16 Identification Of Abusive Use Of Dominant Position

Vijay Kumar singh

17. Identification of Abusive Use of dominant position

Once the dominance of an enterprise is established, the next step is to examine the conduct of the dominant enterprise and to see whether that falls under the categories of abuse mentioned under the Act. An abuse of dominant position may be generally categorised into ‘exclusionary’ (an upstream dominant enterprise supplies the input to its downstream affiliate at lower cost than its downstream rival – leading to price squeeze, causing a competitive disadvantage to the downstream rival, for e.g. if the input cost charged to the downstream affiliate is Rs. 100 to the downstream rival it is Rs. 130, thus there is an inherent competitive disadvantage of Rs. 30 to the rival firm) and ‘exploitative abuses’ (dominant player charges excessive price from consumers or exploits them due to its dominance). However, the Competition Act in India does not make such distinction, though a reference was made by Raghavan Committeei.

The concept of abuse is an objective concept as held in the case of Hoffman La Roche by ECJii,

“The concept of abuse is an objective concept relating to the behavior of an undertaking in a dominant position which is such as to influence the structure of a market where, as a result of the very presence of the undertaking in question, the degree of competition is weakened and which, through recourse to methods different from those which condition normal competition in products or services on the basis of the transactions of commercial operators , has the effect of hindering the maintenance of the degree of competition still existing in the market or the growth of that competition.”Section 4 of the Act provides for five categories of abuses which may be exploitative or exclusionary. Each of these categories has been discussed below.

17.1 Abuse Relating to Conditions of Purchase or Sale and Price in purchase or sale of goods or service

A dominant enterprise or group would be held to abuse its dominant position if it imposes unfair or discriminatory:

• Condition in purchase or sale of goods or service

• Price in purchase or sale (including predatory price) of goods or service

Thus, the abuse may be in relation to the conditions in purchase or sale of goods or service or price in such purchase or sale including predatory pricing. Such an abuse must be by a dominant enterprise or group. However, if the discrimination is for the purpose of meeting competition, it is excusediii (for example the situation of price war between competitors or a reduced price for penetrating the market or introduction price may be an example).

17.1.1  Unfair and Discriminatory Conditions:

A dominant enterprise by virtue of its position of strength may impose unfair and discriminatory conditions of sale of goods or service which is classified as an abuse under the Act. It may be noted here that the Competition Act does not define the term unfair and discriminatory and has been left to the interpretation of the Commission, COMPAT and then Hon’ble Supreme Court in view of the facts and circumstances of the Cases. However, the term “unfair trade practice” has been defined in the Consumer Protection Act, 1986 which essentially enlists a host of practices which is being adopted for the purpose of promoting sale, use or supply of any goods or provision of any serviceiv.

CASES

1. DLF Case: In this Casev, CCI found the conditions of the Apartment’s Buyers Agreement to be in violation of Section 4(2) (a) (i), i.e. to be unfair and discriminatory and a penalty of Rs. 630 crore was imposed by CCI on DLF (7% of the average turnover for the last preceding three years). The moot point in this case was the competition concern of a dominant player abusing its dominant position by imposing blatantly unfair conditions in the “agreement” with its customers and bind them in such one-sided contractual obligationvi. CCI held the conduct of DLF in this regard as ‘unfair’ and even exploitative. While finding this, CCI examined various clauses of the Apartment Buyers Agreement of DLF and found them to be unfair and discriminatory like unilateral changes in agreement and suppression of terms by DLF without any rights to the allottees, DLF’s unilateral right to change the super area without concurrence of allottees, allottees have no exit options, punitive penalty for default by allottees, insignificant penalty for DLF’s default, etc.vii

It is pertinent to mention here that in this case the CCI not only imposed a penalty on DLF but also highlighted the need for a real estate regulation and accordingly directed the Secretary to inform all concerned:

“12.111: The examination of this case has brought forth several areas of concern pertaining to the housing sector in India. The Commission feels that although there is a plethora of laws, there is no proper regulation of the real estate sector, particularly the housing sector. In order to promote overall consumer welfare, to ensure freeand fair competition in real estate residential market and to set standards of conduct of enterprises engaged in similar nature of trade, the Commission therefore makes a strong recommendation to the Central Government and all State Governments to come out with real estate regulations at the earliest for ensuring overall consumer welfare and to discourage unfair trade practices that seem prevalent in the sector.”

After-Market Abuse argument of Member (R): Following the principle laid down in the Eastman Kodak Case in US (US 451-1992), it was held that there are two markets in the real estate case i.e. the first market where the consumer enters into an agreement with the builder and the second market is the aftermarket after it has enter into an agreement with the builder as a locked-in consumerviii.

