A Type 2 error? NCLAT quashes CCI order punishing Hyundai for Resale Price Maintenance and Tying-in.
The National Company Appellate Tribunal (“NCLAT/Tribunal ”) , in one of its few orders passed on appeals filed before it under the Competition Act ,2002 (“the Act” ) , vide order dated 19.08.2018 , has set aside the Competition Commission of India (“Commission/CCI”) Order dated 14 June 2017 against Hyundai Motors India Ltd. (“Hyundai” ) which penalized Hyundai for imposing anti-competitive vertical restraints of indulging in resale price maintenance (RPM) and tying -in , on two of its dealers , based in Faridabad, Delhi NCR ( (Fx Enterprise Solutions India Pvt. Ltd ) and in Trivandrum , Kerala (St. Antony’s Cars Pvt. Ltd.) ( collectively “Informants” ) , primarily on technical grounds of alleged non-appreciation of evidence independently by the CCI and relying completely on the findings given in the Director General(DG)’s investigation report.
The Hon’ble NCLAT, vide this order, has sent a strong message to the Commission on the importance of holding an independent antitrust inquiry under section 26(8) of the Act, post the DG investigation, based upon the objections taken by the parties, which, according to the Hon’ble Tribunal, the Commission failed to undertake in this case.
In its impugned Order dated 14 June 2017 , the CCI, after a detailed analysis of the findings arrived at by the DG in the investigation report and the objections taken by Hyundai against the findings , had held that Hyundai , had imposed the vertical restraints of RPM and Tying -In , with its two dealers in Delhi -NCR and Kerala , the Informants in violation of Section 3(4)(e) [Resale Price Maintenance] and Section 3(4)(a) [tie-in arrangements] of the Act. CCI vide its said order also imposed a penalty of 87 crores on Hyundai.
The thrust of the CCI order for arriving at the violation of Tie-in arrangements and Resale Price Maintenance against Hyundai was based on the findings in the DG investigation report , which was in turn based on hard evidence of Hyundai mandating its dealers to use lubricants and oils from a particular brand and using a Discount Control Mechanism (DCM) by hiring “mystery shopping agencies” to keep surprise checks on the dealers (Informants) to see if anyone was giving discounts beyond the prescribed range to the end customers or not . For enforcing RPM, the dealer found to have deviated from the prescribed discount by giving extra discount to any customer was penalized by Hyundai with a minimum of Rs. 2 lakhs for one violation and maximum of Rs. 80 lakhs for the sixth violation. Moreover, these penalties on dealers for violating the “discount code” were to be deposited not with the Hyundai Company but with an advertisement agency to obfuscate the allegation of the company indulging in RPM. The CCI found that this policy of Hyundai amounted to imposition of vertical restraint in the form of resale price maintenance and that such policy had the direct ‘object” of fixing minimum resale price on which the car could be resold by the dealer and hence restricted competition. Noticeably RPM prevents effective competition both at intra- brand level and inter- brand level and it doesn’t allow the dealers to compete effectively on price. You may read the analysis on the impugned CCI order dated 14.6.2017in my earlier blog “CCI Penalizes Hyundai Motors for RPM and Tie-in arrangement”. here.
But has the NCLAT got it right in the appeal filed by Hyundai ( in which , as per the order , it seems to have mainly relied upon the alleged violation of natural justice (for failure of CCI to give it advance notice on the modified definition of relevant market recorded in the impugned order ) and , perhaps, would have reiterated its earlier stand taken before CCI that the practice of enforcing the DCM through mystery shopping agencies was to prevent “ predatory discounting “ by dealers to maintain their “financial health “ ! (Please refer to para 35 and 36 of the impugned CCI order)? Or is it a case of judicial overreach to teach its subordinate forum a lesson on adjudication but ignoring the blatant anti-competitive conducts of the appellant, which were clearly visible on the face of record? In simple words, is it not a case of a Type -2 error i.e. false acquittal, which is abhorred in competition law as being more serious than a Type -1 error (false conviction) since it allows a market player to perpetuate the anti-competitive conduct against more market players in future with impunity. Let us analyze.
