Competition Law in India Vis-a-Vis Food Delivery Apps in India (Zomato/ Swiggy/ Foodpanda/ Uber Eats) and its Impact on Small Restaurants

20th May, 2019 - 12:29 pm Categories: Intellectual Property Legal Issues 0 Comments

In December 2018, Kerala Hotels and Restaurants Association (KHRA) went on a strike for 10 days on the account of high commission being charged by the food delivery apps. Subsequently to which a report was published stating that if this kind of practice is continued by the food delivery apps then it would definitely harm the dining out business in a long- run. Also according to statistics, there is a jump of 30% in the daily handling of daily order in the first quarter of 2018 when compared to the last quarter of 2017.

With emergence of competition being seen in very field it can be noted that the food business is also not protected from its coherence. After the complained filed by  the retailers and shopkeepers against the e-commerce sites we witnessed that 500- small restaurants owners also filed a petition in the CCI and PMO against unfair trade practices of the food delivery apps. They alleged that apps like Zomato, Swiggy, Uber Eats, Food Panda, etc were abusing their dominant position the market. The petition filed against them include allegations like deep- discounting, in- house kitchens and internal sourcing, because of which the small and medium enterprises. Many of us would not see this as a imminent threat but, this could actually have a grave impact on the dine-out/ restaurant industry in the long run.  Since the awareness about competition law in our country is less so in order to  understand  this concept lets us first  understand about the concepts :

WHAT IS DOMINANCE?

The Competition Act,2002 (the Act)  defines dominant position (dominance) in terms of a position of strength enjoyed by an enterprise, in the relevant market in India, which enables it to:

a. operate independently of the competitive forces prevailing in the relevant market;

b. or a affect its competitors or consumers or the relevant market in its favour.

It is the ability of the enterprise to behave/act independently of the market forces that determines its dominant position. In a perfectly competitive market no enterprise has control over the market, especially in the determination of price of the product. However, perfect market conditions are more of an economic “ideal” than reality. Keeping this in view, the Act specifies a number of factors that should be taken into account while determining whether an enterprise is dominant or not[1]. Thus, dominance per se is not bad, but the abuse of dominance which is the concern of CCI[2].

There are primarily three stages in determining whether an enterprise has abused its dominant position:

1. The first stage is defining relevant market.
2. The second is determining whether the concerned undertaking/enterprise/firm is in a dominant position has a substantial degree of market power in that relevant market.
3. The third stage is the determination of whether the undertaking in a dominant position/having substantial market power has engaged in conduct amounting to the abuse of such dominant position[3].

ABUSE OF DOMINANCE

Dominance is not considered bad per se but its abuse is. Abuse is stated to occur when an enterprise or a group of enterprises uses its dominant position in the relevant market in an exclusionary or/ and an exploitative manner.

The Act gives an exhaustive list of practices that shall constitute abuse of dominant position and, therefore, are prohibited. Such practices shall constitute abuse only when adopted by an enterprise enjoying dominant position in the relevant market in India.

Abuse of dominance is judged in terms of the specified types of acts committed by a dominant enterprise. Such acts are prohibited under the law. Any abuse of the type specified in the Act[4] by a dominant firm shall stand prohibited.

Section 4 (2) of the Act specifies the following practices by a dominant enterprises or group of enterprises as abuses:

• directly or indirectly imposing unfair or discriminatory condition in purchase or sale of goods or service;
• directly or indirectly imposing unfair or discriminatory price in purchase or sale (including predatory price) of goods or service;
• limiting or restricting production of goods or provision of services or market;
• limiting or restricting technical or scientific development relating to goods or services to the prejudice of consumers;
• denying market access in any manner;
• making conclusion of contracts subject to acceptance by other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts;
• using its dominant position in one relevant market to enter into, or protect, other relevant market.

EXPLOITATIVE AND EXCLUSIONARY BEHAVIOUR

Abuses as specified in the Act fall into two broad categories: exploitative (excessive or discriminatory pricing) and exclusionary (for example, denial of market access). These are discussed here under.

