© 2015 Talking Competition. All rights reserved.Disclaimer-The thoughts and opinions mentioned in the present article are those of the Talking Competition Team. The present opinion should not be construed as legal advice. For more information, please contact Danish Khan at [danish@competitionlaw.co.in] or Anand Sree [anand@competitionlaw.co.in]. The present article is protected by Copyright Law(s).







END NOTES:

[1] Majority Order in CCI Case No. 39/2012 Mr. Ramakant Kini v. Dr. L.H. Hiranandani Hospital, Powai, Mumbai. Available At: [http://cci.gov.in/May2011/OrderOfCommission/27/392012.pdf] Currently in Appeal in Competition Appellate Tribunal as Appeal No. 19/2014.

[2] See, for instance, CCI Case No. 1/2009 FICCI/Multiplex Association of India vs United Producers/Distributors Forum, Para. 24; CCI Suo-Moto Case 02/2011 In re: Auminuim Phosphide Tablet Manufacturers, Para.7.40.

[3] For instance, see separate order of Member Prasad in CCI Case 22/2010 Kapoor Glass India Pvt. Ltd. vs Schott Glass Indi Pvt. Ltd. Since then, the CCI has found violation of Section 3(4) of the Act in the case of CCI Case No. 03/2011 Shri Shamsher Kataria vs Honda Seil Cars India Limited and Ors.

[4] CCI Case Nos. 2/28, etc., Para. 19.5.

[5] Available at [http://cci.gov.in/May2011/OrderOfCommission/27/392012GG.pdf]

[6] Baranes, E. & Bardey, D. (2004). Competition in health care markets and vertical restraints. Cahiers de Recherche du LASER 013-03-04, Laboratoire de Sciences É conomiques de Richter (LASER), Université de Montpellier,Montpellier, France.

[7] 2010 OJ C130/10

[8] Commission Regulation (EU) No. 339/2010 [2010 OJ L102/1]

[9] Article 3 of BER

[10] CCI Case No. 33/2011, Para. 12.10.

[11] Vertical Guidelines, Para. 23.

[12] CCI Case No. 33/2011, Para. 12.9.; See also CCI Case No. 03/2011 Shamsher Kataria vs Honda Seil Cars India Ltd. & Ors., Para. 20.6.35.

[13] CCI Case No. 03/2011 Shri Shamsher Kataria vs Honda Seil Cars India Limited and Ors., Para. 20.6.11.

[14] CCI Case No. 33/2011, Para. 12.9.

[15] Vertical Guidelines, Para. 130; See also, Richard Whish, Competition Law(6th edn, Oxford University Press, New York, 2009) 615.

[16] Delimitis v. Henninger Brau [1991] ECR I-935, Paras. 23 and 24.

[17]  Airtours v. Commission [2002] ECR-II 2585.

[18] Id, Para. 294.

[19]  Advocate General Roemer's Opinion in Consten & Grundig  v. Commission [1966] ECR 299

[20] CCI Case Nos. 2/28, etc., Para.19.5.

[21] See R.J. Van den Bergh and P.D. Camesasca, European Competition Law and Economics: A Comparative Perspective (2nd edn., Sweet & Maxwell, 2006), 37.

[22] Alison Jones and Brenda Sufrin , EU Competition Law (4th edn, Oxford University Press 2011)

​​​​In the present Order, limiting the discussion of AAEC to a single Paragraph [Para 20] may result in the Order being on a weaker footing to withstand judicial scrutiny. Unless backed by forceful evidence from the DG Report or otherwise, the analysis of AAEC within Paragraph 20 of the Order may also be viewed as vague assumptions.

Another notable fact is that the Informant’s wife, on whom the exclusive contract was being imposed upon, shifted to another hospital for the delivery. Even though the actions of a single consumer cannot be said to be reflective of the wider market, it does give a prima facie view that there may be sizable constraints upon exercise of market power by the Hospital and Cryobank.


CLOSING COMMENTS

While the order focuses on the harm to the consumers caused due to the conduct of the Hospital and Cryobank, it is debatable as to whether consumer harm can solely, or if at all, be a cornerstone of the finding of anti-competitive conduct.

