Competition Law Guidance for coordination amongst businesses in the age of COVID 19 disruptions

Vinay Kumar Sanduja comments on the competition law guidance for coordination amongst businesses due to the covid-19 pandemic.

Introduction:

Escalating disruptions in the market and distress caused by COVID-19has necessitatedcoordination amongst businesses.Such coordination may be required to ensure continued supply and fair distribution of goods and services including critical healthcare products(viz. hand sanitizers, personal protective equipment (PPE), face masks) and essential services. Amongst other activities, businesses are likely to coordinate on activities such as: sharing information on stock and/or capacity levels; sharing of production facilities, distribution network and infrastructure, transport logistics, research and development (R&D) to develop COVID vaccine etc.

Though coordination amongst businesses appears to be the pragmatic response to current challenges posed by COVID-19 pandemic, businesses must remember that the Competition Act, 2002 (“the Act”) continues to apply during these extraordinary times unless it’sapplication is exempted specifically by the Government.

Advisory to businesses in the times of COVID-19 pandemicissued by Competition Commission of India:

Like other competition law regimes,Competition Commission of India (“CCI”)has issued an “Advisory to Businesses in Time of COVID-19” (“Advisory”)on 19^th April 2020 with an aim to provide guidance to businesses in the time of COVID-19 pandemic.

At the outset, it may be noted that Advisory is meant to provide guidance to businesses intending to coordinate their activities during COVID-19 in order to increase production, optimise supply and ensure availability of goods and services particularly in relation to critical healthcare, medical products and essential services like ventilators, face masks, gloves, hand sanitizers, vaccines, logistics, testing etc.

In particular, Advisory explains the criteria that the CCI will follow in assessing coordinated activities by businesses from the lens of competition rules as contained in the Act. Advisory also provides guidance that businesses need to ensure that coordinated conduct or arrangement result in increasing efficiencies which may be in terms of efficiency in production, supply, distribution, storage, acquisition or control of goods or provision of services. That said, Advisory also cautions businesses not to take advantage of COVID-19 to contravene any of the provisions of the Act. Last but not the least, Advisory provides guidance to businesses by stating that “…. the Act has in-built safeguards to protect businesses from sanctions for certain coordinated conduct,provided such arrangements, as mentioned above, result in increasing efficiencies. These provisions will inform the decisions of the Commission.” In- built safeguards and provisions of the Act that will inform the decisions of CCI for assessing the coordinated activities of businesses will be discussedhereinafter in detail below.

Scope of the Advisory issued by CCI:

Given that CCI has issued the said Advisory as part of it’smandate to enforce the Act, there is a need to look into the scope of Advisory issued by CCI and what it means for businesses.

It must be noted that Advisory issued to businesses in time of COVID-19 should not be understood to authorise businesses to engage in anti-competitive conduct while coordinating their activities in limited sense viz.to cope up with significant disruptions in supply chain. Accordingly, businesses should take care to ensure thatonly such coordinated conduct which is “necessary and proportionate” to address concerns arising from COVID-19 is undertaken.

It is important to note that Advisory supplements the existing competition law regime. CCI has issued the said Advisory to ensure that conduct of businesses while coordinating certain activities is commensurate with the rules of fair play as contained in the Act.

As per the Act, CCI is duty bound to eliminate practices having adverse effect on competition, promote and sustain competition, protect the interests of consumers, and ensure freedom of trade carried on by other participants, in markets in India.

Accordingly, it appears that under the present exceptional circumstances, CCI will closely monitor the developments taking place in markets so as to detect businesses which indulge in anti-competitive practices by taking advantage of the current scenario and take action against such businesses.

That said, businesses must take note of the fact that the CCI will carry out the competition assessment of a particular coordinated conduct against the benchmark test as applied for assessment of anti-competitive agreements viz. whether the conduct causes or is likely to cause “appreciable adverse effect” on competition.

Further, it is pertinent to note that dominant businesses in relevant market while coordinating their conduct must exercise extra care as there actions are likely to be more vulnerable to competition law violations given the market power they possess. Further, businesses abusing their dominant position by adopting anti-competitive practices in respect of critical healthcare products and essential services during the COVID-19 pandemic may not able to justify their conduct.

Competition assessment of coordinated conduct during COVID-19:

Having discussed the scope of Advisory issued by CCI, we may now considerhowcoordinated conduct of businesses during COVID-19 which fall in the realm of agreement amongst businesses will be scrutinised by CCI.

