June 2023
1. Introduction
On May 18, 2023, the Ministry of Corporate Affairs (“MCA”) via Gazette Notification[1] brought some provisions of the Competition (Amendment) Bill, 2023, (“Amendments” or “Bill”), including those discussed herein, into effect. Chapter 2 of the Competition Act, 2002, (“Act”) and its conduct rules forbid agreements and combinations likely to have an appreciable adverse effect on competition (“AAEC”) and an enterprise’s abuse of dominant position, while Chapters 3 and 4 establish the regulator Competition Commission of India (“CCI”) and the factors used to determine an AAEC and appropriate penalties. The Bill formalizes previously informal CCI rules and expands its investigative powers. This newsletter examines (a) two specific provisions of the many new Amendments: the inclusion of hub-and-spoke (“HAS”) arrangements and consumer harms in the CCI’s assessment of an AAEC; (b) attempts to explore these two concepts through their present context in US and EU competition law, as well as compare those countries’ bodies to project how India’s competition law will develop within its new framework.
2. “Hub-and-Spoke” Arrangements
HAS is an existing concept in Indian law, despite its newfound inclusion in the list of prohibited anticompetitive agreements under the Act’s Section 3, which include price fixing agreements, agreements to limit supply or production, and bid rigging agreements among others. The definition of HAS cartels and their factors for illegality tend to differ slightly across jurisdictions. A general definition of HAS arrangements includes participant “spokes” (usually retailers) in bilateral vertical agreements with a common “hub” (often a supplier or manufacturer). The “spokes” have vertical relationships with the “hub,” while horizontal agreements among the spokes form the wheel’s “rim.”[2] Illegal HAS cartels require such horizontal agreements or collusion to fix prices.
2.1 HAS Arrangements in India
Modern recognition of HAS in India is found in Samir Agrawal v. CCI,[3] where the Supreme Court (“SC”) acknowledged the concept of HAS and characterized it as “spokes” using a third-party platform “hub” to exchange information to engage in collusive behavior like price-fixing. The SC rejected allegations that this was HAS cartel behavior because the drivers (spokes) did not agree nor intend to collude to fix prices. HAS cartels require horizontal agreements or collusion to fix prices. In the Amendments, any party that intends to or participates in horizontal agreements likely to have an AAEC can be liable. A HAS “conspiracy” occurs if the vertical supplier hub participates in the horizontal agreement between the spokes to intentionally decrease or eliminate competition between the spokes. The Amendments omit the explicit “HAS” term in including such arrangements.
However, this language “Provided further that an enterprise or association of enterprises or a person or association of persons though not engaged in identical or similar trade shall also be presumed to be part of the agreement under this sub-section if it participates or intends to participate in the furtherance of such agreement” places HAS cartels squarely within the purview of the Act’s Section 3.
2.2 EU and US Doctrine on HAS Arrangements
EU and US competition law diverge in their predispositions to HAS arrangements. One observes these different attitudes towards HAS arrangements even in each respective lexicon, with the US often distinguishing between illegal “conspiracies” and perfectly legal “arrangements” while the EU often makes no such distinction even though it recognizes legitimate vertical arrangements. The EU and US explicitly highlighted their divergent positions in their 2019 Notes submitted to the Organisation for Economic Co-operation and Development, which this newsletter heavily relies upon in framing the current position in these jurisdictions.
In the US, it is per se illegal for the spokes to collude in a horizontal agreement to price fix, divide markets, or engage in other anticompetitive behavior notwithstanding a vertical conspirator’s participation.[4] When the arrangement is a conspiracy to engage in a per se illegal restraint of trade, no participant escapes liability. The EU’s Horizontal and Vertical Guidelines[5] reflect a similar hierarchy of concern. The EU’s biggest concerns with HAS are collusive price-fixing and horizontal agreements between competitors, where the European Commission (“Commission”) often presumes a link to horizontal collusion if resale price maintenance (“RPM”) exists. RPM concerns agreements which, directly or indirectly, try to restrict the buyer’s ability to determine sale price, including those establishing a minimum price. The Commission can determine RPM directly through contractual provisions, concerted practices, and the buyer’s compliance at the seller’s request, or it can determine RPM indirectly through a seller’s incentives for buyers to observe or deviate from a minimum price.[6]
With vertical arrangements, in the US, legitimate vertical HAS arrangements are common. Enterprise “hubs” place legal restraints on their downstream “spokes,” and no relationship connects the spokes directly. Such legal restraints include geographic restraints, exclusivity clauses, RPM, and loyalty discounts among others. Enterprises can institute such restraints for business without forming an illegal cartel or conspiracy.[7] Most US courts analyze vertical HAS arrangements and RPM under a rule of reason, presuming that parties engaging in RPM do not intend to collude in a horizontal conspiracy and that the effects are procompetitive. A plaintiff bringing suit, whether a private party or state attorneys general or a regulator, only overcomes courts’ no-conspiracy presumption through “direct and circumstantial evidence that reasonably tends to prove” a horizontal agreement.
