Business Laws

The law on dominant position and the grey area of its abuse

| Updated on December 13, 2020 Published on December 13, 2020

Abuse occurs when an enterprise uses its dominant position in the ‘relevant market’ in an exploitative manner to its own advantage.   -  Hollie Adams

The legality of this anti-competitive practice is likely to be tested more and more in the coming days

As the Indian economy emerges out of the woods and begins to grow, tensions over a player in the market abusing his dominant position are likely to be tested in law with increased frequency. Last year, the Competition Commission of India probed Amazon for abuse of dominant position, and concluded the retailer did not. And now, Google’s G-pay services are under the lens on similar grounds.

To determine whether an act is anti-competitive or not understanding two concepts is crucial—‘dominance’ and ‘relevant market’. Since businesses should be competitive and innovative, ‘dominance’ per se is not bad. However, from a legal perspective, ‘dominance’ means the position of strength enjoyed by an enterprise in the (relevant) market to operate independent of the competitive forces or is able to affect its competitors and consumers behaviour in its favour. Section 19(4) of the Competition Act specifies the factors that determine whether or not an enterprise is ‘dominant’.

In Lifestyle Equities Vs Amazon Seller Services Pvt Ltd, the Competition Commission of India held that Amazon did not hold a ‘dominant position’. As such there was no question of ‘abuse of dominant position’.

Coming to ‘relevant market’, it is up to the CCI to determine the relevant market as a ‘geographic market’ or a ‘product market’, or both. Section 19(7) lists out factors determining what a ‘relevant product market is’ (such as physical characteristics, end-use, price, consumer preference); Section 19(6) speaks about ‘relevant geographic market’ (factors like regulatory trade barriers, local specification requirements, distribution facilities).

For example, books may be classified on the basis of the nature of sale (consumer or institutional) or category (adult fiction, children’s books, cookery, travel etc). In the case of e-commerce, there are two distinct markets—online and offline. A consumer looks for options in each and takes a decision. In Ashish Ahuja Vs Snapdeal.com, the CCI held that online and offline were just two different channels, not two different ‘relevant markets’. So what is abuse of dominance? Abuse occurs when an enterprise (or a group of enterprises in concert) uses its dominant position in the relevant market in an exclusionary or exploitative manner to its own advantage. In order to establish a consumer base and for the purpose of acquiring the market, the e-commerce sectors resort to various innovative methods such as an exclusive agreements, deep discounting, preferential treatment to certain sellers, predatory pricing which raise competitive concerns.

The Act u/section 4(2)(a) to (e) gives an exhaustive list of practices that constitute abuse of dominant position and are therefore prohibited. It is anti-competitive only if an enterprise holds a dominant position in the relevant market and is guilty of one of these practices.

Examples of abusive practices are: directly or indirectly, imposing unfair or discriminatory condition in purchase or sale of goods or service; or directly or indirectly, imposing unfair or discriminatory price in purchase or sale (including predatory price) of goods or service, limiting or restricting production of goods or provision of services or market therefore; or limiting or restricting technical or scientific development relating to goods or services to the prejudice of consumers.

Exclusive arrangements

Exclusive agreements, however, are not per se anti-competitive but they raise potential competition concerns when they are used as an exclusionary tactic i to either foreclose competition to rivals or to impede entry.

No enterprise or association of enterprises or person or association of persons shall enter into 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. Any agreement entered into, in contravention of the above, shall be void.

In Mohit Manglani Vs Flipkart India Pvt Ltd, the question was whether Chetan Bhagat’s book ‘Half Girlfriend’ available exclusively on Flipkart was abuse of dominant position. The CCI opined it was not.

“It does not appear that because of these exclusive agreements any of the existing players in the retail market are getting adversely affected, rather with new e-portals entering into the market, the competition seems to be growing,” it said.

In Re Delhi Mahavyapar Sangh Vs Flipkart Internet Pvt Ltd, the question was whether the many instances of vertical agreements between Flipkart and their preferred sellers on the platform was an abuse. In this case, the CCI held it was. It said: “there appears to be an exclusive partnership between smartphone manufacturers and e-commerce platforms for the exclusive launch of smartphone brands. Thus, exclusive launch coupled with preferential treatment to a few sellers and the discounting practices create an ecosystem that may lead to an appreciable adverse effect on competition.”

An interesting question is whether companies that give deep discounts or sell at below-cost prices are wrong in the eyes of the law. While Sec 4 defines ‘predatory price’ as the price that is below the cost of goods or services, such predatory pricing is prohibited only if done by a company that has a dominant position. Predatory pricing as a matter of law would become inapplicable if the company is not dominant.

The determination of dominance always boils down to the interpretation of relevant product and geographical market. Thus there is a need to create objective criteria to determine dominance.

For example: In the US, the safe harbour (i.e., a level below which a firm cannot be found dominant) is thought to be a 50 per cent market share and a market share over 70 per cent supports a rebuttable inference of dominance.

It is also important to introduce a concrete “Market Share Test” like other jurisdictions such as South Africa where more than 45 per cent market share is considered dominant, whereas in Israel more than 50 per cent market share is considered as dominant. Owing to the emergence of the e-commerce industry having high potential for growth, there is a need to amend laws and upgrade competition rules to address the competition issues prevailing in the digital economy.

(The author is a Delhi-based advocate and CEO of Indian Law Watch)

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Published on December 13, 2020
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