CCI theoretical analysis of vertical agreements not practical

Anti-competitive agreements are dealt with under section 3 of the Competition Act, 2002 (act). Section 3(4) prohibits vertical agreements between enterprises or persons at different levels of the production and supply chains that cause or are likely to cause an appreciable adverse effect on competition (AAEC). Whereas section 3(3) presumes AAEC while analysing cartels, section 3(4) embodies the legislative intention that vertical agreements should only be held anti-competitive if they create or are likely to create AAEC. Section 19(3) sets out an exhaustive list of factors, including negative and pro-competitive effects, that the Competition Commission of India (CCI) should consider in assessing whether an agreement causes AAEC. This balancing of effects is known as the rule of reason analysis. The CCI does carry out the rule of reason analysis in its decision-making, but has been inconsistent in its findings.

Post investigation. In Shri Ghanshyam Das Vij v M/s Bajaj Corporation Limited and Ors, the CCI noted the requirement for the rule of reason analysis and found that agreements allocating territories to certain dealers and refusing to supply products if dealers would trade outside those territories did not cause AAEC due to the presence of a large number of competitors in that market. This was found despite the supplier being a leading player.

However, the CCI has been inconsistent with this approach of considering the whole market structure in dealing with vertical agreements. This is evident from the dissenting opinion in Shri Ramakant Kini v Hiranandani Hospital (the Cryobank case). Despite economic evidence showing there was no effect on competition, the order delivered by the majority conducted an almost theoretical analysis of AAEC without any reference to the facts of market structure. The dissenting opinion clearly performed the economic analysis that the majority order did not and found that there was no evidence of foreclosure of the market. The evidence in fact suggested that the number of cryobanks had increased during the period with an increase in the volume of business. There was no evidence of the exit of any market player. The majority order was set aside on appeal to the Competition Appellate Tribunal and an appeal by the informant is currently pending before the Supreme Court.

At the prima facie stage. The CCI has generally refused to initiate investigations when a party did not possess sufficient market power (see M/s KC Marketing v OPPO Mobile MU Private Limited (the Oppo Case), Tamil Nadu Consumer Products Distribution Association v Fangs Technology Private Limited and Anr). However, the CCI has not specified a market share threshold for when an enterprise can be said to possess market power.

In Karni Communications and Anr v Vivo Mobile India Private Limited and Ors and the Oppo Case, the CCI conducted a preliminary AAEC analysis at the prima facie stage itself, considered the justifications offered by the parties and concluded that the agreements were unlikely to cause AAEC. The CCI refused to direct an investigation.

However, in recent decisions (see In re Delhi Vyapar Mahasangh etc. and Flipkart Internet Private Limited and Ors., PF Digital Media Services Ltd and Anr v UFO Moviez India Ltd and Ors), the CCI took the view that an investigation was warranted if an entity held market power and had entered into a vertical agreement specified under section 3(4).

Comment. While the CCI has been mindful of the factors listed in section 19(3) of the act, it has often conducted a theoretical, rather than a practical, economic analysis. As the dissenting opinion in the Cyrobank case rightly observed, theoretical analysis would find every exclusive vertical agreement to be anti-competitive. The CCI must undertake detailed economic analysis in line with section 19(3), while taking into account the pro-competitive arguments that the enterprises submit. Preliminary analyses beyond simply assessing market power should be followed before ordering investigations into vertical agreements. Otherwise there will be a plethora of investigations burdening the CCI’s limited resources. Such analyses will also rectify the ambiguity of investigations and bring certainty to business activities.

Avinash Amarnath is a counsel and Tarun Donadi is an associate at Chandhiok & Mahajan.

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