Dealing with exploitative abuse: Does the Competition Commission have the power to fix prices?

JSaiDeepakpicMost students and practitioners of competition law are aware that Section 4 of the Competition Act, 2002 deals with the abuse of dominant position. Among other things, the direct or indirect imposition of unfair or discriminatory prices (including predatory prices) in the purchase or sale of goods or services by a dominant entity is deemed under Section 4(2)(a) of the Act as abuse by that entity of its position in the market.

Of the three kinds of pricing referred to in the provision, predatory price is the only one defined in the explanation to the provision. There is no express guidance on what constitutes “discriminatory price” and “unfair price”. Since the Act uses two distinct terms which are capable of being ascribed independent meanings, they must be recognised as two different forms of abuse by a dominant entity, which also have distinct consequences for the victim of the abusive conduct.

Discriminatory pricing results in what the literature broadly calls exclusionary abuse, whereas unfair pricing is understood to lead to exploitative abuse. Between the two, what constitutes “discriminatory pricing” is relatively easier to understand. The interpretation of “unfair price” poses the challenge of subjectivity and calls for safeguards to prevent the imputation of a meaning which was never intended by the legislature.

As stated earlier, the Act does not define “unfair price”. Section 2(z) of the Act states that words and expressions used but not defined in this Act and defined in the Companies Act, 1956 shall have the same meanings respectively assigned to them in the latter statute. Neither the Companies Act nor the Depositories Act, 1996 appears to define “unfair” or “unfair price”. The definitions of “unfair trade practice” in the Consumer Protection Act, 1986 or the erstwhile Monopolies and Restrictive Trade Practices Act, 1969 too do not seem to be of help in understanding the meaning of “unfair” from the perspective of pricing.

This requires us to look for interpretation of provisions in foreign legislations which are in pari materia with the Indian provision. Article 102 of the Treaty on Functioning of the European Union (TFEU) is similar in language to Section 4(2)(a) of the Competition Act. However, in the EU too, the body of case law on exploitative abuse is significantly small compared to judicial guidance on exclusionary abuse. The trend in the EU too perhaps may be attributed to the reluctance of the European Commission to deal with an inherently subjective enquiry such as exploitative abuse.

Dominant players have to adhere to a higher standard of conduct in pricing

Whatever little case law exists appears to interpret “unfair” as “excessive”. The frequently-cited case on unfair or excessive pricing in the EU is the decision of the European Court of Justice in United Brands Company v. Commission of the European Communities (C-27/76 [1978]), where the following test was laid down:

“The questions therefore to be determined are whether the differences between the costs actually incurred and the price actually charged is excessive, and, if the answer to this question is in the affirmative, whether a price has been imposed which is either unfair in itself or when compared to competing products.”

Of the two questions which need to be answered under the test, the first calls for the establishment of the absence of a correlation between the costs actually incurred and the price charged by the seller for a good or service. This would require the antitrust regulator to also assess the fairness of the profit margin earned by the seller. The larger policy implication is that dominant players could be expected to charge fairly, which obligation does not apply to entities which are not dominant. Simply put, since a dominant player, by definition, is one who can act independent of market forces, he is expected to adhere to higher standards of conduct given the potential for abuse and the consequences for consumers and market as a whole.

Can the regulator fix a price?

FreeCoursesHaving said this, the question that arises with respect to application of the United Brands test is this: is the regulator expected to merely establish the absence of a reasonable correlation between costs and selling price to arrive at a finding of unfair pricing? Or is it expected of the regulator to first arrive at what is fair before commenting on the unfairness of the price? It is one’s opinion that in either approach, the seller cannot be left in the dark as to what is truly fair in order for him to avoid being hauled up a second time for unfair pricing. In other words, although an enquiry on exploitative abuse requires the regulator to perform the role of a price regulator, it could be said that the regulator may also be called upon to set prices. That said, this is not merely an issue of policy, since a regulator who is the creature of a statute cannot exercise powers which have not been vested in him by the statute.

In the Indian context, this boils down to a simple question: whether the Competition Commission has the power to set or fix prices, and not just comment on its unfairness? To answer this, one must interpret Sections 27 and 28 of the Competition Act which spell out the powers of the Commission to deal with abuse of dominant position. Specifically, Section 27(d) empowers the Commission to direct that agreements which are in contravention of Section 4 “shall stand modified to the extent and in the manner as may be specified in the order by the Commission”. Section 27(g) is even broader since it permits the Commission to pass such orders or issue such directions it may deem fit.  Similarly, Section 28(2)(a) empowers the Commission to vest property rights, which implicitly includes creation of interest in favour of third parties by way of a license. The combined interpretation of these provisions makes it abundantly clear that the Commission has the necessary power to fix prices in a given case if the case so warrants.

