Tag: Competition Law

BY RANJUL MALIK, third-year student at ail, mohali

Introduction

Competition regulators across the world including places like Europe, the USA, Australia, Japan and even India are eyeing major amendments in their respective legislatures to better equip themselves in dealing with new and rising antitrust challenges. While there can be a combination of factors leading to this phenomenon, there can be no denying of the inability of regulators to control big tech as the primary factor for such global shifts. To this effect, the Competition Commission of India (‘CCI’) conventionally is likely to implement some changes along the lines of the Digital Markets Act introduced in the European Union.

It may also be of value for the CCI to draw inference with some provisions from developments taking place in rather far West, in the USA. The American Innovation and Choice Online Act (‘AICOA/the Bill’) is a proposed antitrust legislature which is touted as the tool to regulate ‘selective big tech players’. Though still to be cleared on floor by the Senate, this article aims to focus on facets of AICOA, which might be adopted by the CCI to solve some problems of the Indian antitrust ecosystem, especially with respect to big tech.

A Look Into the AICOA- Parallels With India

The bill on the back of bipartisan support in the senate provides new channels to deal with issues like the privacy of users, providing a definition for big tech players that are considered to be a threat to the competition and importantly, the issue of self-preferencing. A breakdown of these three issues vis-à-vis the Indian picture is as follows:

• Defining big tech (covered platforms)

Big tech in antitrust has often been constituted by large companies like Amazon, Apple, Google, etc. By quantifying the definition and referring to them as ‘covered platforms’, the AICOA is surely a mechanism provided against tech giants operating digitally. Most of such enterprises thrive on user data and algorithms based on user-generated data. Due to such instance, the new draft has left both telecommunication and financial services outside the ambit of the legislature, effectively applicable to only core tech enterprises dealing with user data. The AICOA shall apply to companies with either a market capitalization of $1 billion in the last one year or a user base of over 100 million users, to ensure both private and public companies are covered within the ambit.

Secondly, it restricts itself to companies with online platforms either generating user data, involving information queries basis the user, or involving transactions. The Competition Commission of India on the other hand has often failed to regulate big tech due to its inability to define relevant markets in the digital space, largely due to the fact that it still is sticking with the interchangeability or substitutability tests which do not always depict the correct picture with digital and tech-heavy cases.

Additionally, there is no definition with CCI with regards to big tech, with the Chairman of CCI once going on record to refer to big tech as “centres for entrenched and unchecked dominance“. Therefore, in case of there being difficulty in defining a relevant market for such players and a need to restrict their activities, the proposed definition within the AICOA with its quantitative nature ensures stricter compliance and regulations to such players.

At the same time, it is necessary to implement such provisions after negating their negative halves. For example, the AICOA definition will be practically limited to domestic players, with the threshold of 50 million US users or 1 lakh business users from USA, thus ousting from its realms the likes of Tencent, Huawei, etc. for USA. To elaborate further, WeChat, whose parent company happens to be Tencent, has only about 1.3 million users in USA while its global userbase is a whooping 1.3 billion. This step is a big drawback as it is pro-competitive for foreign players while impairing domestic competitiveness via restrictions.

• Selective preferencing

The issue of self-preferencing by giants like Google, Apple, Amazon has been in contention of many debates and discussions. Self-preferencing has been defined as “a digital platform giving preferential treatment to its own products and services when they are in competition with the products and services provided by other companies”. While conventionally an enterprise’s foray into a vertically related business is known to have pro-competitive and pro-consumer impact, it is only the rapid expansion by big tech and digital enterprises into multiple domains at once that has compelled policymakers to think over the practice of selective preferencing.

The example in the Senate was of Amazon Alexa promoting Amazon Basic products over its search results for queries related to products, in cases where they might be of sub-par quality to those of third-party sellers too. In the Indian regime questions of self-preferencing have been raised in cases like Matrimony.com Ltd and Google LLC and Ors, Umar Javeed and Ors v. Google LLC and Ors and in complaints received against likes of Apple. But because the self-preferencing is not per se violative under section 4 of the Competition Act, it has led to no strict actions against such enterprises.

In contrast, the AICOA proposes to impose a fine of 10% of the total revenue of the past year generated within the USA, in case enterprises were to be found engaged in self-preferencing. This thereby ensures that the referred covered platforms need to be neutral in their regular conduct so as not be discriminating against other third-party service providers present on their platforms. While the bill proposes standard exceptions like that for cybersecurity, the more interesting addition is two-layered criteria as an exception. The criteria check an activity vis-à-vis its importance to the core function of the company and comparing it with any less harmful method which could have been used to achieve a similar outcome. The two points as given are:

1. If an activity seems to be anti-competitive, then to check whether or not  such an act is being done to maintain or substantially enhance the core functionality of the covered platform.
2. And that the conduct could not be achieved through materially less discriminatory means, meaning there is no alternative which provides equal or effective results while being less discriminatory.

Hence the bill provides a strong framework which is mechanised with craft to treat unfair self-preferencing.

• Data and Privacy

The bill has introduced many terms which remain undefined and abstract and might be responsible for some high stake litigation in the upcoming times if it were to be enacted. Terms like ‘materially harm competition’, ‘generated data’, or ‘core functionality’ might not be defined, yet anyone can join the dots to point out the direction being aimed at is user data and its privacy. Lummis for example highlights how big tech companies use data generated on their platforms to their unfair advantage. This has explained by FTC and Privacy International in two ways, one by big tech having large data sets about consumers in different markets which help them design products of the future, and acting as gatekeepers to other companies who are in need of such user data and are ultimately made to adhere to unfair conditions to acquire such data.  The Google Fitbit merger at its helm was again a timely importance of such data to Big Tech, with google looking to grab hold of the data aquired by Fitbit over the years

The bill hands down the regulatory powers in entirety to the Federal Trade Commission (‘FTC’). While the powers given to the FTC are an effective step, the term ‘data’ has been broadly and vaguely used and hence the scope of the powers remains undefined and will require regulation in continuance with section 5 of the FTC Act, but the bottom-line is that the FTC is tasked to restrict commercialisation of sensitive user data to unfair advantage and ensuring building of user interfaces which facilitate sharing of such data with the FTC itself, effectively chartering the path to what might be USA’s first central data regulator.

