The Online Platforms Conundrum and its Impact on Contract Law

[Varnika Agarwal is a 3rd Year BA LLB (Hons.) student at National Law University Delhi]

The massive growth of online trade in India, over the past few years, has contributed to a paradigm shift in Indian competition law. It has raised questions regarding platform neutrality (or lack thereof), platform parity clauses, exclusive agreement clauses, and deep discounting, among others. The lack of a clear and cogent approach by the Competition Commission of India (“CCI”) in hearing allegations against platforms, has not helped this situation. Orders by the CCI in the matter relating to Flipkart-Amazon and in the matter of MakeMyTrip (MMT) are cases in point.

In entertaining allegations against the platforms, the CCI has brought to light the interplay between competition law and private contract law and its impact on third parties, specifically in the case of vertical agreements. Contract law and competition law have traditionally been regarded as independent areas with limited interaction since the former focuses on the inner rules of the transaction and the latter focuses on the external effects. However, in practice, both branches seem to have a major impact on each other as indicated by a number of decisions.

In that regard, a particular reference is to be made to two noticeable practices in India’s platform market –establishing exclusive agreements; and offering deep discounts to one seller as opposed to another. Notably, the former is a practice that falls in the domain of contract law while the latter operates as an ‘arrangement’ between the platform and the seller without showing any obvious indications of an ‘agreement’ in the traditional sense of the term. Further, such an arrangement is not per se anti-competitive and has to be adjudicated on a case-to-case basis.

The case-to-case discretion of the CCI raises the question as to how one could reconcile such discretion when the CCI’s decisions are likely to impact market welfare. This post seeks to address this conundrum, and outline the potential economic effects of competition law enforcement brought about by undermining or overturning contracts.

Position of Agreements under Competition Law

Under section 3(2) of the Act, anti-competitive agreements which cause or are likely to cause an appreciable adverse effect on competition (“AAEC”) are void. The most obvious issue that arises before the CCI in hearing an allegation of an anti-competitive agreement is the meaning of the term ‘agreement’. While section 2(b) of the Competition Act, 2002 provides an inclusive definition under which even arrangements or understandings not expressed in a written form could be used as proof of anti-competitive practices, any proof of arrangements is arguably expected to be established cogently, carefully, and with consistency.

This observation becomes especially important in the case of vertical agreements, the undermining of which would result in grave economic consequences on market welfare. Unlike horizontal agreements, vertical agreements are not presumed to have an AAEC and instead follow the ‘rule of reason’ framework. This means that any inquiry into anti-competitive effects of such agreements require a reasoned analysis into the relevant product market, market power, and any evidence showing AAEC. Any order that does not fulfill this criterion is likely to be termed arbitrary. As will be evidenced below, the recent order by the CCI against Flipkart-Amazon demonstrates this lack of principled consistency that exists while determining competition violations in the e-commerce sector. This issue adversely impacts the parties’ freedom to contract and poses grave consequences to market welfare.

Investigation of Flipkart-Amazon

On 16 January 2020, the CCI ordered an investigation against the two platforms based on allegations of deep discounting, preferential listing, and exclusive tie-ups. It observed that certain vertical agreements between them and some sellers were in violation of the Act. Although this order was stayed by the Karnataka High Court, the shift in the CCI’s approach towards online platforms needs to be examined.

The CCI had dealt with similar cases against the two platforms in the past, where it did not find merit in similar allegations. It had found that it is very unlikely that an exclusive arrangement would create an entry barrier for other sellers as most products sold through exclusive platforms face competitive constraints. As compared to this finding, the observations in the present order indicate a complete change of stance without any reasons provided to explain such a change. The resultant shift in approach is likely to create confusion and bring about a change in the manner in which platforms enter into agreements. It will increase uncertainty as it will be difficult for platforms to assess in advance what might be termed as anti-competitive and void. It might also affect a party’s willingness to commit to contracts.

One allegation by the informant in the present case was that of deep discounting. As deep discounts are not anti-competitive per se, any investigation into the issue has to establish that such a move was targeted at taking competitors out i.e. the move has to be linked with the activities of a dominant player in the market. Given the number of players in the e-commerce space, the issue of market dominance does not pass muster. Thus, any allegation of deep discounting is extremely difficult to establish. Without adequate proof, an order of investigation would seem arbitrary.

This is more so problematic when seen through the lens of private contract law. Admittedly, competition policy is quite often at odds with the principle of freedom to contract. Even in European Jurisprudence, it is established that the freedom to contract constitutes an essential element of free trade. Whenever competition law seeks to override this freedom, it is imperative that it employs a careful, balancing approach. This seems to be missing in the present order.

Investigation of MakemyTrip

The CCI’s order in the case filed by Treebo against the alleged dominance of MMT and Oyo demonstrates how intervention by competition regulators in the digital market, in absence of complete understanding of such markets, is likely to adversely affect exclusive agreements between parties.

Generally, it is impossible to predict the competitive and welfare effects of vertical restraints without understanding the market context in which they are applied. In some cases, they could improve efficiency and increase competition, but otherwise they may also prove to be anti-competitive. The latter is only possible when the firm imposing such restraint has the market power to foreclose competition. Therefore, any investigation into vertical restraints needs to be made only after assessing and understanding the relevant market in which they are applied.

Exclusive agreements operate as one such vertical restraint under the Competition Act. While exclusive agreements could be of two kinds – supply and distribution – the scope of this post is restricted to assessing the latter. Section 3(4)(c) defines an exclusive distribution agreement and makes it void provided such agreement causes an AAEC in the market. When placed in the present context, if the investigation into MMT and OYO bears fruit, the exclusive agreement would become void.

In the present case, it is alleged that MMT poses significant market power to influence competition and the use of such power is resulting in restrictions on entry of other players in the market. This is arguable on two grounds. First, if MMT holds market power, then it follows that it faces no potential competition. This means that even if it were to use exclusive contracts, it would do so for efficiency reasons, and not for the purpose of raising prices to exclude competition. A firm that has market power could only earn rent once, because if it continues to raise prices, the consumers would be driven away from the market. Therefore, it is not possible to increase this rent further through exclusive contracts. Second, even if the platform has the means to use vertical restraints to foreclose competition, does not mean it is necessarily doing so. It is possible that the imposition of vertical restraints is to enhance efficiency and deal with free-riding issues. The restraint might foreclose competition because whenever the platform offers a better product, it secures an advantage over its rival. The inability of a rival to offer the same quality does not mean there is an AAEC in the market.

Conclusion

While the author recognizes that these orders are not final in nature, it has to be noted that even investigatory orders may hamper the ability of firms to exercise their freedom to contract. Rules regulating unfair practices in competition need to be distinguished from rules against commercial practices that restrict competition. The object of the Competition Act is not to protect small and medium enterprises, but to assess behaviour of firms and correspond it with their economic efficiency. The two orders pertaining to digital markets seem to distort these objectives and the failure in understanding technology and big tech is one of the key drawbacks for such distortion. Therefore, though investigating into the purported defiance of provisions laid down under the Act is essential, it becomes imperative that the same power is not exercised arbitrarily.

Varnika Agarwal

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