Maruti Suzuki penalised for Resale Price Maintenance – A wake-up call for others?
Updated: Oct 31, 2021
Authors: Aniket Panchal & Punit Sanwal
3rd year students at Gujarat National Law University
Recently, the competition watchdog of India has handed down its order against Maruti Suzuki India Limited (MSIL) for infracting the provisions of the Competition Act 2002 (The Act). The order alleged that MSIL, country’s biggest car maker, was indulging in the anti-competitive practice of Resale Price Maintenance (RPM) by enforcing its Discount Control Policy (DCP) on its dealers. RPM, proscribed under Section 3(4)(e), is a vertical agreement whereby a manufacturer in upstream market specifies the final price that retailers charge consumers. This post aims to critically analyse this ruling in light of several precedents and argues that the order suffers from some deficiencies owing to insufficient investigation.
II. Existence of an Agreement
While denying the allegations, MSIL argued that there was no agreement between MSIL and its dealers to limit the discounts. In fact, the only agreement between MSIL and its dealers was the “Dealership Agreement” which, MSIL argued, specifically allowed dealers to offer lower prices.
However, restricting the definition of “agreement” to such an extent is equivalent to accepting that even if MSIL had unilaterally announced minimum prices, it wouldn’t amount to an “agreement” in the strict sense since the retailer selling products in the market under those terms isn't engaging into an agreement; he’s simply following the manufacturer's unilateral policy.
The Competition Commission of India (CCI) noted, rightly so, that the definition of ‘agreement’ under Competition Act is expansive when compared to the definition in the Indian Contract Act 1872. Under Section 2 (b) of the Act, an ‘agreement’ can include any arrangement or understanding regardless of it being in writing, formal agreement or its legal enforceability. Supplying such an all-embracing interpretation to the word ‘agreement’ mirrors CCI’s approach in Ref. Case No. 01 of 2012 by DG against M/S Puja Enterprises where it was held that an understanding can even be tacit and the definition of agreement also include the situations where the parties’ conduct is based on a “nod or a wink”.
Resultantly, even though a formal written agreement was non-existent between MSIL and its dealers concerning the DCP, it was held that such an arrangement could be construed as falling within the bounds Section 2 (b) of the Act. Further, on a thorough perusal of the E-mails exchanged between MSIL and its dealers, it was clearly observed that each dealer had to get an approval for any discount offered by him over and above the prescribed amount by MSIL and penalties were levied on the dealers who deviated from such an exploitative scheme. MSIL even employed mystery shopping agencies to ensure dealers’ adherence to it. Moreover, the action of penalizing the dealers estopped MSIL from taking a defence of circulating recommendatory discount list which affords final discretion to the distributors as observed in ESYS Information Technologies v Intel Corporation.
III. Did such an agreement cause an AAEC?
Having found such an agreement, the CCI ventured to examine if it caused an Appreciable Adverse Effect on Competition (AAEC) since RPM does not constitute a per se violation of the Act.
M/S Counfreedise v. Timex Group India Limited held that vertical price restraints such as RPM should be analyzed for anti-competitive effect based on the factors for determining AAEC. For this, Section 19 (3) of the Act includes certain factors, one of which is required to find an AAEC. In the present case, CCI’s analysis was mainly based on the factor of ‘Accrual of Benefits to the Consumer’ and on ‘Foreclosure of Competition by hindering entry into the market.’
Stifles Intra-Brand Competition
The most obvious appreciable adverse effect on competition which occurred due to the discount control policy of MSIL was ‘Non-Accrual of Benefit to the Consumers,’ since the MSIL controlled the selling price of cars by its dealers, making it impossible for the dealers to compete on prices. The result of this was that the consumers were forced to buy the cars at a fixed price when, if the dealers were allowed to compete on prices and offer discounts, they could have received lower prices.
Restrictions on the freedom of downstream distributors to sell at a price below the fixed or “recommended” price is, in the words of CCI, “intended to avoid price competition between retailers,” as per Jasper Infotech Pvt. Ltd. (Snapdeal) v. M/S KAFF Appliances India Pvt. Ltd (Jasper). Thus, MSIL’s Discount Control Policy stifled intra-brand competition in the market and created a similar situation to that of a cartel where all the sellers were selling the product at a similar price due to the DCP. The CCI noted that MSIL’s policy caused an AAEC by foreclosing competition by hindering entry into the market as potential new dealers would take into consideration that restriction on the existing dealers and avoid entering the market.
