Does Section 3(1) of the Competition Act 2002 Have a Standalone Applicability?
[Srishti is a student at National Law University, Jodhpur.]
The draft Competition Law Amendment Bill 2020 (Bill) was released recently. The Bill is an outcome of the recommendations given by the Competition Law Review Committee in its report (CLRC / Committee). The Committee was formed to review and recommend a robust competition regime and suggest changes in the existing competition framework. Among other things, the Bill seeks to expand the ambit of Section 3 of the Competition Act 2002 (Act) by amending section 3(4) of the Act.
Section 3 of the Act is focused on anti-competitive agreements which cause or are likely to cause an appreciable adverse effect on competition (AAEC). These agreements can be of two types: horizontal or vertical. Horizontal agreements are arrangements between enterprises or association of enterprises at the same stage of production, and are covered under Section 3(3) of the Act. On the other hand, Section 3(4) of the Act prohibits vertical agreements that are arrangements between two or more enterprises functioning at different levels of production.
The Bill seeks to expand the scope of Section 3(4) to include any kind of agreement amongst enterprises or persons not necessarily agreements amongst entities at operating at different levels of production. This recommendation of the CLRC came in light of the fact that there might be some agreements which do not squarely fall within the strict categorisation of being horizontal or vertical agreements. In this light, the attention of the Committee was drawn towards the case of Mr Ramakant Kini v. Dr L.H Hiranandani Hospital Powai, Mumbai (Ramakant Kini Case). The accused parties in this case, Hirnandani Hospital (Hospital) and Cryobank (which was a stem cell bank) (together, Parties) argued that they cannot be assessed under Section 3 of the Act since they were not horizontally related as the Hospital provided direct medical care to their patients and stem cell bank was just a storage bank. Further, they were not vertically related as both provided services independently of each other, the hospital usually only advised or suggested its patients to use the services of the stem cell bank and generally did not avail the services itself. While assessing the allegations against the accused parties, the Competition Commission of India (CCI) held that the agreement between the Parties was void as it was an anti-competitive agreement under Section 3(1) of the Act. This interpretation by the CCI meant that Section 3(1) of the Act could be applied as an umbrella provision under which any kind of agreement could be charged even without a horizontal or vertical relation. This established the stand-alone applicability of Section 3(1) of the Act as a charging provision. The article seeks to show that Section 3(1) of the Act cannot be applied as a stand-alone charging provision to include agreements which are not covered under the ambit of Section 3(3) or Section 3(4) of the Act.
The Ramakant Kini Case
The Informant alleged that the Parties had entered into an exclusive agreement wherein, the Hospital would offer exclusive stem cell services on a fixed enrolment support fee for every stem-cell banked to Cryobank. The CCI noted that the market of stem cell banking services was at a nascent stage, and there were only a few players in the market. In such a situation, if each player entered into exclusivity agreements with the hospitals to get more customers, it could seriously impair development of competition in the market. Further, the nature of the service of storing stem cell for use in case of future medical emergencies required long term association with the stem cell bank, therefore, choosing one stem cell bank at a point in time could lead to permanently shaping of customer preference in favour of the stem cell bank the hospital contracted with. Accordingly, this would lead to an elimination of choice of service provider for the customers, cause entry barriers, and foreclose the market for new entrants.
The CCI recognised that it has to control behaviour of such enterprises in the market place in order to serve the objective of “consumer welfare”. In furtherance of this, the CCI disregarded the arguments of the Parties that did not come under the prohibition laid down in section 3(3) and Section 3(4) of the Act. It held that Section 3(1) of the Act was wide enough to cover all types of commercial agreements including those which do not come within the ambit of Sections 3(3) and 3(4) of the Act.
