SINGLE ECONOMIC ENTITY: APPROACH TAKEN BY CCI

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Ambrose Brooks
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1 SINGLE ECONOMIC ENTITY: APPROACH TAKEN BY CCI INTRODUCTION 1 Competition law structures economic entities market behavior. The notion of economic entity potentially captures distinct corporate legal persons within a single economic enterprise. To the extent that these distinct corporate legal entities present a single entity, competition law enforcement profoundly alters in scope. On the one hand, single entity notions provide a defense for multiple corporate entities to avoid antitrust scrutiny. On the other, they embolden competition authorities to impute fines for competition law infringements committed by subsidiaries or affiliates to parent or otherwise affiliated companies. Our courts opinion in Indian aspect seems to have curbed enthusiasm for single entity defenses, whereas increasing reliance on parent company liability transformed EU single entity claims into powerful prosecutorial devices. Economic and legal entities do not always coincide for competition law purposes, as competition law mainly structures economic entities behavior. A single economic entity frequently comprises distinct corporate legal persons, jointly contributing to a single economic enterprise. To the extent that multiple corporate legal entities present themselves as a single economic entity, the scope of competition law enforcement alters in relation to interactions within and among those constituent legal entities. This article explores the conditions enabling competition law practitioners successfully to establish the claim that multiple corporate entities present a single entity for the purposes of competition law. These single entity claims will be discussed in light of recent developments in Indian competition law and EU competition law. The evolution of the concept of 'single economic entity' can be traced back as early as the 1960s when the European Commission (EC), in Mausegatt 2, observed that "affiliation to the 1 See in general Arjun Nihal Singh, India: Revisiting The Concept Of Single Economic Entity Under The Indian Competition Act, 2002 mondaq.com (2015), competition/revisiting the concept of single economic entity under the Indian competition act 2002 (last visited Oct 21, 2016) 2 Mausegatt v. Haute autorite, C-13/60 SINGLE ECONOMIC ENTITY: APPROACH TAKEN BY CCI Page 1

2 group deprives the subsidiary company of the ability to act according to an economic scheme of its own. The 'given conditions' of such a subsidiary's operations are prescribed not by the market but by the instructions of the principal company". In this case the relationship between the parent and the subsidiary was used to demonstrate that a cartel could not be formed between the parent and subsidiary, as they must be considered to be governed by the same leading group. This concept was formalized in the EC Guidelines on Horizontal co-operation 3 which notes "Companies that form part of the same 'undertaking' within the meaning of Article 101(1) 4 are not considered to be competitors for the purposes of these guidelines. Article 101 only applies to agreements between independent undertakings. When a company exercises 3 Guidelines on the applicability of Article 101 of the Treaty on the functioning of the European Union to horizontal co-operation agreements. [2011] 4 Article 101: The following shall be prohibited as incompatible with the internal market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the internal market, and in particular those which: (a) directly or indirectly fix purchase or selling prices or any other trading conditions; (b) limit or control production, markets, technical development, or investment; (c) share markets or sources of supply; (d) apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; (e) make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts. 2. Any agreements or decisions prohibited pursuant to this Article shall be automatically void. 3. The provisions of paragraph 1 may, however, be declared inapplicable in the case of: - any agreement or category of agreements between undertakings, - any decision or category of decisions by associations of undertakings, - any concerted practice or category of concerted practices, which contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit, and which does not: (a) impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives; (b) afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question. SINGLE ECONOMIC ENTITY: APPROACH TAKEN BY CCI Page 2

3 decisive influence over another company they form a single economic entity and, hence, are part of the same undertaking. The same is true for sister companies, that is to say, companies over which decisive influence is exercised by the same parent company. They are consequently not considered to be competitors even if they are both active on the same relevant product and geographic markets". The Supreme Court of the United States in Copperweld 5 similarly concluded that "an internal agreement to implement a single, unitary firm's policies does not raise the antitrust dangers that Section 1 of the Sherman Act was designed to police" 6 ; it was further observed that a parent corporation and its wholly owned subsidiary "are incapable of conspiring with each other". 7 I. INDIAN APPROACH The Competition Act, 2002 (Act) applies to the activities carried on by an 'enterprise' 8, a concept similar to that of an 'undertaking' in the EC. The question that begs an answer here is whether Section 3 of the Act 9 applies strictly to enterprises forming part of a single economic entity. The Raghavan Committee Report (based on which the Competition Act was framed) noted that to be covered by the scope of Section 3 of the Act, "it is also required that the parties to the agreement are engaged in rival or potentially rival activities. A potential 5 Copperweld Corp. v. Independence Tube Corp., 467 U. S. 752 (1984) 6 Ibid., at Para 7 7 Ibid., at Para 13 8 "Enterprise" as per Section 2(h) of the Act, means 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...but does not include any activity of the Government relatable to the sovereign functions of the Government including all activities carried on by the departments of the Central Government dealing with atomic energy, currency, defense and space. 9 Anti-competitive agreements SINGLE ECONOMIC ENTITY: APPROACH TAKEN BY CCI Page 3