In India, CCI has often recognized the role of data and IT as an evolving factor to analyze anti-competitive behavior, with the WhatsApp suo moto order talking of need to regulate collection and allocation of excessive data and in the context of platforms like Facebook having ability to process significant data. While data has been recognized by the CCI to be a non-price competitive parameter and even proposes a theory of harm for the same, the powers of the CCI have been at loggerheads with jurisdictional powers of the proposed Data Protection Authority (‘DPA’). A provision solidifying data regulating powers of the CCI in competition pretext would accordingly be a step in the right direction for regulation of this important little space at the hinge of data protection and competition law.

Conclusion

The AICOA is not perfect and is far from it, but that should not stop us from implementing some of the unconventionally creative solutions it poses. The bill falters and is criticized for its vague and unclear terminology which can be defined better for perusal in India. In fact, there can be a combination of provisions from a combination of foreign legislatures. For example- on the front of data privacy, creating a data regulatory body and allocating it powers similar to those given to th FTC while properly defining the term data similar to the Digital Markets Act and ultimately reaching a more concrete and multidimensional provision shall ensure better compliance. The possibilities are endless, and while the Competition (Amendment) Act of 2022 is awaited, the amendments across the world seem focused to put fair restrictions upon unfair practices which have been carried out by ‘the big tech’ for a considerable time. From this uniform complexity come uniform new solutions, which if implemented selectively, fit well into the scheme of things of various nations, as is the case of AICOA and implementation in the Indian regime on the front of data privacy, selective preferencing, and demarcating big tech.

by Sampurna Kanungo and Sanjana Bhasin, fifth year students at NMIMS Kirit P. Mehta School of Law, Mumbai

The recent acquisition of the retail, wholesale, warehousing and logistics undertaking of the Future Group by Reliance Retail Ventures Limited (“Reliance-Future acquisition”) has caused a wave in the market as it is a combination of two key market players in the organised retail segment. Post the acquisition, Reliance would be poised to pose a formidable threat to rivals and local players within the market along with the elimination of a key competitor. Under these circumstances, an investigation into the combination is warranted to ensure that the combination does not cause an appreciable adverse effect on competition in the relevant market.

The proposed combination has been notified to the Competition Commission of India (‘CCI’) as per the statutory obligation imposed under Section 6(2) of the Competition Act, 2002. In the present deal, the parties to the acquisition have submitted that the relevant markets are (a) market for retail in India; and (b) market for B2B sales in India. In this article, the authors break down the decisional practice of the CCI to determine the extent to which such an assessment holds ground and analyse the treatment conferred upon unique aspects of the acquisition as well as explore the possibility of abuse of dominant position.

1. Delineation of Relevant Market

While assessing a combination, the foremost step is to delineate a “relevant market”. The market for retail sales in India is extremely fragmented and comprises of several smaller spheres such as the divide between online and offline segments, organised and unorganised markets etc., each of which are capable of constituting a separate market by itself. Further, a closer look at the parties to the transaction indicates that both have businesses that are spread out across the online/offline retail spectrum.

a. Online/ Offline modes of distribution as a separate relevant market

While considering the demarcation between online and offline retail markets, the decisional practice of the CCI, such as in the case of Ashish Ahuja V. Snapdeal,  has been to regard it as merely two modes of distribution of the same product and not two different relevant markets. Similarly, in the case of Jasper Infotech (Snapdeal) V. Kaff Appliances, the CCI considered the overall market share in the broader market of “supply and distribution of kitchen appliances in India” rather than assessing the market shares individually in the online and offline space.

Interestingly, it is pertinent to note that post 2014, there has been a shift in the outlook of the CCI towards the treatment of online and offline markets. In the case of All India Online Vendors Association v. Flipkart India private limited, the relevant market was exclusively considered as “services provided by online marketplaces for selling of goods in India”, thus highlighting the online retail market as a separate relevant market altogether. The CCI has also acknowledged the growing importance of online commerce in its Market Study on E-Commerce, which highlights the limitation of a unified retail market as a whole on account of the nature of the goods and extent of price differential between sales channels and accordingly calls for a product specific assessment of markets. 

Thus, the conception of retail sales as a broader relevant market as submitted by the parties may not be viable, given the decisional practice of the CCI in recent times. Further, the extent of substitutability between products available for sale via the online and offline modes has also been thrown into question post the COVID pandemic which has acted as a catalyst for the popularity and development of online channels of retail. The CCI has considered factors like ease of choice, convenience etc. for delineating a separate relevant market (of ‘radio cabs service’) in the case of Fast Track Call Cab Pvt. Ltd. V. ANI technologies Pvt. Ltd.,which could further be used to cement the position of online and offline channels of retail as separate relevant markets.

b. Assessment of B2B/B2C sales as overlaps within the relevant market

The other proposed market is the ‘market for B2B sales in India.’ The two common models for retail sales are Business to Business (‘B2B’) and Business to Consumer (‘B2C’). Following previous decisions of the CCI, B2B/ B2C Sales are usually analysed as a horizontal/vertical overlap between the parties and not as a separate relevant market. Overlaps are assessed within the contours of the determined relevant market. An overlap is considered to be horizontal if the parties are close competitors in similar lines of business. On the other hand, a vertical overlap refers to a situation wherein the parties are at different stages of the production chain, such as a combination between a manufacturer and a distributor. A vertical overlap may pose competition concerns since it has the ability to foreclose competition for other distributors.

In case of the Reliance-Future acquisition, not only does Reliance gain a foothold in the B2B segment via the acquisition of the logistics and warehousing segment, it will also continue to operate a B2C business model by way of retail sales to customers through acquisition of physical stores. Since this transaction involves the presence of both business models, it would have to be assessed as a horizontal/vertical overlap within the relevant market.

Illustratively, in Re: Walmart International Holdings, B2B business at the granular level of verticals (i.e. individual goods) was considered while assessing horizontal overlaps. This B2B segment had further been divided into organised and unorganised sectors, even though such a distinction had not been made by the parties. Further, B2C sales were considered under the segment of vertical overlaps. Since Walmart was not engaged in any online marketplace business for B2C sales (on account of such prohibition under the extant FDI Policy), the CCI did not find any vertical overlap.

