Competition Law: How much does a Pandemic cost?
The COVID-19 pandemic is continually evolving, and government advice is being updated as the situation develops. In relation to competition law, measures have been taken to both address the workflow of enforcement measures, and to provide guidance on the application of competition law to co-operation activities during the crisis. In all of India’s history, competition law has been applied to potential cooperation and communication between competitors and acted as a brake on co-operation even if the cooperation activity may be justified.
On April 19, 2020, the Competition Commission of India (CCI) had issued an Advisory to Businesses in Time of COVID-19. The Advisory specifically stated:
"To cope with significant changes in supply and demand patterns arising out of this extraordinary situation, businesses may need to coordinate certain activities, by way of sharing data on stock levels, timings of operation, sharing of distribution network and infrastructure, transport logistics, R&D, production etc. to ensure continued supply and fair distribution of products (e.g. medical and healthcare products such as ventilators, face masks, gloves, vaccines, etc. and essential commodities) & services (e.g. logistics, testing, etc.). Businesses are however, cautioned not to take advantage of COVID-19 to contravene any of the provisions of the Act.”
The pandemic it turned out was a huge opportunity for e-commerce players across the globe, with sales up to double compared with the previous year. With the national lockdown in place, all offline businesses were forced to shut down and the only activity permitted was what came within the realm of essential services/commodities – such as grocery stores, chemists, banks (ATMs). Due to the nature of the virus that was the cause of such drastic steps being taken by countries all over the world, there was an immediate sharp increase in the demand for sanitizers and face masks all over the country. Seeing an opportunity to profit at the expense of the general public, in such times of crisis, companies/ entities manufacturing face masks and sanitizers arbitrarily increased, by manifold, prices of such essential products with steep delivery and operation markups.
In India, to protect small businesses from this, competition policy has been implemented via the Competition Act, 2002 which along with its amendments, establishes a Competition Commission of India to prevent anti-competitive practices, promote and sustain competition, protect the interests of the consumers and ensure freedom of trade in the markets in India. Prompted by the ballooning relevance of digital commerce, the Competition Commission of India (CCI) commenced a market study on e- commerce in April 2019.
The CCI published its findings on 8 January 2019; on the whole, the Report is fairly exhaustive encapsulating the viewpoints of various stakeholders in the digital market ecosystem servicing diverse sectors like travel and hospitability, food, etc. The most consequential section of the Report is the self-regulatory measures that the CCI has very carefully formulated with the objective to reconcile and balance out conflicting interests of stakeholders. This feted advocacy initiative of the CCI certainly promises to serve as a Magna Carta for future investigations in this space, the absence of a judicious implementation of this recommendation also draws attention. The highlight of this paper’s resolution was to suggest a self-regulatory system for fair access to markets, something the European Union also addressed with a public consultation in early 2020; however, from the lessons of the first year of lockdown, we can only infer that the imbalance in bargaining power and information asymmetry may result in market distortion. One of the key competition concerns identified by the CCI in the Indian market study was the imposition of parity clauses by e-commerce platforms on sellers using their platforms. The market study specifically identified the online travel agency market (“OTA”), and the online food ordering and delivery market (“Food Delivery”) as examples of markets where such parity clauses were prevalent. Following on the heels of the Market Study, the CCI in October 2019, directed its first investigation into platform parity clauses in Federation of Hotel & Restaurant Associations of India (FHRAI) v MakeMyTrip India Pvt. Ltd & Ors . Parity clauses, in essence, oblige sellers/retailers to offer on their platform, which acts as their common market, the lowest price and/or best terms, thereby restricting the sellers from offering better prices or terms to competing platforms/marketplaces or on their own websites. The problem with this is that large platforms like Amazon, Zomato or Swiggy often force and use their dominant position to create unsustainable dependencies whereby the sellers/retailers often have no choice but to sell on their platform and are locked in the system. This means that in the long term alternative and independent markets or third party markets will not have the capacity to compete with these larger platforms thereby making them unsustainable to operate outside that private marketplace because parity clauses may result in higher prices for the end-users and incentivize platforms to increase the commissions that they levy on their sellers. Furthermore, an important theory of harm associated with parity clauses, particularly wide parity clauses is that they soften competition between platforms. Most e-commerce platforms in India operate under an agency model where they charge commission/fee for every sale made by a seller through their platform. A wide parity clause removes the incentive for platforms to compete on the commissions that they levy on their sellers. This is because the sellers are prevented from rewarding the platforms that levy lower commissions with lower listing prices on the platforms.
Assuming that most e-commerce platform enjoys a dominant position over the seller marketplace, the imposition of a parity clause can also be assessed under Section 4 of the Competition Act, 2002 (“Act”) in India. Agreements under Section 3(4) of the Act are anti-competitive only if they cause an appreciable adverse effect on competition (AAEC) in India. The question as to whether an agreement causes AAEC or Anti-Competitive behavior is an analysis of a balance between the positive and negative factors listed under Section 19(3) of the Act. The pro-competitive factors provided under Section 19(3)(d)–(f) of the Act include (i) the accrual of benefits to consumers if any; (ii)improvements in production or distribution of goods or provision of services; or (iii) promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services. Thus, the assessment of parity clauses under competition law is a complex balancing act between its pro-competitive and anti-competitive effect,
Similarly, the European Union recently has also shown great concern over the impact of Covid-19 on competition laws, especially in terms of Price Parity Clauses and Vertical Arrangements between companies. The Verticals Block Exemption Regulation and the accompanying Vertical Guidelines together form an important tool kit for companies when self-assessing the compatibility of their vertical arrangements with EU competition law. The rules are due to expire in May 2022 and so a consultation by the European Commission is needed. However, in the light of market developments since the adoption in 2010, the European Commission has started early having already consulted stakeholders on the future. The most significant and impactful market development since 2010 is, of course, the explosive growth of e-commerce. Understanding digital markets in the broader sense is at the core of the EC’s current competition enforcement policy, most recently evidenced by the commissioned Report on Competition Policy for the Digital Era. A revision of the guidelines is important because it is essential that the competition landscape evolves to take into account significant market changes in the online sector. These changes have impacted commercial relations and will continue to do so in the coming years. The recent Booking.com judgment in Germany does provide some good news for hotel booking platforms, other online marketplaces and price comparison websites who want to use "narrow" price parity clauses.
The way forward is not all gloom however, as in India the CCI has called for clear and transparent policies on discounts by e-commerce platforms, the basis of discount rates and the implications of participation/non-participation in such discount schemes and that discounts could be considered distortionary if the e-commerce platforms are using them for forging exclusive contracts with the retailers and curbing the retailers from having tie-ups with multiple platforms. They also go on to say that exclusive agreements raise potential competition concerns when used as an exclusionary tactic to foreclose competition to rivals or to impede entry. In the European Commission’s Final Report on the e-commerce sector inquiry both “wide” and “narrow” clauses are considered unproblematic if the parties’ shares remain below 30% and, exceeding this, require individual assessment. The current German approach to “narrow” clauses is notably not limited by these thresholds and is in line with the CCI’s recommendations and could be a guide used to engage in regulation moving forward.
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