FORM VS. EFFECT BASED APPROACH – THE STORY OF COMPETITION

The enforcement of competition law in India, in a fair, balanced, and optimal manner is a complex task given the diverse economic and legal considerations involved. The jurisprudence on competition in India vide the enactment of Competition Act, 2002 and the establishment of Competition Commission of India (‘CCI’) has evolved the landscape of enforcement and regulation of competition in India.

Introduction:

The origins of the Competition Act, 2002 (‘the Act’), being an economic jurisprudence can be traced back and found in the ancient Indian texts, mainly in the Manusmriti and Arthashastra, which not only portray the rich state of trade and commerce, but also provide insights on the prevalent laws to deal with and negate foul play in the market.

The unfolding of Monopolies and Restrictive Trade Practices Act, 1969 (‘MRTP Act’) into the Competition Act, 2002 transpired with the principal object to promote, foster or sustain competition in India. However, based on principle, there was not much of difference between the legislations, though not all principles which the erstwhile law embodied, migrated into the Act (Lok Sabha Transcript - Consideration for passing the Competition Bill, 2001 (16^th December 2002). With the changes envisaged as part of the Act, it was expected to benefit the producer, retailer and the consumer.

The promulgation of the Act was seen as a measure to facilitate an environment with perfect competition. Like the other laws in India, the Competition Act, 2002, aims to create a level playing field without discriminating any class of stakeholders. The benefit of perfect competition, as also affirmed by Supreme Court in CCI v. Steel Authority of India & Anr. (Civil Appeal No. 7779 of 2010), which can be categorised into three namely:

a.      Effective allocation of resources;

b.     Minimum cost of production; and

c.      Promoting creative and innovative practices.

The codification of the Act is a dual measure aimed at gearing up the domestic companies to face competition consequent to liberalisation and globalisation and to prevent and prohibit any trade practices which has any appreciable adverse market effect in India. This is resonated under the Statement of objects and reasons of the Act.

Dominant Enterprise – Conceptual Overview:

The enactment of the Competition Act, 2002 aimed at regulating and monitoring the conduct of dominant enterprises in the market. As the words suggest, a dominant enterprise enjoys a degree of control in the market through its position. Explanation to Section 4 of the Act, defines dominant position as a position of strength or power, enjoyed by an enterprise, in the relevant market in India which enables it to:

a.  Conduct its business and operate independently in the market, irrespective of the presence of competitive entities in the relevant market.

b.     Create an impact upon its consumers and competitors in the relevant market.

The concept of dominant enterprise has close nexus with the concept of monopoly in the relevant market. The position of dominance has legal recognition under the Act and presence of dominant entity in the market is not bad per se. The conduct of dominant enterprises resulting in activities having appreciable adverse market effect are considered against the spirit of the competition law. The CCI in the case of Jupiter Gaming Solutions Private Limited v. Govt. of Goa & Ors. (Case no. 15 of 2010; decided 12^th May 2011) opined that dominance in market is not bad, but rather its abuse by enterprises is considered serious.

The conundrum of market share measurement:

Section 19(4) of the Act inter alia lists out the factors to be considered by CCI such as market share, economic power, market size, and resources (of the enterprise and competitor), market structure, entry barriers etc., in the stage of inquiry to find out whether an enterprise enjoys a dominant position in the relevant market. One of the most used metrics is the market share, to determine the level of dominance of an enterprise. The market share metric is an inadequate measure to establish dominance and leads to inconsistencies as there is no accepted benchmark on the market share cut-off, beyond which an enterprise may be considered dominant. In the matter of Financial Software and Systems Private Limited v. ACI Worldwide Solutions Private Limited & Ors. (Case no. 52 of 2013; decided 13^th January 2015), the CCI was considering whether an enterprise engaged in business of software development (Electronic Fund Transfer Switch) for electronic payments for enabling card based transaction (such software was present in 77% of ATM’s in India back then) and which enables an ATM or POS terminal to establish contact and communicate with relevant bank’s core banking network, would enjoy a dominant position based on market share. The CCI bench concluded that the DG (CCI) while assessing the market share of ACI has limited himself to the volume of transactions processed through an EFT Switch using frontend devices such as ATMs, POS terminals, internet payment gateways. In doing so, the DG has not considered the various users of EFT Switch / switch software thereby limiting itself to a segment of the relevant market. Therefore, a market share analysis based on the volume of transactions, as captured in the RBI data, would not give a true picture of the number of times a switch gets activated. More often, the CCI has adopted a comprehensive approach in drawing a conclusion on dominance. In Mr Ramakant Kini v. Dr L H Hiranandani Hospital, Powai, Mumbai (Case no. 39 of 2012, decided by CCI on 05^th February 2014), the CCI contemplated that market share of an enterprise is only one of the factors that decides whether an enterprise is dominant or not, but that factor alone cannot be decisive proof of dominance.

