Competition Law

[By Vijpreet Pal]   The author is a student at National Law Institute University, Bhopal. Introducing The Subsisting Punitive Framework The primary goals of Competition Law are to abolish anticompetitive practices, encourage competition and to protect consumer interests. For the effective fulfillment of these goals, there are three broad frameworks adopted by various nations throughout the world i.e. (a) Civil Sanctions, (b) Criminal Sanctions, and (c) Mixed. India has adopted the enforcement based on fines and other similar civil remedies. It is always contended that the enforcement regime based on fines has less deterrent effect as compared to Criminal sanctions. Even the historical background of various nations shows the usage of Criminal sanctions to detect, prevent and punish the prevailing malpractices in the market. The author in the article will examine whether the Criminal sanctions are desirable in the Indian Competition Law regime by drawing comparative analysis of the nations that shifted from Civil sanctions to Criminal sanctions and even vice-versa. The author will further delineate the challenges on the path of implementing the Criminal sanctions and then put forth viable solutions to tackle those concerns. Insights From The Punitive Framework Of Other Jurisdictions Similar to India there are various other nations like China, Hungary, Ethiopia, Peru, etc. who have retained Civil punishments. There are other nations that initially adopted the Criminal framework but later switched to Civil enforcements mechanism like the Netherlands where the concerned authority can now only impose an administration fine or an order subject to penalty for non-compliance, in proportion to the infringement committed. Similarly, in Luxembourg, the original Criminal sanctions were replaced by Civil sanctions. Now, its Competition Act does not per se provide for Criminal penalties under Article 101/102 of the Treaty on the Functioning of European Union(‘TFEU’) however, some infringements could subsequently lead to violation of Article 311 of the Luxembourg Penal Code. On the other hand, some nations have criminalized anti-competitive practices and imposed Criminal sanctions like the Antitrust Laws of USA: there are three antitrust laws in USA i.e. Clayton Act of 1914, Sherman Act of 1890 and Federal Trade Commission Act, 1914 amongst which Sherman Act involves Criminal penalties against anti-competitive agreements. There can be imprisonment for the period of 3 to 10 years along with a fine of amount US$ 350,000 to US$ 1 million. The enforcement mechanism of New Zealand and Canada also developed imposing Criminal liability with imprisonment up to 7 years and 14 years respectively for serious anticompetitive practices like price-fixing, bid-rigging, market sharing, etc. Belgium’s Competition Act enforces Criminal sanctions for Cartel infringes whereas, in Germany, Criminal punishment is confined to Bid-rigging only. In several other nations like Armenia, Japan, Mexico, Republic of Korea, South Africa, Thailand, Brazil, Australia, etc. criminal liability is imposed in cases of severely anti-competitive behavior. Exigency Of Criminal Punishment In India’s Competition Law Regime The deficiency of the Civil punishments in curbing the malpractices could easily be seen in the Indian Competition Law. There are instances that manifestly demonstrate that even if fines in the millions of rupees are levied still the offender would be unaffected because they are making significant profits out of their malpractices and often have large assets. Resultantly, in most situations, the offender is willing to pay this insignificant sum and continue with their anti-competitive practices. They make a prior estimation of the benefit which they will reap and also the penalty which could possibly be imposed if they are caught violating the Competition Laws. There are other more contentions and justifications in favour of the imposition of Criminal sanctions like the notion that Criminal sanctions have a greater deterrent effect because it incapacitates the violator from committing future crimes and also, as stated earlier, fines imposed on the violator are lesser in comparison to the profit they gained. Jerome Bentham and Stuart Mill propounded a political philosophy called ‘Utilitarianism’ i.e. ‘greatest number of goods for the greatest number of people in the 19th CE. It supports the Criminal sanctions by postulating that if imposing Criminal punishment does more good and less pain, then it is justified. Furthermore, the Retributive theory of punishment entails that the criminals should be met with an equal amount of pain. German Philosopher Immanuel Kant argues that “retribution is not just a necessary condition for punishment but also a sufficient one. Punishment is an end in itself. Retribution could also be said to be the ‘natural’ justification”, in a way that it is quite natural and just that a bad person ought to be punished and a good person rewarded. Consequences of the Criminal sanctions like the resultant impact on the family and hostile reaction of the society also stigmatizes the act which has a deterrent impact. Apart from the philosophical reasons, there are pragmatic reasons as well which legitimizes the Criminal punishments for example, liability in most of the