There are two different rulebooks for dealing with anti-competitive behaviour around the world. Respected legal academic Souvik Chatterji analyses the differences from an India perspective and explains how one makes for quicker and more effective enforcement against infringers
Competition agencies across the world examine anti-competitive agreements either through the lens of the per se rule or the rule of reason. Competition laws in most countries make this distinction because there is a consensus that hardcore activities like cartelisation have a pernicious effect and should be made illegal. In such cases, competition agencies are supposed to balance the pro-competitive benefits and anti-competitive effects in determining the allegations against parties. However, Indian law has not made any sharp distinctions between the two rules, and the liability is instead based on appreciable adverse effect on competition within India. Within this context, it is pertinent to examine the stand of India in respect of the per se rule and the rule of reason.
Competition authorities across the world are overburdened with determining the liability of alleged parties in respect of anti-competitive activities and abuse of dominant positions. So, to determine liability, the broad approach is either the per se rule or the rule of reason. In countries or jurisdictions where per se illegal activities are identified, competition agencies are only required to establish the anti-competitive activity, such as bid rigging, for example. But for rule of reason cases, the competition agency not only has to establish the activity, such as market allocation, but also establish the level of adverse effect caused in the economy and market of the jurisdiction.
Activities that have a more pernicious effect are examined by the per se rule, and the competition agencies can directly and immediately prevent them. Others are examined by the rule of reason, where pro-competitive effects are balanced with the anti-competitive effects, but the process is longer. Only when anti-competitive effects outweigh the pro-competitive effects do competition agencies issue preventive orders.
THE PER SE RULE
Under this rule, it is the actions or practices as specified by the act that are deemed or presumed to have an appreciable adverse effect on competition, which is prohibited. For example, price-fixing cartels or bid rigging are per se illegal offences in the US, UK and Japan, as they affect a huge number of people. In these cases, unless criminal sanctions or imprisonment are given, the economy will be harmed. However, in India there is a test of appreciable adverse effect on competition. For cases of bid rigging, the Competition Commission of India (CCI) has to establish not only that the bid rigging has taken place, but that the anti-competitive activity had more of an appreciable adverse effect on competition than a pro-competitive benefit. Here, the bidding company in defence has the scope to rebut the evidence before the appellate authority, the National Company Law Appellate Tribunal (NCLAT).
Under the per se rule, this is unnecessary if competition is limited or restricted. The reason for not showing how competition is restricted is natural. Let us say an LPG company has been engaged in tied selling of ovens with LPG cylinders. In this case, consumers have to buy the oven from the same company, even if they don’t want one, otherwise they will not get the LPG cylinder. By declaring the activity as per se illegal, jurisdictions like the US, UK and Japan reduced the time of court proceedings. In other countries where the rule of reason approach is applied, there is scope for rebuttal.
This view is based on established experience of the nature of the actions and practices that produce anti-competitive effects. In the case of Northern Pacific Railway Co v United States, the US Supreme Court explained the basis of per se rule. It said that there were certain agreements or practices which, due to their overtly pernicious effect on competition and lack of any redeeming virtue, were conclusively presumed to be unreasonable and therefore illegal, without elaborate inquiry as to the precise harm they had caused or business rationale for their use.
The principle of per se avoids the necessity for an incredibly complicated and prolonged economic investigation into the entire history of the industry involved, as well as related industries, to determine whether a particular restraint has been unreasonable, an inquiry which is so often wholly fruitless when undertaken.
In State Oil Co v Khan, the US Supreme Court held that vertical price fixing was no longer considered a per se violation of the Sherman Act, but horizontal price fixing was still considered a breach of the act. Also, in 2008, the defendants of United States v LG Display Co, United States v Chunghwa Picture Tubes, and United States v Sharp Corporation, all heard in the northern district of California, agreed to pay a total of USD585 million to settle their prosecutions for conspiring to fix prices of liquid crystal display panels, which was the second-largest amount awarded in the history of the act.
Elaborate enquiry is not made in respect of such activities, and only the involvements of the alleged parties in such activities are enough. In the US, price fixing, group boycotts and tying arrangements are considered bad per se.
The efficacy of having the per se rule in place can be explained with an example. Let’s say in a jurisdiction that a tying arrangement is considered per se illegal. This is where the seller conditions the sale of one product (the tying product) on the buyer’s acceptance to purchase a separate product (the tied product) from the seller.
Here, only the question of the tying product being tied with another product, and the compulsion of the consumers to buy both the products, proves the allegation and, accordingly, the competition agency can take appropriate action.
In another jurisdiction, where it is treated with the rule of reason, various elements are supposed to be proven. For example, in India, if 10 cement companies are alleged to increase the price of cement by 10%, the CCI can bring the activity before the NCLAT. The CCI has to establish that consumers bought the cement at 10% extra, and that they had to face hardship. The cement companies can say in their defence that the quality of cement was good, which has a pro-competitive benefit.
