Cartels by Hub and Spoke in the New App-Based Economy–Can Authorities Turn an Ostrich-Like Blind-Eye to ‘Digital’ Cartels?

Samir Agrawal

What is a Cartel?

In extremely simple terms, a ‘cartel’ occurs when players engaged in provision of similar products/services, collude on pricing or supply and stop independently determining their own pricing/supply. This is usually done to earn supra-normal profits at the hands of the poor customers/consumers who are robbed off an efficient, competitively priced choice of product/service.For instance, one fine day if all the bread manufacturers/suppliers in Delhi were to get together and decide that they will supply their brown bread for price close to‘X’only to the retailers, (which is likely to be much higher than a competitive normal price), then the bread retailers in Delhi would hardly have any choice but to purchase the expensive bread for further sale; unless there are alternative suppliers of bread available in Delhi who are not part of the cartel. And it wouldn’tmake commercial sense to source bread from another state or a far-off region for the retailers.Legally speaking, Section 2(c) of the Competition Act, 2002 (“the Act”) defines the term ‘cartel’[1].

However, the present article is not about this kind of a straightforward, vanilla cartel which is easily understood. With the changing times, and the businesses getting sophisticated by the day, transactions shifting online, and the tsunami of ‘Apps’ and technology start-ups, the ways of fixing price, or engaging in a cartel have also become creative. No consumer/customer can afford to turn a blind eye to that, much less any adjudicating authority or courts. Therefore, in this article we shall discuss the interesting concept of a cartel by way of ‘hub and spoke’ as it occurs in sophisticated businesses these days and is already happening in India, while being a well-settled concept abroad.

Hub-and-Spoke Model

One of the most recent and interesting ways is a cartel by hub and spoke.

As already stated, this is not your standard cartel where competitors exchange price sensitive information with each other in order to suppress competition, such as in the case of the cement cartel[2], or the alleged steel cartel[3], pursuant to a singular understanding or agreement amongst the competitors.

In a hub and spoke cartel model, the competitors (spokes) simply delegate the responsibly of pricing to one single ‘hub’ usually on the behest of the hub itself, which may not necessarily be their competitor, but a player in the neighbouring/vertical market with vested interests.

This usually happens when the ‘hub’ is a big enterprise with considerable market power in a particular region, so much so that it is able to dictate the behaviour of its suppliers/buyers etc., and the suppliers/buyers would have hardly any choice to opt out if they have to have any business with the hub.

The arrangement happens via independent agreements of each spoke with the one and the same hub. Therefore, even if the spokes never speak, they are aware for sure that the hub will do the job for them. This is more of a ‘concerted practice/orchestrated conspiracy’ than a straightforward agreement to cartelise. For e.g., a powerful toy retailer chain in a region sets the price for all toy manufacturers by sending them independent letters, so as to ultimately derive supra normal profits by eliminating price competition. In such a case the toy retailer and the manufacturers are participants of the ‘hub and spoke cartel’ if the spokes have the knowledge that all other spokes are also behaving similarly.

To understand this better in the context of modern days ‘Apps’, let us take another example of the Ola App in India. Ola, determines the price of a taxi ride through its app. The drivers agree to what Ola determines, while not speaking to other drivers on this issue. However, all of them are well aware that as far as pricing is concerned; it is only Ola that gets to decide the price. No driver is determining his own price. They have the knowledge that no driver shall undercut them on pricing, because pricing is single-handedly being decided by the behemoth that is Ola. This is a classic case of a cartel by hub and spoke. The entities in question have managed to practically carry out coordinated anti-competitive actions without being explicit about it[4]. The following diagram depicts the whole arrangement –

Given the fact, that a standard to determine hub-and-spoke agreements in India does not exist owing to the lack of local precedents, the only option left for us is to place reliance on the findings of more developed anti-trust jurisdictions. The European Union and the USA have settled positions in law, stating that a hub-and-spoke cartel is a serious anti-trust violation.

Foreign Jurisprudence

Lessons from US

In the 1930s, the US Supreme Court passed several rulings with respect to hub-and-spoke cartels. The extensive jurisprudence led to the determination of the very crucial ‘inference standard’. ‘Inference standard’ refers to the ‘rim’ that connects the spokes to each other through the hub. In effect, the existence of a rim is essential to distinguish a number of legal parallel vertical agreements from an orchestrated hub-and-spoke cartel. If the rim is proved, one need not prove explicit communication or agreements between the spokes. The satisfactory establishment of the existence of the rim will amount to the establishment of an agreement that is violative of Section 1 of the Sherman Antitrust Act of 1890. The following case laws shall explain how the existence of a rim in parallel vertical agreements was determined.

