Dominance. The regulation of dominant firm conduct in 36 jurisdictions worldwide. Contributing editors: Thomas Janssens and Thomas Wessely

Transcription

1 Dominance The regulation of dominant firm conduct in 36 jurisdictions worldwide 2008 Contributing editors: Thomas Janssens and Thomas Wessely Published by getting the deal through in association with: ELIG Attorneys-at-Law Elvinger Hoss & Prussen Freshfields Bruckhaus Deringer Hoet Peláez Castillo & Duque J Sagar Associates Lambadarios Law Offices Lejins Torgans & Partners Magalhães Ferraz e Nery Advocacia Marques Mendes & Associados Matheson Ormsby Prentice Norcous & Partners Partners Attorneys & Counselors LLC Raidla & Partners Attorneys at Law Roschier Attorneys Ltd Sai Law & Economics Salans Stikeman Elliott LLP Tuca Zbârcea & Asociatii Vinge Webber Wentzel Bowens Yulchon Attorneys at Law GlobaL Competition Review

2 India Farhad Sorabjee & Manas Chaudhuri J Sagar Associates General 1 What is the legislation applying specifically to the behaviour of dominant firms? The law concerning dominant firms is the Monopolies and Restrictive Trade Practices Act 1969 (MRTPA). The MRTPA frowns upon dominance per se and concerns itself with restrictive and unfair trade practices and the prohibition of specified categories of such practices. The Act prescribes no penalties for offences and has been largely used to obtain cease-and-desist orders. The central government is empowered to appoint one or more inspectors for making an investigation into the affairs of the such an undertaking. The MRTPA is a largely toothless and moribund piece of legislation and is not enforced with any degree of vigour. The main legislation concerning the behaviour of dominant enterprises is the Competition Act 2002 (CA). The CA draws from the legislation of several established jurisdictions, but appears to largely base itself upon the UK Competition Act 1998 and the UK Enterprise Act The Competition Commission of India (CCI) provided for under the CA was established on 14 October 2003 and has been active in the education and advocacy spheres and in the drafting of regulations. The substantive provisions of the CA are expected to be in force by spring This chapter therefore focuses on the law as set out in the CA. Amendments to the CA have been made by parliament in September Changes have been effected in the substantive provisions relating to the abuse of dominance by make, the same also applicable to groups in addition to enterprises, and amplifying denial of market access by inserting the words in any manner. The CCI has also been empowered to order division or winding up of dominant enterprises, transfer of property, rights, etc, and restructuring of shares, stocks or securities. It may provide for any other matter necessary to give effect to the division of the enterprise. 2 Does the law cover conduct through which a non-dominant company becomes dominant? The actual transition to dominance is only obliquely touched upon by way of the provisions for the regulation of combinations. The CCI may inquire into whether a combination would have the effect of making an enterprise dominant. 3 Is the object of the legislation and the underlying standard a strictly economic one or does it protect other interests? The underlying standard of the CA is the prevention of an appreciable adverse effect upon competition in India. The stated object of the CA is to prevent practices having an adverse effect on competition, to promote and sustain competition in markets, to protect the interest of consumers and to ensure freedom of trade carried on by other participants in markets in India. The CA is primarily intended to protect competition, and not competitors. However, in cases involving inquires into predatory pricing or entry barriers, competitors may be protected as a consequence. That being said, the CA specifically excludes restraints and conditions permissible under Indian intellectual property laws. The CA also requires that the social obligations and social costs of an enterprise be taken into consideration when inquiring into the existence of a dominant position. 4 Are there any rules applying to the unilateral conduct of non-dominant firms? Is your national law relating to the unilateral conduct of firms stricter than article 82? There are no specific rules applying to the conduct of nondominant firms. The explanation in section 4(2)(e) of the CA merely defines dominant position to mean a position of strength enjoyed by an enterprise in the relevant market in India, which enables it to operate independently of competitive forces prevailing in the relevant market or affect its competitors or consumers or the relevant market in its favour. This definition is wide enough to include a firm which merely occupies a dominant position in a relevant market. 5 Is dominance controlled according to sector? Certain sectoral regulators exercise concurrent jurisdiction on control of dominance, such as the Telecommunication Regulatory Authority in the telecom and broadcasting sector, the central and state electricity regulatory commissions in the electricity sector, and in some respects, the Reserve Bank of India in the banking sector. The recent amendments to the CA empower the CCI and sectoral regulators to refer matters pending before them to each other for opinions. 6 What is the relationship between the sector-specific provisions and the general abuse of dominance legislation? Concurrent and complementary jurisdictions are envisaged. The CCI would be entitled to inquire into a possible abuse of a 90 Getting the Deal Through Dominance 2008