4 rival is one who could be capable of engaging in the same type of activity. Such a provision has generally been interpreted to mean that firms that are under common ownership or control are not considered as "rival" or "potentially rival" firms". 10 II. COMPETITION COMMISSION OF INDIA s APPROACH Given its nascent stage, the precedents so far on the concept of single economic entity are extremely limited under the Indian competition regime. However, the Competition Commission of India (CCI) has also recognized that when a parent company owns all in its subsidiary, it constitutes a single economic entity. In Exclusive Motors 11, the CCI accepted the concept of single economic entity and opined that "Agreements between entities constituting one enterprise cannot be assessed under the Act. This is with accord with the internationally accepted doctrine of 'single economic entity'... As long as the opposite party and Volkswagen India are part of the same group, they will be considered as a single economic entity for the purpose of the Act". 12 In an appeal filed by Exclusive Motors 13 before the Competition Appellate Tribunal (COMPAT), the COMPAT observed that an internal agreement between subsidiaries, which are a part of the same group, cannot be considered as an agreement for the purpose of Section 3 of the Act, thereby endorsing the view of the CCI. The decision in Exclusive Motors is suggestive of the fact that an intra-group agreement or arrangement cannot fall within the confines of the Act. Similarly, in Shamsher Kataria 14, the CCI observed that "an internal agreement/arrangement between an enterprise and its group/parent company is not within 10 Ibid., at Para of the Report Exclusive Motors Pvt. Ltd. v. Automobili Lamborghini S.P.A, Case No. 52 of 2012, Order dated 12 Ibid., at Para 6 13 Appeal No. 01/2013, Order dated Shamsher Kataria v. Honda siel & Ors, Case No. 03/2011, Order dated SINGLE ECONOMIC ENTITY: APPROACH TAKEN BY CCI Page 4

5 the purview of the mischief of section 3(4) of the Act... At the same time, the Commission would like to emphasize that the exemption of single economic entity stems from the inseparability of the economic interest of the parties to the agreement. Generally, entities belonging to the same group e.g. holding-subsidiaries are presumed to be part of a 'single economic entity' incapable of entering into an [anti-competitive] agreement, the presumption is not irrebuttable." 15 Moving on to a recent decision, the opposite parties in cartelization by public sector insurance companies 16, submitted that the Government of India holds 100% shares of each of the companies i.e., National Insurance Co. Ltd., New India Assurance Co. Ltd., Oriental Insurance Co. Ltd. and United India Insurance Co. Ltd and that the management and affairs of the companies are controlled by the Government of India through Department of Financial services (Insurance division), Ministry of Finance. However, the CCI rejected the submissions of the insurance companies and stated that even though the overall supervision of the insurance companies are with the central government, each of the companies placed a separate bid in response to the tenders floated by the government. Further, it was also observed that the Ministry of Finance did not exercise de facto control over the insurance companies business decisions and as such cannot be considered as a single economic entity. III. CURRENT INVOLVEMNT OF CCI The CCI is currently investigating the alleged cartel in the sugar industry for supply of ethanol. As per reports, 17 three government owned Oil Marketing Companies (OMCs) namely Indian Oil Corporation Limited, Bharat Petroleum Corporation Limited, and Hindustan Petroleum Corporation Limited, have contravened the provisions of the Act by 15 Ibid., at Para In re: cartelization by public sector insurance companies in rigging the bids submitted in response to the tenders floated by the Government of Kerala for selecting insurance service provider for Rashtriya Swasthya Bima Yojna, Suo Moto Case No. 02 of 2014, Order dated Article on order of CCI against cartelization in sugar industries, Available at: (last visited on 29 September 2015). SINGLE ECONOMIC ENTITY: APPROACH TAKEN BY CCI Page 5

6 floating a joint tender for the procurement of ethanol, pursuant to the ethanol blending programme, which makes 5% blending of ethanol compulsory in petrol. It will be interesting to observe how the CCI will approach this. Will it give the benefit of the doctrine of single economic entity to the three OMCs as they come under the direct control of the Ministry of Petroleum or will the CCI, as recent practice suggests, penalize the OMCs for anti-competitive practices by floating the joint tender. SINGLE ECONOMIC ENTITY: APPROACH TAKEN BY CCI Page 6

7 IV. CONCLUSION 18 It is axiomatic that an agreement requires at least two parties and that for the purposes of Section 3 atleast two persons are required. Therefore, if two departments within an enterprise take a decision or agree upon an action, it will not amount to an understanding or an agreement because it is a unilateral action undertaken by one enterprise. This has been extended in Europe to even distinct legal parent-subsidiary undertakings where the subsidiary does not enjoy any economic independence or the parent company and subsidiary form an economic unit where the subsidiary does not determine its own course of action but carries out the instructions issued by the parent company. 19 This is called the Single Economic Entity Doctrine. Such conduct is considered as a unilateral conduct as opposed to an understanding between two separate undertakings and is kept outside the purview of the anti-competitive agreement analysis. While this 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 joint ventures where the agreement between one parent and the joint venture entity is in contention. Nevertheless, this order 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 20 Though the problems were seen in the Super Sports car case regarding the distribution and related other concerns with such an arrangement amongst the various entities of the same enterprise can actually have an effect on competition regime in India but to protect the business from economic adversities it is very much needed to take this doctrine into consideration and practically accepted in the eyes of law. 18 V Lakshmikumaran, COMPETITION LAW RECENT DEVELOPMENTS AND CHALLENGES LAKSHMIKUMARAN & SRIDHARAN (2010), law_2013.pdf (last visited Oct 21, 2016). 19 Case C-73/95 P, Viho Europe BV v Commission [1996] ECR I-5457: [1997] 4 CMLR Dhruv Suri, INDIAN COMPETITION AUTHORITIES: FILLING THE GAPS IN THE LAW (2013), (last visited Oct 21, 2016). SINGLE ECONOMIC ENTITY: APPROACH TAKEN BY CCI Page 7

BATHTUB CONSPIRACIES AN INDIAN COMPETITION LAW PERSPECTIVE

BATHTUB CONSPIRACIES AN INDIAN COMPETITION LAW PERSPECTIVE By Mr. Ravisekhar Nair & Mr. Aakarsh Narula 1 Having imposed a penalty of approximately USD $2 billion in the seven years since the enforcement