Softens Inter-Brand Competition
MSIL’s policy for controlling discounts and thereby maintaining a fixed price among all its dealers can actually hinder inter-brand competition as well. MSIL has a huge market share. If it controls the price across all its dealerships, other brands can detect a pricing trend in the market and easily include this factor in their pricing strategy. Smaller competitors will not try harder to provide extra discounts if the largest player itself has fixed a certain price. This results in price stabilization and softened competition, and the consumer will face the consequences of this in terms of higher prices.
The CCI in Fx Enterprise Solutions India Pvt. Ltd. v. Hyundai Motor India Ltd. held that imposition of minimum RPM in this scenario can result in the softening of competition among other brands as well because they would be sure of the prices enforced by Hyundai and will know they do not need to fear inter-brand discounting. Thus, such a policy of MSIL caused an AAEC as no benefit was accrued to the consumer.
IV. Market Power of MSIL
CCI noted that MSIL had a huge market share in the passenger vehicle segment as it commands 51% of the market share. While arguing the difference between market share and market power, MSIL also argued that their market share kept on fluctuating and that it was not relevant for causing AAEC due to its discount control policy. Further, the doctrine of de minimus allows the competition authority to avoid looking into agreements that do not materially impede competition. In Shri Ghanshyam Das Vij v. M/S Bajaj Corp Ltd. and Ors, . the CCI had held that market dominance is an important factor to conclude the existence of AAEC due to a Resale Price Maintenance Agreement.
Interestingly, in finding that MSIL has nearly 51% market share, CCI has neither delineated relevant product market nor relevant geographic market. In fact, this pronouncement goes against the law of the land as laid down by the Supreme Court in Competition Commission of India v. Coordination Committee of Artistes and Technicians of West Bengal Film and Television, which held that the term ‘market' under section 19(3) will be interpreted as ‘relevant market,' necessitating its delineation when examining anti-competitive agreements.
V. Rule of Reason Approach to weigh in the pro-competitive effects
In line with international practice, CCI has also adopted the rule of reason approach while assessing the RPM. This approach invites an investigation into the economic rationale of the RPM policy. It is a widely accepted proposition that, in certain cases, the discount limit helps prevent free riding among distributors. Customers frequently window-shop at the distributors who prioritise retail services over discounts, and buy the product at distributors who prioritise discounts over quality of retail services. Since retail services encompass marketing, advertising, etc., the distributors offering heavy discounts are essentially able to free-ride on the demand generated by the distributors spending on retail services.
In fact, MSIL argued that RPM in the present case actually had pro-competitive effects including the elimination of the ‘free-riding’ problem. CCI, however, opined that the dealers' conduct concerning pre-sales services was regulated by MSIL's appropriate Sales Operating Procedures & System and Process Guides, and that even if they were insufficient to eliminate the problem of free-riding, imposing a minimum floor price was not the solution. The CCI concluded that the RPM caused more harm by reducing intra- and inter-brand competition, and that those effects outweighed the benefit of any extra services provided by the dealers.
RPM arguably fosters competition by facilitating new entry in the market since a fresh entrant cannot sustain in a market marred with heavy discounts. In fact, CCI emphasised in the Jasper case that RPM may not be inescapably anti-competitive, but rather could be “efficiency enhancing with sound economic justifications”.
Having found the conduct of MSIL to be anti-competitive, the CCI issued a cease and desist order against it. Further, considering this Covid-19 crisis of unprecedented sorts, the CCI imposed a ₹200 crore penalty on MSIL under Section 27(b) as against a maximum permissible penalty of 10% of entity’s average relevant turnover. Being second in line after FX Enterprise v. Hyundai, this seminal ruling of the CCI will be a wake-up call for many other entities including enterprises operating in the same market . Notwithstanding that, in no way is this an end to this litigation since the MSIL has already announced that they are contemplating further actions under law.