ENFORCEMENT / CONDUCT CASES
HORIZONTAL RESTRAINTS / AGREEMENTS
Coercion emerges as a mitigating factor for penalty
The Competition Commission of India (CCI) has held that the Bengal Chemists and Druggists Association and its district committees (collectively, Association) had indulged in anticompetitive conduct.1
In terms of material facts, the CCI noted that the offer letters of stockistship issued by various pharmaceutical entities were contingent on prospective stockists obtaining certain clearances / formalities. The CCI interpreted these requirements to be referring to no objection certificates (NOCs) from the Association.
Despite a finding of contravention, the CCI did not impose any monetary penalty on the Association and its office bearers in view of the steps taken by the Association towards eliminating the practice of prior approval. Instead, the CCI directed the Association to conduct advocacy events to ensure that their members and office bearers comply with the tenets of the Competition Act, 2002 (Act).
Similarly, no penalty was imposed on the pharmaceutical entities (or their office bearers) operating within the District of Burdwan during the period of allegations, owing to their plea of having engaged in the anticompetitive conduct under coercion from the Association. However, a cease and desist order was passed against the pharmaceutical entities to restrain them from further engaging in the said conduct.
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Comment: It is an interesting development that the CCI has considered the fact of coercion as a mitigating factor when determining the quantum of penalty to be imposed. This is likely to raise issues related to the standard and onus of proof for such coercion/duress in future cases. In the past, the former Competition Appellate Tribunal had found that pharmaceutical entities acting under the diktats or under coercion/duress from trade associations, cannot be said to have entered anticompetitive agreements in terms of the Act.2
The CCI scores a winning goal at the appeal tribunal
The National Company Law Appellate Tribunal (NCLAT) has dismissed an appeal filed by the Association of Malayalam Movie Artists (AMMA), the Film Employees Federation of Kerala (FEFKA), the FEFKA Directors' Union, the FEFKA Production Executives' Union (collectively, the Appellants).3
The issue relates to the CCI's imposition of penalty on the Appellants and their office bearers for collusive behaviour. The sector involved is the Malayalam language film industry. Note that regional films increasingly compete with Bollywood films. The issue was brought to the CCI's notice by the head of an initiative called the "Cinema Forum" (Complainant). The initiative aimed to facilitate collaborations between film makers and distributors for the production of low budget films involving new actors.
The NCLAT affirmed the CCI's observations based on the Director General's (DG's) investigative findings that (i) the Appellants boycotted the Complainant's projects, and (ii) coerced actors, technicians, producers, and financers, not to associate with the Complainant in any manner. Many stakeholders withdrew from the Complainant's projects due to the threat of disciplinary action and blackmail.
The evidence revealed a tacit understanding among the members of AMMA and FEFKA that they would not work with the Complainant. Further, the difficulties and losses suffered by the Complainant's business including the implementation of his projects, were solely attributable to the embargo against him.
The Appellants and their office bearers were held to have limited and controlled the provision of services in the Malayalam film industry. This had a negative impact on the interest of consumers and the freedom of trade.
While the Appellants denied the allegations and the findings against their activities, they were unable to adduce adequate evidence in this regard, before the CCI as well as the NCLAT. Accordingly, seeing no infirmity with the CCI's findings, the NCLAT upheld the CCI's order along with the penalties imposed.
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Comment: Constitutionally, market players have a right to form industry associations. As such, industry associations are by themselves not considered anticompetitive. However, industry associations when used as a medium for anticompetitive conduct and consequent personal gain could violate competition laws. It is well recognised by CCI, that such associations can be used as a "hub" or a platform for facilitating collusive behaviour, and they have been penalised accordingly in the past. Whilst the CCI has found mixed success with the appeal tribunal, it is interesting to note that the NCLAT upheld the CCI's decision.
ABUSE OF DOMINANT POSITION
Indian competition law continues to march prospectively
The NCLAT dismissed an appeal against the CCI's order which exonerated SKF India Limited (SKF) from allegations of an abuse of a dominant position.4 The relevant market in this case was the market for industrial bearings in India.
The complainant approached the NCLAT challenging the CCI's delineation of the relevant geographic market. It was averred that transportation costs were an important factor for the procurement of industrial bearings. Therefore, the complainant argued that the relevant geographic market should constitute the market for industrial bearings in western India as opposed to the whole of India.
The NCLAT noted that there was no material on record to establish that the supplies were transported only to western India and not throughout India. Therefore, the NCLAT found that the definition of the relevant geographic market could not be limited to western India and upheld the CCI's relevant market definition.
Interestingly, the NCLAT also affirmed the CCI's position that a majority of the allegedly anticompetitive conduct occurred prior to May 2009 and could not be retrospectively examined. On the question of dominant position, the NCLAT upheld the CCI's reasoning and noted that a substantial portion of supplies in the relevant market was imported from outside the country and no domestic players enjoyed a position of strength. Accordingly, the NCLAT dismissed the appeal.
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Comment: While the Act was passed in 2003, provisions in relation to anticompetitive arrangements and abuse of dominant position only came into effect on 20 May 2009. Accordingly, violations (or even allegations) in relation to anticompetitive conduct that took place prior to this date, fall outside the purview of the Act. The precedents, in this context, indicate that any continuing conduct (even if it began before the enforcement of the Act) can be reviewed by the CCI.
