Tie-in Arrangement or Tie-in Deal under Competition Law in India

Every case of tying should be decided on its own merits and demerits.

 

Introduction

Anticompetitive agreements are negative or adverse as it impacts the process of competition in the market. Section 3 of the Competition Act deals with anti-competitive agreements and was notified on 20th May, 2009. Further Section 3 (1) of the Competition Act prohibits any agreement by enterprise or person or association of enterprises or association of persons with respect to production, supply, distribution, storage, and acquisition or control of goods or provision of services which causes or is likely to cause an appreciable adverse effect on competition within India. The Competition Act does not categorize agreements into horizontal or vertical, however the terminology or language Sections 3 (3) and 3 (4) makes it clear that the former is aimed at horizontal agreement and latter at vertical agreements. Horizontal agreements relating to activities referred to under Section 3 (3) of the Competition Act are presumed to have an appreciable adverse effect within India. The Supreme Court in Sodhi Transport Co. v. State Of U.P. as interpreted ‘shall be presumed’ is not evidence itself but act as a presumption, but merely indicative on whom burden of proof lies. Vertical agreements relating to activities referred to under Section 3(4) of the Competition Act on the other hand are prescribed only if it be shown that such agreements are likely to cause AAEC in India, thereby has to be analyzed in accordance with the rule of reason analysis under the Competition Act. In essence these arrangements are ant-competitive only if they cause or are likely to cause an appreciable adverse effect on competition in India.

Further anticompetitive practices invoke wide range business practices that company or firm or group of company or group of firm may indulge in order to confine inter-firm competition to profits without necessarily providing goods and services at a lower cost or higher quality and to sustain or increase their relative market position and.

TIE-IN ARRANGEMENT or TIE-IN DEALS

Tie-in agreement includes any arrangement requiring a purchaser of goods as a requirement of such purchase to purchase some other kinds of goods. It is also referred to as tying agreement, tying arrangement, tie-in sale, tie-up sale, or clubbed sale. As prescribed under Section 3(4) explanation, tie-in arrangement includes any arrangement requiring a purchaser of goods, as a condition of such purchase, to purchase some other goods. The product or service that is obtain by the buyer as per as requirement is called the tying product or service and the product that is compelled or forced to the buyer is called the tied product.

A tie-in agreement under section 3(4)(a) has to tested for its actual or probable adverse effect on the competition, this being the only determining factor as per the instant provision, to be calculated in light of the enumerations made under section 19(3) of the Act. It should be observed that as per the C.C.I., vertical agreements  as under section 3(4) do not include consumers since, a manufacturer/service provider and the consumer cannot ever be said to be part of any “production chain” or even operating in “different markets” because a consumer does not participate in production. However, the same is not without dissent.

Precedents of Tie-in Deal in India

Shri Sonam Sharma v Apple Inc. and Ors-

• The allegations in this case pertained to distribution agreements entered into between Apple India Pvt. Ltd., Indian subsidiary of Apple Inc. U.S.A. and Vodafone Limited and Bharat Airtel Limited, by virtue of which Apple iPhones (3G/3GS) could only be purchased on the GSM network of Airtel or Vodafone and only through their respective distributors.
• The allegations were compounded to have offended provisions both under section. 4 i.e. provisions condemning abuse of dominance and under section. 3 i.e. provisions deplore anti- competitive agreements likely to have Appreciable Adverse Effect on Competition in the market. The alleged tie-in as identified by the C.C.I. was Contractual tying between Apple and Vodafone/Airtel for distribution/sales arrangement wherein the cellular Phone manufacturer and service provider have collaborated to offer a packaged product to the customer.’
• As per the DG, the arrangement between Apple, Airtel and Vodafone of selling ‘locked’ iPhones was a Tie-in arrangement u/s. 3(4)(a). However given the miniscule market share of Apple in the ‘Smartphone’ market in India (1%- 3% in terms of volume) at the time of the aberrations i.e. between 2008- 2010, such tie-in could not have caused any AAEC in the said market in India. With regard to violations u/s. 4,the DG point out the two relevant market first the market for smartphones and second the market for GSM cellular services in India’and further deduced that Apple or Airtel and Vodafone (individually) were not dominant in these markets respectively.

