MERGER REVIEW / CONTROL
The CCI's counter-factual, crystal ball gaze extends to inchoate, future business plans unearthed from email evidence
The Competition Commission of India (CCI) approved the India leg of the USD 7 billion (~ INR 530 billion)1 acquisition of WABCO Holdings Inc (WABCO) by ZF Friedrichshafen AG (ZF) (WABCO and ZF are collectively, Parties).
Parties to the transaction
WABCO is a global supplier of a range of hardware and software solutions for automobiles, including braking systems and diagnostic tools for fleet operators. ZF is a global supplier of automotive components (such as gearboxes) and mobility solutions (such as safety technology for automobiles).2
ZF is present in India through several subsidiaries and joint ventures, including Brakes India Private Limited (Brakes India).
Activities of WABCO and ZF (through Brakes India) overlap in the manufacture and sale of automotive components forming braking systems3, steering systems and clutch systems4.
Static v dynamic market share analysis
The CCI found that the proposed acquisition was likely to cause an appreciable adverse effect on competition (AAEC) in India. Both ZF (through Brakes India) and WABCO had significant (potential and actual) horizontal overlaps in their Indian business activities.
Interestingly, the CCI highlighted that a mere static analysis of the market shares of the Parties in the overlapping markets would not be reflective of their true position or capabilities. Therefore, competition assessment should include other dynamic factors such as, post-acquisition behaviour and enhancement of market position. For instance, the CCI observed that before the acquisition, both Parties had insignificant horizontal overlaps in the market for air disc brakes for medium and heavy commercial vehicles (MHCVs).5
The CCI noted that while WABCO is a global supplier of air disc brakes and has a significant presence in the Indian market, Brakes India enjoys a mere 5-10% market share. Even so, the CCI emphasised that Brakes India had future plans to expand its presence in the market for the manufacture and supply of air disc brakes.
Among other things, the CCI relied upon email communications between Brakes India and ZF and its tie-up with Meritor, Inc (a company with capabilities in the market for air disc brakes). The CCI took into consideration that if Brakes India were to expand its presence, the combined market share of both, WABCO and Brakes India would result in the creation of a large player (post-acquisition, ZF would hold 25-35% market share with a high likelihood of a further increase).
Therefore, Brakes India and WABCO, who would otherwise be aggressive competitors in the market for air disc brakes, would cease to impose competitive constraints on each other. Unlike a competition assessment based on static factors (such as present market shares), the CCI found an evaluation of dynamic factors to be more appropriate.
The CCI delineated the relevant markets in which the analysis for (potential and actual) horizontal overlaps would be carried out. The CCI defined relevant markets in terms of each individual automotive component where both Parties were active or intended on being active. Given the utility / physical characteristics of the component, the CCI stated that the market delineated should also be based on the type of the vehicle in which that component could be used. That is, three separate markets could be delineated for the use of the same automotive component in (i) passenger vehicles, (ii) light commercial vehicles6 and / or (iii) MCHVs. For instance, the automotive component "air disc brakes" is used as a part in all the three types of vehicles. Therefore, the market for the manufacture and sale of air disc brakes for MCHVs, will be different from the market for air disc brakes used in passenger vehicles and light commercial vehicles.
The CCI also noted that several of the Parties' activities were "vertically related / complementary". For instance, the CCI observed that while Brakes India manufactures and sells drum brakes, WABCO manufactures and sells slack adjusters7. From a functional point of view, slack adjusters work alongside drum brakes and therefore, form part of the same braking systems market.
Assessment of anticompetitive effects
During competition assessment, the CCI noted that the horizontal and vertical linkages would result in reduced incentive for both, Brakes India and WABCO to independently develop capabilities and compete in the systems market. In particular, it noted that suppliers of automotive components are specialised manufacturers who are required to repeatedly innovate to meet the original equipment manufacturers' (OEM) requirements. Therefore, capability and trust drive the decision of OEMs to partner with automotive component manufacturers. The Parties' reduced incentive to compete in a market characterised by constant innovation, contributed to the CCI's AAEC concerns.
Additionally, the CCI also noted the impact of certain other factors influencing market competition i.e., the (i) absence of well-entrenched players, (ii) low likelihood of new entrants, and (iii) absence of countervailing buyer power (i.e., imposed by OEMs). These factors, in the CCI's view, would render the markets incapable of correcting anticompetitive effects of the proposed acquisition.
To alleviate these concerns, the Parties initially offered purely behavioural commitments such as setting up a firewall between the board of directors of ZF and Brakes India. The CCI observed that purely behavioural commitments are more feasible for mitigating competition concerns where there are a small number or a low degree of overlaps, unlike the present case. Therefore, the CCI found these commitments insufficient to remedy its AAEC concerns.
ZF then volunteered to divest its entire 49% shareholding in Brakes India and not re-acquire any interest in Brakes India for a stipulated period of time. This divestment would remove existing / potential overlaps between the Parties activities thereby eliminating the identified AAEC concerns. This was strengthened by the direction of the United States' Department of Justice to divest WABCO's steering business in India. WABCO's divestment would mitigate the remaining AAEC concerns relating to braking and driveline / clutch actuation systems.
