The Real Meaning of Per-Se Rule In Indian Competition Law

Aditya P Arora

RGNUL, Patiala

Editor’s Note: The author of the paper analyses the meaning of the per-se rule in Indian Competition Law, this is in light of Section 3(3) of the Competition Act, 2002 which presumes certain agreements to have an appreciable adverse effect on competition in India.”

INTRODUCTION

There are many legislations of competition law that exist in the world today. Some of the laws are a century old like the Sherman Act of the US while some are more recent like the Indian Competition Act, 2002 and the Singaporean Competition Acts of 2004. While doing business in India, parties are prohibited from executing anti-competitive agreements. Generally, the agreements which cause or are likely to cause appreciable adverse effect on competition are anti-competitive agreements.[1] Such agreements may be horizontal or vertical. The most pernicious form of anti-competitive agreement is cartelization.

Any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition within India, is an anti competitive agreement.[2] Such agreements are void agreements.[3] The term ‘agreement’ includes any arrangement or understanding or action in concert whether or not formal or in writing or is intended to be enforceable by legal proceedings.[4] In Registrar of Restrictive Trade Agreements v. W. H. Smith and Sons,[5] the court observed, ‘people who combine together to keep up prices do not shout it from the house tops. They keep it quiet. They make their on arrangements in the cellular, where no one can see. They will not put anything into writing nor even into words. So it includes not only an ‘agreement’ properly so called but any ‘agreement’ however informal’. However, in the EU in some recent cases, for example, Bayer[6] and Volkswagen[7], the court disagreed with the EC’s expansive interpretation of ‘agreement’ and has effectively toughened the standards for proof of agreement in cases or restrictive distribution.

To bring in the application of Section 3, it is pertinent that the effect on competition must be ‘appreciable’. The term ‘appreciable adverse effect on competition’, used in section 3(1) has not been defined in the Act. The determination of ‘appreciable’ has proved to be a main problem under the Competition Act. The author T.Ramappa considers that to be considered ‘appreciable’, the effect has to be substantial.[8] However; this may not be in line with Indian economic interests. Accordingly, a more appropriate meaning has been given in Law Lexicon where ‘appreciable’ is defined as ’capable of being estimated, weighted, judged of or recognized by the mind’ which is ‘perceptible but not a synonym of substantial.’ For the most practical purposes ‘appreciable’ has to be more than just a detectable effect but may not be substantial.

Section 19(3) of the Act states that while determining whether an agreement has an appreciable adverse effect on competition under section 3, the commission shall give due regard to all or any of the following factors:

  • creation of barriers of new entrants in the market;
  • driving existing competitors out of the market;
  • foreclosure of competition by hindering entry into the market;
  • accrual of benefits to consumers;
  • improvements in production or distribution of goods or provision of services;
  • Promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services.

The first three relate to the negative effects on the competition while the remaining three relate to beneficial effects.[9] In Automobiles Dealers Association v. Global Automobiles Limited & Anr.,[10] CCI held that it would be prudent to examine an action in the backdrop of all the factors mentioned in Section 19(3).  The agreement should be the cause of the adverse effect on the competition. Even if such a consequence is probable, the agreement is anti-competitive. The probability and not mere possibility of its consequence as appreciably affecting competition is the requirement.[11]

Competition law usually places anti-competitive agreements in two categories of horizontal and vertical agreements. The horizontal agreements are viewed more seriously than vertical agreements. The Act doesn’t specifically use the terms horizontal agreement and vertical agreement. However, the agreements referred in section 3(3) are horizontal while those referred in section 3(4) are vertical agreement.[12]

Horizontal agreements refer to agreements among competitors, i.e., agreements between two or more enterprises that are at the same stage of the production chain and in the same market. A distinction is also made between cartels a special type of horizontal agreement and other horizontal agreements.[13] The Act provides for the following four kinds of horizontal agreements, which are presumed to be anticompetitive:[14]

(a). Agreements regarding prices: Agreements that directly/indirectly fix purchase/sale price;

(b). Agreements regarding quantities: Agreements aimed at limiting or controlling production, supply, markets, technical development and investment;

(c). Agreements regarding market sharing: Agreements for sharing of markets by geographical area, types of goods/services and number of customers; and

(d). Agreements regarding bids (collusive tendering and bid rigging): Tenders submitted as a result of joint activity or agreement.