Thus, the CCI is likely to assess B2B/B2C sales while examining overlaps in the relevant product market.

2. Assessment of Combination

Post the determination of a relevant market, the effect on competition within that market on account of the proposed combination must be assessed. Pursuant to the same, certain unique aspects of the Reliance Future acquisition, such as the nature of the non-compete clause as well as the structure of e-commerce market itself and its implication on the proposed combination, warrant a more detailed examination.

a. Analysing inordinately long Non-Compete Clauses

One of the features of the Reliance-Future acquisition is the inclusion of a non-compete clause as one of the terms of the transaction. As per the Non-Compete Clause, Mr. Kishore Biyani and his family members have been barred from competing in the retail space for 15 years.

The guiding principle for assessment of non-compete clauses is whether the restriction is “ancillary” i.e. directly related and necessary to the implementation of the combination. As a rule of thumb, the CCI has prescribed a period of 3 years in case of transfer of goodwill and know-how and 2 years for transfer of goodwill.

Consequently, while such an inordinately long restriction period is likely to fall under CCI’s scanner, it is unlikely to sound the death knell for the transaction given the regulatory body’s favourable assessment of the same in recent times. CCI has permitted a  longer duration in certain sectors wherein customer loyalty would persist for longer duration. This specific carve out would prove to be beneficial for RRVL in justifying the long duration of the non-compete clause given the expansive loyalty base that has been garnered by Future Group, especially in case of its retail outlets such as Big Bazaar. While the CCI has ordered the reduction of the restriction period under non-compete clauses in numerous cases, a departure from the “ancillary” principle is not considered to be an infringement of the provisions of the Act. Further, the recent stance of the CCI regarding non-compete clauses has been indicative of a more relaxed assessment in view of modern business arrangements,  which can be gauged by a proposal to omit the obligation to disclose details of non-compete clauses.

b. Increase in level of concentration due to network effects

A significant threat to competition within the market is an increase in the level of concentration i.e. the presence of limited key players. A peculiar feature of the functioning of e-commerce platforms is the presence of network effects, which acts as a catalyst in increasing concentration in the market. Network Effect is a phenomenon whereby a product/ service becomes more valuable with the increase in number of users. The importance of e-commerce platforms further increases as growing number of users makes the platform more valuable, which attracts more sellers in return and leads to a ‘positive feedback loop’.

In the present combination, combining both front end and back end services (logistics and warehousing), would make the platform more viable for sellers, which would conversely lead to a larger customer base. This is not only lucrative for emerging platforms such as Jio-Mart which doesn’t have an existing customer base, it can very quickly lead to a concentrated market in this case, especially when combined with the advantages of the existing brand value and loyalty base of the Future Group. Thus, the acquisition of back end services in particular would have the effect of strengthening the network effect of e-commerce platforms of Reliance, and lead to an increase in the level of concentration in the market.

3. Abuse of dominant position

The deal provides massive synergies to Reliance by doubling the retail outlets under operation alongside development of strong back-end and front-end retail businesses, conferring the highest market share to them in the organised retail segment. Key factors such as market share of the enterprise, size and resources of the enterprise and size and importance of the competitors are essential to determine the dominant position of the post-acquisition enterprise.

With Reliance Industries now having access to a strong supply chain and warehousing facility, overlapping with their venture into the online retail space JioMart raises concerns of them abusing their dominant position in one relevant market i.e. offline retail to enter into, or protect, the other relevant market of e-commerce retail. It has been established that the regulator considers not just immediate effects on competition, but also scenarios where the combination may adversely affect competition in the future. Therefore, such vertical integration of the enterprises with large sales and service network puts them in a dominant position, making available the opportunity to indulge in unfair and discriminatory pricing and denying market access to new players in the offline organised retail segment and strengthening their position in the e-commerce retail.

Conclusion

The Reliance-Future acquisition is arguably one of the largest and most significant transactions in recent times, which is likely to have far-reaching consequences in the entire retail space. Consequently, it is imperative to analyse the effects of this combination on the overall level of competition in the market. While an analysis of anti-competitive agreements or abuse of dominance is not conclusive at this preliminary stage, an analysis from a merger control perspective highlights some key aspects. The question of delineating the relevant market has always been one of substantial uncertainty, and the CCI’s decision in this particular combination would be especially significant given that all stages of the production chain as well as different modes would have to be taken into consideration. Moreover, some aspects such as network effects and the ability to leverage position in one market to capture another would have a bearing on a subsequent assessment of dominance as well owing to the plausible increase in market share and concentration.

BY MADHULIKA IYER, FOURTH-YEAR STUDENT AT SYMBIOSIS LAW SCHOOL, PUNE

Introduction

Owing to the economic uncertainty due to the ongoing COVID-19 pandemic, many businesses are in search of potential avenues to wither this impact – one of which is the “failing firm” defence (‘FFD’).  The FFD is employed by businesses in cases where their transactions raise anticompetitive issues. The acquirer argues that this transaction, if approved, is unlikely to have an appreciable adverse effect on competition (‘AAEC’), as the target firm would invariably exit the market, if the transaction remains unsuccessful. Hence, the rationale behind this defence is such that the firm’s dominant position will not be strengthened, instead the post-merger performance would aid in maintaining competition in the relevant market.

As widely documented, the effects of the COVID-19 pandemic on the financial stability of various businesses has been almost disastrous. Therefore, this post seeks to analyse that whether the ongoing pandemic (or any financial crisis) affects the assessment of the FFD, the pro-active role of the Competition Commission of India (“CCI”), and its viability post this outbreak as well.

What is the Failing Firm Defence?

First explored in the case of Kali und Saz (now reflected in the European Union’s Merger Guidelines), this defence lays down a 3-point test, which is as follows –

• The failing firm must be on the verge of exiting the market,
• There is no less anti-competitive alternative, and
• In the absence of this merger, the failing firm would invariably exit the market.

Once these 3 conditions are established, it could be stated that there would be no reduction in competition, and therefore, the proposed combination should be approved. A similar test is applicable in the United States (US) as under Section 11 of its 2010 Horizontal Merger Guidelines.

