Commission’s order in the complaint filed against All India Organization of Chemists & Druggists (AIOCD)

The order can be accessed here. The facts and the certain issues in the said matter to be noted are discussed below:

 Facts

 The complaint was filed by M/s. Peeveear Agencies alleging that the All India Organization of Chemists & Druggists (AIOCD) and Janssen- Cilag Pharmaceuticals  are limiting and restricting the supply of pharmaceutical drugs in India in contravention of the provisions of the Act. The Informant alleged that AIOCD is abusing its dominant position by imposing unfair and discriminatory conditions which had the effect of limiting / denying market access to genuine distributors unless they submit to its dictates. The Informant also submitted that various MOUs and agreements by AIOCD and its affiliated organizations either with the association of drug manufacturers or with individual drug manufacturers restricting the appointment of distributors,  is illegal and contrary to the provisions of the Act. This was obviously a Section 3 case and not a Section 4 case as alleged by the Informant. The Commission found AIOCD guilty of contravening Section 3 of the Competition Act for fixing trade margins, compulsory payment of PIS charges, issuing NOC and boycotting companies.

 Issues to Note

 (a)        The Commission on whether AIOCD was an enterprise for the purpose of the  Competition Act stated that since the members of an association are engaging in an economic act, the association would be deemed to be an enterprise for the purposes of the Act. The question that needs to be asked is whether an  association carrying out an activity of a non-economic nature would be an enterprise for the purposes of the Act or not. The answer can be found in various  EU judgments. It has been held that it is not necessary in order to apply Article 101(1) to an association of undertakings that the said body should be  engaged in an activity of an economic nature. As long as the activities of the association or the members affiliated to it are calculated to produce effects contrary to the laws of competition, Article 101(1) would be applicable.

  (b)       One of the members in the separate opinion stated that decisions taken by an  association of undertakings should amount to a cartel and that the members should also be punished for the violations of the association. On this issue, my opinion is that the members of an association should be penalized only if can be proved that the members were colluding through the platform of the association. It is only when membership coincides with participation in an agreement that individual members should be penalized.  If there is only a decision by an association and it has not been proved that the members were colluding or had an agreement between them then only the association should be penalized. Similarly, in a cartel case only if the association is actively supporting the cartel activities, should the association be penalized along with the cartel members.

 (c)       The Commission’s growing desire of going after individuals for competition law violations. The Commission has stated that it shall proceed against the office bearers of AIOCD. I think that the Commission should levy individual sanctions only for grave anti-competitive infringements like hardcore cartels and restrain themselves in other cases. It will be interesting to see the penalties that the Commission decides to levy on individuals.

 (d)        The Commission in the majority order held that an agreement between three associations which are not engaged in identical goods & services cannot be held to be violating Section 3(3) of the Competition Act. Accordingly, two  associations namely IDMA & OPPI were let off. I fail to see as to why the arrangement between the three associations does not violate Section 3(1) of the Act which is a general provision covering all anti competitive agreements causing or likely to cause an appreciable adverse effect on competition within India. Also, an agreement entered into by an association of undertakings may amount to a decision of the said association of undertakings. Therefore, Individually the three associations do violate Section 3(3) as well.

 (e)        Considering that the Commission found AKCDA (affiliate of AIOCD) guilty of contravening competition laws, all the state and district associations affiliated to AIOCD should also have been found guilty and proceeded against.

Individual Liability for Competition Law Violations

At para 20 of the order of the Competition Commission of India in the complaint filed by Micromax against Ericsson, the Commission not only directed the Director General to investigate if Ericsson has violated the Competition Act but also to investigate against the persons who are responsible for the same. Further, the Commission states that if the opposite party has contravened any provision of the Competition Act, 2002 then it shall fix responsibility for the persons who were incharge and responsible for the same under Section 48 of the Competition Act.  This is in addition to the penalty that would be levied on the dominant undertaking. The question that comes to my mind is Whether there should be individual sanctions in abuse of dominance matters?

