Can dominant enterprises refuse to deal?

By Karan S Chandhiok and Tarun Donadi, Chandhiok & Mahajan
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Abuse of dominance takes many forms. One such form is the refusal to deal. Not every instance of a refusal to deal infringes competition laws. Since competition laws look to preserve and protect competition, there must be a likelihood of significant and demonstrable harm to competition for a refusal to deal by a dominant enterprise to be considered anti-competitive.

Karan S. Chandhiok, Partner, Chandhiok & Mahajan
Karan S. Chandhiok
Partner
Chandhiok & Mahajan

A guidance note of the European Commission (EC) states that enterprises must be able to choose their trading partners. A refusal to deal would typically raise competition law concerns where a dominant enterprise competes in the downstream market with the entity to which it refuses to deal with. The guidance note states that a refusal to deal would be an enforcement priority if the product or service in question (input) is objectively necessary to compete effectively in the downstream market; the refusal is likely to eliminate effective competition; and the refusal is likely to result in consumer harm.

The guidance note also states that the EC will examine claims by dominant enterprises to justify their conduct. The objective necessity of an input depends on whether it is indispensable, and whether there are potential or actual substitutes. The European Court of Justice in the Oscar Bronner case ruled that for an alternate channel to be considered as a substitute, it should be economically viable to create the alternative. Economic unviability of accessing the alternate channel is not a sufficient basis to argue indispensability.

The US Supreme Court has also ruled that dominant enterprises do not have an antitrust duty to deal with rivals except in limited circumstances. These include a refusal to supply an input that cannot be obtained elsewhere, termination of a prior profitable course of dealing or discriminatory dealing. Lower courts in the US have also considered essential facilities as an exception.

While there may not be similar express guidance in the Competition Act, 2002 (act), the Competition Commission of India (CCI), in its decisions, has considered objective justifications and the effect on markets while examining abuse of dominance allegations. In Kapoor Glass Pvt Ltd v Schott Glass India Pvt Ltd, the CCI took the view that Schott Glass could not be forced to deal with an entity that previously infringed its trademarks. While the erstwhile Competition Appellate Tribunal overturned the CCI’s decision on appeal on other grounds, it agreed with the views on a dominant enterprise’s duty to deal.

In East India Petroleum Pvt Ltd v South Asia LPG Company Pvt Ltd, the CCI did consider claims by South Asia LPG Company to justify its unilateral conduct, even though it ultimately did not agree with the safety and efficiency claims.

In Kansan News v Fastway and Others, the CCI held that it was a denial of market access where a dominant multi system operator terminated an agreement with a non-rival broadcaster without valid justifications. In its decision, the CCI considered that the broadcaster had been “effectively wiped out” with access to only 56,000 households of the 4.5 million households connected to cable network in the relevant market.

The CCI’s decision was upheld by the Supreme Court. Even though the Supreme Court seemingly gave an expansive interpretation to “denial of market access” and rejected the argument that denial can only be caused to competitors, it did not dilute the mandate of the act, which is to protect the effective competitive process and not competitors. Interpreting the court’s verdict to mean that any form of denial of market access would amount to abuse of dominance, would stretch the decision beyond the clear intent and spirit of the act.

The decisional practice of the CCI of giving due consideration to objective justifications must continue. Regulatory intervention must be in limited situations where demonstrable and appreciable harm to competition is likely. After all, the CCI assesses cartels on the cornerstone of appreciable adverse effect on competition. Abuse of dominance, which is certainly hard core and pernicious than cartels, should not be tested on a higher standard. Deviating from this course would oblige dominant enterprises to deal with other entities at the cost of their incentives and the ability to invest and innovate. Such an obligation would also allow “free riders” to take undue advantage of investments made by dominant enterprises.

Karan S Chandhiok is a partner and Tarun Donadi is an associate at Chandhiok & Mahajan

competition law

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