Guest Post: CCI Order on Car Manufacturers for Anti-Competitive Conduct

[The
following guest post is contributed by Ann
Minu Jose
, a lawyer working with the Competition Commission of India.
Views expressed are personal.

The CCI Order
discussed is available
here

Facts:

Information
was filed under Section 19(1)(a) of the Competition Act, 2002 (“Act”) initially against 3 car
manufacturers[1]
alleging anti-competitive practices on part of the opposite parties (“OPs”). OP1 to OP3 were involved in the
business of manufacture, sale, distribution and servicing of passenger motor
vehicles in India and also operated/authorized/controlled the operations of
various authorized workshops and service stations which were selling automobile
spare parts, besides, rendering aftersale automobile maintenance services.

The
informant alleged that the components and parts used in the manufacture of OP’s
respective brand of automobiles were often sourced from independent original
equipment suppliers (“OESs”) and
other suppliers were restrained by the OPs from selling them in the open
market. Such restriction on the OESs limited the access of such spare
parts/components in the open market, thereby allowing the OPs to create a
monopoly-like situation in spare parts for their respective brand of
automobiles, and enabling the OPs to influence and determine the price of the
spare parts/components.

The
Director General (“DG”) investigated
the market practices of all the automobile manufacturers or original equipment
manufacturers (“OEMs”). During the
course of the investigation, it was observed that other car manufacturers also
indulged in similar practice. Vide Commission’s order dated 26 April 2011, the
scope of the investigation was extended to 14 other opposite parties.


Order
of the Commission:

1.         Jurisdiction-
Commission not required to confine inquiry only to parties named in the
information

The
OPs argued that the scope of the inquiry was confined only to the 3 OPs named
in the information. The Commission, on the basis of the judgment in CCI v.
Sail[2]
held that being an expert
body, it is clothed with a duty to prevent practices having adverse effect on
competition in the markets. Hence the Commission is mandated by law to examine
the issues in a holistic and not in a piecemeal manner. In the present case, the
direction of the Commission was with respect to alleged anti-competitive
conduct by the said industry in general and not specifically qua the car
manufacturers named in the information.

2.         Violation of Section 4 of the Act

2.1       Definition
of Relevant market
: The Commission held that there existed two separate
relevant markets; one for manufacture and sale of cars and the other for
the sale of spare parts and repair services in respect of the
automobile market in the entire territory of India. The automobile primary
market and the aftermarket for spare parts and repair services does not consist
of a unified systems market since: (a) the consumers in the primary market (manufacture
and sale of cars
) do not undertake whole
life cost analysis
when buying the automobile in the primary market (as
data required is either not available or the data is very complex) and (b) in spite
of reputational factors[3]
each OEM has in practice substantially hiked up the price of the spare parts[4]
since the customers are ‘locked in’ the aftermarket due to high switching cost
and depreciated value of the vehicle post registration.

2.2       Assessment of Dominance of OEMs:
The Commission was of the view that each OEM is a 100% dominant entity
in the aftermarket for its genuine spare parts and diagnostic tools and
correspondingly in the aftermarket for the repair services its brand of
automobiles.

Factors under Section
19(4):
The Commission while considering factors
under Section 19(4) noted that in terms of ‘market
share of the enterprise
’, each OEM is a monopolist player and owns a 100
per cent share of the market share of the spare parts and repair services
aftermarket for their own brand of cars. As far as ‘dependence of consumers
on the enterprise’
is concerned,
the limited interchangeability of spare parts between the automobiles
manufactured by various OEMs made each consumer completely dependent upon such
OEM. With respect to ‘entry barriers
under Section 19(4), the Commission noted that barriers to entry can include
advantages peculiar to the dominant company and the technical compatibility of
a consumable secondary product to the durable primary product act as such a barrier.
Further, each OEM had also created barriers in the entry of independent
repairers to the aftermarket of the repairs and maintenance of its brand of
cars.

