Akshata Singhvi
Introduction
A wheel has three components, the hub, a spoke and a rim. In a Hub and Spoke (H&S) Agreement, hub is the common retailer (or supplier), spokes represent competitors at the same level in the production cycle, whereas rim is the agreement between a hub and a spoke or between the Spokes. Such an agreement has characteristics of both, a vertical and a horizontal agreement. There exists a horizontal agreement between the spokes and a vertical agreement between the hub and spokes. The hub is a common entity having separate vertical agreements with the spokes. In a cartel, the ‘hub’ facilitates price fixing among horizontal competitors by serving as a central point for sharing sensitive market information and coordinating strategies, ensuring consistent pricing decisions throughout the industry. Players operating at the same production level also engage in horizontal agreements. Under this agreement, the spokes exchange information or collude through the hub. The main objective of this agreement is to earn super-natural profits.
The Competition Act, 2002 under Section 3(3) previously only prohibited the horizontal agreements as agreements between competitors at the same level can affect the competition in the market and affect it negatively and therefore can have a Appreciable Adverse Effect on Competition(AAEC). Vertical agreements are not by default anti-competitive unless it causes or is likely to cause Appreciable Adverse Effect on Competition as the players are at different levels of the production chain. This is where the question of hub and spoke agreements comes up because they aren’t vertical agreements nor are they horizontal agreements. The new amendments[1] have effectively expanded its scope by including hybrid agreements like the hub and spoke cartel and participants who intended to become a part of the cartel. There are several economic and legal factors which contribute to the existence of a hub and spoke cartel. In a hub and spoke cartel, a vertical player’s involvement is crucial because it can use its position in production or distribution to influence suppliers and customers at different stages. This helps enforce cartel agreements better and improves coordination within the cartel. Due to no direct communication between the spokes, it is difficult to establish transfer and exchange of information between them. Therefore, the existence of collusion between these types of cartels cannot be easily ascertained due to vague choice of words as it may include common platforms used by e-commerce websites to facilitate transfer of information.
Uber and Ola Antitrust Case: Landscape prior to the Competition (Amendment Act, 2023:
This case is particularly significant because it talked about the existence of an arrangement similar to a hub and spoke agreements before the amendment. Cognizance is taken of this landmark case in cases revolving around hub and spoke agreements. In Samir Agrawal v. CCI[2] Ola and Uber were accused of engaging in anti-competitive practices before the Competition Commission of India (CCI).Collusion was alleged on the ground that the price was fixed by way of the algorithm of these cab aggregators, as a result of which the drivers were forced to accept these prices. They couldn’t negotiate these prices with customers. Ola and Uber were said to be the hub and drivers were the spokes thus making it a hub and spoke agreement. Here, the CCI was presented a matter pertaining to hub and spoke cartels for the first time.
However, the CCI held that this was not a hub and spoke agreement due to absence of any agreement between the drivers or between Ola/Uber and the drivers. Exchange of information, any concerted action or common intention between the drivers was not established. Additionally, no Adverse Effect of Competition could be established. Also, there are several other mobile applications providing the same services. Drivers are not employees and the pricing is fixed through an algorithm which determines the prices on the basis of factors such as time, traffic etc. This model, thus, cannot be said to be similar to a hub and spoke agreement. Hon’ble NCLAT also upheld this decision of the CCI after it was challenged in NCLAT. On the basis of the case, a two-fold test was to be laid down to determine the existence of a hub and spoke agreement. Firstly, the presence of an agreement between the players and secondly, the common intention between them.
Impact of the Competition (Amendment) Act, 2023
Before the amendments, there was no clearcut provision to deal with such hub and spoke cartel agreements. hub and spoke agreements don’t entirely come under either categories of vertical or horizontal agreements as it involves both, a vertical agreement between the hub and the spokes and a horizontal one between the spokes. Therefore, those agreements which did not show any direct horizontal agreement were not held as anti-competitive. They escaped any sort of liability. Now, the new amendments[3] to the Competition Act, 2002 confer liability on participants engaged in a hub & spoke agreement. It has widened the definition of anti-competitive agreements to include even those who “intend to participate in or participate in furtherance of” agreement[4] even though not engaged in the trade of similar goods, thus bringing hub and spoke agreements within its purview. Irrespective of the fact that they are not engaged in the trade of similar goods, i.e., they aren’t horizontal competitors, entities will be held liable or presumed to be part of the agreement. This amendment was important as such agreements may lead to anti-competitive practices in the society, hinder economic growth and interfere with the market’s ability to function freely for trade.
Ambiguity surrounding ‘intention’ of players
Industry associations expressed concern over the language as it could unintentionally involve e-commerce platforms and associations that offer communication platforms but do not intend to take part in the agreements. The Samir Agrawal ‘Ola Uber’ case was the first instance where the need for legislation on hub and spoke cartel was recognised. Today, the e-commerce industry is rapidly growing. The number of players has increased significantly in the market. Ola, Uber, Swiggy, Amazon, Zomato, Myntra, all have become a part of our daily life. All of them have an algorithm in place to determine their prices, delivery charges etc. In such a scenario, it is difficult to establish if the intention between the parties is to adversely affect the competition in the market. The new amendments fail to recognise this aspect of intention, and may unnecessarily involve e-commerce websites that have no such intention to hinder the competition in the market.