NCLAT has passed the order setting aside the impugned CCI order on the following grounds:
Firstly, as regards the violation of RPM, the Hon’ble Tribunal, while noticing that the CCI , had arrived on the finding of Hyundai committing the violation of RPM , mainly on account of Hyundai having admitted the same before the DG regarding hiring various mystery shopping agencies to monitor its policy of DCM for “policing its dealers” and monitoring the arrangement in question, however, held that this was not correct since “CCI has not cited any evidence for coming to such conclusion” (Para 35) . In addition to this, NCLAT also observed that “mere reference of one or other provisions such as Explanation (e) to Section 3(4) of the Act, 2002 will not constitute any offence, till it is proved by the Commission with the help of any evidence” (Para 36). This is clearly beyond comprehension since the admission by Hyundai of such anti-competitive behavior ipso facto proved the anti-competitive conduct and there was no requirement for CCI to look for any other “evidence”. In law, CCI only had to examine Hyundai’s explanation for such behavior, which, as mentioned above, was prima facie, not an objective justification for the conduct, which the Commission did correctly reject, in my view. Thus, the finding of the NCLAT on RPM is, perhaps, a case of Type 2 error, in my opinion.
Secondly , as regards the violation of “ tying-in “ , according to Hon’ble Tribunal , the order of CCI was not based on any specific evidence and was merely based on the opinion of the DG and the finding of CCI with respect to the tie-in arrangement of lubricant and oils by Hyundai Motors was termed as being not based on any evidence and nothing was brought on record by the DG or the Commission to suggest that Hyundai Motors penalized a dealer for not using the recommended lubricants and oils. NCLAT in its order held that “Commission of its own has not discussed any evidence, much less the dealership agreement including the date of agreement to reach conclusion about violation of one or other provisions of the Act, 2002.” NCLAT held that the finding of CCI on this issue was not based on any evidence. Also, as per the Hon’ble Tribunal, CCI had failed to consider that “normally car dealers of all companies recommend use of particular quality of lubricant.
Further, in support of its above finding on merits , the Hon’ble Tribunal , while discussing the relevance of the DG report, sent a strong message to CCI by reiterating that “DG report is merely an opinion primarily to assist the Commission for appreciation of evidence in arriving at a final conclusion during the inquiry and the DG report is not binding on the Commission” (Para 37) . Explaining the role of the Commission, NCLAT has further held that the “Commission is expected to analyse the evidence and the report and required to read it in conjunction with other evidence on record and then to form its final opinion as to whether such report is worthy of reliance or not.” and that it cannot merely depend on the finding on the DG to hold alleged violation of Section 3 and 4 of the Act.
Thirdly, NCLAT observed that the DG as well as the Commission has failed to decide the relevant geographic market as also the relevant product and has also failed to inquire into the agreement in the light of Sub-Section 3 of Section 19 of the Act, It was also observed the relevant geographic market and relevant product market having not been taken into consideration, the inquiry is incomplete being in violation of Section 19(6). NCLAT held that Section 26 of the Act prescribes ‘procedure for inquiry under Section 19’ but in the present case no such inquiry has been made in terms of Section 19 and the procedure for inquiry under Section 19 is not a mere formality.
Comments: This order of NCLAT has, in my humble view, failed to proscribe the main violation of RPM by Hyundai, which is writ large on the face of record, in this case. The Hon’ble Tribunal apparently overlooked the admission and the lame excuse given by Hyundai for its, so far unheard conduct, of hiring mystery shopping agencies to monitor its exploitative policy of Discount Control Mechanism. The Hon’ble Tribunal has, in my humble view, wrongly acquitted Hyundai for the violation of RPM , which is per se illegal in USA and is considered a hard core restriction “by object” in the European Union . Hyundai is now a well-established OEM in India, holding the second largest market share in the market for small and medium sized cars and by allowing the appeal of Hyundai, the NCLAT, has not only encouraged it by legitimizing a wrong market practice but also emboldened it to continue with similar practices indefinitely to the detriment of its dealers. The decision will also discourage the hapless dealers of Hyundai (and perhaps of other OEMs) in other parts of India to approach the CCI against such anti-competitive market practices by Hyundai and other OEMs. It would have been better, in my view, if the NCLAT, apart from setting aside the impugned CCI order completely, could have remanded the case for a de novo inquiry considering the observations made in the NCLAT order, which would have given the dealers a fresh chance to prove their case.