[Dikshya Debipya Panda and Pavitra Priyadarshan are penultimate year students at National Law University, Odisha]
The Competition Amendment Act 2023 (‘amendment’) addresses a longstanding issue pertaining to the meeting competition defence (‘defence’). The defence is available to enterprises that are dominant in a given market. This empowers a dominant entity to impose discriminatory conditions or prices to meet the competition. It enhances adaptability to navigate the changing market scenario. Earlier, the defence was only limited to discriminatory practices. However, the amendment has broadened the scope of the defence by encompassing unfair conditions and prices.
Unfair conditions and prices mean “inequitable business practices[1]” including both unfairly excessive prices and unfairly low prices. Whereas, if a business indulges in differential treatment in conditions or prices to create an economic barrier without reasonable basis is referred to as discriminatory practices.[2] However, the Competition Commission of India (‘CCI’) has not defined the terms discriminatory and unfair. Whether a condition is unfair or discriminatory can be derived from the factual matrix of a case.
The defence entails a dominant entity modifying its strategy and market approach in response to the changing dynamics of the competitive scenario. These conditions might arise due to reduced prices, improved trading terms, altered strategy by competitors, or the entry of new players in the market. An application for defence is admissible only when there is financial distress or a decline in the company’s market share.
The authors, in this article, attempt to provide a cross-jurisdictional analysis of the defence and decipher any implication the amendment might have over India’s competitive environment.
The evolution of the defence
The concept of meeting competition as an objective-justification stems from the Robinson Patman Act (‘RPA’) of the United States of America (‘USA’). It is generally applicable in discriminatory conditions with the rationale that compelling a company to hold non-competitive practices would go against the fundamentals of antitrust laws. While other countries like Canada hold the defence valid, the recognition is not evident in New Zealand. In the European framework, neither the European Commission (‘EC’) nor the Courts have given a definitive ruling on this aspect.
The American approach
In the USA, the antitrust laws aim to prevent anti-competitive conduct that deprives the citizens of the benefits of competition. The RPA prohibits specific forms of price discrimination that tend to create a monopoly or lessen the competition. The defence’s applicability hinges on demonstrating that the alleged conduct was to achieve a legitimate objective. It provides immunity to dominant enterprises accused of abusing their dominance through predatory pricing.
The defence pertains to price discrimination, where a dominant company is empowered to counter a prima facie violation under section 2(b) of the RPA. To avail the defence, a company must show that the low prices were implemented in ‘good faith’ to meet the competitors’ prices. The standard is akin to what a ‘prudent businessman’ would do in response to a situation necessitating competitive modifications.
Additionally, in Falls City Indusm. Inc. v. Vanco Beverages Inc., the Court commented on the validity of the defence by stating that it does not beat the defence but instead meets it in good faith to retain or attract customers. Moreover, in United States v. AMR Corp. v. American Airlines, the Court opined that it is unreasonable to expect a dominant entity to stand by and endure losses due to a new competitor.
Furthermore, in Brooke Group It Ltd. v. Brown & Williamson Tobacco Corp., the Supreme Court opined that the RPA should be interpreted broadly and harmonized with other antitrust policies. This would balance the literal interpretation with “fairness and convenience” to achieve the legislature’s intent for other acts like the Sherman Act. Essentially, the defence is applicable if the dominant company can prove that lowering the prices was done in good faith. Therefore, these precedents cemented good faith as an essential criterion for the defence to hold good.
The European approach
According to the European framework, the defence is a subset of objective justification and finds its roots in Article 101 of the Treaty of the Functioning of the European Union. It distinguishes between anti-competitive activities and the actions intended to safeguard commercial interest. The principle revolves around the concept of proportionality. It operates under the assumption that abusive conduct is permissible as long as it is essential, not excessive, and has a legitimate objective.
The conundrum around the defence pertains to the extent to which a dominant company can legitimately protect its commercial interest against smaller competitors. The framework has acknowledged the unique responsibility of the dominant entities to safeguard the limited level of competition in the market while addressing the defence. This responsibility prohibits a dominant company from utilizing the defence to its full extent.
In Napp Pharmaceutical Holdings Limited v. Director General of Fair Trading, the EC examined the defence in the context of the special responsibility of dominant entities. It observed that the dominant entity has the right to safeguard its commercial interest. However, such acts need to be proportionate and legitimate. In this manner, the framework has provided for the preconditions for the applicability of the defence.
