[By Dharmvir Brahmbhatt & Aneeta Mathew]
Dharmvir Brahmbhatt is a student at the Gujarat National Law University and Aneeta Mathew is a student at the National University of Advanced Legal Studies.
Introduction
The CCI’s judgment in a Suo moto case against Maruti Suzuki India Ltd. (MSIL) grabbed eyeballs, both for the penalty of a whopping Rs. 200 Crore it imposed as well as for laying down the law that Discount Control Policies (DCP) imposed on dealers by manufacturers amounts to Retail Price Management (RPM) and hence is illegal. The CCI further flagged the appointment of Mystery Shopping Agencies (MSAs) to execute and monitor the policies and the use of such audits to penalize the dealers. This article attempts to delve deep into two aspects of the judgment where the CCI has faltered. Firstly, the authors critique the CCI’s hesitation to contribute to the larger debate on whether RPM is intrinsically anti-competitive or not. Secondly, the authors elaborate on why they view this decision as a missed opportunity to clarify the Indian legal position on MSA, which albeit having a few scattered mentions in Indian jurisprudence, is largely unexplored, compared to the international position on the same.
Resale Price Maintenance – Per se illegal or rule of reason standard?
Essentially RPM refers to a vertical agreement in which an upstream firm restricts the price at which a downstream firm can sell the product to the customer. DCP, which MSIL has been found guilty of employing by the CCI, is a subset of RPM. The kind of agreements that fall under the per se rule is so inherently anti-competitive that the courts condemn them without any inquiry into their effects. An example of the same would be bid-rigging among competitors. On the contrary rule of reason is the legal principle which when applied the court makes an attempt to look into and evaluate the pro-competitive effects of a prima facie restrictive trade practice. Applying the “per se rule” courts have for a long time presumed RPM to be violative of competition disregarding any other factors in play. However, the trend has changed in the last decade. The US Supreme Court in the case of Leegin Creative Leather Products Inc. v. PSKS Inc. opined that not all RPM policies are per se illegal and must be evaluated by the standard of rule of reason. The Leegin case settled that RPM can have both pro-competitive and anti-competitive effects. In the opinion of the authors, the CCI in the MSIL judgement used the “per se rule” without considering the potential pro-competitive effects of the DCP imposed. The CCI failed to scrutinize the possible benefits of the DCP even though in the Jasper Infotech Private Limited (Snapdeal) v. KAFF Appliances (India) Pvt. Ltd. the CCI had recognized the pro-competitive effects of RPM. To analyze RPM and DCP it is necessary to compare the anti-competitive effects of RPM with the pro-competitive effects of RPM.
Possible anti-competitive effects
The possible anti-competitive effect that could have been caused by MSIL putting in place DCP as outlined by the CCI is that it may cause direct harm to consumers. The CCI in its order has opined that DCP has led to consumers being denied benefits as higher prices are being charged. This is an argument that is intrinsically flawed because the main purpose of imposing RPM policy is to ensure that customers are spending more despite the increased prices. In fact, the manufacturers would be wary of setting a retail price higher than the competitive prices due to inter-brand competition. The possibility of a net loss to consumer surplus is very distant. The same was pointed out by R D Blair in his paper titled The Demise of Dr. Miles: Some Troubling Consequences.
Possible pro-competitive effects
There are two possible pro-competitive effects of DCP which were enforced by MSIL. Firstly, it can be an effective measure against the free-rider problem plaguing the retail industry. A free rider is a person who benefits from something without paying for it. Generally, a few retailers will choose to offer pre and post-sale services including advice, demonstration, instruction, etc. Since buying an automobile needs technical knowledge these services would be essential for the customer. However, providing such services would be costly for the retailer and therefore the retailer will not be able to offer any discount. The retailers that do not provide services would want to be the free riders and offer heavy discounts to the consumer. The consumers therefore would seek services at no cost from one retailer and buy from the one offering a discount. This would cause market failure which can be understood with an example of the prisoner’s dilemma game.
For example, ‘A’ and ‘B’ are two individuals who are considering a contribution of 10 units each for the larger good. The benefit would be 100 units for every 10 units contributed. P1 is the ideal scenario and P4 is the worst-case scenario as the net public benefit is 0 which would lead to market failure. In this game, both ‘A’ and ‘B’ would come to the conclusion that it is unwise to contribute anything to the public good unless both the players were assured of the fact that the other individual would also make a contribution. The DCP enforced by MSIL did exactly the same by ensuring that there was no price competition amongst retailers. When the retailers can’t compete on prices they would be forced to increase the level of services offered by them thereby increasing net public benefit. This would also promote intra-brand competition and increase consumer satisfaction.
