E-Commerce and Vertical Agreements: Is The Latter’s Scope Under the Competition Act Limited?

By Shagun Singhal and Khushbu Turki

Introduction

The Competition Act, 2002 (‘the Act’) sets out the prohibition against anti-competitive agreements under Section 3(1) of the Act.[1] Even though the Act does not explicitly use terms like horizontal or vertical agreements, it prohibits these under Section 3(3) and 3(4), respectively.[2] The Act provides for five types of vertical agreements – tie-in, exclusive supply, exclusive distribution, refusal to deal, and resale price maintenance; all of which would be in contravention of Section 3(1) if they cause or are likely to cause appreciable adverse effects on competition in India. The term “appreciable adverse effect on competition” mentioned in Section 3 is not defined in the Act. The Act, however, specifies a number of factors under Section 19(3), which must be taken into account while examining the overall impact of the agreement.[3]

Since Section 3(4) is exhaustive in nature, the Competition Commission of India (the CCI) have often found its hands tied when faced with vertical agreements that did not fit within the confines of the section. In order to resolve this conundrum, the Government in July 2019, constituted the Competition Law Review Committee to make recommendations with respect to the amendments needed in the Act. Based on such recommendations, the Competition (Amendment) Bill, 2020 (‘the Bill’) was introduced in the Parliament.[4] This bill, amongst other suggestions, proposed the scope of Section 3(4) of the Act by including “other agreements” within its ambit.

The authors in this article specifically focus on the growth of the e-commerce sector, thereby contending that its evolution has resulted in the execution of novel types of anti-competitive agreements, some of which have not been brought within the ambit of vertical agreements as provided under Section 3(4) of the Act.

Status of ‘Other Agreements’ Before the Introduction of the Bill

In the case of Ramakant Kini v. LH Hiranandani Hospital[5], the CCI had to evaluate the legality of an exclusive agreement between a super-speciality hospital and Cryobanks, a provider of stem cord banking facilities. As per the agreement, only Cryobanks could enter the premises of the hospital and collect stem cords right after the birth of a child. After concluding that the agreement was neither a vertical nor a horizontal arrangement, the CCI held that horizontal and vertical agreements are merely a sub-species of anticompetitive agreements under Section 3(1) of the Act and are in no way exhaustive of the scope of this Section. It then concluded that the agreement was in contravention of Section 3(1), and penalised the hospital.

It is therefore contended that such an interpretation appears erroneous on two accounts – First, while Section 3(3) mandates the respondent to discharge the burden of proof, Section 3(4) requires the CCI to prove that the impugned agreement has an appreciable adverse effect on competition. In case an agreement is found to be neither horizontal nor vertical, but is still examined under Section 3(1), the legislative scheme is not clear as to who will discharge the initial burden of proof. Second, the ultimate impact of vertical agreements is judged on the anvil of the criteria laid down in Section 19. In cases where the agreement falls under Section 3(4), justifications need not be restricted to the positive factors listed under Section 19(3); whereas in cases where the agreement falls under Section 3(1), any justifications offered must be related to the positive factors listed under Section 19(3). This, in effect, means that the rule of reason analysis in the case of an agreement falling within the ambit of Section 3(1) allows for fewer justifications than its counterpart under Section 3(4).

The Emergence of E-Commerce and the Novel Anti-Competitive Agreements

The advent of digitizationin the Indian markets has given birth to an individualistic and differentiated e-commerce retail sector. This sector, unlike the traditional brick and mortar markets, has certain distinctive consumer benefits which includes services like delivery at the customer’s doorstep, comparison of the product prices, viewable ratings etc. While these advantages have prompted the sector’s growth in a relatively short period of time, it’s complicated nature has resulted in the emergence of unique issues in the sphere of Competition law in India. The authors therefore contend that the CCI should disregard its existing one-size-fits-all approach to curb the anti-competitive tendencies that arise in this sector. For doing this, the authors explain the novel types of vertical restraints that take place in this sector, thereby urging on the exigency of including these agreements within the ambit of Section 3(4) of the Act.