The Competition Law Review Committee was constituted, inter alia to review and recommend changes in the competition laws in India. The Committee vide its report dated 26^th July 2009, discussed the adoption of a bright line test for determination of dominance which is based on the market share of the enterprise or group and, introduction of a threshold limit, below which, an enterprise would not be considered dominant. The Committee concluded that the present structure of the Act was sufficient and that the concept of bright line test was not necessary.

Abuse of dominance

The Competition Act, 2002, prohibits abuse of dominance by an enterprise in the relevant market. The basic premise in such prohibition is that abuse of dominant position by an enterprise leads to an appreciable adverse market effect and depreciates the spirit of competition in the market, which the law otherwise aims to protect. Section 4 of the Competition Act, 2002 lays down the circumstances, as listed below, wherein an enterprise is said to have abused its dominant position:

1. Imposition of unfair or discriminatory conditions in purchase or sale of goods including predatory pricing.
2. Limiting or restricting the supply of goods and services or technical or scientific development relating to goods or services to the prejudice of consumers.
3. Conduct leading to denial of market access to other players.
4. Using the dominant position in one relevant market to enter another relevant market.

Fundamentally, abuse of dominance relates to unfair conduct of a dominant enterprise which is against the principles of fair competition and development in the competition market. The term ‘unfair’ is not defined under the Act. However, determination of a conduct as unfair under the Act, would be subject to case-to- case basis considering its effect. This was also upheld by CCI in Shri Neeraj Malhotra, Advocate v. North Delhi Power Ltd. & Ors. (Case no. 06 of 2009, decided by CCI on 11^th May 2011).

The pre-requisite to cast liability under Section 4 of the Act commences with first establishing whether an enterprise holds a dominant position in the market. Without dominance, there can be no abuse. Therefore, as the first step, the criteria of dominance must be established and thereafter the conduct ought to be assessed and asserted to demonstrate the abuse of such dominance.

The above is also evident from the dictum of CCI in Mr. Ajit Mishra vs Supertech Limited (Case no. 03 of 2013, decided by CCI on 31^st May 2013) wherein it was alleged that Supertech abused its dominant position to deprive the original allottees of the flats by cancelling the allotted apartments without any reasonable basis. The CCI concluded that Supertech did not enjoy a dominant position in the relevant market as there existed other recognised real estate players. Since there was no question of dominance, the CCI opined that there was no question of abuse of the dominant position within the ambit of Section 4. Similar view was taken by CCI in Anil K Jain v. Janta Land Promoters Limited (Case no. 48 of 2014, decided by CCI on 27^th October 2014).

Abuse of dominance may be categorised into two viz. exclusionary abuse wherein the conduct of a dominant enterprise results in exclusion of competitors in the market and the exploitative abuses wherein a dominant enterprise uses its position to impose unfair or discriminatory conditions / restrictions upon other players in the market.

Form based assessment – Lack of Consensus

In the European Union (‘EU’), if an entity is accused of dominant position and abuse of such position thereof, such entity may put forward a justification aimed objectively towards not harming the competition. Such justification, if accepted, shall render that there is no abuse and no violations of the EU laws. However, it is pertinent that such justifications for conduct should produce substantial efficiencies that outweigh the anti-competitive effect on consumers. On the global perspective, most anti-trust jurisprudence has accepted the defence through doctrine of objective justification, which in other words signifies the acceptance of legitimate business justification, business justification or valid business reasons as defence for conduct of acts resulting in abuse of dominance.