Such agreement may lead to a cartel, which is pernicious.[15] Cartels have an unfavourable effect on competition and anti-trust legislation all across the world try to curb them. Unlike the MRTP Act, the Competition Act explicitly defines Cartels. They are placed under Section 3(3) where there is a presumed appreciable adverse effect on competition.

CARTELIZATION

Cartels are agreements between enterprises[16] (including association of enterprises) not to compete on price, product (including goods and services) or customers. The purpose of a cartel is to raise price above competitive levels, resulting in injury to consumers and to the economy. For the consumers, cartelization results in higher prices, poor quality and less or no choice for goods or/and services. In the European Union, Mario Monti, the former commissioner for Competition, once described cartels as “cancers on the open market economy”[17], and the Supreme Court in US has referred to cartels as “the supreme evil of antitrust”[18].

The Indian Competition Act, 2002 covers cartels under Section 3(3). According to the section, it is presumed that such agreements causes appreciable adverse effect on competition. Thus the burden of proof in any cartel case is on the defendant to prove that the presumption is not causing appreciable adverse effect on competition. A specific goal of Competition Act is the prevention of economic agents from distorting the competitive process either through agreements with other companies or through unilateral actions designed to exclude actual or potential competitors.

“Cartels” are included in the category of agreements, which are presumed to have appreciable adverse effect on competition. The term “Cartel” is explicitly defined in the Act as:- [19]

“Cartel includes an association of producers, sellers, distributors, traders or service providers who, by agreement amongst themselves, limit, control or attempt to control the production, distribution, sale or price of, or , trade in goods or provision of service”.

There are three essential factors have been identified to establish the existence of a cartel, namely

  1. Agreement by way of concerted action suggesting conspiracy;
  2. The fixing of prices
  3. The intent to gain a monopoly or restrict/eliminate competition[20]

Parity of prices coupled with a meeting of minds has to be established to prove a cartel. The test for concerted practice is that the parties have co-operated to avoid the risks of competition, and this has culminated in a situation which does not correspond with the normal conditions of the market.

A cartel is a horizontal agreement to fix prices, allocate customers or territories, restrict output or rig bids. A cartel is regarded as the most pernicious form of violation of competition law since it unequivocally damages competition and causes loss to the economy and to consumers. Owing to the seriousness of cartels, they are subject to the per se rule[21] in many jurisdictions e.g., in the US[22] and in the European Union[23]. The most crucial ingredient of cartelisation behaviour is collusive manipulation of prices by the competitors. A mere simultaneous movement of prices, especially for homogeneous products, is not by itself sufficient to prove a cartel.[24]

The conditions in a competition that make it conducive for cartelization are oligopolistic market, structural factors, highly concentrated market, demand and supply conditions, dependence of customers, homogeneous product, entry barriers, exchange of information, active trade association.

A “hard-core” cartel as defined in the OECD Recommendation is an anticompetitive agreement, anticompetitive concerted practice, or anticompetitive arrangement by competitors to fix prices, make rigged bids (collusive tenders), establish output restrictions or quotas, or share or divide markets by allocating customers, suppliers, territories or lines of commerce.[25] Adam Smith, often recognized as the father of modern economics, wrote in 1776 in The Wealth of Nations, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”[26]

Cartels are not easy to detect since the colluding parties go to great lengths to cover their tracks. Therefore, competition agencies have been resorting to and seeking greater investigative powers for unearthing evidence. So to do so the same various methods are adapted all over the world such as:

  1. Dawn Raids:

Upon request by the Federal Competition Agency, the Austrian Cartel Court issues a search warrant (provided there is reasonable suspicion of a cartel infringement). With a search warrant, the Federal Competition Agency can, similar to the EU Commission, enter premises, search documents and computers, etc. Notably, the inspection can start without the search warrant being served on the undertakings concerned; the law only provides that it must be served within 24 hours.[27]

  1. Incentives and Rewards

Under US law, the Civil False Claims Act enables a private citizen to bring an action in the name of the US Government claiming fraud by government contractors and other entities that use government funds, and the litigant is then able to share in any money received. This legislation was used in the case of a bid-rigging cartel of wastewater treatment projects in Egypt funded by USAID, representing the first time that the legislation had been used to expose a large multinational cartel.[28] In South Korea, the Korean Fair Trade Commission has established a reward system for those who report or give information about competition law violations.[29] A reward of 66.87 million won was paid in June, 2005 to a person who provided decisive evidence in a welding rod cartel case.[30]

  1. Whistleblowing and Leniency

A crucial tool in the detection of cartels has proved to be the policy of encouraging whistleblowers to approach the competition authorities with information about a cartel. Subject to a series of conditions, such as that the whistleblower will cooperate with the investigation of the authority in question and that it was not a ringleader of the cartel, complete immunity will be available from any penalty that might otherwise have been imposed. Amnesty programs have been implemented in many jurisdictions, and have proved to be highly successful. For Example 200 the European Commission received 49 applications for immunity and leniency in 25 different cases in 2004.[31]

The Competition Commission of India had given various landmark judgements on various allegations of cartel formation. Some of the significant judgments were:

  1. All India Tyre Dealers Federation v. Tyre manufacturers[32]

The AITDF alleged that since independence, the behaviour of domestic tyre majors has been anti-competitive, anti-consumer and they have been indulging in various pricing and trade mal-practices, which had direct bearing on the revenue of the state exchequer. CCI undertook detailed investigation on various grounds after the report of DG was prepared and found that there is not sufficient evidence to hold a violation by the tyre companies Apollo, MRF, J.K. Tyre, Birla, Ceat and ATMA of the provisions of Section 3(3)(a) and 3(3)(b) read with Section 3(1) of the Act.

  1. Builders association of India v. Cement manufacturers association and other[33]

In a first-of-its-kind order, the CCI has imposed a penalty of over Rs 6,000 crore on 11 leading cement producers after finding them guilty of forming cartels to control “prices, production and supply” of cement in the market. According to the CCI order, it found cement manufacturers violating the provisions of the Competition Act. The CCI issued the order after “investigation by the Director General (CCI) upon information filed by the Builders’ Association of India”.

While imposing the penalty, the commission considered the “parallel and coordinated behaviour of cement companies on price, dispatch and supplies in the market”. The commission observed that the act of these cement companies in “limiting and controlling supplies in the market and determining prices through an anticompetitive agreement” was detrimental to the entire economy.

  1. In re: Suo Motu Case against LPG Cylinder Manufacturers[34]

The Commission had held the manufacturers of LPG cylinders guilty of bid-rigging for quoting identical prices in the tender issued by Indian Oil Corporation Limited. All LPG manufacturers were penalized at the rate of 7% of their average turnover.

In all these cases the CCI presumes that there is an appreciable adverse effect in the market. The presumption and its implication have been discussed in the next chapter.

PRESUMPTION RULE

To identify an agreement and then reproving it as an anticompetitive agreement has always been a grey area in anti-trust cases. Due to which the courts have devised apparatus of investigation in order to expeditiously come to a rational conclusion. Of the numerous legal principles that have become the cornerstone of anti-trust common law none have attracted more attention then the rules of “per se” and the “rule of reason”. These two rules have been helpful in ascertaining that whether or not a particular agreement is anti-competitive.

