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15 April, 2020
The world at large is currently experiencing unprecedented challenges in responding to the COVID-19 pandemic. Businesses are also undertaking extraordinary measures to sustain themselves during this time of crisis.
The last few days have witnessed reports of companies “joining hands” to fight COVID-19 in the pharmaceutical, hospitality, banking, software development sectors and amongst founders of startups. While these efforts are admirable and arguably necessary, it is critical to note that any cooperation between entities must remain compliant with the provisions of the Competition Act, 2002 (“Competition Act”). Absent appropriate legislative or executive exemptions from the application of the Competition Act, the provisions of the Competition Act continue to apply to all enterprises. Any action by enterprises that violates Indian competition law is likely to invite scrutiny under the Competition Act regardless of the prevailing circumstances. If such conduct is viewed to be in violation of the law, this could also involve significant penalties.
Anti-Competitive Cartel Agreements
Agreements amongst competitors to: (a) directly or indirectly determine purchase or sale prices; (b) limit or control production, supply, markets, technical development, investment, or provision of services; (c) share markets, source of production, or provision of services by way of allocation of geographical area of market, type of goods or services, number of customers in the market, or any other similar way; or (d) rig bids, are presumed to be anti-competitive under the Competition Act. The Competition Act does however recognize that not all forms of agreements or joint actions between competitors are necessarily anti-competitive. To this extent, the Competition Act creates a carve-out for “efficiency enhancing” joint ventures (‘JVs’) between competitors from this presumption. To benefit from this presumption, efficiencies arising from the JV must be demonstrable by parties and cooperation between competitors disguised as a JV will not pass muster under the requirements of the Competition Act. Factors that the Competition Commission of India (‘CCI’) has considered in the past when determining efficiencies realized from a JV’s include:
i. Technological Efficiencies: When examining the competitive effects of a JV contemplated in the media and broadcasting sector, CCI identified better transmission and projection of films, reduced piracy, cost reduction in broadcasting and transmission, optimum utilization of resources and cost reduction as pro-competitive efficiencies.
ii. Inefficiencies in the Market which the JV sought to Resolve: Lack of infrastructure for supply of products in a state, being resolved by the JV;
iii. No Deleterious Effect on Consumers: Likelihood of benefit to consumers due to the presence of an efficiency enhancing JV.
While certain jurisdictions like the European Union (‘EU’) recognize ‘crisis cartels’ in limited circumstances[1], the Competition Act does not. Crisis cartels involve industry players cooperating to find a solution to their common challenges arising out of a crisis. To qualify as a crisis cartel, competitors must be able to demonstrate that their coordinated conduct is indispensable to improving production or distribution of goods and that the consumers will receive a fair share of the resulting benefits. By contrast, an ‘efficiency enhancing JV’ carve-out under Indian competition law is arguably a defense for a specific collaboration between competitors and not an industry-wide collaboration.
In an effort to help businesses sustain themselves during the COVID-19 pandemic, several jurisdictions have temporarily exempted certain kinds of competitor collaborations involving the procurement and provision of essential products and services[2] from antitrust scrutiny. These measures are permitted on the principle that such collaborations lead to efficiencies and ultimately, consumer benefit in the market. Some of these measures include:
(a) United States where a joint statement by the Department of Justice and Federal Trade Commission on COVID-19 confirm that collaborations between competitors in respect of the following, will be presumed to be pro-competitive: (a) Research & Development collaborations, (b) sharing of technical know-how, (c) sharing of standards for patient management developed to assist providers in clinical decision making, and (d) joint purchase agreements among healthcare providers.
(b) EU where the European Commission (‘EC’) has recently exempted cooperation in the health sector to ensure the supply and adequate distribution of essential scarce products and services during the COVID-19 outbreak on medicines and medical equipment that are used to test and treat COVID-19 patients or are necessary to mitigate and possibly overcome the outbreak.
(c) United Kingdom where the Competition and Markets Authority (‘CMA’) has statedthat it will not take any action against coordination undertaken by businesses that are, amongst others, appropriate and necessary to avoid a shortage and contribute to the well-being of consumers arising as a result of the COVID-19 pandemic.
(d) Australia where the Australian Competition & Consumer Commission has authorized limited co-operation between wholesalers, gas and electricity industry participants, supermarket operators, shopping center owners and managers, medical technology companies and private hospitals in Victoria and Queensland.
(e) Norway where the transportation companies have been allowed a three months temporary exception from the prohibition of anticompetitive agreements and practices. The exception makes it possible to maintain the transportation of passenger and goods in Norway in order to secure the population access to necessary goods and services.
