EVOLUTION OF ANTITRUST ENFORCEMENT

IN THE DIGITAL SPACE IN INDIA

By

AUGUSTINE PETER FORMER MEMBER, COMPETITION COMMISSION OF INDIA

& Currently Visiting Fellow At the Research and Information System for Developing Countries (RIS), New Delhi

Email: apeter1900@gmail.com

E-Commerce in India

• India has been fast changing. • With the recent disruptive policies, including demonetisation and the thrust on digitalisation the share of E-commerce has gone up substantially in recent years

• E-commerce in India is projected to grow to US$ 200 billion in 2026 from the current US$ 50 billion

Share of different types of Commerce in India

Sl. No

Type of Commerce

2012 (%)

2017 (%)

1 Traditional Retail 86 84

2 Modern Retail 13 11

3 E-Commerce 01 05

Source: Euro Monitor. AT Kearney Analysts

The Indian Competition Law

• Indian Law covers in section 3(3) horizontal agreements. And Section 3(4) deals with Vertical Agreements. •Section 19(3) gives the factors that should be taken into

account by the Commission if there is appreciable adverse effect on competition (AAEC) •Section 4 addresses issues related to Abuse of Dominant

Position in Relevant Markets •Section 5 and 6 deal with Combination (Mergers,

Amalgamations and Acquisitions)

Horizontal Agreements •The jurisprudence on horizontal agreements in the digital

and e-commerce sector, both in India and abroad has been largely limited • In India the issue of Hub and spoke was alleged in

Snapdeal vs. Kaff Appliances wherein the Opposite Party (Kaff) put out a notice that its goods sold on the Informant’s (Snapdeal) market place were spurious • And further that Kaff would not honour the warranties on

the products sold through such market place. The Informant alleged that the issuance of such notice amounted to a hub and spoke arrangement

Horizontal Agreements

•However, the Commission directed DG to investigate based on a violation of section 3(4) of the Act relating to Resale Price Maintenance (RPM). The issue of Hub and Spoke Conspiracy was not examined.

•Even if firms that are distributers do not directly communicate with each other, the fact that they use the supplier as an intermediary or back channel medium to communicate should not exculpate them from any liability.

Vertical Agreements •Collection, processing and use of large amounts of data

are becoming increasingly important for e-commerce. On the one hand data can be valuable asset and analysing large volumes of data can bring substantial benefits in the form of better products and services, and can allow companies to become more efficient. •On the other hand, the results of the e-commerce sector

inquiry confirm to the increased relevance of data and point to possible competition concern relating to data collection and usage.

Vertical Agreements

• In Asish Ahuja vs Snapdeal (Case No. 17 of 2014) the Informant alleged that Sandisk and Snapdeal had entered into an agreement to prevent the informant from selling certain products of Sandisk, and that such an arrangement violated section 3 of the Act, as the conduct of the Opposite Parties intended to force the Informant to become an authorised dealer of Sandisk.

•No specific provision of section 3 was alleged to have been breached.

Digital Content

•Commission held that the “insistence by Sandisk that the storage devices sold through the online portals should be bought from its authorised distributors by itself cannot be considered as abusive as it is within its rights to protect the sanctity of its distribution channel”

• In Mohit Manglani V. Flipkart India Pvt. Ltd and ors (Case 80 of 2014), the Commission had to review allegations of the Informant that all the arraigned e-portals and e-commerce websites and product sellers enter into exclusive agreements to sell to the exclusion of physical outlets.

Touchstone for Anti-competitiveness

•The Commission held that such agreements have to be evaluated on the touchstone of the factors listed under section 19(3) of the Act

• It is unlikely that exclusive agreements between a manufacturer and an e-portal will create any entry barriers since the market seems to be growing with uninhibited entry of e-portals

•Regarding allegations of abusive conduct the CCI dismissed the allegation of the informant that each exclusive product sold by each e-portal cannot be taken as a relevant market in itself

Resale Price Maintenance • RPM can be understood as any agreement to sell goods on the condition

that the price to be charged on the resale by the purchaser shall be the price stipulated by the seller, unless it is clearly stated that prices lower than those prices may be charged.

