This piece was first published in the August 2017 issue of The Practical Lawyer [(2017) PL (Comp. L) August 80]
Price fixing arrangements strike at the very heart of antitrust violations since they go against the accepted norm of price being determined by market forces. Such arrangements raise concerns in both horizontal and vertical markets. Under the scheme of the Competition Act, 2002 (Act), while horizontal pricing agreements (between competitors) are presumed to cause an appreciable adverse effect on competition (AAEC), there is no such presumption in the case of vertical agreements (between entities operating at different levels of the value chain), where the “rule of reason” approach is applied.
Interestingly, the treatment of vertical agreements and in particular resale price maintenance (RPM)[i], has been long debated in many jurisdictions. Initially, antitrust authorities in mature jurisdictions were in agreement that RPM, in principle, was a per se violation and as such, not subject to any justification. However, acknowledging the need for relaxation, the US Supreme Court and the European Commission refrained from adopting a strict per se presumptive approach in cases of RPM to apply the “rule of reason” standard. On the other hand, national competition authorities in the European Union continue to take a hostile approach towards RPM without considering any pro-competitive effects that may arise. Moreover, in the Indian context, while the CCI had reiterated the statutory construct in dealing with RPM, by stating that AAEC needs to be determined on basis of the factors provided under Section 19(3) of the Act, until recently the treatment of RPM (including its scope and standard of proof) lacked clarity.
On 14 June 2017, the CCI imposed a penalty on Hyundai Motor India Limited (HMIL), engaged in the sale and distribution of Hyundai cars and its parts in India, for engaging in the practices of RPM[ii] and tying.[iii] Against the above backdrop, a discussion of this decision is not only interesting but also pertinent.
The CCI combined information filed against HMIL by authorised HMIL dealers, Fx Enterprise Solutions India Private Limited and St. Anthony’s Cars Private Limited (“Informants”), alleging a contravention of Section 3 of the Act on the grounds that (i) HMIL had restricted the Informants from acting as dealers of competing brands by requiring prior consent of HMIL for investing in any new or existing business; (ii) HMIL had fixed the maximum retail price (MRP) of the cars (which included the pre-fixed margin of the dealers) and the maximum discount which could be offered by the dealers through its Discount Control Mechanism (DCM); and (iii) HMIL designated certain companies as the preferred suppliers of their complementary goods. The CCI found a prima facie case against HMIL and directed the Director General (DG) to specifically investigate the alleged contravention of Section 3 of the Act. On investigation, the DG concluded that HMIL had not only contravened the provisions of Section 3(4) but also Section 4 (relating to abuse of a dominant position) of the Act.
On merits the CCI’s findings were as follows:
- Exclusive Supply Agreement and Refusal to Deal: The CCI observed that the requirement to get prior consent from HMIL for dealing with competing brands was not a prohibition. This was bolstered by the fact that over one hundred Hyundai dealers already operated other dealerships, without any objection from HMIL. Hence, the requirement did not amount to an exclusive supply agreement under Section 3(4)(b) and/or refusal to deal under Section 3(4)(d) of the Act.
- RPM: The CCI held that by designating the MRP and the maximum permissible discount which could be given by the dealers, HMIL had effectively set a minimum resale price, thereby engaging in RPM. The DCM was monitored by HMIL through its “mystery shopping agency”, and the dealers were subjected to penalty for non-compliance with it. The CCI held that, such arrangement of setting minimum resale price and monitoring the same through a penalty mechanism, prevents the dealers from decreasing the sale prices, thereby stifling intra-brand competition. Further, higher prices resulting from RPM can decrease the pricing pressure on other competitors, marking a reduction in inter-brand competition as well.
- CNG kits: The CCI held that cancellation of warranty for use of non-designated CNG kits may be objectively justified and did not amount to a contravention. Further, the CCI observed that HMIL may have a legitimate interest in ensuring that alternative brands of CNG kits are not used since ultimately HMIL would have to bear the costs of warranty.
