STUDY NOTES: Abuse of Dominant Position under the COMPETITION ACT, 2002

What is the meaning of Dominance in context of companies?

“Dominance” means the ability of an enterprise to increase price or reduce production or output or both, independently of its counterparts or consumers. Dominance creates monopoly of a firm in the market. It is important to understand that dominance is not illegal but only its abuse is [Section 4(1)].

It was held by CCI in Shri Neeraj Malhotra, Advocates v. North Delhi Power Ltd.[1] that it is not the dominance, but its abuse, which is prohibited in law.

DEFINITION- What is ‘Dominant Position’?

Explanation (a) of Section 4 of the Competition Act, 2002 defines “dominant position” of an enterprise as its position of strength in the relevant market in India which makes it possible to:

1. operate independently of its competitors in the relevant market, or
2. affect its competitors or consumers or the relevant market in its favor.

An enterprise which is in a dominant position in the market may disregard market forces and unilaterally impose trading conditions, fix prices, etc. The abuse of dominant position refers to anticompetitive business practices in which a dominant firm engages in unlawful acts in order to restrict the competition, or eliminate the effective competition, or maintain/increase its position in the market.

Section 19(4) of the Act further provides factors that are required to be taken into account by the CCI while determining dominant position of an enterprise. Some of these factors are market share, size, resources, economic power of the enterprise, dependence of consumers on the enterprise, entry barriers, market structure, etc.

In Re M/s ESYS Information Technologies Pvt. Ltd. v. Intel Corporation (Intel Inc.)[2] the CCI in order to determine dominance of Intel acknowledged not only the market share of Intel but also several other factors such as consumer preference due to the brand name, the presence of high entry barriers in the relevant market, the significant intellectual property rights of Intel and the scale and scope enjoyed by Intel.

What acts amount to ‘Abuse of Dominant Position’?

Section 4 (2) of Competition Act, 2002 provides a list of conducts that would amount to abuse of dominant position. The provision prohibits per se and prevents the following acts resulting in abuse of dominant position:

• Impose unfair or discriminatory conditions or prices in the purchase or sale of goods or services. This includes “Predatory Pricing” which is defined in Section 4 Explanation (b) as sale of goods/ provision of services at a price below the cost of production with an intention to reduce competition or reduce the competitors in the market.
• Restrict or limit production of goods or services in the market;
• Restrict or limit technical or scientific development relating to goods or services to the prejudice of consumers;
• Indulge in practices resulting in a denial of market access;
• Make the conclusion of contracts subject to acceptance by other parties of supplementary obligations, which, by their nature or according to commercial usage, have no connection with the subject of such contracts; or
• Use its dominance in one relevant market to enter into or protect its position in other relevant markets. This is known as leveraging.

In Dhanraj Pillay v. Hockey India[3], Hockey India which was a dominant body for private professional hockey activity organization in India and hockey player facilities decided not to add World Hockey Series to the list of sanctioned activities, thus preventing players from participating in the event. CCI exonerated Hockey India from all the allegations of abuse of dominant position and anti-competitive agreement and held that it is one of the regulatory functions of the Hockey India to sanction events and cannot, per se, be said to be violative of the competition laws. In making a further distinction between means and ends, CCI held that it had to proven that Hockey India applied the contention clause in an unjust or unequal or discriminatory manner.

Abuse of dominance can fall into 2 broad categories:

• Exploitative Practices: These are the activities by which a dominant firm abuses its strength by imposing discriminatory or unjust conditions on other firms or costumers in order to exploit them. For instance, excessive prices, discriminatory prices etc.
  
  Pankaj Aggarwal v. DLF Gurgaon Home Developers Private Limited[4]– In this case DLF unilaterally drafted contracts for allotment of apartment which allowed them to be arbitrary about the allocation of super-area, secretive about information relevant to the buyers, to cancel allotments, forfeit booking sums, etc. CCI held these one-sided agreements to be exploitative and discriminatory against consumers.
• Exclusionary Practices: These are the strategies adopted by a dominant firm to foreclose its competitors from entering into the market. For instance, denial of market access, predatory pricing, etc.
  
