Introduction

The Competition Act, 2002 (‘Act’) proscribes anti-competitive horizontal and vertical restraints. A hub-and-spoke (‘H&S’) arrangement has elements of both. An H&S arrangement is one in which an entity (the ‘hub’), facilitates coordination relating to prices, market or customer allocation, production, distribution, or any form of bid rigging, amongst competing entities operating at a different level of the supply chain (the ‘spokes’). Recent amendments to the Act (‘2023 Amendment’),^[1] have now sought to codify the illegality of such H&S arrangements. Much has been written about the change in the law and its elements. But we examine in this article, what exactly is the implication of such codification and what has changed, if at all, from the Competition Commission of India’s (‘CCI’) existing approach towards governing H&S arrangements.

H&S Arrangements in India: Proscribed v. Permitted Conduct

Story Thus Far

Although H&S arrangements were not expressly recognized under the Act prior to the 2023 Amendment, the CCI has previously reviewed in one case an alleged H&S arrangement. In Samir Agarwal v. ANI Technologies Private Limited and Others, (‘Samir Agarwal’)^[2] it was alleged that leading online cab aggregators, Uber and Ola were each coordinating prices amongst their respective driver-partners (such that Uber was the hub for its drivers, as was Ola for its drivers). The CCI rejected these charges on the grounds that the complainant was unable to show either of the two necessary conditions to sustain this charge i.e., (i) an agreement amongst  the drivers to set prices through the platform (Ola/ Uber); and (ii) an agreement amongst the drivers and the platform, where the drivers allow the platform (Ola/ Uber) to coordinate prices amongst drivers.^[3] Before this, in Jasper/ Kaff^[4] and Fx/ Hyundai^[5], allegations of H&S arrangements were levelled. Although the CCI noted that certain vertical arrangements were conducive for effective monitoring of a cartel, it limited its analysis to resale price maintenance related concerns and did not examine the H&S arrangement allegations.

The CCI’s decisional practice thus far, albeit limited, suggests that any analysis for an H&S arrangement is geared towards addressing active collusion. Any H&S arrangement must involve a decision amongst the ‘spokes’ to coordinate with each other – either directly or indirectly. What was not examined is any collusive outcome absent an intention amongst the spokes to coordinate. So, for example, a mandate from a manufacturer to limit discounts amongst its dealers such that the ultimate sales price does not fall below price ‘X’, may well amount to a uniform price amongst such dealers such that it resembles a ‘collusive’ price. But such a direction was unlikely to qualify as an H&S arrangement, as long as the dealers did not agree amongst themselves to keep the price above ‘X’. What remains unclear is what the standard of ‘agreement’ amongst spokes would qualify as an actionable H&S arrangement. Although the definition of an agreement^[6] under the Act is broad enough to include tacit collusion, it remains unclear whether simple knowledge of each other’s adherence to the manufacturer’s diktat re discounts qualifies as a ‘tacit agreement’ amongst dealers, sufficient for it to be scrutinised as a H&S arrangement.

What Does 2023 Amendment Change?

Apart from expressly recognizing H&S arrangements, per the 2023 Amendment, the CCI can scrutinise the role of a non-competing entity as a cartel participant if it ‘participates or intends to participate in furtherance of’ a cartel.^[7] In other words, a hub can be liable for cartelization, regardless of its actual participation in facilitating a cartel, (i) as long as the CCI can show that there is an agreement between competing entities to carry out any of the proscribed conduct under Section 3(3) of the Act; and (ii) the hub ‘intended’ to participate.

The 2023 Amendment effectively dilutes the standard of evidence required to attribute liability to the hub as a cartel participant under an anti-competitive H&S arrangement. It does not, however, do away with the need for there to be a ‘rim’, i.e., an active agreement between competitors, nor does it address the level of engagement spokes need to have with one another to qualify as a ‘rim’ in an H&S arrangement. This suggests, that in order for a ‘hub’ to be liable for an anti-competitive H&S arrangement – its ‘intent’ to participate is sufficient, regardless of it having taken any steps to actively engage in it, as long as an existing arrangement between the spokes is established to fix prices, limit supplies, allocate markets or customers. The intention behind the 2023 Amendment therefore appears to attribute to a vertically related company, at least the same financial liability borne by cartel participants for knowing or participating in a cartel, even though it is not ‘engaged in the same level of trade’ as the cartel participants.^[8]

Intention to Participate v. Actual Participation: Implications for Business

What qualifies as ‘intent’ to participate in a cartel is yet to be seen. As the CCI in the Samir Agarwal case already confirmed that an H&S arrangement requires, at the very least, some form of understanding between the ‘spokes’ to coordinate their conduct, it is unlikely that mere exchange of commercially sensitive information by the hub to each of its  vertically related  businesses as part of the ordinary course of business (e.g., forward-looking market discussions and price/sales projections), will attract liability. While, on account of the diluted standard of evidence for establishing an ‘agreement’ between competitors, a mere exchange of competitively sensitive information between competitors is enough for establishing an anti-competitive ‘agreement’^[9], it remains key for the competitors to, at least, have a tacit understanding to coordinate and the exchange of sensitive information is carried out in furtherance of that intention. But where, the hub was to share dealer A’s confidential information with dealer B and vice versa, including for entirely legitimate reasons such as trade negotiations or reviewing incentives, but neither A nor B are aware of the other dealer having access to its confidential information, it is arguable that there is no intention to coordinate between A and B, i.e., the spokes. Accordingly, based on CCI’s precedent, absent a cartel, i.e., an understanding between the competitors/ dealers, obtaining sensitive information about a competitor through the ‘hub’, absent an agreement or a ‘meeting of minds’ between competitors, is arguably insufficient to attract liability under the amended provision.