In the Indian landscape, there lies an ambiguity whether such defence can be accepted. The bare reading of Section 4 of the Act outlines prohibition of activities resulting in abuse of dominance by an enterprise and casts absolute and strict liability in case of deviation from compliance of Section 4. The law provides extremely limited defence, on the ground that such abuse of dominant position results in promoting competition. Further, the vires of Section 4 remains silent on the treatment of abuse in case, the conduct of a dominant enterprise emanates from a policy or rule. Though Section 4 of the Act gives limited scope of defence, the report of Raghavan Committee (S.no. 4.5.0 of the Raghavan Committee on need for Competition Policy) draws out the following inclusive questions for adjudication on abuse of dominance:

a.     How will the practice harm competition?

b.     Will it deter or prevent entry?

c.      Will it reduce incentives of the firm and its rivals to compete aggressively?

d.     Will it provide the dominant firm with an additional capacity to raise prices?

e.      Will it prevent investments in research and innovation?

f.      Do consumers benefit from lower prices and/or greater product and service availability?

The CCI and courts have often adopted form based approach in determining the abuse of dominance by an enterprise over effect based approach. Statutorily, abuse of dominance is treated as a violation per say without giving an afterthought on the effect of such conduct. This approach was adopted by the CCI in several cases including the BCCI case (Surinder Singh Barmi v. BCCI (Case no. 61 of 2010, decided by the CCI on 08^th February 2013), wherein the CCI found BCCI to have abused its dominance by denying market access in the organisation of professional domestic cricket leagues or events in India by virtue of a clause in the media rights agreement entered by it. Given the enforcement of competition laws in India, there has been a debate between presumptive or form based assessment and effect based assessment in respect of abuse of dominant positions. The doctrine of objective justification, as more often, accepted in criminal jurisprudence supports the assessment of abuse of dominance on effect basis i.e. usage of economic thresholds and techniques, being accurate and conductive to the view of optimal enforcement of competition laws in India. Until the recent times, there was no clear consensus in India regarding the effect based analysis and approach. In Uber India Systems Private Limited v. CCI (Civil Appeal No. 641 of 2017, decided on 03^rd September 2019), the Division Bench of the Supreme Court considered whether discounts and high incentives given to retain drivers and loss made by Uber per trip, would amount to abuse of dominance. The Apex Court postulated that Uber indulged in predatory pricing to keep the competitors at a disadvantage in the relevant market and thereby abusing its dominant position. In the case of MCX Stock Exchange Limited v. National Stock Exchange of India Limited (Case no. 13 of 2009, decided on 23^rd June 2011), the CCI followed a per se approach by not enquiring into the effects of NSE’s conduct. The CCI’s dictum was based primarily out of market share of NSE holding the same as determinative of its dominance and holding the practice of zero-pricing of products as abuse of dominance.

Effect over form - Departure from the existing practice

In a significant decision, the Principal Bench of National Company Law Appellate Tribunal (‘NCLAT’) in the case of Google LLC & Anr. v. CCI (Competition Appeal (AT) No. 01 of 2023, decided on 29^th March 2023), has endorsed that effect based analysis are required to be carried out by CCI for proving abuse of dominance and the CCI has to showcase, that the conduct of an enterprise is anti-competitive in order to prove abuse of dominance. The NCLAT held that “For proving abuse of dominance under Section 4, effect analysis is required to be done and the test to be employed in the effect analysis is whether the abusive conduct is anti-competitive or not.”