While DLF was directed to modify the unfair and discriminatory clauses in this case by CCI, at the direction of Hon’ble COMPAT, CCI vide its supplementary order dated 03.01.2013 provided for the modified clausesix. In DLF Case, the COMPAT has upheld the findings of the Commissionx as regards abuse of dominant position by DLF and so also the penalty amount. However on a technical point COMPAT has observed that the CCI could not have examined the clauses of the Apartment Buyers Agreement as Section 4 was not in force on the date of the agreement. The decision of COMPAT is now in appeal before Hon’ble Supreme Court.

Pragati Maidan Case: Another case xi of unfair and discriminatory condition imposed by a dominant player is relating to the Pragati Maidan in Delhi. This case was against the Indian Trade Promotion Organization (ITPO) for abusing its dominant position in the relevant market for “provision of venue for organizing international and national exhibitions, trade fairs (events) in Delhi”. It was held in this case that Pragati Maidan is the only established venue for holding international and national trade fairs/exhibitions (events) in Delhi and ITPO as venue provider for holding events in Delhi has absolute control and dominance. It was further found that ITPO has abused its dominant position by imposing unfair and discriminatory condition on the third-party event organisers for example the time gap restriction between two “third partyevents” was 15 days before and after the event whereas in case of ITPO’s own organised events/exhibitions, the time gap restriction was 90 days before and 45 days after the event (which was amended to 90 days before and after the event in 2011). This was held to be unfair and discriminatory by CCIxii. A penalty of 2% of the average turnover of preceding three years was imposed on ITPO which amounted to Rs. 6.75 crores.

C. Coal India Case: CCI passed a common orderxiii against Coal India Limited and its subsidiary finding it to abuse its dominant position by imposing unfair/discriminatory conditions and indulging in unfair/discriminatory conduct in the matter of supply of non-coking coal to power producers by way of unequal Fuel Supply Agreements (FSAs) imposed upon the purchasers of coal who do not have any option but to approach Coal India for supply of coal. While finding the abuse under section 4(2)(a)(i) of the Act, CCI found the following specific clauses to be unfair and discriminatoryxiv:

(i) Clauses relating to the sampling and testing procedure.

(ii) Clauses relating to charging the transportation and other expenses from the buyers on supply of ungraded coal and the clauses relating to DDQ.

(iii) Clauses relating to capping on compensation for supply of stones for new power producers.

(iv) Clauses relating to review and termination provisions of the agreement.

(v) Discrimination between existing and new power producers with respect to review of grade.

(vi) Clauses relating to force majeure for new power producers.

A penalty of Rs. 177305 crores, i.e. 3% of the average turnover of last preceding three years was imposed on Coal India. The matter is under appeal before COMPAT. As regards promoting competition in this sector and requirement of a regulator, CCI observed:

“However, there is an imperative need to carry forward this reform momentum further by restructuring the sector by introducing more number of players so that it can reduce the dominance of any one player and can facilitate competition. Bringing the coal sector under the independent regulatory oversight would only help if there are enough players in the market.”

D.Adani Gas Case: Similar to Coal India case (supra), CCI found that Adani has imposed unfair conditions on the buyers by way of Gas Supply Agreement (GSA), for example “likely termination of contract by the opposite party on account of failure to off-take 50% or more of the cumulative DCQ by the buyer during a period of 45 consecutive days as against the longer period available to the opposite party from GAIL.” CCI imposed a penalty of 4% of the average turnover, i.e. Rs. 2567 lakhs on Adani in this casexv along with the orders to cease and desist and modification of the unfair and discriminatory clauses of the GSA.

The aforesaid cases provide adequate example as to the approach of dealing with the unfair and discriminatory conditions imposed by a dominant enterprise in India. It appears from the interpretation of the Commission’s order that the dominant enterprise or group in India has a special responsibility to discharge and cannot behave as they like which leads to detriment of the market.

17.1.2  Unfair and Discriminatory Pricing:

A firm’s freedom to price its goods cannot be challenged and that freedom has been recognised as an essential element of doing business; however in what situations the pricing becomes unfair and discriminatory is the question which needs to be determined by the competition agencies. The Competition Act recognises the aforesaid exception in its explanation. Analysis of whether a dominant undertaking’s pricing practices are abusive typically requires consideration of its costsxvi. Now, an abuse may occur when the price charges and the costs incurred is excessive, it lacks cost justifications, and when it is charged below cost. One has to encounter the concepts like, fixed costs, sunk cost, marginal cost, variable cost, avoidable cost, average variable cost (AVC), average avoidable cost (AAC), long -run incremental cost (LRIC), long run average incremental cost (LRAIC), average total cost (ATC), and stand alone cost, while appreciating the concept of cost.