In the case of Interstate Circuit[5], the defendants who had monopolized first-run movie theatres in the US sent a letter to numerous subsequent-run theatres directing them not to charge lesser than a certain price for their tickets as this was leading to a loss in business for the former. The letter was clearly addressed to all subsequent-run theatres. It became evident that each addressee knew that their competitors had received the same information. Therefore, their subsequent acceptance of the proposal amounted to an anti-competitive agreement. The agreement’s illegality was further inferred from the parties’ deviation from standard industry practice. Moreover, the letter represented a malafide motive along with the scant probability of it being a coincidence.

The Toys-“R”-Us case[6] (“TRU Case”) saw a further fine-tuning of the ‘rim’ determination theory. TRU, a dominant toy retailer, had facilitated a cartel among leading toy manufacturers by asking them to boycott the sale of their toys to other retailers. The rim, in this case was inferred from the “shuttle diplomacy” carried out by TRU, i.e., its act of directly communicating to each manufacturer the fact that it was simultaneously discussing this policy with other manufacturers who intended to get on board. TRU also used this tactic to police manufacturers who complained that one of their competitors was selling to other retailers by threatening to stop giving orders to the defaulting competitor; thus keeping the manufacturer in continued compliance with the boycott policy. The Court observed that “key toy manufacturers were unwilling to refuse to sell to or discriminate against the clubs unless they were assured that their competitors would do the same.” Thus, the court saw the clear existence of a rim and denounced TRU’s practices as anti-competitive.

Lessons from EU

Similarly, even in the EU, the awareness and the context behind the information exchange between the spoke and its competitors is crucial. The determination of anti-competitive behaviour varies on a case-to-case basis.

VM Remonts[7] highlighted it was unnecessary for a spoke to have complete knowledge of anti-competitive conduct. Instead, the mere awareness of it, the intention to contribute to it or the willingness to accept the risk entailed, could be sufficient to distinguish a hub-and-spoke cartel from legal parallel vertical agreements.

In Eturascase[8], Eturas emailed all travel agencies of a cap to be placed on discounts offered by them. ECJ held that since the travel agencies knew the content of Eturas’ email and did not attempt to distance themselves from the anti-competitive scheme, they could be held liable for indulging in a hub-and-spoke cartel.

On one hand, it is presumed that information exchanged between parties is used to determine their business decisions and market conduct. However, if an entity is able to display the lack of a cause-effect relationship between the two, it will be acquitted of the anti-competitive violations alleged against it.

In AC Treuhand[9], ECJ ruled that the hub can be charged for horizontal cartelization even if it did not operate in the affected market with the other competitors. To charge the hub, it was ruled that awareness of concerted action between the downstream/upstream parties and the hub’s commission of acts was necessary.

Through these case laws, the following indicators of hub-and-spoke agreements have been put across –

  1. The spokes need not speak or exchange commercially sensitive information with each other let alone a written down formal agreement inter-se.
  2. The hub brings about the ‘horizontal collusion’ by multiple vertical restrains/agreements with the spokes.  
  3. The hub need not be active on the market on which price fixing by hub and spoke is alleged.
  4. Participants of hub and spoke giving adherence to the scheme is sufficient evidence.

Indian Scenario

The recognition of hub-and-spoke collusions in the India scenario is murky, with the relevant authority/court repeatedly brushing off the principle of hub-and-spoke as a non-issue. The issue of cartel facilitator liability was first raised in the case of Surendra Prasad v. CCI[10]. However, while adjudicating the issue, both the CCI and the erstwhile Competition Appellate Tribunal (“COMPAT”) rejected the allegations made against the facilitator without providing any sort of reasoning. Further, in the case of Fx Enterprise Solutions India Pvt. Ltd v. Hyundai Motor India Limited[11], Case No. 36 of 2014., Hyundai was alleged to have facilitated a hub-and-spoke cartel among its dealers. The interesting thing about this case is that while the CCI found a prima-facie case of collusion, the issue remained entirely unaddressed before the CCI and the NCLAT. Most recently, in the case of Samir Agrawal v. Competition Commission of India[12], the CCI and the NCLAT did not agree with the allegations of the facilitation of a hub-and-spoke agreement by Uber/OLA among the drivers on the basis of the use of the cab aggregators’ price fixing algorithm. Both the authorities ruled that the finding of an explicit agreement between all the drivers to coordinate prices between them or to finalize the ride charges through the platform was a prerequisite to the establishment of a hub-and-spoke cartel. The absence of such an agreement was noted due to which the ruling was made in favour of Uber/OLA stating that there was no violation of s. 3(3)(a) of the Act. This clearly showed that the understanding of the principle concept of hub-and-spoke agreements was sorely lacking as the authorities refused to realise that that the whole concept of a hub and spoke cartel is that the drivers do not need to have a agreements inter-se among them. The hub is doing that job for them.

Merger of COMPAT in NCLAT: Part of the Problem?