This brings us to the implication of the 2023 Amendment for the ‘hub.’ Following the 2023 Amendment, it is possible that the hub simply knowing of an arrangement to, for example, fix prices, is sufficient, without anything further, to attribute liability to the ‘hub.’ This effectively means that anything short of the hub taking active steps to stop coordinated conduct by its business partners, could attribute cartel liability to the hub. Businesses that find themselves in the role of a ‘hub’, such as digital platforms, manufacturers, distributors may then be expected to undertake necessary measures to ensure compliance, not just internally, but ensure that its vertically related business relationships are not, to the best of their knowledge, engaged in any form of illegal coordination. The CCI may argue that the alleged hub’s knowledge, combined with its inaction to stop such collusive conduct, attribute it with the intention to be a part of the arrangement between the dealers.

In such a case, the hub will need to exercise abundant caution in its vertical relationships and curtail the amount of information that it would otherwise be interested to secure. If such information is critical for the hub’s business, then the hub will need to ensure necessary compliance measures to ensure that its dealers are not involved in any form of coordinated conduct. This is primarily because it is difficult to prove, or at least credibly so, a ‘negative’ proposition. Once the hub has ‘knowledge’ of anti-competitive coordination amongst its vertically related entities, to prove that it did not have the intention to facilitate such coordination, it would need evidence of intervention. The lack of this, coupled with knowledge of such coordination is likely to lead to the presumption of tacit collusion. When asked to defend the charge of a ‘hub’ in an H&S conspiracy, the relevant entity will need to demonstrate that it did not have any intention to facilitate the charge. While maintaining a compliance manual or holding routine competition training sessions would show a culture of compliance, existing precedents of the CCI indicate that it is likely to need more to show that the hub did not intend to coordinate as against the silence being taken as evidence of condoning the conduct.^[10]

The risk is particularly high for digital platforms, given the volume of trade they facilitate between and amongst different levels of trade. Where the platform may closely monitor the conduct of its trading partners, particularly in terms of prices charged, and there is similarity in prices amongst sellers of similar items, the platform may be scrutinized for price coordination. It will be prudent for digital platforms to have in place necessary safeguards to appropriately rebut such perceived charges of potential coordination amongst traders on its platforms.

Meanwhile, Elsewhere in World

Jurisprudence involving hub and spoke arrangements are more evolved in the United Kingdom, and elements of which have been set out succinctly by a UK Court of Appeal,^[11] per which,^[12] in order to find an anti-competitive H&S arrangement, there needs to be evidence of (i) a spoke passing on competitively sensitive information to the hub where it may have intended or did in fact foresee that the hub would make use of its information to influence competitive conditions between spokes, by disclosing the competitively sensitive information to the spokes; (ii) the hub, in fact, does pass on the competitively sensitive information to the spoke; and (iii) the competing spoke uses the information passed on by the hub to alter its conduct. Element (iii) is based on the rebuttable presumption that where the competition remains active on the market after having received information regarding its competitors’ pricing intentions, it is presumed to have taken account of that information. Notably, the test clarifies a few principles for sanctioning an H&S arrangement, discussed above. First, there needs to be a ‘meeting of minds’ between the spokes; an inadvertent exchange of competitively sensitive information is not sufficient. Second, the hub must be a willing participant in facilitating a cartel. There must not only be knowledge and intent to participate, but also action that needs to be undertaken by the hub in not only acting as a conduit in the exchange of competitively sensitive information between competitors and actively intending to influence the conduct of the competitor recipient. And finally, the spokes must have acted on the information received. As gathering evidence for actively using the information received is often challenging, the law presumes that received information has been used to influence conduct – although this presumption may well be rebutted.

In the United States, over the years, courts have inferred the liability of a hub, where there is a proven ‘rim’^[13] and where parallel or similar conduct amongst the rim is witnessed on account of (i) the hub having communicated the intentions of spokes inter se; or (ii) vertical agreements have been enforced by punishing spokes that do not comply with the cartel’s policies and restrictions.^[14]

Conclusion

The expected key challenge for the regulator is to accurately distinguish legitimate business interactions from illegal interactions that facilitate horizontal collusion. The amended provision expanding the liability of the hub must be invoked to charge illegitimate conduct, rather than risk being an increased compliance burden for entities that find themselves in the position of a ‘hub.’