As regards the pricing issues, the debate rovers around the following key issuesxvii:

(i) whether and under what market conditions pricing by dominant firms warrants antitrust intervention

(ii) conceptually what constitutes ‘unfair’ or ‘excessive’ price

(iii) the practical challenges in applying the various tests that have been proposed by various commentators for assessing unfairness of prices and

(iv) the choice of efficient remedies.

What amounts to unfair and discriminatory pricing under the Indian Competition Law is a question of debate and is not yet settled. However, the approach of CCI reflects that it is wary of the fact that unfair pricing cases may cause a distortion in the markets and ultimately harm the consumers, industry and economy. In MCX-NSE Casexviii the concept of ‘unfair pricing’ was in issue wherein CCI held ‘predatory price’ to be a subset of ‘ unfair price’ and held that ‘zero pricing’ by NSE in ‘currency derivative market’ was annihilating or destructive pricing as it was beyond the parameters of promotional or penetrative pricingxix. CCI further directed NSE to maintain separate accounts for each segment of the market and modify its zero pricing policy.

17.1.3 Predatory Pricing – Explanation (b) to Section 4 defines predatory pricing as “the sale of goods or provision of services, at a. price which is below the cost, as may be determined by regulations, of production of the goods or provision of services, with a view to reduce competition or eliminate the competitors.” Predatory pricing refers to conduct, where a dominant undertaking incurs losses or foregoes profits in the short term with the aim of foreclosing its competitors. Broadly speaking, it consists in one competitor setting a price which is “too low”, such that competitors find themselves unable to compete at that pricexx. Determination of cost becomes an important and relevant factor for finding out the allegation of abuse by way of predatory pricing. The Competition Commission of India (Determination of Cost of Production) Regulations, 2009 is the relevant regulation in this regardxxi. As per the regulation, unless justified, selling a product by a dominant enterprise below the cost of production (to be taken as average variable cost generally) would be predatory pricing. However, no ‘strait-jacket’ formula can be laid down, and each case would depend on its own facts and circumstances. While there are different standards of ‘predation test’ in US and EU, India has not examined any of them in a case so far.

17.1.4 Excessive Pricing – While EU in its famous United Brand’s case xxii has held ‘excessive pricing’ to be an abuse of dominant position, in India the concept of excessive pricing have not been taken up by CCI specifically. By and large the ‘price setting’ is not considered as the job of the competition regulator, as there are Sectoral Regulators with expertise to do that (for e.g. TRAI in telecom sector). Excessive pricing is considered an exploitative abuse and is distinguished from the exclusionary abuses as “under exploitative abuses, it is the high price itself that is deemed problematic, whereas under exclusionary conduct high or higher prices tend to be the result of the exclusionary practise.” South African Competition Act defines excessive pricing as “a price for a good or service which –(i) bears no reasonable relation to the economic value of that good orservice; and (ii) which is higher than the economic value referred to abovexxiii. The concept of ‘economic value’ is borrowed from the EU United Brand’s case which is generally considered as the notional price of the goods or service under assumed conditions of long-run competitive equilibriumxxiv.

In India, recently, the unfairness in pricing has definitely been a concern and the latest cases involving the violation of FRAND commitments (A SEP holder is under an obligation to license the SEPs to every party under Fair, Reasonable and Non-Discriminatory terms) by Ericsson has been subject of examination by CCIxxv. The cases are still under investigation and may involve issues like excessive and/or unfair pricing.

17.1.5 Royalty Rebates and Margin Squeeze – In US and EU, the competition agencies have found in a number of cases fidelity or loyalty rebates to be abusive. For example in Intel Case, EC imposed a fine on Intel for abuse of dominant position in the market for computer processing unit (CPUs) by offering rebates to the computer manufacturers conditional upon them purchasing all or the great majority of their CPUs from itxxvi. In the case of Kapoor Glass, CCI referred to the practice of EU condemning the discount policy of a dominant enterprise which has exclusionary and exploitative effect (referred to Hoffman La Roche Case), and held that the discount policy of the OP is both unfair and discriminatory and is violative of provisions of section 4(2)(a) (i) and 4 (2)(a)(ii) of the Act, which prohibits any dominant enterprise from imposing directly or indirectly unfair or discriminatory conditions and prices in sale of goodsxxvii.