The Indian Competition Law recognises this concept as well. Section 20(4)(k) of the Competition Act, 2002 (“Competition Act”) recognises the ‘possibility of a failing business‘ as a factor in regulating combinations. The S.V.S. Raghavan Committee Report, also commented that no social welfare loss would occur if the assets of the failing business were to be taken over or combined with another firm. Hence, while it is not regarded as an absolute defence under the law, the CCI considers it as a factor while determining whether the combination would have an AAEC or not.

It is also pertinent to note that this defence is still in a nuanced stage in India, as factors such as what constitutes a failing business, or how the CCI should evaluate this defence remain unclarified.

Implications on the assessment of the FFD due to the pandemic or any financial crisis

While answering the question regarding the implications on the assessment of this defence, due to the ongoing pandemic or any financial crisis, it is relevant to highlight the EU’s Olympic/Aegean Airlines case, wherein a merger cited this defence during the 2007-08 worldwide financial crisis. The party’s defence was initially rejected by the Commission, as the conditions of the test were not fulfilled, nor was there satisfactory evidence to establish actual bankruptcy or that the firm would actually exit the market. The Commission observed that temporary losses were a common feature in a financial crisis, which did not warrant any inference that the firm was “failing” per se.

Notably, the Commission approved the same transaction filed in Aegean/Olympic II two years later, owing to the dismal state of the Greek economy, and its finding that the merger posed no negative impact on competition, or that the firm would exit the market upon failure of the same. With reference to the ongoing pandemic, the Commission has published a ‘Guidance Note’, whereby firms first have to avail assistance, in the manner prescribed, before approaching the Commission. Such form of assistance includes existing instruments deployed from the EU budget in order to support the hard-hit SMEs and small mid-caps, as well as credit holidays, which allow for delayed repayment of loans – which will also be implemented for affected companies under the same instruments, in order to relieve the strain on their finances.

The American stance is even more stringent, whereby firms have a higher burden of establishing bankruptcy, due to the presence of both the “failing” and “flailing” firm defence. The latter indicates those firms who have been weakened, merely due to market competition. During times of financial crisis as well, the standards of this defence have never been compromised upon by the US Justice Department. With respect to the ongoing pandemic, American authorities have called for expedited review of failing firms, whereby parties have a timeline within which they can base their transaction upon, providing clarity to their overall business functioning as well.

The takeover of Bhushan Steel by Tata Steel, shows India’s accepting stance on the FFD. The CCI has approved, without any objection, almost-all mergers, which have significantly increased since the establishment of the Insolvency and Bankruptcy Code, 2016 (“IBC”) as well. Despite their pro-active approach as highlighted above, it is interesting to note that the Advisory issued by the CCI, is void of any specific merger mention, and contains only a general warning for businesses to refrain from violating any provisions under the Competition Act. As stated above, there is also no clarity regarding the FFD, nor has it been provided during the ongoing pandemic either.

The threshold the CCI should establish for the FFD and its importance post COVID-19

It is common knowledge that India is facing an economic slowdown, with the GDP at a decline of 23.9%. Owing to the same, the CCI is faced with an issue of balancing market competition, while also saving essential failing businesses. Another point to note is the suspension of the application of IBC for a year, due to which any combination approaching the CCI during this period, will not go through the rigour of IBC to adduce its bankruptcy, and whether it truly is failing. Hence, the burden of this determination rests solely upon the CCI at this point in time. I believe it is the need of the hour to put forth regulations de-marking the criteria for utilising the FFD in India. The factors the Commission should keep in mind while establishing the same are as follows –

1. Parties to the proposed combination should be given the chance to put forth their case, with factors such as proof of the possibility of exiting the market upon failure of this combination, proof of no AAEC by demonstrating their nearly bankrupt state or evidence of alternative negotiations with other potential buyers as well. All in all, the factors as considered under the Olympic/Aegean case, would in my opinion provide a holistic approach to the CCI while trying to adduce the true intentions of the parties. With reference to this point, the Canadian Merger Enforcement Guidelines , which suggest that parties can rely on projected cash flows, audited financial statements and proof of continuing operating losses to prove the FFD could also be taken into account. By looking into the same, it can be proved by the parties that the firm truly is failing and is likely to exit the market. Emphasis can also be placed upon other information such as financial analysis memorandums, minutes of the board meetings or even documented negotiations which have taken place with other competitors, in order to prove that there is no less-competitive alternative to the proposed combination and also that the firm is incapable of being reorganised.  
2. Secondly, factors such as accessibility, price, and cost should be given greater consideration, especially during any financial crisis, as they have higher relevance to consumers as well. Demonstrating the same, during the analysis of the FFD in the minority stake acquisition of Deliveroo ( a food delivery start-up) by Amazon, the Competition and Market’s Authority   in the United Kingdom, adduced  that loss of the food delivery application would have a negative effect on consumers, owing to the possibility of higher prices along with a decrease in quality and choice.
3. Following the steps of the United States, with respect to their differentiation on “failing” and “flailing”, as highlighted above could also be beneficial to our country. It is evident that the service industry, from airline companies, to the hospitality sector and tourism have bourn the brunt of the pandemic to a greater extent. Hence, adopting different standards or thresholds based on industry-specific impact will also, to some extent, prevent the decline of these industries, and uphold their overall welfare and business functions. One can also seek guidance from the South Korean Free Trade Commission, wherein they adopted a similar approach with respect to the relaxation of merger guidelines, in order to assist their aviation sector.
4. Lastly, keeping in mind the lack of clarity regarding the FFD and its interpretation in India currently, potential parties could also opt for a pre-consultation with the CCI, in order to clear any ambiguity present in their proposed transaction and its interpretation. Another possibility would be adopting the Green Channel mechanism, specifically for COVID-19 mergers, and transactions citing the FFD as well, under regulation 5A. This possibility was also recommended by the Competition Law Review Committee, although not adopted. There are often circumstances wherein the competition in the market could be best secured by authorising a deal that allows for the assets of the failing firm to remain in the market, in the absence of which the market share of the failing firm will be taken over by the present competitors, and in any event would have an effect on the competitive constraints. Following the basis of this argument, there is no reason to set-back the approval of a combination, involving the acquisition of the failing firm, once the resolution plan has been approved. While some may argue that this possibility would serve as an additional burden on the CCI, I truly believe this mechanism outweighs the inefficiencies present.

