The Beginning:
The Competition Act, 2002 has been amended by the Indian legislature through the Competition (Amendment) Act, 2023. These amendments recognise that anti-competitive agreements can take many forms, including hybrid agreements like hub-and-spoke cartels and the involvement of intermediaries/facilitators who are not engaged in identical businesses. Under the new proviso added to Section 3(3) of the Act, the entity is presumed to be part of such anti-competitive agreements if it “participates or intends to participate in the furtherance of such agreement”. The Act defines two types of anti-competitive agreements: horizontal agreements, which fall under Section 3(3)[1] of the Act, and vertical agreements, which fall under Section 3(4)[2] of the Act. The former is presumed to have an appreciable adverse effect on competition (‘AAEC’), while the latter is considered anti-competitive only if it causes or is likely to cause AAEC and is scrutinised as per the rule of reason. Hub and Spoke Arrangement refers to a situation wherein an Entity (‘hub’) facilitates coordination amongst competing entities operating at a different level of the supply chain (‘spokes’). It involves at least two information exchanges: one between spoke A and hub B, and another between hub B and spoke C. Even if strategic, these vertical exchanges are usually considered legal business practices. The main issue is identifying when the legitimate exchange of information turns into a prohibited horizontal coordination without direct proof of collusion.[3]
The National Standpoint:
As per the Amendment, the Competition Commission of India (‘CCI’ or ‘Commission’) has the power to investigate non-competing entities that ‘participates or intends to participate’ in a cartel, even if they do not actively facilitate it. Essentially, a hub can be held responsible for cartelisation if the Commission can establish that there was an agreement between competing entities to engage in any of the prohibited activities outlined in Section 3(3) of the Act[4], and the hub had the intention to participate. This means that the standard of evidence required to attribute liability to the hub as a cartel participant has been diluted. However, it is still necessary to establish an active agreement between competitors in order to prove liability. The Amendment does not address the level of engagement required between spokes to qualify as a ‘rim’ in the said arrangement. The intention behind the Amendment appears to hold vertically related companies liable for knowing or participating in a cartel, even if they are not ‘engaged in identical or similar trade’ as the actual cartel participants.
The Commission, initially in Fx Enterprise Solutions Limited[5] and Jasper Infotech[6], focused on Section 3(4)[7] violations when investigating allegations of a hub-and-spoke arrangement being utilised to facilitate resale price maintenance (‘RPM’). However, the CCI did not make any observations of a hub-and-spoke cartel. Later, in Samir Agrawal[8], the informant alleged that the platforms of Cab Aggregators (‘Ola’ & ‘Uber’) were acting as a hub for the collusion between the spokes, i.e. drivers. The commission observed that “a hub-and-spoke cartel would require an agreement between all drivers to set prices through the platform, or an agreement for the platform to coordinate prices between them. There does not appear to be any such agreement between drivers inter-se to delegate this pricing power to the platform/Cab Aggregators.” Nonetheless, the CCI did not find any evidence of an agreement between drivers using a common cab aggregator and, therefore, could not conclude that the cab aggregators were facilitating collusive conduct among cab drivers. Later, when the case was appealed, the appellate courts, including the National Company Law Appellate Tribunal[9] and the Supreme Court of India[10], upheld the CCI’s decision. Also, in CP Cell[11], the CCI had adopted a similar approach and dismissed allegations of hub-and-spoke agreements.
Through International Lens:
In the United States, either direct or circumstantial evidence must reasonably prove the horizontal agreement of the rim. In case of insufficient evidence, various factors are considered for establishing the horizontal agreement with the spokes, such as the spokes knowing about agreements with other spokes and expecting reciprocity[12], communication among spokes[13], communications from hubs to spokes regarding other spokes’ intentions[14], and abrupt changes to business practices.[15] In United States v. Apple[16], the Department of Justice (‘DOJ’) filed the case against Apple and five publishers for hub and spoke conspiracy. In 2007, Amazon launched Amazon Kindle, wherein in 2009, it accounted for 90% of sales in the Ebook Market due to its pricing model of $9.99; on the other hand, the Publishers didn’t support the pricing model. In the same year, Apple entered the market and entered into an agency distribution agreement with five publishers wherein they coordinated regarding the pricing model, which would effectively eliminate price competition with Amazon. The United States District Court for the Southern District of New York found the said arrangement to be in violation of Section 1 of the Sherman Act, 1890 and passed an Injunction restraining Apple from re-entering into the said arrangement. Later, when the same was appealed before the Second Circuit Court, the District Court’s order was upheld as the intention, and the agreements between Apple and the publishers were the key evidence to prove the horizontal agreement between the parties.[17]
The Replica Kit and Toys’s Cases[18] have played a significant role in determining the application of hub and spoke arrangements in the United Kingdom. In both cases, a major supplier wanted the retailers to avoid discounting on the products sold. On the other hand, the retailers hesitated to adhere to the recommended prices provided by the Supplier as they needed assurance of their competitor’s adherence to the proposed prices. As a result, the suppliers acted as spokes and the major suppliers as the hub, facilitating the exchange of pricing intentions among retailers to prevent discounting from recommended prices in the respective markets. When further appealed, the Competition Appeal Tribunal laid down the test for establishing a hub and spoke arrangement: firstly, A disclosed information regarding its retail pricing intentions to B, which was reasonably foreseeable to A that B would reveal it to A’s competitors; secondly, B does pass A’s pricing intentions on to C; lastly, C uses A’s information in determining its pricing behaviour.[19]
Within the European Union, the AC-Treuhand[20] case established that the hub bears responsibility for facilitating a cartel. At the same time, the spokes are liable if they were aware of or should have reasonably foreseen the anti-competitive behaviour. For a hub to be liable, it must be shown that it knew or should have known about the downstream coordination, and that its actions played a role in making that coordination happen. The European Court of Justice (‘ECJ’) held that “AC-Treuhand played an essential and similar role in both the infringements at issue by organising a number of meetings which it attended and in which it actively participated, collecting and supplying to the producers of heat stabilisers data on sales on the relevant markets, offering to act as a moderator in the event of tensions between those producers and encouraging the latter to find compromises, for which it received remuneration.” In another ruling by the ECJ in VM Remonts[21], an entity has the potential to be held responsible for a coordinated practice due to the actions of an independent service provider if the entity was aware of the anti-competitive goals pursued by both the provider and its rivals and intended to assist in those goals through its behaviour. Alternatively, an entity can be held accountable if it reasonably predicted the anti-competitive actions of its rivals and service provider and was willing to accept the associated risk. Additionally, the court clarified that an entity is not at fault if the service provider improperly utilises its confidential information for anti-competitive purposes without informing the entity.[22]
The Current Ambiguity:
The amended provision raises questions about the interpretation of “intent”. In order to establish the intent to participate in a cartel, there must be some level of coordination between the parties involved. If commercially sensitive information is exchanged between a hub and its vertically related businesses as part of normal business operations, it would not result in any legal liability. However, if competitors exchange competitively sensitive information, this can be sufficient to establish an anti-competitive agreement, provided there is an understanding to coordinate. Obtaining sensitive information about a competitor through a hub is not enough to attract liability unless there is a clear understanding or agreement between the competitors or dealers.