- Lubricants and Oil: HMIL mandated its dealers to purchase engine oil from its two designated vendors only, at the price indicated by HMIL. In case of non-compliance by the dealers, HMIL threatened to terminate the dealership agreement. The CCI noted that this resulted in price discrimination, without accruing any benefit to the dealers or the consumers, thereby contravening Section 3(4)(a) of the Act.
- Car Insurance Services: The CCI noted that it was a business norm to have a tie-up with insurance companies and, hence, merely recommending that the dealers suggest designated insurance companies to consumers does not amount to a tie-in arrangement, since it is not mandatory for consumers to purchase the same.
On the procedural front, the CCI was of the view that the DG’s investigation into contravention of Section 4 of the Act by HMIL went beyond the scope of investigation directed by the CCI and therefore deserved to be disregarded in entirety.
In terms of penalty, CCI, after considering mitigating factors such as proportionality, absence of supra-normal profits and voluntary introduction of a competition law compliance programme, imposed a penalty of INR 87 crore (approx. USD 13.54 million), i.e., 0.3 per cent. of the average turnover of HMIL in the past three years which accrued from the sale of motor vehicles.
Interestingly, the CCI has adopted a business friendly view and steered away from the approach in the Autoparts[iv] case by making a clear distinction between prudent/standard business practices and anti-competitive conduct. This is demonstrated through the CCI’s approval of consumers’ disentitlement to warranties for not using the manufacturer’s designated products, thereby aiming to intervene only when necessary. Further, by adopting an “effects based approach”, the CCI has affirmed the evolving undertone that exclusivity is not anti-competitive per se [v] and may often be a fundamental part of doing business. Nonetheless, from an antitrust compliance perspective, this decision compels industry to review their vertical arrangements (with dealers/distributors/retailers) and re-visit seemingly routine business practices.
Being the first case to examine the issue of RPM in detail, the decision provides valuable insight in as much as it classifies the practice of setting a limit on maximum discount as RPM and demonstrates that any assessment in this regard should necessarily consider intra and inter brand competition as well as the factors stipulated under Section 19(3) of the Act. This decision evidences that the CCI does not deem it necessary to treat RPM cases in a different light, and similar to other vertical arrangements, will be tested on the touchstone of “rule of reason”- much like the approach adopted in mature antitrust jurisdictions. This is also the first instance where the CCI pursuant to the judgement in the Excel Crop case[vi] applied the principle of “relevant turnover” in the imposition of penalty. All in all, while this decision marks the CCI’s first step towards providing clarity regarding RPM, it will be interesting to see the decision’s impact on industry and the subsequent development of jurisprudence in this area, particularly with the introduction of the NCLAT[vii] as the appellate body.
* This piece was co-authored by Aishwarya Gopalakrishnan, Senior Associate. The authors were assisted by Twinkle Chawla, Associate.
[i] RPM includes agreements and/or concerted practices, which have as their direct or indirect object the establishment of a fixed or minimum resale price or a fixed or minimum price level by the manufacturer which is to be observed by the buyer. Apart from explicit pricing arrangements, even sophisticated mechanisms such as fixed distribution margins, fixed levels of discounts, grant of rebates or reimbursement of promotional costs subject to the observance of a given price level, come within the purview of RPM.
[ii] Explanation (e) to Section 3(4) of the Act defines resale price maintenance to include “any agreement to sell goods on condition that the prices to be charged on the resale by the purchaser shall be the prices stipulated by the seller unless it is clearly stated that prices lower than those prices may be charged.”
[iii] In re: Fx Enterprise Solutions India Pvt. Ltd. vs. Hyundai Motor India Limited (Case No. 36/2014) and St. Antony’s Cars Pvt. Ltd. vs. Hyundai Motor India Limited (Case No. 82/2014).
[iv] Shamsher Kataria vs. Honda Siel Limited & Ors., Case No. 03 of 2011.
[v] Dr. L.H. Hiranandani Hospital vs. Competition Commission of India & Another, Appeal No. 19 of 2014.
[vi] Excel Crop Care Limited vs. Competition Commission of India & Another, Civil Appeal No. 2480 of 2014.
[vii] National Competition Law Appellate Tribunal has replaced the Competition Appellate Tribunal.