CCI's show cause notice (issued post a DG investigation report) receives appeal tribunal's shot in the arm
The NCLAT dismissed an appeal against a show cause notice issued by the CCI pursuant to an investigation by the DG, in relation to allegations of abuse of dominant position by the Uttarakhand Agricultural Produce Marketing Board (Board), a wholesale licensee of foreign alcohol in the State of Uttarakhand, and its sub- wholesalers.5
The CCI had initiated a DG investigation into purportedly unfair and discriminatory practices adopted by the Board and its sub- wholesalers to procure and distribute alcohol. The DG's investigation found that while the Board had abused its dominant position in the market for wholesale procurement of branded alcohol, no case of abuse could be made out against its sub- wholesalers.
The CCI examined the DG's report and issued a notice (Notice) to the sub-wholesalers to show cause as to why their conduct should not be held to be in contravention of the Act. The CCI's notice clarified that its observations did not amount to the expression of a final opinion on the merits of the case.
However, the Board believed that the CCI had passed a final order with respect to the sub-wholesalers and filed an appeal before the NCLAT challenging the CCI's notice. The NCLAT observed that no penal order holding a contravention was passed by the CCI.
The CCI's notice categorically stated that its contents were not a final expression of its opinion. The NCLAT held that the appeal was not maintainable since the show cause notice was not a final order holding contravention, and the CCI had the liberty to pass an appropriate final order in the matter.
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Comment: In terms of the Act (after consideration of the DG's investigation report), the CCI is obligated to share the investigation report with the parties. The rationale behind the legislative scheme is to give an opportunity to parties to provide their objections in relation to the DG's findings. Typically, the CCI then considers the DG's report and the parties' submissions, conducts a final hearing, and makes a final decision under specific provisions of the Act. Pursuant to the hearing and before passing a final order, the CCI may not usually seek further inputs from the parties. However, in this case, by issuing a show cause notice, the CCI identified certain specific issues, and sought to provide the parties an additional opportunity to clarify their position. The show cause notice was not issued under the specific provisions in which a final order is required to be passed and therefore, rightly so, was not an expression of contravention of the Act.
The CCI scores another win at the appeal tribunal
The NCLAT upheld the CCI's order imposing a penalty of approximately INR 45,000,000 (approximately USD 580,000)6 on Verifone India Sales Private Limited (Verifone) for abusing its dominant position in the market for point of sale (POS) terminals in India.7
The abuse involved (i) imposition of unfair and restrictive conditions in relation to the use of its software development kits (SDK) which are essential to operate a POS terminal, and (ii) leveraging its position in the relevant market for POS terminals to enter into the downstream market.
The CCI had found that Verifone unilaterally amended its SDK agreements and merely communicated the changes to the complainants, without providing room for negotiation. The amendments were found to be a complete departure from business practices prevailing in the industry for several years.
The abusive conditions imposed by Verifone included restrictions on the ability to optimise the POS terminals for various value- added services (VAS), such as in mobile electronic ticketing machines used in city buses. Verifone's anticompetitive conduct also included arbitrarily withholding an integral security key of the SDKs, delivery of SDKs incompatible with the specific usage requirements of the complainants and requiring the complainants to share their proprietary VAS related information with Verifone. Such acts were found to be undertaken to protect Verifone's competitive foothold in the downstream VAS market.
The CCI observed that Verifone's actions were aimed at foreclosing the market for VAS, thereby limiting the overall scientific and technical development of the POS terminals market. By requiring access to confidential commercial information from VAS providers, Verifone was also held liable for leveraging its position in the market for POS terminals to enter into the downstream market for VAS. Accordingly, the CCI imposed a penalty of 5% of Verifone's average relevant turnover for the last 3 financial years.
Verifone appealed to the NCLAT, challenging the CCI's findings in the order. In relation to the definition of the relevant market, Verifone argued that all electronic payment devices perform the same function and the market should be defined as the electronic payments market. Verifone's broader proposition was in contrast to the CCI's narrow delineation of the market as the POS terminals market.
The NCLAT affirmed the CCI's definition, noting that there was no alternative or substitute for POS terminals in India. It further noted that the hardware used in POS terminals was the same (irrespective of the varied usage of the machine). The NCLAT further observed that the SDK agreements were not aligned with industry standards and their unilateral nature, aided Verifone's exploitation of the VAS market. Accordingly, the NCLAT upheld the CCI's findings of abuse along with the penalty imposed.
Click here to access the order.
Comment: In India, Verifone was present in the POS market, while the complainants were present in the market for providing VAS services for various usages of POS terminals. However, Verifone was also present in the market for VAS services for POS terminals at a global level. Consequently, Verifone was also seeking to enter the VAS market in India, thereby also becoming a potential competitor of the complainants.
While the CCI's analysis is focused on vertical overlaps, it is also important to be mindful of the horizontal linkage among the parties.
Further, given that there is little jurisprudence available on such technology related cases in India thus far, this order provides insight into CCI's analytical approach to such markets and potential concerns that may arise.
1. Shri Saiful Islam and Others v. Alkem Laboratories Limited, Macleods Pharmaceuticals Limited and Others (Case No. 31/2016) of 12 March 2020.
2. M/s Lupin Limited and Others v. Competition Commission of India and Others (Appeal No. 40/2016) of 7 December 2016.
3. Association of Malayalam Movie Artists v. Competition Commission of India and Others (Competition Appeal (AT) No. 05/2017) of 13 March 2020.
4. Asmi Metal Products Pvt. Ltd. v. SKF India Limited and Another (Competition Appeal (AT) No. 27/2018) of 12 March 2020.
5. Uttarakhand Agricultural Produce Marketing Board v. Competition Commission of India and Others (Competition Appeal (AT) No. 84/2018) of 12 March 2020.
6. Exchange rate of 1 USD = INR 76.72 as on 22 April 2020.
7. Verifone Sales India Pvt. Ltd. v. CCI and Others (TA (AT) (Competition) No. 01/2017) of 13 March 2020.
Originally published 06 May 2020
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