For instance, in a situation where the agreement relates to a patent license between a patentee who is a dominant entity and another entity which is the licensee, the royalty tariff demanded by the dominant patentee could be accused of abuse under Section 4 for unfair or excessive pricing. In exercise of its power under Sections 27(d),(g) and 28(2)(a) based on the language of the provisions, it appears possible for the Commission to modify and spell out the prospective royalty tariff. Simply stated, apart from finding the extant royalty tariff unfair, the Commission has the express power to dictate the future tariff.

This conclusion typically raises objections relating to the ability and expertise of the Commission to set future commercial terms in highly specialised agreements where domain or sectoral expertise is called for to understand the commercial practicalities of the sector. But that objection is not one of statutory power, it is one of the Commission having the wherewithal or expertise to do justice to the nature of enquiry. Therefore, such an objection cannot be used to argue that the Commission lacks statutory authority to fix prices since it is the language of the Act that is decisive of the issue. In any event, this is not an insurmountable challenge since the Commission has the power to consult experts in the relevant domain before it fixes future tariff in specialised contexts.

In conclusion therefore, the Competition Commission has the power to enquire into exploitative abuse by a dominant entity and also has broad powers to fix prices, where warranted.

J. Sai Deepak, an engineer-turned-litigator, is a Senior Associate in the litigation team of Saikrishna & Associates. He is @jsaideepak on Twitter and the founder of “The Demanding Mistress” blawg. All opinions expressed here are academic and personal.


Are the Competition Commission’s decisions ‘in rem’?

JSaiDeepakpicAre orders and decisions of the Competition Commission of India (“CCI”) judgments in rem, or do they only bind the parties to a particular dispute? Take a scenario where the CCI has ultimately held that an agreement between X with Y is anti-competitive under Section 3 of the Competition Act, 2002.

1. Would the finding apply to an identical agreement between X and Z, which the parties entered into after the CCI made its finding? Would it apply to an identical agreement between X and P, which the parties entered into before the CCI’s finding?

2. Would the finding apply to identical or similar agreements between A and B, which the parties entered into, either before or after the CCI’s finding?

Section 3 of the Act which deals with anti-competitive agreements, Section 4 which deals with abuse of dominant position, and Section 6 which deals with the regulation of combinations, attempts to proscribe or forbid certain types of behaviour which have an adverse bearing on competition in the market. The focus is on the behaviour of the entities, as opposed to the entities themselves. It could be said therefore, that a finding that a certain clause or transaction or practice is anti-competitive or abusive could apply to third party enterprises indulging in identical or similar practices, even if they were strangers to the earlier proceedings. To that extent, it could be said that the CCI is laying down the law on legally acceptable behaviour in the market.

However, practically, does this mean the CCI can forego investigation and proceed to declare as anti-competitive, the agreements between X and Z, or X and P, or A and B? Sections 42A and 53N help address these questions.

Section42ACompetitionActSection53NCompetitionAct _awardingcompensation

Comparing Sections 42A and 53N 

Section 42A applies to the violation of specific directions or orders issued against a specific enterprise, whereas Section 53N applies to situations covered by Section 42A as well as to subsequent violations of Chapter II of the Act (which contains Sections 3, 4, and 6) by the same enterprise. In other words, the scope of Section 53N is broader. In both instances, the Competition Appellate Tribunal (“COMPAT”) decides applications for compensation.

Under both provisions, an application for compensation may be moved by “any person” who is aggrieved either by a violation of the CCI’s directions or orders by the enterprise against which they were issued, or by a violation of the Act itself by such an enterprise, subsequent to and prior to the date of its conduct being declared as anti-competitive by the CCI or the COMPAT.

Critically, Section 53N(1) read with the Explanation (a) to Section 53N answers the queries raised in the APCCLP_CompanyLaw-Bannerpost. An application for compensation against an enterprise such as X may be moved only after its conduct has been found violative of the Act either by the CCI orthe COMPAT. It can be moved by “any person” who has suffered damage or loss as a result of the conduct. Therefore, if X’s conduct in relation to Y has been found anti-competitive, and X has entered into identical or similar transactions with P and Z in the past or the future, Y,P, and Z may all apply to COMPAT for compensation against X.

However, as the explanation implicitly clarifies, the finding with respect to X’s conduct cannot be directly applied or extended to an agreement between A and B, even if the agreement is identical or similar to the X’s agreement with Y, until it is determined afresh by the CCI or COMPAT (in appeal) that such agreement between A and B is violative of the Act.

