Hub and Spoke Cartels: A Perspective on Future Investigations

[Aditya Goyal and Shreya Chandhok are students at National Law Institute University, Bhopal]

Amidst the ever-increasing anti-competitive concerns and the inadequacy of the present competition regime to tackle the emerging issues, the Indian Government introduced the draft Competition (Amendment) Bill, 2020 in March this year. One of the proposed amendments in the Bill widens the scope of ‘cartels’ by explicitly bringing ‘hub and spoke’ cartels within the ambit of competition scrutiny. This introduction is a welcome move in view of the fact that Covid-19 has propelled the growth of e-commerce marketplace, which has seen a sharp increase in online marketplace platforms. These online platforms pose newer challenges to the competition authorities, since the detection of possibly illegitimate activities becomes more complex and difficult. It then ultimately falls upon the authorities to adapt new investigation techniques and emerging jurisprudence to keep a close check on cartel formations in the online space. This raises a pertinent question whether the Competition Commission of India (CCI) is well equipped to deal with such a situation in the post-Covid era, especially to enforce newer provisions such as hub and spoke cartels. This post attempts to seek an answer to this question, firstly, by analysing the scope of ‘hub and spoke’ cartels in the Indian context, having regard to recent developments; secondly, by undertaking a cross-jurisdictional analysis to study the approach followed by other jurisdictions, and lastly, by suggesting the way forward.

Hub and Spoke Arrangement: Indian Context

A hub and spoke cartel is one where market players at the horizontal level (spokes) enter into an agreement, tacit or explicit, to share sensitive information through a vertical common player, referred to as ‘hub’. Although not directly involved in its activities, the hub act as a medium to facilitate the cartel. There are transfers of information from the spokes to the hub, which is then used by the other spokes; hence, an information exchange mechanism is formed which facilitates cartel formation.

In the era of digitization, the internet is one of the most disputed forms of hub, which provides various spokes the opportunity to enter into cartel-like formations in a way that evades competition law scrutiny. For instance, one such matter came up for the consideration of CCI in Samir Agrawal v ANI Technologies Pvt. Ltd wherein it was decided that the use of same cab aggregator platforms like Uber and Ola by individual drivers that use same or similar algorithms for price discovery does not amount to cartelization under the Competition Act, 2002. The matter went on appeal to the National Company Law Appellate Tribunal (NCLAT), wherein the NCLAT held that since Ola and Uber work on price algorithms and the drivers do not act in the capacity of employees, they are not acting as a hub and spoke and thus concluded that there is no cartelization. The authors argue that the CCI and the NCLAT have taken a narrow view of the hub and spoke cartel and not taken into account the realities of the modern-day.

Although hub and spoke cartels operating with different price algorithms appear to be free from competition law concerns, similar price algorithms owing to factors like purchasing the same algorithm from the same IT company may anyhow end up in a concerted action. Since wide arrays of sectors are similarly placed in terms of their operations, an inapt precedent like the one discussed above must be revisited to accommodate future instances. Further, because the post-Covid era is likely to be marked by newer business models and an increased use of internet platforms, such a view only restricts the ability of the CCI to look beyond what is apparent on the face of it and poses a challenge in applying the available jurisprudence in practice. This calls for the CCI to work out a mechanism so that such cases are dealt with a more stringent criterion. An exploration of other jurisdictions’ approaches on cartel determination might offer a bird’s eye view of the widely accepted practices and help determine investigation methods suited to Indian conditions.

Position in the UK and the US

In order to better understand the approach towards hub and spoke cartels, we will first look into the legal assessment followed by the United States (US), which has a long tradition of jurisprudence in proving the illegality of a ‘hub and spoke’ arrangement. The US has repeatedly dealt with such cases by following an inference standard, which is based on establishing a ‘rim’ around the unconnected spokes. The US authorities understand the lack of direct communication under such agreements and, therefore, give due credence to circumstantial evidence and the presence of ‘plus factors’ to conclude the formation of a hub and spoke cartel. These plus factors are simply additional factors that the authorities look into to reach a conclusion and include factors such as the type of information shared, the effects of sharing and the market structure. Various cases such as Interstate Circuit case,Toys “R” Us (TRU) case, andthe Parke, Davis & Co. case applied the inference standard by scrutinizing the plus factors present in an arrangement such as the exchange of individual emails, unanimity of action, lack of benign motive, an abrupt change in policy, and the subtle diplomacy which is embraced by different undertakings to maintain the flow of price information between different market players.

On the other hand, the United Kingdom follows the ‘concerted practice model, which is “a form of coordination between undertakings which, without having reached the stage where an agreement properly so-called has been concluded, knowingly substitutes practical cooperation between them for the risks of competition.”  Furthermore, a reciprocal contract between market players is required under such a practice. For this purpose, sharing of information from one party and the reception of that information or, at the very least, acceptance of that information by the other party suffices the requirements of a concerted practice. Subsequently, the Competition and Markets Authority (CMA) used this model in the Replica Football Kit case and the Toys case, and established a criterion for the finding of a concerted practice. According to this criterion, the future pricing intentions need to be linked to each other by intentions, actions, and circumstances that allow the conclusion that a concerted action has taken place, and eventually named it as the state of mind test.

The Way Forward

It is important to understand that hub and spoke cartel is a subtle form of anti-competitive practice that may go unrecognized if not detected with appropriate expertise. Theoretically, it may operate in a disguise, escaping the eye of regulatory authorities. Hence, it is important to maintain a check as to when legitimate business talks cross the line and become illegitimate. At the same time, it is equally important to raise the threshold to such an extent that necessary and innocent exchanges are protected.

To meet the said ends, a comprehensive study as to the functioning and anti-competitive effects of hub and scope cartel can go a long way in materializing a healthy and competitive market. It, therefore, becomes imperative that a broader view is taken while considering various business structures, especially in the case of the digital marketplace. One cannot re-iterate enough that cartel investigations must be case-specific and the ‘real relation’ must be ascertained before coming to a conclusion. It also becomes interesting to make this process as objective as possible, to minimize the potential costs and increase efficiency at the same time. A cue may be taken from the US and the UK since their devised framework, i.e., inference method, concerted practice and state of mind,had been largely effective in prosecuting cartels; its application may be tested in the Indian context. No matter what approach is taken by the CCI in deciding upcoming cartel matters, it remains a question of academic debate as to whether the rule of reason should be preferred over the per se rule. The authors believe that the rule of reason provides a better perspective of the potential harm that a hub and spoke cartel may cause, and helps set up a more objective criterion to detect illegal cartels while, at the same time, protecting healthy business activities. However, a shift in approach has to be tested against time.

Aditya Goyal & Shreya Chandhok

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