[Tanya Varshney is a fourth-year BA LLB student from Jindal Global Law School]
The effect of information exchange and collusion amongst firms can have a significant impact on the market structure. When firms collude to fix prices and supply levels, they hold a great degree of market power. However, in the absence of a written contractual agreement as direct evidence, is there a presumption of cartelization and illegal information exchange when firms engage in parallel pricing? In this post, I seek to answer this question as I highlight the reliance on circumstantial evidence by the Competition Commission of India (‘CCI’) and the use of the ‘appreciable adverse effect on competition’ test in India.
It is highly unlikely that firms that form cartels and enter into anti-competitive agreements will keep prima facie evidence of a written agreement. A UK Court in Registrar of Restrictive Trade Agreements v. W. H. Smithobserved under the Restrictive Trade Practices Act, 1965 that “people who combine together to keep up prices do not shout it from the house tops. They will not put anything into writing nor even into words. So, it includes not only an ‘agreement’ properly so called but any ‘agreement’ however informal”. Under section 3 of the Competition Act, 2002 (the ‘Act’), attention should be paid to the terms ‘appreciable adverse effect on competition’ to examine whether competitors have engaged in anti-competitive practices. Adverse effects on competition refers to various economic factors, some of which have been laid out under section 19 of the Act such as “creation of barriers of new entrants in the market, driving existing competitors out, accrual of consumer benefits, etc.”
In Automobiles Dealers Association v. Global Automobiles Ltd, the CCI opined that in order to determine whether any agreement is in contravention of section 3(4) read with section 3(1) of the Act, the five essential ingredients of section 3(4) must be satisfied, which are: (a) the existence of an agreement between enterprises; (b) the parties to such agreement must be at different stages or levels of production chain, in respect of production, supply, distribution, storage, sale or price of, or trade in goods or provision of services; (c) the agreeing parties must be in different markets; (d) the agreement should be of the nature as illustrated in clauses (a) to (e) of section 3(4) of the Act; and (e) the agreement should cause or should be likely to cause appreciable adverse effects on competition. If there is a probability of these factors causing an adverse effect on the market, then the agreement shall be presumed to be anti-competitive. Thus, the burden of proof is placed on the defendants that their practices are not causing any adverse effect on the competition presently, nor are they creating a probability of such a consequence in the future.
In Builders Association of India v. Cement Manufacturers’ Association, the CCI held certain cement manufacturers guilty of violating sections 3(3)(a) and (b) of the Act. Presumption of anti-competitive agreements can be inferred from the intention or conduct of parties and can be established by circumstantial evidence alone. Thus, it was held that the circumstantial evidence of parallel changes in the prices and production of goods along with ‘plus factors’ indicated that the cement companies had formed a cartel to “(a) directly or indirectly determine purchase or sale prices and (b) limit or control production, supply, markets, technical development, investment or provision of services” and that there was no requirement of an explicit agreement to prove the same. Factors such as sharing of information amongst the 11 cement manufacturers which could facilitate price-fixing and the presence of identical prices, manufacturing units and dispatch rates after certain meetings were the “plus factors” which supported the presumption of cartelization.
Allegations of cartelization and bid rigging were also raised in Excel Crop Care Limited v. Competition Commission of India where the issue before the Supreme Court of India was whether the four manufacturers of Aluminium Phosphide Tablets had formed a cartel by entering into anti-competitive agreements amongst themselves since these manufacturers quoted identical rates for their products. The UNCTAD Competition Glossary defines bid rigging as “bid rigging or collusive tendering is a manner in which conspiring competitors may effectively raise prices where business contracts are awarded by means of soliciting competitive bids”. In the absence of direct evidence of an agreement, the Apex Court relied on circumstantial evidence based on the oligopolistic character of these firms. It was observed that there are limited manufacturers in the chemical industry, and despite having different costs of production, geographical locations and profit margins, these manufacturers have quoted identical rates. Accordingly, the Court held the appellants guilty under Section 3 of the Act.
A common thread that emerges through the string of cases under section 3 of the Act is the reliance on circumstantial evidence by the courts and the CCI. Various scholars have highlighted doctrines such as “rule of reason”, “per se rule” and “conscious commitment test” in the United States Supreme Court’s decisions as the standard of proof while examining collusive agreements or information exchange between companies. However, in Indian jurisprudence involving competition law, the primary test is the “adverse effect” test which is also embodied in the wording of the Act. The advantage of using this test and relying on circumstantial evidence is that any explicit agreement or correspondences regarding the cartels or price-fixing will be strictly hidden and possibly destroyed; thus, if there are parallel behaviors in the functioning of firms which harm or have adverse effects on the market can be presumed to be anti-competitive under the Act. However, a clear disadvantage of relying on circumstantial evidence is the ambiguity in assessing parallelism and adverse effects on competition.
– Tanya Varshney
(1969) 3 All ER 1065