On 14 June 2017, the Competition Commission of India (CCI) has decisively addressed the issue of “resale price maintenance” (RPM) under the Competition Act, 2002 (Act). The CCI found that Hyundai Motor India Limited (Hyundai) enforced RPM on its dealers and levied a penalty of 0.3% of its relevant turnover (i.e., INR 87 crores). The decision of the CCI also provides certain clues regarding its treatment of “hub-and-spoke” arrangements (i.e., collusive conduct between entities at different levels of production).
As per Section 3(4) of the Act, RPM refers to a vertical agreement to sell goods on the condition that the prices to be charged on the resale by the purchaser shall be the prices stipulated by the seller unless it is clearly stated that prices lower than those prices may be charged.
Certain dealers alleged that Hyundai had violated Section 3(4) of the Act as follows:
- The Dealership Agreement required dealers to seek consent prior to taking up dealerships with a competing brand and to procure spare parts either directly from Hyundai or through its pre-approved vendors and this amounted to an “exclusive supply agreement” and “refusal to deal”.
- The enforcement of the “Discount Control Mechanism” (DCM) under the Dealership Agreement by Hyundai resulted in RPM. Further, it was alleged that Hyundai perpetuates “hub-and-spoke” arrangements, wherein bilateral vertical agreements between Hyundai and its dealers and horizontal agreements between dealers through Hyundai, resulted in price collusion.
- It was alleged that Hyundai forces its customers to purchase passenger cars tied with CNG Kits, Lubricants and Oils, and Insurance Services from specified vendors.
- Hyundai also has control over the sources of supply for the dealer’s products and ties the purchase of desired cars to the sale of high-priced and unwanted cars to its dealers in violation of Section 3(4) of the Act.
The CCI directed the office of the Director General (DG) to investigate the allegations in its prima facie order. To examine the allegations, the DG defined the relevant markets as per each allegation. For instance, to examine whether Hyundai enforced RPM among its dealers, the DG defined the relevant product market as “intra-brand sale of Hyundai Brand of Cars in Delhi and NCR”. The DG concluded its report in favour of the informants and confirmed the abovementioned allegations. The DG also concluded that the conduct of Hyundai also constituted an abuse of dominance under Section 4 of the Act.
In the first instance, the CCI disregarded the DG’s findings relating to abuse of dominance since it was outside the scope of the DG’s mandate.
Additionally, the CCI chose not to adopt the DG’s methodology in terms of defining the relevant market. Instead, the CCI defined the markets in question as: (i) upstream market for all passenger cars in India; and (ii) the downstream level of sale and distribution of Hyundai passenger cars to end consumers in India. The definition of the upstream market is in keeping with the CCI’s previous orders in similar cases in the automotive sector.
With regard to the allegation of exclusive supply and refusal to deal, the CCI observed that merely because the requirement of prior consent before entering into a dealership for a competitor brand, did not amount to exclusivity. The CCI also observed that several Hyundai dealers had, in fact, set up such competing dealerships and therefore, Dealership Agreement (in theory and in practice) did not violate Section 3(4) of the Act.
On tie-in arrangements, the CCI reiterated its position in Sonam Sharma vs. Apple and Ors., Case No. 24 of 2011 to state that purchasers of Hyundai cars were not “forced” to purchase CNG Kits, Lubricants and Oils, and Insurance Services from specified vendors.
On the question of RPM, the CCI has most notably observed that Hyundai’s DCM prescribed the maximum discount which a dealer could offer to its end consumers. This was enforced by employing “mystery shopping agencies”, which would monitor the activities of dealers and would report to Hyundai. Penalties were then imposed on those dealers which deviated from the DCM. According to the CCI, this practice did not ultimately benefit consumers who ended up paying a higher price for the cars that they purchased. The arrangement also did not improve technology or the distribution of goods and services and would have hindered entrants from effective price competition.
More significantly and perhaps for the first time, the CCI has emphasised on the linkage between intra-brand price competition and its subsequent impact on inter-brand price competition, which is particularly significant from a pricing perspective and therefore, affects the ultimate customer.
The CCI also made an interesting observation regarding hub-and-spoke arrangements, stating that “RPM, when enforced at the instance of the distributors/dealers, is particularly problematic since it helps maintain collective interest of the downstream players, i.e. the distributors, to maintain higher resale prices, causing consumer harm…” (emphasis added)
Previously, in cases dealing with RPM issues, the CCI has used market share of the infringing party as the centre piece in its analysis and had found that where the market in question was generally competitive, the RPM was less likely to cause an appreciable adverse effect on competition. This particular order of the CCI has the potential to greatly effect pricing policies because it emphasises the need for intra-brand competition and states that the absence of intra-brand competition has a direct, and adverse impact on inter-brand competition. The fact that the CCI has not made an in-depth of the automotive market, which it has generally found to be competitive in the past, could suggest that RPM will be subjected to a more stringent standard when compared with other vertical restraints under Section 3(4). This is not unlike the situation, which prevails across many jurisdictions globally.
The CCI’s decision notes that the DCM was in place at the behest of distributors. The question of the liability of such distributors under the Act then arises.