Hub And Spoke Cartels In The Indian Competition Regime: Sketching The Way Forward

The authors are Yash Arjariya and Kunal Thawani, second year students at Hidayatullah National Law University.

The Competition Amendment Bill (the “bill”) proposes to amend Section 3 of the Competition Act (the “Act”) by providing an explanation for it, leading to the acknowledgement of the “hub-and-spoke cartel” in the legislative scheme, albeit the word has not been explicitly mentioned in the bill. Hub and spoke cartels are distinct from other cartels because of the lack of direct communication between the horizontal competitors (spokes). Such cartels use a third party (the hub) to share information and manipulate the competition. A "hub" may or may not be involved in the same type of trade, or it may simply be an algorithm or piece of software.

The first part of the article provides an overview of the Competition Commission of India’s (CCI) current jurisprudence on hub-and-spoke cartel behaviour, and then puts forth the dilemma of narrow construction in the existing paradigm. It goes on to decipher how the proposed amendment better dynamically adjusts CCI to cope with hub and spoke cartel behaviour. Further, an examination of numerous committee reports and foreign jurisprudence has been made to establish the need for the inclusion of ascertainment of “intention” before the imputation of liability in such cartel cases.

Existing Jurisprudence of CCI

The case of Jasper Infotech (Snapdeal) v. Kaff Appliances might be considered the first case in which claims of developing hub-and-spoke cartels were levelled against the opposition party (OP). The informant alleged that the OP maintained the price of its goods at a high level via specific agreements with its suppliers and distributors. However, the CCI opted to instruct the Director General (‘DG’) to solely investigate the concerns of breaches of “resale price management” under Section 3(4)(e) of the act, thereby burying the question of the existence of a hub-and-spoke arrangement in the case. The case of Fx Enterprise Solutions India vs. Hyundai Motor India Limited received the same outcome. The informant stated a series of hub-and-spoke arrangements in the form of bilateral vertical agreements between supplier and dealers and horizontal agreements between dealers via the role played by a common supplier, which resulted in pricing collusion. However, in a kind of replica of the prior case, here too the CCI concentrated on resale price management to hold Hyundai guilty and did not explore the claims of a hub-and-spoke arrangement.

It would not be incorrect to say that the development of Indian jurisprudence on hub-and-spoke cartels can be attributed to the Cab Aggregator Case (Samir Agrawal v. Competition Commission of India & ORS). The informant alleged collusion between drivers through the platforms of cab aggregators. The informant provided that cooperation between drivers, through the Ola and Uber apps, results in concerted action under Sec. 3(3)(a), read with Sec 3(1) of the act. The regulator noted that the allegations failed on the grounds that there was neither an agreement nor intention between drivers to act in collusive behaviour, thus hub-and-spoke cartel behaviour was not established in the case.

Thus, as determined by CCI in the cab aggregator case, the test for establishing hub-and-spoke cartel behaviour in India is twofold: agreement between players (in which a third party facilitates collusion between two or more horizontal parties) and intention (meeting of minds of parties). The authors submit that the former criteria of agreement between parties take precedence over intention when determining hub and spoke cartel behaviour by CCI. The authors place reliance on the case of Re: Domestic Air Lines. In this case, the airlines had begun pricing extravagantly, after the strikes by Air India’s employees. The DG stated that all the airline businesses had indulged in parallel behaviour to increase prices, effectively tacitly colluding. However, CCI did not agree with DG’s report on account of the lack of material evidence showing the presence of any agreement between airlines and the pilots that affected the collusion.

However, the authors submit that this approach is wrongly fixated by CCI, especially to deal with cases of tacit collusion. The authors place their reliance on the ruling of the erstwhile Monopolies and Restrictive Trade Practices Commission (‘MRTPC’) in Ghai Enterprise Ltd and Quality Ice creams (RTPE 18 of 1983), which was relied on by CCI in Re: Aluminium Phosphide Tablets Manufacturers, wherein MRTPC has connected a tacit agreement with price parallelism. Both ice cream firms, which had eight percent of the market share, announced comparable reductions and maintained the same pricing. The MRTPC remarked that the ‘preponderance of the probabilities’ in this instance led to the inference that there was a coordinated effort amongst the firms and consequently, tacit collusion. The Peruvian Authority also considers that the mere transfer of information by a third party to the competing corporations regarding collusion and related negotiations amounts to hub-and-spoke behaviour. CCI’s order in Re: Domestic Air Lines was based upon no finding of any direct proof to the conclusion that a shared software was adopted by rival airlines with a purpose to set prices. However, the regulator did not take into account the tacit collusion between airline companies that the DG report alluded to. The authors advance that such a narrow construction of criteria (merely restricting it to direct evidence test) to determine hub-and-spoke cartel behaviour fails to account for tacit collusion and allows the corporations to escape liability by precluding the identification of any direct agreement through third-party software.