Conclusion

At this time, while it is crucial to exercise caution in order to prevent any problematic mergers which may have an AAEC, it is also pertinent to protect businesses which truly are financially distressed and whose exit would impact or cause adverse market reactions. The FFD is one of the potential avenue’s businesses are venturing into, especially during the current economic slowdown. However, the lack of any legislative framework or clarity proves to be a drawback.  Hence, the pro-active role of the CCI in this matter is the need of the hour, in order to provide and maintain a balance between market competition and the considerations for the FFD in merger proposals, as well as its impact and precedence post the pandemic as well.

BY SWIKRUTI MOHANTY AND TUSHAR CHITLANGIA, SECOND YEAR STUDENTS AT NLU, ODISHA

Introduction

The long wait of WhatsApp to enter into the Unified Payment Interface (‘UPI’) enabled digital market in India has finally come to an end. In an order dated 18 August 2020 in Harshita Chawla v WhatsApp, the Competition Commission of India (‘Commission’) has allowed WhatsApp to launch its payment service termed WhatsApp Pay. Additionally, National Payment Corporation of India has also assented to WhatsApp Pay’s data localisation compliance and gave permission for it to go live. WhatsApp Pay is a UPI based payment service and will undoubtedly come out to be a massive winner in the digital payments market as WhatsApp already has the largest user base in India with 400 active million users; hence attracting users will not be a problem. However, this may lead to WhatsApp abusing its dominant position, which the post discusses further. The post also discusses why Big Data, which WhatsApp can abuse after the launch of WhatsApp Pay, should come under the Commission’s ambit. The post also lays down the ways which the Commission can consider to bring Big Data under its jurisdiction to prevent possible problems.

Issues Raised and the Judgement

In the instant case, Harshita Chawla, the informant, has alleged that WhatsApp is taking the leverage of its predominance in one market (market of OTT messaging apps through smartphones) to enter into another market (UPI enabled digital market) by authorising pre-instalment of WhatsApp Pay on WhatsApp, and bundling WhatsApp with WhatsApp Pay. Therefore, she contended that WhatsApp is abusing its dominant position under section4(2)(d), and 4(2)(e) of the Competition Act, 2002 (‘the Act’). She also pointed out that UPI enabled digital payment apps dealt with  Big Data which are essentially vast chunks of personal data which have characteristics like that of high volume, variety, value, and velocity and are available to corporations, which use it for targeted advertising.. With a given volume of such data, WhatsApp might adversely affect the integrity of personal data and national security in the future. Hence, Harshita Chawla prayed for the cease and desist order of the anti-competitive operations.

Despite the acknowledgement of WhatsApp’s dominance in the market of over-the-top  (‘OTT’) messaging Apps through smartphones in India, the Commission was of the view that pre-instalment of WhatsApp Pay did not appear to be in contravention of section 4(2)(d) and 4(2)(e). Users will still have a choice to utilise any other UPI based apps which might be already downloaded on their smartphones, and there will be no express or implied encumbrance which can take away this liberty. Further, the Commission added that UPI enabled digital market is already established with eminent players competing enthusiastically, and it appeared improbable that WhatsApp Pay will consequently claim a more vital position only on account of its pre-installation. The Commission also noticed that WhatsApp which managed Big Data was prone to abuse and it can raise a potential anti-trust concern. However, the Commission held that it could not examine the matter of misuse of sensitive due to lack of concrete evidence. Hence, the Commission ordered the closing of the case under section 26(2) of the Act as it found no prima facie case arising from the issues raised by Harshita Chawla.

Critical Analysis

Abuse of Dominant Position by WhatsApp

The Commission examined the matter of tying under section 4(2) (d) in detail. It laid down four conditions which have to be satisfied to determine a case of tying. The first two conditions were met, as WhatsApp and WhatsApp Pay were separate products, and WhatsApp was dominant in the market for tying product. However, the Commission opined that the last two conditions, namely: iii) a complete restriction to only obtain a tying product without tied product, and iv) tying capable of hampering the competition in the market, was not met by WhatsApp. On the contrary, authors opine that last two conditions were also met as WhatsApp Pay feature came embedded with the WhatsApp and thus essentially the tying product (WhatsApp) cannot be obtained without tied product (WhatsApp Pay). The last condition is also met as WhatsApp Pay is capable of hampering the competition in relevant market due to huge existing user base of WhatsApp. The Commission refuted the fourth condition on the basis of it being premature but instead the Commission could have taken Dynamic Analysis approach in which future outcomes are predicted using the real time data.

The Commission further observed that the mere existence of an app on the phone does not necessarily guarantee the usage and hence the allegation cannot be scrutinised under the purview of section 4(e) However, the Commission possibly ignored the fact that if WhatsApp introduces its own UPI app, it does have an undue advantage since the user base of WhatsApp is practically being served on a silver platter to the upcoming app. Therefore, WhatsApp can use its dominant position in one market to enter into another and thus contravening section 4(2) (d).

Further, the Commission held in Re Biocon Limited v Hoffmann-La Roche AG that even a partial denial of the market access, which deprives the competitors to compete effectively violates section 4 of the Act. The fact that these third-party payment apps have meagre margin and the prime factor for these apps to sustain in the market is to keep their users engaged through different tactics cannot possibly be taken out of consideration. In this manner, user-base shapes one of the major facets of driving competition among all market players.

Additionally, the Commission was of the view that in the UPI enabled digital market, the competitors compete enthusiastically, and in such a scenario, it is difficult that WhatsApp will amass a market share solely owing to its pre-installation and a dominant position. However, in the case of Shri Vinod Kumar Gupta v. WhatsApp Inc. & Ors., the Commission observed that even if an app held a dominant position in the relevant market, once a new alternative app is installed on a device, users can quickly switch to the alternative app. In the instant case, WhatsApp Pay is the new alternative and pre-existing players like Google Pay, and Phone Pe are in the dominant position, the chances of WhatsApp taking over these apps within a short period does not seem all that improbable provided its gigantic existing user base of. Hence, WhatsApp can abuse its dominant position with the launch of WhatsApp Pay.