(f) Iceland where the Icelandic Competition Authority has granted several exemptionsfrom the ban on cooperation owing to the COVID-19 crisis. These include exemptions on (i) cooperation between travel agencies aimed at facilitating the safe return home of tourists abroad and in Iceland, (ii) cooperation between importers and distributors of pharmaceuticals aimed at securing necessary access to important pharmaceuticals, (iii) cooperation between smaller pharmacies aimed at preventing the closure of such pharmacies to the detriment of effective competition against larger retailers, in addition to securing consumer access to necessary pharmaceuticals, (iv) cooperation between lenders (mainly banks and pension funds) enabling uniform and temporary standstill on loan/debt payments of undertakings, (v) cooperation between two major distributors of fuel enabling the distributors to assist each other in parts of the country where difficulties arise as a result of COVID-19, and (vi) cooperation in maritime transportation of certain necessary supplies (pharmaceuticals) to Iceland.
(Indian) Central Government’s Power to Exempt
Section 54 of the Competition Act provides that the Central Government, may, by notification, exempt any class of enterprises from the applicability of the Competition Act, if it considers it necessary in the interest of security of the State or public interest.
The Central Government has exercised this power sparingly in the past. Since 2013, the Central Government has, from time to time, exempted vessel sharing agreements (‘VSA’) in the liner shipping industry regardless of the nationality of either the carriers or the ships from any Indian port, subject to the fulfillment of certain conditions. This exemption (in force till July 3, 2021) appears to recognize the efficiencies involved by VSAs amongst shipping companies resulting in operation of ships more efficiently by sharing resources but clarifies that the Central Government may withdraw this exemption if any complaint involving price-fixing, capacity limitation, or market or customer allocation is brought to its notice. Recently, the Central Government renewed the exemption available to banks placed under moratorium from the purview of the CCI’s merger regulation powers.
The Central Government’s ability to exercise its powers to exempt is critical in the prevailing circumstances particularly in light of the relaxations adopted by other jurisdictions. While the Government is yet to exercise its powers under these provisions to contain the impact of COVID-19 on businesses, it may at the outset, consider exempting certain forms of cooperation in key sectors from the purview of anti-competitive agreements and merger control regulation under the Competition Act.
Abuse of Dominance
Exploitative or exclusionary practices, when carried out by an enterprise in a “dominant” position[3] are prohibited under the Competition Act. Exploitative conduct, in particular, includes imposition of “unfair” purchase or sale prices (including excessive prices) or “unfair” conditions on the purchase or sale of goods or services. In the past, the CCI has imposed penalties for excessive pricing in the automobile auto-parts sector, transportation services market, and patented technology in the telecommunications sector.
Under existing circumstances, antitrust authorities are likely to closely monitor exploitative practices by dominant firms. Firms with market power that are looking to capitalize on excessive demand and supply shortfalls particularly involving essentials goods or services in healthcare by raising prices or making misleading claims about efficacy are likely to be dealt with strictly under the Competition Act. Such conduct during the current crisis is also likely to be viewed as an aggravating factor in light of the Government’s effort to cap/control the retail prices of essential products such as hand sanitizers and surgical masks.
Even competition authorities in other jurisdictions like China, Brazil and Russia have already begun probing into reports of excessive pricing. For instance, Brazil’s Administrative Council for Economic Defence recently launched a preliminary probe into the conduct of manufacturers and retailers of medical-pharmaceutical products further to complaints against suppliers of face masks and hand gel charging disproportionately higher prices.
Further, in an open letter dated March 20, 2020 to the pharmaceutical and food and drink industries, the Senior Director (Markets) of the CMA has urged pharmaceutical and drink companies in the United Kingdom to (a) not impose unjustifiably high prices for essential goods; and (b) self-report instances where a price increase is caused by equivalent increases applied by wholesalers or suppliers – to assist the CMA in investigating such issues.
Conclusion
Absent a specific relaxation from the Central Government, antitrust rules governing competitor coordination and other restraints continue to apply to companies operating in India. Moreover, the CCI is likely to closely monitor the market for any exploitative conduct by firms with market power. Regardless of the challenges faced by businesses across the country on account of COVID-19, enterprises must continue to be mindful of ensuring that their conduct is consistent with antitrust principles and best practices to avoid scrutiny and potential follow-on penalties.
For further information, please contact:
Zia Mody, Partner, AZB & Partners
zia.mody@azbpartners.com
[1] For instance, the EC has clarified in the Irish Beef cartel case that even if an anti-competitive agreement has been entered into with the object of removing the effects of a crisis in the entire sector, the cartel still cannot be justified if it has the ‘object of prevention, restriction or distortion of competition’.
[2] As long as the collaboration does not result in price fixing or is more than what’s necessary to counter the challenges created by the pandemic.
[3] Position of strength that enables an enterprise to operate independently of market forces.
