ISSUE IV : Competition laws: Learning through the CCI orders

Introduction

The Competition Commission of India (“CCI”) has passed some historic orders in the last 12 months. While the Competition Act, 2002 (“Act”) is still being tested across industries, the members of the CCI have demonstrated their expertise in this area by writing very reasoned orders and clarifying some grey areas of the Act. In its order dated November 11, 2012 emerging from information provided by Exclusive Motors Private Limited (“Informant”) with respect to an alleged anti-competitive agreement executed by Automobili Lambhorgini S.P.A (“Opposite Party”), the CCI discussed the internationally recognized doctrine of “Single Economic Entity” and held that for the application of section 3¹ of the Act, an agreement has to be executed between two unrelated “enterprises.” With respect to allegation for abuse of dominant position, the CCI held that mere market share of the Opposite Party does not reflect its dominance in the relevant market as per section 19(4)² of the Act.

The present bulletin analyzes the November 11, 2012 order in view of the novel and unprecedented interpretations adopted by the CCI.

1.0 Brief Facts

• The Informant is a dealer engaged in the business of buying and selling super sports cars, whereas the Opposite Party is a wholly owned subsidiary of Audi AG, which is part of the Volkswagen group.

• In 2005, the Informant and the Opposite Party executed a dealership agreement per which the Informant was appointed as the importer and dealer in India for super sports cars manufactured by the Opposite Party. Thereafter, the Informant invested substantial time and money to develop the Opposite Party’s presence in India which, prior to the execution of the dealership agreement, was negligible.

• Subsequently, in 2011, the Opposite Party appointed Volkswagen India Private Limited (“Volkswagen India”), a subsidiary of the Volkswagen group, as its exclusive importer of cars in India. A fresh dealership agreement was proposed for the Informant which entailed a larger deposit amount and a reduced notice period of 3 months (contrary to a 12 month period in the earlier dealership agreement). Since the Informant refused to accept the terms of the new dealership agreement, a 12 month notice period for termination of the earlier dealership agreement was served upon the Informant by the Opposite Party.

• The Informant alleged that during the notice period, the Opposite Party offered its cars to the Informant at rates higher than those offered to Volkswagen India. The Informant further alleged that since the dealership agreement between the Opposite Party and Volkswagen India determined the sale and purchase price of the cars imported to India, it was anti-competitive and in contravention of section 3(3)(a) of the Act.³ Moreover, since the alleged agreement between the Opposite Party and Volkswagen India was exclusive in nature and excluded the Informant and other prospective persons to become the importers and dealers of Opposite Party’s products in India, the agreement was in contravention of section 3(4)(c)⁴ of the Act.

• Finally, the Informant also alleged that since the Opposite Party individually held 52% market share in the “relevant product market” of super sports cars in India, it was in a dominant position to impose unfair and discriminatory conditions on the Informant, thereby contravening sections 4(2)(a)(i), 4(2)(a) (ii) and 4(2)(c)⁵ of the Act.

2.0 Order of the CCI

The CCI held that a prime facie case was established and ordered the director general to conduct its investigation. At the stage of passing its order, the CCI elaborately discussed the definition of “enterprise” under section 2(h) of the Act while analysing the allegations made under section 3 of the Act. The CCI introduced the application of the “Single Economic Entity” principle, which is already acknowledged and enforced by competition regulators across the world, and held that in order to establish a contravention under section 3, an agreement has to be proved between “two or more enterprises.” An internal agreement between entities constituting “one” enterprise cannot be assessed under the Act. This implied that the dealership agreement between the Opposite Party and Volkswagen India was outside the ambit of the Act since both these entities were part of the Volkswagen group, and, accordingly, any allegation under section 3 of the Act would not sustain.

Further, with respect to the allegation of abuse of dominant position under section 4 of the Act, the CCI accepted the contention of the Informant that super sports cars in India constituted a separate “market” within the auto industry. The CCI held that “considering their characteristics, price and end use, super sports cars constitute a distinct relevant market within the auto industry which cannot be substituted for other types of cars in the auto industry it may be concluded that market for super sports cars constitute a distinct market, relevant for this case. The relevant geographic market in this case is proposed to be the whole of India which appears to be correct. Therefore, the relevant market is market for super sports cars in India’’.

Once the relevant product and geographic market was determined, the CCI had to assess whether the Opposite Party was a dominant player in accordance with section 19(4) of the Act. It held that none of the Informant’s allegations contained any information with respect to:

• Size of the Opposite Party vis-a-vis its competitors;
• Economic power of the Opposite Party;
• Commercial power of the Opposite Party vis-a-vis its competitors.

The Informant had specifically mentioned in its submission that the Opposite Party sold only 93 cars in the relevant product and geographic market, which led the CCI to conclude that the market for super sports cars in India was miniscule, and, accordingly, it would be fair to conclude that every competitor stood at the same footing with no commercial advantage over the other. In view of this, the CCI held that the Opposite Party was not in breach of section 4 of the Act as well.

3.0 Impact of the Order and Conclusion

After deliberating upon the Informant’s contentions and the Opposite Party’s reply in detail, the CCI held that there was no contravention of the Act. However, the reasoning given by the CCI has set a precedent for future cases. While the “Single Economic Entity” principle is not specifically provided for in the Act, it will be interesting to see whether the CCI continues to apply it even for 50-50 joint ventures where the agreement between one parent and the joint venture entity is in contention. Nevertheless, reasoning provided by the CCI will provide comfort to wholly owned subsidiaries where contracts between them and their parent entity could potentially fall within the ambit of section 3 and cause appreciable adverse effect on competition in India.

The order also gives some important takeaways to enterprises looking to file similar submissions before the CCI. The Informant did not establish any criteria mentioned under section 19(4) of the Act to highlight how the Opposite Party was a dominant player in the relevant market. This information can often be critical while establishing an allegation under section 4 of the Act. Similarly, it is also important to assess the extent to which information should be disclosed to the CCI. In the instant case, the Informant provided information regarding the number of cars sold by the Opposite Party, which eventually resulted in weakening the Informant’s contention alleging the Opposite Party as a dominant player. Therefore, it is extremely important to carefully scrutinize the content of submissions to ensure that neither too much is disclosed, nor too little is told.

Authored by:
Dhruv Suri

1 Section 3 of the Act prohibits anti-competitive agreements and specifically includes both, horizontal and vertical agreements.

2 Section 19(4) states that while inquiring whether an enterprise enjoys a dominant position, the CCI shall give regard to, amongst other things, (i) market share of the enterprise, (ii) size and resources of the enterprise, (iii) size and importance of the competitors, (iv) economic power of the enterprise including commercial advantages over competitors, etc.

3 As per section 3(3)(a) of the Act, any agreement which “directly or indirectly determines purchase of sale prices” shall be presumed to have an appreciable adverse effect on competition and shall be deemed void.

4 Section 3(4)(c) of the Act states that any exclusive distribution agreement shall be void if it causes or is likely to cause an appreciable adverse effect on competition in India.

5 These sections state that there shall be an abuse of dominant position if an enterprise directly or indirectly imposes unfair or discriminatory (i) conditions in purchase or sale of goods and services and (ii) price in purchase or sale (including predatory price) of goods or services, and indulges in practices resulting in denial of market access in any manner.