Envisioning Public Interest in the Indian Competition Law Regime through the Wouters Lens

The author is Nooransh Grover, a fourth-year student at Gujarat National Law University, Gandhinagar.

Introduction

Deriving its roots from Adam Smith, competition law has always thrived upon serving public interest by establishing a competitive market. Theorists have believed that effective competition in the market shall lead to consumer welfare as firms shall indulge in the pursuit to deliver high quality products at lowest prices.[1] 

Various neo-classical economists have believed that a combination of productive and allocative efficiency shall lead to maximisation of consumer surplus and ultimately societal welfare. An additional combination of dynamic efficiency, which is nothing but inclusion of technology in the production and supply chains, shall further enhance the consumer welfare yield.[2]

With the evolution of the market, a contentious issue which has emerged relates to the legality of anti-competitive practices serving public benefit. This issue has been substantially dealt with by European courts in various judicial precedents which has led to the emergence of the Wouters Doctrine.

Undeniably, the Indian competition law regime derives its foundations from the US’ and EU’s regime, but plain imposition of foreign jurisprudence into the Indian legal regime could be counterproductive. It thus becomes necessary to have a nuanced analysis of the Wouters Doctrine and its possible application in India.

This article therefore, puts forth a critical examination and evaluation of the Wouters Doctrine with the help of certain theories developed by jurists and legal scholars relating to incorporation of Consumer Welfare in Competition Law. It further critically examines the impediments in the Indian Competition Law regime to embody public interest and other non-economic considerations with the help of legal provisions and judicial precedents.

This article is an attempt in the direction to bring certain key amendments in the Indian Competition law framework so that it doesn’t circumscribe itself only to certain economic considerations as an exception to anti-competitiveness. It becomes imperative that the ambit of the exception provisions of anti-competitiveness is broadened to enable inclusion of non-economic and public interest considerations which shall kindle a transformative journey to make the Indian Competition Act a social welfare legislation. 

Examining the Wouters Doctrine

The Wouters Doctrine finds its genesis in the case of Wouters v Algemene Raad van de Nederlandse Orde van Advocaten  and further elaboration in three major decisions of the Grand Chamber in European Super League Company (“ESU”) case, International Skating Union (“ISU”) case and the Royal Antwerp Football Club (“Royal Antwerp”) case. Although in the ESU, ISU and Royal Antwerp case, the Court went ahead to hold that the application of the Wouters Doctrine is restricted to professional associations and sporting associations, it is important that the idea at the inception stage is taken into consideration. 

In the Wouters v Algemene Raad van de Nederlandse Orde van Advocaten case decided in 2000, the Court held that in determining whether an alleged anti-competitive practice is violative of Article 101(1) of the Treaty on the Functioning of the European Union (“TFEU”), an examination with regards to the consequences of the anti-competitive practices in achieving legitimate objectives has to be undertaken. The essential elements of such an examination involves analysing the means adopted in achieving such objectives as well. If such means pass the test of necessity or the least-restrictive-means test, such a practice shall not attract liability under Article 101(1) of the TFEU.

The Consumer Welfare Test: Analysing Professor Salop’s Opinion

Professor Steven C. Salop is an American economist who focuses on analysing antitrust policies and vociferously advocated for the Consumer Welfare Test. He argues that a broader analysis must be undertaken in analyzing antitrust claims. He argues that anti-competitiveness must be analysed from the standpoint of consumer welfare, that is to say that a conduct is unlawful if it stifles competition in the market without sufficiently improving consumer welfare to offset the effect on competition. He argues that greater pro-competitive benefits must be shown where the harm to competitiveness in the market is great.[3] 

 Applicability in India and its Impediments

There are primarily two approaches for identifying anti-competitive effects which have evolved by virtue of jurisprudence in many countries. These approaches are (i) per se approach, and (ii) the rule of reason or effects-based approach. The per se approach analyses anti-competitive activities in a narrow sense by primarily looking into whether there exists, prima facie, anti-competitiveness or not. The per se approach, as against the rule of reason or the effects-based approach, refrains from undergoing a cause-effect analysis and determining the outcomes of the alleged anti-competitive behavior.

The Competition Act, 2002 (“Act”), under Section 3 and Section 4, has adopted a quasi per se approach by incorporating the word ‘shall’ rather than ‘may’. Contrary to popular perception, the use of the word ‘shall’, denotes a higher degree of presumptiveness as compared to the word ‘may’. According to settled principles of legal interpretation, ‘may’ indicates and allows for a wider scope of accommodativeness of varied factors. The word ‘may’ denotes a discretionary or flexible approach in the process of legal interpretation. On the contrary, the term ‘shall’ signifies a comparatively narrower and stricter form of legal interpretation giving a highly skewed scope of flexibility. Thus, it can be rightly deduced that incorporation of the term ‘may’ rather than ‘shall’ gives ambit for incorporation of varied factors as well as an analysis into the reasonableness of the effects of a rather anti-competitive practice. This incorporation shall pave the way for an effects-based approach under Section 3 and Section 4.