There has been a growing trend and discussions throughout the world pertaining to levying individual sanctions for violations of competition law.  The US antitrust agencies have been levying  individual sanctions through fines and imprisonment for quite a while.  On the other hand, the EU Commission at the moment only has the powers to prosecute undertakings. However,  in nineteen of the EU member states, there are provisions for sanctioning of individuals for violation of competition laws. There is a growing belief and understanding that the threat of individual sanctions would help increase cartel detection. Employees would be discouraged from indulging in cartel activities since the punishment for violation of competition laws would not be limited only to the company. There is a possibility that employees under the threat of fine and imprisonment would start filing leniency applications  for immunity and the same increases cartel detection.  Typically, individual sanctions have been imposed by certain Competition authorities around the world for hardcore cartel activities, failure to comply with orders, giving false information etc.

Lack of precedents and use of imprecise legal concepts leads to legal uncertainty as far as abuse of dominance is concerned. It is difficult to predict at times whether a proposed conduct of a dominant undertaking may end up being abusive or not. Also, at times the dominant undertaking may have no intention to indulge in abusive conduct and may not be even aware that it is indulging in abusive conduct. Also, while strategising future activities, it is not possible for companies to obtain absolute certainty regarding whether their conduct would be abusive or not. Therefore,  individual sanctions should not be imposed in abuse of dominance cases.

FRANDLY WARS

ImageIndia’s mobile handset maker Micromax has filed a complaint against the Swedish telecommunications company Ericsson to the Competition Commission of India  for abusing its dominant position by  charging unfair, discriminatory and exorbitant royalty rates for  use of its standard essential patents for GSM technology.  This complaint has been filed subsequent to Ericsson filing for an injunction against Micromax in the Delhi High Court. The Competition Commission of India after hearing both the parties has directed the Director General to investigate into the allegations made by Micromax and violations of the Competition Act, if any. The order can be accessed here.

Standard Essential Patents (SEP’s) are patents protecting a technology which is essential for the implementation of an industry standard developed by a standard-setting organization. All undertakings desirous of manufacturing products based upon the standards set require access to and use of such standard essential patents. The undertakings that own these standard essential patents are required to license the same on FRAND terms. The term FRAND stands for Fair, Reasonable and Non Discriminatory. Currently, there is quite a bit of uncertainty/disagreement regarding the precise meaning of FRAND. The same shall be discussed in a separate blog entry. In the subject matter, Ericsson was required to license its SEP’s pertaining to GSM technology to Micromax on FRAND terms. However, it has been argued by Micromax that the royalty rates that are being asked for are unfair and exorbitant and that Ericsson is thereby abusing its dominant position.

 Another aspect of the said dispute which gets only a passing reference in the Commission’s order is whether the seeking of injunction by the owner of SEP’s amounts to an abuse of dominance. Injunctions or the threat of it may be used to distort the licensing negotiations and impose unfair licensing terms on the licensees. The question of whether seeking injunctions for a standard essential patent is an abuse of dominance is currently being discussed and deliberated upon by the European Commission in the complaints filed against Samsung and Motorola by Apple. I am  sure that the Competition Commission of India would in the said matter also deliberate upon the same along with the issue of unfair and exorbitant royalty rates. The European Commission published a Q&A memo on its website pertaining to the Samsung matter.  To the question of whether the Commission takes a position on what a reasonable royalty rate is, the Commission’s answer is in the negative and further states that the national courts and arbitrators are generally well equipped to do this.  The  EU Commission’s issue of concern is whether the seeking of injunctions may unjustifiably distort FRAND licensing negotiations where a commitment to license the SEPs in question on FRAND terms has been given.

 Also, as per the order under Section 26(1), the Director General is required to submit the investigation report to the Commission within a period of 60 days. Such stringent time frames imposed on the DG may prove to be inadequate in order to carry out thorough and satisfactory investigations. Considering the limited resources of the Director General, more time should be given for carrying out investigations in order to avoid haphazard and incomplete investigations.

Evidence in Cartel Cases

Proving the existence of cartels is a difficult task for the Competition Commission of India. Cartels conduct their activities in a secret and clandestine manner. Therefore, it becomes increasingly difficult for the Commission to get any direct evidence or Smoking Gun evidence regarding a cartel and its activities. Definitely, with the passage of time and  the development of special investigative tools, techniques and increase in resources would enable the Commission to gather direct evidence regarding collusive anti-competitive activities. However, at the moment, it is understandable that the Commission would find it necessary to build cases on circumstantial evidence because they have not yet developed effective tools and techniques for acquiring direct evidence. 