3 dominant position regardless of the fact that the relevant sectoral regulator has chosen not to. Enterprises may approach the sectoral regulators with respect to abuse of dominance instead of approaching the CCI. Sectoral regulators are also entitled to file applications with the CCI and provide information to it under the CA. In general, matters pertaining to competition in India are expected to be primarily regulated by the CCI and sectoral regulators are expected to assist the CCI in its investigations. The amended section 21 and newly inserted section 21A may have to be looked into to formulate an appropriate reply to this question. 7 How frequently is the legislation used in practice and what is its practical impact? The MRTPA, which is still in force, is largely unused and ineffective. The substantive provisions of the CA are not yet in force, but are expected to be by spring Indications suggest it will be vigorously implemented. 8 What is the role of economics in the application of the dominance provisions? The establishing of an abuse of dominance requires, among other things, a determination and appreciation of the relevant market, and section 19 of the CA specifies several relevant factors which require to be taken into consideration such as market share, size, resources the importance of the competitors, commercial advantages over the competitors, vertical integration, existing entry barriers and other economic issues. The CA has established an advisory committee comprising representatives from trade and industry and other regulatory authorities, economists, lawyers and management experts to help with inquiries and studies, and recommend research institutes and researchers to advise on these and attendant matters. The CCI is empowered to call upon experts from any field to assist it in the conduct of any proceeding before it. 9 To whom do the dominance provisions apply? To what extent do they apply to public entities? The provisions apply to an enterprise or group. An enterprise is defined to mean a person or a department of the government who or which is or has been engaged in any activity relating to the production, storage, supply, distribution, acquisition or control of articles or goods or the provision of services of any kind, or in investment or the business of acquiring, holding, underwriting or dealing with shares, debentures or other securities of any other body corporate, either directly or through one or more of its units or divisions or subsidiaries, but does not include any of the government s sovereign functions related to atomic energy, currency, defence and space. A group is defined to mean two or more enterprises that directly or indirectly are in a position to exercise 26 per cent or more of the voting rights or appoint more than 50 per cent of the members of the board of directors in the other enterprise, or control the management or affairs of the other enterprise. This definition is poorly drafted and renders the term the other enterprise confusing and perhaps contradictory. 10 How is dominance defined? The term dominant position is defined under section 4 of the CA to be a position of strength, enjoyed by an enterprise, in the relevant market, in India, that enables it to: operate independently of competitive forces prevailing in the relevant market; or affect its competitors or consumers or the relevant market in its favour. In assessing dominant position, the CCI gives due regard to the factors set out under section 19 of the CA and mentioned in question What is the test for market definition? Relevant market is determined with reference to the relevant geographic market or the relevant product market. The geographic market comprises an area in which competition conditions for supply of or demand for goods or services are homogeneous and distinguishable from conditions in neighbouring areas. Relevant factors for determining a relevant geographic market include regulatory trade barriers, local special requirements, national procurement policies, distribution facilities, transport costs, after-sales services. The product market is a market comprising all products or services regarded as interchangeable or substitutable by the consumer by reason of price, characteristics or usage. Relevant factors for determining the relevant product market include consumer preferences, specialised production and classification. The term relevant market is defined and generally applicable to all prohibitions under the CA, including merger control. 