  In Shri Shamsher Kataria v. Honda Siel Cars India Ltd.[5], CCI held car companies liable for abuse of their dominant positions in the market by entering into such agreements with the Overseas Suppliers (OS) which kept OS from providing spare parts to free repairers. Hence, market access was denied to the competitors and also consumers were made to purchase spare parts solely from the respective car manufacturers.

How to determine ‘Abuse of Dominant Position’ in the market?

In order to determine the abuse of dominant position by any enterprise in the market in India generally 3 steps are followed which are as follows:

STEP 1: DETERMINE THE RELEVANT MARKET [Sections 2(r), 2(s), 2(t), 19(6), 19(7)]

The first stage while determining abuse of dominant position by an enterprise is to delineate the ‘relevant market’ in which the accused enterprise has a dominant position. The purpose to determine a relevant market is to define the scope within which the position of an enterprise is to be tested for dominance and abuse thereof.

Section 2(r) of the Act defines ‘relevant market’ as ‘the market which may be determined by the commission with reference to the relevant product market or the relevant geographic market or with reference to both the markets’. Hence, relevant market is defined in the terms of product or/and geographic, that is, the product produced or service rendered by an enterprise in a given geographic area.

1. Relevant Geographical Market- Section 2(s) of the Act defines ‘relevant geographic market’ as ‘a market comprising the area in which the conditions of competition for supply of goods or provision of services or demand of goods or services are distinctly homogenous and can be distinguished from the conditions prevailing in the neighbouring areas.’

To determine the ‘relevant geographic market’, the CCI takes into consideration a number of factors as specified in Section 19(6) of the Act- regulatory trade barriers, local specification requirements, national procurement policies, adequate distribution facilities, transport costs, language, consumer preferences and, need for secure or regular supplies or rapid after-sales services.

If such factors or conditions are uniform throughout a territory for a product then that whole territory (even a whole country) would be the relevant geographical area. [Shri Bijay Poddar v. M/s Coal India Limited[6]]

2. Relevant Product Market- It is defined under Section 2(t) as ‘a market comprising all those products or services which are regarded as interchangeable or substitutable by the consumer, by reason of characteristics of the products or services, their prices and intended use.’

While determining the ‘relevant product market’, the Commission considers the factors mentioned in Section 19(7) of the Act- physical characteristics or end-use of goods, price of goods or service, consumer preferences, exclusion of in-house production, existence of specialised producers and, classification of industrial products.

In the case of M/s Atos Worldline India Pvt. Ltd. v. M/s Verifone India Sales Pvt. Ltd.[7] CCI held that the relevant product market is to be looked at from both demand and supply perspective based on the characteristics of the product, its price and intended use.

It was held in Surinder Singh Barmi v. BCCI[8], the relevant market was decided on the basis of substitutability of different types of entertainment. It was held that a cricket match cannot be held to be substitutable by any other game due to its characteristics and consumer preference.

STEP 2: DETERMINE THE DOMINANT POSITION [Sections 4 Explanation (a) & 19(4)]

Once the relevant market has been defined the next stage would be to assess and determine whether the enterprise holds dominant position in that relevant market or not. Explanation (a) of Section 4 of the Competition Act, 2002 defines “dominant position” of an enterprise as its position of strength in the relevant market in India which makes possible for it to operate independently of its competitors in the relevant market, or affect its competitors or consumers or the relevant market in its favour.

Section 19(4) of the Act further provides factors that are required to be taken into account by the CCI while determining dominant position of an enterprise. Some of these factors are market share, size, resources, economic power of the enterprise, dependence of consumers on the enterprise, entry barriers, market structure etc.

STEP 3: DETERMINE IF ABUSE OF DOMINANT POSITION [Sections 4(1) & 4(2)]

The final stage after establishing the relevant market and the dominant position of the enterprise is to assess if the enterprise has abused its dominant position in that market. It has already been mentioned that dominance in itself is not prohibited but it is the abuse of the dominance that is illegal under Section 4(1). Abuse is stated to occur when an enterprise or a group of enterprises uses its dominant position in the relevant market in an exclusionary or/ and an exploitative manner. Furthermore, Section 4(2) lists the activities that would amount to abuse of dominant position.