• In M/s ESYS Information Technologies Pvt. Ltd. Vs Intel Corporation and Anr (Case 48 of 2011) the Informant averred that by dictating the retail price of its products to the distributors, Intel has contravened the provisions of section 3(4)(e) of the Act, which prohibits resale price maintenance and other vertical restraints, provided they cause AAEC

• Commission felt that monitoring the downstream market’s price of its own products cannot by itself be said to be anti-competitive.

Resale Price Maintenance -2 • In Ganashyam Das Vij vs Bajaj Corp Ltd & Ors (Case No 68 of

2013) during the course of the investigation the DG stated that Bajaj Corp had indulged in resale price maintenance by prescribing the rate at which products were to be re-sold by the dealers to the retailers. Further Bajaj Corp also gave a suggested price of the products.

•The Commission however, held that although there were vertical restraints, “the fact remains that there is no dearth of other equally and better brands in the market”, and accordingly the doctrine of de minimis was applied here

•Therefore, no AAEC was found.

Where is India heading? - 1

• In following this approach the Commission is similar to the United States, which follows a more permissible approach to vertical restraints as far as recommended retail prices are concerned.

•This would also be similar to the approach followed in the EC in the sense that market share thresholds are a determining factor when it comes to finding of violation

Where is India heading? - 2 • In the case of Snapdeal vs. Kaff Appliances, the Commission ordered

an inquiry into the practice of resale price maintenance with respect to the sale of Kitchen appliances.

• There was no agreement between the OP and the Informant. Rather there was an email/notice from the OP to the Informant, warning the informant that if the market operating price (MoP) of kitchen appliances is not maintained then the OP will not allow the sale of products on the market place. Again there was no investigation directed by the Commission with respect to the allegation of “refusal to deal” when the OP refused to honour warranties of the product sold on the Informant’s market place.

• Therefore, the Commission, just like in Ashish Ahuja vs. Snapdeal appears not to view the termination of warranty as something which warrants an investigation.

Where is India heading? - 3 •The Commission issued the first infringement Order with respect

to Resale Price Maintenance in FX Enterprise vs. Hyundai Motor India Ltd.

• In this case it was alleged, inter alia, that the OP imposes a “Discount Control Mechanism” through which dealers are only permitted to provide a maximum permissible discount and dealers are not authorised to give discount which is above the recommended range.

•Although this case did not deal with the e-commerce market, the findings of the Commission in this case may be relevant for future cases in the e-commerce market as well.

MFN Clause

•The Competition Commission of India has not come across any case involving MFN clause

•Nonetheless, such clauses are used in wide range of websites, most notably involving e-ticketing websites

• It is expected that such practices would catch the attention of CCI in the coming days

Abuse of Dominance • Dominance in the Indian Act is explained in the Explanation to

Section 4 and is a position of strength, enjoyed by an enterprise, which enables it to act (i) independently of competitive forces prevailing in the market, and (ii) affect its competitors or consumers in its favour.

• Four aspects have been found to be important in the digital space as far as Abuse of Dominance is concerned: (i) Predatory Pricing (ii) Unilateral modification of conditions (iii) Privacy concerns (iv) Leveraging

(i) Predatory pricing - 1

•Predatory pricing is sale of goods or services at prices, lower that cost of production as defined in Regulations and with the intent to reduce competition or eliminate competition/competitor(s).

• In India predation involves pricing below cost and predatory intent. This is unlike of the US where besides pricing below cost, ‘recoupment’ possibility is also important. In the US the Plaintiff must prove that the defendant had a “dangerous probability of recouping its investment in below cost prices”

Predatory pricing - 2 • The Commission has come across predatory pricing allegations in ride

sharing/Aggregator model employed by car companies.

• Such allegations have been levelled by legacy companies who are asset heavy, i.e. where the taxies are shared by the taxi service provider.