cases are imposed only on the company and not on the directing minds, thereby fines levied from the company does not give assurance of the accountability of the Directors of the company and they are left scout free. Further, in the age of developments, there is no territorial limit of malpractices and thence, the competition law must accommodate the extra-territorial application of its provisions. However, Civil Competition Law cannot be applied in other nations as every nation is sovereign under International Law but there are multiple principles like active nationality, passive nationality, etc which legitimizes the extra-territorial application of the Criminal Competition Law. For instance, Section 3 and 4 of the Indian Penal Code,1860 provide for extra-territorial jurisdiction. Challenges To Enforce Criminal Sanctions The biggest challenge is the component of Mens-Rea along with Actus-Reus, which is required to be established beyond reasonable doubt in Criminal matters however, in Civil matters, there is a preponderance of probability. The second main challenge is accountability i.e. who should be made accountable for the act because the malpractices are carried out in the name of the corporation but the mind behind is of the

[By Akanksha Agrahari & Arjun Nayyar] The authors are students at the NALSAR University of Law, Hyderabad.  Introduction WhatsApp was heavily featured in the news recently when the Competition Commission of India took suo moto cognizance of the updated privacy policy and terms of service for its users. Due to its extremely large user base, as well as the network effects associated with it, the Commission held that users were left with no other option but to accept the updated conditions. Hence, Whatsapp’s actions were found to be in prima facie abuse of its dominant position, a view which was upheld by the Delhi High Court. It raises certain concerns regarding the dominant position held by companies by virtue of their ability to manipulate consumer behaviour. This isn’t a unique instance wherein WhatsApp was called into question for its ability to influence the market and its users. Previously, WhatsApp was fined 3 million Euros by the Italian Competition Authority for abusing its dominance. This post analyses various concepts of behavioural economics using which competitors can obtain a dominant position and influence their user base. Understanding Behavioral Economics The CCI has on many instances discussed factors that compound a firm’s dominance in the market and lead to an abuse of its dominant position. The order in the WhatsApp case follows an extensive analysis of network effects and how they have led to the app reaching a position where it is difficult for the users to switch to any substitutes. Such companies use certain tactics and human tendencies to build a user base and subsequently abuse it. This dependence of the consumers on one platform may lead to a denial of market access to competitors. Network Effects of Scale and Tipping The larger the consumer base of a platform, the more inclined a consumer would be to use it. Network effects relate to an increase in the desirability of a platform due to an increase in the number of users. The CCI has looked at network effects in the past to understand whether or not a competitor holds a dominant position, and subsequently, to determine whether this position has been abused. This concept is amplified in the relevant market of over-the-top (OTT) messaging apps, benefitting WhatsApp the most with 70 million users in the country, or a market share of 95%. Such a large user base allows WhatsApp to function mostly independently of market forces, due to the lack of feasible substitutes and the hesitation of users to switch. As the updated terms of use and privacy policy of WhatsApp does not allow for the user to opt-out, any individual who disagrees is left with the sole option of uninstalling the app. However, due to the nature of OTT messaging apps, it is not sufficient for users to simply delete WhatsApp and switch to other competing apps. It is also necessary to ensure that other users make the switch as well, to make the alternative a viable substitute. This creates a barrier to the efficient substitutability of the application, preventing the users from refusing to conform to the updated conditions and the alleged breach of their privacy. Such a barrier to entry is anti-competitive practice and is said to have an appreciable adverse effect on competition under Section 19(3) of the Competition Act. The EU has dealt with network effects as a reason for dominance on various occasions. In the Booking.com case, it was remarked that network effects may cause markets to tip towards a particular competitor. It was further stated that once a particular threshold is crossed, these network effects might lead to a major barrier to entry for competitors. This ties into the aspect of “tipping”, whereby the market tips in favour of a leading firm due to an increased market share. On reaching such a tipping point, firms can rely on their large user base to consolidate even more users. Large players are protected from competition and market forces due to their dominance and subsequent barriers to entry, allowing them to make decisions and impose policies that would otherwise cause a loss in business if the market was competitive.