Secondly, it is not clear as to whether restricting consumer choices would have necessarily caused consumer harm. It is possible that the conduct may have lead to certain efficiencies within the production chain, for instance standardization of the service of stem cell collection being provided in the Hospital.  Section 3 should not be applied on the basis of purely theoretical considerations to a situation which might, upon closer inspection, reveal no AAEC.[19]

Lastly, the CCI has talked about consumer welfare in its earlier orders, emphasizing the need to ensure free competition between existing and potential competitors as competition results in allocative and productive efficiencies that ultimately result in consumer welfare.[20]

If competition policy is concerned with consumer welfare rather than total welfare it will be concerned with the transfer of surplus from producers to consumers.[21] In other words, prohibiting conduct and transactions which reduce consumer welfare may not allow efficiency gains which maximize total welfare. Efficiency and consumer welfare may pull in different directions.[22]

Part of the reason why CCI took more than 5 years since enforcement of the Act to penalize an anti-competitive vertical agreement is because there isn’t a definitive set of rules or guidelines for analysis of AAEC under Section 19(3) of the Act. The European Commission’s Guidelines on Vertical Restraints(Vertical Guidelines)[7] set out principles for the assessment of vertical agreements under Article 101 of the Treaty on the Functioning of the European Union (TFEU). More importantly, the Block Exemption Regulation (BER)[8] exempts agreements from Article 101(1) TFEU if the market share of parties to the agreement (the supplier and the buyer) is less than 30% on the market share.[9] The CCI has made a reference to the Vertical Guidelines and BER in its decision in Automobile Dealers Association, Hathras, UP vs. Global Automobiles & Ors.[10]

The Order mentions that the combined market share of Cryobank and the Hospital is about 67% in Mumbai[Para. 20], though it is not stated in which product market such share is being enjoyed. Further, the competition agency should not presume[11] AAEC beyond a market share of 30% within a reference market. Any finding of AAEC has to be based on analysis of factors under Section 19(3), even for an enterprise which has a market share exceeding 30%.

Section 19(3) provides a list of factors which the CCI needs to keep in mind while analyzing AAEC. Though accrual of benefit to consumers is one of the factors, it can be considered only as an efficiency justification.[12] The last three factors in 19(3)- known as“positive factors”[13]- cannot be used alone to establish AAEC, in the absence of any of the first three incriminating factors. The pivot of the present Order- harm to consumers-is not even one of the factors under Section 19(3), let alone being one of the incriminating factors.

It so flows that normally at least one of first three incriminating factors needs to be established for a finding of AAEC.[14]

The Vertical Guidelines suggest foreclosure of market for competing suppliers and potential suppliers as possible risks to competition arising out of single branding agreements.[15] It is appropriate to consider whether all similar agreements entered into in the relevant market, coupled with other factors relevant to the economic and legal context, cumulatively have the effect of denying access to the market to new competitors.[16] However, the CCI does not seem to have considered whether other hospitals also have the same exclusivity agreements withCryobank (or vice-versa). The same would have reflected the extent of market foreclosure caused due to the alleged anti-competitive agreement(s).










The CCI has based its order on the premise that Section 3(1) is independent of Sections 3(3) and 3(4) of the Act.

Even assuming the same as the correct reading of Section 3(1), it is still undeniable that the Act makes any finding of violation of Section 3(1) of the Act contingent upon establishing AAEC due to the said agreement. Whether the alleged agreement between the Hospital and Cryobank actually caused AAEC is something which needs thorough analysis.


The Commission is of the view that Section 3(1) of the Act should not be evoked independently

CASE ANALYSIS

The decision stands out in so far as the CCI has adopted a cross-sectional reading of Sections 3(1) and 19(3) of the Act and read them in light of the Preamble which makes it a duty of CCI ‘to protect the interest of consumers’ and to ensure ‘freedom of trade carried on by other participants in the market in India.’

In simplest terms, Section 3(1) prohibits agreements between enterprises, or persons or association which cause or are likely to cause an appreciable adverse effect on competition (AAEC) within India.

Section 3(3) of the Act covers horizontal agreements which carry a rebuttable presumption of AAEC. Section 3(4) covers vertical agreements which are prohibited only if the Informant/CCI can establish AAEC.

Upto this Order, the approach of the CCI has been to find a violation of Section 3(1) read with 3(3) in case of horizontal agreements.[2] When this Order was passed- there still wasn’t a majority decision of the CCI where a violation of Section 3(4) was established.[3]The case marked the first instance where the CCI has found a violation of Section 3(1) without coupling it with either of Section 3(3) or Section 3(4) of the Act.