To illustrate this concept, many US courts characterize vertical arrangements with no “rim” (horizontal agreement) as not being HAS conspiracies at all. In the case In re Musical Instruments and Equipment Antitrust Litigation, the Ninth Circuit of the United States Court of Appeals put this concept simply, “for what is a wheel without a rim?” In that case, the US Ninth Circuit upheld a lower court’s ruling that the plaintiffs failed to plausibly state a claim because they lacked direct evidence of communication among the spokes, and the court did not find it plausible that parallel conduct with other factors constituted a conspiracy. Defendant Guitar Center, the US’s largest seller of musical instruments, pressured its manufacturers to set the lowest prices on which a retailer could advertise its products. The court found the complaint showed “ample independent business reasons” for each manufacturer to adopt Guitar Center’s policy. To the court, if it was reasonable to have this policy without assurance that each manufacturer would enter a similar agreement, there was insufficient evidence of collusion.[8]
However, because the Commission often presumes collusion in the case of RPM, the burden of proof for evidence of horizontal agreements is lower in the EU than the US. For example, in 2018, the Commission fined four companies for imposing RPM on retailers in breach of EU law. The Commission found there were four vertical distribution agreements, but they indicated that, at least some of the time, the retailers drove RPM by informing their supplier of other retailers’ low prices and requesting a certain price level. This was sufficient to trigger a violation, as the supplier’s reciprocal response to retailers’ requests can lead to more of this behavior. When the retailer drives such conduct, the more likely there is a finding of horizontal collusion.[9] A greater exchange of information between competitors leads to more certainty about the market, which often leads to anticompetitive outcomes.
2.3 Amendments Favor EU’s Presumption of Anticompetitive Effect
Indian competition law is similarly sensitive to information-sharing conduct among competitors. Therefore, the Amendments favor the EU’s cautionary predisposition towards HAS arrangements over the US’s more permissive attitude towards such arrangements. The relevant Amendment’s placement within the Act’s Section 3 hinges liability for HAS arrangements upon a rebuttable presumption, meaning that the CCI will presume vertical agreements engaging in conduct outlined in Section 3(3)[10] have an AAEC in the absence of direct evidence to the contrary. This presumption juxtaposes US competition law, which requires other plus factors to a vertical arrangement for a presumption of AAEC to arise. Liability carries to all parties who participate in such an agreement or intend to participate in such an agreement under the new Amendment.
Two key inquiries as to what behavior will carry liability stem from this Amendment: (1) what behavior the CCI will establish as “active participat[ion]”, and (2) how will it establish requisite violative intent. Although the CCI has addressed alleged HAS cartel behavior in the past, it had no official statutory authority from which to delineate standards and procedure for analyzing such cartels. Now, with such authority in effect, the CCI’s jurisprudence under the Amendments should expand and inform enterprises of exactly what behavior and evidence will impute liability.
3. AAEC Analysis Now Includes Consumer Harms
Besides formally recognizing HAS, the Amendments’ Section 14 directs the CCI to consider “the accrual of harm or benefits to consumers” in determining whether an AAEC exists. This Amendment adds harms to the existing consideration of benefits to an AAEC analysis under Section 19(3) of the Act. As is the trend in these Amendments, the Bill grants even greater discretion and investigative power to the CCI in AAEC determinations.