17.2 Putting Limitation or Restrictions

Second category of abuse relates to a dominant enterprise or group limiting or restrictingxxviii:

This category of abuse, which is an exclusionary abuse, may be practiced with an objective to create artificial shortage in the market so that dominant enterprise may raise prices of goods or service, or even in some cases it may restrict the technical or scientific development to the prejudice of consumers (for example an enterprise may delay or inhibit the production of innovative products if it is dominant as there would be no competitive constraint, for e.g. initial period of automobile sector in India may be considered when the only car manufacturer was Hindustan Motors, Ambassador was the only model produced however, the competitive constraints at present forces every car manufacturer to come up with new models.)

In the Kapoor Glass case (supra) CCI found that the practice of Schott Glass to “ensure that the converters do not switch over to the other suppliers in upstream market including imports, limits the overall market of tube glass and is violative of provisions of section 4(2)(b)(i) of the Act, which prohibits a dominant enterprise from engaging in any practice which limits or restricts the marketxxix. ” In this case, there were two markets identified by CCI, i.e. upstream market of borosilicate clear glass in which Schott was found dominant, which was to be used for producing borosilicate glass ampules in the downstream market by players like KapoorGlass and also Schott Kaisha (a downstream entity of Schott itself).

17.3 Denial of Market Access

Sub-clause (c) to Clause (2) of Section 4 of the Act provides that it would be an abuse of dominant position if an enterprise or group indulges in practice or practices resulting in denial of market access [in any manner]. In a recent case, CCI has ordered an investigation forming a prima facie opinion that “JCB by abusing their dominant position in the relevant marketsought to stifle competition in the relevant market by denying market access and foreclosing entry of ‘Bull Smart’ in contravention of the provisions of Section 4 of the Actxxx”. This case touches upon the famous ‘Essential Facilities’ doctrine by which the competition agencies have granted access to an essential infrastructure (facility) of a competitor on reasonable terms if that facility could not be replicatedxxxi. The Competition Act does not define the term ‘essential facility’, however, the same has been defined in the South African Competition Law as “an infrastructure or resource that cannotreasonably be duplicated, and without access to which competitorscannot reasonably provide goods or services to their customersxxxii.”

In the case of Arshiya Railxxxiii , CCI refused to invoke the ‘essential facility doctrine’ observing as follows: “the essential facility doctrine is invoked only in certain circumstances, such as existence of technical feasibility to provide access, possibility of replicating the facility in a reasonable period of time, distinct possibility of lack of effective competition if such access is denied and possibility of providing access on reasonable terms. In the present case, we are of the view that there are no technical, legal or even economic reasons as to why other CTOs should not be creating their own terminals or similar facilities. As set out in the Indian Railways (Permission for operators to move container trains on Indian Railways) Rules, the Model Concession Agreement (MCA) and Gazette Notification No 458 dated 26/09/2006, CTOs are obligated to build their own terminals at their cost.”

Draft National Competition Policy document published for comments by MCA enlisted ‘access to essential facilities’ as one of the competition policy principles in the following wordsxxxiv:

“Third party access to ‘essential facilities’, i.e. requiring dominant infrastructure owners to grant to third parties access (e.g., electricity, communications, gas pipe lines, railway tracks, ports etc.) to their infrastructure on agreed terms and conditions and at regulated prices, aligned with competition principles.”

17.4 Tying and Bundling

By virtue of a position of dominance when an enterprise or group makes conclusion of contracts subject to acceptance by other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts, would be considered an abusexxxv. This particular category of abuse has been considered in EU in a number of cases like Microsoft Media Player Case wherein tying of Windows Media Player to Windows was considered as abuse of dominant positionxxxvi. CCI examined this provision in the case of Kapoor Glass and found the conduct of Schott Glass to be abusive on two counts that is making supplementary obligations on purchasers of clear tubes to purchase amber tubes and secondly providing discriminatory discounts to its own downstream entity as compared to its rival downstream entityxxxvii.

It is important to note here that the concept of tying has been referred to in both Section 3 as well as Section 4 of the Competition Act, 2002. In section 3(4)(a) a specific mention has been made to the term ‘tie-in arrangement’ which includes any agreement requiring a purchaser of goods, as a condition of such purchase, to purchase some other goods. Section 4 of the Act refers to this concept in sub-clause 2(d) of section 4 as “making conclusion of contracts subject to acceptance by other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts ”. While the provisions may seem to be similar, the approach in handling these cases are different. Especially, in case of tie-in arrangement under section 3(4) the analysis is more detailed as the factors of establishing AAEC has to be satisfied, however, in case of section 4 there is no requirement of establishing AAEC.

