India Inc. is moving online: Key Antitrust considerations

With internet penetration reaching nearly 60% of India’s population, there has been a spurt in online marketplaces and stores over the last few years. This trend has accelerated with the spread of corona virus disease of 2019 (“Covid-19“), which has imposed movement restrictions on customers and resulted in the shutting down of several brick and mortar retail markets. Businesses that have traditionally operated through physical stores have been pushed to go online and some may say that an online presence has become essential for most retailers. While some manufacturers may select to sell their products through established marketplaces such as Amazon and Flipkart, others have set up their own “company-owned” online stores to sell their products. Companies are increasingly faced with a choice on whether to distribute their products through brick and mortar stores, third party online marketplaces or their own online stores. Choosing between multiple channels of distribution involves a careful consideration of the antitrust implications.

Key commercial considerations

Establishing a distribution network which involves selling through all three channels – online, offline and through company-owned online stores involves a careful balancing act between the commercial interests of the company, its brick and mortar distributors and its online partners. Some practical commercial issues that merit anti-trust consideration could be: (a) do you need to allow your brick & mortar stores to sell online; or can you appoint a separate set of partners to sell online (or even do it through your own website)? (b) will traditional brick and mortar store partners complain that they have been discriminated against?; (b) can you differentiate between the discounts or margins offered to online platforms vis-à-vis brick & mortar stores?; (c) could the increased price transparency as a result of online price listings, result in some form of (tacit) co-ordination between brick & mortar stores?; and (e) can online resale prices be regulated to prevent ‘deep discounting’?

While there is no one-size-fits-all answer to some of these issues, each needs to be carefully considered from an antitrust perspective. Indeed, market-leaders or companies that enjoy a dominant position in the market will face greater anti-trust scrutiny because of their “special responsibility” to preserve competitive conditions in the market.

Big players – be careful!

 If you are an entity that enjoys a market-leading or “dominant” position, then anti-trust rules suggest that discriminatory conduct e.g. differential margin/discounting policy between your online and offline platform, may constitute an “abuse of dominance” under Section 4 of the (Indian) Competition Act, 2002 (“CA02“). Take for instance, a recent case where the CCI penalized Grasim Industries Ltd. (“Grasim“), for price-discriminating between different categories of distributors/intermediaries while selling viscose filament yarn, in which it was a clear market-leader. The CCI observed that Grasim as a dominant enterprise had “special and differential obligations” towards its downstream customers and that its discriminatory pricing policy distorted competition within their market for distributing viscose filament yarn. While the CCI’s order in Grasim did not involve an online vs offline sales debate, the principal laid out is clear – discriminating between your distributors could raise antitrust risk.

In addition, differentiating between various sales channels – online, offline or company-owned, may also be scrutinized as anti-competitive “vertical arrangements”. Such arrangements or agreements are typically entered into with distributors or suppliers and could entail an “exclusivity condition” which limits an online or brick & mortar from selling rival brands. Distributor agreements could also contain geographical limitation clauses (although these involve complex geo-blocking tools in the online world), or even stipulations that limit brick & mortar distributors from selling online, or vice-versa. Manufacturers might also prevent their online and offline distributors from selling their products below a certain price by imposing resale price maintenance arrangements (“RPM“).

Each of these types of vertical arrangements (and others) will be scrutinized under Section 3(4) of the CA02 to test for potential anti-competitive effects of such conduct in the market. While Section 3(4) does not require an enterprise to be “dominant” for the restriction to be anti-competitive, it has usually been the case that companies with greater market power are more likely to distort market conditions and be sanctioned by the CCI.

While we have outlined some of the issues that might arise from conditions that are imposed in distributor agreements, it is worth noting that the conditions themselves do not render agreements as being anti-competitive. The CCI will analyze objective justifications offered by companies explaining why such restrictions are necessary for their business and will apply the ‘rule of reason’ test while doing so. So for instance in KC Marketing v. Oppo, CCI rejected complaints of territorial restrictions and online sales ban as they were aimed at protecting investments of Oppo’s distributors and its online channels, respectively. Similarly, in Snapdeal v. KAFF Appliances, it concluded that restricting online sales to curb deep discounting and incentivizing offline channels who make considerable investments in display and pre-sale services, did not cause any AAEC in terms of Section 3(4). That said, both Oppo and KAFF did not exercise significant market power in their respective markets. The CCI may have been less generous if either company had substantial market power.

Not so dominant? The law may still catch you: Enhanced risk of cartelization

Businesses also need to be mindful that online presence increases price transparency. In some traditional markets, final prices are negotiated between the consumer and retailer/dealers, but selling online involves publishing the final price on a website. This increased price transparency could reduce competitors’ incentives to compete on prices and raises the risk of (tacit) coordination. Essentially this would mean that different dealers of the same product would agree not to compete on prices after observing their respective online prices. While the focus of the anti-trust scrutiny would be on the dealers for engaging in a price cartel, online marketplaces may also be exposed to anti-trust for facilitating this coordination in what is known as a “hub-and-spoke” cartel.

Conclusion

In sum, this new commercial paradigm requires cautious deliberation on the benefits that innovation may lead to and potential issues associated with it, especially from an anti-trust perspective. More so, since CCI itself is still assessing newer (digital) markets for anti-competitive concerns.

Authors:
Samir Gandhi, Partner
Gaurav Bansal, Senior Associate

Date: July 10, 2020