In India, the Competition Act, 2002 (Competition Act) recognizes two distinct categories of agreements – horizontal agreements and vertical agreements. Since hub-and-spoke arrangements involve both horizontal and vertical elements, it is difficult to place them under one or other of these categories. Further, since the computation of penalty and the availability of leniency are premised on the understanding that all anti-competitive agreements fall into either of these categories, the legal framework governing hub-and-spoke arrangements is currently mired in ambiguity. The Competition Law Review Committee (CLRC), instituted by the Ministry of Corporate Affairs in India, acknowledged this ambiguity, and recommended the inclusion of hub-and-spoke arrangements within horizontal agreements, which has been reflected in the Competition Amendment Bill, 2022 (Bill) currently before the Indian Parliament. However, it remains to be seen under what circumstances the hub will itself become liable for the horizontal conduct between competitors. This article provides an overview of the current regime and the proposed amendments and outlines some proposals to bring the Indian regime in line with the best practices in other jurisdictions.

The Journey so Far

Statutory Provisions and Interpretative Questions

Locating hub-and-spoke arrangements under Section 3

In India, anti-competitive agreements which cause or are likely to cause an appreciable adverse effect on competition (AAEC) within India are prohibited under Section 3 of the Competition Act. Section 3(1) of the Competition Act provides:

“No enterprise or association of enterprises or person or association of persons shall enter into any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition within India.”

Section 3(3) sets out an exhaustive list of different categories of horizontal agreements, including cartels, that shall be presumed to have an AAEC. On the other hand, Section 3(4) provides a non-exhaustive list of various categories of vertical agreements that may lead to an AAEC, but are not presumed to have such effect. In its decisional practice, the Competition Commission of India (CCI) has clarified that vertical agreements falling under Section 3(4) shall be examined under a rule of reason approach,^[5] while agreements falling under Section 3(3) are presumed to be anti-competitive.^[6]

Over the years, the approach followed by the CCI in assessing agreements that are neither horizontal nor vertical or have both these elements has been to review them under Section 3(1). In the Hiranandani Hospital case,^[7] the majority of the CCI expressly held that anti-competitive agreements that did not fall within the scope of Section 3(3) or Section 3(4) might still come under Section 3(1) which prohibited all forms of anti-competitive conduct, and was not limited by sub-sections (3) or (4). The majority order observed that Section 3(1) was enforceable independent of Section 3(3) and 3(4) because the latter were expansions of Section 3(1) and did not limit the scope of Section 3(1). While the majority order was set aside on appeal,^[8] the then appellate tribunal, COMPAT, did not specifically discuss whether Section 3(1) could be enforced without any reference to Sections 3(3) and 3(4).

Over the years, Section 3(1) has been used independently and the current position seems to be that, even if hub-and-spoke arrangements cannot be viewed under the cartel provisions of Section 3(3), they can still be assessed under Section 3(1).

In the initial cases where it was alleged that a hub-and-spoke arrangement had been used to facilitate resale price maintenance (RPM), the CCI confined its inquiry to assessing whether the alleged vertical agreements were in violation of Section 3(4) and did not inquire into the question of a hub-and-spoke cartel.^[9] Later, in the Samir Agrawal case,^[10] the Informant had alleged collusion between cab drivers through cab aggregators such as Uber. The CCI observed that there was no evidence to indicate any agreement between various drivers using a common cab aggregator and, accordingly, it could not be held that the cab aggregators were facilitating collusive conduct between various cab drivers. The decision of the CCI was upheld on appeal by both the National Company Law Appellate Tribunal (NCLAT)^[11] as well as the Supreme Court of India,^[12] which affirmed that evidence of collusion between the spokes was essential to demonstrate the existence of a hub-and-spoke cartel. The CCI has followed a similar approach in subsequent cases and has dismissed allegations of hub-and-spoke agreements unless an agreement between the spokes can be demonstrated.^[13]

Calculating Penalty for the Hub

Under Section 27(b) of the Competition Act, the maximum permissible penalty for cartels is substantially higher than the maximum penalty for other infringements. Under special, alternative provisions for cartels, the maximum penalty for cartels is up to 10% of the turnover of the enterprise or 3 times its profits, for each year of the continuance of the cartel, whichever is higher, whereas the maximum penalty for other infringements is limited to 10% of the average turnover for the last three years.

