Atul Dua and Anupam Sanghi analyse why the competition regulator’s order was set aside
The automobile industry is prominent for a high incidence of alleged anti-competitive conduct on the part of car manufacturers and their dealers. The Competition Commission of India (CCI) recently penalized Hyundai Motor India for indulging in such behaviour through vertical agreements with its dealer via: (1) resale price maintenance (RPM) i.e. imposing price levels and maximum permissible discount at which the passenger car should be sold; and (2) tie-in arrangement i.e. tying-in lubricants/oils to buy from specified vendors and imposing penalties for non-compliance.
Upon appeal, National Company Law Appellate Tribunal (NCLAT) set aside the CCI order stating that the competition regulator should have drawn up its own opinion, and based its decision on relevant evidence; analysis of competition concerns; and provide an explanation of whether the evidence on record is reliable.
Following a pronouncement by the Supreme Court, NCLAT observed that the decision was made without defining the relevant market.
RELEVANT MARKET DEFINITION
Market definition is a tool to identify and define the boundaries of competition between enterprises and the competitive constraints faced by them. Without considering the different aspects of a relevant product involved in anti-competitive behaviour, and linking these with an appreciable adverse effect on competition, it cannot be conclusively held as to how the behaviour has affected the market.
The European Commission’s notice on market definition provides for factors the competition authorities need to consider while defining the reelevant market, namely:
“(1) The boundaries of product and geographic markets with the necessary factual evidence to reach a conclusion; (2) separate product and geographic markets for different levels of production or distribution of the goods/services in question; and (3) any additional information of the undertakings involved.”
RESALE PRICE MAINTENANCE
Usually for RPM to constitute a violation of competition law, the upstream enterprise (in this case, the car manufacturer) may actively seek to penalize deviations from prescribed prices, with threats to cut supply to the dealer/retailer and impose related conditions, such as not advertise or promote a deviation from the minimum or maximum price.
While deciding that Hyundai India imposed RPM to stifle inter-brand competition, CCI did not explain how the relevant market had suffered from higher prices and how there was lesser competition between cars of the same brand (intra brand) and other brands (inter-brand).
According to the theory of harm, inter-brand competition is reduced when all the car manufacturers follow RPM to keep prices at a certain level, leaving no choice for consumers to shift to other brands and/or to different dealers of the same marque. Without finding actual evidence of such harm in the market, compared to efficiencies created through supply chains of a huge range of brands of cars, as well as dealers, it cannot be concluded there is an adverse effect on competition.
Hyundai mandated its dealers to purchase engine oil from two designated vendors, at the price it indicated. In case of non-compliance, Hyundai threatened to terminate the dealership agreement.
While CCI noted that the threat resulted in price discrimination under section 3(4)(a) of the Competition Act, it did not support its reasoning with actual evidence on record. Thus, NCLAT found there was no basis on which CCI could have penalized Hyundai and/or its dealers.
NCLAT has set the benchmark for CCI to pass final orders after an independent assessment of the relevant market from the market factors found in the Director General’s report and other evidence on record. However, in our view instead of setting aside the order, an opportunity could have been taken to develop jurisprudence on RPM and vertical arrangements that have an adverse effect on the market.
It could have done so with elaborations on the law relating to vertical restraints in developed jurisdictions, competition concerns, based on evidence on record, as well as the missing links of facts and law on RPM.
In conclusion, the role of the appellate body is crucial to develop jurisprudence, with the help of precedents in foreign jurisdictions, based on sophisticated market analysis and economic concepts applicable to any anti-competitive conduct.
In this light, the role of competition law experts would be even more significant in helping the corporate sector with its business arrangements to mitigate competition law risks and liabilities.