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© 2015 Talking Competition. All rights reserved.

Disclaimer- The thoughts and opinions mentioned in the present article are based on news reports available in public domain. The Talking Competition Team bears no responsibility to the factual correctness of any of the said reports. The present opinion should not be construed as legal advice. For more information, please contact Anand Sree at [anand@competitionlaw.co.in] or Danish Khan at [danish@competitionlaw.co.in].

It is very much possible that the manufacturers in ceasing supplies and issuing advisories are acting on the collective pressure applied on them by trade associations of brick and mortar retailers. Prima facie, this appears to be violation under Section 3(3)(b) of the Act. Horizontal anti-competitive agreements are viewed as more serious than vertical restraints and are presumed to cause AAEC.

We may not need to look farther than the AIOCD series of orders[12] of the CCI to understand how pressure from retailers on manufacturers works. In these cases, the associations of chemists and druggists pressurized manufacturers with an intent to control the distribution and supply of medicines within their respective local markets and also restricted the quantum of discounts to final consumers. Under threat of boycott from the powerful retailer association(s), the manufacturers’ inevitably wilt.

OPINION

The present allegations of perceived anti-competitive conduct by the e-tailers seem to have its origins in the reality that the brick and mortar retailers are slowly ceding market share to e-tailers.

Still following business models/strategies from bygone eras, they find it difficult to compete with the innovative business strategies of modern e-tailers. It’s true that e-tailers are forcing the brick and mortar retailers to either innovate or close down their business. However, their conduct cannot be in any way termed as anti-competitive. After all the purpose of competition laws is to protect the competitive process, and not the competitors.[13]

In our opinion, any new business strategy or business model which places economic power in the consumer’s hands and eliminates intermediaries should be encouraged. As the Hon’ble Supreme Court held in CCI v. SAIL,[14] the “main objective of competition law is to promote economic efficiency using competition as one of the means of assisting the creation of a market responsive to consumer preferences”. Therefore, it is our opinion that the competitive process must be allowed to run its course.

The CCI should necessarily intervene only where breaches of competition laws are significantly and artificially preventing the consumers from exercising effective choice or in situations where competition is impeded in such a way that the consumers are prevented from enjoying the fruits of effective competition.

[26 APRIL 2015]- [UPDATE-1]- As noted in this article, the CCI has prima-facie taken cognizance of allegations of resale price maintenance existing in the e-retail sector. In a case filed by online retailer M/s Jasper Infotech Pvt. Ltd.(Snapdeal), the CCI has commenced an investigation against kitchen appliance-maker Kaff Appliances (India) Pvt. Ltd. against allegations of resale price maintenance.

[1 MAY 2015]- [UPDATE-2]-As regards allegations of predatory pricing against e-retailers, the CCI has reiterated its earlier stand no online retailer can be considered enjoying a dominant position in the retail market(s). As such, allegations of predatory pricing cannot be entertined owing to lack of dominance. The decision of CCI dismissing the case filed against major online retailers can be read here.



CARTEL OFFENCE

Finally, the collective conduct of the brick and mortar merchants needs to be scrutinized. Come to think of it, they are the ones who are most aggrieved by the advent of the e-retail model, unsurprisingly; they are the ones creating the most noise.

A news report enumerates how the brick and mortar stores are putting pressure on manufacturers’ to stop such undercutting by the e-retailers.[11] It is inconceivable that any single brick and mortar retailer can enjoy such economic strength so as to get manufacturers’ to stop supplying to online retailers. On the face of it, the same appears a collective action on part of the brick and mortar traders’ community.



RESALE PRICE MAINTENANCE?

Fixing the minimum price for the sale of any product in the market is a serious violation of competition laws and amounts to a “object” restriction of competition laws. Any attempt by manufacturers/suppliers to fix a minimum price for their product with a view to prevent huge discounts from being given, amounts to a violation of Section 3(4)(e) of the Act.

This leads us to a scrutiny of vertical agreements between suppliers and e-retailers under Section 3(4) of the Act. Again, it should be noted that covering any of the manufacturers or suppliers under Section 3(4) would be difficult considering the fact that any violation of Section 3(4) hinges on establishing appreciable adverse effect on competition (AAEC). Enterprises having smaller market shares in a relevant market do not possess the capability to cause AAEC through their anti-competitive agreements.[8] Consequently, any allegation of Section 3(4) against the individual manufacturers is unlikely to render a violation of the Act. However, without going into specifics, it is clear some manufacturers enjoy significant market shares to cause AAEC within their limited markets, especially consumer electronics. Any pressure exerted by manufacturers/suppliers with an intent to influence the resale prices of their products may amount to resale price maintenance under the Act and can raise significant competition concerns.

In a similar case before the German Cartel Office, a fine of €11.5million was imposed on contact lens manufacturer CIBA Vision for having illegally restricted the online trade in contact lenses of its own brand and having influenced the resale prices of internet traders. CIBA established a price monitoring system which forced sellers to raise prices where it undercut the recommended prices.[9]

In Pierre Fabre v. President de Pautorite de la Concurrence,[10] the European Court of Justice (ECJ) observed that an agreement stipulating sales to be made exclusively in physical space-resulting in a ban on the use of the internet for those sales- amounted to an object restriction falling foul of Article 101 of the TFEU (Similar to Section 3 of the Act), unless justified objectively.









