The Quandary of Market Delineation under Section 3 of the Competition Act

[Ahkam Khan Divyansh Prasad are 3rd Year BA LLB (Hons.) students at Dr Ram Manohar Lohiya National Law University, Lucknow]

Antitrust laws aim at protecting and sustaining competition by preventing practices having appreciable adverse effects on competition (or AAEC). This competition necessarily exists in closed economic models or marketplaces. For the purposes of gauging whether a particular practice hinders or affects competition, there needs to be an identification of the market where such practice exists or is relevant. The Competition Act, 2002 contemplates this definition of relevant market in two variables: relevant geographic and relevant product market. The former is the area that the market covers and is defined using factors under section 19(6) of the Act while the latter defines the totality of substitutable products that could form a part of the market using factors under section 19(7).

This definition of relevant market is an indispensable facet of an investigation under section 4 for the abuse of dominance since ‘dominance’ as defined in explanation (a) to section 4 explicitly uses the words ‘position of strength in a relevant market’. Similarly, section 6 also uses the term ‘relevant market’. However, this definition of relevant market is not explicit in section 3 where the Act uses the word market without prefixing “relevant”, which has been a cause for concern and a subject of debates for long now.

The Background

Section 3 of the Act only penalises conduct that causes AAEC. While the Act presumes these effects in case of a horizontal agreement or cartelisation under section 3(3), a vertical restraint under section 3(4) requires satisfaction of factors listed under section 19(3) of the Act to establish these effects. These effects on competition necessarily occur in a market and, as such, determination of these anti-competitive effects would anyway bring us to a market that they affect. However, in this case, the accused parties would be more than likely to plead an alternative market definition, where the competition does not feel these effects. As a result, the definition of market operates as a predecessor to identifying AAEC and not the converse. If this proposition stands true, there should be a definite need to identify the relevant markets where the adverse effects exist. Then why does the Competition Act not provide for it?

The Competition Commission of India (or the CCI) tried answering this question for the first time in the Cement Manufacturers Association case wherein the accused parties had pleaded that the Director General (or DG) had not delineated the relevant market where the contravention had been found. The CCI stated that a section 3 investigation does not need a market determination since it is concerned with the effect of anti-competitive agreements on the markets in India, clearly stating that “there is a distinction between ‘market’ as in Section 3 and ‘relevant market’ as defined in Section 4 of the Act”.

However, in paragraph 20 of Sonam Sharma v Apple, the CCI had relied on the small market share of Apple in the relevant market for the sale of smartphones in India to establish that there was no contravention of section 3(4), thereby reading a factor of significant market power or dominance in section 3(4). If this significant market power is a necessary factor, it needs to exist in a market that needs identification. Therefore, the delineation of relevant market becomes necessary to establish a contravention under section 3(4), irrespective of the competition concerns in any market as highlighted in Cement Manufacturers case.

The Current Situation

The Supreme Court in CCI v Coordination Committee put the mixed approach taken by the CCI in the earlier cases to rest on 7 March 2017. The Supreme Court held that a section 3 investigation mainly requires a look into AAEC, thereby endorsing the views of the CCI in Cement Manufacturers case. These adverse effects need an evaluation on the factors listed under section 19(3) of the Act. A bare reading of section 19(3) shows that the factors (a)-(c) need to be present in ‘the market’. The Supreme Court interpreted section 19(3) of the Act stating that: “The word ‘market’ used therein has reference to ‘relevant market’. As per sub-section (5) of Section 19, such relevant market can be relevant geographic market or relevant product market.”  The judgment further goes to explore the concept of ‘effected markets’ in India to establish how section 3 concerns itself with the anti-competitive effects of the practices. The Supreme Court observed, therefore, that before evaluating the anti-competitive effects under section 3, the CCI needed to define the relevant market where the competition was ‘effected’, thereby mandating the market delineation of section 3.

This market delineation requirement under section 3 would have burdened the CCI with yet another bar to balance while investigating a section 3 allegation. In such a scenario, the CCI preferred an application for clarification of the 2017 order before the same bench of the Supreme Court that issued a clarification order on 8 May 2018. It was clarified that in terms of the provisions of the Act there was no necessity of defining markets in all cases pertaining to section 3, particularly placing emphasis on the presumption of adverse effects under section 3(3).

An Incessant Incertitude?

The National Company Law Tribunal (or the NCLAT) on 19 September 2018 set aside the penalty of 87 crores imposed on Hyundai Motor India Limited by the CCI for contravention of section 3(4). In that case, the CCI had not only identified a relevant market for the allegations under section 3(4) but the accused party also contended an alternative market definition. The NCLAT placed reliance on the original judgment in Coordination Committee caseand went on to the subject of delineation of relevant market. However, the NCLAT rebuked the CCI and the DG for not being meticulous enough in their market definition and for their failure to consider a variety of other relevant factors, which was also one of the grounds for setting aside the penalty. Although the NCLAT overturned the CCI’s order, the acceptance of market delineation citing the unclarified Supreme Court case on its necessity in section 3 cases takes us back to the situation before the clarification order.

Conclusion: The Authors’ View

The dynamics of section 3 are very typical in a sense that a case under section 3(3) juxtaposed against a section 3(4) case would entail a very different approach to investigation. The presumption of appreciable adverse effects under section 3(3) would automatically negate the need for market definition; all that is required is an agreement between the parties indulging in the trade of similar or identical goods or services. Anti-competitive effects on any market under section 3(3) would suffice in establishing the culpability and therefore, there is no requirement for a market evaluation.

However, section 3(4) offences are vertical restraints that need an economic evaluation in light of the factors mentioned under section 19(3) to establish anti-competitive effects. It is well accepted that such vertical restraints would almost never be anti-competitive if the imposer does not command sufficient market power. In such a case, the identification of the alleged infringer’s market share in some market would give us the relevant market for consideration. One argument against this necessary delineation of relevant market for section 3(4) when the Act does not contemplate it is that it would substantially increase the already long time that an investigation takes. In most of the cases where section 3(4) allegations are read with section 4, this market delineation would not affect the time for investigation since section 4 anyway requires a market and dominance evaluation. However, justice and fair play cannot be sabotaged on time constraints and, therefore, the market definition in section 3(4) cases becomes unavoidable.

Ahkam Khan & Divyansh Prasad

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