This decision has various inconsistencies which were expressed in the dissenting opinion of Mr. ML Tayal (Mr. Tayal) who was a Member of the CCI. Mr. Tayal stated that the CCI in applying the general prohibitions as expressed in Section 3(1) of the Act independent of the specific provisions as expressed in Sections 3(3) and 3(4) of the Act would make the Act applicable on parties regardless of their economic relationship. Mr. Tayal referred to The 93rd Parliamentary Standing Committee’s report on the Competition Bill 2011 to show that there were only two types of anti-competitive agreements: horizontal / vertical. This indicated that the Parliament intended to prohibit only those anti-competitive agreements where the parties to the agreements were either horizontally or vertically related. Thus, application of a general prohibition to parties that do not share any kind of vertical / horizontal economic relationships would be inconsistent with the parliamentary intention.
Consequently, the justification of the CCI, that the aims and objectives of the Act necessitated a liberal interpretation is inconceivable. Listed below are some of the issues with the interpretation adopted by the CCI:
Holistic interpretation of the Act: The rules of statutory interpretation provide that a statute should be read holistically. This means that no section should be read in a manner that it makes the application of the other provisions infructuous. If, for instance, there are multiple clauses of one provision, all the clauses should be read together ensuring that the interpretation of one clause does not leave the other clause pointless. Therefore, if Section 3(1) of the Act was wide enough to cover all kind of anti-competitive agreements, the presence of other clauses in Section 3 of the Act which prohibit specific agreements would be superfluous.
Burden of proof: According to the scheme of the Act, in case of horizontal agreements, there exists a presumption of AAEC, whereas in the case of vertical agreements, AAEC must be demonstrated. In the Ramakant Kini Case, the CCI accepted the argument that the agreement did not come under any category, however, it failed to specify the implications of the categorization under Section 3(1) of the Act for the burden of proof.
In order to solve this issue, the CCI has established relationships even in cases where there was no vertical or horizontal relationship. In Dhanraj Pillay v Hockey India, the Commission opined that the relationship between the national hockey organisation in India and professional hockey players ‘tantamounts to a vertical relationship’. This was the first case where the majority accepted the stand alone applicability of Section 3(1) of the Act. Before this decision, the dissenting members in the case of Neeraj Malhotra v. Deutsche Post Bank Home Finance, noted that if an enterprise deals with an individual entering into an agreement which causes an AAEC in India would be hit by Sections 3(1) and 3(2) of the Act.
Competition Amendment Bill 2020
The amendment to the Act to include 'any other agreement' between parties not in a vertical agreement shows that the CLRC noted that Section 3(1) of the Act is not an umbrella provision. The committee took note of the competition laws in various countries such as United States, United Kingdom, European Union, Singapore and Brazil. It observed that the parent statute for competition law in these countries did not make any distinction between vertical or horizontal agreements. Instead, the approach followed by them is based on the object or the effect of the anti-competitive agreement. This means that if there are certain agreements the object of which is most likely to lead to negative effects they would be considered per se anti-competitive. Other agreements would be assessed on the basis of their impact or effect on competition i.e. on the basis of rule of reason.
Therefore, in order to broaden the ambit, the legislature thought it best to modify Section 3 to expressly include any other kind of agreements. If Section 3(1) of the Act was an umbrella provision, the CLRC could have recommended adding an explanation to that effect. The Committee also noted that expansion of scope becomes particularly relevant in the context of digital markets wherein there may be unanticipated linkages and arrangements that may not fall strictly in the existing classifications of Section 3 of the Act. Lastly, even though Ramakant Kini Case has not been expressly overruled by the CCI or the appellate body, it has rarely been followed by any of the forums. Even in the case of Financial Software and Systems Private Limited v. M/s ACI Worldwide Solutions Private Limited & Ors. wherein the CCI observed that the agreements between the accused parties cannot be caught under Section 3(4) of the Act, they were not assessed under Section 3(1) of the Act.
Thus, the amendment to the Act would put this issue to rest by expressly including other kind of agreement in Section 3(4) of the Act. This would ensure that arrangements where parties are not strictly vertically or horizontally related could also be assessed. This would also make any kind of future assessment solely under Section 3(1) of the Act redundant.