2.3       Abuse
of Dominant Position
: Each OEM through a network of contracts restricted
the supply of genuine spare parts of models of automobiles manufactured by it
to the aftermarket and imposed restrictions on their respective local OESs from
supplying spare parts directly in the aftermarket. The
Commission found the OEMs  to be
indulging in anti-competitive practices resulting in contravention of section
4(2)(a)(i), 4(2)(a)(ii), 4(2)(c) and 4(2)(e) of the Act.

(a)        Denial of market access: The
Commission held that the OEMs have violated Section 4(2)(c) of the Act. OEM,
being a dominant player in the aftermarket for the supply of spare parts and
diagnostic tools, through a network of contracts, limited the access of
independent repairers and other multi brand service providers to genuine spare
parts and diagnostic tools required to effectively compete with the authorized
dealers of the OEMs in the aftermarket.

(b)        Unfair Price: The Commission was
of the view that Section 4(2)(a)(ii) does not prohibit profit margins; only
unfair prices have been prohibited. Unfair price means price which is unrelated
to the ‘economic value’ of the product and that such price is being charged
because of the enterprise’s capacity to use its market power in that relevant
market to affect its competitors or consumers in its favour.

The
Commission considered the decisions in British Horseracing Board v. Victor
Chandler International[5]
and General Motors Continental NV v.
Commission[6]

and noted that the fact that the OEMs are the only source of genuine spare
parts compatible to its brand of automobiles in the aftermarket allows such
OEMs to use its dominant position to reap trading benefits. The DG’s
investigations revealed that all OEMs had substantially marked up the price of
its spare parts by an average of 100% and in some extent to as high as 5000%. Such
exploitative pricing conduct by each OEM is a manifestation of lack of
competitive structure of the Indian automobile market and structural
modification of the competitive nature of such market will itself induce market
self-correcting features.

(c)        Leveraging: The Commission held
that the OEMs are in violation of Section 4(2)(e) of the Act because they use
their dominance in the relevant market of supply of spare parts to protect the
other relevant market, i.e, after sales service and maintenance. The OEM and
the authorized dealers allowed the use of genuine spare parts only for purpose
of undertaking service and repairs at the workshop of the authorized dealers.
Therefore, in most cases the owner of the automobile was completely dependent
on the authorized dealer network of the OEMs and was not in a position to avail
services of independent repairers. In addition to this, nearly all the OEMs had
warranty clauses which effectively denied any warranty to the owners of
automobiles if such owners availed the services of the independent repairers or
other multi brand service providers. Further, none of the OEMs allowed their
diagnostic tools, repair manuals etc., to be sold in the open market, thereby
foreclosing independent repairers from the aftermarket for repairs and
maintenance.

(d)        Intellectual property– The Commission noted that unlike Section 3(5), there is
no exception to section 4(2) of the Act. Therefore, if an enterprise is found
to be dominant pursuant to Explanation
(a) to Section 4(2) and indulged in practices amounting to denial of
market access; it is no defense to suggest that such exclusionary conduct is
within the scope of intellectual property rights of the OEMs.

3.         Violation of Section 3 of the Act

It
was noted that the OEMs enter into three types of agreements: (a) agreements
with overseas suppliers; (b) agreements with OES and local equipment suppliers
and (c) agreements with authorized dealers and analysis was done to determine
whether these agreements and arrangements were prohibited under section 3(4) of
the Act.

3.1       “Between”
under Section 3(3) and “amongst” under Section 3(4)
: It was argued by some
OEMs that an agreement relatable to section 3(4) cannot be a bilateral one and
has to be an agreement between 3 or more persons, (i.e., multilateral)
and that the provisions of the Act will apply to vertical agreements, i.e.,
agreement between the OEMs and the OESs or the OEMs and their authorized
dealers, only when three (3) of more parties are present to an agreement. The
Commission held that the Legislature did not intend to restrict the application
of the provisions of section 3(4) of the Act to only multilateral agreements
and that such an interpretation shall encourage enterprises to enter into
anti-competitive vertical agreements by structuring such agreements as
bilateral agreements.

