A Rule of Reason Analysis Vis-à-Vis Exchange of Information in Competitive Markets

A Rule of Reason Analysis Vis-à-Vis Exchange of Information in Competitive Markets

Due to the relative novelty of Competition Laws in India, there is a lack of jurisprudence on various facets of such law. One such lacuna is seen in CCI’s stance on agreements related to Exchange of Information. The CCI has, in Flashlights case, refused to hold exchange of strategic information between competitors as anti-competitive. In doing so, it has contradicted its own past decisions, as well as international jurisprudence. For these reasons, there is a need for an objective lens through which such agreements can be analyzed. Accordingly, this article employs a Rule of Reason analysis to understand the legality of information exchange in competitive markets.

Healthy competition in the market is a prerequisite to a healthy economy. Mandated with preserving competition in the markets, countries around the world have formulated laws which prevent competitors from indulging in anticompetitive conducts. In India, the Competition Act, 2002 has set up the Competition Commission of India [“CCI”] as a watchdog to prevent practices, such as cartelization, having an appreciable adverse effect on competition [“AAEC”]. In accordance with its mandates, the CCI has been vigilant in punishing cartel activities that are harmful to the competition in India, and has not shied away from using maximum penalties to deter such violations. However, due to relative novelty of CCI, there is a general lack of jurisprudence on competition in India. This has led the CCI to give out contradictory orders which may not conform to the laws in place and create confusion in the approach to be taken.

Whereas the CCI has been particularly harsh on cartel violations[i], it has not yet taken a stand on whether mere exchange of information between the competitors can amount to a violation or not. In 2017, the Commission got flak for its decision in the Flashlights case. The Commission exonerated four flashlight manufacturers from alleged cartelization even though there was clear evidence of exchange of commercially sensitive information related to pricing, production, sales, among other data. The rationale of the Commission was that even though there was exchange of information between the companies, there was insufficient evidence to show that the information was used by the competitors to determine prices. On the other hand, in the case of In Re: Cartelisation in Industrial and Automotive Bearings of the same year, the Commission found four automotive bearing producers engaged in anti-competitive conduct as they shared confidential information among themselves with the object of booking higher profits. This decision was in consonance with the Commission’s earlier decisions such as in Builders Association of India v Cement Manufacturers Association and South Eastern Railway v Orissa Concrete. In these cases, the commission was of the view that mere exchange of commercially sensitive information can be treated as anti-competitive.

The contradictory stances of the Commission point towards a jurisprudential gap and legal uncertainty. This can be harmful to the companies, as the lack of concrete understanding as to how they are legally expected to act, can lead the companies to either ‘overcomply’ or ‘undercomply’.[ii] This might also mean that the companies will have to tread carefully, to avoid any potential transgression, which can reduce the efficiency of the company.

Rule of Reason and Its Relevance in an Indian Context

The contradictory judgments of the Commission point towards the need to employ an objective analysis to judge whether exchange of information in a particular case can be considered anti-competitive or not. This is where the ‘Rule of Reason’ analysis can be of immense utility, which can reduce legal uncertainty and lead to uniformity in CCI’s decisions.

Section 3 of the Competition Act, 2002, covers two types of agreements. There are agreements, which are per se[iii] illegal, listed under section 3(3). Apart from these agreements, there are agreements which are illegal under the act only if they cause or are likely to cause AAEC. These agreements are covered under section 3(1) In Neeraj Malhotra v. Deustche Post Bank, it has been recognized that section 3(1) is in pari materia with section 1 of the Sherman Act, 1890. Therefore, to determine the legality of an agreement falling under section 3(1), it has to be examined through the lens of “Rule of Reason”. Rule of Reason is a method of analysis which takes into consideration the positive and negative effects of a particular agreement on the competition, to evaluate the legality of that agreement. Even though the phrase “Rule of Reason” has not been mentioned in the Competition Act, 2002, section 19(3) of the act has the same function as its provisions allow the Commission to compare pro-competitive and anti-competitive features of an agreement.