There is a presumed appreciable adverse effect on competition if the said agreement falls under Section 3(3) of the Competition Act, 2002. In order to truly discern the spirit of sub-section (3) of section 3 the language of the provision must be given utmost supremacy. In order to unlock the mystery surrounding section 3(3) the words “shall be presumed” must be given utmost importance. “Presumptions operate where certain facts may be presumed to exist even in the absence of complete proof.”[35] The court is bound to take the fact as proved until evidenced is given to disprove it. In this sense such presumption is also rebuttable.

The presumption raised under Section 3(3) is that of “AAEC”. If there is sufficient proof to establish that the opposite parties are engaged in any of the restricted activities laid down in the sub-section then the commission shall presume that there is “AAEC”. Two possible scenarios appear once “AAEC” is presumed. The first being that opposite parties may rebut the presumption by showing that their actions don’t fall tainted with any of the clauses [(a) to (d)] of the sub-section. The other being when the parties rebut the presumption by availing the grounds laid in section 19(3) of the act.

The first scenario appears to be reasonable and to a certain extent echoes the spirit of the “per se” rule. The opposite party, if this scenario were to prevail, will not be allowed to show the pro-competitiveness of their actions. Thus the only grounds available for rebuttal are those laid down in clauses (a) to (d) of section 3(3). However such a situation will not arise because of the language of the sub-section. The sub-section raises a presumption of “AAEC” and therefore rationally the grounds for determining “AAEC” should also be the ground for rebutting “AAEC”.

In the second scenario if the opposing parties are permitted to buttress their defence by seeking aid of 19(3) then the whole process will be reduced to a “rule of reason” analysis and not a “per se” rule. The “rule of reason” evidently mandates an elaborate analysis in to the reasonableness of an agreement and sub-section (3) of section 19 enables the opposite parties to do the same but the language of the Act inadvertently negates the true spirit of the “per se” rule.

The use of the words “shall be presumed” gives rise to a “presumption” against the opposing parties. The principle of ‘shall presume’, used in section 3(3) has been explained by courts in India in numerous cases such as in Sodhi Transport Co. v. State of Uttar Pradesh[36] and R.S. Nayak v. A.R. Antulay[37]. In Sodhi Transport Co., the court observed that:

‘The words “shall presume” have been used in the Indian judicial lore for over a century to convey that they lay down a rebuttable presumption in respect of matters with reference to which they are used…and not lying down a rule of conclusive proof.’

The court also observed that

‘A presumption is not itself evidence but only makes a prima facie case for the party in whose favour it exists. It indicates the person on whom the burden of proof lies. But when the presumption is conclusive, it obviates the production of any other evidence. But when it is rebuttable, it only points it the party on which lies the duty of going forward on the evidence on the fact presumed, and when that party has produced evidence fairly and reasonably tending to show that the real fact is not as presumed, the purpose of presumption is over’.[38]

It is perceptible that the language used in section 3(3) imposes a limitation on the competition authorities to apply the per se rule in its true spirit. Indian Competition law vide Section 3 does not provide for a case-by-case application of the per se rule. If the “per se” rule has to be applied in its true spirit then the legislature has to rephrase the language of the section. The words, “shall be presumed” creates considerable doubt in the minds of legal practitioners. There is an absolute need to have a ‘per se’ rule in India especially while dealing with serious offences like bid-rigging. However policy makers must also conceive of a “per se” rule that suits Indian conditions.

Edited by Amoolya Khurana

[1] Section 3(1), Competition Act, 2002.

[2] Ibid.

[3] Section 3(2), Competition Act, 2002.

[4] Section 2(b), Competition Act, 2002.

[5] Registrar of Restrictive Trade Agreements v. W. H. Smith and Sons (1968) 3 All ER 721.

[6] Bundesverband der Arzneimittel- Importeure and Commission of European Communities v. Bayer AG, C-2/01P and C- 3/01P.

[7] European Commission v. Volkswagen, Case No. C-74/04P.

[8] T.Ramappa, Competition Law In India- Policy, Issues and Development, Oxford India Paperbacks, 2nd Ed (2009).

[9] Vinod Dhall, Competition Law Today, Oxford University Press, First Publication, p. 503.