Given the fact that the essential objectives of the Companies Act, 2013 and the Act are distinct from one and other, the weaving of the COMPAT into the umbrella of the NCLAT has raised many issues. The difference in the approach of the two towards regulating issues would not be beneficial to their stakeholders. While it has been argued that this amalgamation of tribunals is a welcome move, considering the fact that issues spanning company law and competition law both can now be tried under a single court; however this rationale is proving to be too ambitious. While certain aspects of mergers and combinations may be common to both the legislations, a major chunk of the ambit of the Act, i.e., horizontal and vertical anti-competitive practices and abuse of dominance, remains completely distinct from the Companies Act, 2013. Thus, it would be extremely difficult for the NCLAT to harmonise the two objectives.

The competition law remains an extremely niche and specialised area of law. Given this fact, it is extremely imperative for experienced professionals to adjudicate on competition issues. This can be reflected in section 8 of the Act which calls for the appointment of a Chairperson and members to the CCI who have “such professional experience of not less than fifteen years in, international trade, economics, business, commerce, law, finance, accountancy, management, industry, public affairs or competition matters, including competition law and policy.” While the members of the NCLAT may be well-versed in the adjudication of company law disputes, there is an evident lacuna in experience within the tribunal when it comes to presiding over competition law disputes. Further, this is contrary to the entire objective of the creation of tribunals which is to ensure that for the purpose of adjudicating upon a highly specialized area of law, a group of experts as well as judicial members is available.

Moreover, in addition to the COMPAT, eight other specialized tribunals have been added to the NCLAT. This creates a tremendous load on the already burdened NCLAT leading to an ineffective adjudication of cases.

Conclusion

The competition authorities of India cannot turn an ‘ostrich-like’ blind eye to the changed businesses and mechanisms or else the smart business owners will continue to flourish at the cost of the public at large.  Applying traditional principals of competition law for formality sake cannot work in today’s times. Gone are the days where price fixing bosses could be found in smoke filled rooms. Attempts to spot direct evidence that shows “meeting of minds” are no longer efficient when the facilitation of cartels is carried out through price-fixing algorithms in the modern times.

The hub-and-spoke principle, thus, cannot be taken lightly by the tribunals if they want to achieve progressive and up-to-date competition regulation.Given the abundance of precedents globally, concerning algorithm based anti-trust violations, the CCI should have been faster to incorporate the principle of hub and spoke, but has still not managed to develop any substantive jurisprudence on hub-and-spoke cartels which can be said to be the most common forms of ‘digital cartel’. If the CCI were to continue to apply traditional, dried and dusted formulaic methods and letting the modern-age cartels go scot-free, it would indeed be a mockery of the path-breaking (over-ambitious) law that the competition legislation is.

Summing up, if the CCI continues to remain blinded to the threat posed by pricing algorithms’ cartels, the blind spot of the Act would be entirely exploited. Be that as it may,if the CCI is still unable to wrap its head around the competitive intricacies of the digital economy, the Government of India could instead consider introducing sweeping legislative exemptions for these new app-based businesses, at least to allay confusion for competition lawyers and stakeholders!


Samir Agrawal has been the face of the Ola-Uber case before the CCI and holds 11 years of experience in competition/corporate laws. He has worked with the competition law teams of JSA and AZB & Partners and is currently a partner at RallyMark Legal. You can find him on LinkedIn.

He was assisted by Palash Moolchandani, a Student at National Law University Odisha. You can find him on LinkedIn.


Photo Credits: Dibyangshu Sarkar/India Today

Notes:

[1] 2(c) “an association of producers, sellers, distributors, traders or service providers who, by agreement amongst themselves, limit, control or attempt to control the production, distribution, sale or price of, or, trade in goods or provision of services.”

[2]Builders Association of India v. Cement Manufacturers’ Association and Ors., Case 29/2010

[3]In Re: Alleged cartelization by steel producers, Case RTPE No. 09 of 2008

[4] Commission v.Anic Partecipazioni,C-49/92, [1999] EUECJ C-49/92P; Asnef-Equifax, Administración del Estado v AUSBANC, [2006] E.C.R. I-11125.

[5]Interstate Circuit v. U.S., 306 U.S. 208 (1939).

[6]Toys “R” Us, Inc v. FTC, 221 F. 3d 928 (7th Cir. 2000).

[7]Case C-542/14, SIA ‘VM Remonts’ (formerly SIA ‘DIV un KO’) and Others v.Konkurencespadome, ECLI:EU:C:2016:578.

[8]“Eturas” UAB and Others v. LietuvosRespublikoskonkurencijostaryba, (2016) 4 CMLR 19.

[9]Case C-194/14, AC-Treuhand AG v European Commission, ECLI:EU:C:2015:717.

[10]2015 Indlaw COMPAT 61.

[11]2017 SCCOnLineCCI 26.

[12]Competition Appeal (AT) No.11 OF 2019.

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