Sagardeep Rathi Swati Bala Siddharth Bagul Satvik Mohanty February 17 2022 CCI penalises maritime car shipping cartel Khaitan & Co | Competition & Antitrust - India Sagardeep Rathi, Swati Bala, Siddharth Bagul, Satvik Mohanty Competition & Antitrust IntroductionFactsDecisionCommentIntroductionOn 20 January 2022, the Competition Commission of India (CCI) penalised the following Japanese car shipping companies for cartelising in relation to maritime motor vehicle transport services to automobile original equipment manufacturers (OEMs) in contravention of section 3(3) read with section 3(1) of the Competition Act 2002:(1)Nippon Yusen Kabushiki Kaisha (NYK Line);Kawasaki Kisen Kaisha Ltd. (K-Line);Mitsui OSK Lines Ltd (MOL); andNissan Motor Car Carrier Company (NMCC).The CCI fined the four offending parties (the OPs) and 33 associated officials a total of approximately 64 million Indian rupees ($8,497,600); NYK Line was granted a 100% penalty reduction, while MOL and NMCC were granted 50% and 30% reductions, respectively.FactsThe case was initiated by the CCI on 20 November 2014 following a leniency application filed by NYK Line under section 46 of the Act read with the CCI (Lesser Penalty) Regulations 2009 (LPR). In its application, NYK Line disclosed that the OPs had colluded to provide maritime motor vehicle transport services to OEMs for certain trade routes for three contracts, which involved some or all the OPs.Based on the LPR application, the CCI prima facie found that the OPs had coordinated their prices for OEM tenders for transport services on pure car carrier (PCC) vessels and instructed the director general (the DG) to investigate the matter. While the DG was investigating, MOL and NMCC also filed leniency applications and admitted their involvement. However, K-Line contested the allegations.This article provides an overview of the key aspects of the CCI's decision.DecisionJurisdiction of CCI and exportsK-Line contended that as the OPs had transported cars manufactured by an Indian subsidiary of a global OEM (ie, outbound intra-company sales), such services were exempt under section 3(5) of the Act, which deals with exports-related conduct.Dismissing this argument, the CCI noted that section 3(5) does not oust the applicability of section 3 of the Act, as it only provides a safe harbour for exports from India. Further, it clarified that since the OPs had provided transport services to the OEMs, the OEMs were the exporters and not the OPs. The CCI also added that K-Line's suggested interpretation would mean that cartels, with regard to the supply of any input goods and services, and where the ultimate product was exported, were exempt from the Act.K-Line further argued that given the investigated routes were outbound (ie, from India) and the "ultimate consumer" was located outside India, no harm had been caused within India. Relying on a CCI decision,(2) K-Line asserted that as most of the relevant commodities had been exported and no harm had been caused in India, the parties to such an anti-competitive agreement were not in violation of the Act.CCI also rejected this claim and held that section 2(f) of the Act does not distinguish between an "ultimate consumer" and an "intermediate consumer". The CCI observed that the OEMs with manufacturing bases in India would be considered "consumers" since they had availed themselves of the OPs' services. Accordingly, any anti-competitive agreement among the OPs would naturally impact the OEMs in India; therefore, the CCI held it had jurisdiction over the case.Respect ruleThe CCI found that the cartel among the OPs was primarily based on a "respect rule" to maintain their stronghold over respective customers and historical businesses. The "respect rule" meant that the OPs had avoided competition with each other and protected the business of the existing PCC by providing quotes higher than the incumbent's rates or not providing quotes at all.Guideline pricing and implementationK-Line asserted that the discussion on freight levels should be viewed as guidelines and not final rates as no OP had been obliged to follow them. In addition, K-Line stated that it could not have known what final figures were concluded by the other OPs. In this regard, the CCI noted that even assuming the final figure had been not discussed or fixed, the discussion about a guideline rate alone would vitiate the price discovery process and set a higher benchmark for the final price.K-Line later claimed the guideline pricing had not been implemented and, based on the CCI's ruling in Flashlight,(3) no anti-competitive agreement should be found. The CCI disagreed and clarified that section 3(1) of the Act forbids not only agreements that cause harm but also agreements that are likely to cause harm. It also distinguished Flashlight on its facts and noted that in that case, the Ops had not only shared confidential information but also implemented them. Quoting its decision from Beer Cartel,(4) the CCI noted that implementation of an anti-competitive agreement and actual causing of harm are not prerequisites to find a contravention once the agreement has been established.Negotiation of ratesCiting CCI's decision in Rail Coach Kapurthala,(5) K-Line contended that since OEMs split tenders between relevant OPs for some contracts, there was no incentive for the bidders to compete. Further, relying on the Supreme Court's decision in Rajasthan Cylinders,(6) K-Line argued that the DG had ignored the possibility that the OPs acted under normal market conditions.By contrast, the CCI observed that even if freight rates were negotiated by OEMs and subsequently brought down, such action was of no consequence. It emphasised that once the OPs distorted the price discovery process by collusion, negotiation by OEMs was not likely to achieve the same competitive freight rates that could have been discovered under competitive conditions.Bid rigging and tenderIt was also argued that some of the OEMs did not have a formal tendering process and had approached the OPs on an individual basis by way of request for quotations so that a bid rigging cartel could not be found. Negating this argument, the CCI noted that a formal tendering process is not essential to finding a violation of section 3(3)(d) of the Act and it reemphasised the procurers had still been looking for competitive prices.Oligopolistic market and VSAThe CCI rejected the argument of oligopolistic market and consequent price transparency and held that even in those markets, competitors