Furthermore, the hub may be held liable for knowing about arrangements to fix prices, even without taking any further action. This means that if a hub fails to take active steps to stop coordinated conduct by its business partners, it may be held responsible. If the hub finds itself in such a situation, it must exercise caution in its relationships with other entities and limit the amount of information it collects. If the information is crucial for the hub’s operations, it must take measures to ensure that its dealers are not involved in any coordinated activities that could be deemed anti-competitive. If the hub becomes aware of anti-competitive behaviour among its vertically related entities, it must have evidence of intervention to prove that it did not intend to facilitate such conduct. The absence of such evidence, combined with the knowledge of such coordination, may lead to the presumption of collusion.
A Way Forward:
To effectively deal with such an arrangement, it is imperative for businesses to take certain precautions. One such measure is to include Non-Disclosure Agreements and Confidentiality Clauses with a direct termination clause in case of any breach by business partners. Moreover, it would be wise to allocate sufficient resources to establish an Internal Investigation Committee to identify any possible breaches. In case of any such breaches, businesses can either address the concerned parties directly or seek the assistance of the Commission to resolve the situation. By adopting these measures, businesses can ensure legal compliance and create a more competitive environment in the market. Furthermore, it is also important to note that the Commission should strive to be business-friendly and avoid overly broad interpretations of “intention” while dealing with such situations. One way to reduce this uncertainty is for the CCI to issue guidelines. By providing clear and concise guidance, businesses will be better equipped to navigate the regulatory environment, ultimately leading to greater compliance and better outcomes for all stakeholders involved.
[1] The Competition Act, 2002, § 3(3).
[2] The Competition Act, 2002, § 3(4).
[3] OECD, Background Note by the Secretariat, Roundtable on Hub and Spoke Arrangements (2019).
[4] The Competition Act, 2002, § 3(3).
[5] Fx Enterprise Solutions Limited v. Hyundai Motor India Limited, CCI, Case Nos. 36 and 82 of 2014 (14 June 2017).
[6] Jasper Infotech v. KAFF Appliances, CCI, Case No. 61 of 2014 (15 January 2019).
[7] The Competition Act, 2002, § 3(4).
[8] Samir Agrawal v. ANI Technologies Private Limited and Others, CCI, Case No. 37 of 2018 (6 November 2018).
[9] Samir Agrawal v. Competition Commission of India and Others, NCLAT, Competition Appeal (AT) No. 11 of 2019 (29 May 2020).
[10] Samir Agrawal v. Competition Commission of India and Others, Supreme Court, Civil Appeal No. 3100 of 2020 (15 December 2020).
[11] CP Cell, Directorate General Ordnance Service Master General of Ordnance Service v. UP State Handloom Corporation Limited, CCI, Reference Case No. 04 of 2019 (3 November 2021).
[12] United States v. Apple, 791 F.3d 290 (2d Cir. 2015).
[13] United States v. General Motors Corp., 384 U.S. 127 (1966).
[14] Toys “R” Us, Inc v. FTC, 221 F. 3d 928 (7th Cir. 2000).
[15] Interstate Circuit v. United States, 306 U.S. 208 (1939).
[16] United States v. Apple, 791 F.3d 290 (2d Cir. 2015).
[17] OECD, Note by the United States on Hub and Spoke Arrangements (2019).
[18] Argos Limited and Littlewoods Limited v. Office of Fair Trading and JJB Sports PLC v. Office of Fair Trading, [2006] EWCA Civ 1318. Case No: 2005/1071, 1074 and 1623, on appeal from the Competition Appellate Tribunal’s judgements in [2004] CAT 17 (Replica Kit); [2005] CAT 13 (Toys).
[19] OECD, Note by the United Kingdom on Hub and Spoke Arrangements (2019).
[20] Case C-194/14, AC-Treuhand AG v. European Commission, ECLI:EU:C:2015:717.
[21] Case C-542/14, SIA ‘VM Remonts’ (formerly SIA ‘DIV un KO’) and Others v. Konkurences padome, ECLI:EU:C:2016:578.
[22] OECD, Note by the European Union on Hub and Spoke Arrangements (2019).
Author Bio