[i] The EU also extensively discusses the concept of tipping. It states that cases dealing with anti-competitive practices must be brought to the commission’s notice before companies can abuse such a dominant position. Consumer Inertia Consumers tend to opt for the default option or the option that is readily available. This aspect is abused by dominant firms by virtue of the ‘inertia’ of consumers.[ii]  Having used a platform for a considerable amount of time, consumers lack any incentive to switch to another option. Moreover, the habit formation of using a particular app over a period of time puts the average consumer in a state of inertia. Google reportedly pays USD 1 billion to Apple to be the default search engine on the iPhone. This illustrates the importance of default options and the inertia generated for them to the firms. Consumer inertia is also known as the status quo bias. The concept was extensively discussed in the EU in the Google Android Case, and has also been held by the CCI to be sufficient grounds to raise a prima facie case of abuse of dominance. It entails that those individuals who already have access to a particular platform or application on their mobile devices would have no incentive to switch to competing apps on the market. This concept is witnessed to an even greater extent in the WhatsApp case, as not only do the users already have the application on their smartphones; they also utilize it on a daily basis. It would be highly inconvenient for consumers to switch to another app if they disagree with the updated privacy policy and would be much more likely to accept the conditions despite having their differences. This is coupled with the network effects discussed earlier, as the status quo bias would only amplify when multiple users have to switch in order for any

[By Vanshaj Dhiman and Palak Jagetia] The authors are students at the Dr. Ram Manohar Lohiya National Law University, Lucknow. Relevant market delineation has become the most prominent determinant to ascertain the market power of enterprises and to analyze their ability to abuse their market power or to cause an appreciable adverse effect on competition (AAEC) in the market. Market practices like making warranty obligations contingent to use of its own aftermarket, lack of open market access to genuine spare parts, accessories, and associated technical know-how for the after-sales services of the product, higher aftermarket prices, etc, lead to consumer harm and foreclosure in the aftermarket and thus causing AAEC. Aftermarket is a type of derivative market consisting of spare parts, repair services, and consumable goods.[i]An in-depth analysis of Indian, European, and American case laws suggests that the following parameters need to be considered while determining whether an intertwined market of the primary product and its aftermarket shall be delineated into two separate relevant markets – a) Whether the consumer undertakes whole-life cost analysis at the time of purchasing the primary product; b) Is it possible for a consumer to switch to aftermarket of another manufacturer; and c)What is the cost of switching to another primary product relative to the cost of the spare parts? As far as the automobile sector is concerned, all the mature jurisdictions including India depict the need for delineation of a separate aftermarket rather than a single system’s market consisting of primary market and aftermarket. However, when it comes to the market for electronic appliances, the Competition Commission of India (CCI) seems to deviate from the separate aftermarket rule. The CCI did so as it believed that the availability and accessibility of information about the aftermarket products were sufficient enough to delineate a unified system’s market. This is evident from the cases of Trend Electronics v. Hewlett Packard and S.K. Mittal v. HP Inc., where the CCI denied recognizing the existence of a separate relevant aftermarket and held that Hewlett Packard (HP) was not dominant in the ‘market for laptops including its spares and after-sale services in India’. In this blog, the authors shall discuss the possibility and feasibility of the existence of a separate aftermarket in cases of laptops as well as mobile phones. Whole Life-Cycle Cost Analysis The concept refers to the consumer’s ability to compute the life-cycle cost of a product at the time of purchasing it and the customer’s anticipation of the future costs of ownership of the primary product by taking into account the probable expenditure on after-market products.  Engaging in this analysis is based on various factors, inter alia, availability, and accessibility of information in the public domain, and presence of required sophisticated analysis skills in the consumers. As far as printers and photocopiers are concerned, a unified system’s market encompassing of primary and aftermarket should be delineated. The consumables (toner cartridges) are indispensable for the proper functioning of printers or photocopiers and will be needed again and again depending upon the life-cycle of the primary product. Therefore, it can reasonably be presumed that a consumer will undertake the whole-life cost analysis at the time of purchasing the primary product. Now, this position needs to be distinguished while dealing with other aftermarket cases where instead of consumable products, spare parts and repair services are involved. Lack of sophisticated analysis skills, prevalent consumer myopia, and illiteracy make the Indian consumers more sensitive to upfront cost than running cost. Moreover, even if consumer undertakes life Cost Analysis at the time of purchase, then too does it really prevent them from getting locked-in?  