Are current provisions of the Competition Act,2002 dealing with abuse of dominant position exhaustive in order to address the issue of abuse of dominant position?

Inquiry Into Abuse Of Dominance

In exercise of powers vested under section 19 of the Act, the Commission may inquire into any alleged contravention of section 4 (1) of the Act that proscribes abuse of dominance. Section 19(4) gives a detailed list of factors that the Commission shall consider while inquiring into any allegation of abuse of dominance. Some of these factors are market share of the enterprise, size and resources of the enterprise, size and importance of the competitors, dependence of consumers, entry barriers, and social obligations and costs in the relevant geographic and product market.

The Commission, on being satisfied that there exists a prima facie case of abuse of dominance, shall direct the Director General to cause an investigation and furnish a report. The Commission has the powers vested in a Civil Court under the Code of Civil Procedure in respect of matters like summoning or enforcing attendance of any person and examining him on oath, requiring discovery and production of documents and receiving evidence on affidavit. The Director General, for the purpose of carrying out investigation, is vested with powers of civil court besides powers to conduct ‘search and seizure’.

What form do Anti-competitive practices take when Dominant entities attempt to manipulate the market dynamics to their advantage?

There is a fine distinction between defending one’s market position in market share which perfectly legal and legitimate and may involve a certain degree of aggressive competitive behaviour and deliberate exclusionary and exploitative practices. A greater threat to competition lies majorly from the action(s) of dominant enterprises is inimical to future completion. Based on the definition and understanding of ‘abuse’. Abusive of conducts may classify into broad categories;

 (A) Exploitative practices

1. Excessive pricing- the Indian completion law condemns and prohibits imposition of unfair price by dominant firms.[1] While there is very less guidance as to unfair price so far the CCI is cognizant of the importance of evolving an appropriate analytical framework for treatment of unfair price cases that may come up in future so as to avoid the associated risk and cost to consumers, industry and economy.

(B) Exclusionary practices
Exclusionary practices are contracts, pricing strategies and more generally actions taken by dominant firms to deter new competitors from entering an industry, to oblige rivals to exit, to confine them to market niches, or to prevent them from expanding, and which ultimately cause consumer harm[2]. One class of exclusionary practices involve vertical agreements. Such arrangements are common business practices and infringe the law only if reduce competition. These could result from the following types of arrangements:

1. Predatory pricing– it refers to strategies adopted by a dominant undertaking whereby it offers low prices to consumers( below their cost of production) in the short term to insure the exit of competitors and then followed by higher prices in the medium and long run to recoup the losses. Thus we see that for predatory pricing to be proved two conditions must be fulfilled;

(a) Pricing below cost
(b)With a view to reduce completion and eliminate competitors

Thus we see that the Indian definition of predatory pricing focuses on both cost based approach combined with the intention to dominant undertaking to eliminate competition.

2. Rebates– Sec.4 (2) has been couched in an extremely wide manner and it includes cases when the dominant undertaking provides rebates with the intention of foreclosure of competition in market. Broadly speaking 3 forms of non- predatory price cuts which can be regarded as exclusionary include;

1. Selective price cuts- price cuts that are offered only to certain selected customers.
2. Fidelity rebates- discounts or rebates that are offered to customers who purchase products only from dominant undertakings.
3. Threshold rebates- where the dominant firm offers its customers and across-the-board discounts of x percent if the total value of the customers purchase during a given period crosses a certain threshold.

Thus, it is this differential condition in sale of goods, which attracts liability under section Sec.4 (2)(a)(1).

3. Denial of Market Access- Sec.4(2)(c) suggests that any entry barriers created by the dominant enterprise, by its conduct which results in denial of market access, in any manner will be an abuse. The set clause will cover all acts done by dominant undertaking which will result in market foreclosure for the competitors in the same market or even the downstream or upstream market.

