The Defence of Objective Justification in Competition Law: Is the Defence is Really “Objective” in N
[Yash Bhatt is a student at Government Law College, Mumbai.]
The defence of objective justification in competition law exempts liability of a dominant enterprise whose conduct has been alleged of abusing the dominant position in the relevant market by demonstrating that such conduct was necessary to achieve a legitimate objective. For instance, a dominant enterprise may seek to justify an exclusionary form of abuse like offering fidelity rebates by demonstrating an economic justification of advantages in terms of efficiency derived to the consumer by such conduct.
The European Union (EU) and other foreign jurisdictions recognize the concept of objective justification and have applied the justification quite consistently in their decisions. Though, Section 4 of the Competition Act 2002 (Act) does not explicitly recognize the concept, except for the limited defence of 'meeting competition' in Section 4(2)(a) of the Act, the Supreme Court of India has considered the concept as a mitigating factor in the Competition Commission of India v. M/s Fast Way Transmission Private Limited, whereas the Competition Commission of India (CCI) has varied its approach while dealing with this defence as a mitigating factor or as this concept is traditionally understood. The traditional application of this defence consists in holding that because an enterprise has an objective justification for its conduct, it has not abused its dominant position.
This defence and its various facets have not been explored in its entirety in India. This article is an attempt to analyze and bring out the various facets of this defence in a lucid manner.
Protecting commercial interests
Protection of commercial interests of an entity is crucial for fair competition in the market. However, in United Brands Company v. Commission (United Brands Case), the European Commission (EC) held that protection of commercial interests when a firm is attacked is legitimate; however, such protection cannot be objectively justified at the expense of abusing and strengthening dominant position in the relevant market.
The proposition laid down in the United Brands Case finds support in the judgment of CCI in East India Petroleum Private Limited v. South Asia LPG Company Private Limited wherein the opposite party forced the other companies to mandatorily use their cavern facilities. They also charged exorbitant bypass charges which made it unfeasible for them to operate in the relevant market. South Asia LPG Company offered business justification of protecting its commercial interest which was rejected by the CCI since their abusive conduct had the effect of foreclosing competition in the market by levying unfair and discriminatory conditions on East India Petroleum.
Protection of commercial interests also entails protection of intellectual property rights of an enterprise. In Kapoor Glass Private Limited v Competition Commission of India, the Competition Appellate Tribunal (COMPAT) affirmed the reasoning of CCI with respect to the refusal of Schott India to deal with Kapoor Glass because of the latter’s attempt to pass off the goods of the former. The COMPAT affirmed that such a refusal to deal was not a violation under the Act because an enterprise is justified in protecting its brand value and preventing dilution and infringement of its trademark. The CCI recognized the justification of protection of trademark as a legitimate commercial interest of Schott India.
This defence seeks to establish that the efficiencies resulting from the conduct in question override the anti-competitive effects. This defence is embodied both in Indian as well as EU legislation with respect to horizontal agreements; however, in abuse of dominance cases, it does not find an explicit mention in both cases.
The firms in a market strive for maximum efficiency in production and distribution of resources to achieve consumer welfare. It is widely believed that one of the objectives of competition law is to promote efficiency and some authors further believe it to be the ultimate goal of competition law. The term efficiency includes cost savings, more intensive use of existing capacity, economies of scale or scope, or demand-side efficiencies such as increased network size or product quality. The various components of the term efficiency can be classified into productive, allocative, dynamic and transactional efficiency for the purposes of competition law. However, the realization of a particular efficiency may lead to the loss of another kind of efficiency. A merger may lead to a greater productive efficiency because of increased resources and economies of scale, whereas the merged entity may yield greater market power leading it to impose supra-competitive prices, which is paradoxical to allocative efficiency. This makes it even more difficult for this defence to succeed because of the inherent contradictions between the various forms of efficiencies.
The Guidance Note of the EC with respect to abusive exclusionary conduct states that such an abuse can be justified by the defence of efficiencies. The following conditions are laid down for this defence to succeed:
a) the efficiencies are or are likely to be realized by such conduct;
b) the conduct and the efficiencies are indispensably connected;
c) the efficiencies outweigh the negative effects on competition; and
d) the conduct does not lead to removal of all effective competition.