The answer is “No”, as all the prominent manufacturers engage in similar anti-competitive practices leaving consumers with no alternative but to buy from one of them. Thus, even the prior knowledge about the lifetime cost of a product cannot be construed as the sole reason to delineate a unified system’s market. Non-Substitutability and Locked-in Effect An aftermarket may be broader than merely the secondary products of one brand of primary product where the secondary products of different brands of primary product or independent secondary product bands are readily substitutable. However, if the secondary products for different brands are not compatible or substitutable, and a consumer requires certain parts and accessories for his/her smartphone or laptop, in a sense, the consumer is ‘locked-in’ to use brand-specific parts. The CCI, in Shamsher Kataria v. Honda Siel, noted that since the spare parts of one automobile brand are not substitutable with spare parts of other brands, the consumers are ‘locked in’ and forced to purchase the brand-specific spare parts. If the manufacturers do not allow consumers to use the spare parts and repair services of other manufactures including independent service providers and even then, consumers choose to use the parts of other manufactures, those consumers will have to face a penalty in terms of revocation of the warranty obligations. Thus, such practices are not only anti-competitive in nature but also force the consumer to use the unlawfully tied aftermarket products even if they are provided at a higher cost. The Magnitude of Switching Cost Generally, the magnitude of switching cost is considered as the determinant factor while deciding the existence of a separate relevant market. That means, if it is possible to switch to another primary product to avoid higher costs in the aftermarket, there may be a unified system’s market encompassing the primary and secondary products. That said, just to avoid the increase in the cost of aftermarket, a consumer who already owns a primary product will not undertake the switching costs, which are as high as the cost of a new phone or laptop. Furthermore, even the second-hand product market could not decrease the switching costs to reasonable levels as the residual value of these products is very low owing to fast-changing technology and a high rate of obsoletion in the electronics market. Analysis – Antitrust Concerns at Play It is a settled position that in case the consumer finds

[By Rushil Anand] The author is an associate at ALA Legal. Introduction – In what can be the watershed moment for Anti-Trust Cases in 21st Century, the Federal Trade Commission of United States, on 9th December 2020, sued Facebook for maintaining its monopoly illegally. According to the complaint, Facebook over the years has abused its dominance by imposing anti-competitive conditions such as, regressive policies that allow third-party Application Programming Interface (APIs) access to Facebook Blue (platform is generally known as Facebook), only if they are not competing with Facebook. The investigation highlights how certain inherent structural features of the digital market itself make it prone to monopolization. These structural features can broadly be divided into concentration of users, revenue, and data. India in recent years has seen certain mergers and acquisitions, most notably the Jio-Facebook deal, capable of tipping the Indian digital markets towards monopolization. Scrutinizing the Jio-Facebook deal through this derived framework of structural features, the monopolization risk posed by it becomes evidently clear. Similar to how the concentration of users, data, and revenue with Facebook made the American digital markets prone to its abuse of dominance, the Jio-Facebook, including their stated purpose of combining JioMart and WhatsApp can have serious consequences for the comparatively nascent Indian digital markets. This calls for closer scrutiny of Jio and Facebook’s conduct and incorporating effects of these structural features in future CCI investigations. Inherent Structural Features – Concentration of Users Monopolization risk posed by concentration of users primarily surrounds two digital market phenomenon called Network Effects and High Switching Costs. Networks Effects is a phenomenon whereby monetary as well as the utility value, of a digital platform, increases, at an increasing rate, as more people join the platform. As the number of users increases, it leads to a gain for the existing users of the service, as interactions with more users are possible on the same platform. Furthermore, users will start becoming familiar with the digital platform’s interface, helping them navigate the platform with ease and invest personal time in it by building connections and sharing content (such as pictures and posts) that cannot be moved to other rival platforms. Shifting