12 Is there a market-share threshold above which a company will be presumed to be dominant? There is no prescribed market share threshold. It is possible that, depending on relevant factors and conditions, an enterprise with a relatively small market share could be determined to be dominant, and an enterprise with a relatively high market-share may not be so determined. 13 Is collective dominance covered by the legislation? If so, how is it defined? There is no specific definition for collective dominance. With the introduction of the term group in section 4(1) by the recent amendment, collective dominance by group entities now stands covered. Further, section 4 of the CA explains dominant position to mean a position of strength enjoyed by an enterprise or group which allows it to ignore competitive forces and affect competitors and consumers in its favour. The wide amplitude of the phrase a position of strength enjoyed by an enterprise would also permit interpretation so as to include situations where enterprises or groups enjoy positions of strength as a result of being a parties to collective dominance. Further, the term enterprise includes a person conducting activities either directly or through one or more of its units or divisions or subsidiaries. 14 Does the legislation also apply to dominant purchasers? If so, are there any differences compared with the application of the law to dominant suppliers? The provisions of the CA specifically cover both the purchase and sale of goods and services without distinction. Getting the Deal Through Dominance

4 Abuse in general 15 How is abuse defined? Section 4(2) of the CA provides that there shall be an abuse of dominant position if an enterprise directly or indirectly, imposes unfair or discriminatory conditions upon the purchase or sale of goods or service or the price of the purchase or sale (including a predatory price) of goods or services. However, an otherwise unfair or discriminatory condition upon the purchase or sale of goods or price stands excluded if adopted to meet the competition. The adoption of practices that result in the denial of market access in any manner, limit or restrict production or technical or scientific development, or protect or provide entrance into another relevant market as a result of the dominant position also constitute abuse. The law therefore provides for both a form-based as well as effects-based approach to identifying anticompetitive conduct. 16 Does the concept of abuse cover both exploitative and exclusionary practices? Both categories are covered by the CA. 17 What link must be shown between dominance and abuse? A link is required between a dominant position and the abuse of such position adopted by dominant enterprises. While it is implicit in the provisions of the CA that it is the dominant position that would enable the abuse, there is no direct causal link explicitly stated to be required. Further, the law clearly considers the use of an enterprise s dominant position in one relevant market to enter into or protect another relevant (possibly non-dominated) market also constitutes an abuse (section 4(2)(e)). 21 Rebate schemes There is no specific provision for this in the CA. However, such schemes could well be investigated as instances of unfair, discriminatory or predatory pricing. such as the UK, the United States and the EU. 22 Predatory pricing Such conduct may amount to an abuse. Section 4(2)(a) (ii) of the CA provides for the same. 23 Price squeezes Under the CA, the use of a dominant position in one relevant market (which will be determined by the CCI) to enter or protect another relevant market amounts to an abuse of dominance. Exploitative pricing is also proscribed by the CA. Read together, a case may be made out that price squeezes may be brought within the ambit of the CA. However, given the complicated and elaborate integrated enterprise structures required for effecting price squeezes and the difficulties of proof faced in even the established jurisdictions, this area is unlikely to be vigorously pursued, at least in the short term. 18 What defences may be raised to allegations of abuse of dominance? In inquiring into the possible dominant position of an enterprise, the authorities are required to consider various factors (detailed in question 8) that afford defences. Further defences include economies of scale, the high cost of substitutable goods or services being barriers to entry, social obligations, social costs, and contribution to economic development. The CCI would be free to consider any other factor which it may consider relevant for its inquiry. Specific forms of abuse 19 Price and non-price discrimination Such conduct may amount to an abuse. Section 4(2)(a) of the CA specifically provides for the same. the Competition Appellate Tribunal (CAT) will rely upon precedents from established jurisdictions such as the UK, the US and the EU. 20 Exploitative prices or terms of supply Such conduct may amount to an abuse. Section 4(2)(a) of the CA provides for the same. 24 Refusals to deal and access to essential facilities The practice of refusal to deal, like the practices covered under questions 25 and 26, involves overlapping prohibitions and is provided for in the CA in the section relating to anti-competitive agreements (section 3(4)(d)). However, such practices could perhaps constitute restrictions on the provision of services or practices which result in the denial of market access, both of which specifically constitute abuse under section 4(2)(b) and (c) respectively. 