4.Refusal to deal– the term refusal to deal(refusal to supply) describes a situation in which one firm refuses to sell to another firm, is willing to sell only at a price that is considered too high or is willing to sell only under conditions which are deemed unacceptable.[1]

5. Exclusivity- exclusive dealing arrangement are commonly defined as arrangement, which require a buyer to purchase all of its requirements or a large extent thereof only from one (dominant) seller, or, respectively, as arrangements, which require a supplier to sell all of its products or services or a large extent thereof to the dominant firm.[2]

• Exclusive dealing and purchasing- under such arrangements a retailer agrees to purchase or deal in good of only one manufacturer making entry difficult for new manufacturers
• Exclusive/selective distribution- under such arrangements the manufacturers supplies one or a selected numbers of retailers making entry difficult for other retailers.
• Tie-in sales- its makes the purchase one product conditional on the sale of another (tied) product.

LEGAL POSITION IN INDIA

There are a plethora of cases that have come up for consideration before the Competition Commission with respect to Abuse of Dominant position as it has become a rampant practice in the market for dominant enterprises to abuse their position of strength. And such abusive conducts cannot be overlooked as they have far reaching consequences. Hence it would be of immense importance to comprehend the position of this practice in India with the help of certain landmark cases handed down by the commission from various sectors of the market. Transportation sector Case: In Shri Shamsher Kataria[3]: Two levels of market were determined. One was the primary market for “sale of cars in India”, and two aftermarkets, at secondary level, are market for “sale of spare parts” and market for “repair and maintenance services”. Original Equipment Manufacturers (OEM’s) contended that there exists no such distinction as primary and secondary markets and that there is only one “system market”. The Commission observed that the two levels were distinguished so as to see the capability to affect competitors and consumers, market share and entry conditions. As regards market share, it was observed by the CCI that OEM’s have a 100 percent share in the aftermarket for their own brand of cars. This was solely because of the inter and intra brand non-substitutability of the spare parts of one brand with other, due to high degree of technical specificity. As a consequence of lack/absence of substitutability of their spare parts, OEM’s were protected from any form of competitive restraints in the aftermarkets from their competitors in the primary market. Furthermore, through a series of contracts, OEM’s became the only suppliers of their own brand of spare parts and tools in the aftermarket and protected themselves from any competition. This makes it abundantly clear that OEM’s had 100% share in their own brand of cars whereby being in a dominant position and also abusing the same.

Real- Estate Case: In Belaire Owners Association[1], the CCI in this case delineated the relevant market in the context of services of development or construction provided by the opposite party. While determining the relevant product market for the service of construction, the impugned assets were categorized as being of the “residential” and “high-end” assets category. Residential property, being different from the non residential ones, may be of various kinds, such as independent houses, builder-floors, apartments, row-houses, condominiums or studio apartments, et al. Irrespective of the presence of consumer preferences, these categories are substitutable to quite an extent, with respect to the price range, geography, facilities and amenities of these assets. On the basis of these factors the Commission held that DLF is in every sense capable of operating independently of competitive forces in the relevant market and thus, the requirement of conditions laid down in explanation (a) (i) to section 4 are fulfilled. DLF thereby has the ability to manipulate the market dynamics itself in its favour. On one occasion an announcement was made regarding several large projects by DLF Ltd. DLF possesses substantial market power to make its competitors react by withholding some of their own projects in order to avoid market saturation. Similarly, prospective consumers may shift or sustain their demand in expectation of availability of projects to be offered by the market leader. Thus, DLF would be in a position to influence both demand and supply of projects in the given relevant market. These possibilities prove that DLF enjoys a position of strength like none of its competitors as envisaged in explanation section 4 (a) (ii) of the Act.

The Competition Act, 2002 (as amended), follows the spirit and philosophy of modern competition laws regime and aims at fostering competition and at protecting Indian markets against anticompetitive practices by enterprises. The Act prohibits anticompetitive agreements, abuse of dominant position by enterprises, and regulates combinations (mergers, amalgamations and acquisitions) with a view to ensure that there is no adverse effect on competition in India.