3.2       Analysis
of agreements/arrangements between the OEMs and their overseas suppliers:
The
DG alleged that it is possible that there was an internal
arrangement/understanding between the OEM and their overseas suppliers restricting
the latter from supplying spare parts directly to the Indian aftermarket in the
nature of an exclusive distribution arrangement/understanding under section
3(4)(c) of the Act. The Commission, however, was unable to conclude the
existence of these agreements within the meaning of section 3(4)(c) of the Act,
because of insufficiency of evidence.

3.3       Analysis
of agreements/arrangements between the OEMs and the OESs
: The OEMs were
procuring spare from the local OESs. Their dealing were vertical in nature and
the Commission concluded that these agreements were having features of
exclusive distribution agreement and refusal to deal as per the provisions of
section 3(4)(c) and (d) of the Act.

(a)        Balance between factors in Section 19(3): The Commission observed
that Section 19(3)(a)-(c) deal with factors which restrict the competitive
process in the markets where the agreements operate (negative factors)
while clauses (d)-(f) deals with factors which enhance the efficiency of the
distribution process and contribute to consumer welfare (positive factors).
Whether an agreement restricts the competitive process is always an analysis of
the balance between the positive and the negative factors listed under section
19(a)-(f). Where an agreement, irrespective of the fact that it contains
certain efficiency enhancing provisions, allows an enterprise to completely
eliminate competition in the market, and thereby become a dominant enterprise
and indulge in abusive exclusionary behavior, the negative factors should be
prioritized over the positive factors.

(b)        Protection of OEM’s IPR: The
Commission was of the opinion that the restrictions placed on the OESs
adversely affects the competition in the automobile sector and falls within the
mischief of Section 3(4) read with Section 3(1) of the Act. The OEMs submitted
that the restrictions imposed upon the OESs were necessary to ensure quality
control and protect the goodwill of the brand of the OEM. The Commission
observed, inter alia, that the OEMs
can, through its contractual agreements with the OESs, ensure that its
intellectual property rights are not compromised and are protected. The OEMs
can license their safety check methodology to their OESs for a royalty fee and
can require that the OESs label the genuine spare parts sold by them directly
in the aftermarket with appropriate labels to limit their liability. The
Commission was of the view that the ultimate choice should be left with the
consumers who may choose either an authorized dealer of the OEM or an
independent repairer to purchase spare parts of repair services.

3.4       Availability
of the IPR exemption under Section 3(5)(i) of the Act
: Section 3(5)(i)
allows an IPR holder to impose reasonable restrictions to protect his rights ‘which
have been or may be conferred upon him under
’ the specified IPR statutes
mentioned therein.

(a)        Statues specified in Section 3(5)(i): The OEMs were unable to establish their claim of IPRs in the spare
parts and the diagnostic tools to avail of the exemption provided in Section 3(5)(i)
of the Act. Further, even if the parent corporation of the OEMs held such
rights in the territories where such rights were originally granted, the same
cannot be granted upon the OEMs operating in India by entering into a technology
transfer agreement (“TTA”)[7],
unless such rights have been granted upon the OEMs pursuant to the provisions
of the statutes specified under Section 3(5)(i) of the Act. Consequently, such
OEMs could not avail of the exemption provided in Section 3(5)(i) of the Act.

(b)        Necessary restrictions: The exemption under section 3(5)(i) allows an IPR
holder to “impose reasonable conditions, as may be necessary for protection
any of his rights”,
thus
qualified by the word “necessary”. The Commission held that the OEMs
could contractually protect their IPRs as against the OESs and still allow such
OESs to sell the finished products in the open market. Since the exception
under Section 3(5)(i) of the Act was not applicable to the agreements between
OEMs and OESs, the contravention found by the Commission under Section 3(4)(c)
& (d) read with Section 3(1) of the Act was established.