The difficulty in these cases is that the CCI should have evidence to establish how the cartel between the cement companies was entered into. At the same time, the appreciable adverse effect on competition (AAEC standard) implies that the CCI has to also show that the 10 cement countries have huge market power, so that smaller players cannot match their cartel or conspiracy. Many authorities the world over are struggling because manufactured products and component products are tied and the law on tying arrangements is not applied in such situations.
Unless the seller denies the sale of a tied product to a buyer, the buyer cannot file a case of anti-competitive activity in any jurisdiction, be it India, the US or UK. Sellers can advertise about tied products business, but unless a company has dominance there is no effect on the market even if tied sales are practised.
Taking an Indian example, let’s say Indane Gas is dominant in the state of West Bengal. If Indane ties the sale of LPG cylinders and ovens in West Bengal, it will contravene section 4 of the Competition Act, 2002, as amended by the Competition (Amendment) Act, 2007, relating to abuse of dominance. But if it is done in Himachal Pradesh, where Indane is not dominant, the company can be booked for anti-competitive activity as the impact of the tied sales is obviously less and, as such, is a lesser offence.
The example shows that for establishing liability in cases relating to anti-competitive activity while treating the activity with the rule of reason, the procedure is longer, more elaborate, costlier and more technical. If competition agencies can identify certain activities as more harmful than others, those activities can be brought under the per se rule scanner.
THE RULE OF REASON
Conversely, under the rule of reason, the effect of competition is based on the facts of the case, the market and the existing competition, as well as the actual or probable restraint on competition. Tata Engineering and Locomotive Co Ltd v Registrar of Restrictive Trade Agreement was a case where the Supreme Court of India interpreted the rule of reason. It was held that to determine the question, three matters were to be considered: (1) what facts are peculiar to the business upon which the restraint is imposed; (2) what the condition was before and after the restraint was imposed; and (3) what is the nature of the restraint and what is its actual and probable effect.
In the case of the rule of reason test, the pro-competitive effects are balanced with anti-competitive effects and, after that, if the pernicious effect is considered higher, the activity is prevented by the competitive agency of the respective jurisdiction.
In certain jurisdictions where criminal sanctions exist, competition agencies try most cases with the rule of reason approach because with criminal liability for cases such as cartelisation the evidence to be adduced needs to be at par with proof that is beyond reasonable doubt. Where doubt is raised before the courts, the doubt goes in favour of the accused, and competition agencies do not want to risk losing cases for lack of collateral evidence.
India had devised a test for appreciable adverse effects on competition to determine the liability of an alleged party. There are no separate categories of trade practice that are examined by the per se rule.
The factors that are weighed by the CCI include: (1) creation of barriers to new entrants in the market; (2) driving existing competitors out of the market; (3) foreclosure of competition by hindering entry into the market; (4) accrual of benefits to consumers; (5) improvements in production or distribution of goods or provision of services; and (6) promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services.
Anti-competitive activities like tying arrangements, refusal to deal, exclusive supply agreements, exclusive distribution agreements and resale price maintenance are defined in section 3 of the Competition Act. The factors to be weighed in case of liability are defined under section 19 of the act. The new act has included an effects doctrine so the CCI can even investigate cases that occur outside India, but where the effect is felt within India. In 2021, a number of cartel cases were tried by the CCI, and judgments given. The CCI in 2021 directed six companies and their officials to cease and desist from indulging in anti-competitive practices after finding them guilty of cartelisation by entering into concert or conspiracy in the bidding process for tenders floated by the Food Corporation of India. The tenders pertained to procurement of low-density polyethylene (LDPE) covers.
The CCI concluded that the opposite parties had indulged in cartelisation and bid rigging in respect of tenders floated by the Food Corporation of India and other government agencies for procurement of LDPE by means of directly or indirectly determining prices, allocating markets, co-ordinating bid response, and manipulating the bidding process. The opposite parties, or the alleged parties, here refer to companies namely Shivalik Agro Poly Products, Climax Synthetics, Arun Manufacturing Services, Bag Poly International, Shalimar Plastic Industries and Dhanshree Agro Poly Product.
Recent cases handled by the CCI under the Competition Act, 2002, as amended by the Competition (Amendment) Act, also show that the authority seeks to weigh the pro-competitive and anti-competitive effects of the alleged activity to ascertain the liability of the alleged party. In Belaire Owner’s Association v DLF Limited & Ors, the CCI successfully dealt with a case of abuse of dominant position. The information in the above-mentioned case was filed under section 19(1) (a) of the Competition Act, 2002, by Belaire Owners’ Association against DLF, Haryana Urban Development Authority, and the Department of Town and Country Planning, Haryana.
It was alleged by the informant that DLF, by imposing highly arbitrary, unfair and unreasonable conditions on the apartment allottees of the housing complex The Belaire, had serious adverse effects and ramifications on their rights and that DLF had abused its dominant position.