Cartels are defined as “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”.^[14] Therefore, if cartels are considered as agreements between competitors, the spokes can be penalised under cartel specific penalty provisions. The hub could possibly be penalised under the more general provisions, which could result in lower penalty for the hub as compared to the spokes. This clearly would create an unequal penalty regime for the same offence. The CCI has not yet found a hub-and-spoke cartel to exist, but if it did, it would have been interesting to see how this issue of penalty would have been addressed.

Availability of Leniency Programme

Section 46 of the Competition Act is the substantive provision which empowers the CCI to impose lesser penalty if, “it is satisfied that any producer, seller, distributor, trader or service provider included in any cartel, which is alleged to have violated Section 3, has made a full and true disclosure in respect of the alleged violations and such disclosure is vital.^[15] Further, under the Competition Commission of India (Lesser Penalty) Regulations, 2009, the “applicant” is defined as “an enterprise who is or was a member of a cartel and includes an individual who has been involved in the cartel on behalf of an enterprise, and submits an application for lesser penalty” to the CCI.^[16]

As discussed above, it is difficult to determine whether the hub, which operates in a different market and is only vertically related to the spokes, can be said to be “included in any cartel” or “a member of the cartel”. Accordingly, whether hubs can apply for leniency under the current regime remains unclear.

In conclusion, the CCI has looked at hub-and-spoke arrangements under Section 3. However, it did not make any specific observation on whether these are covered under the cartel specific provisions – therefore making the cartel-specific penalty, leniency and other provisions also applicable to hub-and-spoke arrangements. The CCI has tried to address these concerns in the Bill, as discussed below.

Proposed Changes in the Bill to Address Hub-and-Spoke Arrangements

Hub-and-Spoke Arrangements to be Assessed under Section 3(3) of the Competition Act

Given the ambiguity surrounding the standing and legal liability of the hub in hub-and-spoke arrangements, the CLRC recommended the express inclusion of hub-and-spoke cartels within Section 3(3), clarifying that the hub was as equally culpable as the spokes that took part in the agreement. In its report, the CLRC noted that in the UK, hubs were penalised only if it was demonstrated that they had the intention to facilitate anti-competitive conduct. However, the CLRC disagreed with such an approach, and recommended that no inquiry of knowledge or intention should be required to impute liability to the hub.^[17]

The recommendation was reflected in the Bill, which seeks to amend Section 3(3) to include hub-and-spoke agreements. Under the Bill, a hub would be presumed to have participated in the horizontal agreement “if it actively participates in the furtherance of such agreement.”^[18] Such explicit inclusion of hub-and-spoke agreements within Section 3(3) would likely reduce the legal ambiguity since the liability of the hub and the availability of the leniency programme would become clear. However, it is not yet clear what active participation in the furtherance of the agreement would entail, and how participation of the hub in the agreement will be proved or disproved.

In this regard, the Parliamentary Standing Committee on Finance (Standing Committee) has recommended further amendments in the text of the Bill to ensure that hubs such as online marketplaces are not unduly penalised for collusive conduct between third parties using their services. The Standing Committee recommended that the liability of the hubs should be restricted to cases where the hub had the intention to participate in the anti-competitive conduct.^[19] It is yet to be seen whether the changes proposed by the Standing Committee will be incorporated into the Bill.

Active participation

It is not unusual for resellers to share certain competitively sensitive information with suppliers. This may be done for many reasons, such as to improve foothold in the market, to get a better deal or to obtain bigger discounts. However, issues will begin to arise when such information is passed on by the supplier to a competing reseller.^[20] Therefore, extreme caution will have to be exercised when any confidential information is being shared between retailers and suppliers. Not every retailer-to-supplier exchange of information will be problematic. However, where such information finds its way to the competitor in question, the triangular nature of the conduct can be seen in terms of being a horizontal agreement. The challenge will be to identify such situations.

What is clear is that competitor-to-competitor exchanges and reseller-to-supplier-to-competing reseller exchanges can both involve de facto horizontal agreements. Where the supplier is a conduit for sharing information between the competing resellers, the analysis will likely be fairly straightforward. This is simply competitors talking to each other where the supplier replaces the telephone, and the presence of the supplier will not negate the existence of a horizontal agreement between the resellers.

Things can get complicated where the role of the supplier gets blurred. Would the supplier be said to be actively participating in a situation where the supplier is a chatter and simply likes to discuss every detail of his dealings with his two/three resellers? He is clearly not aware of his role as a hub/facilitator, and therefore, arguably cannot be said to be actively participating in the furtherance of such agreement. This may get further complicated when the resellers are aware of this peculiar habit of the supplier and continue to engage with him – would this aspect change any assessment?