Circumstantial Evidence comprises of Communication Evidence and Economic Evidence. Communication evidence implies that the cartel members met and communicated with each other. The same may include records of telephone calls, association meetings, details of travel of representatives of companies to a common destination etc. Economic evidence comprises of the conduct of the firms on the market, elements of market structure which suggest that collusion was feasible and certain practices that can assist in sustaining the cartel.

In the cements cartel matter, the Commission proved the existence of a cartel in the cement industry through circumstantial evidence which included both communication and economic evidence. The order of the Commission can be accessed here. The evidence put forward by the Commission is as follows:

  • Price Parallelism;
  • Under utilization of capacity despite increase in demand;
  • Dispatch parallelism;
  • High operating profits;
  • Regular communication of Competitors through the association i.e. CMA
  • Collection of sensitive information like prices, production & dispatch details etc. from cement companies by CMA;
  • Circulation of the aforesaid sensitive information by CMA to all members;
  • Homogeneous product.

Taking a holistic consideration of the aforesaid evidence, the cumulative effect of the same is convincing to infer the existence of a cartel. Another plausible argument which the Commission could have put forward was that the regular circulation of pricing & production information by CMA to all the members is to enable the cartel members to monitor whether all cartel members are acting in accordance with the cartel agreement, Monitoring is one of the most important aspects of sustaining a cartel. Another aspect that the Commission could have discussed is that the conduct of the concerned enterprises was inconsistent with ‘unilateral self interest’. Considering that the increase in prices was not due to any major change in variable costs, wouldn’t it be in the self interest of enterprises to not increase prices (while other competitors are doing the same) and thereby increase their sales and market share.   

 

High Fines Necessary To Deter Cartels

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I wanted to discuss the deterrence effect of high fines on cartels in light of the reduction of penalty by COMPAT in the Aluminium Phosphide tables bid rigging cartel matter. The facts of the matter and my observations on the same have already been provided in one of the previous blog entries.The same can be accessed here.

At the outset, I hope that the Competition Commission of India is appealing against the reduction in penalties by COMPAT in the aforesaid case to the Supreme Court of India. I read certain news articles which stated that Competition Commission of India’s headline grabbing penalties are nearing an end and that CCI’s enthusiasm regarding high penalties against cartels is over. In regard to the same, i wanted to point out couple of things. Firstly, it is not an ego boost for the Commission to impose such huge penalties against enterprises for violating competition laws. They are doing the same for the good of the consumers. The Commission levies the penalties in order to punish colluding enterprises that form a cartel and cheat the consumers of the country of crores of rupees every year through various anti-competitive activities like price fixing, output reducing, market allocation etc. The Commission while deciding on the penalty takes into account the gravity of the anti-competitive infringement and also ensures that the colluding enterprises don’t engage in such activities again in the future.

Why high penalties are necessary to deter cartels?

Cartels is one of the most serious form of anti-competitive practice that harms the consumers through higher prices, lesser quality and reduced choice. As a result of cartelisation, the consumers have no other choice but to buy products at high prices. It also leads to less innovation as enterprises don’t have any competitive constraints and therefore are not motivated to bring new products and services to the market. With the passage of time, cartelisation damages the overall economy of the country. 

The probability of detecting cartels is extremely low as they operate in a secret and clandestine manner. The optimal fine for deterrence and punishment of cartels needs to take into account the low probability of cartel detection. High fines are necessary as the same would result in enterprises hesitating to engage in collusive activities. The costs of colluding i.e. the penalties that may be imposed by the Commission needs to be higher than the expected benefits of cartelisation by the enterprises. Only then would the competition laws have any impact for the benefit of the consumers. If the fines are less then the deterrence effect becomes weak. Further, if the fines are low then it may even encourage those enterprises, that are not colluding, to actually cartelise after doing a cost benefit analysis and earn higher profits. Considering the same, the competition agencies need to impose a penalty that punishes colluding enterprises but also ensures that colluding/non-colluding enterprises are always hesitant and discouraged to collude in the future.

Another impact of less penalties is that it reduces the benefits of the leniency programme. The primary purpose of the leniency programme is cartel detection. It encourages colluding enterprises to come forward and provide details of cartel activity to the Commission in exchange for immunity from high penalties. Leniency programmes have proved to be a vital tool in the arsenal of the competition authorities and has led to the detection of numerous cartels around the world. The said programme would only have an impact if the corresponding penalties that may be levied for cartels is significantly high. The fear of (if I may say so) headline grabbing fines/penalties would result in enterprises approaching the Commission for leniency. Concluding, I would hope that the Competition Commission of India appeals against the reduction in penalty to the Supreme Court of India.   

