3 August, 2017
Vertical agreements (‘VAs ’) or agreements between companies operating on different levels of the supply chain have increasingly become the subject matter of scrutiny before the Competition Commission of India (‘CCI ’). VA s are an important part of how businesses function and CCI ’s mandate is to scrutinize only those VA s that may adversely effect competition in Indian markets. VA s that look similar can have different effects on competition and under the Competition Act, 2002 (‘Competition Act ’), CCI is required to adopt the ‘rule of reason’ approach in examining these (i.e., balance the anti-competitive effects of the agreement against any pro-competitive justifications). Certain types of VA s covering exclusive supply, exclusive distribution, tying and bundling, or minimum resale price maintenance have been identified as anti-competitive agreements under Section 3(4) of the Competition Act and require careful consideration from an antitrust perspective.
In a significant recent development (June 2017), CCI has issued its first decision on resale price maintenance (‘RPM ’) against Hyundai Motor India Limited (‘Hyundai ’). The CCI held that Hyundai entering into a discount control mechanism with its dealers, resulted in anti-competitive minimum price fixing and imposed a penalty of Rs 87 crore (approx. US $13.43 million) on Hyundai.1 The Hyundai order is important for being the first decision on contravention of the RPM provision under the Competition Act and also for understanding CCI ’s approach towards exclusive supply arrangements and tying practices. We consider below CCI ’s assessment of RPM in this case and the likely ramifications for industry.
Brief facts of the Hyundai case
In 2014, Fx Enterprise Solutions India Pvt. Ltd. (‘Fx ’) and St. Antony’s Cars Pvt. Ltd. (‘SAC ’) (collectively, ‘Informants ’) filed an information before CCI . Briefly, the allegations made by the Informants against Hyundai, inter alia , related to the following: (i) exclusivity arrangements with dealers, requiring dealers to take prior permission of Hyundai before entering into dealership agreements with any other automobile manufacturer; (ii) resale price maintenance (‘RPM ’), by imposition of ‘discount control mechanism’ under which dealers could not provide discounts above the maximum permissible range; and (iii) tying the sale of popular cars to the sale of
high-end unpopular cars and designating sources of supply for complementary products such as oils, lubricants and Compressed Natural Gas (‘CNG ’) kits. Delineation of relevant market For assessing the anti-competitive effects of the alleged VA s, CCI delineated the relevant market into (i) upstream market of inter brand sale of passenger cars in India (‘Upstream RM ’) and (ii) the downstream market for the dealership and distribution of Hyundai cars in India (‘Downstream RM ’). While defining the Upstream RM , CCI considered that: (i) passenger cars of different companies were substitutable with each other and (ii) cars could be purchased from anywhere in India. While defining the Downstream RM , CCI observed that the relevant product market should be limited to the market for dealership and distribution of Hyundai cars in India, since: (i) from a demand-side substitutability perspective, a customer who wants to test drive/purchase a Hyundai car will only visit a Hyundai dealership and (ii) in any event, there is only an insignificant level of multi-brand dealerships in India.
Assessment of RPM
Hyundai had implemented a ‘discount control mechanism’ by prescribing the maximum discount which a dealer could offer to its end consumers. As a result, Hyundai had effectively fixed the minimum resale price. Additionally, Hyundai engaged mystery shopping agencies to monitor the pricing by dealers and penalized dealers who did not adhere to the ‘discount control mechanism’. On intra-brand competition, CCI held that discount control mechanism stifled competition amongst dealers by not allowing them to compete on prices. Further, inter-brand
competition was seen to have been adversely effected by CCI given Hyundai was a “popular” brand that could ease pricing pressure on competing manufacturers, leading to artificial maintenance of higher prices.
We note that CCI does not appear to have considered the market share or market power of Hyundai in the Upstream RM . By contrast, in Prime Mag.2 , a publisher had imposed maximum discount rate on the distributor but CCI acknowledged absence of a prima facie case and held that although imposing a maximum discount led to fixing of the lower limit of the price of journals, the impact of such RPM would be limited and not likely to have adverse effect on com petition given the negligible market shares of the publishers. Accordingly, CCI ’s approach in Hyundai appears to be inconsistent with its approach in Prima Mag where it has placed reliance on market power in the upstream relevant market and its impact on inter-brand competition as an important factor in examining RPM s. Tying CNG kits and oil/lubricants with Hyundai cars Hyundai nominated CEV Engineering Panel (‘CEV ’) to install CNG kits in Hyundai cars and required cancellation of warranty in the event a customer were to install a non-CEV CNG Kit.
Similar conditions were imposed in relation to oil and lubricants. Hyundai justified this tying practice on the basis that CEV CNG kits were of superior quality and were specifically manufactured for Hyundai to ensure smooth running of the Hyundai cars as compared to other CNG kits. The CCI agreed with this business justification provided by Hyundai. It held that Hyundai had a legitimate interest as it was bearing the cost of warranty and was not sure of the quality and operability of CNG kits of other brands. The CCI ’s appreciation of objective justifications provided by the company is a welcome step for the industry. It also appears that CCI has diluted
its stand from the previous Autoparts3 case, where it held that warranty conditions which required customers to only get their automobile repaired through authorized service network of dealers resulted in an adverse impact on competition. Interestingly, a similar quality defense was argued in Autoparts as well.
Exclusivity restrictions
On exclusivity restrictions which required the dealer to obtain prior permission from Hyundai before entering into dealership agreements with its competitors, CCI noted that this clause was not effectively an exclusivity restriction as it only required dealers to obtain ‘prior permission’ from Hyundai. According to CCI , the purpose of this clause was that dealers do not free-ride on the facilities provided by Hyundai. Again, CCI ’s order appears to have rightly considered the business needs, justifications and reality. Also, in the previous Autoparts case, CCI did not consider the “prior consent” requirement as a reasonable restriction while analysing the alleged exclusive supply agreements between OEM s and their suppliers.
Conclusion
In considering whether a VA causes or is likely to cause an appreciable adverse effect on competition, antitrust agencies (‘AAEC ’), including CCI , usually first examine the market power of the parties in the vertical markets.4 Given this, it is unclear why CCI has not considered the market power of Hyundai in relation to Upstream RM s for its assessment of effect of RPM on competition.
That said, an important takeaway from this decision is that a discount control mechanism that has the effect of fixing maximum discounts will be treated by CCI as an anti-competitive RPM . However, it remains to be seen whether CCI will consider the anti-competitive effects of such RPM only on intra-brand competition, and not on inter-brand competition where the product competes without competitors’ products. Further, this decision also offers valuable guidance on possible business justifications that could be considered while drafting exclusivity clauses and tie-in arrangements.
1 Case nos. 36 & 82 of 2014.
2 Prime Mag, Subscription Services Pvt. Ltd. v. Wiley India Pvt. Ltd. & Anr., Case No. 07 of 2016.
3 Shamsher Kataria v. Honda Siel Cars India Ltd. & Ors, Case No. 03/2011.
4 Automobiles Dealers Association, Hathras, U.P. v. Global Automobiles & Pooja Expo India Pvt Ltd., Case No. 33/2011.
For further information, please contact:
Rahul Rai, AZB & Partners
rahul.rai@azbpartners.com