3.5       Analysis
of agreements/arrangements between the OEMs and the authorized dealers:
The Commission was
of the view that consumer’s choice should not be taken away in the guise of consumer
protectionism. It held that by restricting access of independent
repairers to spare parts and diagnostic tools and by denying the independent
repairers access to repair manuals, the agreements entered into between OEMs
and authorized dealers fell foul of the provisions of Sections 3(4)(b), 3(4)(c)
& (d) read with section 3(1) of the Act.

4.         Conclusion and Penalty imposed by the
Commission

The
Commission noted that in both mature and the developing competition law regimes
of the world, refusal to access branded or alternate spare parts and technical
manuals/repair tools, necessary to repair sophisticated consumer durable
products, such as automobiles, was frowned upon. The Commission concluded the
order by observing that it is necessary to (i) enable the consumers to have
access to spare parts and also be free to choose between independent repairers
and authorized dealers and (ii) enable the independent repairers to participate
in the aftermarket and provide services in a competitive manner and to have
access to essential inputs such as spare parts and other technical information
for this purpose.
The
Commission in addition to imposing a penalty of about Rs. 2545 crores and a cease
& desist order, inter alia,
directed the OPs to put in place an
effective system to make the spare parts and diagnostic tools easily available
through an efficient network and allow OESs to sell spare parts in the open
market without any restriction. Further no impediments were to be placed on the
operation of independent repairers/garages. The Commission, through this order,
also drew the attention of the government to the
lack
of suitable legislation pertaining to safety and standards relating to spare
parts and after sales services.

Analysis
of the order

This order creates many firsts for
competition law jurisprudence in India. This is the first order of the
Commission pertaining to the concept of ‘aftermarkets’ and in which an
agreement under Section 3(4) of the Act was found to have an appreciable
adverse effect on competition in India. There is an interesting interplay of
Section 3(4) and Section 4 of the Act in the instant case, since dominance in
the aftermarket for sale of spare parts and repair of automobiles is created through
a series of agreements and arrangements of the nature prohibited under Section
3(4). The OEMs, through these vertical agreements and arrangements, in turn were
abusing their dominance in violation of Section 4 of the Act, thus resulting in
a vicious circle where the OES’ bargaining position is progressively weakened
and the OEMs continue imposing restrictive clauses; further strengthening their
dominance. This model is not self-correcting and hence interference of the
Commission was appears to be necessary.

This is also the Commission’s first
order to discuss the interface between IPRs and competition law. Competition
law and IPR regime promote innovation and consumer welfare, albeit through
different means. Innovation gives rise to competition, thus encouraging more
innovation, and ultimately resulting in economic development of the country. The
Commission, by only restricting a dominant enterprise from indulging in unfair
prices and suggesting methods to sell finished goods in open market without
compromising on OEMs’ IPR on spare parts and diagnostic tools, has strived to
strike a balance between the objectives of IPRs and competition law.

Mr. Ashok Chawla, the Chairperson
of the Commission, stated in an interview at an ASSOCHAM event that this order
is an attempt to make the spare parts and maintenance market more broad-based,
user-friendly and less expensive for the consumers. In the coming days, it will
be interesting to see how this sector will reorganise and correct itself, in
the light of this order, and whether the OESs, independent service providers
and the end consumers can avail the benefits of a competitive market.

– Ann Minu Jose



[1] Honda Siel Cars India Ltd (“OP1”), Volkswagen India
Pvt Ltd (“OP2”) and Fiat India Auomobiles Ltd (“OP3”)
[2]  (2010)10SCC744
[3] The OPs submitted the theory that reputational
concerns in the primary market usually dissuade the manufacturer of the primary
market product from charging exploitative prices in the aftermarket.
[4] In certain cases up to 5000% approx.
[5]
[2005] EWHC 1074 (Ch)
[6]
[1975] ECR 1376
[7] The
Commission held that the OEMs, pursuant to a TTA, were holding a right to
exploit a particular IPR held by its parent corporation and not the IPR right
itself.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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