Anomalies Of Section 3(1) Of The Indian Competition Act 2002

The first ever order under section 3(1) of the Competition Act, 2002 (Act), Ramakant Kini v. Dr. L.H. Hiranandani Hospital, Powai, Mumbai (Hiranandani),[1] has witnessed its fair share of controversy since the Competition Commission of India (Commission/ CCI) laid the precedence for a standalone applicability of section 3(1) and observed that, "Section 3(3) and section 3(4) are expansion of section 3(1) but are not exhaustive of the scope of section 3(1)..... scope of section 3(1) is independent of provision of section 3(3) & 3(4)".[2]

It took almost three years for the Commission to put section 3(1) into effect, despite the repeated acceptance by one of its ex-members, Mr. Rajender Prasad, who passed various dissent orders acknowledging the standalone application of section 3(1). In Neeraj Malhotra v. Deutsche Post Bank Home Finance[3], the member noted that if an enterprise deals with an individual by entering into an agreement which causes an appreciable adverse effect on competition (AAEC) in India would be hit by Sections 3(1) and 3(2) of the Act. Similarly, in Savitri Leasing and Finance Ltd v. Punjab National Bank and Others,[4] a pre-penalty payment clause levied by the banks on the consumers for switching their loans to another bank, was held as anti-competitive and violative of 3(1). It was observed that, being an end-consumer agreement, the said section cannot fall under section 3(4), but nevertheless reduced efficiencies, prevented new entrants and exploited consumers and was therefore caught under 3(1).[5]

What remains surprising is the Commission's reluctance to pass a single order after Hiranandani, invoking the standalone applicability of the provision. Even though the Commission had bare minimal reasons to assign for its independent enforcement,[6] the possibility of certain agreements not falling under horizontal [S. 3(3)] or vertical categories [S. 3(4)] cannot be disregarded. Agreements between entities forming part of completely distinct supply/ production chains may not fall under sections 3(3) or 3(4) of Act, yet lead to anti-competitive effects.

Classification

Section 3(1) raises the question of whether there can, in fact, be agreements which do not fall under either the 3(3) horizontal or 3(4) vertical variety. For instance even in Hiranandani, the agreement was examined vis-a-vis the hospital, however, the same could have been considered as an exclusive supply agreement from the stem cell bank's perspective (considering that the hospital's are the a crucial part of the bank's supply/ production chain and without which the banks cannot operate).[7] The most apt order to highlight the inconsistencies between Commission's own orders is Shri Sonam Sharma v. Apple Inc. USA & Ors.,[8]wherein the Commission had categorically noted that, "The present case involves a distribution / sales arrangement between Apple and Airtel / Vodafone is a case of 'contractual tying' wherein the handset manufacturer and service provider have joined hands to offer a packaged product to a customer."9 The nature of the agreement between Apple and Vodafone / Airtel, was similar to the agreement entered into between Hiranandani and Cryobanks. Moreover, Apple (handset manufacturer) and Vodaphone/ Airtel (service provide) dealt with completely different products / services and therefore, formed part of different supply /production chains. Yet, the Commission considered the same as a tie-in arrangement falling under Section 3(4) rather than 3(1), and thereafter, scrutinized the AAEC.[9] In the present case the issue of a consumer, interested in buying an iPhone, being tied to one of the two mobile networks i.e. Airtel or Vodafone, is comparable to the factual matrix in Hiranandani; yet Commission chose to enforce section 3(1) independently. Based on its own observations in the present case, there seems no justification behind considering the agreement in Hiranandani under section 3(1).

The Commission's commitment to the standalone applicability of section 3(1) also appears fickle considering its most recent order in Financial Software and Systems Private Limited v. M/s ACI Worldwide Solutions Private Limited & Ors.,[10] wherein the Commission observed that the agreements between ACI and ACI banks cannot be caught under section 3(4) of the Act since ACI banks are the purchasers of ACI software and hence, they do not form part of the production chain as required for Section 3(4) to apply. After setting the precedent itself, it is unexpected of the Commission to be unwilling and hesitant in invoking section 3(1) in matters of the said nature.

Similarly, in Jeetender Gupta v. BMW India Ltd and Anr,[11] the informant alleged issues of bundling of the sale of BMW cars with a specialized insurance policy by BMW India Ltd., which not only allegedly affected the consumer interest by precluding them from considering alternate insurance policy but also led to denial of market access to other insurance companies. Although, the allegation was that of abuse of dominance, nothing precluded the Commission from considering a similar set of facts under either Section 3(4) (being an exclusive tie-up) or the omnibus section 3(1) of the Act. Similarly, in Consumers Guidance Society v. Hindustan Coca Cola Beverages Pvt. Ltd. (HCC) and INOX Leisure Pvt. Ltd. (Inox),[12] the informant contested the exclusive agreement between Inox and HCC under section 3(4), whereby, HCC was appointed as 'preferred beverage provider' for Inox, resulting in complete foreclosure of competition due for the competitors and inflated prices of goods for the consumers. The Commission yet again dismissed the complaint due to the lack of a showing of dominance by Inox and HCC.