It must be noted that Article 101 (1) of the TFEU also adopts an effects-based approach by incorporating the word ‘may’ and also stating that agreements having ‘their object or effect’ to prevent or restrict competition shall be void.

This quasi per se approach restricts the application of the Wouters Doctrine in the Indian competition law regime. The minimum benchmark for undertaking an effect-based analysis is limited to ascertaining whether there is an ‘appreciable adverse effect on competition’. Such an analysis restricts the adjudicatory mechanism to limit its area of scrutiny to ascertain measurable adverse effects on competition and refrain from including exclusions such as public interest.

This myopic view of scrutiny can be better appreciated by analyzing the case MCX-Stock Exchange v. National Stock Exchange & Ors.. The case pertained to the alleged attempts by National Stock Exchange (“NSE”) for engaging in predatory pricing by charging zero transactional cost from traders engaged in trading of currency derivatives (“CDs”). The Competition Commission of India (“CCI”) analysed the situation purely from an abuse of dominance perspective, relegating larger questions of public interest. The CCI found the NSE to be engaging in predatory pricing by making the transactional cost lower than the marginal cost. It is an undeniable fact that the NSE has very low operational expenditure which makes such schemes viable for the NSE to undertake. The CCI also erred in finding the ‘relevant market’- it found the relevant market to be ‘the stock exchange services in respect of the CD segment in India’, but instead I believe that the stock exchanges are a platform and the CD market is a vertical segment of the platform.

The findings of the CCI in the present case indicates that the approach of the CCI has been superficial. Owing to the low operational expenditure and high capital expenditure, the NSE sought to come up with these innovatively priced schemes. Such a mechanism, in my humble opinion, cannot be termed as predatory pricing. Furthermore, zero transactional costs in trading in CDs shall have a trickle-down effect enabling small traders and businessmen to have better export strategies and enabling them to have a variety of hedging instruments. The intent of THE NSE to come up with such initiatives was to encourage exports among small enterprises instead of creating entry barriers for new entrants. It can be fairly concluded that the decision of the CCI in the present case was in consonance with the scheme of the Act, but whether it has led to enhancement of public welfare and benefit, is contentious. 

A juxtaposition of the decision of the CCI to the larger market analysis leads us to the conclusion that the approach of the CCI is based on the premise that a monopolist sets higher prices for the goods while restricting output to a level where marginal revenue is equal to the marginal cost and generates monopoly profits.

It is evident that the CCI presupposes that an increase in producer surplus is at the detriment or decrease in the consumer surplus, which creates an anomalistic view of public interest. This has led to the Act becoming a binary contest between competition and monopoly, hence making certain key amendments to the Act a necessity.

Objects Test: Pre-requisite for Application of Wouters Doctrine

For the effective implementation of the Wouters Doctrine in India, it is important that due consideration is given to the practical realities of the market and avoid creating a mechanism whereby unreasonable application of the Wouters Doctrine becomes a norm. It is important that prior to the application of the Wouters Doctrine, in any given factual matrix, a prior Objects Test is undertaken. If the agreement is by its object found to be anti-competitive, then there is no rationale for undertaking an effects-test. Furthermore, it is also essential that the anti-competitive object of such an agreement outweighs the legitimate effect of the agreement, for it to be declared as void. A better understanding of the term ‘object or effect’ can be gained from the case of Consten and Grundig v. Commission, where the Court held that there is no need for an examination on effects when the object of agreement is found to be anti-competitive. Thus, any legislative amendment in the future has to be based on or incorporate the Objects Test.

Conclusion

The application of the Wouters Doctrine has been given a limited scope by virtue of the ESL, ISL and Royal Antwerp judgments. A holistic understanding of the three judgments clearly indicates that the application of the Wouters Doctrine is (i) limited to professional associations and sports associations, (ii) is applicable to violations under Article 102 of the TFEU, meaning thereby it can be applied in case of abuse of dominance, and (iii) cannot be applied to agreements which by their nature are anti-competitive.

An implementation of this doctrine in India requires that there is a shift from the quasi per se or presumption-based approach. It is imperative that CCI analyses situations from a holistic perspective rather than applying strict rules of interpretation. There is not an iota of doubt that markets are by nature, dynamic. In such a dynamically competitive market, application of strict rules of interpretation shall be detrimental to the purpose of establishing a competitive market.

It is important that the slight difference between consumer welfare and public welfare is carved out, the former having a more restrictive and economics-based meaning while the latter having a societal connotation. By inserting public welfare, a larger objective of including non-economic justifications to any anti-competitive agreements is to be achieved. Therefore, it becomes crucial for the adjudicatory mechanism to determine the legitimate justifications in the name of public welfare and interest, and the extent to which they can outweigh the anti-competitive nature.

[1] Dr. Versha Vahini, Indian Competition Law (Lexis Nexis 2020)

[2] Richard Whish and David Bailey, Competition Law (9th edn, OUP 2018)

[3] Abel M. Mateus and Teresa Moreira, Competition Law and Economics (Edward Elgar Publishing Limited 2010)