The said outlook of CCI should be contrasted with one of its earlier decisions. In the matter of Govind Agarwal vs. ICICI bank Ltd & Ors.,[4] the CCI clearly stated the following:






Stem Cell collection services being specialized services are generally not offered by hospitals themselves. Instead, a stem cell service provider- like Cryobank- is contracted to collect the umbilical cord blood immediately after the delivery- preferably within 10 minutes.

As per the agreement, any consumer availing the maternity services of the Hospital and seeking to avail services of stem cell collection- would have to do so only through Cryobank. As such, no other stem cell service provider was allowed to enter the premises of the Hospital for collection of umbilical cord blood for the duration of the agreement.

Lifecell Inc., a competitor of Cryobank, had registered a consumer of the Hospital for availing of its stem cell banking services. However, on being denied Lifecell’s services in the Hospital’s premises, the said consumer shifted to another hospital which permitted availment of Lifecell’s services. Subsequently, the same consumer (her husband) filed an Information in the CCI alleging violations of Sections 3(4) [Vertical agreements having appreciable adverse effect on competition], 4(2)(a)(i)[Abuse of dominant position by imposition of unfair conditions on consumers] and 4(2)(c) [Denial of market access to competitors] of the Act.

The present article focuses on the allegations and the decision of the CCI vis-à-vis Section 3 of the Act.


OBSERVATIONS AND DECISION OF CCI

The CCI noted that it is not essential for an agreement to be included under Sections 3(3) or 3(4) of the Act to be considered violative of Section 3(1) of the Act. The scope of Section 3(1) of the Act is independent of Sections 3(3) and 3(4) of the Act [Paras. 11 and 15]. Further, the CCI has to look into freedom of trade, consumer welfare aspects in addition to appreciable adverse effect of competition (AAEC)[Para. 12].

It was observed that the Hospital had forced a service provider(Cryobank) on its patients [Para. 17]. Further, the exclusive agreement between the Hospital and Cryobank was purely actuated by financial considerations in utter disregard of the effects of the agreement on competition in the market and consumer welfare [Para. 17].

It was noted that the two major players in the stem cell banking services sector, Cryobank and Lifecell had almost 67% of the market share in Mumbai. The development and competition in stem cell services industry is bound to be hindered because of such exclusive arrangement between the Hospital and Cryobank as each player, instead of competing with other players for efficiency and competitive price, would endeavor to pay commission to different hospitals and mop up clients [Para 20]. Such an agreement would result in total failure of service for the consumer. [Para 20] The agreement "actually kills all competition replacing competition culture by commission culture". [Para 21]








On 5th of February 2014, the Competition Commission of India (CCI) passed an order penalizing Dr. L.H. Hiranandani Hospital, Mumbai for entering into an anti-competitive agreement in violation of Section 3(1) of the Competition Act, 2002 (Act).[1] We think the Order brings more questions than answers. Here's our viewpoint.


FACTS IN BRIEF

The case essentially involves an “exclusive agreement” [Para. 2 of the Order] entered into between Dr. L. H. Hiranandani Hospital, Mumbai (Hospital) and Cryobank International Limited (Cryobank) -a service provider of stem cell banking services.


[25 Jan 2015]  [Danish Khan & Anand Sree]

We find the Order against Hiranandani Hospital puzzling in more ways than one. Here’s our take on the Order.

The Curious Case of Hiranandani Hospital

Copyright © 2018 Talking Competition All Rights Reserved

NEXT ARTICLE

-petition Law may remember the Airtours[17] saga where the Court of First Instance annulled European Commission’s (EC) merger prohibition decision holding that the EC had not satisfied the standard of proof for its finding and the EC’s decision - far from being a prospective analysis on cogent evidence - was vitiated by a series of errors as assessment of the fundamental factors therein.[18]

WHAT WE THINK:

Section 19(3) provides a list of factors which the CCI needs to keep in mind while analyzing AAEC.The pivot of the present Order- harm to consumers-is not even one of the factors under Section 19(3), let alone being one of the incriminating factors.

While it is not to be suggested that the agreement between the Hospital and Cryobank was not anti-competitive, a deeper evaluation of its effect was definitely desirable. Keen followers of European Com-

WHAT WE THINK:

Keen followers of European Competition Law may remember the Airtours saga where the Court of First Instance annulled European Commission’s (EC) merger prohibition decision holding that the EC had not satisfied the standard of proof for its finding and the EC’s decision - far from being a prospective analysis on cogent evidence - was vitiated by a series of errors as assessment of the fundamental factors therein.