to another platform will be a loss of this valued personal investment. This cost associated with shifting to a new platform is called Switching Cost. Just like Network Effects, Switching Cost increases over time, to the benefit of the dominant player. Strong Network Effects and High Switching Cost locks-in the dominant position of a platform, especially for the first movers and creates a dependency once such position is locked-in. Gradually, the effect of these phenomena increases, making it difficult for new competitors to attract users. FTC in its complaint stated that strong Network Effects and High Switching Costs act as entry barriers that help Facebook maintain its monopoly – “65. Facebook’s dominant position in the U.S. market is durable, due to significant entry barriers, including direct network effects and high switching costs”. Concentration of Data Having a large number of users allows a platform to have access to large sets of data. It allows platforms to track broader user trends and any potential competitive threat that can either be copied, acquired or suppressed. Just like the concentration of users, the concentration of data is self-reinforcing as more data allows them to perfect their platforms, which attract users and hence attract more data. Aware of the competitive advantage of data, Facebook pervasively collects data and tracks competitive threats, according to the FTC complaint, to maintain its monopoly. Facebook in 2010 introduced Open Graph API, which allows third parties to add a Facebook interface to their website. Due to the popularity of the platform and familiarity with its interface, developers were quick to adopt the API. The API allows Facebook to track potential competitive threats by sharing with Facebook data of any user interacting with third-party platforms utilising the Facebook interface. By 2012, the API was estimated to be sharing one billion pieces of social data with Facebook per day. Mike Hoefflinger, former Head of Global Business Marketing of Facebook, in his book “Becoming Facebook” stated Open Graph API was used to track Instagram, as Instagram had enabled the Open Graph API on its platform before it was acquired by Facebook. Facebook also acquired a digital platform named Onavo, a Spyware VPN provider which unknown to its users, tracked their activity. Through Onavo, Facebook had access to data that helped them track and identify apps that posed a competitive threat before it was forced to shut down the app in 2019. The complaint quotes an internal Facebook document, showing how the acquisition helped them track competitive threats to buy or suppress them – “With our acquisition of Onavo, we now have insight into the most popular apps. We should use that to also help us make strategic acquisitions.” Concentration of Revenue Unlike traditional businesses, most digital platforms do not charge any monetary fee. Instead, they rely on user data which is monetized by being sold to advertisers. This is a very crucial part of their business as advertisement is the largest source of income for most digital platforms. Facebook, according to FTC, earned around $70 Billion from advertisement, 98% of their total revenue. Data sold to advertisers is utilized to personalize advertisements. This form of advertising is called social advertising. It allows advertisers to not only reach large numbers of audiences but also restrict it to likely interested parties. It is a data-reliant mode of advertisement which favours company that can persistently track users’ data. Advertising with Facebook, with over 2.7 billion users per month on Facebook Blue alone, has become necessity for any advertisers to effectively compete in their domain. David Heinemeier Hansson, Chief Technology Officer of Basecamp, in the hearing before the Subcommittee On Antitrust, U.S. House of Representatives Judiciary Committee laid out how refusing to advertise on Facebook is like “competing with one arm behind your back”, asserting that they were losing growth by not advertising on Facebook. This

[By Raghav Harini N] The author is a student at ILS Law College, Pune. The Competition Commission of India (CCI) recently published a report on a market study on the telecom sector in India. The Report examined the mechanics and the economics of the sector to identify potential competition law concerns.  This post explores these concerns and analyses them from the lens of CCI and international jurisprudence to address them in an effective way. In light of the same, the article also proposes the introduction of market -structure-based assessment in lieu of dominance-based assessment under S.4 of the Competition Act, 2002 (the Act) and unified regulatory consultation between sectoral regulators and CCI.      I.   