REAL COMPETITION CONCERNS

Amidst all the sabre-rattling by the brick and mortar retailers and manufacturers, the limelight appears to be on the anti-competitive practices carried out by the e-tailers. However a closer scrutiny of the industry would reveal that rather than the e-tailers it is the brick and mortar retailers who are walking on a tightrope with respect to falling foul of competition laws.

If media reports are to be believed, the Confederation of All India Traders (CAIT) is seeking legal action against e-tailers like Amazon, Flipkart and Snapdeal for what they perceive as predatory pricing.[3] Further, it has been reported that the Competition Commission of India(CCI) has even received a case against e-tailers alleging “anti-competitive” conduct.[4]The Talking Competition team finds the predatory pricing charge ludicrous.

Why the predatory pricing allegation is baseless under the Competition Law regime in India:

Explanation (b) to Section 4 of the Competition Act, 2002 (Act) defines “predatory pricing” as “the sale of goods or services, at a price which is below the cost....of production of the goods or services, with a view to reduce competition or eliminate competitors”.

Without delving into the details, it is suffice to note that the most important prerequisite for the application of Section 4 of the Act(prohibiting abuse of dominant position) is that the enterprise which is alleged to be indulging in abuse - predatory pricing in the present case - should be in a “dominant position” in the relevant market. 

A dominant position means a position of strength” enjoyed by an enterprise which enables it to operate independently of competitive forces prevailing in the market. In this context, is any one of the e-tailers operating in the Indian e-retail space able to operate independently of market forces? Certainly not.

Reliance can be placed on the decision of the CCI in Mr. Ashish Ahuja v. Snapdeal & Ors.[5] where it was held that both offline and online markets form part of the same relevant market, i.e the retail market, and are merely different channels of distribution of the same product. It follows that all the e-retailers-including Flipkart (valued at US $10 billion)[6] are no more than minor players in the Indian retail market which was valued at US $ 520 billion in 2013.[7]








It has been an interesting couple of months for the US $ 520 billion retail industry in India with the spotlight firmly on the e-retail companies. Massive discounts on offer from Flipkart’s “Big Billion Day” to the annual festive season discounts had consumers buzzing with anticipation and the brick and mortar retailers up in arms.


The aftermath of the mega-discount sales saw newspapers awash with brick and mortar traders(physical stores) alleging “unfair trade practices” by e-tailers[1] and manufacturers like Samsung, Sony and LG reportedly suspending fresh sales to the online retailers.[2] Being competition lawyers, such incidents inevitably caught our eye.


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

Amidst all the noise of perceived anti-competitive conduct, we look into the actual competition issues in E-Retailing in India

THE (REAL) COMPETITION ISSUES IN E-RETAIL

END NOTES:

[1]Source: http://www.business-standard.com/article/companies/traders-to-protest-against-e-commerce-players-114103000836_1.html

[2] Source: http://www.bgr.in/news/flipkart-facing-heat-from-samsung-lg-and-sony-over-predatory-pricing-on-big-billion-day-sale/

[3] Source: http://articles.economictimes.indiatimes.com/2013-11-05/news/43695006_1_traditional-retailers-flipkart-predatory-pricing

[4] Source: http://www.business-standard.com/article/pti-stories/cci-gets-complaint-against-online-retailers-114112800592_1.html

[5] CCI Case 17 of 2014. Currently in Appeal in Competition Appellate Tribunal as Appeal No. 54/2014

[6] Source: http://timesofindia.indiatimes.com/business/india-business/Flipkart-to-raise-fresh-funds-at-10-billion-valuation/articleshow/45092704.cms

[7] Source: http://www.ibef.org/industry/retail-india.aspx

[8] CCI Case No.33 of 2011, Automobiles Dealers Association, Hathras, U.P v. Global Automobiles Limited & Pooja Expo India Private Limited, Para. 12.11.

[9] Case B3-123/08, CIBA Vision press release available at: http://www.bundeskartellamt.de/SharedDocs/Meldung/EN/Pressemitteilungen/2009/25_09_2009_Ciba-Vision.html?nn=3591568

[10] Case C-439/09

[11] Source: http://www.livemint.com/Industry/f6eARBcJOWrTZTzuDcZZzI/Ecommerce-boom-hurts-brickandmortar-retailers.html

[12] CCI Case No 20 of 2011 M/s Santuka Associates Pvt Ltd v. All India Organization of Chemists and Druggists and Ors; CCI Case No 41 of 2011 M/s Sandhya Drug Agency v. Assam Drug Dealers Association and Ors; CCI Case No 30 of 2011 M/s Peeveear Medical Agencies, Kerala v. All India Organization of Chemists and Druggists and Ors.

[13] Brown Shoe Co. v. US, 370 US 294 (1962), p. 319

[14] (2010) 10 SCC 744

WHAT WE THINK:

Amidst all the sabre-rattling by the brick and mortar retailers and manufacturers, the limelight appears to be on the anti-competitive practices carried out by the e-tailers. However a closer scrutiny of the industry would reveal that rather than the e-tailers it is the brick and mortar retailers who are walking on a tightrope with respect to falling foul of competition laws.

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