2015 (4) TMI 214 - Commission - Indian Laws

Anti competitive practices - genuine spare parts of automobiles manufactured by respondents are not made freely available in the open market - even the technological information, diagnostic tools and software programs required to maintain, service and repair the technologically advanced automobiles manufactured by each of the aforesaid OPs were not freely available to the independent repair workshops - The OPs and their respective dealers, as a matter of policy, refuse to supply genuine spare parts and technological equipment for providing maintenance and repair services in the open market and in the hands of the independent repairers - restrictive practice carried out by the OPs in conjunction with their respective authorized dealers, amounts to denial of market access to independent repair workshops - OPs charge arbitrary and high prices to the consumers who are forced to avail the services of the authorized dealers of the OPs for repairing and maintaining their automobiles since the genuine spare parts, diagnostic tools and the technological information required to service their cars are not made available by the OPs to independent repair workshops - contravention of sections 3(3)(a) and 3(3)(b) of the Competition act - violation of section 3(4)(d), section 4(2)(a), 4(2)(b) and 4(2)(c) of the Act. Jurisdiction of commission to inquire the conduct of those OPs which were not named specifically in the information filed by the Informant - Held that - Commission is a statutory body, established under the Act with the legislative mandate inter alia to prevent the practices having adverse effect on competition, to promote and sustain competition in the markets, to protect the interests of consumers and to ensure freedom of trade carried on by other participants in the markets, in India. To perform the above mentioned functions, under the scheme of the Act, the Commission is vested with inquisitorial, investigative, regulatory, adjudicatory and advisory jurisdiction. The Commission is entitled to evolve its own procedure under section 36(1) of the Act for conducting inquiry as contemplated under the provisions of the Act. Further, the said inquiry is set into motion before the Commission in accordance with the provisions of section 19 of the Act, which is to be conducted by the Commission as per the procedure provided under section 26 of the Act. Under section 26(1) of the Act, the Commission has to form only a prima facie opinion as to the existence of contravention of any provision of the Act and pass a direction to the DG to cause an investigation to be made into the matter and submit its report. The direction under section 26(1) is an administrative direction to the DG for investigation of contravention of provisions of the Act, without entering upon any adjudicatory or determinative process. It does not effectively determine or affect rights or obligation of the parties. Although only 3 OPs were named in the information but the information and additional information disclosed that the allegations were not confined to the named OPs and the Informant had requested the Commission to inquire into alleged anti-competitive conduct of other OEMs also - The direction of the Commission was with respect to alleged anti-competitive conduct by the said industry in general and not specifically qua the car manufacturers named in the information. This is apparent from the order of the Commission dated April 26, 2011 which was passed after considering the request of the DG when he found, at that stage that alleged anti-competitive conduct was not confined to the named entities in the information but was prevalent across the industry. - Commission is of the opinion that the objections taken by the OPs regarding jurisdiction of the Commission are not only contrary to the scheme of that but also do not capture the factual position in the correct perspective. Based on above discussion the contention raised by the OPs has no force and is liable to be rejected. Whether the Opposite Parties have violated the provisions of section 4 of the Act as has been alleged - Determination of Relevant Market - Held that - DG, during the course of its investigation, considered the nature of the business and conduct of the OEMs and concluded that the product market in the automobile sector can be categorized under the two heads Primary Market and Secondary Market - DG has concluded that once the primary product has been purchased, consumer choice is confined to those aftermarket products or services compatible with that primary product - 'relevant market' for cars and that of spare parts consists of multiple markets, i.e., a market for primary products and separate markets for the secondary product(s) associated with each primary product (e.g. one market for all cars, individual markets for spare parts and repair and maintenance services. The Commission is of the view that the primary basis for determination of the existence of a 'systems market', as argued by the OEMs, do not exist in the present case. The Commission is of the view that in the current case compatibility between the primary market products and secondary market products are of primary importance. - a 'systems market' does not exist in the present case and that the relevant product market consists of the primary market for the sale of automobiles and the secondary markets for the sale of spare parts and repair and maintenance services. The Commission is of the opinion that for the purpose of this case, in order to correctly determine the relevant product market, the delineation of the primary market into separate automobile segments is not necessary. Whole life cost analysis - OEMs themselves do not have the data regarding the future maintenance/service costs of their own brand of vehicles. Even in instances where the OEM does possess such internal estimates, the same is considered confidential and is not shared with the consumers. If the OEMs are themselves not in possession of the basic data, to expect that an average prospective owner of a car will be able to overcome the hurdle of the high cost of information gathering and thereafter successfully engage in analyzing such data, given the various future variables to successfully undertake a whole life cost analysis would be unreasonable. Therefore, the whole life costing theory is not a feasible test for an average unsophisticated consumer in the Indian automobile market. Therefore, the Commission is not in agreement with the