      

    

3rd BRICS International Competition Conference 2013

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The 3rd BRICS International Competition Conference 2013 is to be held at New Delhi during November 20-22, 2013. It is one of the most prestigious conferences in the field of competition law and policy. The objective of the said conference is to discuss various issues and challenges in competition enforcement in BRICS countries. The conference shall include various discussions on issues and challenges in setting up an effective competition agency, enforcement vis-a-vis state owned enterprises, public procurement and creation of competition culture. The conference not only has speakers from BRICS countries but also from mature competition law jurisdictions like US & EU. The list of speakers is extremely impressive and includes names like Mr. Joaquin Almunia (Vice President – European Commission and European Commissioner for Competition), Ms. Edith Ramirez (Chairwoman, United States Federal Trade Commission) and many more noteworthy names in the field of competition law. The details of the conference can be accessed here.  

A special welcome to one of the speakers Mr Frederic Jenny (Chairman, Competition Committee of the OECD). It was an absolute pleasure to learn about ‘Abuse of Dominance’ from Mr. Frederic Jenny and Mr. Jean-Francois Bellis (Managing Partner of Van Bael & Bellis) during the LLM at Brussels School of Competition. 

Jet Etihad Deal Cleared by CCI: Few Observations

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The Competition Commission of India has approved the proposed acquisition of a 24 percent stake in Jet Airways by Etihad Airlines. The approval order of the CCI can be accessed here. It is the first combination approval matter in which there is a dissenting order by one of the members of the Commission. The dissenting member in its order stated that the said deal “may cause an appreciable adverse effect on competition within the relevant market of international air passenger traffic from/to India at the macro level”. Contrary to the majority order, the dissenting member of the Commission stated that the parties be issued a show cause notice calling upon them to reply within thirty days as to why an investigation in respect of the proposed combination should not be conducted. The minority order can be accessed here. The majority of the Commission members approved the combination without a thorough investigation by the DG.  There are certain reasons as to why ordering a thorough investigation by the DG in such a horizontal combination may have been a good call.

Prospective Analysis of Combinations

Combination Regulation involves prospective analysis regarding the future impact of the combination on the prevailing competition in the relevant market. Unlike Section 3 & 4 violations, combination regulation involves ex ante control whereas the aforesaid violations involve ex post control. It may be noted that combination regulation analysis is not easy as it involves predicting the future conduct of parties and conditions of the market. In the matter of Tetra Level BV vs. Commission (EU), the Court of Justice stated that

” A prospective analysis of the kind necessary  in merger control must be carried out with great care since it does not entail the examination of past events- for which often many items of evidence are available which make it possible to understand the causes – or of current events, but rather a prediction of events which are more or less likely to occur in future if a decision prohibiting the planned concentration or laying down the conditions for it is not adopted.”

Lack of robust information/data

In para 22 of the minority order,the member pointed out that all the information available with the Commission has been largely provided by the concerned parties. The veracity of the data has not been independently tested and necessary relevant data required for the purpose of analyzing the said combination, due to paucity of time, has not been collected. The order further states that there is no independently credible data base available with any recognized institution/authority. Therefore, considering the various competition concerns arising, it was suggested in the order that a thorough investigation be carried out for the purposes of a robust competition assessment,

Ex post unscrambling of eggs

In the majority order the Commission stated that “it is incumbent upon the Parties to ensure that this ex ante approval does not lead to ex post violation of the provisions of the Act”. Though, there is the possibility that ex post a combination may be divested. However, the same has major consequences for the parties and for the consumers at large. Subsequent to a combination approval, the parties carry out various activities like combining their business operations etc. An order of divestiture at a later stage may be difficult, costly, punitive to the business involved in the merger and detrimental to the interests of consumers.

Conclusion

Considering the lack of robust verifiable data, prospective analysis of combination regulation and the costs of ex post divestiture, the order of the dissenting member of the Commission calling for an in-depth investigation of the said matter holds good. Do u think that especially in combination regulation matters, in case there is a dissent on the part of any member(s), as a rule the Commission should order for a DG investigation?