by Tavashya Kumar
This the second part of a two part series. The first part can be accessed here.
The first part of this series had dealt with ‘Exclusive Distribution Agreements’ between manufacturers and e-commerce marketplaces. This part shall focus on ‘Arrangements for Preferential Treatment’, which are understandings, written or otherwise, between E-commerce marketplaces and large vendors selling on these platforms for certain preferential treatment in the form of incentives and services. This article avers that these arrangements are anti-competitive and may constitute an abuse of dominant position enjoyed by e-marketplaces.
MODELS OF E-COMMERCE
Indian law recognises two models of e-commerce activities: the Inventory model and the Marketplace model. The former refers to a system where the goods & services are owned by the e-commerce entity and sold to the consumers directly. FDI is not permitted in the inventory-based model of e-commerce. The latter is defined as the provision of an online platform by an e-commerce entity to act as a facilitator between buyer and seller. 100% FDI is permitted in the marketplace model of e-commerce. Thus, a thorough distinction between the two models is required primarily because one model allows foreign investment whereas the other does not. The rationale behind placing such a restriction is, perhaps, that e-commerce entities backed by vast resources from investors, would be able to leverage these resources to sell the products cheaply, thereby capturing the retail market and greatly disadvantaging the smaller retailers, who do not have the clout to purchase at scale and offer steep discounts.
Prior to the promulgation of Press Note 2, the regulations that governed this area were found in the 2017 FDI Policy, which stated that e-commerce entities were restricted from allowing more than 25 percent of the total sales value in a financial year through its marketplace to be from one vendor. Moreover, an e-commerce entity providing a ‘marketplace’ was not allowed to exercise ownership over the products sold on the marketplace. The 2017 FDI Policy also merely states that e-commerce entities should not influence the sale price of goods and maintain a level playing field. However, it does not define what constitutes ‘level playing field’. This lacuna has been exploited by e-commerce entities, as explained hereunder.
LACUNAE IN LEGISLATIVE FRAMEWORK
The regulatory framework as envisaged by the 2017 FDI Policy was found to be grossly inadequate to prevent intermingling between the two models because the companies developed complicated seller structures and created loopholes through contracts that helped them comply with the restrictions while exercising some level of control over inventory. These contracts need not be necessarily written or expressly enforceable as “the definition of ‘Agreement’ under the Act is an inclusive one which includes any arrangement, understanding or action in concert.”
They developed agreements whereby their wholesale units, backed by funding from foreign investors, would purchase goods in bulk and then sell them cheaply to ‘preferred’ vendors, who would, in turn, sell them on the marketplace at extremely low prices, to the prejudice of non-preferred vendors. Thus, they would exercise control over inventory without ownership. Both Amazon and Flipkart drove more than half the sales on their platforms either through captive sellers, like Cloudtail and Appario, or indirectly through their wholesale units, which were suppliers to the preferred vendors.
Additionally, they also provide certain services, such as payments, logistics, free delivery etc. Flipkart lends the term “Assured Seller” to its preferred sellers and Amazon lends the term “Fulfilled” to these sellers, which allegedly creates a bias in favour of these sellers and acts to the detriment of other sellers. As averred by the companies themselves in the case of AIOVA v. Flipkart, they provide incentives to sellers based upon criteria such as quality of product and volume/value of sales. The provision of these services is, therefore, completely at the discretion of the entities, who may provide them to certain ‘preferred’ sellers and may deny them to others, thereby distorting competition. Further, the preferred sellers are placed at an advantage when it comes to search results because the e-marketplaces provide a preferential listing to them in the first few pages of search results, whereas similar products with similar ratings sold by other traders are listed much further down, which allegedly creates a disadvantage for them.
