With the ever growing and evolving nature of the Indian market, various new business models have surfaced up. And so, The Competition Act 2002, governing the market practices in India is often scrutinized time and again to check whether it is in sync with the current market trends and practices. In pursuance of the same, the government set up the Competition Law Review Committee in 2018 to ensure that the Act had the required artillery to protect the flourishing Indian economy from unfair practices and also to aid its development.

Based on the recommendations made by the Committee in its report, a Draft Competition (Amendment) Bill, 2020 was formulated. Out of all the amendments thus suggested - this article focuses specifically on – is the efficacy of adding a proviso to Section 3(3) in order to expand the overall scope of section 3 w.r.t cartels. The proviso to be inserted reads as follows: ––

“Provided further that an enterprise or association of enterprises or person or association of persons though not engaged in identical or similar trade shall be presumed to be part of the agreement under this sub-section if it actively participates in the furtherance of such an agreement.”.

The proviso at a glance intends to incorporate a type of hub and spoke cartel in the ambit of Section 3(3). However, the purpose that such a proviso might serve in the Act needs to be analysed on grounds like: Firstly, if the wording of the proviso translates the intent of the Committee report into action. Secondly, if it addresses all the concerns around hub and spoke cartels and thirdly (and lastly), if the Section 3 of the Act in its present form is insufficient to cover such cartels.

The Intent of The Review Committee

In recent times, a lot of cases have emerged before the CCI wherein allegations of a hub and spoke cartel were made. The first case, to mention such arrangements was the Hyundai motors case (Case No. 36 and 82 of 2014) and as it merged out, it was the starting point to a long line of cases where the claims regarding hub and spoke were dismissed by the Commission on the reasoning that such a concept was not known to the Indian Competition Act. It was finally in the Uber case (Case no. 37 of 2018) that the Commission shed some light on what it understands as a hub and spoke arrangement. It listed out important factors like that the hub should be a third-party platform that is used by the spokes to exchange sensitive information and that there should exist a collusion to facilitate such exchanges leading to the price fixing.

The Committee was of the opinion that the Indian Act had rigid demarcations for horizontal and vertical agreements within Section 3 unlike the Competition Act in other jurisdictions like the US and the UK which were more broadly worded. In the US, according to Article 1 of the Sherman Act, all anti-competitive agreements are void. This made the hub and spoke agreements per se void too (United States v. Apple, 791 F.3d 290, 322 (2d Cir. 2015) While in the UK, to analyse the liability of the hub, its intention of forming a cartel is taken into consideration on a case by case basis. Both these jurisdictions, with their respective procedures, have encountered plethora of such cases and thus have gained an expertise in dealing with them in the current evolving market.

Naturally, the committee felt that if such a cartel is to ever be penalised in India, it could only be done under section 3(3) where the hub would always escape the penalty as the wordings of the section 3(3) only recognises cartels formed amongst parties functioning at the same level or engaged in a similar trade. This concerned the Committee as they felt that this could seriously hamper the powers of the CCI to bring parties to justice and curb unfair market practices.

Their primary motive was to make sure that the hub cannot escape liability and so they didn’t consider its intention or knowledge as a criterion for imposing penalty. However, the underlying aim of the Committee was also to ensure that the Competition Act was capable enough to deal with such dynamic hub and spoke agreements that are a recurring phenomenon, and that it has a clear understanding of the same so as to face future challenges in a better prepared manner.

Further, taking note of the changing digital front of businesses across India and how their practices often stand in violation of the Competition Act, the Committee in its report also assessed the powers of the Act in dealing with a conduct that is born out of the digital space. The most prominent unfair conduct it found was that of forming an ‘Algorithmic collusion’. The committee also considered how such collusions are often propelled by inserting MFN (Most Favoured Nations) clauses in agreements. And so, they recommended that with the introduction of the terms ‘and other agreements’ in Section 3(4) such online vertical restraints would be covered too.