Thus, in the absence of a clear legislative principle recognising hub-and-spoke agreements, CCI had to apply the breadth and generality of Section 3 (1) to handle circumstances where the agreements were not restricted to either horizontal or vertical categories. Due to the difficulty of demonstrating direct proof or agreement among participants who were not at horizontal level with each other, such agreements avoided liability. This statutory lacuna has been rectified by the amendment bill. Authors are optimistic that CCI’s jurisprudence would grow in determining a pragmatic test for such agreements since the bill detracts from the necessity for finding a direct agreement for imputation of liability. The proposed scheme presumes liability of the party if it actively participated in pursuit of cartel behaviour despite the fact that it did not engage in similar trade or was not a horizontal competitor.

Addressing the “Active Participation” Conundrum in the Proposed Amendment

The bill seeks to amend Section 3 of the act by adding an explanation to it.Section 3 of the Act would be amended as follows by the bill:

"Provided further that an enterprise or association of enterprises or a person or association of persons though not engaged in identical or similar trade shall also be presumed to be part of the agreement under this sub-section if it actively participates in the furtherance of such agreement."

The liability ordained by this proposed explanation is based upon a rebuttable presumption rule, which is a fundamental scheme of Section 3 of the Act. However, it remains uncertain what would constitute “active participation” for the purpose of the provision. This concern intensifies in its gravity as the liability under the proposed provision is not subject to the “intention” of the accused enterprise. This may be better understood by taking an example: suppose a trade association facilitates communication between competitors and vertical distributors of a sector in order to address the impact of COVID-19 on the industry and the resultant repercussions. This platform may be used by horizontal and vertical players to collude. If the said proposed provision were to become law, the association’s liability would be imputed based upon its active participation in facilitating communication between colluding parties. Thus, the absence of the requirement of intention to impute liability creates a conundrum.

The authors place their reliance on the decisions of foreign jurisdictions to establish that it is customary practice by other foreign antitrust regulators to gauge the intention of the party before imposing liability for hub-and-spoke cartels. In Toys “R” Us v. FTC, the FTC ascertained the liability of the accused based upon the “conscious commitment to a common scheme.” This criterion was later affirmed by the court of appeal. In Tesco v. Office of Fair Trading, the regulator held that a party may have limited control over information shared in normal commercial dialogue and how it may be used by other suppliers. Thus, in the absence of a clear establishment of intention, the accused was held not liable. The orders of UK jurisdiction given in JJB v. Office of Fair Trading and Argos Ltd v. Office of Fair Trading and the Hungarian Regulator in SCA/Vajda Papír acknowledged that sensitive information may be passed by parties for legitimate reasons and hence developed a “state of mind” parameter for the imputation of liability. This global jurisprudence is consistent with the Supreme Court’s decision in Cab Aggregator Case, which upheld the CCI’s order that intention is sine qua non for liability under sec 3 of the act.

The Competition Law Review Committee, 2019 opined in favour of imputing liability in such cartel cases on the basis of the rebuttable presumption rule, i.e., guilty until proven otherwise, but did not vouch for the inclusion of any element of knowledge or intention for imputing liability. On the contrary, the 52nd report of the Finance Committee on the Competition Amendment Bill, 2022, recommends the inclusion of an element of intention in the determination of liability. The committee suggests that the term “active participation” should be qualified with the intention to act or to have acted with knowledge of such an anti-competitive agreement.

The authors submit that the imputation of liability for hub-and-spoke cartels in the proposed amendment should be qualified with intention. In the opinion of the authors, this would be along the lines of global jurisprudence and prevent unnecessary imputation of liability upon mere facilitators of communication in industry like associations, confederations, etc. without the knowledge of any collusion or cartel behaviour.

Conclusion

The amended bill is a positive step in calibrating CCI’s capacity to deal with hub-and-spoke cartel behaviour. The modification will fine tune CCI’s capacity to deal with tacit collusion by doing away with the direct evidence test and imputing liability on active participation in furtherance of the agreement. The authors have established that imputation of such liability based on active involvement in such cartel activity is qualified by ascertainment of intention in advanced foreign jurisdictions. Not only will such inclusion bring the Indian competition regime at par with the practices of developed foreign jurisdictions, but it will also preclude the imputation of liability to entities merely providing intermediation services or consortiums or associations organising meetings without an agenda for sharing sensitive information.