Additionally, it is worth mentioning that South Africa Reserve Bank (‘SARB’), the Central Bank of South Africa, also suspended digital payment operations of WhatsApp shortly after it started in South Africa to “preserve an adequate competitive environment”.

Big Data Conundrum

The Commission once again got a chance to analyse the anti-trust concerns surrounding Big Data in the instant case, long after an unsuccessful stint in Vinod Kumar Gupta v WhatsApp Inc. & Ors. However, yet again, it failed to lay a definitive decision on the same. Big Data is useful to some extent; however, wrongful use of this user data can lead to wiping out of competitions in the market as the choices of the consumers remain only known to the data collecting entity and not to other competitors.

The Commission in the present case has dismissed the possibility of looking into the issues surrounding big data stating  there is no concrete evidence to support the claim by Harshita Chawla. However, it was held in the case of Registrar of Restrictive Trade Agreements v. W. H. Smith and Sons that entities which combine “will not put anything into writing nor even into words” and will only hint in the slightest way possible. This implies that finding concrete data alleging violation of anti-trust rules is difficult. In such cases, The Commission should consider extending its reaches to include any wrongful use of big data as an anti-competitive activity and include it under the realm of its jurisdiction.

To bring Big Data under its jurisdiction in cases of mergers, the Commission may treat Big Data as assets (precisely intangible assets) under section 5 of the Act. Due to this, mergers of kinds which involve Big Data transfers would be under the ambit of the Commission by virtue of section 6 of the Act. Section 6 states that combinations should not cause an appreciable adverse effect (e.g., barriers to entry) in the relevant market.

Another, route which the Commission can take is that it should assign Big Data a relevant market. Relevant market refers to the market where the competition takes place. Defining the relevant market is the initial step of any anti-trust analysis. One of the major issues why big data has not come under the radar of Competition Tribunals around the world is that Big Data could not be assigned a relevant market as online providers use data as an input in their service and not as product being sold to consumers. The European Commission review of the merger of WhatsApp/ Facebook also declined to define the relevant market for Big Data. Some scholarly work suggests that ‘Big Data Relevant Market’ (‘BDRM’) should be the relevant market for Big Data. Companies use data for gaining a competitive advantage and thereby also showing an indication of exclusionary practice. Hence, demarcating a separate market for Big Data would encourage better identification of anti-trust issues like market power, entry barriers, and abuse of dominant position in BDRM.

Concluding Remarks

Although the launch of WhatsApp Pay will be a big rejoice for the users, it comes with a resounding blow to the anti-trust regulations in the country.  In this tech-upgrade saga, the chances are high that consumers would be at a losing end as the market will not have any competitor to provide them with different and innovative services other than WhatsApp. This may also lead to the problems of Big Data usage by WhatsApp as there is no law in India to govern big data and the Commission is yet to acknowledge the misuse of big data as a competition concern.. Also, incidents like that of Pegasus spyware in 2019 adds onto the vulnerabilities of privacy and data security in hands of WhatsApp. Therefore, to prevent such issues, the Commission must include Big Data under its jurisdiction, so that a check can be put on digital mammoths like that of WhatsApp.

BY MOHIT KAR, A fourth-year student At mnlu, aurangabad

On 20^th February, 2020, The Ministry of Corporate Affairs came up with the Draft Competition (Amendment) Bill, 2020 (“the Bill”) on recommendations of the Competition Law Review Committee (“CLRC”). The Bill, amongst other changes, has proposed for addition of Section 4A to widen the scope of protection accorded to Intellectual Property (“IP”) holders in Abuse of Dominance (“AoD”) cases. Section 4A acts as an exception to Section 3 (prohibiting anti-competitive agreements) and Section 4 (cases of AoD) and allows the IP holders the rights to safeguard themselves from infringement and impose reasonable restrictions to protect their rights under existing IP statutes. It is pertinent to note that a similar provision is already in existence in the form Section 3(5) of the Competition Act and the new section merely adds the protection to the AoD cases.

Intersection of Abuse of Dominant Position and protection of Intellectual Property: Jurisprudence in India

The Bombay High Court in the case of Aamir Khan Productions Pvt Ltd v Union of India held that the Competition Commission of India (“CCI”) had the jurisdiction to hear competition cases involving IPR. Subsequent to that decision, the CCI has dealt with a multiple of cases involving competition law and intellectual property. Most of the cases deal with the ‘refusal to license’ issue. In the case of Shri SamsherKataria v. Honda Siel Cars &Ors, the CCI held that the refusal to license the diagnostic tools and spare parts essential in the manufacturing of automobiles constituted an abuse of dominant position. This was the first case CCI took a significant look at the potentialities of competition abuse with the help of IP rights.

In the case of Justickets Pvt. Ltd v. BigTree Internet Pvt. Ltd. & Another, CCI took a cautious approach while dealing with a delayed licensing conundrum. Justickets, an online movie ticket booking website, had alleged that BigTree, another online movie ticket booking portal, along with Vista Entertainment were misusing their dominant position by denying access to Vista’s Application Programming Interface (“API”) whose access was essential for ticket booking portals to smoothly transfer data from their website to Vista screens at theaters. After the DG investigation, CCI found that, although delayed, the access to the API was duly given by BigTree and Vista. CCI held that the delay in licensing was justified and as every business entity has a right to protect itself against threats of reverse engineering and protect its business interest, especially IPR before committing to licensing deals. In quite contrary to its position in the Samsher Kataria case, the CCI took the side of the IP holder in the present case and it was rightfully so. A mere delay in allowing a license cannot be considered as AoD since every party has a right to perform a due diligence and take the stock of the situation before entering into any licensing agreement with the other party.

A key conflict between IP rights and competition law lies in the licensing of Standard Essential Patents (“SEP”). In the case of Telefonaktiebolaget LM Ericsson (PUBL) v. Intex Technologies (India) Ltd, the Delhi High Court while deciding about this conflict laid down certain guidelines for the holders of SEPs and the potential licensees to abide by so as to avoid AoD. This intricate balance between the SEP holder and licensees also exists in the EU to create an equilibrium between the rights of a holder of a patent that is essential for a standard and ensuring that said right does not allow it to hold a dominant position in the market.