But at the same time the Committee clearly worded that they were of the opinion that Section 3 was sufficient enough to cover algorithm collusion and other forms of collusions formed out of digital models too. However, the amendment proposing to add the proviso only focused on one aspect of the Committee’s recommendation that is to penalise the hub and left all the other concerns aside.

Are Hub and Spoke Cartels Exactly What CCI Understands Them To Be?

As discussed above, the primary legal understanding of hub and spoke cartels in India has emanated from CCI’s explanation in the Samir Aggarwal v ANI technologies or popularly, the Uber case. However, the factors laid down by the Commission only mention one out of the many possible settings in which a hub and spoke arrangement might operate. It was as if the Commission was trying to figure out such a cartel only through the lens of the Uber case.

Even the most sought-after international organisation – OECD - had numerous roundtables discussing the hub and spoke cartels and still couldn’t come up with a complete definition that covers every aspect of such an agreement. Traditionally, it was understood that it is a type of a cartel wherein a common party, through indirect vertical exchanges with numerous parties termed as spokes operating at a horizontal level, colludes over prices. In such an understanding, the Hub was understood to be the initiating force of a cartel. Gradually, it dawned on jurisdictions across the world that it’s not always the Hub that imposes such an arrangement on the spoke. Thereafter, such agreements were categorised as upstream and downstream hub and spoke cartels (OECD, Roundtable on Hub-and-Spoke Arrangements – Background Note, 3 December 2019).

The concept has evolved solely through the cases that have come to the notice over the years. In the initial, cases like the Interstate Circuit case (Interstate Circuit, Inc., et al. v. United States 306 U.S. 208 (1939)), Toy case (Argos Ltd & Anor v. O¢ ce of Fair Trading [2006] EWCA Civ 1318 [114]), the Pharmaceutical case (United States v. Parke, Davis & Company, 164 F. Supp. 827 (D.D.C. 1958)) etc. all resembled typical price fixing cartels but with indirect communication. But the cases in the recent decade have shown that such an arrangement is mostly found in e-commerce business platforms i.e. in online business models.

Cases like the Apple Inc. v US reshaped many concepts about such arrangements in the US. Still, no matter how indirectly the collusion might exist or in whichever form, the cartel still requires existence of an agreement, whether explicit or tacit, for there to be a claim. In the US, the agreement is often termed as the ‘Rim’ that connects the hub and the spokes. Popular practice involves proving such an agreement through concerted acts and meeting of minds between the spokes, or the hub and the spokes. Another recurring concept that has been acknowledged in such cases is that mostly such arrangements are of a nature of a RPM (Resale price maintenance) agreement with MFN clauses, especially in the digital medium. Regulators in the Germany and Austria have been of the view that it’s usually the RPM cases that have hidden hub and spoke cartel agreements and thus, have had a history of investigating and penalising them heavily.

Ideally, the common practice has been that if it’s a jurisdiction that treats RPM as per se illegal, then it’s easier and better to prove the anti-competitive conduct through RPM and treating the liability of the hub on a special basis at the court’s discretion rather than going for a roundabout approach of proving a hub and spoke cartel. Even in India, cases like the Hyundai Motors and Jasper infotech (Snapdeal) v Kaff Appliances (Jasper Infotech Pvt ltd v Kaff appliances India Pvt ltd., Case No. 61 of 2014), when the hub and spoke claims were dismissed were treated as cases of RPM violation under Section 3(4)(e) of the Act.

Does Section 3 Already Cover Such Agreements?

A major bone of contention while assessing the proviso has been to figure out whether the wordings of Section 3 already provides scope for coverage of such agreements. Hub and spoke cartels are the result of a unique blend of horizontal and vertical agreement which are elaborated in Section 3(3) and Section 3(4) respectively. However, Section 3(1), which is the parent section that prohibits anti-competitive agreements causing AAEC, specifically mentions the term ‘….any agreement…’ when it comes to declaring anti-competitive agreements null and void. If this were to be given a liberal interpretation, that would cover all the possible agreements under the Hub and Spoke arrangements as well. The only limitation with such wording is that it is too broadly mentioned, and if the Commission pays too much reliance on it while finding cases for the contravention, it might result into unpredictability for various players where they are not able to decipher which practice is compliant with the law, and which one violates it.