Before the Competition Act, 2002, section 37 of MRTP Act, 1969 dealt with restrictive trade practices, and allowed agreements prejudicial to public interest to be struck as void. Unlike section 19(3) of the Competition Act, 2002, the MRTP Act did not have a provision facilitating a Rule of Reason analysis. However, in Mahindra & Mahindra Ltd. v. Union of India, the Supreme Court deliberated upon the utility of the Rule of Reason vis-à-vis MRTP Act, and held that such an analysis has to be made before deciding whether a particular trade practice is restrictive or not.  Under the current competition regime, the Rule of Reason is extremely relevant and the Authorities have time and again utilized it to determine the legality of agreements. For instance, in Kerala Film Exhibitors Association v CCI, the COMPAT compared the pro-competitive and anti-competitive features of an agreement, entered between theatres of Kerala Film Exhibitors Federation, and concluded that the agreement was illegal as its negative features outweighed the positive ones.

Information Exchange Through the Lens of Rule of Reason

It is undeniable that information exchange is a common feature of competitive markets and it certainly has some pro-competitive effects. However, the difference between anti-competitive and pro-competitive information exchange lies in the nature and type of information exchanged. If the information exchanged leads to enhanced economic efficiency and leads to more intense competition among competitors, then it might not be considered anti-competitive.

Information Exchange: A Boon for Competitive Markets?

Effective sharing of information can aid businesses in developing unique and innovative goods. It might also help them interpret market trends in a better way and promote out-of-the-box thinking among companies. Further, in sectors prone to fluctuations, sharing of information can help coordinate supply and demand.[iv] It is pertinent to note that in certain types of horizontal and vertical agreements, exchange of information is absolutely necessary and comes part in parcel with the agreement itself; for example, technology transfer agreements. In such agreements the exchange of information is not considered anti-competitive as these agreements prevent duplication of research, which strengthens the incentives for new innovations. Further, exchange of research between companies enables manufacturers to make standard components, which helps achieve standardization[v]. Standardization is good for consumers as it provided consistency in the quality of goods available in the market.

European Union [“EU”] Competition Law also recognises the importance of information exchange vis-à-vis certain type of agreements; these agreements have been specifically exempted from prosecution through Block Exemptions[vi].For example, liner shipping consortia has been granted exemption and is allowed to freely exchange information to achieve economies of scale and a better utilization of the space on vessels. Exemption has also been granted to research and development agreements. Information sharing between companies can further help achieve allocative efficiency by making sure that resources are efficiently allocated between competitors. This allows full utilization of available resources, minimising wastage and reducing costs. An example of this can be seen in southern India among fishermen, where exchange of information helps evenly allocate fishermen to various ports.

Information Exchange: A Pandora’s Box?

Even though there can be various pro-competitive effects of Information Exchange, it is pertinent to note that the information that brings about the above mentioned pro-competitive effects is rarely condemned by competition authorities; and it is only the information which is “commercially sensitive” in nature that generally comes under the scanner. Commercially Sensitive Information can be defined as any sort of information that a competitor will never share in a competitive market. It is any type of information that can reduce strategic uncertainty in the market. It includes information which can influence policy decisions or strategy of the competitors; such as information related to pricing, production, sales, price margins, input costs, etc.

Information related to prices is considered the most commercially charged, followed by information related to quantities, capacities, costs, and demand, because mere knowledge of pricing preferences of other competitors can reduce strategic uncertainty in the market. In Fresh Del Monte Produce v Commission, the European Commission penalized three producers of bananas for holding phone calls to exchange “price-relevant” information. The Commission took a clear stand that even disclosure of pricing intentions with competitors can constitute anti-competitive behavior. Mere exchange of information, in this case, was taken as proof of concerted action. The exchange of information related to pricing is considered so pernicious under EU Jurisprudence that the Commission, in T-Mobile v NMa, held even a single instance of exchange of price information to be a proof of concerted practice that has as its object the restriction of competition. By this logic, even sharing a range of prices or a top price can provide competitors with a focal point around which they can coordinate their behavior.