It may very well be the case that active participation is only found in circumstances where the reseller can reasonably foresee that information shared with the supplier will get passed on to the competing reseller/s. Where the information is shared by the reseller for a legitimate purpose and it could not have been foreseen that the supplier would direct this information to a competing reseller, it may be more likely that the CCI will not find a hub-and-spoke agreement.

Subject to what we see in the final Bill, these issues will have to be addressed by the CCI. However, what is key is that the players in vertical markets will have to exercise extreme caution when sharing information with each other and non-disclosure restrictions will have to be a necessary part of these arrangements.

Hub-and-Spoke Cartels in the US and the EU.

While the proposed changes to the legal framework on hub-and-spoke arrangements is still under discussion in the Indian Parliament, it may be helpful to look at how mature competition regulators in jurisdictions like the United States (US) and the Eurpean Union (EU) have understood hub-and-spoke cartels.

United States

In the US, conspiracies in restraint of trade are prohibited under Section 1 of the Sherman Act, 1890. The statute is broadly worded and does not distinguish between horizontal agreements and vertical agreements. Although there is no express reference to hub-and-spoke cartels in the statute, US courts have recognised the illegality of hub-and-spoke agreements for almost a century.^[21] In its decisional practice, the court has repeatedly clarified that it is essential to demonstrate the existence of a rim that connects the spokes. According to the case law, the “rim” connecting the horizontal spokes, which are otherwise just individual parties to parallel vertical agreements, draws the line between presumptively legal vertical agreements and illegal horizontal agreements. The rim establishes the agreement needed to conclude a per se violation of Section 1 of the Sherman Act, 1890. Without the rim, the parallel vertical agreements can only be subject to a rule of reason analysis.^[22]

Once a rim between the spokes has been established, the agreement is illegal per se. The hub which facilitates concerted action between the spokes is equally culpable if it can be shown that the hub was a knowing participant in that agreement and facilitated the scheme.

European Union

In the EU, anti-competitive agreements are prohibited under Article 101 of the Treaty on the Functioning of the European Union (TFEU). While the text of the TFEU is broadly worded, various possible scenarios in which hub-and-spoke arrangements may be used to facilitate anti-competitive conduct have been discussed in Guidelines on both horizontal as well as vertical agreements.^[23]

The European Court of Justice has clarified that an undertaking may be held liable for a concerted practice on account of the acts of an independent service provider if the undertaking was aware of the anti-competitive objectives pursued by its competitors and the service provider and intended to contribute to them by its own conduct, or if that undertaking could reasonably have foreseen the anti-competitive acts of its competitors and the service provider. If the third-party service provider shared the commercially sensitive information of an undertaking with its competitors without the knowledge or consent of the undertaking, the undertaking cannot be held liable for the anti-competitive conduct.^[24] Further, once it is established that an undertaking was aware of the anti-competitive agreement, it may rebut the presumption that it participated in the concerted practice by demonstrating that it had publicly distanced itself from the practice.^[25]

The liability of the hub is determined in a similar way. In order to hold the hub liable for anti-competitive conduct, it would be necessary to prove that it was aware of the upstream/downstream coordination, or at least that it could have reasonably foreseen the possibility, and that it contributed to the realisation of the conduct through its actions.^[26]

The Way Ahead

The express inclusion of hub-and-spoke agreements within Section 3(3) resolves the legal ambiguity surrounding hub-and-spoke agreements. However, in the current proposed form the provisions may open floodgates of enforcement cases. The evidentiary standards that are to be followed by the CCI in assessing hub-and-spoke cartels should accordingly be set out in clear terms and guidance should also be issued.

An important aspect is the determination of the evidentiary threshold after which the CCI may presume that the agreement may lead to an AAEC. Hub-and-spoke agreements typically involve a number of similar independent vertical agreements between various enterprises. The vertical agreements, individually or collectively, are not anti-competitive unless it can be shown that they lead to collusion. As the discussion above illustrates, under US and EU law, the evidence of an agreement between the spokes is a sine qua non in establishing the existence of a hub-and-spoke cartel and imputing liability to the hub. In India, the Bill stipulates that the hub shall be presumed to be a part of the agreement if it actively participates in the furtherance of the agreement. However, the role of the supplier, his knowledge of the conduct and the reseller’s knowledge of the supplier’s role will become key aspects and will put a significant evidentiary burden on the CCI.