submissions of the OEMs that the average car owner undertakes a life cycle cost analysis before purchasing a car in the primary market. Reputation Effects - Commission, believes that reputational effects will not be enough to deter an OEM in the primary market from increasing prices in the secondary market if the consumers of the OEM are locked-in the aftermarket. A purchaser of a product in the primary market is to a great extent locked in with the primary product and the feasibility of switching to another primary product to avoid a price increase in the secondary market of spare parts or repair services is greatly limited - The higher is the price of the installed base, i.e., the cost of the primary market equipment, the more difficult it is to switch to another product for incremental rise in the price of the consumable parts in the secondary market. OEMs not only have the incentive, but have in practice, raised prices of the spare parts in the locked-in automobile aftermarket of India. Therefore, it is no longer a theoretical possibility whether consumers may be subjected to exploitative price abuse in the aftermarkets. Given the above mentioned findings of the DG, the submissions of the OEMs that they are disincentivized from charging higher prices in the aftermarket due to reputational concerns in the primary market are moot. Further, the high ratio of locked-in to new customers reduces the penalty in the primary product market of increasing aftermarket prices. Cluster Markets - The concept of cluster markets was applied to spare parts by the U.S. Ninth Circuit court in Image Technical Servs v. Eastman Kodak Co. 1997 (8) TMI 510 - United States Court of Appeals,Ninth Circuit . The circuit court held that there could be a relevant market for Kodak photocopier replacement parts, notwithstanding lack of substitutability, because both independent service organizations and customers needed all parts in order to service or use their image machines. - From the consumer's perspective the technical differentiation between a gear box and an anti-lock system does not necessarily put such spare parts in different relevant product markets; since from the perspective of the consumer; commercial reality requires that she focuses on the aggregation of such products in order to service and use her Honda car. Therefore, under section 2(t); such aggregated class of products would be the appropriate relevant product market. The Commission is of the opinion that there exist three separate relevant markets; one for manufacture and sale of cars, another for sale of spare parts and another for 'sale of repair services'; although the market for 'sale of spare parts' and 'sale of repair services' are inter-connected. Further the Commission is of the opinion that a 'clusters market' exists for all the spare parts for each brand of cars, manufactured by the OEMs, in the Indian automobile market. - Commission is of the opinion that there exist two separate relevant markets; one for manufacture and sale of cars and the other for the sale of spare parts and repair services in respect of the automobile market in the entire territory of India. Assessment of Dominance of OEMs - In order to determine if the OEMs are in a dominant position, as per the provisions of Explanation (a) to section 4(2) of the Act, viz., dominant position means a position of strength, enjoyed by an enterprise, in the relevant market, in India, it is necessary to first examine the competitive structure of the said relevant market - Section 19(4) of the Act, provides the factors which the Commission shall take into account by the Commission, to determine if an enterprise is dominant under section 4 of the Act. One such factor is market share of the enterprise. Market shares provide a useful first indication of the market structure and of the relative importance of the various undertakings active on the market (Hilti v. Commission 1994 (3) TMI 378 - EUROPEAN COURT OF JUSTICE . Each OEM has a position of strength which enables it to affect its competitors in the secondary market, i.e., independent service providers in its favour, thereby limiting consumer choice and forcing the consumers to react in a manner which is beneficial to each OEM, but detrimental to the interests of the consumers - The perusal of the agreements entered by the OEMs with the local OESs has revealed that invariably there are restrictions on the OES from supplying parts directly to third parties without the prior written consent of the OEMs. The restrictions have been placed upon the OESs ability to sell spare parts directly to third parties, where such spare parts are being manufactured by the OEMs using the drawings/ designs/ specifications/ knowledge/ toolings/ moulds/jigs/ IPRs/ trademarks etc of the OEMs. The DG has observed that none of the OEMs have confirmed even a single instance where the permission has been granted to the OESs in terms of the agreements to sell spare parts to third parties. Denial of market access is specifically aimed at adopting a course of conduct with a view to exclude a competitor from the market by means other than legitimate competition and such exclusionary abusive conduct allows the OEMs to further strengthen their dominant position and abuse it. - It is the opinion of the Commission that in such cases a violation of section 4(2)(c) of the Act is clearly established - OEMs have submitted that the spare parts and diagnostic tools, workshop manuals are their proprietary materials and therefore accessible only to the authorized dealers network of each OEM. The Commission notes that unlike section 3(5) of the Act, there is no exception to section 4(2) of the Act. Therefore, if an enterprise is found to be dominant pursuant to Explanation (a) to section 4(2) and indulges in practices that amount to denial of market access to customers in the relevant market; it is no defence to suggest that such exclusionary conduct is within the scope of intellectual property rights of the OEMs. On the basis of aforesaid, the Commission is of the opinion that the OEMs have denied market access to independent repairers and other multi brand service providers in the aftermarket without any commercial justification. Unfair Price - Fact that the OEMs are the only source of genuine spare parts compatible to its brand of automobiles in the aftermarket allows such OEMs to use the opportunities arising out of its dominant position to reap trading benefits which it would not have reaped if there had been normal and sufficiently