Relevant market and AAEC

Hiranandani also raises certain other questions which remain unanswered. A reading of the section clearly suggests that, an AAEC analysis is crucial for its applicability. Consumer harm alone cannot be sufficient to hold an agreement void under section 3(2) of the Act.[13] The Commission did not delineate the relevant market[14] in that case for an effective AAEC analysis and noted that such exclusive arrangements do not accrue any benefit to the consumer and are rather at the cost of consumer and the competition in stem cell service industry is bound to be hindered. The Commission's stance that delineation of relevant market is not necessary for the purposes of section 3(3)[15]seems to have a seeping effect on section 3(1) as well, which may destroy the very purpose of and AAEC analysis and section 19(3). The Commission, in Hiranandani observed that for the purpose of section 3, it need not identify the relevant market, but nevertheless noted that it is the market of stem cell banking in which competition was being adversely affected. While stating the same, the Commission, did not make an effort to delineate the relevant product or geographic markets separately, let alone the factors prescribed under sections 19 of the Act. The crux of section 3(1) is causation or likelihood of adverse impact within a particular market; if the said limb is severed from the section, a standalone enforcement of the section can only be unwarranted and unreasonable. With this reluctance of the Commission to delineate the relevant market in section 3 cases, it is hard to envision its assessment under section 3(1) and the basis of holding an agreement anti-competitive.

Penalties

Finally, the levy of penalty has further added to the anomalies appended to section 3(1). In Hiranandani, even when the agreement entered into between the hospital and the stem cell bank was held to be anti-competitive and moreover, the stem cell banking market was observed to be affected, the Commission only penalized the hospital. It is difficult to comprehend the reasons behind doing the same and the Commission has not assigned reasons behind the said approach, failing which, the question of penalty remains a mystery until the Commission passes another order under section 3(1). Unfortunately, there hasn't been a single order penalizing an entity based on the standalone application of section 3(4) alone, to draw a comparison or lay reference.

Conclusion

The question regarding the standalone applicability of Section 3(1) thus still remains unsettled and open-ended. It will be definitely worthwhile to witness Commission's approach and how the unaccompanied implementation of section 3(1) can help assessing agreements / conducts not caught under sections 3(3), 3(4) and 4. The provision definitely has over-arching effect and can allow the Commission to take cognizance of any agreement entered into between two entities, but the issues of delineation of relevant market, assessment of AAEC within the relevant market, consideration factors under section 19(3), penalizing all delinquent entities to the agreement, ensuring that the agreement does not fall under 3(4) etc., are hitherto unresolved.

[1] Ramakant Kini v. Dr. L.H. Hiranandani Hospital, Powai, Mumbai, Case No. 39 of 2012, order dated 05 February, 2014

[2] Case No. 5 of 2009, order dated 02 December, 2010

[3] Case No. 5 of 2009 order dated 02 December 2010

[4] Case No. 45 of 2011, order dated 12 October, 2011

[5] In V. Ramachandra Reddy and Others v. M/s HDFC Bank Ltd. and M/s ICICI Bank Ltd., Case Nos.7 of 28, 25 of 28, 8 of 28, 9 of 28 & 10 of 28, order dated 31 May, 2011, and M/s Metalrod Ltd. v. M/s Religare Finvest Ltd, Case No. 28 of 2010, order dated 23 May, 2011, similar allegations were levied against HSBC bank and Religare and it was observed that an agreement between the banks and consumers are hit by section 3(1) of the Act since they lead to an AAEC within India.

[6] "There can be various kinds of agreements among enterprises which may fall under section 3(1) including agreements which are against the interests of consumers, affect freedom of trade and cause or are likely to cause appreciable adverse effect on competition in India....It is also evident from a reading of section 19(1) and section 33 that both these sections also talk of violation of section 3(1) and not section 3(3) & 3(4). This makes it abundantly clear that scope of section 3(1) is independent of provision of section 3(3) & 3(4)."

[7]  The agreement stipulated that hospital will offer exclusively Cryobanks International India stem cell banking services for its patients for a period for one year.

[8] Case No. 24 of 2011, order dated 19 March, 2013

[9] The Commission noted at 66 "A tying arrangement occurs when..... a firm selling products X and Y makes the purchase of product X conditional to the purchase of product Y. Product Y can be purchased freely on the market, but product X can only be purchased together with product Y." - Commission uses the word sale as opposed to manufacture, which negates the requirement of existence of the same supply/purchase chain, since, one entity may be selling two distinct products, whether or not both are manufactured by the said entity

[10] Case No. 52 of 2013, order dated 13 January, 2015

[11] Case No. 104 of 2013, order dated 28 February, 2014

[12]  Case No. UTPE 99 of 2009, order dated 23 May, 2011

[13] Section 19 of the Act requires consideration of factors such as creation of barriers to new entrants in the market, driving existing competitors out of the market, foreclosure of competition by hindering entry into the market etc., while assessing AAEC.

[14] Relevant market was delineated for the purposes of Section 4 analysis only and the Commission noted that "It must be kept in mind that for the purpose of section 3, the Commission is not required to identify the relevant market...." (Hiranandani Order)

[15] In Builders Association of India v. Cement Manufacturers' Association and Others, Case No. 29 of 2010, order dated 20 June, 2012, the Commission observed that "The Commission observes that there is no requirement under the provisions of section 3(1) and section 3(3) of the Act as also under section 19(3) to determine and construct a relevant market, although that remains sine-qua-non for the determination of contravention under the provisions of section 4 of the Act. Sections 3(1) and 3(3) are concerned with effect of anti-competitive agreements on markets in India..."