CCI’s Order in the Snapdeal – KAFF Case

[Gokul Plaha is a fifth year year B.A., LL.B. (Hons.) student at the National Law University, Delhi]

By way of an order dated 15 January 2019 passed under section 26(6) of the Competition Act, 2002 (the Act) in Jasper lnfotech Private Limited (Snapdeal) and KAFF Appliances (India) Pvt. Ltd. (KAFF) (15 January 2019), the Competition Commission of India (CCI) clarified that section 3(4)(e) of the Act extends its purview to online platforms, in the same manner as it covers brick and mortar enterprises. Section 3(4)(e) concerns ‘resale price maintenance’ (RPM), which “includes any agreement to sell goods on condition that the prices to be charged on the resale by the purchaser shall be the prices stipulated by the seller unless it is clearly stated that prices lower than those prices may be charged.”[1] In a product distribution chain, RPM amounts to a vertical imposition, whereby a manufacturer or seller determines the price, in some manner, at which a product can be resold by the downstream distributor or the wholesaler or the retailer. The practice of RPM serves to inhibit downstream price competition amongst retailers beyond a certain threshold, and thereby harms consumer welfare.

Relevant Facts

In the instant case, Snapdeal filed information under section 19(1)(a) of the Act with the CCI, alleging contravention of section 3(4) of the Act on the part of KAFF. Since Snapdeal had listed KAFF’s products on its website at discounted prices, the company issued a caution notice to Snapdeal stating that it will refuse to honour the warranties available on its products sold through the website, as the products were being sold without express authorisation from the company and were counterfeit. Snapdeal then issued a legal notice to KAFF demanding a withdrawal of the caution notice. In response, KAFF stated that it did not permit online sales of its products and had not authorised any of its dealers in this regard.

In the information filed with the CCI, Snapdeal submitted an email that KAFF addressed to it, which stated that “if the MOP is not maintained properly company will not allow you to sell our products either by authorised or unauthorised dealers or distributors. Kindly update your pricing within 24 hrs”. Snapdeal argued that this email clearly established that KAFF made an attempt to impose a minimum operating price (MOP): a form of price restriction, which clearly fell foul of section 3(4)(e) of the Act. Further, Snapdeal alleged that by threatening to not honour the warranties on its products listed on the website, KAFF had attempted to “cut-off supplies” to distributors who wanted to sell the products online.

Director General’s Investigation

After conducting its investigation, the Director General (DG) opined that since Snapdeal was merely a market platform – facilitating market exchange between sellers and potential buyers – it did not form a part of the vertical chain connected with the product. To support this contention, the DG relied on a three-pronged reasoning: firstly, an online platform does not perform any “material function” which could make it a part of the vertical chain; secondly, a necessary requirement to sustain an allegation of RPM i.e., the presence of a buyer-seller relationship, was not fulfilled in the case: Snapdeal did not purchase the goods from KAFF; and thirdly, the online platform did not influence the price of the products listed on its website.

Order

In the order, the CCI rejected the reasoning adopted by the DG. It held that the view taken by the DG was myopic insofar as it did not take into account the peculiar nature of online platforms –vis-à-vis traditional offline distribution channels – which are driven entirely by technology. Online platforms perform a host of functions which help meet business needs as well as consumer satisfaction, thereby adding value in each phase of the process. For instance, they provide various value added services: logistics, warehousing, marketing and sales, etc. Further, besides connecting buyers and sellers, online platforms also collect data on the products of the suppliers and the preferences of the consumers – matching them, and thereby reducing search costs associated with market transactions. Thus, the online platforms act as a parallel distribution chain, just like their offline counterparts. Furthermore, the CCI relied on its orders in Deepak Verma v. Clues Network and Confederation of Real Estate Brokers Association of India v. Magicbricks.com & others wherein, while determining the relevant markets, it was held that online and offline are not two different relevant markets, but rather two different channels of distribution associated with the same relevant market.

The CCI refuted the DG’s conclusion that a buyer-seller dynamic was a necessary ingredient insofar as sustaining an allegation of RPM is concerned. In the case of traditional brick and mortar businesses, there are pre-defined stages which form a part of the vertical chain. However, the same structure does not exist in case of online platforms. The test for determining whether a firm can be deemed to be a part of the product chain is whether it contributes value to the product (or service). The CCI noted that “what may be relevant is to examine as to whether such player provides any active service to the end customer in availing the product or service involved”. Though the online platform – while facilitating the transaction between the buyer and the seller – does not take possession of the product, it nonetheless adds value through the functions it performs in the entire process. The essence of RPM lies in the “resale” of the product, and not the identity of the parties involved in the transaction connected with the product.

The CCI did not agree with the DG’s conclusion that the online platforms were not in a position to influence the prices of products listed on their websites. Even if the online platform were to provide discounts on the listed products, or offer cashbacks, the dealers or manufacturers could not legally interfere with this process. Therefore, these platforms could easily influence prices of products listed on their websites.

In India, the violation of RPM is assessed under the ‘rule of reason’ analysis. This means that a violation of section 3(4)(e) of the Act can be established only if the alleged means of violation cause or are likely to cause an “appreciable adverse impact on competition” (AAEC). On an appreciation of the evidence on record and the DG’s investigation reports, the CCI held that KAFF had not violated section 3(4)(e) of the Act by indulging in resale price maintenance, as there was no evidence of AAEC in the relevant market.

Conclusion

Through this order, the CCI has reaffirmed that a relevant market in a case can have both a traditional offline distribution channel and an online channel, and that they are not separate relevant markets in, and of, themselves. Further, establishing a violation of section 3(4)(e) does not require the pre-existence of a traditional buyer-seller relationship. The implication is that even a party which has not purchased the product directly can be aggrieved by the practice RPM in a “relevant market”. However, the market player making an allegation of RPM must be a contributory to the value chain associated with the product or service in question. The identity of the enterprise is irrelevant, as long as it contributes value to the transaction.

Gokul Plaha

[1] Explanation to Section 3(4)(e), Competition Act 2002.

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