One of the main contentions was that in place of 19 floors with 368 apartments, which was the basis of the allottees booking their apartments, 29 floors were constructed by DLF. Consequently, not only the areas and facilities originally earmarked for the apartment allottees were substantially compressed, but the project was also abnormally delayed without providing any reason to the allottees. In accordance with the complaint made by an allottee, the commission had directed the Office of the Director General to carry out investigations on the allegations levelled against DLF and submit a report on its findings.
The commission observed that a relevant market is delineated on the basis of a distinct product or service market and a distinct geographic market. These terms were defined in section 2(r) of the act, read with section 2(s) and section 2(t). As per the commission, DLF’s promotional brochures of the property provided for innumerable additional facilities like schools, shops and commercial spaces within the complex, a club, dispensary, health centre, sports and recreational facilities and such features, along with the cost-range of the apartments, may be broadly considered to define the characteristics of “high-end residential accommodation”.
The commission noted that in the present case, Gurgaon, where The Belaire apartment complex has been constructed, is seen to be the relevant geographical market and a decision to purchase a high-end apartment in Gurgaon is not easily substitutable by a decision to purchase a similar apartment in any other geographical location. As per the commission, Gurgaon is known to possess certain unique geographical characteristics such as its proximity to the capital New Delhi, proximity to airports and a distinct brand image as a destination for upwardly mobile families.
Thus, the commission was of the view that the relevant market in the above-mentioned case is the market for services of a developer/builder in respect of high-end residential accommodation in Gurgaon.
For the outcome of the case, the CCI asked DLF to pay a fine of INR6.3 billion (USD79.1 million), which was upheld by the Supreme Court on appeal. It was accepted that the apartments belonged to the high-end product/services market in the geographical market of Gurgaon. The CCI was successful in establishing that DLF was dominant in that market, and that this was one of its biggest success stories of the past 10 years.
The CCI successfully decided another case on the abuse of dominant position, in UPSE v National Stock Exchange Limited (NSE). In this case, the CCI dealt in detail with the concepts of dominant position, relevant market, predatory pricing and abuse of dominant position in one market to enter another market in the context of stock market services.
The CCI, relying on a host of factors provided under the act, has attempted to determine whether the NSE’s activities amounted to abuse of its dominant position and a violation of the provisions of the act. The Multi Commodity Exchange (MCX), operating as an exchange platform for trading in currency derivatives, alleged that the NSE indulged in wrongful and abusive exercise of market power by eliminating competition from the currency derivative segment and discouraging potential entrants from entering the relevant market through leveraging, waiver of transaction fees, annual subscription charges, data feed fees, and adopting exclusionary devices to kill competition.
The major issue for analysis before the CCI was whether the NSE merely occupied a position of strength in the other markets, and could be considered a dominant player. It may be pertinent to note that the market share of the MCX in comparison was higher in the commodity exchange market than in the currency derivative market, where it occupied only 33.17% of the market share, with the recent entry of several other players.
In discussing the issue of relevant market, the CCI assessed all segments of the stock exchange market including equity, futures and options, and wholesale debt market segment dealing with government securities alongside the currency derivatives market. It effectively delineated different sectors of the stock market and interestingly did not club the other sectors of the stock market in arriving at its determination.
The CCI opined that the other segments of the stock market were not “adequate substitutable or interchangeable products” for the currency derivative (CD) segment. Since the CD segment was “distinctly different” from other segments, requiring separate approvals, it was considered an independent and distinct relevant market.
The boundaries of relevant markets freeze when the products involved cease being practically interchangeable or substitutable, so the CD segment in India was found to clearly be an independent and distinct market. In all these cases, the factors under section 19 of the Competition Act, 2002, as amended by the Competition (Amendment) Act, 2007, were examined. The per se rule was not used at all.
A quick scan of competition laws around the world will show that competition authorities make a distinction between horizontal and vertical agreements between companies. Horizontal agreements are generally viewed more seriously than the vertical agreements. Horizontal agreements are those among competitors and vertical agreements are those relating to an actual or potential relationship of purchasing or selling to each other.
A particularly pernicious type of horizontal agreements is the cartel. Vertical agreements are pernicious if they are between two or more companies in a position of dominance. Most competition laws view vertical agreements generally more leniently than horizontal agreements as, prima facie, horizontal agreements are more likely to reduce competition than agreements between companies in a purchaser-seller relationship.
The Competition Act, 2002, has not used the term horizontal agreements and vertical agreements, however the language used in the act suggests that agreements referred to in sections 3(3) and 3(4) are horizontal and vertical agreements, respectively. It is to be noted that sections 3(3) and 3(4) are the main provisions, which are mainly applied to prove the existence of any anti-competitive agreements.
It can be said that the Indian Competition Act could have identified certain categories of anti-competitive activities like bid-rigging or price-fixing, which could be considered to be bad when applying the per se rule. Doing so, the CCI could have saved time during the enquiry process, and the expense of investigation and complicated procedures could be reduced. Only the impugned practice would have been required to be established, not the anti-competitive effect.
Souvik Chatterji is the head of the Department of Juridical Sciences at JIS University in Kolkata.
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