Secondly, because the DCP ensures that the services offered by the retailers are of the highest quality the consumers would be enticed to buy the products of the brand sold by those retailers and this, in turn, would promote inter-brand competition as retailers of other brands would be forced to either sell products at highly competitive rates or increase the level of services provided by them. And therefore, while the CCI was of the opinion that RPM will stifle both inter-brand and intra-brand competition, the authors have successfully shown that it may not always be the case.
Mystery Shopping: An Unchartered Territory
In the judgment, various penalties were levied on the dealers to prevent them from providing any further discounts to the customers, pursuant to the reports of MSAs. Despite being an increasingly popular industry with several players offering market research services, Mystery Shopping is largely unregulated within the Indian legal framework. However, as judicial gaze has fallen on it through this judgment flagging the use of Mystery Shopping Audits to ‘police’ dealers, a deep dive into the same is necessary.
One area where Mystery Shopping is a legally recognized practice in the banking sector. The RBI’s 2007 Master Circular on Credit Card Operations of Banks, mandates that banks and NBFCs should have a system of random checks and mystery shopping to ensure that their agents have been properly briefed and trained in order to handle their responsibilities with care and caution. This was particularly in aspects like “soliciting customers, hours for calling, the privacy of customer information, conveying the correct terms and conditions of the product on offer, etc”. This has also found mentions in judgments like M/s. Hongkong & Shanghai Banking Ltd v. Union of India. Greater standardization is observed at the international level with bodies like the European Banking Authority issuing a methodological guide for the same. Though Mystery Shopping is legitimized in the banking context, the law is silent beyond this in India.
Multi-Jurisdictional Analysis
A multi-jurisdictional analysis reveals distinct approaches to MSAs, and increased engagement and regulation. It has a distinct statutory basis, in countries like Belgium, where the relevant Royal Decree mandates that Mystery Shopping is to be carried out only for specific infringements, an exhaustive list of which includes infringements like unfair trade practices, discriminatory behaviour, violation of pre-contractual information requirements etc. The same can be resorted to only when deemed necessary and in compliance with the privacy requirements, particularly when evidence is collected. Mystery Shopping also finds more frequent mentions in judicial decisions of other jurisdictions with some delving into implications in the realms of privacy and labour rights like the Director of Consumer Affairs v. The Good Guys Discount Warehouses (Australia). Mystery Shopping has also aided and advanced the judiciary’s interests by being used to investigate racial and ethnic discrimination in the real estate and housing sector, both in a Queens Bench Judgment as well as a US District Court Judgment.
Apart from legal concerns, ethical concerns are bound to arise when a covert exercise is performed under false pretences, particularly when those subject to it have not been intimated of a potential threat to their privacy as seen in the MSIL Case where the Mystery Shoppers obtained video and audio recordings. This lacuna has been filled through non-governmental texts, some of which are widely recognized and adhered to, like the Mystery Shoppers Providers Association (MSPA) Guidelines of 2011. The MSPA, an organization of such firms, also favours the consent of the subjects. MSPA’s official guidelines state that the beneficiary of the service should inform the parties involved that this mechanism could potentially be used by them. It limits the objectives of Mystery Shopping as being to increase customer satisfaction, advocacy and loyalty, and mandates that it must not be the sole reason for dismissals or reprimands. These, if contextualized to the decision at hand, would lead us to believe that dealers should have ideally been warned that Mystery Shopping is to be used to evaluate them as they had been faced with consequences like fines. However, in the absence of domestic laws to this effect, such inactions are not faced with any consequences. This lacuna needs to be filled with greater judicial and legislative engagement on MSAs.
Conclusion
The authors are of the opinion that the CCI faltered in its judgement by using the per se rule to come to the conclusion that DCP employed by the MSIL was necessarily anti-competitive and harmed consumers. The CCI should have ideally used the rule of reason when it evaluated the DCP. If the CCI after applying the rule of reason and analyzing the pro-competitive effects of DCP had come to the conclusion that DCP is anti-competitive, the order of the CCI would have been acceptable. However, the CCI chose to disregard any pro-competitive effects DCP might have. Further, the authors also contend that in regards to mystery shopping the need for regulation and standardization within the Indian context, to further privacy, competition and consumer welfare is necessary. The international jurisprudence on it should be an impetus to the same.