Subject to the structural commitments (i.e., divestment of WABCO's steering business and ZF's interest in Brakes India) the Parties were able to secure the CCI's approval for the proposed acquisition.
The CCI's efforts to consider the role of innovation in spurring competition between players is noteworthy. The CCI not only focussed on current competitive dynamics but also considered the impact of reduced innovation as an important factor to adjudge the potential competitive landscape on account of the acquisition.
The case is also unique because it involved the CCI placing reliance on internal e-mail communications between ZF and Brakes India to gauge their future business plans. Access to these e-mails aided the CCI's projection of market dynamics pursuant to the combination. However, the CCI's decision does not clarify how it was able to access the e-mail evidence.
Note that in the (recently) revised Notes to Form I,8 the CCI offers a guidance on "complementary goods" - those products and services that are related because they are combined and used together (e.g., printers and ink cartridges). Further, complementary goods are not vertically related, do not compete, and generally enhance the value of the combined product / service. Interestingly, in its assessment of overlaps in this case, the CCI has used "vertically related" and "complementary" interchangeably.
This is likely to impact assessment of green-channel cases which uses a similar standard of complementary goods.
ENFORCEMENT / CONDUCT CASES
CEMENTING JURISPRUDENCE ON THE CCI'S JURISDICTION
Delhi High Court illuminates guiding principles for the CCI's jurisdiction vis-à-vis sector specific regulators
In the context of a judicial review challenge9 filed by Mahyco Monsanto Biotech (India) Private Limited (Mahyco Monsanto), the High Court of Delhi (Court) upheld the CCI's jurisdiction to initiate the Director General's (DG) investigation of Mahyco Monsanto's conduct. This relates to Mahyco Monsanto's sub-licensing of a patented gene, "Bt Cotton Technology".
Note that the CCI had issued an order of investigation against Mahyco Monsanto's alleged abuse of dominant position. Among other things, the purportedly abusive conduct involved charging excessive royalties and the imposition of unfair conditions in sub-licensing agreements with seed manufacturers.10
Facts and arguments
Mahyco Monsanto with its group entities (Monsanto) disputed the CCI's authority to investigate dealings in relation to patented technologies. It was contended that the Patents Act, 1970 (Patents Act) was an all-encompassing legislation that regulated every aspect of the exploitation of a patent. Monsanto believed that this included remedying any potential abuse of dominant position resulting from patent exploitation. Monsanto argued that for the CCI to decide the case it would have to determine whether the royalties charged by Monsanto were unfair / excessive - an issue to be determined by the Controller of Patents in terms of the Patents Act. Due to this, Monsanto argued that the jurisdiction to investigate infirmities arising from the exploitation of a patent would lie exclusively with the Controller of Patents and not the CCI.
To persuade the Court, Monsanto had the uphill task of demonstrating why the Court's Ericsson11 precedent, which involved similar issues, were inapplicable to the present case. In Ericsson, the Court held that the legislature intended the Competition Act, 2002 (Competition Act) to operate alongside the Patents Act. The Court in Ericsson concluded that there was no irreconcilable conflict between the two legislations. Therefore, the CCI's jurisdiction to entertain complaints regarding abuse of dominant position relating to patent rights could not be excluded.
However, Monsanto argued that Ericsson was not good law and relied upon the Supreme Court of India's (Supreme Court) precedent - Bharti Airtel12 - which addressed the issue of the CCI's jurisdiction vis-à-vis the jurisdiction of a sector specific regulator for the Indian telecom market.
In Bharti Airtel, the Supreme Court had held that the CCI could not parallelly investigate allegations because the subject matter fell within the specific expertise of the telecom regulator. Additionally, the exercise of parallel jurisdiction by the CCI and the telecom regulator would likely give rise to the possibility of conflicting decisions. Therefore, the CCI could exercise jurisdiction only after the examination of the subject matter by the telecom regulator.
Monsanto relied on Bharti Airtel to argue that the Competition Act ought to give way to issues arising under the Patents Act.
Disagreeing with Monsanto's interpretation, the Court interpreted Bharti Airtel's ratio decidendi narrowly and clarified the following.
- Bharti Airtel clearly stated that the CCI's jurisdiction is not ousted in the presence of a regulator.
- The exercise of the CCI's jurisdiction can be deferred until the regulator (such as that of the telecom sector) arrives at a finding in relation to the subject matter in which the sector specific regulator has domain expertise.
- Bharti Airtel did not imply that the CCI can never exercise simultaneous jurisdiction in the presence of another regulator.
As summarised below, the Court highlighted Bharti Airtel's inapplicability.
- The findings in Bharti Airtel related to the jurisdiction of the telecom regulator. However, the present case involved the question of the Controller of Patent's jurisdiction.
- Unlike the telecom regulator (which regulates the telecommunication industry) the Controller of Patent isn't a sector-specific regulator since patents do not constitute any specific sector.