25 Exclusive dealing, non-compete provisions and single branding The provisions concerning these issues are again contained in section 3 of the CA which relates to anti-competitive agreements. Under general Indian law, non-compete provisions are generally unenforceable, being conditions in restraint of trade and in violation of the provisions of the Indian Contract Act Agreements for exclusive dealing or single branding may be considered to be anti-competitive if they were shown to cause or be likely to cause an appreciable adverse effect on competition in India. Under the CA, in certain situations, such agreements may be deemed to have such an effect. 92 Getting the Deal Through Dominance 2008

5 There is a plethora of judgments holding agreements in restraint of trade to be void and unenforceable. 26 Tying and leveraging Again, the specific provision concerning tie-in arrangements is contained in section 3 of the CA which relates to anti-competitive agreements and dominance. Under the CA, such arrangements may amount to anti-competitive behaviour if they have an appreciable adverse effect on competition in India. Leveraging, though not specifically mentioned in the provisions for abuse under the CA, may amount to an abuse by a combined or selective application of the provisions prohibiting a practice or practices resulting in denial of market access (section 4(2)(c)), a practice that makes the conclusion of contracts subject to acceptance by other parties of supplementary obligations which naturally or commercially have no connection with the subject of such contracts (section 4(2)(d)), or the use of a dominant position in one relevant market to enter into or protect some other relevant market (section 4(2)(e)). Again, no precedent exists and it is expected that the CCI and 27 Limiting production, markets or technical development Again, no precedent exists and it is expected that the CCI and 28 Abuse of intellectual property rights The abuse of intellectual property rights may amount to abuse of dominance if it is found that a dominant enterprise indulged in practices that constitute abuse under section 4 of the CA. The government of India has very recently communicated that the CCI would examine how companies enforce their intellectual property rights. No precedent exists and it is expected that the CCI and the CAT will rely upon precedents from established jurisdictions 29 Abuse of government process Such practice is not specifically covered under the provisions of the CA. Anti-dumping complaints are very often filed by applicants whose production constitutes more than 50 per cent of total domestic production, and are commonly believed to be a tool used to protect the market of the domestic industry. Such complaints may constitute a practice resulting in denial of market access. However, the ultimate endorsement and approval of this practice is effected by a coordinate governmental regulatory authority, the directorate-general of anti-dumping, and by the relevant ministry of government itself. It remains to be seen as to how the two authorities resolve the apparent conflict. There is no precedent concerning this issue. 30 Structural abuses mergers and acquisitions as exclusionary practices Getting the Deal Through Dominance 2008 Structural abuses are not specifically provided for, but may amount to abuse of dominance if it is found that the restructuring results in a practice that constitutes abuse under section 4 of the CA. No precedent exists. 31 Other types of abuse The abuses provided for in the CA are set out in fairly broad terms, and as the law evolves and situations arise, other types of abuse or practices that result in the effects which constitute abuse under the CA may well be specifically included or considered to constitute abuse under the existing provisions. Enforcement proceedings 32 Is there a directly applicable prohibition of abusive practices or does the law only empower the regulatory authorities to take remedial actions against companies abusing their dominant position? There is an explicit prohibition of abusive practices. Violation of the same would attract remedial and penal orders from the CCI and possible additional compensatory orders from the CAT. Statutory