Incidentally, Section 19(3) does include foreclosure of competition and creation of barriers to new entrants in the market as possible factors to be analysed by the CCI. However, the order barely makes a passing reference to foreclosure of competition and creation of entry barriers[Para 20] without going into a deeper scrutiny of any of the “incriminating” factors. Instead the CCI appears to have chosen to focus on reading the “welfare of consumers” and “freedom of trade carried on by other participants” from the Preamble into the factors within Section 19(3).

The present Order stands in stark contrast to the above pronunciation by CCI. The substantial deviation in the present Order should be justified by cogent reasons, lest the same be considered a glaring inconsistency. The order of Govind Agarwal (supra) has not been mentioned by the CCI in its present majority order. Instead, the Order tries to justify invoking Section 3(1) independently by a cross-sectional reading of Ss. 3(1), 19(3) and the Preamble of the Act.


ANALYSIS OF AGREEMENT BETWEEN HIRANANDANI HOSPITAL AND CRYOBANK

As can be seen from the summary above, the Order has a distinct consumer-centric flavor to it.

The agreement between the Hospital and Cryobank essentially required the Hospital not to deal with any stem cell bank other than Cryobank during the duration of the agreement, in return for a specified commission per enrolment. Considering that the umbilical cord blood needs to be collected within 10 minutes of delivery, it is pertinent that the same be collected from the hospital premises immediately upon child-birth. In other words, the Hospital was acting as a platform or an interface between the patients and the stem cell bank. As explained by Member Gouri in her dissenting order,[5] health care industry displays some sort of vertical integration, although different from conventional vertical relation[Para. 10-17]. For instance, exclusivity agreements between insurers and hospitals have long been considered a vertical restraint.[6]

If vertical restraints exist between the Hospital and Cryobank in the exclusivity agreement, the vertical agreement can be considered as amounting to Refusal to Deal under 3(4)(d) of the Act. Refusal to Deal- comparable to ‘single branding agreements’ in the European Union(EU)- is an agreement which restricts, or is likely to restrict, by any method the persons or classes of persons to whom goods (or services) are sold or from whom goods (or services) are bought.

The agreement restricted- or at least was likely to restrict- the ability of the competitors of Cryobank to enter into an agreement with Hiranandani Hospital for providing stem cell collection services for Hiranandani’s patients. However, the CCI did not delve much into the agreement between Hiranandani and Cryobank from the perspective of competitors of Cryobank.

The focus seems to have been towards consumer welfare. The CCI considered that AAEC was caused primarily because of the resulting consumer harm and restraints on the freedom of trade by other market participants [Para 11, 12 and 15].


ANALYSIS OF APPRECIABLE ADVERSE EFFECT ON COMPETITION













Lastly, the CCI also considered the difficulty and inconvenience caused to an expecting mother when she needs to change a hospital, especially during the later stages of the pregnancy. No woman admitted in a super specialty hospital, to save few rupees will change the hospital. Citing the above reasons, the CCI rejected the argument of the Hospital that the consumer was free to leave the Hospital[Para 24].

The CCI thereby concluded that the agreement between the Hospital and Cryobank is violative of Section 3(1) of the Act. In addition to declaring the agreement as null and void, a penalty of 4% of the average turnover of preceding three years- amounting to INR 3.81 Crore- was imposed on the Hospital.


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[01 Dec 2015]- [Update-1]-Building upon the disposition in the order against Hiranandani Hospital, the CCI has recently penalised Alkem Laboratories Ltd. for a violation of Section 3(1) of the Act for following the diktat issued by local chemist and druggist association relating to procurement of No-Objection-Objectionbefore appointing stockiest in Kerala.The CCI noted that even though the agreement between the pharmaceutical manufacturer and trade association cannot be covered under Section 3(3) or Section 3(4) of the Act, the CCI nevertheless relied on the order against Hiranandani Hospital to find a violation of Section 3(1) of the Act. [Read Order]

[18 Dec 2015]- [Update-2]- The Hiranandani Order of the CCI was appealed to COMPAT as Appeal No. 19/2014. The COMPAT delivered its judgment in Appeal on 18 Dec 2015, setting aside the majority order of the CCI which found the violation of Section 3(1) of the Act. Along similar lines to the opinion note of TalkComp, the COMPAT noted that findings of the majority order of the Commission “are based on pure conjectures and imagination and not on any concrete evidence.” The COMPAT noted that the the finding recorded by the majority order of the Commission regarding violation of Section 3(1) of the Act is “wholly erroneous and unsustainable.”[Read Order]