Simply put, if the conduct of a party has been found to be violative of the Act, the Commission need not revisit the illegality of the party’s conduct over and over again in order to award compensation to parties affected by the party’s conduct. However, if a stranger to the earlier proceedings indulges in identical or similar conduct, it needs to be investigated and a fresh finding must be arrived at.

Another important caveat is that if a party’s conduct involves abuse of dominance under Section 4 of the Act, it may not be possible to extend the findings arrived at in one case to past or future conduct since it would need to be ascertained if the party was in a position of dominance during each of the impugned transactions. This is because under Section 4, only the conduct of dominant parties may be investigated. Therefore, if a party is no longer dominant at the time of the subsequent transaction, the earlier finding may not be valid, which means a fresh investigation is necessary to arrive at the finding of abuse of dominance.

J. Sai Deepak, an engineer-turned-litigator, is a Senior Associate in the litigation team of Saikrishna & Associates. He is @jsaideepak on Twitter and the founder of “The Demanding Mistress” blawg. All opinions expressed here are academic and personal.

Supreme Court of India

Competition Commission v. SAIL (2010) – Comment

On 9th September, a landmark judgment was passed by the Supreme Court on the Indian Competition Act pointing out that the primary objective of competition law – promotion of economic efficiency through competition in the market – cannot be attained unless matters related to contravention of the Act are dealt with in an expeditious and time bound manner. In the event of a delay, the very purpose and object of the Act would be frustrated, as greater damage would be caused to the market and the country’s economy.

The Indian Competition Act, which recently came into force, prohibits anti-competitive practices, abuse of dominant position and combinations which result in distortion of the market. To look into violations of the Act, the Competition Commission of India has been established, a body vested with wide powers – inquisitorial, investigative, regulatory, adjudicatory, and to some extent, even advisory. Appeals from directions, decisions or orders of the Commission lie before the Competition Appellate Tribunal.

In October 2008, Jindal Steel and Powers Ltd. informed the Competition Commission that Steel Authority of India (SAIL) had entered into an exclusive supply agreement with Indian Railways for the supply of rails. SAIL being a key player in the Indian steel market was alleged to have abused its dominant position in the market in contravention of Section 4 (1) of the Act, and also acted in contravention of Section 3 (4) of the Act which prohibits certain exclusive supply agreements. On registering the information, the Commission directed SAIL to submit its comments. When SAIL failed to do so within the stipulated time, the Commission formed the opinion that a prima facie case existed against SAIL and passed an order directing the Director General to start investigation into the matter. The Commission also granted liberty to SAIL to file its comments before the Director General during the course of the investigation.

This order was challenged by SAIL before the Competition Appellate Tribunal on grounds, inter alia, that the order was contrary to the principles of natural justice as the Commission did not give SAIL extension of time to file its reply and denied the latter of its right to be heard.

In a decision of significant ramifications for the growth of Competition law in India, the Appellate Tribunal, on 15th February, 2010, stayed the Commission’s order and also dismissed the Commission’s application for impleadment in the appeal, stating that the Competition Commission was neither a necessary party, nor a proper party in appellate proceedings before the tribunal.

The Supreme Court in its judgment of last Thursday corrected what would have otherwise been a grave error in interpretation of the law, by ruling, inter alia, that:
•    All orders passed by the Competition Commission are not subject to appeal. Only orders specifically made appealable under the Act. [Section 53 A (1) (a)] will be treated as such. An order of this nature (forming a prima facie case and directing the Director General to start investigation) is a direction simpliciter, NOT an appealable order.

•    At the stage of forming a prima facie case, there is NO statutory duty on the Commission to give notice or grant hearing to any party. There is also no need to record any detailed reason while passing such an order for starting investigation, though keeping in mind the principles of natural justice, some minimum reasons should be recorded.

•    The Commission, in cases where an inquiry has been initiated suo motu, shall be a necessary party, and in all other cases, a proper party in proceedings before the Appellate Tribunal.

This judgment goes a long way in reinforcing the legislative intent behind the enactment of the new Competition Act. A mere direction to start investigation, like in the instant case, is not one which determines any right or obligation of the parties involved in the dispute. The Supreme Court, by declaring that such orders are not appealable has ensured a more effective and expeditious functioning of the new law. When it comes to a law on competition, delay can be fatal to the market. Further, by including the Competition Commission as a party in proceedings before the Tribunal, the Apex Court, apart from the reinforcing the Commission’s legal right has also ensured that the expertise of the latter would be available on all matters in dispute. This is also crucial in view of the nascent stage the law is in. Commendable first steps indeed!

(Tilottama Raychoudhary is an Assistant Professor at WBNUJS, Kolkata.)