This defence is often used but it rarely succeeds because parties fail to submit cogent evidence to substantiate their claims and additionally to adopt a lesser anti-competitive alternative. In the Indian context, the efficiency defence has failed as well as succeeded on few occasions. It has failed in the case of East India Petroleum Private Limited v. South Asia LPG Company Private Limited, wherein the CCI reasoned that the efficiencies achieved by denial of blender facilities without use of cavern facilities to the oil terminalling services companies were outweighed by inefficiencies and losses accruing from such denial. However, it succeeded in the case of Kapoor Glass Private Limited v. Competition Commission of India, wherein target based and fidelity discounts were held not to be in the nature of violation of Section 4 of the Act because of consequent efficiencies of cost and economies of scale. One of the latest developments with respect to efficiency took place in the case of Meet Shah and Another v. Union of India and Another, wherein the practice of rounding off the base fare of railway tickets to nearest highest multiple of five was held not be abuse of dominance on efficiency and social parameters.
Social welfare and public interest
The defence of social welfare and public interest consists of showing that the alleged conduct is necessary for social welfare and larger public interest. This defence may consist of economic as well as non-economic aspects. From the economic aspect, the justification may nearly resemble the previous defence of efficiencies. From a non-economic point of view, the justification may seek to argue for the conduct to protect public order and health. The preface to the Act recognizes the interest of consumers and Article 9 of the TFEU recognizes protection of human health as an important concern and Article 3 of the TEU also recognizes similar objectives. This defence has been argued unsuccessfully in Hilti v. Commission (Hilti Case) and Tetra Pak v. Commission (Tetra Pak Case).
In the Hilti Case, Hilti was engaged in the business of manufacturing nails, nail-guns and cartridge strips. Bauco and Eurofix were engaged in the business of manufacturing nail-guns and other materials that were compatible with the products of Hilti. It was alleged by Bauco and Eurofix that the commercial practices of Hilti of tying up its nails along with nail guns were aimed at foreclosing competition and driving out independent nail manufacturers from the market of nails and other materials that were compatible with Hilti tools. Hilti sought to offer an objective justification stating that the nails manufactured by both the parties were incompatible and possessed safety and public health considerations. Moreover, it pointed out that it possessed a duty of care as a manufacturer to the consumers under product liability law. The EC rejected this objective justification and stated that if Hilti was concerned with safety and reliability of the allegers’ products, it should have approached competent authorities vested with powers to verify the safety. Moreover, Hilti neither approached the allegers with respect to safety considerations nor did it warn its users of the same. Thus, Hilti failed to offer a proper social welfare justification and was motivated more by commercial than public interest.
A similar justification for exclusionary and tying up practice was later rejected in the Tetra Pak Case and the EC reiterated: “The technical considerations and those relating to product liability, protection of public health and protection of its reputation put forward by Tetra Pak must be assessed in the light of the principles enshrined in the judgment in the Hilti Case, in which the Court of First Instance held that it was "clearly not the task of an undertaking in a dominant position to take steps on its own initiative to eliminate products which, rightly or wrongly, it regards as dangerous or at least as inferior in quality to its own products.” Thus, more often than not, this justification has also failed because a dominant undertaking isn’t allowed to subsume the power of authorities in its own hands.
The defence of objective justification is dependent on a variety of factors and often fails because a dominant firm is entrusted with special responsibility to not indulge in abusive practices. Hence, the defence offered must balance that responsibility and additionally sufficient evidence ought to be submitted to succeed. The author proposes the following probable suggestions to deal with the issue at hand.
The CCI must deal with the defence as it is traditionally understood and not as a mitigating factor. If it is used as a mitigating factor, an enterprise would be held to have indulged in abuse of dominance with minimal or no penalty imposed. This leads to an absurdity because if an enterprise has a valid justification, holding it foul of the Act lacks application of mind.
The CCI must release a Guidance Note on the application of this justification as done by other jurisdictions throughout the world. For instance, the EC has released a Guidance Note with respect to application of this defence in relation to efficiencies caused by exclusionary abuse.
The Act must be amended to include this defence as a part of the Act itself. If it is incorporated in the Act, the justification would have a legislative backing, and the courts would not be left with an uncertainty as regards its application.
D Hildebrand, The Role of Economic Analysis in the EC Competition Rules (2nd edn Kluwer Law International The Hague 2002), p. 388.
M Furse, The Role of Competition Policy: A Survey (1996), pp. 257-258
ICN Merger Working Group: Investigation and Analysis Subgroup, “Merger Guidelines Work Book” , p. 62.
Roger J. Van Der Bergh and Peter D. Camesasca, European Competition Law and Economics, Intersentia, 2001, p. 5.