In European Jurisprudence, the Guidelines on Horizontal Cooperation Agreements mention two main areas of concern relating to exchange of information. Firstly, the exchange of information can help competitors predict each others behaviors and plan their actions in a coordinated manner.[vii] Secondly, the exchange of Information can lead to anti-competitive foreclosure of market as the exchange of Information will put some companies at a comparative advantage than the companies that are not exchanging information.[viii] The concern of the Guidelines, that exchange of commercially sensitive information can promote collusion in the market, was illustrated in Danish Ready-mixed Concrete case. In 1993, the Danish Competition Council decided to collect and publish information related to transaction prices for ready-mixed concrete in various regions. However, following the publication, the prices increased 15-20% in only one year. This shows that mere knowledge of the pricing choices of other competitors can have serious anti-competitive consequences.

Conclusion

Under section 3(1) of the Act any agreement which “causes or is likely to cause” AAEC can be penalized. Therefore, for an agreement to be considered anti-competitive, the agreement should be capable of constituting a threat, actual or potential, to the competition in the market; the operationalization of the agreement is of secondary consideration.

As per the US Supreme Court, under Competition Laws the essence of violation is the illegal agreement itself; the test of illegality revolves around the potential harms that would be ensued if the agreement is acted upon, not the actual consequences. Thus, the implementation of the agreement is not the right metric, as was taken in Flashlights case, to decide whether it is in contravention to section 3; instead, the agreement should be scrutinized under the rule of reason analysis before coming to a conclusion on its illegality. The ambiguous stance of CCI on the matter can create confusion among the companies which might lead to a spur in anti-competitive activities. Alternatively, it might make the companies wary of information exchange which is not even remotely anti-competitive, halting activities which might actually be beneficial for the economy.  This warrants an objective analysis to judge whether the exchange of information will actually distort competition.

Further, when dealing with agreements that concern the exchange of such information, the accused should provide proper reasons for the exchange of such information. The mere fact that such information was exchanged without any good reason, or reasons which cannot be provided to the Commission, should raise red flags, and should warrant investigation. As to the impact of exchange of information on the competition, the nature and type of information is of prime importance. However, as the information starts approaching the commercially sensitive nature, the possible pro-competitive effects start diminishing. On the extreme end of the commercially sensitive spectrum is information related to pricing, and mere exchange of this information can have serious anti-competitive effects.

The mere possession and exchange of commercially sensitive information is harmful to the competition as it reduces uncertainty in the market, influences strategic decisions, and diminishes the incentives of the competitors to compete fairly. This type of information can also be seen as facilitating practice in pursuance of a Cartel. Thus, the Commission should not be reluctant in fulfilling its mandate by punishing competitors for exchange of commercially sensitive information.


[i] See also Aditya Bhattacharjea, Cartels and the Competition Commission, 47 Economic and Political Weekly14 (2012).

[ii] John E. Calfee and Richard Craswell, Some Effects of Uncertainty on Compliance with Legal Standards, 70 Virginia Law Review 965(June 1984).

[iii]See S.M. Dugar, Guide to Competition Law 30 (7th edn, 2019). 

[iv]Matthew Bennet and Philip Collins, The Law and Economics of Information Sharing: The Good, the Bad and the Ugly, 5European Competition Journal 311 (2010).

[v]Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements, OJ C 11, ¶257.

[vi]Id, ¶88.

[vii]Guidelines, supra note 5, ¶66.

[viii]Guidelines, supra note 5, ¶70.


This article has been written by Namah Bose and Vivek Kumar, students at Rajiv Gandhi National University of Law, Punjab.