Key Takeaways from the Report The Indian Telecommunication sector is highly concentrated with 3 private sector Telecom Service Providers (TSPs) namely RJIo, Airtel and Vodafone-Idea controlling 88.4% of the market share. RJio with its initial launch offer caused a disruptive reduction of data prices; this was received by parallel pricing strategies by the competitors. While this seems to have placed India as the world’s cheapest telecom market, the TSPs have been earning negative profits consistently, indicating a sector-wide distress. According to the Report, consumers value network coverage, customer service, tariff packaging and lower tariffs in choosing their TSP. With greater parity among the products of the competitors, non-price attributes contribute significantly towards retaining customers and widening the clientele. The industry is also showing an accelerated interest in vertical integration with over-the-top (OTT) platforms. The recent examples include Reliance Jio’s acquisition of stake in both Eros and Balaji Telefilms, Airtel’s offer with Hotstar , Vodafone’s deal with Amazon, and Facebook’s investment in Reliance Jio. Two of the TSPs have also introduced their own content platforms namely Airtel’s Hike, Reliance’s Jio Cinema.    II.Analysis of Competition Concerns in the Telecom Sector The Report has highlighted that the vertical convergence in the sector has the potential to cause adverse effects on the competition. The current TRAI framework on net neutrality proscribes TSPs from engaging in differential treatment with any of its vertically integrated entities; the Report clarifies that if the dispute merits detailed competition law investigation, then CCI may take it up. It has also cautioned the potential data aggregation in the telecom sector and CCI may examine excessive data extraction by these digitally-enabled entities. Whether excessive data extraction constitutes a valid cause of action under competition law is controversial. Several antitrust agencies including CCI shy away from taking up excessive pricing cases, for reasons such as inability to define what constitutes excessive, presence of countervailing powers, self-correcting attributes of the free-market system, and perils of regulatory intervention; arguments of same fashion may be applicable to excessive data extraction as well. However, excessive data harvest by entities with significant market power may be construed as exploitative behaviour from consumer protection and privacy angles. The German antitrust authority in the case against Facebook explored the anti-competitive and welfare-reducing effects of excessive data extraction by digital platforms. The authority observed that violation of privacy laws can be read into abusive conduct by a dominant entity since the aim of the law was to prevent the dilution of the constitutional right to self-determination in business dealings, where one party is able to unilaterally command the terms. It remains to be seen how the CCI would read the intersection of competition law, data protection law, and our constitutional right to privacy into exploitative data harvest practices. Privacy has been recognised as a non-price parameter by both European Commission (EC) and the Federal Trade Commission (FTC). The Report, drawing inspiration from global jurisprudence, has clarified that such privacy concerns may be examined under the Indian competition law domain. It observed that privacy is central to consumer welfare, any dilution or violation of the data protection standard by a firm with significant market power can be examined by CCI. Earlier CCI had expressed a divergent view in the case Vinod Kumar Gupta v. WhatsApp Inc o by stating that “allegations of breach of the IT Act, 2000 do not fall within the purview of examination under the provisions of the (Competition) Act.” The Report’s observation in converging the two domains of law is welcome at a time when the industry is witnessing rapid vertical integration. CCI may also consider examining the privacy and data protection standards of the merging entities as a metric of consumer welfare at the merger approval stage. Digitally enabled markets are characterized by structural risks such as network effects and lock-in effects. The creation of walled gardens, as the Report describes, is a result of technological unification and vertical integration in the telecom sector; this tends to lock the consumers within the ecosystem, leaving no incentive for them to switch or cross-visit other TSPs. TSPs also perform platform roles between content providers and subscribers. A vertically integrated firm therefore can hinder competition and indulge in abusive conduct. However, none of the TSPs enjoys a dominant position in the market and therefore they cannot be brought under the purview of S.4 of the Act since it employs a dominance-based assessment. In consideration of the structural risks that sectors such as telecom may be exposed to, an alternative assessment may be considered on lines of Competition and Market Authority’s Market Investigation Regime. This regime employs a market-structure-based assessment in lieu of dominance-based assessment. This is effective for two reasons; firstly, it does not require the presence of a dominant firm in the relevant market. Secondly, this assessment is useful in markets where none of the players engage in anti-competitive behaviour but the market is not competitive; CMA cannot impose a penalty on the players but can merely propose structural remedies (such as divestments) and/or other behavioural remedies to correct market risks as long as it can justify the consumer welfare associated with the proposed remedies. Stakeholder engagement in the investigation process as opposed to adversarial inquiries aids the authority in addressing the concerns in the sector most effectively. Such sector overhauling remedies