effective competition. - Given the complete dependence of the users on the OEM for their spare parts requirements, the interest of consumers are not safeguarded in form of competitive prices of spare parts in the present scheme of things. The cost benefit, if any, that may arise from the OEM having its own distribution channels also does not seem to be passed onto the customer in the form of low prices of spare parts and there appears no justifiable efficiency factors in the form of any benefits to the consumers. Exploitative pricing conduct by each OEM is a manifestation of lack of competitive structure of the Indian automobile market. The Commission is therefore of the opinion, that structurally modifying the competitive nature of the Indian automobile market will itself induce market self-correcting features, by enhancing consumerchoice and access of independent repairers to effectively compete in the Indian aftermarket. Such remedies, in the opinion of the Commission shall have a rationalizing effect on prices of the products in the Indian automobile aftermarket. Leveraging - owners of various brands of automobiles are completely dependent on the authorized dealer network of the OEMs and are not in a position to exercise option of availing services of independent repairers. In most cases, the users of car wanting to purchase the spare parts have to necessarily avail the services of the authorized dealers of the OEM. It is therefore found that such OEMs use their dominance in the relevant market of supply of spare parts to protect the other relevant market namely; the aftersales service and maintenance thereby violating Section 4(2)(e) of the Act. Even in case of OEMs where the spare parts are available to the independent repairers as well as the owners of cars in the open market, the independent repairers are still foreclosed from the aftermarket for repairs and maintenance of the various brands of automobiles manufactured by the OEMs. This is because none of the OEMs allow their diagnostic tools, repair manuals etc., to be sold in the open market. The submissions of the OEMs and those of the multi-brand service providers appear to be contradictory. If the data submitted by the OEMs is correct, and an increasing number of car owners are using the services of independent service providers in the post-warranty period, then there would have been no reason for the multi-brand service providers to allege their inability to service their customers in the post-warranty period. - Commission finds the OEMs (OPs) to be indulging in anti-competitive practices resulting in contravention of section 4(2)(a)(i), 4(2)(a)(ii), 4(2)(c) and 4(2)(e) of the Act. Whether the opposite parties have violated the provisions of section 3 as has been alleged - Held that - The mere selling of spare parts and diagnostic tools in the aftermarket by the OESs does not violate the intellectual property rights in such spare parts. Additionally, the OEMs can through its contractual agreements with the OESs ensure that its intellectual property rights are not compromised and are protected. The OEMs can contractually require the OESs to produce the finished spare parts (which are meant to be sold in the open market) in compliance with the applicable industry standards and other consumer laws of India ensuring that the safety of consumers purchasing such spare parts is not compromised. It is opined that there is a requirement for the creation of a collaborative space between the independent repairers, multi-brand operators, the OEMs and their OESs so that they can play an effective role in curbing the usage of spurious spare parts and providing the automobile consumers of India with competitive and efficient repair and maintenance options. Therefore, the restrictions placed on the OESs adversely affects the competition in the automobile sector and falls within the mischief of section 3(4), read with section 3(1). The argument of the OEMs of putting the restrictions on OESs for sale of their proprietary parts to third parties as reasonable conditions for claiming the exemption under section 3(5)(i) is found to be unacceptable devoid of any merit. - Therefore, since the exception under section 3(5)(i) is not applicable to the agreements between OEMs and OESs, the contravention found by the Commission under section 3(4)(c) & (d), read with section 3(1) stands established. Opposite Parties (OPs) have contravened the provisions of sections 3(4)(b), 3(4)(c), 3(4)(d), 4(2)(a)(i) and (ii), 4(2)(c) and 4(2)(e) of the Act, as applicable. As elucidated in detail in the order, the Commission does not accept the unified systems market in this case specifically, and in the Indian market conditions in general. The kind of parameters which have been defined even in other jurisdictions and literature for accepting the systems market approach do not normally exist in the Indian market, including in regard to availability of relevant information (e.g. life-cycle cost) to the consumers, his ability/inability to take a rational/analytical decision based on complex data which may or may not be available, the reputational impact of anti-competitive conduct in the aftermarket on the firm's product in the primary market etc. These factors are aggravated in the Indian market situation due to some globally recognised different characteristics of Indian consumer (including cost-consciousness) and the complex nature of aftermarkets. The parties are hereby directed to immediately cease and desist from indulging in conduct which has been found to be in contravention of the provisions of the Act. As regards imposition of penalty, the Commission notes that the OPs have violated the provisions of both sections 3 & 4 of the Act. Anti-competitive conduct of the opposite parties has restricted the expansion of spare parts and independent repairers segment of the economy to its full potential, at the cost of the consumers, service providers and dealers. The directions of the Commission will be complied with by the opposite parties in letter and spirit. Each OP is directed to file individual undertakings, within 60 days of the receipt of their order, about compliance to cease and desist from the present anti-competitive conduct, and initiation of action in compliance of other directions. This will be followed by a detailed compliance report on all directions within 180 days of the receipt of the order. The amount of penalty will be paid by the OP within 60 days of the receipt of the order. - Decided in favour of appellant.