Order

As per C.C.I.’s order, A tying arrangement occurs when, through a contractual or technological requirement, a seller conditions the sale or lease of one product or service on the customer’s agreement to take a second product or service Further in the order, C.C.I. acknowledges that tie-ins are not per se anticompetitive as ‘economics literature suggests that there are pro-competitive rationales for product-tying. These include assembly benefits, quality improvement as also addressing pricing inefficiencies’. Thus, it seems clear that C.C.I. in essence acknowledges that tie-ins should be dealt with under the rule of reason approach as is the scheme under scheme. 3(4) of the Act. Thereafter, C.C.I. very categorically goes on to identify ‘necessary and essential conditions’ in respect of ‘anti-competitive tying’, these being: (1) Presence of two separate products or services capable of being tied; (2) For considerable restrain free competitions in the market for their product, the seller must  have sufficient economic power with respect to the tying product (3) The tying arrangement must affect a not insubstantial amount of commerce,

Ramakant Kini v Dr. L.H. Hiranandani Hospital-

• In this case, Dr. L.H. Hiranandani Hospital did not allow for any stem cell bank apart from Cryobanks International India to offer stem cells banking services on its premise as both were in agreement which lead to cause for the dispute to arise. The informant in had approached M/s Life Cells India Pvt. Ltd. earlier for its services and then had engaged Hiranandani for maternity related services and delivery of her child. However,she was not aware neither was notified about the special deal or arrangement between Hiranandani and Cryobank at this point, she got aware regarding this special deal when she requested Hiranandani to allow Life Cell to collect the umbilical cord at the time of the delivery of her child that she was refused the same and Cryobank as an alternative was suggested to her. This caused for the Informant to engage another hospital for its maternal services. Based upon the above mentioned, allegations u/s. 3(4), Section 4(2)(a) (i) and 4(2)(c) were enlisted with the C.C.I., who instructed an investigation of the DG under section 26(1).

As per DG’s investigation, the agreement between Hiranandani and Cryobank was anti-   competitive as u/s. 3(4) and the same was likely to have AAEC in the market. Further, Hiranandani was viewed as predominant in the market of arrangements of maternity services and covering S, L, N, K/E, T & P/S wards of Municipal Corporation of Greater Mumbai as per Section 2(r) of the Act which it had abused by imposing unfair conditions on expecting mothers to it for maternity administration or service. It must be elucidate that Commission had evaluated that section 3(1) of the competition act has only been violated as agreement was causing appreciable adverse effect on Competition but not falling expressly within section 3(3) or 3(4) i.e. the claim for tie-in did not materialize.

Order

While dealing with the alleged tie-in the C.C.I. at least opined (majority) in conformity with the scheme of section 3 in general and section 3(4) in particular, at the point when it recognize the differentiation with respect to the treatment to be met out to agreement under 3(3) and 3(4) going on to further accept that ‘Section 3(3) categories are examples of agreements which are considered in violation of Section 3(1) and the Commission, under law, has to presume that these agreements have an appreciable adverse effect on competition’ and in case of an agreement of the nature under Section 3(4), it is to be proof that agreement is likely to cause an appreciable adverse effect on competition in India respectively.
This was with no reference to ‘dominance’ being a prerequisite for a claim of anti-competitiveness under section 3.

Tying and Bundling

Tying exists when the seller purchase a product but is bound to take the product as well forcibly. According to the leverage theory, tying provides a mechanism to circumvent whereby a firm who has dominance in one market can use the leverage provided by this power to rule out sales in, and thereby make a dominance over second market. Whereas Bundling means, a firm may sell two or more products together as a bundle and charge more attractive prices for the bundle than for the constituent parts of it. Bundling may or may not have same effect.

Distinction

• Bundling is not tying because forcing is absent. In bundling there are two or more products and there are various attraction to take the whole bundle of products by providing various discounts. These products are available separately and there is no such obligation that if you buy product A along with product B.
• The difference between tying and (pure) bundling is that the tied product is available on a stand-alone basis under tying, but not under (pure) bundling. The difference between mixed bundling and tying is that under tying only tied good is available separately but under bundling both the goods are available separately. This distinction is however insignificant if, the tied product is worthless without the tying product.
• Tying is a concept of legality whereas bundling is concept of business and the distinction between two is a technical one. Though tying and bundling are two different concept, the courts and commentators often used it interchangeably but in practice it operates differently.
• In USA, Tying and Bundling (both) are dealt under Section 3 of the Clayton Act, Section 1 of the Sherman Act and Section 5 of the Federal Trade Commission Act. In EU, both tying and bundling are dealt under Article 82(d) of the treaty of European community. Merely because both the concepts are dealt under with the same law doesn’t mean that they are the same. They are two forms of abuse and their regulation is done in a similar manner, by the same laws. The distinction between the two is still maintained

 

Conclusion

It can be concluded from this research that every case of tying should be decided on its own merits and demerits and not in regard with straitjacket formulae. Further tying arrangement has an adverse affect on the economy of the country.