It appears that if coordinated conduct of a business during the period of COVID-19 comes under scrutiny, the same will be analysed by CCI as per rule of reason approach as contained in provisionsrelating to anti-competitive agreements. In other words, before coming to any conclusion, CCI will consider positive as well as the negative impact of such conduct on competition.

Given the fact that form of agreement is not important under the Act, any arrangement, understanding, action in concert whether or not the same is formal or in writing or is intended to be enforceable by legal proceeding will fall under the definition of agreement contained in the Act and can be examined by CCI on the touchstone of the provisions relating to anti-competitive agreements. Accordingly, any communication or conduct among businesses, either in person or by document, e-mail, mobile or through any other means viz. by wink or a nod will qualify as agreement and can be scrutinised by CCI.

In the light of aforesaid discussion, let us examine the legal framework within which coordinated conduct amongst businesses will be analysed by CCI. Businesses must understand that section 3 of the Act prohibits agreement that causes or is likely to cause an appreciable adverse effect on competition. As per section 3 (3) of the Act, certain concerted actions between competitors such as forming cartels, price fixing; market sharing; limiting or controlling production, supply, market, technical development investment or provision of services etc. are presumed to cause an appreciable adverse effect on competition. However, as per proviso to section 3 (3) of the Act, said presumption is not applicable to joint ventures, if such agreements increase efficiency in production, supply, distribution, storage, acquisition or control of goods or provision of services.

During the competition assessment of coordinated conduct by CCI, businesses need to demonstrate that there are pro-competitive effectsofsuch coordinated business conduct in the form of accrual of benefits to consumers; or improvements in production or distribution of goods or provision of services; or promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services. Thereafter, it will be for the CCI to assess whether the coordinated conduct causes or is likely to cause appreciable adverse effect on competition within India on the basis of all or any of the factors laid down under section 19 (3) of the Act. For the said purposes, CCI will assess whether the pro-competitive effects of coordinated conduct as demonstrated by businesses outweigh the anti-competitive effectswhich may result from such coordinated conduct viz. creation of barriers to new entrants in the market; driving existing competitors out of the market; foreclosure of competition by hindering entry into the market.

Competition law compliance by businesses during COVID-19:Practical considerations:

We now try to understand what businesses should do to comply with the competition law during COVID-19.

Depending upon their position in the market, businesses should be very careful while exchanging any business information, using any platform such as trade association to take business decisions.

While coordinating their conduct, businesses must determine for themselves whether the conduct will be lawful or could breach the provisions of the law given the fact that the Act operates on a “self-assessment” basis.Accordingly, it is important for businesses to put in place adequate safeguards while giving effect to coordinated activities such as entering into efficiency enhancing joint ventures which lead to increase efficiency in production, supply, distribution, storage, acquisition or control of goods or provision of services.

It goes without saying that prevention is better than cure. In this context, businesses need to understand that compliance with the Act isimportant given the fact that the consequences of non-compliance may be serious for any business in terms of significant financial penaltieswhich can be imposed under the Act.

For reducing the risk of violating the competition law, training of the employees who may come in direct contact with competitors is important. Such employees must be sensitised about what constitutes violation of the Act and how to carefully manage any communication or coordination with competitors.

In the “new normal”, an effective compliance strategy by the businesses may also be helpful in establishing due diligence defence by the person who at the time contravention was committed, was in charge of, and was responsible for the conduct of the business of the company. In other words, as per section 48 of the Act a person will not be liable to any punishment if he proves that contravention was committed without his knowledge or that he had exercised all due diligence to prevent the commission of contravention.

To protect themselves from sanctions, businesses must clearly and appropriatelydocument that the coordinated conduct will or has lead to accrual of benefits to consumers; improvements in production or distribution of goods or provision of services; promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services.

Businesses should also try to document the rationale of limited/temporary coordinationduring COVID-19 including necessity and proportionality of the conduct. That said, it may be noted that while structuring coordinated conducte.g. in the form of joint venture etc., businesses should endeavour that the coordination leads toincreasing efficiency in production, supply, distribution, storage, acquisition or control of goods or provision of servicesand the same is alsoclearly and appropriately documented.

To sum up, aforesaid practical considerations will help businesses to defend their case in case coordinated conduct is scrutinised by CCI on it's own or on the basis of information/reference being filed with it.