delivery', consumers in India have now come to expect lower prices for products they buy online.

The Competition Commission of India (CCI) recently ordered an investigation against Kaff Appliances for alleged resale price maintenance based on information supplied by Snapdeal. The CCI expressed a view that Kaff had a share of 28% in the market of 'supply and distribution of kitchen appliances in India', and the condition to maintain a minimum resale price imposed by Kaff on its dealers is prima facie likely to have appreciable adverse effect on competition in the said market.

This order could be a preliminary seal of approval of the e-tailing business model where players are unwilling to maintain resale price according to the manufacturer's expectations. But what does this mean for the manufacturers and brick and mortar stores? Increased sales of goods, even if some dealers undercut others, must mean good business for the manufacturer. Then why is Kaff insisting on maintaining a minimum resale price – Are the brick and mortar retailers behind this?

This comment explores these questions and the likely impact of this order on the e-tailing sector, the manufacturers and brick and mortar stores.

What is resale price maintenance?

Simply put, resale price maintenance is when an upstream supplier (say, a manufacturer) enters into agreements with downstream sellers (retailers) that they will sell the goods at a pre-fixed minimum or maximum price.

Why would a manufacturer want to maintain a minimum resale price?

As discussed in the opening comments, increased sales of goods, even if due to the fact that some dealers undercut others, must mean good business for the manufacturer. If we give the benefit of the doubt to the manufacturer, he will maintain a minimum resale price only if there are some efficiencies associated with it (We explore situations where the manufacturer may not get the benefit of the doubt in the next section).

Minimum resale price maintenance is seen to increase inter brand competition, even if it decreases intra brand competition. Once the manufacturer gets its retailers to, well, stop competing on price, it can make them compete on add-ons like services which can build a stronger brand for the manufacturer. This is likely to increase inter brand competition.

Now, this gets us to a very interesting question - what exactly is competition law promoting – intra brand competition or inter brand competition?

Another reason to not burn 'minimum retail price maintenance' at the stake is the impact it has on new entrants – it facilitates entry of new manufacturers. New entrants to the market can use minimum resale price maintenance as an incentive to get retailers on board.

Yet another reason for resale price maintenance is to avoid 'free riding'. Let's take an example - if retailers are competing on resale price, they would try to undercut each other. This means they are likely to cut costs such as those involved in maintaining a big showroom, employing the best sales persons with more knowledge about the product etc. In this situation, a consumer can go to the retailer that provides the best showroom experience but buy the product from the one that is sells it at the lowest price.

Lastly, imposing a resale price maintenance condition may be seen as the least restrictive option to achieve the above efficiencies in some markets as the alternative will be that the manufacturer engages in vertical integration which may be wasteful in the concerned market.

Can minimum resale price maintenance be anticompetitive?

Most jurisdictions remain suspect of minimum resale price maintenance. Even in India, such conduct is condemned under the Competition Act, 2002 if it has 'appreciable adverse effect on competition' in India.

Minimum resale price maintenance may aid in forming a retail cartel where downstream players with market power force the upstream supplier to fix prices to eliminate intra brand competition.

Minimum resale price maintenance may also aid in setting up an arrangement where the manufacturer and retailers keep the price of the product artificially high and share the profits. This situation is akin to the manufacturer acting as the ring master of the retailers' cartel.

Snapdeal has alleged the presence of such a cartel in its complaint against Kaff. Interestingly, the CCI has not ordered an investigation for looking into horizontal agreements and has limited the direction to the Director General to look into violation of Section 4 of the Competition Act.

Another theory of harm in cases of minimum resale price maintenance is that it aids in the operation of a manufacturers' cartel. When the resale price is fixed, it is easy to spot cheaters, if any, in a cartel. Snap deal has not alleged this theory in the complaint against Kaff.

In cases where the manufacturer is also operating at the retail level, it may be argued that minimum resale price maintenance agreements are in fact horizontal and should not be treated as vertical agreements.

Is the free riding problem more prevalent in e-tailing?

At least in the Indian context, free riding seems more pronounced in the e-tailing versus brick and mortar context. Now, this problem may be more pronounced for some products than others. For example, consumers may simply buy books online after reading reviews on the internet. On the other hand, when a consumer is looking to buy a phone, he or she is likely to go to a store and assess the product before buying it.

What about the warranty issue?

Snapdeal also raised the issue of 'refusal to deal' in its complaint since Kaff allegedly declined to honour warranty of its products sold online by Snapdeal. Snapdeal relied on the spare parts case to argue that Kaff could not have a blanket refusal to honour the warranty of goods, unless it is justified in some cases for reasons such as safety of consumers. Interestingly, the CCI has not directed an investigation for such conduct.

Kaff may have a justification to not provide warranty if it can prove trademark violation. Recent consumer forum decisions indicate that a right holder is obligated to provide warranties even for unauthorized sales unless the right holder approaches the court to stop the unauthorized sale.

Did the CCI get it right?

The absence of a well defined market and any analysis for checking whether Kaff exercised market power, a prima facie view taken by the CCI may be vulnerable to error, especially when minimum resale price maintenance is justified in some cases. Since this is only an order directing an investigation, its impact at this stage may be limited and manufacturers should buttress their case for such restraints in the meantime to prepare for the upcoming fight.

Originally published on The Legal 500

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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