Further, in order to ensure that the business activities of online platforms are not unduly jeopardized, it is crucial that the recommendations of the Standing Committee on assessing the intention of the hub is incorporated into the proposed amendment. In mature antitrust regimes such as the EU or the US, intention or knowledge of the anti-competitive activity is necessary to establish the culpability of the hub. If penalties are imposed on online platforms or other third parties that may have unwittingly facilitated concerted action between upstream or downstream players without any knowledge of the concerted action, it would result in overdeterrence and may have a chilling effect on the market.

Conclusion

Hub-and-spoke arrangements are not new to the CCI’s enforcement regime. However, the specific inclusion of these in Section 3(3) will undoubtedly remove legal ambiguity and increase scrutiny. The challenges will be to apply this provision in a manner consistent with international practices. It would be good if a soft touch approach is adopted till such time there is clarity on the issues raised in new provision. However, the key aspect remains that the players in the vertical chain will have to careful about information sharing, irrespective of the approach that may eventually be adopted by the CCI. Any retailer-to-competitor information exchange should be duly protected in a manner that it does not result in a situation where rival players get access to this information. If this happens, the CCI will most likely view this as tantamount to a competitor-to-competitor information exchange and the harsher cartel regime will get triggered.

Footnote

^[1]      OECD, Background Note by the Secretariat, Roundtable on Hub and Spoke Agreements (2019).

^[2]      Barak Orbach, ‘Hub-and-Spoke Conspiracies’ 15 Antitrust Source 1 (2016).

^[3]      See n.2, above.

^[4]     See, for instance, United States v. Apple Inc., 952 F. Supp. 2d 638 (S.D.N.Y. 2013).

^[5]      Jasper Infotech v. KAFF Appliances, CCI, Case No. 61 of 2014 (15 January 2019).

^[6]     Ghanshyam Dass Vij v. Bajaj Corp Limited and Others, CCI, Case No. 68 of 2013 (12 October 2015).

^[7]      Ramakant Kini v. Dr. L.H. Hiranandani Hospital, CCI, Case No. 39 of 2012 (24 February 2014).

^[8]     This was appealed to the Supreme Court where it is currently pending.

^[9]     Jasper Infotech v. KAFF Appliances, CCI, Case No. 61 of 2014 (15 January 2019); Fx Enterprise Solutions Limited v. Hyundai Motor India Limited, CCI, Case Nos. 36 and 82 of 2014 (14 June 2017).

^[10]     Samir Agrawal v. ANI Technologies Private Limited and Others, CCI, Case No. 37 of 2018 (6 November 2018).

^[11]     Samir Agrawal v. Competition Commission of India and Others, NCLAT, Competition Appeal (AT) No. 11 of 2019 (29 May 2020).

^[12]     Samir Agrawal v. Competition Commission of India and Others, Supreme Court, Civil Appeal No. 3100 of 2020 (15 December 2020).

^[13]     CP Cell, Directorate General Ordnance Service Master General of Ordnance Service v. UP State Handloom Corporation Limited, CCI, Reference Case No. 04 of 2019 (3 November 2021).

^[14]     Emphasis supplied.

^[15]     Emphasis supplied.

^[16]     Regulation 2(b), Competition Commission of India (Lesser Penalty) Regulations, 2009. Emphasis supplied.

^[17]     Ministry of Corporate Affairs, Government of India, Report of the CLRC (2019) 60-62.

^[18]     Competition Amendment Bill (2022). Emphasis supplied.

^[19]     Standing Committee on Finance, Fifty-Second Report (December 2022).

^[20]     Hub-and-spoke arrangements can, of course, also involve vertical exchanges which facilitate collusion between suppliers and the arguments here apply mutatis mutandis.

^[21]     Interstate Circuit Inc. v. United States, 306 U.S. 208 (1939).

^[22]     For a detailed discussion on the evidentiary standards required to show hub-and-spoke agreements, see Benjamin Klein, “Inferring Agreement in Hub-and-Spoke Conspiracies”, 83 Antitrust Law Journal (2020).

^[23]     See n. 2.

^[24]     Case C-542/14, SIA ‘VM Remonts’ (formerly SIA ‘DIV un KO’) and Others v. Konkurences padome, ECLI:EU:C:2016:578.

^[25]     Case C-74/14, Eturas UAB and Others v. Lietuvos Respublikos konkirencijos taryva (Eturas), ECLI:EU:C:2016:42.

^[26]     Case C-194/14 P, AC-Treuhand v. Commission, ECLI:EU:C:2015:717.

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