Analysis of Section 4A from an EU perspective

As mentioned before, the added protection provided to IP holders that has been suggested by the Bill is not all together new and was previously in existing Section 3(5) of the Competition Act. The proposed section 4A merely extends the protection to cases of AoD under Section 4. Although the provision seems like a blanket protection to IP holders, a key aspect of it lies in the wordings of “reasonable conditions”. It states that the IP holders can make use of their rights under certain restrictions to ensure fair play and promote competition. The CLRC while drafting the provision have stated that the provision should be interpreted in a narrow sense so as to bring it in line with international jurisprudence.

AoD in the EU is regulated under the Article 102 of the Treaty on the Functioning of the European Union (“TFEU”) which states that: “Any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal market in so far as it may affect trade between Member States”. The EU courts have faced a number of cases on the question of whether use of intellectual property to facilitate market exploitation results in violation of Article 102. In the cases of AB Volvo v Erik Veng (UK) Ltd. and CICRA & Another v. Renault with regards to design rights of automobile parts, the European Court of Justice (“ECJ”) held that refusal to license the design rights could not amount to AoD as it was part of the exclusivity given by IP rights. Further in the case of Parke, Davis and Co. v. Probel, Reese, Beintema-Interpharm and Centrafarmthe ECJ had maintained that use of IPR to gain foothold in a market does not necessarily amount to AoD as there may be a significant amount of substitutes available in the market. However, the ECJ changed its stance moving forward, evidenced in the cases of Radio Telefis Eireann (RTE) & Independent Television Publications Ltd. (ITP)v. Commission and IMS Health GmbH & Co. OHG v. NDC Health GmbH & Co. KG wherein it held that a refusal to license IP rights would constitute AoD only in “exceptional circumstances”. It laid down the exceptional circumstances in a “narrow” sense as: (a) the IP is a necessity to compete in the market; (b) the refusal is no objective justification; (c) the refusal would hand over a secondary market to the IP owner without any competition; (d) the licensee offers to produce such products which is not in the inventory of the IP holder. In a different case involving Microsoft, the European Commission took a different stand and stated that licensing could be made compulsory under the following circumstances: (a) the IP right is a necessity for the competitor to stay viable in the market; (b) the refusal to license would reduce disclosures; (c) there exists a “risk” of elimination of competition in the secondary market; (d) the refusal to supply could end up stifling innovation; (e) the refusal to supply would not be objectively justified as it could lead a lack of balance between the incentives to innovation for the IP holders and the incentives to innovate for the market as a whole. This interpretation in the Microsoft case was very broad. It mandated access to licenses very strictly and led to situations where in the courts would find refusal to license as abusive when in fact they were not.  Such a strict interpretation reduced consumer welfare and led to an overall lack of social welfare.

Given the similarities between Section 4A, the CLRC recommendations and the aforementioned constructions laid down by the ECJ, it is expected that CCI is expected to refer to ECJ cases whenever it is faced with questions related to Section 4A. It would prove beneficial if CCI follows a similar route of the “narrow” construction while dealing with the issue. The CCI would also need to take a similar path when dealing with the SEP licensing cases so as to ensure that the SEP holders do not stifle competition while ensuring that they get the necessary freedom to enforce their IP rights.

Conclusion

The provision of Section 4A is a very adventurous step that has been recommended by the CRLC, given it’s a road not taken by other jurisdictions. It does come with certain flaws as it may lead to lengthy implementations and trials. But on an overall basis, it is quite positive and a move worth welcoming, as it could bring some much-needed clarity to the “conditions” under which the dominant IP holder can enforce its rights. It could also nudge CCI to refer much-appreciated interpretation made by ECJ in its narrow construction with regards to refusal to license cases and could bring about larger welfare for the society.

BY ANURAG MOHAN BHATNAGAR AND AMIYA UPADHYAY, THIRD-YEAR STUDENTS AT NLU, ODISHA

Introduction

With a vision to impede unjust trade practices in the e-commerce industry, immediate selling, and to safeguard the interest and the rights of the consumers, the Central Government has come up with Consumer Protection (E-commerce) Rules, 2020 (‘the Rules’). The Central Government has the authority to take certain actions to avert unfair trade practices in the e-commerce industry as under section 94 of the Consumer Protection Act 2019 (‘the Act’). The rules concerned, have been worked out as under the powers provided in section 101 (1) (zg) of the Act. One of the basic definitions that have come up under the new rules, include “e-commerce entity” that is, “any person who owns, operates or manages digital or electronic facility or platform for electronic commerce, but does not include a seller offering his goods or services for sale on a marketplace e-commerce entity”.

Furthermore, the Central Government has also replaced a three-decade-old (1986) act with a new Consumer Protection Act 2019 which came into effect in July 2020. The present piece seeks to present a detailed analysis of the Rules including certain loopholes within the same, and the similarities or differences between competition laws (antitrust laws) and consumer protection laws. Further, the authors have also formulated a cross-jurisdictional analysis with USA and the European Union (EU).

Critical Analysis

The replaced Act lacked the vision to provide justice to the consumers and was time-consuming. As per the new Rules, the seller has to mandatorily show details such as price, information about refund/exchange, delivery, and shipment, grievance redressal, etc. The Rules also mention that the sellers cannot make unjustified profits by manipulating the price of the goods (rule 4(11) (a)).In the case of M/S Cargo Tarpaulin Industries vs Sri Mallikarjun B.Kori, the National Consumer Disputes Redressal Commission held that it is an offence to sell any good at a price higher than the current retail price of that good.

While, the report given by the Competition Commission of India (‘market study’) covered most of the difficulties faced by the consumers, it only comprised of objective facts with the end goal of research and did not establish an authoritative or a binding legal obligation. On the other hand, these rules not only legally bind the e-commerce platforms but also deal with major issues present in the market study such as platform neutrality and search rankings (rule 5 (3)(f)). Regulatory authorities have been strict about search rankings ever since they found Google liable in Matrimony.com Ltd v. Google LLC and Ors.