Competition laws all over the world are primarily concerned with the exercise of market power and its abuse. The term “market power” is variously known as “dominant position”, “monopoly power” and/ or “substantial market power”[1].

 The Competition law denies the utilization of market controlling position to avoid singular ventures or a group from driving out competing organizations from the market and from managing costs. The idea of maltreatment of dominant position of market control alludes to anticompetitive business in which prevailing firm may take part with a specific end goal to keep up or increment its situation in the market.

Abuse of dominant position bears upon the unilateral behaviour of the enterprise or group thereof. Thus concurrence of wills of two or more parties is not a condition precedent to make out a case under Section.4 of the Act. Abuse of dominance being a unilateral conduct does not emanate from any agreement.

A finding of abuse of dominance-be it of an individual enterprise or that of a group essentially involves a three stage or a threefold process in the Indian jurisdiction- firstly it is the determination of relevant market based on relevant product market or relevant geographic market. Secondly, it is the determination of dominance in the relevant market and thirdly, it is the determination of “abuse” of that dominant position[2].

Conclusion

After understanding these basic concepts of Competition Law, we understand that the practices which Zomato, UberEats, Swiggy and Ola financed FoodPanda are following are  clearly a  case of Predatory Pricing, offering food at unsustainable discounts below the cost price which forces small eateries and restaurant to shut down owing to huge losses , as per reports, Zomato intends to serve meals for as low as 50-60 Rs. Therefore, they are in a manner, directly or indirectly, imposing unfair or discriminatory price in purchase or sale. Over and above this, they are also involved in Exclusive Sales Contract, Tie-in arrangements with restaurants and some like Swiggy have started their own kitchens like “The Bowl Company” and then drive traffic to their kitchens bypassing other restaurants. In this manner these big MNC’s crush small start-up kitchens and to an extent medium business restaurants who are not able to compete due to Predatory Pricing. In view of the above there is a strict need to put an end to this unsustainable pricing.

Mr. Anurag Katriar CEO of deGustiBus Hospitality ( Indigo, Tote on the Turf and Neem) stated

“ Deep Discounting by the online food delivery platforms is impacting footfalls and diverting the Customers Traffic to these platforms , besides the cost of doing business is also escalating because Commission are directly getting impacted, these are hurting us in the Long run”

Thomas Fenn, Founder of Mahabelly restaurant  said  “ We need to reach middle grounds on commissions and have more transparency in the system. The Delivery platforms are very good for the restaurant sector but the concequence cannot be detrimental for businesses. As for the … in house kitchens.[1]

Author: Mr. Shubham Borkar, Senior Associate – Litigation and Business Development  and Co- Author- Poulomi Goswami, at Khurana & Khurana, Advocates and IP Attorneys. In case of any queries please contact/write back to us at shubham@khuranaandkhurana.com or at www.linkedin.com/in/shubhamborkar.

References:

[1] Available at

[2] Roy Abir and Kumar Jayant, Competition Law in India, Eastern Law House, Second edition,2014,p.159

[3] Clauses (a) to (e) of sub section (2) of Section 4

[4] A combined reading sec. 4(1) along with sec. (2) which lays down the ingredients of unfair or discriminatory price.

[5] Available at  https://www.cambridge.org/core/books/exclusionarypractices/AC0652A15F36536280BAD10F8A2EBC25

[6] OECD Policy Rounds Tables, Refusal to Deal, 2007,(DAF/COMP(2007) 46) at page 11

[7] Reports on Single Branding and exclusive Dealing, The unilateral Conduct Working Group,7^th Annual Conference, International Competition Network, April 2008,p.3

[8] Shri Shamsher Kaaria v. Honda Siel, MANU/CO/0066/2014:2014 Comp LR 1 (CCI)

[9] Belaire Owner’s Association v. DLF Ltd., Case no. 19 of 2010. Decided on 12 August 2011.

[10] Available at