Vertical Restraints in Online Sales

Across Platform Parity Agreements (‘APPA’)

APPA also termed as ‘Most Favored Nation’ Clauses (‘MFNs’), are agreements entered into between a supplier and a platform retailer, wherein the retailer agrees to not charge a price higher than the price charged on any other platform.[6] These agreements result in the conduct of anti-competitive behavior in instances, wherein a number of online retailers enter into such contracts with the same supplier. By doing this, they unintentionally fix the prices of the product sold on their respective platforms. These fixations of prices result in an increase in the retail charges, foreclosure of markets, decrease in the competition between platforms etc. Even though the CCI has ascertained APPA’s as challenges under its recent e-commerce report (‘Report’), it failed to address the process of investigations involving such agreements, thereby making its inquiry arbitrary in nature.

Selective Distribution Agreements

These agreements are entered into between the manufacturers and the distributors wherein the former wants to maintain an exclusive brand image of its product. By entering into such agreements, the manufacturers restrict online-offerings of its products to a selective chain of distributors. Even though the intention behind such agreements is to provide a shopping experience that is consistent with its brand image, it entails certain potential anti-competitive risks. These include, reduction in intra-brand competition, closure of certain types of distributors, reduction in the chances of discounts etc. Since these agreements do not entirely fall within the bracket of ‘exclusive distribution agreements’ as provided under Section 3(4)(c) of the Act, it gives the manufacturers the leeway to carry out such activities, unjustly.

Online Resale Price Maintenance (‘RPMs’)

In the offline markets, RPM’s are just another form of price restraint agreements, wherein the manufacturer sets a minimum or maximum price for its distributors, thereby violating Section 3(4) of the Act. However, in the e-commerce sector, the digitization of markets has completely revolutionized the supply and resale chain, resulting in the re-invention of the idea of RPMs. In the case of Jasper v. Kaff[7], it was held that the CCI should duly consider the intricacies of these agreements in order to include them within the ambit of the current law concerning vertical restraints. Moreover, this case noted that RPM’s in the online market can be conducted without the act of conventional ‘resale’, making its investigation to be distinct from the traditional retail markets.[8] This is because the online platforms are not “purchasers” of the products, and thus cannot “resale” the same in the market. They can only add value to the supply chain through other ways i.e. logistics, marketing and providing a platform for the sellers and the buyers to connect and complete their transactions. It is therefore concluded that Section 3(4) in spite of ascertaining RPM’s as vertical restraints, does not address the peculiarities of such agreements within the sphere of e-commerce retail.

Conclusion

As previously established, the scope of vertical agreements within Section 3(4) is limited in nature. This section, by specifying certain forms of vertical agreements, disregards the existence of any novel agreements that are entered into, in the e-commerce sector. Even though the CCI has made a sincere effort of explaining the implications of the online retail agreements in its report, there is still no clarity on the mode of investigations that should be resorted to, if and when a case of this nature arises. This ambiguity ultimately results in unjust decisions being rendered by the Courts. It is thereby concluded that the inclusion of these novel agreements within the ambit of Section 3(4) can result in a number of positive outcomes.

First, the online retailers will be aware of the consequences of such agreements, which shall further discourage them into accepting these contracts. Second, the competitors in the market will have a definite legal sanction to resort to, if they face any adverse effects of these agreements. Third and most importantly, there will be a prescribed mode of inquiry, and the burden of proof shall shift onto the CCI, benefiting the entire investigative and judicial process. Hence, according to the authors, the expansion of the scope of Section 3(4) as per the Bill is a welcome move, and should be implemented without any limitations.

The authors are second year students, currently pursuing their law degree from the National Law Institute University, Bhopal.


[1]Competition Act, 2002, § 3(1), No. 12, Acts of Parliament, 2002 (India).

[2] id., §3(3) & §3(4).

[3] id., §19(3).

[4] Draft Competition (Amendment) Bill, 2020, http://feedapp.mca.gov.in/pdf/Draft-Competition-Amendment-         Bill-2020.pdf (last visited June 15, 2020).

[5] Ramakant Kini v. Dr. L.H. Hiranandani Hospital., 2014 SCC OnLine CCI 15.

[6] Ariel Ezrachi, The Competitive Effects of Parity Clauses on Online Commerce, 11:2-3 EUR. COMPET. J. 488 (2015).

[7] Jasper Infotech Pvt. Ltd. v. KAFF Appliances (India) Pvt. Ltd., 2014 SCC OnLine CCI 150.

[8] id., at ¶ 33, 34.

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