Platform neutrality means that e-commerce platforms cannot discriminate in favour of their services. For instance, Flipkart could not favour its products in the search rankings on its marketplace while demoting the other retailers on the platform. Thus, a platform cannot act as both a marketplace and a competitor on that marketplace. In Re: All India Online Vendors Association, Flipkart was alleged for leveraging its position as a marketplace to extend preferential treatment to WS Retail on its platform. Preferential treatment is accorded by numerous e-commerce players in India by marketing and selling products of their own subsidiaries, related parties or others. By doing so, the undertaking imposes dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at competitive disadvantage. Under rule 5(3), marketplace e-commerce entities are required to disclose any differentiated treatment which it is / maybe extending to goods, services or sellers of the same category. As such, the e-commerce platforms will need to disclose descriptions of practices like premium/preferred listing, skewed search results, sponsored deals etc. in the terms and conditions governing the relationship with the sellers on the platform. This will help in curbing such discriminatory profit-making practices.

Further, the Act aims to establish a Central Consumer Protection Authority (‘CAPA’), Disputes Redressal Commission, Central Consumer Protection Council. These bodies shall carry out investigations in certain matters about misleading advertisements, product liability, and unfair trade practices.

The Rules have also mapped out a grievance redressal system for complaints. Under the Rules, grievance is classified as any complaint with respect to violations of the Act or the Rules, made to any e-commerce entity. The Rules have made it essential for every e-commerce entity to appoint a nodal grievance officer, whose designation and contact information has to be displayed on its website. Further, it is essential for every e-commerce entity to certify that the appointed officer acknowledges the receipt of the complaint in 48 hours and furnish rectification of the same within 1 month from the receipt date. From the perspective of a consumer, the clause of “acknowledging the receipt” of the complaint will act as improving the transparency in the redressal system and obviously, a time-bound dispute redressal system will qualify as a righteous move.

Inter alia, other relevant duties of the e-commerce platforms include non-imposition of cancellation charges, explicit consent of consumers and effective refunding. According to the clauses under rule 7, e-commerce entities will not impose cancellation charges on consumers who cancel after confirming the purchase, unless the e-commerce entity is also bearing similar charges. Furthermore, the consent acquired from the customer while purchasing must be express and voluntary. In this way, the e-commerce entities will not under any conditions include pre-ticked boxes in consent forms. In addition, products and services will be taken back and refunds shall be given if there is an occurrence of defective, inadequate or bogus and counterfeit, or not at standard with or not of the characteristics advertised or when delivered late from the schedule, except if brought about by force majeure.

Relationship between Antitrust and Consumer Protection: Under One Umbrella

Prima facie, the objectives of both the legislations are quite similar as both deal contortions in the market place, which is driven by supply and demand. While the Competition Law ensures access to goods and services at competitive prices for consumers and averts illicit activities which could hamper an environment of healthy competition, Consumer Protection on the other hand, aims to safeguard the basic right of the consumers to be guaranteed access to diverse goods and services at competitive prices.

The relation between both the laws can be expressly witnessed in the Competition Act itself, as under section 4, “where an enterprise or a group shall be termed as abusing its dominant position if it limits technical development relating to goods or services to the prejudice of consumers”. A similar reference can also be seen in section 18 of the Competition Act whereby the “interest of consumers must be protected”. Thus, it can be reasonably argued that both the legislations ultimately support one another as two parts of an overarching unity, and that overarching unity is consumer sovereignty.

Loopholes and Criticism of the Rules

Rule 2 states that the Rules does not apply to a natural person where the activities are being carried out in personal capacity. The Rules should have included all the stakeholders within its purview to be qualified as an extensive piece of legislation. Secondly, the Rules could have mapped out a detailed rate list of the delivery charges, which the sellers charge on the e-market, which are often unnecessarily higher than what a common man would be willing to fork out. Thirdly, the malpractice of drip pricing has not been addressed. Drip pricing is an act where the seller consistently increases the price of the goods at different stages of online shopping till the final stage of payment. Lastly, the rules have surprisingly not included any legal structure other than a company, such as a limited liability partnership (‘LLP‘). This preclusion would definitely hamper many e-commerce entities which are functioning under different legal structure.

Furthermore, there are certain terms in the Rules which might create confusion or conflict such as “unjustified prices”, “arbitrary classification” and “unreasonable profits”. Arguably, clauses like “restricting access to sale/discounts on products/services” can be termed as arbitrary categorization since they affect the rights of consumers directly.

Cross-Jurisdictional Analysis

Before the Indian Ministry of Consumer Affairs, market research and examinations on the impact of digital marketplaces have similarly been carried out by consumer protection and competition law watchdogs of many other jurisdictions. Some of the noteworthy regulations introduced in other jurisdictions are as follows:

USA: The two agencies involved in online consumer protection in the US are the Federal Trades Commission (‘FTC’) and the Federal Communications Commission (‘FCC’). While the FCC reviews consumer complaints, the FTC investigates and takes actions against those involved in illicit trade practices. Previously, the FTC had released a dotcom disclosure guidance document in which it mentions that how intently it manages the structure and substance of information distributed in the online marketplace to prevent unreasonable or deceptive activities and protect the consumers from such practices. In any case, while the sectoral division of regulators may provide cures for that specific sector, it isn’t without its disadvantages, lack of co-operation between the regulators and overlapping decisions of authorities, just to name a few.

EU: The EU introduced new rules for consumer protection in January 2020. This initiative adopted by the commission urges more transparency on e-commerce marketplaces, same consumer rights for “free digital services”, better search rankings, transparency in customer reviews, customized pricing.  It also focuses on forbidding purchasing of tickets online through bots and encouraging honest discount claims. The directive also mentions levying penalties on those e-commerce platforms which violate these consumer rules, which is up to 4 percent of the platform’s overall turnover.

Conclusion

In an industry that is going through a phase of expansion and technological advancement, robust legislation such as the Act was the need of the hour. Certainly, the Rules can be considered as a step in the right direction. Even though some of the provisions of the Rules might be in contravention to the sellers but overall, these rules were needed because until now, there was no particular legislation that dealt with unconventional issues resulting from the e-commerce industry. Lastly, these Rules cover all the contemporary issues and act as much-awaited legislation governing the new e-commerce industry and shall aim to let out some uniformity in the market.