The text of Section 3(4) is also relevant in such a scenario Even though it explicitly names five types of vertical agreements, the list is not exhaustive. The same can be derived from the language of the section, namely “…any agreement amongst persons or enterprises at different stages or levels of production chain…….provision of services, including- (a)tie-in;(b) Exclusive supply;(c) Exclusive distribution;(d) Refusal to deal;(e) Resale price maintenance; shall violate Section 3(1)” which implies that any type of vertical agreement would fall under this section and the mentioned agreements are just suggestive. The same can be derived from the usage of the words, ‘…any agreement’ and ‘including…’.

This proves that in a scenario, if there exists an upward hub and spoke cartel pushed in by the spokes, then the same can be considered a hybrid RPM agreement and be dealt under section 3(4) of the Act. Furthermore, no matter how much the Committee tried to side-track the element of intention or knowledge on the part of the hub, overwhelming evidence world over suggests that it plays a huge role in deciding the nature of the agreement.

When the hub intentionally facilitated such cartel formation, then the vertical exchanges can be dealt under Section 3(4), whereas, if the scheme was purely concocted by the spokes using hub as a common platform without its explicit knowledge, then it leads to a cartel agreement at the horizontal level to be dealt under Section 3(3). The case remains whether Section 3(1) can be used as a melting pot of such hybrid agreements? To answer this, CCI’s interpretation in the Ramakant Kini case can be used as a reference point. Wherein the commission held that “…All agreements as described in sections 3(3) and 3(4) of the Act alone cannot be the only agreements covered under section 3(1) of the Act…” (Ramakant Kini v. Dr. L.H. Hiranandani Hospital, Powai, Mumbai, Case No. 39 of 2012, order dated 05 February, 2014, Para15). That is to say in other words, section 3(3) and 3(4) are extensions of 3(1). It was established that the term ‘…any agreement…’ in Section 3(1) thus in fact gave it a wider scope and an individual existence, and that agreements that are neither horizontal nor vertical, but cause AAEC, can be treated under Section 3.

Before this in Neeraj Malhotra v. Deutsche Post Bank (Case No. 5 of 2009), it was noted that if any enterprise enters into an agreement with an individual that leads to AAEC, then it would invoke Section 3(1) and 3(2) of the Act directly. Similarly, in Savitri Leasing v. Punjab National Bank (Case No. 45 of 2011), an end-user agreement that did not fall under Section 3(4) was still held anti-competitive in violation of Section 3(1) as it fulfilled the negative criterions of Section 19(3) causing AAEC.

This gives enough evidence that if required, the court can invoke Section 3(1) independently and consider any agreement under its ambit, including the hub and spoke cartel agreements, peculiar to facts and circumstances of the case.

Conclusion

The introduced proviso, even though aims at making the matters easier for the CCI with its limited scope, only seems like an unnecessary add on. In the current form, it only complicates the matter in terms of invoking liability to a party at a vertical level in a discussion of horizontal misconduct. This will only confuse the authorities in the future about the demarcation of two levels of agreements that it so boasts of. In simple terms, the proviso does not benefit the Act in any major way. Even with this addition, many questions related to the hub and spoke would be unanswered. Also, the Commission, with its broad interpretation, can any day treat such agreements under the purview of Section 3. And therefore if any proviso is added for simplifying the process of the law, it should be worded in such a manner that it, at least, incorporates hub and spoke agreements in a holistic manner. In light of such a discussion, it is concluded that the text of Section 3 should be amended in such a fashion that it not only widens the scope of it, but becomes immune to evolving concepts of newer agreements as well. This would be a long way to go as far as jurisprudence related to anti-competitive agreements in the Indian jurisdiction is concerned.