CCI Order on the Scope of Section 3(3) and Confidentiality under Leniency Regulations: A Critique

[Amitav Singh is a lawyer based in Lucknow and a graduate of NUALS Kochi]

Recently, the Competition Commission of India (CCI) passed an order in Nagrik Chetna Manch v Fortified Securities Solutions & Orswherein it found six out of seven parties before it guilty of bid rigging under section 3(3)(d) of the Competition Act, 2001 (the Act) and imposed a total fine of nearly Rs. 3.5 crore. In this case, the CCI has made some interesting observations regarding(a) the question of confidentiality in lesser penalty regulation and (b) the scope of the phrase “engaged in identical or similar trade” as mentioned in section 3(3) of the Act.

The facts of the case are that information was filed by Nagrik Chetna Manch before the CCI regarding alleged bid rigging by two bidders with respect to the tenders that were floated by the Pune Municipal Corporation (PMC) for the ‘Design, Supply, Installation, Commissioning, Operation and Maintenance of Municipal Organic and Inorganic Solid Waste Processing Plant(s)’ (i.e., the cartelized product). Thereafter, upon the request of the Director General (DG), four more bidders were added as parties to the action. During the course of investigation, all such parties, except for PMC, filed ‘leniency application’ under regulation 5 of the Competition Commission of India (Lesser Penalty) Regulations, 2009 (the Leniency Regulations) read with section 46 of the Act.

On the basis of the investigation carried out by the DG and information provided through leniency applications, the CCI found that all the parties, except for the PMC, had cartelized and violated section 3(3)(d) of Act.

It would be useful to analyze the decision of the CCI as follows:

(a) The Scope of the phrase “engaged in identical or similar trade of goods or provisions of services”

During the course of arguments, it was asserted that some bidders were not covered under section 3(3) inasmuch as they were engaged in varied or different trades (not related to the cartelized product), and submitted a bid only to provide cover to the bid of Ecoman Enviro Solutions Pvt. Ltd., which is one of the parties before the CCI, so that the date of tender is not extended. Their contention was that section 3(3) covers only those agreements that are entered between persons or entities engaged in similar or identical trade or service. However, the CCI reject their arguments and held that even if parties are (or were) not engaged in similar trade, they would still be covered under section 3(3)(d) of the Act if they participated in cartel like activity. The CCI observed: “[i]f the parties were allowed to escape the grasp of the Act by considering them as not competitors on the pretext that they are actually engaged in varied businesses, it may defeat the very purpose of the provisions of Section 3(3) (d) of the Act”.

This is probably the first time that entities not engaged or willing to engage or even related to the entities actually engaged (like trade associations) in similar or identical trade or services are found guilty of violating section 3(3).

Section 3(3) deals with the case of a ‘horizontal agreement’, i.e. an agreement between entities that operate on the same level of production or distribution of an identical or similar goods or services. In this case, however, the CCI has enlarged the scope of section 3(3) by also including those entities that were actually engaged in very different trades (in some cases not even remotely related to the market of cartelized product) like, steel trading business, distribution and stockists, shipping of drugs, sales and services of electronic security systems, health and medical equipment etc.

It is noteworthy that the European Court of Justice (ECJ) in AC Treuhandv Commissionwas also faced with a similar situation where an entity that was not engaged in the cartelized product market was found guilty of cartelization because it actively and consciously facilitated the formation of cartel. However, it is pertinent to note that one of the reasons for reaching this conclusion, as observed by ECJ, was that “there is nothing in the wording of that provision [which deals with horizontal agreement] that indicates that the prohibition laid down therein is directed only at the parties to such agreements or concerted practices who are active on the markets affected by those agreements or practices.” In contrast, the Act in India specifically and unambiguously provides that the parties need to be ‘engaged in similar or identical trade or services’ for the purpose of horizontal agreement.