• In Fast track Call Cab/Meru vs. ANI Technologies (Case Nos.06 and 74 of 2015) the Commission rejected the argument of OP that it is only a technology software service provider and not a radio taxi provider. Accordingly it was clubbed with other taxi service providers. The Commission observed that despite a market share that vacillated between 60% and 75 %, the OP was not dominant as Uber was in competition aggressively with the OP for both drivers and riders.

(ii) Unilateral modification of terms and conditions - 1 • In Vinod Kumar Gupta vs WhatsApp (99 of 2016), it was alleged that the

WhatsApp was abusing its dominant position in the relevant market by introducing privacy policy which compelled its users to share their account details and other information with Face Book.

• The Commission noted that WhatsApp provided the option to its users to opt out of sharing use account information with the ‘Facebook’ within 30 days of agreeing to the updated terms of service and privacy policy.

• As long as there exists a mechanism in an agreement to re-examine the obligation cast on a contracting party, that contracting party cannot be said to have been compelled to act in a particular manner.

Unilateral modification of terms and conditions - 2 • In this case the Commission held that “the incumbents were left catching

up with a new entrant armed with a new technology which allowed it to arrogate to itself a large unmet demand”

• Therefore, the Commission held that “the erosion in their market share is more attributable to the expansion of consumer base in the market than them being deprived of the demand which they were serving before.” The Commission was hesitant to interfere in a market which was yet to fully evolve.

• There is apparently an efficiencies defence here in terms of the cheaper rides, ease of booking, ride tracking, and more importantly, the exponential growth of the market which grew 1900 % in the relevant market as per the above case.

(iii) Privacy Concerns

• In India privacy has not yet been invoked as a ground for infringement of competition law except indirectly in Vinod Kumar Gupta vs. WhatsApp.

• Privacy issues can impact competition assessment: Companies may compete on various parameters, including their privacy policies and any degradation of such policy may be seen by anti-trust authorities to result in an inferior product and limiting technical development of good/service to the prejudice of consumers.

• Privacy policies will play an important role in the merger review since more data usually leads to consolidation of market power.

(iv) Leveraging – The Case of Google - 1

•CCI found that Google runs its core business of search and advertising in a discriminatory manner. It was found that Google is creating an uneven playing field by favouring Googles own services and partners, through manipulating its search results to the advantage of its vertical partners.

• It was also pointed out that Google’s own sites would appear prominently on the search results page irrespective of whether they are the most popular or relevant sites to the search

Leveraging – The Case of Google - 2

• In Case Number 30 of 2012 the Informant averred that Google was indulging in abuse of dominance in the market for online search through practices leading to search bias, search manipulation, denial of access to competing search engines, refusal to license content to competing search engines and creation of entry barriers etc.

•Allegations were also made about the abusive conduct of Google in the market for online search advertising through imposition of unfair and discriminatory conditions on its customers.

Leveraging – The Case of Google - 3

• In Case Number 30 of 2012 the Informant averred that Google was indulging in abuse of dominance in the market for online search through practices leading to search bias, search manipulation, denial of access to competing search engines, refusal to license content to competing search engines and creation of entry barriers etc.

•Allegations were also made about the abusive conduct of Google in the market for online search advertising through imposition of unfair and discriminatory conditions on its customers.

Unfair and Discriminatory Conditions

• CCI also found that Google had abused its dominant position on three counts:

Ranking of Universal Research Results prior to 2010 was not determined by relevance

Prominent display of Google’s commercial flight Unit with link to Google’s specialised search options/services amounts to an unfair imposition upon users of services amount to an unfair imposition on users of search services as it deprives them of additional choices.

Prohibition imposed upon search intermediation agreements upon other 3rd party publishers are unfair as they restrict the choice of these partners and prevent them from using the search services of competing search engines.

Big Data

•CCI also made observations regarding Big data in the course of the order:

•Google argued that in the case of online search there is no purchase or sale of goods or services as Google provides search services to users for free, and hence the question of applicability of section 4 does not arise.

