Draft E-Commerce (Amendment) Rules, 2021 – A Competition Law Perspective

[Moksh Roy and Arjun Sahni are 4th year students at Symbiosis Law School, NOIDA]

The Department of Consumer Affairs (“DCA”)on 21 June 2021 released the Draft Consumer Protection E-Commerce (Amendment) Rules, 2021 (“Draft Rules”). According to the press release, the Amendment Rules are aimed at bringing transparency to e-commerce platforms and strengthening the existing regulatory regime.  In order to achieve these objectives, the Draft Rules have brought about a myriad of changes; however, this post will focus on the proposed amendments that are likely to have an effect on competition in the e-commerce space. 

Proposed Amendments

Flash Sales

Flash sales, defined under rule 3(e), means sales organized by an e-commerce entity in which it offers selective goods and services at significantly reduced prices, high discounts or any other such promotions with an intention to draw customers. The proviso to the rule restricts the definition of flash sales to only those sales that are organized by “fraudulently intercepting the ordinary course of business using technological means” and “with an intent to enable only a specified seller or group of sellers managed by such entity to sell goods or services on its platform”. Naturally, the Draft Rules, through rule 5(16), propose to ban such flash sales.

This is not the first time an attempt has been made to address preferential treatment concerns, concomitant with deep discounting practices. The Competition Commission of India (“CCI”) in its Market Study on E-Commerce Platforms (“Market Study”) has observed that intermediary platforms such as Amazon Seller Services Private Limited (“Amazon”) and Flipkart have been supporting their “preferred sellers” in offering deep discounts, and that such practices have the potential to distort competition. In Delhi Vyapar Mahasangh v. Flipkart, many micro, small and medium enterprise traders alleged that a few “preferred sellers” could offer deep discounts on Amazon and Flipkart because the platforms covered those discounting costs for them. It was also alleged that these “preferred sellers” are connected to the platforms via common investors, directors and shareholders. The CCI opined that these discounting practices, in context of the exclusivity agreements entered into by Amazon and Flipkart with mobile phone manufacturers, merited further investigation, and passed an order directing the Director General to investigate and determine whether such conduct is in contravention of section 3(1) read with section 3(4) of the Competition Act, 2002 (“CA”).

Search Manipulation

Rule 5(14)(c) aims to prohibit e-commerce entities from manipulating search results or indexes relating to the search query of the user. Search manipulation or fixing search results is an anti-competitive practice and companies like Google have been fined for it in the past. The importance of search rankings and their effect on consumer choice was discussed by the CCI in its Market Study. Platforms competing in their marketplaces can potentially manipulate search results in order to give precedence to their products or services, naturally affecting platform neutrality. This is a step in the right direction as directing e-commerce platforms to increase transparency with respect to search rankings would further the DCA’s objectives.

However, we do find it imperative to mention that if any concern were to be raised for violation of rule 5(14)(c) against any marketplace e-commerce entity, a novel and resource intensive investigation would have to be conducted, as it would be aimed at gauging the search ranking algorithm. One way to prevent this from happening is to keep the ranking algorithm transparent. However, transparency should not come at the cost of sellers or service providers being able to game the mechanism. Therefore, a balanced approach is needed.

Private Label Brands; Using Marketplace Collected Information

Marketplace e-commerce entities have started participating on their platforms by various means, one of which is through Private Label Brands (“Private Labels”). Creating Private Labels is essentially a practice of selling goods manufactured by a third party under the brand name of the platform. The CCI, through the Market Study, has taken note of the competition concerns that arise out of the conflict of interest between the platform acting as a marketplace, and as a seller through Private Labels. It has observed that in such situations, the platform could and will control the marketplace in favour of their Private Labels as it will have a natural tendency and incentive to do so.

Rule 5(14)(d) proposes to address the same concern. It prohibits use of the name or brand associated with a marketplace e-commerce entity for the sale or promotion of goods or services in a manner that suggests that the goods or services are associated with the entity. The aforementioned rule will result in Private Labels shedding all indicators of their connection to the platform on which they are being sold.

Moreover, the position contemplated by rules 5(14)(f) and 6(6)(a) is interesting to take into consideration in this regard. Both the provisions mandate marketplace e-commerce entities not to use information, collected through their platforms, to benefit:

1) any of the goods bearing a brand or name common with that of the entity’s name (rule 5(14)(f)); and

2) related parties and associated entities (rule 6(6)(a)).

Rule 5(14)(f) would only come into the picture if the practice in question amounts to unfair trade practice, as defined under section 2(47) of the Consumer Protection Act, 2019, and impinges on the interests of the consumers. Rule 6(6)(a) would come into the picture if the information is being used for an unfair advantage.

For example, according to rule 5(14)(d), AmazonBasics products will have to be rebranded in a manner that the products’ association with Amazon cannot be made out by an ordinary consumer. If the product name is rebranded to an extent that it does not bear a name or brand common with that of the entity, it would not be covered by rule 5(14)(f). This essentially means that Amazon will be able to use marketplace collected information for the sale of the rebranded product, even if such use amounts to an unfair trade practice impinging on the interests of the consumer. It is interesting to note that, back in November 2020, on similar lines, the European Commission formed a prima facie view that Amazon has been using data associated with marketplace sellers or service providers to its benefit and for its private labels “to avoid the normal risks of retail competition”.

On the other hand, in terms of rule 6(6)(a), Amazon will not be able to use marketplace collected information for the benefit of its related parties or associated entities. Peculiarly, if we assume that Cloudtail India Pvt. Ltd. (“Cloudtail”) is a related party or associated enterprise, then, as per rule 6(6)(b), Cloudtail would not even be allowed to sell directly to the consumers in the very first place. This essentially means that rule 6(6)(a) would only apply to situations where entities like Cloudtail would be selling goods on Amazon through a third party.

Takeaways

Apart from the provisions discussed above, the Draft Rules also aim to prohibit all e-commerce entities from abusing their dominant position in a market (rule 5(17)). Abuse of dominance is a concept sufficiently dealt with in section 4 of the CA, and applies to all enterprises. A redundant provision to the same effect added by the Draft Rules is bound to create confusion as to where the remedy would lie in case a dominant e-commerce entity indulges in abusive conduct. Violations of the E-Commerce Rules will, in all probability, be dealt with by the Central Consumer Protection Authority (“CCPA”), and concurrently, violation of the CA will be looked into by the CCI. On a bare reading of the text, abuse of dominance by an e-commerce entity might lead to jurisdictional strafes between the CCPA and CCI. However, reference should be made to section 19(2) of the Consumer Protection Act, 2019, which gives the CCPA the power to refer a matter to any other regulator after it has made its preliminary inquiry and is satisfied that the matter should be dealt with by such other regulator established under any other law for the time being in force (such as the CCI). The requirement of a preliminary enquiry to be made before referring the matter would lead to a lengthening of the investigation timeline; however, it is better than leaving such matters of import to be clarified by the courts of law at a later stage.

While the DCA has certainly kept the contemporaneous developments regarding e-commerce competition concerns in mind when it came out with the Amendment Rules, it will be interesting to see how they further improve upon them once they are in receipt of the comments made by all stakeholders.

Moksh Roy & Arjun Sahni

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