appeals against any order of the CCI lie to the CAT. It is expected that common law and writ courts (other than the Supreme Court on statutory appeal from an order of the CAT) will be reluctant to interfere in matters falling within the domains of the CCI and the CAT. 33 Which authorities are responsible for enforcement and what powers of investigation do they have? The enforcement authorities are the CCI and the directorgeneral, competition and his officers. The director-general investigates complaints forwarded to him by the CCI. The director-general and the CCI are vested with the same powers as are vested in a civil court under the Code of Civil Procedure 1908 with respect to: summoning and enforcing the attendance of a person; examination of persons on oath; discovery and production of documents; receiving affidavit evidence; issuing commissions for witness examination or documents; and requisitioning public records or documents from any office. The director-general and the CCI may also call upon experts to assist the investigation and direct the production of books, documents or records or other trade related information. 34 Which sanctions and remedies may they impose? The CCI may pass orders for discontinuance of the abuse, a penalty of up to 10 per cent of the average turnover for the three preceding financial years upon each person or enterprise that is party to the abuse, and such other orders as it may deem fit. Further the CCI may also direct: the division of an enterprise enjoying a dominant position; the transfer or vesting of property, rights, liabilities or obligations; the adjustment of contracts; the creation, allotment, surrender or cancellation of shares, stocks or securities; the formation or winding up of an enterprise; the amendment of the memorandum or articles of association or other instruments regulating the enterprises business; and 93

6 Update and trends The amending Bill to the Competition Act, 2002 has now been passed by both houses of parliament, and implementation of the Act is expected to begin in spring However, very recent reports suggest that there may be some further delay in implementation because of procedural difficulties. In inquires into the abuse of dominance the most significant change is the specific inclusion in the CA of the concept of dominance by a group. However, in the area of merger control significant changes have been made in the law, including the compulsory notification of mergers and acquisitions exceeding the prescribed threshold limits, the increase of the waiting time for clearance from 90 working days to 210 days and the inclusion of low local nexus thresholds of 500 crores (US$125 million) of assets and 1,500 crores (US$375 million) of turnover in India for transactions that otherwise may be entirely offshore. The CCI has very recently issued draft regulations concerning its general functions, meetings and business procedures, the lesser penalty provisions, and determinations of cost of production and merger control. any other matter necessary to effectuate a division. The CCI may also pass appropriate interim orders. 35 What are the consequences of an infringement for the validity of contracts entered into by dominant companies? There is no express provision under the CA that an infringement of section 4 would lead to the invalidity of an underlying contract. While it is unlikely that the courts would enforce a term of an agreement that has been held to infringe a prohibition under the CA, the validity of non-offending terms would be depend on the facts of the particular case. The CCI may suspend the operation of contracts or specified contract terms by interim orders. 37 Do companies harmed by abusive practices have a claim for damages? Yes. Section 53N empowers a person to apply to the CAT for compensation arising as a result of the findings of the CCI and for recovery of the loss or damage suffered as a result of an abuse. In the absence of any special guidelines on determination and quantification of damage or loss, the CAT would be governed by common law. A claim may also be filed by a person in a representative capacity on behalf of other interested persons. Recent enforcement action 38 What is the most recent high-profile dominance case? There have been no decisions on this issue so far. 36 To what extent is private enforcement possible? Does the legislation provide a basis for a court or authority to order a dominant firm to grant access (to infrastructure or technology), supply goods or services or conclude a contract? Obviously, there is no specific precedent at the moment, but Indian courts do grant equitable relief and it is quite possible that such relief would be granted by the CCI and CAT as well. Existing Indian authorities and tribunals in other unrelated spheres commonly pass such orders. J Sagar Associates Farhad Sorabjee farhad@jsalaw.com Vakils House Tel: Sprott Road Fax: Ballard Estate Mumbai India 94 Getting the Deal Through Dominance 2008