Businesses across the world have been impacted by the global pandemic, COVID – 19 and State measures have brought many economies to a standstill. It is inevitable that the next few months are going to present new challenges to businesses. While certain industries such as airlines, entertainment, hotels etc. will struggle to get back on their feet, essential commodities, pharmaceuticals and healthcare providers will be strained with unprecedented demand. “We are all in this together” is the message resonating across the world in the fight against the pandemic. To overcome the impending economic slump and to control demand or prices, competing businesses may also be tempted to adopt this approach. However, this approach is antithetical to the core principle of competition law – that competitors must act independently.
Historically, large corporations have shown ingenuity in working around great catastrophes to make profits. Nearly a century ago, companies engaged in war profiteering in World War I and then again during World War II by monopolizing and controlling strategic businesses such as gun powder and automobiles.While these entities could get away with their anti-competitive actions back then, it would be impossible for businesses to do so in this time and age. As enterprises prepare to tackle the “new normal” they must be aware of the consequences their actions could have under the Indian competition law regime.
Collaboration Amongst Competitors
In India, the temporary lockdown has already triggered shortages in essential commodities, fast moving consumer good (FMCG), medicines and medical supplies. The high demand combined with disruptions in the supply chain across state boarders as well as panic buying has presented novel challenges for enterprises. These exceptional circumstances may compel competing business to collaborate and coordinate production, distribution, supply etc. to ensure uninterrupted supply in the market as well as make-up for lost business opportunities and profit maximization. However, businesses must bear in mind that the provisions of the Competition Act, 2002 (Competition Act) apply with no less vigor, even in these trying times.
Section 31 of the Competition Act prohibits collaboration amongst competitors unless such collaboration is by way of an efficiency enhancing joint venture. As such, the prohibitions under the Competition Act continue to be in force until any specific exemption is provided by the Central Government in public interest in light of the pandemic2. When it comes to anti-competitive agreements between competitors, the size, economic prowess and line of business (essential or non-essential commodities) of an enterprise is irrelevant. As such, every enterprise must be wary of its conduct.
For instance, in the pharmaceutical sector, a large number of companies have dedicated their resources for the research and development of test kits, vaccines or treatment for COVID-19. It is probable that competing enterprises may engage in joint research and development agreements to expedite this process and such agreements may be allowed as they generate efficiencies that would most likely outweigh competition concerns. However, between competitors, even such agreements can be problematic in certain circumstances, for example, if they lead to a reduction in innovation by removing a viable competitor. The other apparent concern could be that such collaboration will spill over into other areas and reduce competition between the parties outside the scope of their research and development agreement.
Besides individual firms, the role of trade associations is likely to gain much significance in the times ahead as common industry concerns will need to be addressed. While such communication is imperative, there must be strict compliance with competition law by industry bodies to ensure that they do not become a platform for coordination or exchange of sensitive business information in contravention of the Competition Act.
Exploitative Unilateral Conduct
While certain collaborations may be defendable, exploitative conduct will be actively tracked and punished by competition authorities in India and the world over.
Section 3 (4)3 of the Competition Act prohibits agreements amongst enterprises at different levels of the production chain which cause an AAEC whereas, Section 4 prohibits abusive unilateral conduct by dominant enterprises.
In light of the market conditions ensuing the pandemic, firms should refrain from inter alia, the following exploitative practices:
- exclusivity in supply or distribution agreements when businesses have the potential to procure from or supply to more than one entity;
- tying and bundling of essential but unrelated commodities or non-essential commodities with essential commodities;
- determining and enforcing the sale price for resellers in the market; and
- refusing to deal with an enterprise with respect to essential commodities without any objective business rationale.
Additionally, market leaders should resist any temptation to profit from the situation by actioning sudden modifications in agreements, interruptions in the supply chain, artificially generating demand, inflating prices or discriminatory practices.
In India, the concept of maximum retail price provides an inbuilt safety net against arbitrary pricing to consumers and the Government has already declared face masks and hand sanitizers as “essential commodities” and capped the maximum price for both4. However, in times of crisis, what constitutes essential commodities is a fast evolving concept depending upon the demand and supply. Moreover, competition law applies equally to essential and non-essential goods as well as services. As such, firms which wield significant market power have an additional burden to tread with caution and ensure that they do not take any opportunistic steps or exploit consumers.
Measures Implemented by the Competition Commission of India (CCI)
The CCI has partially resumed its working with effect from 14 April 2020 after a three-week suspension in its activities5 . The competition regulator has quickly adapted to the situation at hand and has implemented processes to now accept electronic filings for new informations in behavioural matters as well as fresh merger notifications. During the initial 21- day lockdown, electronic filings were only accepted for green channel6 merger notifications. While all hearings before the CCI remain deferred until further notice, the CCI at its backend will continue to assess and process old and new filings and CCI officials will also be available for pre-filing consultation through video-conferencing7.
Measures by International Antitrust Authorities
Internationally, antitrust regulators in several jurisdictions including, the United Kingdom (UK), European Union (EU), United States of America (USA), Australia, South Africa etc. have been swift in implementing measures to handle the challenges on account of COVID-19.
The government in the UK was the first to respond and has temporarily relaxed competition laws to enable supermarkets to work together to ensure that the supply meets the demand for food8. The European Commission in a joint statement, has allow suppliers to coordinate distribution of scarce commodities without apprehension of violating competition law9. The Federal Trade Commission and the U.S. Department of Justice Antitrust Division have also issued guidelines detailing an expedited antitrust procedure and providing guidance for collaborations of businesses working to protect the health and safety of American citizens10.
In line with international practice, it is likely that the Central Government may allow collaboration in deviation from competition law, to ensure continual supply of essential commodities, medical supplies/equipment, research and development, etc. However, any such exemption must not be interpreted as a carte balance with respect to competition rules. Until then, it is status quo for the antitrust regime and firms should be careful not to assume that exceptional times justify a departure from strict competition law compliance. It is important for legal and compliance teams to remind business colleagues that a crisis is not a time to let the company’s guard down.Any action to take advantage of the situation to the detriment of consumers or to manipulate the market by anti-competitive agreements or abuse of dominant position will expose enterprises to antitrust scrutiny and hefty financial penalties.
[The authors are Partner and Joint Partner, respectively, in Competition and Antitrust Practice in New Delhi]
- Section 3 of the Competition Act prohibits any agreement which causes or is likely to cause appreciable adverse effect on competition in India (AAEC). It includes agreements between competitors and agreements between entities at different levels of the supply chain.
- Section 54(a) of the Competition Act empowers the Central Government to exempt through a notification the application of any provision of the Competition Act on the ground of public interest. As such, the Central Government may, exempt collaboration in certain industries such has pharmaceuticals, essential commodities, health care etc. in an effort to enhance research and development for vaccines and medicines and meeting the demands.
- A violation of Section 3(4) requires a subjective analysis and firms with significant market strength are more likely to fall foul of this provision.
- Notices in relation to combinations which do not present any overlaps between the parties (horizontal or vertical or complimentary) but which cannot avail any of the exemptions from notification to the CCI under the Competition Act. Such transactions are deemed to be approved by the CCI upon filing of notice.