The Indian approach
Despite various foreign jurisdictions having a definitive stance on the defence, the scope of the defence was limited in India before the amendment. It entailed discriminatory conditions or pricing strategies to meet the competition.
Under S. 4(2)(a)(ii) of the Competition Act of 2002, a dominant entity can take the defence of meeting the competition. It comes into play in investigations of discriminatory pricing and conditions. It empowers a dominant entity to safeguard its commercial interests against actions by competitors. The application of defence mandates strict interpretation and the presence of a legitimate objective to pass the proportionality test. The entity needs to demonstrate that the conduct is a proportionate response to the differential pricing by rivals. However, it is inapplicable if the Commission can establish that the conduct is primarily to eliminate competitors or the entity is unable to justify its claim.[3]
The CCI has stated that the imposition of discriminatory conditions or prices to meet the competition is not abusive. Furthermore, the Tribunal by relying on foreign precedents has confirmed that the applicability of the defence is strictly limited to discriminatory pricing. Thus, keeping the invocation of unfair pricing outside its purview.
Analysis
Prima facie, the expansion of the scope of the defence, seems to be beneficial to the dominant entities. It addresses a loophole in the extant framework. However, it is susceptible to misuse. Under the garb of the defence, a dominant entity can employ discriminatory or unfair conditions through a wide variety of market strategies. For instance, the chemical giant Solvay was slammed with a penalty of 20 million euros by the EC for employing exclusionary practices even though the measures by Solvay intended to counter the pressure from import competition. Therefore, it is always good to have such a legislative mandate to prevent and control anti-competitive practices so that the possibility of dominant firms taking advantage is eliminated.
In the long run, small competitors will be eliminated from the market leading to the concentration of market share in the hands of a few dominant entities. It will restrict the entry of new players, as meeting the conditions set by the dominant entities would be unattainable. This will lead to inflated prices of goods and services which will affect the affordability of the consumers. Thus, there is a need to issue nuanced guidelines for the effective implementation of the defence.
Furthermore, the Indian framework needs to take inspiration from the matured antitrust frameworks for the applicability of the defence. For instance, in the American framework, the concepts of ‘good faith’ and ‘prudent businessman’ are key criteria. This can be adopted to ascertain the ultimate objective of the dominant entity and verify if the defence has been employed to meet or beat the competition.
Moreover, the ‘recoupment test,’ which is prevalent in the matured frameworks, can be adopted as another criterion. The test will facilitate in identifying whether the altered prices are to meet the prices of the competitor or to eliminate competition. It is a two-fold test to identify abusive conduct. Firstly, if the dominant entity sets the prices below the average variable cost just to raise its prices after the elimination of the competition. Secondly, if the prices are set below the average total cost but above the average variable cost just to eliminate the competition. In the first part, the intent is presumed, while in the second, the intent needs to be proved.
Lastly, in matured antitrust frameworks, such as the European framework once a justification is acknowledged, the dominant entity is exonerated. However, in the Indian framework, the justifications have a mitigating effect on the penalty rather than exonerating the dominant entity. This is a fair approach for the Indian competition regime as it is still evolving. The absence of any guidelines or jurisprudence peculiar to the Indian context increases the room for error while granting an absolute defence. This might set a wrong precedent, lethal to the growth of the Indian antitrust framework. Therefore, the defence needs to be inculcated gradually enabling the scope for adaptations depending on how the defence plays out in the Indian framework.
Conclusion
The amendment is a welcome move as it expands the ambit of the defence. However, the application of the defence is still a conundrum due to the lack of clear guidelines. The limited legal precedents by the CCI for guidance elevate the risk of the defence being exploited. A dominant entity can eliminate smaller competitors from the market by adopting unfair or discriminatory prices or conditions. The efficacy of the amendment hinges on the diligent and meticulous application of the defence. The amendment is a positive step for streamlining the Indian competitive regime. However, there is scope for further improvement to meet the global benchmarks. Drawing inspiration from foreign jurisprudence can significantly contribute to elucidating and resolving the existing issues within the defence and strengthening the roots of antitrust law in India.
[1] Black’s Law Dictionary (9th edn) 1667.
[2] ibid 534.
[3] Abir Roy, Competition Law in India: A Practical Guide (Kluwer Law International 2016) 223.
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