[10] CCI Case No 33 of 2011, decided on July 3, 2012

[11] D.P. Mittal, Competition Law and Practice, Taxmann, 3rd Ed. (2011), p. 176.

[12] Supra note at 9, p. 504.

[13] Report of the High Level Committee on Competition Policy and Law, (Chairman S.V.S. Raghavan) 2000, ¶4.3.1

[14] Department-Related Parliamentary Standing Committee on Home Affairs, Ninety- third Report on Competition Bill, 2001, ¶4.3.2

[15] Id at ¶4.3.3.

[16] § 2(h), Indian Competition Act, 2002.

[17]Press release available at www.europa.eu/rapid/pressReleaseAction.do?reference=SPEECH/00/295&format=HTML&aged=0&language=EN&Tguilanguage=en.

[18] Verizon Communication Inc. v. Law offices of Curtis v. Trinko, www.supremecourtus.gov/opinions /03pdf/02-682. pdf.

[19] § 2(c), Indian Competition Act, 2002.

[20] ITC Ltd v MRTP Commission (1996) 46 Comp Cas 619.

[21] BLACK’S LAW DICTIONARY 1162 (1999), (The per se rule is the judicial principle that a trade practice violates the Sherman Act simply if the practice is a restraint of trade, regardless of whether it actually harms anyone).

[22] See White Motor Co. v. United States 372 US 253 (1963); C.A.A. V. Board of Regents of the University of Oklahoma 468 US 85(1985); Federal Trade Commission V. Superior Court Trial Lawyers Association 493 US 411 (1990); Ernited States v. Topco Associates Inc 405 US (1972); Copperzueld Corporation V. Intieptlhicirce TubeCorp. 467 US 752 (1984), etc, (Price-fixing, market allocation, output limitation etc are subject to the per se rule in the United States.)

[23] EC Treaty, Article 81 (In EU law, the prohibition in Article 81 applies in particular to, inter- alia Agreements to directly or indirectly fix purchase or selling prices or any other trading conditions; agreements to limit or control production, markets, technical development; or investment and agreements to share markets or sources of supply).

[24] Re Alkali and Chemical Corporation of India Ltd, Calcutta and Bayer(I) Ltd, Bombay RTPE 21 of 1981, Order dated 3/7/1984; Association of State Road Transport Undertakings v. Kar Mobiles Ltd, 2002 CTJ 433 (MRTP).

[25] Hard Core Cartels: Third report on the implementation of the 1998 Council Recommendation, OECD Journal of Competition Law and Policy, Vol. 8, No-1, June 2006, OECD Publishing.

[26] Smith Adam, An Inquiry into the Nature and Causes of  the Wealth of Nations in THE WEALTH OF NATIONS 125 (2007).

[27] Florian Neumayr, bpv Hügel Rechtsanwälte OG, Dawn Raids: The (New) Austrian Way, available at  http://kluwercompetitionlawblog.com/2012/07/17/dawn-raids-the-new-austrian-way/

[28] Speech by Bill Koviav, available at www.ftc.gov/speeches/other/030514biicl.htm

[29] Reward System, available at www.ftc.go.kr/data/hwp/rewardsystem.doc.

[30] Informant Reward, available at www.ftc.go.kr/data/hwp/informant_reward.doc.

[31] Paul Crompton and Graham Reynolds, Leniency Programs in Competition Law in COMPETITION LAW TODAY 108 (2008)

[32] MRTP CASE: RTPE NO. 20 OF 2008

[33] CASE NO. 29/2010, DATED 20.06.2012

[34] In re: Suo Motu Case against LPG Cylinder Manufacturers, Suo-motu Case no. 3/2011.

[35] Steve Uglow’s, “EVIDENCE: TEXT AND MATERIALS”, 1997, p.686

[36] Sodhi Transport Co. v. State of Uttar Pradesh, AIR 1980 SC 1099

[37] R.S. Nayak v. A.R. Antulay , AIR 1986 SC 2045

[38] Supra note at 36

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