INQUIRY BY THE COMMISSION

CCI under Section 19 of the Act can inquire into the alleged abuse of dominant position prohibited in Section 4(1) of the Act.

Who may ask for inquiry?

Section 19(1) of the Competition Act provides that the CCI may inquire into abuse of dominant position:

• On its own or;
• On receipt of any information from any person or consumer or their association or trade association or;
• On a reference by the government.

Factors To be considered by CCI while determining abuse of dominant position

Section 19 (4) gives a detailed list of factors that the Commission shall consider while inquiring into any allegation of abuse of dominance:

• market share of the enterprise
• size and resources of the enterprise
• size and importance of the competitors
• economic power of the enterprise including commercial advantages over competitors
• vertical integration of the enterprises or sale or service network of such enterprises
• dependence of consumers on the enterprise
• monopoly or dominant position whether acquired as a result of any statute or by virtue of being a Government company or a public sector undertaking or otherwise
• entry barriers including barriers such as regulatory barriers, financial risk, high capital cost of entry, marketing entry barriers, technical entry barriers, economies of scale, high cost of substitutable goods or service for consumers
• countervailing buying power
• market structure and size of market
• social obligations and social costs
• relative advantage, by way of the contribution to the economic development, by the enterprise enjoying a dominant position having or likely to have an appreciable adverse effect on competition
• any other factor which the Commission may consider relevant for the inquiry.

Procedure for inquiry [Section 26]

After receiving complaint or information against abuse of dominant position by any enterprise if the Commission is of the opinion that no prima facie case of abuse of dominance exists then it closes the matter then and there. However, if the Commission is satisfied regarding the existence of a prima facie case of abuse of dominance then it directs the Director-General to investigate into the matter and furnish a report.

If the report of the Director General suggests contravention of Section 4 (abuse of dominant position) then the Commission may order for further inquiry. However, if the report recommends otherwise, that is, no contravention of Section 4 then the objections and suggestions of the concerned opposition parties are invited and considered by the Commission. The Commission then passes such order as it deems fit, that is to say, either reject or call for further inquiry.

CCI has the powers vested in a Civil Court under the Code of Civil Procedure in respect of matters like summoning or enforcing attendance of any person and examining him on oath, requiring discovery and production of documents and receiving evidence on affidavit [Section 36(2)].

CONSEQUENCES OF ABUSE OF DOMINANT POSITION [Sections 27, 28 & 33]

If after inquiry CCI finds that there is contravention of Section 4, it may pass all or any of the following orders:

• Direct the parties to discontinue such abuse of dominant position [Section 27(a)].
• Impose penalty (not to be more than 10% of the average of the turnover for the last three preceding financial years) upon each party involved in such abuse [Section 27(b)].
• Modify such agreement [Section 27(d)].
• Direct the enterprise to comply with the orders, directions and make payment of cost as directed by CCI [Section 27(e)].
• Pass any other order or direction as it may deem fit [Section 27(g)].
• Direct division of the enterprise enjoying dominant position to ensure that such enterprise does not abuse its dominant position [Section 28(1)]. In order to give effect to the division of the enterprise the Commission can pass any order(s) stated in Section 28(2).
• Issue interim orders [Section 33].

[1] Shri Neeraj Malhotra, Advocates v. North Delhi Power Ltd., Case No. 06/2009.

[2] In Re M/s ESYS Information Technologies Pvt. Ltd. v. Intel Corporation (Intel Inc.), Case No. 48 of 2011.

[3] Dhanraj Pillay v. Hockey India Dhanraj Pillay v. Hockey India, Case No. 73 of 2011.

[4] Pankaj Aggarwal v. DLF Gurgaon Home Developers Private Limited, Case No. 13 & 21 of 2010 and Case No. 55 of 2012.

[5] Shri Shamsher Kataria v. Honda Siel Cars India Ltd., Case No. 03/2011.

[6] Shri Bijay Poddar v. M/s Coal India Limited, Case No. 59 of 2013.

[7] M/s Atos Worldline India Pvt. Ltd. v. M/s Verifone India Sales Pvt. Ltd., Case No. 56 of 2012.

[8] Surinder Singh Barmi v. BCCI, Case No. 61/2010.