must make decisions independently. Regarding vessel-sharing agreements (VSAs), the CCI noted that the block exemption to VSAs was not available during the cartel period. Further, despite the Ministry of Corporate Affairs' subsequent exemption of VSAs in a notification on 11 December 2013, the exemption excluded only price fixing, customer allocation and collusive bidding, as in the case at hand.Anti-competitive conductBased on evidence (eg, emails, depositions, visitor logs, meeting logs, calls, memos, and lesser penalty regulations (LPR) applications), the CCI concluded that the OPs had regularly:shared commercially sensitive information including ship space availability and frequency of sailing;fixed freight rates and volumes;allocated customers and routes;discussed splitting of services to OEMs; andcolluded for bids by cover bidding or refraining from providing or undercutting quotes.The CCI therefore concluded that the OPs had contravened sections 3(3)(a), 3(3)(c) and 3(3)(d) of the Act.Penalty and LPR applicationsWith a basis in Excel Crop,(7) the OPs argued that the penalty should be proportionate and based on "relevant turnover" (ie, the turnover earned from specific customer, tender and/or route). However, the CCI noted that such an argument would not lead to penalisation if the OPs had refrained from quoting and it would also go against the spirit of Excel Crop, which concerned multi-product companies. Therefore, the CCI imposed the penalty at 5% of their relevant turnover from providing maritime transport services in relation to India during the cartel period (ie, 2009-2012), which it said was higher than 1.5 times the profit earned during the cartel period; however, in case of NYK Line, its profit appeared to be higher than its turnover.Penalty and Single Economic EntityMOL argued that it had had a 40% stake in NMCC in 2008, which had increased to 90% in 2009, and therefore MOL and NMCC should be viewed as a single economic entity (SEE) or group entity. Consequently, it argued that if MOL (the parent) is penalised, NMCC (the subsidiary) should not be penalised. Their initial joint LPR application was rejected by the CCI and they were asked to file separate applications. On the penalty, the CCI noted that the definition of "group" under section 5 of the Act does not extend to section 3. Moreover, even though MOL had provided the relevant financial data, it had failed to confirm that the data as consolidated and included NMCC's financial figures as well. Thus, the CCI proceeded to penalise them separately.LPR and penalty reductionsAs noted above, given the first marker status and disclosures made by NYK Line, which helped the CCI in passing the prima facie order when the CCI had no evidence on the cartel, NYK Line was granted a 100% reduction in penalty. Based on the second and third marker status and cooperation, MOL (fined 101.2 million Indian rupees (approximately $1,343,800)) and NMCC (fined 286.9 million Indian rupees (approximately $3,808,600)) were granted 50% and 30% reductions, respectively. K-Line, which had not filed an LPR application, was penalised 242.3 million Indian rupees (approximately $3,217,300). The CCI also penalised the relevant officials of the OPs at 5% of the average of their incomes for the three financial years preceding the cessation of the cartel and granted them similar reductions as their respective companies.CommentThis decision is the latest in the global investigations, fines and settlement orders issued against the OPs, as well as other car carriers, which all emanated from an investigation initiated by the Japanese Fair Trade Commission. Other jurisdictions in which the OPs have been penalised include:Australia;Chile;China;Korea;the European Union;Mexico;Peru;South Africa;the United Kingdom;the United States.This marks the first time that the CCI has issued an order in the maritime car and transport industry; it promises to be a trend-setting precedent and will provide guidance for future competition cases in this sector. The decision also clarifies several legal issues, including the application of VSAs and export exemption, and it restates that implementing a cartel is no longer a prerequisite to finding a violation. In order to not extend the definition of a "group" and an "SEE" to section 3 of the Act, it remains unclear whether the CCI will follow this approach in the future. However, the fact that it might have looked at the consolidated accounts of MOL, if provided, indicates that it will remain mindful of not imposing a double penalty.This also marks a return to the strict penalty regime, in contrast to the "soft approach"(8) that the CCI adopted towards cartels at the beginning of the covid-19 pandemic, when it imposed only a few lenient penalties. Lastly, the decision once again reinforces the effectiveness of the leniency regime in tackling cartels. In fact, most recent cartel cases investigated or penalised by the CCI have originated from leniency applications. It is thus expected that the LPR will continue to push ahead the CCI's policy objective to curb cartels and promote competition in markets by ensuring freedom of trade in India.For further information on this topic please contact Sagardeep Rathi, Swati Bala, Siddharth Bagul or Satvik Mohanty at Khaitan & Co by telephone (+91 120 479 1000) or email ([email protected], [email protected], [email protected] or [email protected]). The Khaitan & Co website can be accessed at www.khaitanco.com.Endnotes(1) See Cartelisation by Shipping Lines in the matter of provision of Maritime Motor Vehicle Transport Services to the Original Equipment Manufacturers, suo moto case 10 of 2014, 20 January 2022.(2) Shri Nirmal Kumar Manshani v M/s Ruchi Soya Industries Limited & Ors, case 76 of 2012.(3) Alleged Cartelization in Flashlights Market in India, suo moto case 01 of 2017.(4) Alleged anti-competitive conduct in the Beer Market in India, suo motu case 06 of 2017.(5) Deputy Chief Materials Manager, Rail Coach Kapurthala v Faiveley Transport India Limited, case 06 of 2013.(6) Rajasthan Cylinders and Containers Limited v Union of India & Ors, (2020) 16 SCC 615.(7) Excel Crop Care Limited v Competition Commission of India & Anr, (2017) 8 SCC 47.(8) Chief Materials Manager, South Eastern Railway v Hindustan Composites Limited, Industrial Laminates (India) Private Limited & Ors, reference cases 03 and 05 of 2016, 01, 04 and 08 of 2018 and Cartelisation in Industrial and Automotive Bearings, suo moto case 05 of 2017, 10 July 2020, 5 June 2020.