The CCI would need to identify cases of legitimate facilitation rather than inadvertent knowledge or indeed sharing commercially sensitive information necessary to carry on business, to reduce the risk of creating false positives in competition jurisprudence. Compliance is indeed necessary for doing business, but it mustn’t be unduly costly to insulate you from inadvertent risk. To increase regulatory certainty, it would be helpful for the CCI to issue guidance, in the form of guidelines or ‘frequently asked questions’ for businesses.

[1] The Competition (Amendment) Act, 2023.

[2] Samir Agrawal v. ANI Technologies Private Limited and Others, CCI, Case No. 37 of 2018 (6 November 2018). The CCI order was upheld by the appellate courts. Samir Agrawal v. Competition Commission of India and Others, NCLAT, Competition Appeal (AT) No. 11 of 2019, and Samir Agrawal v. Competition Commission of India and Others, Supreme Court, Civil Appeal No. 3100 of 2020.

[3] The CCI in this regard held that, ‘the drivers may have acceded to the algorithmically determined prices by the platform (Ola/Uber), this cannot be said to be amounting to collusion between the drivers. In the case of ride-sourcing and ride-sharing services, a hub-and-spoke cartel would require an agreement between all drivers to set prices through the platform, or an agreement for the platform to coordinate prices between them.’, See paragraph 15, Samir Agrawal v. ANI Technologies Private Limited and Others, CCI, Case No. 37 of 2018 (6 November 2018).

[4] Jasper Infotech (Snapdeal) v. Kaff Appliances, CCI, Case No. 61 of 2014 (29 December 2014).

[5] Fx Enterprise Solutions India v. Hyundai Motor India Limited, Case Nos. 36 & 82 of 2014 (14 June 2017).

[6] Section 2(b) in Act defines an agreement, to include any arrangement or understanding or action in concert: (i) whether or not, such arrangement, understanding or action is formal or in writing; or (ii) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings.

[7] The Ministry of Corporate Affairs notified the provision on May 19, 2023, effective from May 18, 2023.

[8] In case of cartels, the CCI is empowered to impose on the enterprise a penalty of up to three times its profit for each year of the continuance of such an agreement or 10% of the turnover for each year of the continuance of such an agreement, whichever is higher. If an enterprise or group is found to have abused its dominant position or held in contravention for vertical restraints, the CCI may impose fines of up to 10% of the enterprise’s or group’s average turnover for the preceding three financial years.

[9] In In Re: Alleged anti-competitive conduct in the Beer Market in India, Suo Motu Case No. 06 of 2017 (paragraphs 23, 36, 86, 102, 139), CCI inter alia held that Section 3 not only proscribes the agreements which cause AAEC within India, but the same also forbid agreements which are likely to cause AAEC. Accordingly, the CCI held that even mere exchange of commercially sensitive pricing information amongst the beer manufacturers, compromised the integrity of an independent bidding process, and was likely to stifle competition amongst them in the tenders floated by the Andhra Pradesh State Beverages Corporation Limited. In Re: Anti-competitive conduct in the paper manufacturing industry, Suo Motu Case No. 05 of 2016 (paragraphs 181, 197, 198, 201 to 204) – The CCI inter alia held that it is axiomatic to assume that competitors meeting and discussing prices influences and takes away the independent decision making of the market participants involved in such meetings.

[10] In Re: Director, Supplies & Disposals, Haryana, v. Shree Cement Limited & Ors., Ref. Case No. 05 of 2013, the CCI took note that one of the opposite parties had put in place a competition compliance programme, however, it imposed a penalty on the contravening parties regardless. In Re: Cartelisation by broadcasting service providers by rigging the bids submitted in response to the tenders floated by Sports Broadcasters, Suo Motu Case No. 02 of 2013, the CCI noted that the existence of a compliance programme and violation occurring despite it is normally considered as a mitigating factor. However, in this case, what was argued was the initiation of a compliance programme, which is not eligible as a mitigating factor and the parties were penalised regardless.

[11] In Argos Limited and Littlewoods Limited v. the OFT and JJB Sports PLC v. the OFT [2006] EWCA Civ 1318. Case No: 2005/1071, 1074 and 1623, on appeal from the Competition Appellate Tribunal’s judgements in [2004] CAT 17 (Replica Kit); [2005] CAT 13 (Toys); and [2012] CAT 31 (Dairy).

[12] See Directorate For Financial And Enterprise Affairs Competition Committee, OECD note on Hub and Spoke arrangements, available at  https://one.oecd.org/document/DAF/COMP/WD(2019)106/en/pdf.

[13] See Directorate For Financial And Enterprise Affairs Competition Committee, OECD note on Hub and Spoke arrangements, available at https://one.oecd.org/document/DAF/COMP/WD(2019)88/en/pdf.

[14] Interstate Circuit v. United States, 306 U.S. 208 (1939); JTC Petroleum Co. v. Piasa Motor Fuels, Inc., 190 F.3d 775, 778 (7th Cir. 1999); Parke, Davis, 362 U.S. 29.