Summary

Issues Involved:
1. Anti-competitive practices in the automobile aftermarket.
2. Denial of market access to independent repairers.
3. Imposition of unfair prices for spare parts.
4. Leveraging dominance in one market to protect another.
5. Restrictive agreements with overseas suppliers and local OESs.
6. Restrictive agreements with authorized dealers.

Detailed Analysis:

Anti-competitive Practices in the Automobile Aftermarket:
The Commission found that the OEMs (Original Equipment Manufacturers) were engaging in anti-competitive practices by restricting the availability of genuine spare parts, diagnostic tools, and technical information to independent repairers. This effectively created a monopoly over the supply of spare parts and repair services, leading to high prices and limited consumer choice.

Denial of Market Access to Independent Repairers:
The OEMs were found to have imposed restrictions on their overseas suppliers and local OESs (Original Equipment Suppliers) from selling spare parts directly in the Indian aftermarket. The agreements between OEMs and OESs included clauses that required OESs to seek prior consent from OEMs before selling spare parts to third parties. This practice was deemed to deny market access to independent repairers, violating Section 4(2)(c) of the Act.

Imposition of Unfair Prices for Spare Parts:
The investigation revealed that OEMs were imposing unfair prices on spare parts, with substantial markups ranging from 100% to 5000%. The Commission found that these prices were excessive and not related to the economic value of the products, violating Section 4(2)(a)(ii) of the Act.

Leveraging Dominance in One Market to Protect Another:
OEMs were using their dominance in the market for spare parts to protect their position in the market for repair and maintenance services. By restricting access to spare parts and diagnostic tools, OEMs ensured that car owners had to rely on authorized dealers for repairs, thereby leveraging their dominance in one market to protect another, violating Section 4(2)(e) of the Act.

Restrictive Agreements with Overseas Suppliers and Local OESs:
The Commission found that OEMs had entered into agreements with overseas suppliers and local OESs that restricted the latter from selling spare parts directly in the Indian aftermarket. These agreements were in the nature of exclusive distribution agreements and refusal to deal, violating Sections 3(4)(c) and 3(4)(d) of the Act. The OEMs' claim of protection under Section 3(5)(i) (IPR exemption) was not accepted as they failed to provide sufficient evidence of their IPRs in India.

Restrictive Agreements with Authorized Dealers:
The agreements between OEMs and their authorized dealers included clauses that restricted over-the-counter sales of spare parts and required dealers to source spare parts only from the OEMs or their approved vendors. These agreements were found to be in the nature of exclusive supply and distribution agreements, leading to refusal to deal and foreclosure of competition, violating Sections 3(4)(b), 3(4)(c), and 3(4)(d) of the Act.

Conclusion:
The Commission concluded that the OEMs had contravened Sections 3(4)(b), 3(4)(c), 3(4)(d), 4(2)(a)(i), 4(2)(a)(ii), 4(2)(c), and 4(2)(e) of the Act. The OEMs were directed to cease and desist from anti-competitive practices, make spare parts and diagnostic tools available through an efficient network, allow OESs to sell spare parts in the open market, and not impose blanket conditions that warranties would be canceled if consumers used independent repairers. A penalty of 2% of the total turnover in India was imposed on the OEMs. The OEMs were also directed to file compliance reports within specified timelines.