Furthermore, if entities not engaged in similar or identical trade are found guilty of violation section 3(3), any attempt to penalize such entities by imposing fine on the turnover in accordance with section 27(b) of the Act would violate the decision of Supreme Court (SC) in Excel Corp Care Ltd. v CCI & Anr. In the said case,the SC held that the penalty should be calculated onlyon the ‘relevant turnover’. According to the SC, relevant turnover is that turnover which pertains to the product or service with respect to which the provisions of the Act were violated. When this issue was brought before the CCI, it simply brushed it aside by culling out a paragraph from Excel Corpand interpreting it out of context. It is pertinent to note that the SC had observed that any attempt to calculate penalty on the turnover pertaining to the non-cartelized products would be arbitrary and against the purpose of Act. Therefore, when entities do not operate in the market of cartelized product, there is no relevant turnover to impose any penalty. In such circumstances the conclusion reached by CCI seems untenable in the light of sections 3(3) and 27(b).

(b) Confidentiality under the Leniency Regulations

The parties against whom action had been brought also raised an argument that, by disclosing the contents of their leniency applications, both the DG and the CCI had violated regulation 6 of the Leniency Regulations that accords confidentiality. This argument was negated by the CCI on the ground that only that information which the DG had collected during investigation was disclosed, and such information is covered under Competition Commission of India (General) Regulations, 2009 (i.e., General Regulations). The CCI further observed that regulation 5 of the General Regulations gives discretionary power to the DG to grant (or not to grant) confidentiality to any information received during investigation, and since no specific request was made by opposite parties to keep it confidential, there was no violation. In other words, the CCI held that“[t]he confidential treatment granted under Lesser Penalty Regulations does not extend to evidence obtained or collected by the DG, even if such an evidence is obtained from a Lesser Penalty Applicant.”  Therefore, according to the CCI, information that is gathered by the DG during investigation is separate piece of evidence which shall be governed by General Regulations, even if the content of the said information is similar to that of leniency application.

When the Act was enacted, the leniency provision was hailed as one of its hallmarks. This is because cartels are formed in a very clandestine manner and are hard to detect. In such circumstances, the leniency regulation provides an incentive for the cartelists to emerge and cooperate with CCI in order to avoid heavy penalty. In other words, the system of leniency regulation works on the scheme of quid pro quo. One of the facets of this scheme, and perhaps most important, is the provision of ‘confidentiality’. The Department of Justice in United States, while acting as an amicus curiae in the case of In Re: Flat Glass Antitrust Litigation, observed:

The Amnesty Policy [Leniency Policy] depends on confidentiality… The basis for this confidentiality policy is the common-sense understanding that corporations or individuals will be unwilling to step forward unilaterally to admit their guilt if their request and the information they supply is made public for all — most notably their competitors, customers, shareholders, and employers — to see.

In the similar vein, the European Union (EU)in the preamble of its Directive 2014/104/OJ observes that disclosure of leniency statement poses a serious risk of exposing cooperating undertakings to civil or criminal liabilities which might prevent them from cooperating with competition authorities under leniency programmes. Here, the EU also highlights the importance of leniency provisions by observing that “many decisions of competition authorities in cartel cases are based on a leniency application… leniency programmes are also important for the effectiveness of actions for damages in cartel cases.”

The Leniency Regulations are effective tools for detecting cartels. The provision of confidentiality is one of its incentives that not only protects the identity of the applicants, but also the information provided by them, so that they are placed on a better position compared to those cartelists who have not filed leniency application, in case of any follow-up action by consumers etc.[1]

In this case, the reasoning put forth by the CCI for rejecting the arguments of the parties on this issue may be correct on technical grounds; however, keeping technicalities aside, the CCI should have adopted a more pragmatic approach. Besides detecting instances of cartelization, the Leniency Regulations also prevent the formation of cartel due to the fear they generate in the minds of prospective cartelists that some amongst them might break away and inform the CCI. Any attempt to whittle down the importance of ‘confidentiality’ would render leniency provision feckless which in turn makes the detection of cartels difficult.  

Amitav Singh

[1] Section 53N of the Act allows any person to file a claim for compensation for the loss caused by any enterprise or entity that has contravened the provisions of this Act.

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