3.1 Cross-Jurisdictional Balancing of Harm and Benefits
EU, US, and Indian competition law all give discretion to weigh procompetitive benefits against anticompetitive effects in determining an AAEC. While procompetitive benefits include those accrued to market competitors, all three bodies strongly favor benefits accrued to consumers over those to competitors. Through a rule of reason, US courts give deference to procompetitive justifications when conduct is not per se violative, weighing those against anticompetitive effects.
In an illustrative US antitrust case, NCAA v. Board of Regents of the University of Oklahoma, the SC held that horizontal restraints on college football game broadcasts enabled the product to exist, and thus a rule of reason (balancing of effects) was necessary. In that case, the NCAA restrained game broadcasts to one network at a time to promote equity in the number of schools whose games were broadcast. The SC found that, though the one-broadcaster agreements aided in efficiency, the NCAA forced schools to enter the agreement. Therefore, it forced schools to limit production of broadcasted games and limited consumer choice. The NCAA did not offer further competitive justification, so the SC found the agreement unreasonable.[11] This case illustrates the balancing of anticompetitive effects and procompetitive benefits US courts engage in under a rule of reason.
In a similar fashion, Section 101 of the EU’s Treaty on the Functioning of the European Union is the defining statute on prohibited anticompetitive agreements. It carves out an exception to its list of prohibited agreements if an agreement “contributes to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit.” The statute allows consumer-friendly agreements so long as they do not eliminate all competition or lack a reasonably practicable alternative. India’s new Amendment, while specifically addressing harm, arises from this spirit of judicial balancing of consumer effects across other jurisdictions. As well, its inclusion is coherent among the Amendments’ provisions which provide greater discretion to India’s courts and regulatory bodies in determining whether a given conduct has an AAEC.
4. Conclusion
In its totality, the 2023 Bill means to provide greater enforcement of the Act’s provisions and goals and expand the CCI’s investigative discretion. It also means to enshrine existing CCI rules and concepts which had not yet been officially placed into law in recognizing HAS arrangements. Although the contours of enforcement towards these arrangements are still vague, their recognition is a significant step by the MCA and Parliament in updating India’s competition laws for a modern global economy. This is also true for its recognition of consumer harms, among the many other Amendments that attempt to fill in the gaps in India’s statutes on competition law.
Though some of this expanded discretion does not yet define its parameters, future jurisprudence will only clarify the profile of these laws. Enterprises doing business in India should be prudent to educate themselves on these changes, upcoming case law, and influential EU and US competition doctrine, as this will help prevent unnecessary penalization and enforcement action in times to come.
This Newsletter is written by Matthew Philips, a law student from University of
Georgia School of Law, United States (under the guidance of Priti Suri, Founder & Managing Partner) who was an intern at PSA
[1] MCA, S.O. 2228(E)
[2] Kotteakos v. United States, 328 U.S. 750, 755-756 (1948)
[3] Samir Agrawal v. CCI, (2021) 3 SCC 136, 138
[4] United States v. Apple, 791 F.3d 290, 322 (2d Cir. 2015)
[5] These guidelines set out principles for assessing vertical and horizontal agreements and concerted practices under Article 101 of the Treaty on the Functioning of the European Union (discussed below). Guidelines on Vertical Restraints (2022), OJ C 248/1, 3
[6] OECD, Hub-and-spoke arrangements, note by the European Union (2019), https://one.oecd.org/document/DAF/COMP/WD(2019)89/en/pdf, last accessed June 8, 2023.
[7] OECD, Hub-and-spoke arrangements, note by United States (2019), https://www.ftc.gov/system/files/attachments/us-submissions-oecd-2010-present-other-international-competition-fora/oecd-hub_and_spoke_arrangements_us.pdf, last accessed June 8 2023
[8] In re Musical Instruments and Equipment Antitrust Litigation, 798 F. 3d 1186, 1192 n.3 (9th Cir. 2015)
[9] OECD, Hub-and-spoke arrangements, note by the European Union (2019), https://one.oecd.org/document/DAF/COMP/WD(2019)89/en/pdf, last accessed June 8, 2023
[10] E.g., price fixing, production or supply limitations, market allocation, and bid rigging. Act, Ch.2, S.3
[11] Herbert Hovenkamp, Principles of Antitrust (2nd Edition, West Academic Publishing, St. Paul, MN, 2020) 246-247