Buyer – Seller Arrangements: Is CCI Expanding The Cartel Horizons?

On January 15, 2019, Competition Commission of India (‘CCI’) imposed a penalty on Godrej and Boyce Manufacturing Company Limited (‘Godrej’) and four of its officials for entering into a price fixing arrangement with Panasonic Energy India Company Limited (‘Panasonic’) in violation of Section 3(3) of the Competition Act, 2002 (‘Competition Act’) (‘Godrej Order’).[1] By way of a separate order, involving similar facts, CCI imposed a penalty on Geep Industries (India) Private Limited (‘Geep’) and its officials for a similar arrangement with Panasonic (‘Geep Order’).

To appreciate the implications of the Godrej Order and the Geep Order, the background and facts of these cases are particularly important[2]: (i) on one hand, Panasonic was a manufacturer of zinc-carbon dry cell batteries (‘DCBs’), on the other hand, Godrej did not have the capability to manufacture DCBs; (ii) Panasonic and Godrej entered into a product supply agreement (‘PSA’) for supply of DCBs starting from early 2012 until late 2014; (iii) similar to customary contract manufacturing arrangements, the DCBs were procured by Godrej from Panasonic in a ready to sell form i.e., the labelling and packaging of the battery was also done by Panasonic; (iv) the DCBs procured by Godrej from Panasonic were sold by Godrej under its own brand name, giving due credit to Panasonic as manufacturer of such batteries, on the labelling of the DCB.

In parallel, Panasonic entered into a price fixing arrangement with its competitors i.e., Eveready Industries India Ltd. (‘Eveready’) and Indo National Limited (‘Nippo’) during the period between May, 2009 and August, 2016. Panasonic filed a leniency application before CCI disclosing this conduct and CCI found Panasonic, Eveready and Nippo guilty of a cartel conduct. In the Godrej Order, CCI specifically notes that Panasonic used its knowledge of future prices fixed with Eveready and Nippo and used ‘its position of leverage to extract higher procurement price’ from Godrej, by indicating that the prices will go up. Yet, CCI held Godrej guilty of entering into a cartel with Panasonic on the basis of: (i) a specific mutual comfort clause under the PSA effectively stating that the buyer and seller would not act against each other’s market interests; and (ii) e-mails that were exchanged between the officials of Panasonic and Godrej in relation to procurement price of DCBs pursuant to the PSA.

CCI’s reasoning appears to be primarily based on the following premise: (i) Godrej and Panasonic were identified as ‘independent principals’ under the agreement and therefore, a mutual comfort clause was inherently anti-competitive; and (ii) none of the e-mail exchanges used the term ‘procurement price’ and therefore, could not have been viewed as negotiation between buyer and seller in relation to procurement price. As a corollary, CCI reasoned that price related discussion on e-mails could only be viewed as an anti-competitive price fixing of DCBs.

The Godrej Order appears to suggest that an agreement entered between a buyer and seller on a principal-to-principal basis could be viewed as akin to an agreement between independently operating competitors and therefore, could be scrutinized under the ambit of Section 3(3) of the Competition Act. Section 3(3) of the Competition Act (i.e., horizontal agreements) which precludes collusion between competitors i.e., independent operating entities at the same level of the production chain. In contrast, Section 3(4) (i.e., vertical agreements) of the Competition Act deals with agreements between two or more enterprises that are at different stages of the production chain. Vertical agreements manifest an interdependent relation between (non-competing) enterprises as a result of being staged at different points of a value chain and generally proscribe harm associated with unilateral conduct. On the other hand, Section 3(3) of the Competition Act governs agreements between competitors, who were otherwise required to act independently. EU does not consider agreements between enterprises at different levels of the production chain as horizontal agreements, unless the parties are potential competitors. By way of an example, a seller could be considered to be a potential competitor to a buyer if in the event of non-supply or increase in prices of products provided by the seller, the buyer could be reasonably expected to manufacture the product supplied on its own in a short period of time.

In fact, the EU and US antitrust regimes do not view the type of arrangement entered into between Panasonic and Godrej in the present matter as akin to a horizontal agreement between competitors. The very reason for not considering these types of agreements between competitors as horizontal, but only as vertical, is the inability of one party to compete at the manufacturing level with the other and therefore, an inherent inability of the buyer to enter the market where the manufacturer is present. CCI appears to have overlooked the fact that Godrej and Panasonic could not have been treated as competitors, i.e. Godrej could not have reasonably been expected to start manufacturing DCBs and therefore, could not have been expected to compete independent of Panasonic’s manufacturing capabilities.

The Godrej Order rings an alarm, given that buyer-seller, distributorship, dealership or contract manufacturing arrangements which are generally viewed as vertical arrangements and are all entered on a principal to principal basis could potentially be categorized, scrutinized and punished under the cartel provisions of the Competition Act.

Another key takeaway is that a buyer, distributor, or dealer needs to exercise caution in terms of their agreement and interactions with their respective manufacturer, contract manufacturer, and supplier, as the case may be, if both of them are present in the market for sale of products or provision of services. Such agreements and interactions/price negotiations pursuant to such agreements could, contrary to commercial realities, be viewed and scrutinized under Section 3(3) of the Competition Act as agreement between competing enterprises.

In order to mitigate the possibility of any potential risk, until there is settled jurisprudence on this issue, entities involved in similar arrangements should closely look at their existing legal arrangements and all communications should clearly reflect the necessity of negotiations in such commercial arrangements.

[1] Suo Moto Case No. 3 of 2017.
[2] For the purposes of this article, we have referred to the specific facts in the Godrej Order.

Published In:Inter Alia Special Edition- Competition Law - March 2019 [ English
Date: March 1, 2019