Artificial Intelligence and E-commerce Websites
India has over 300 million smartphone[5] users today. As of 2022, internet has penetrated over 48.7% of our population, racking up nearly 658 million internet[6] users in India as of January 2022. Clearly, the Internet and smartphones have become an integral part of our daily lives, and with that the use of e-commerce as well. The COVID pandemic has also been a major factor in the rise of popularity of e-commerce websites. Due to the growing number and variety of e-commerce websites, we can now buy anything with just a click on our smartphones, whether it be gadgets, clothing, or groceries.
E-commerce companies are constantly competing. To gain advantage over each other, top E-commerce companies have turned towards Artificial Intelligence (AI); to determine the market, create preferred products and to manage logistics. Flipkart, Myntra, Amazon etc. have their own AI models, their own algorithms to manage and sell products of different retailers on their website. However, this business model cannot be termed as something similar to a hub & spoke agreement as these algorithms are simply platforms to facilitate communication. They can’t be termed as anti-competitive. This is the problem which may arise as a result of the new amendments as the ambiguity surrounding the intention may lead to unnecessarily involving these platforms.
According to the new amendment, it may be understood that these platforms of the E-commerce websites create a link between the website and the different retailers and thereby may be anti-competitive and prohibited under the Act. But in reality, they can’t be termed as anti-competitive as they don’t adversely affect the prevalence of competition between retailers. Therefore, in such cases, intention between the parties is important to be established to determine if an agreement exists or not. Such agreements should not be classified as hub & spoke agreements in the absence of clear intention between the parties. For instance, in the case of Ghai Enterprises (P) Ltd.,[7] both ice-cream firms portrayed their intention through a tacit agreement, in relation to price parallelism and so, were brought under the purview. Without intention, they shouldn’t be brought under the purview of the new amendments and be termed as anti-competitive.
Another aspect of digitalisation that cannot be ignored is where AI and third-party software algorithms actually act as the hub and are in reality leading to an anti-competitive environment. Therefore, in such instances, it becomes imperative to establish intent in order to allocate liability specifically to those individuals or entities actively facilitating anti-competitive behavior within the market.
The 52nd Finance Committee report on the Competition Amendment bill also proposed adding intention or knowledge as factors in assigning liability, targeting those knowingly involved in anti-competitive practices to bolster enforcement efforts.
Foreign Jurisprudence
In the famous Toys “R” Us case of USA[8], Toys “R” Us entered into same agreements with ten manufacturers like Mattel and Fisher Price. The agreement and its terms were anti-competitive as Toys “R” Us wanted to eliminate competition from the market and it would have had to lower its prices. In this case, the intention was established between all the parties as Toys “R” Us was the mastermind, the main player in this scheme of anti-competitive practices and the manufacturers acted in consonance with each other and with Toys “R” Us. It was a “conscious commitment to a common scheme” and so liability was imposed as intention was established. According to jurisprudence of UK also, intention is given importance to impute liability.
Conclusion
The 52nd report of Finance Committee on the Competition Amendment bill, recommended the inclusion of the aspect of intention/knowledgeThe new amendments to Section 3 of the Competition Act, nowhere include “intention”. It simply presumes liability in case of active participation in a hub & spoke agreement. But a hub & spoke agreement can’t be assumed without intention. Until there exists intention between the parties’, they can’t be held liable. Indian Jurisprudence, as in the case of Ola/Uber also emphasises on the aspect of intention like UK, USA Jurisprudence on the matter.
The amendments are definitely a step in the right direction but a modification to include intention is the need of the hour, especially with growing e-commerce websites and artificial intelligence. Agreements should be termed anti-competitive only if the intention of parties is to affect the competition in the market. A two fold test, like laid down in Uber Ola Case, may be included in these new amendments. The two conditions being the presence of an agreement and intention of parties. These tests should be applied before establishing an agreement as anti-competitive so as to prevent unnecessary liability on entities and also to bring it at par with foreign jurisdictions.
[1] ‘Home: PRSIndia’ (PRS Legislative Research, 21 April 2024) <https://prsindia.org/>
[2] Samir Agrawal v CCI (Cab Aggregators Case), (2021) 3 SCC 136
[3] Explanation to Sec 3(3), The Competition (Amendment) Act, 2023.
[4] The Ministry of Corporate Affairs notified the provision on May 19, 2023, effective from May 18, 2023.
[5] Baruah A, “Artificial Intelligence at India’s Top eCommerce Firms – Use Cases from Flipkart, Myntra, and Amazon India” (Emerj Artificial Intelligence Research, March 11, 2020) <https://emerj.com/ai-sector-overviews/artificial-intelligence-at-indias-top-ecommerce-firms-use-caes-from-flipkart-myntra-and-amazon-india/>
[6] Kemp S, “Digital 2022: India — DataReportal – Global Digital Insights” (DataReportal – Global Digital Insights, February 15, 2022) <https://datareportal.com/reports/digital-2022-india>
[7] Ghai Enterprises (P) Ltd., In re, 1986 SCC OnLine MRTPC 29
[8] Toys “R” Us, Inc. v. Step Two, S.A. 318 F.3d 446 (3rd Cir, 2003)