- The Controller of Patent's role does not extend to regulation of the exercise of rights between a patent holder and a third party, in the same manner as the telecom regulator.13 The principal function of the Controller of Patents is to grant patents while the telecom regulator's authority is all pervasive within its specific realm.
Whilst the Court interpreted Bharti Airtel narrowly, it affirmed an earlier Delhi High Court precedent Ericsson. The Court highlighted the legislature's intention of concurrent operation of the Competition Act and the Patents Act. This is evidenced by two provisions in the Competition Act, namely a non-obstante or supremacy clause14 and a clause which explicitly clarifies that the Competition Act operates in addition to any other law in force15. Moreover, it cannot be said that the entire field of patents is regulated by the Patents Act. For instance, denial of a patent license may give rise to a contravention under the Competition Act (for e.g., abuse of dominant position) and simultaneously require intervention under the Patents Act (for e.g., grant of a compulsory license in public interest)16. Further, an order remedying a contravention under the Competition Act will not be inconsistent with the grant of a compulsory license under the Patents Act. This harmonious interpretation is bolstered by the Competition Act which allows the CCI to refer a matter to any other statutory regulator (and vice-versa), during its investigation / proceedings17.
In sum, the Court permitted the CCI to go ahead with the DG's investigation of Monsanto's conduct.
Click here to access the order.
It is interesting to note the narrow reading of the Bharti Airtel precedent - that it is not an authority for the proposition that wherever there is a statutory regulator, the complaint must be first brought before the regulator and that the examination of a complaint by the CCI is contingent on the findings of that regulator.
As a general matter, when determining whether the CCI can concurrently investigate a dispute, the Court will be guided by all or any of the factors set out below:
- whether the regulator is an industrial / sectoral regulator (such as the telecom regulator) or whether it is a sector agnostic regulator (such as the Controller of Patents);
- whether the operation of the regulator is all pervasive and extends to oversight over the exercise of the rights of the market player (as opposed to a limited role such as, the grant of a compulsory license by the Controller of Patents);
- the degree of domain knowledge / expertise of the regulator; and
- whether the primary issue in the competitive claim is required to be adjudicated by the regulator.
At the time of writing, this single-judge decision has been challenged before a two-judge bench of the Court and its effect has been stayed through an interim injunction. Regardless, the final outcome will have an impact upon pending Amazon and Flipkart judicial review cases at the High Court of Karnataka.18
1. Exchange rate as on 29 May 2020: 1 USD = 75.50 INR.
2. Combination Registration C-2019 / 11/ 703 of 14 February 2020.
3. Components forming part of a braking system include (i) foundation brakes (i.e., disc brakes and drum brakes), (ii) components comprising brake actuation systems and (iii) components comprising electronic braking systems.
4. Components comprising clutch systems include components comprising hydraulic clutch actuation systems (i.e., clutch boosters and clutch master cylinders).
5. Medium and heavy commercial vehicles refer to vehicles that have a tonnage above 7.5 tons.
6. Light commercial vehicles refer to vehicles that have a tonnage between 3.5 and 7.5 tons.
7. Slack adjusters enable the transmission of power from actuation systems to shafts in drum brakes.
8. A summary of the revised Notes to Form I published on 27 March 2020 can be accessed here.
9. High Courts in India have a constitutional mandate to assess jurisdiction-related challenges mounted against specialised statutory bodies such as the CCI. In recent times, there have been several challenges to the CCI's jurisdiction filed at the High Courts.
10. Monsanto Holdings Private Limited and Others v. Competition Commission of India and Others (Writ Petition (Civil) 1776/2016) decided on 21 May 2020.
11. Telefonaktiebolaget L.M. Ericsson v. Competition Commission of India and Another (Writ Petition (Civil) 464/2014) decided on 30 March 2016.
12. Competition Commission of India v. Bharti Airtel Limited and Other (Civil Appeal 11843/2018) decided on 5 December 2018.
13. The Court observed that the distinction between the role of the telecom regulator and the Controller of Patents has been confirmed by the High Court of Bombay in Writ Petition 8594/2017.
14. "Non-obstante" is an Old English term often used until date in Indian legal parlance. Such a clause indicates that a particular statute will prevail over other laws, that may be contrary to the statute in question. This implies that potentially inconsistent laws will not serve as a(n) obstacle / hinderance to the operation of the statute in question; See also Section 60 of the Competition Act, 2002.
15. Section 62 of the Competition Act, 2002.
16. Section 84 of the Patents Act, 1970.
17. Sections 21 and 21A of the Competition Act, 2002.
18. Amazon Seller Services Private Limited v. Competition Commission of India, Delhi Vypaar Mahasangh and Flipkart Internet Private Limited (Writ Petition (Civil) 3363/2020). In this case, the High Court of Karnataka has stayed the CCI's investigation into Flipkart (a leading e-commerce platform in India) and Amazon's alleged anticompetitive conduct inter alia, due to parallel proceedings against them under the Foreign Exchange Management Act, 1999.
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