 

The NCLAT was dealing with an appeal arising out of CCI order levying penalty of Rs. 1,337.76 crores for abuse of dominance. The NCLAT was considering inter alia whether restrictions imposed by Google on Original Equipment Manufacturers (‘OEM’) through pre-existing commercial agreements would be tantamount to abuse of dominant position. NCLAT assessed the bargaining power of Google vis-à-vis OEM, in terms of finalising the terms and conditions of an agreement. It was observed that OEM lacked bargaining and negotiating power with Google thereby proving harm to competition. It was also observed that as part of the commercial agreements, OEM had to seek prior approval of Google in case of launch of any new applications. This was also held anti-competitive amongst other things.

 

This is a very significant precedent, as neither the CCI nor the NCLAT had, in past, affirmed that effect based analysis indeed forms integral part of Section 4. Though in the past, there were instances where the CCI and the courts did adopt the objective justification doctrine and considered cases on effect basis, but the concept did not draw legal recognition to be mandatorily followed by CCI. The ruling by NCLAT is though more imperative, considering that burden of proof now rests with the CCI in cases involving abuse of dominance. This is a stark departure from the practice that the burden of proof vested upon the entity under question.

 

In the past as well, there had been catena of cases wherein effect based analysis was resorted to, in cases involving abuse of dominance.

 

In Pps International v Union of India (Writ Petition no. 38168 of 2018, decided on 10^th April 2023), the Allahabad High Court, while dealing with a case relating to overpricing of imported electrical equipment, discharged the complaint regarding abuse of dominance. The High Court reasoned that excessive pricing was not constant and there was no continuous trend evidencing increase in pricing, which falls under the purview of Section 4 and accordingly held that the entity did not abuse its dominance.

 

In a separate, the Appellate Tribunal for Electricity in Uttar Pradesh Power Corporation Limited v. Noida Power Company Limited & Anr. (Appeal No. 26 & 36 of 2007, decided on 25^th October 2007), assessed whether the supply of power by Uttar Pradesh Power Corporation Limited (‘UPPCL’), in presence competing offers from suppliers, would amount to abuse of dominance by UPPCL when the Noida Power Company Limited considered contracts with UPPCL, for the want of preferential treatment, which was otherwise not available with other suppliers. The Tribunal held that there was scope to procure power from other players apart from UPPCL. The contract offered by UPPCL was not considered worse than other players and hence it was observed that UPPCL did not abuse its dominance.

 

The CCI in the case of Indian National Shipowners Association (INSA) v. Oil and Natural Gas Corporation Limited (ONGC)(Case no. 01 of 2018, decided on 02^nd August 2019) applied the effect based analysis to hold that imposition of restrictions or unfair conditions may amount to contravention of Section 4, but the conduct of an enterprise has to be examined which is essentially a fairness or reasonability test, to unearth whether there was any underlying object in imposition of such condition or restriction.

 

In Shri Vinod Kumar Gupta v. WhatsApp LLC and CCI (Competition Appeal (AT) No. 13 of 2017, decided on 02^nd August 2022), the NCLAT upheld and affirmed the CCI order to hold that WhatsApp was not abusing its dominant position as the new privacy policy provided flexibility to ‘opt-out’. The NCLAT also touched on the allegations of predatory pricing by WhatsApp. It was concluded that communication applications are offered at free of cost and there are no significant costs preventing the users from switching from one application to another.

 

In summary, the recent orders from regulators reflect the move away from form based approach. Though Section 4 of the Act provides for a rigid approach, Section 19(4) leans towards broad approach to be adopted by CCI in adjudication of issues involving abuse of dominance.

Concluding Remarks:

The Report of Review Committee (The Report of Competition Law Review Committee (July 2019) – Point 4.3.) stressed that the CCI and appellate authorities adopted distinct approach in different circumstances and there was no uniformity on adoption of effect based analysis for adjudication on abuse of domination. The precedent set by NCLAT in Google LLC (2023) is a game changer and now burden of proof lies on CCI to establish abuse of dominance, moving ahead from the traditional practice of presumptive approach towards abuse of dominance. The dictum of NCLAT also signifies that effect based assessment lies as an integral part of Section 4 of the Act. With the ruling of NCLAT’s order in Google, it is expected that CCI would start exploring options to bring uniformity in its investigation.

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