Application of the Single Economic Entity Doctrine to Anticompetitive Agreements

[Oorvi Mehta is a III Year student of B.A. LL.B. (Hons.) at the NALSAR University of Law, Hyderabad]

Section 3 of the Competition Act 2002 applies to cases of anti-competitive agreements between two or more enterprises. The usual route to examine an infringement of this provision was to determine firstly, whether there was an agreement between two or more enterprises, fulfilling which, secondly, whether the agreement was anticompetitive in nature, and lastly, whether the presumption of an “appreciable adverse effect on competition” (AAEC) being caused is rebutted, using the factors under section 19(3). However, following a series of judgements in European and American antitrust law, Indian courts have accepted the application of the single economic entity doctrine, through which this route of examination can wholly be avoided.

The Doctrine

The single economic entity doctrine lays down that, irrespective of their legal status, two or more enterprises can be said to form a single economic unit for the purposes of competition law. The implications of the doctrine seem to be threefold. First, that a single economic entity cannot attract the application of section 3, since it cannot collude with itself, and ‘intra-enterprise’ agreements do not fall within the ambit of the provision. Second, an enterprise may, however, be made liable for competition law infringements committed by other undertakings or enterprises comprising that single economic entity. Third, the doctrine may potentially be used to assert jurisdiction over entities outside India, forming a part of the same economic unit as entities inside India. While judicial precedents have developed some degree of clarity regarding the implications of section 3, the application of the latter two inferences remains dubious, owing to the nascency of the doctrine in India.

Criteria

Given the potentiality of this doctrine, the criteria that enterprises must fulfil in order to be recognized as a single economic entity, and thus escape the application of section 3, must be examined. These criteria have been drawn from corporate law that imputes liability on a parent for its subsidiary’s actions, and has been improvised through judicial precedents for the purposes of competition law. The central guiding logic behind the doctrine is that, if the enterprises never were in a competitive relationship to begin with, the relationship is not capable of being restricted by any agreement. Courts hence seek to determine whether the concerned enterprises are capable of exerting individual and autonomous competitive forces in the market, or whether their market conduct is regulated by other organizational and economic linkages. In order to determine whether a competitive relationship exists, inter alia, factors like legal control, single centre of decision making, unity in economic decisions and exercise of decisive influence have been considered by courts.

Parent- Subsidiary

Usually, the doctrine is readily invoked in cases of a parent-subsidiary relationship. However, the cases of sister companies, or agency relationships, are murky territories. Cemented initially in Viho v. Commission, the doctrine was adopted in India in Shamsher Kataria v. Honda, where an agreement between Hyundai Motor Company and its subsidiary Hyundai Motor India Limited could not subject to section 3. If a subsidiary does not independently determine its conduct in the market, but acts according to its parent’s instructions, the agreement between the parent and the subsidiary cannot be scrutinized as anticompetitive. A rebuttable presumption of the exercise of decisive influence by the parent is raised in cases of wholly or nearly wholly-owned subsidiaries.

The doctrine was applied to legal enterprises having a common owner in the Hydrotherm case. Similarly in the 1998 and 1999 UEFA Cup, AEK Athens and Slavia Prague were not allowed to compete together owing to the common ownership of the English National Investment Company. For sister entities who have a common owner, or partly owned subsidiaries, the single economic entity doctrine may be invoked if it is shown that there is a unity of economic interest between the enterprises. This entails a scrutiny of any evidence of a coordinated strategy, organisational linkages and economic synergy.

Interaction with the Parallelism Plus Approach

However, in scenarios where primary reliance is placed upon the observation of a unity of economic interest, such a scrutiny can produce counter-productive results. This is because a parallelism plus approach is used to establish the existence of an agreement, which is the first stage for section 3 to apply. This requires that there be parallel economic conduct, along with some plus factors, such as evidence of communication, coordination, et cetera. These plus factors, often relied upon, seem similar to the pattern of behaviour considered to indicate the existence of a single entity. Incidentally, colluding firms tend to behave with the kind of synergy that a single economic entity displays and, hence, an establishment of a unity of economic interest may enable the firms to evade section 3, while their conduct might amount to a direct infringement of the same.

Conclusion

While the Indian invocation of the doctrine has been rare, the Shamsher Kataria and Exclusive Motors cases, along with several decisions on the Treaty on the Functioning of the European Union and Sherman Antitrust Act, provide the requirement of decisive influence and supporting indicators to invoke the single economic entity doctrine.  Competition law authorities must tread with caution and rely on evidences of economic synergy that predate the alleged anticompetitive conduct. For instance, linkages like joint production, common employees or a long standing communicative relationship may be better indicators of a single unit, than parallel economic strategy or information exchanges, to conclusively establish an innocent intra-enterprise operation.

– Oorvi Mehta