In a tying case the buyer is obligated to purchase some goods which he is not willing to purchase because manufacturer would not sell him the goods he is willing to purchase without the goods tied. An extreme case of tying would be ‘full-line forcing’ in which the buyer of a product is coerced by his supplier to buy the complete range of its products. These abuses have a foreclosure effect on the markets as a part of market is foreclosed for other competitors. Under MRTP Act, this has been dealt with under Restrictive Trade Practicesxxxviii and one of the famous examples can be insistence of a gas distributor to buy a gas stove as a condition to the gas connection xxxix . CCI examined an alleged tie-in arrangement in the case of Tata Skyxl under section 3(4), however, found no violation.

17.5 Leveraging

The last form of abuse is when a dominant enterprise or group uses its dominant position in one relevant market to enter into, or protect, other relevant marketxli. While the other categories of abuse in Indian Competition law seems to be taken from the EU law, this category of abuse is not specifically mentioned in the provisions of the EU law, however, while interpreting the case of Tetrapak case recognised this form of abusexlii. In MCX-NSE Case, CCI had found that NSE has used its position of strength in the non CD segment to protect its position in the CD segment to be in contravention of section 4(2) (e) of the Actxliii.

In Float Glass casexliv, the allegation of leveraging was not found to be correct by CCI. In this case, the allegations were that the market power of the Saint Gobain in the architecture glass (reflective) was abused in the other glass market.Leveraging Monopoly in Amber segment to make sale of amber tubes contingent upon purchase of clear tubes was in issue in Kapoor Glass case. CCI found that “conduct of OP, who is in dominant position in the upstream relevant market of tubes, has contributed to the lessening of level of competition in the downstream market in the favor of Joint Venture, the Schott Kaisha. The Commission accordingly holds that the said act on the part of OP together with other group concerns attract the provision of Section 4 (2) (e) of the Act, which stipulates that no enterprise will use its dominant position in one market to enter into or protect other relevant marketxlv.”

17.6 Remedies/Penalty

After an abuse of dominance is established under Section 4 of the Act, CCI may pass the following orders under section 27 of the Act:

Further, under section 28 of the Act, CCI may also direct division of an enterprise enjoying dominant position to ensure that such enterprise does not abuse its dominant position. Such an order by CCI, which has to be in writing, may provide for the following:

(a) the transfer or vesting of property, rights, liabilities or obligations;

(b) the adjustment of contracts either by discharge or reduction of any liability or obligation or otherwise;

(c) the creation, allotment, surrender or cancellation of any shares, stocks or securities;

(d) …xlvi

(e) the formation or winding up of an enterprise or the amendment of the memorandum of association or articles of association or any other instruments regulating the business of any enterprise;

(f) the extent to which, and the circumstances in which, provisions of the order affecting an enterprise may be altered by the enterprise and the registration thereof;

(g) any other matter which may be necessary to give effect to the division of the enterprise.

The Commission may, during the pendency of an inquiry into abuse of dominant position, if the conditions of Section 33 of the Competition Act, 2002 are met, temporarily restrain any party from carrying on the offending act until conclusion of the inquiry or until further orders.

Other than the above, the Central Government or a State Government or a local authority or any enterprise or any person may make an application under section 53-N of the Act to COMPAT requesting to pass an order for the recovery of compensation from any enterprise for any loss or damage shown to have been suffered, by the Central Government or a State Government or a local authority or any enterprise or any person as a result of any contravention of the provisions of Chapter II (which includes section 4), having been committed by enterprise.

SUMMARY

An analysis of the aforesaid provisions relating to the abuse of dominance spells out the evolution of the concept of ‘dominance per se being not bad’ rather ‘abuse of that dominance’ being bad in law. This development is in line with the present corporate milieu which essentially does not require a lot of restrictions on the growth of enterprise or groups or markets. The Competition Act in India draws upon the international developments as well as settled jurisprudence which is evident from the fact that it clearly outlines the factors to be considered while determining the relevant market (both product and geographic), dominance of an enterprise, as well as enumerates the kinds of abuses. Further some of the abuse is defined specifically like predatory pricing.

While CCI has not yet got an opportunity to fully interpret the provisions relating to abuse of dominant position, in coming years definitely the cases would come to do that, the significant development lies at the appellate level when the matter reaches the Competition Appellate Tribunal (COMPAT) and thereafter Supreme Court in appeals and the jurisprudence on these issues gets settled in India. Apart from the judicial machinery provided under the Competition Act, 2002, several High Courts have also interpreted the provisions of the Competition Act which requires an analysis and appreciationxlvii.