•CCI however, rejected the plea of Google and stated that the submission that there is no sale or purchase is not only flawed but altogether ignores the role of big data in the digital economy

Big Data and Price •The huge volume of information generated from each and every

search conducted on such platforms constitute what is known as big data by aid of which search platforms are able to attract advertisers, target relevant ads and conduct their search business.

•The submissions made by Google , according to CCI, completely missed the role and nature of “bid data” i.e. an aggregate of eyeballs /choices which is being provided by users while availing the search services offered by a search engine.

•Definition of Price in the Competition Act of India is wide enough

Big Data and Price

• There have been views expressed in the context of the Google case that the Act in its current form is not capable of addressing the issue of double sided and multi-sided markets.

• However the Commission has been of the view that the way price is defined in the Act, it is capable of addressing the issue of platform markets.

• Price is defined in the Act section 2 (o) as follows:

“Price” in relation to the sale of any goods or to the performance of any service, includes every valuable consideration, whether direct or indirect , or deferred, and includes any consideration which in effect relates to the sale of any goods or to the performance of any services although ostensible relating to any other matter or thing.

Online Vertical Restraint

Provisions of Competition Act, 2002

Online RPM Sec. 3(4)(e) Resale Price Maintenance

Complete or Partial ban on Online sales

Sec. 3(4)(c) Exclusive Distribution Agreement Sec. 3(4)(d) Refusal to deal

Market partitioning Sec. 3(4)(c) Exclusive Distribution Agreement

Across Platform Parity Agreements

Sec. 3(4)(e) Resale Price Maintenance Sect. 3(4)

Internet Minimum Advertised Price (iMAP)

Sec. 3(4)(e) Sect 3(4)

General reluctance of CCI to rush to conclusion about Dynamic Markets •CCI observed that ‘innovation cycles are progressing at a fast pace

in the digital economy disrupting and reshuffling long established positions. In this context, it is of paramount importance that public intervention in such markets should be targeted and proportionate.

•However the CCI also observed that such markets are often characterised by a ‘winner takes all’/most phenomenon, especially in the present market which displays network effects and therefore, “if in a given case, the Commission finds the conduct to be egregious, appropriate remedies and directions shall be issued to correct such distortion”.

Combinations/Mergers • Spurt of investment in India from VC and PE Funds from the Unites

States and technology majors in China.

• Mergers involving digital players, raise questions regarding the efficacy of conventional merger review process, even when remedies are imposed.

• Authorities like Carl Shapiro and John Kwoka have pointed out the inadequacies of the current merger review process for addressing the mergers in the digital space. Similar observations have been made by the Chief Competition Economist of the European Commission Thomas Valetti

• The trend of the dominant technology companies acquiring disruptive firms in adjacent markets that have the capability to rival the incumbent dominant enterprise in terms of its product offerings.

Combinations/Mergers • CCI approved the acquisition by US retail giant Walmart of 77% stake in

Flipkart for $16 billion

• The absence of or limited overlap of the activities of the two companies facilitated the approval

• The CCI said that discounting practices by Flipkart may have to be reviewed by the relevant authorities.

• CCI said in its order that “The issues concerning the FDI policy would need to be addressed in that policy space to ensure that online market platforms remain a true marketplace providing access to all retailers”

Google’s Acquisition of Halli Labs

•The Indian Start Up Ecosystem witnessed Google acquiring Halli Labs 9a four month old start up) specialising in Artificial Intelligence). Halli Labs did not have any product. The acquisition is believed to be motivated by a search for scarce AI talent. The acquisition has been termed acqui-hire.

•This transaction was not notifiable based on the asset and turnover thresholds in the Indian Act.

Need for revision of merger thresholds

•Mergers in the digital space are not captured due to the asset/turnover based thresholds

•Being technology companies these companies are asset light. ‘Size of transaction’ thresholds are being demanded by many. Germany, for example, in 2016 introduced transaction based merger thresholds.

•Commission has been mindful not to stifle innovation and commit Type 1 errors that may be irreversible. Type 2 errors, while also being a cause of concern, can however, be redressed with relative ease.

THANK YOU