AMENDMENTS IN PRESS NOTE 2
The Government attempted to curb such practices by promulgating amendments to this policy in Press Note 2. Clause (iv), which initially prohibited entities from exercising ‘ownership’ over the products sold on its platform, now prohibits the e-commerce entity from exercising ‘ownership’ and/or ‘control’ over them. Moreover, vendors in whom the e-marketplace or its group company owns an ‘equity share’ or over whose inventory the e-marketplace exercises ‘control’ are also barred from selling their products on the particular e-commerce marketplace. An e-commerce entity is considered to have ‘control’ over the inventory of a particular vendor if over 25% of the goods the vendor/retailer purchases are from the entity or its group companies.
Moreover, Clause (ix) delimits the scope of the phrase ‘maintain a level playing field’ as provided in 2017 FDI Policy by stating that services provided by e-commerce entities to the vendors on the platform must be provided in a fair and non-discriminatory manner.
IMPACT OF CHANGES
This move of the government impacted the e-commerce enterprises severely. They were forced to pull down hundreds of thousands of products from their online stores. As a result, the sales volume of these entities contracted by over 30% in the initial days after the policy came into place, since a majority of the products sold on these platforms were sold by vendors who violated the new norms. Amazon’s private labels like Symbol and Basics were made unavailable as they were sold by Cloudtail and Appario Retail, both partly owned by Amazon.
The sheer impact that these new regulations had is sufficient to establish the intricate network that the e-commerce giants had constructed by way of contractual agreements and the vastness of this network, which essentially used to form the basis of the e-commerce sector.
ANALYSIS OF RELEVANT CASES
The accusations regarding the anti-competitive nature of such agreements were most vociferously articulated in the case of All India Online Vendors Association v. Flipkart India Private Limited.In that case, it was alleged that the aforementioned exercise whereby the e-commerce entities exercised a certain degree of control over the inventory of the products and enabled the captive sellers to sell products at a lower price, was a clear case of use of unfair and discriminatory trade practices and thus constituted an abuse of dominance. However, the CCI held that, in the relevant market (which was defined as ‘services provided by online marketplaces for selling goods in India’), the e-commerce entities were not individually dominant and therefore, the question of abuse of dominance did not arise. The reason given for this decision was that due to the existence of several competitors in the e-commerce space, the individual market share of each entity is negligible. Similarly, the online retail market represents a minuscule portion of the entire retail market, when both channels are included. Thus, even collectively taken, the market share of large e-commerce entities remains insignificant.
However, this approach suffers from various inconsistencies. In consonance with the reasoning provided by the CCI, having a significant market share is a prerequisite for establishing a dominant position in any market. However, the judgement fails to take cognisance of any of the other factors relevant for establishing dominant provision as provided in the Act.
It is for this reason that the decision of the CCI, in this case, was overruled by the NCLAT, which stated that there existed a prima facie case against the e-commerce entities which merited a full-fledged investigation. Dominant position in the market refers to a position of economic strength enjoyed by an undertaking which affords it the power to behave, to an appreciable extent, independently of its competitors. It is an internationally recognised principle that a large market share might imply a dominant position but is not a prerequisite to establishing dominance. Several other factors could result in the establishment of market dominance, even in the absence of a significant amount of market share. Market share is not a determinative factor and its importance varies depending upon the structure of the market. This principle was affirmed by the CCI in Belaire Owners’ Association v. DLF Limited(Belaire-DLF case), where it stated that market share analysis is a static concept and is not suitable for all markets, especially in the case of a dynamically evolving market. Thus, a comprehensive analysis of all market conditions must be conducted.
Other factors to establish dominance that become relevant in this scenario are size & resources of the enterprise, economic power including commercial advantages and vertical integration.As established in the Belaire-DLF case, the size and resources of DLF, such as having greater capital resources as compared to competitors, can help in establishing dominance. E-commerce players like Amazon & Flipkart, backed by huge foreign investments, have vast capital resources. For example, Amazon has a market capitalisation of 1 trillion USD internationally and Flipkart saw an infusion of 16 billion USD by Walmart, which picked up a 77% stake. Even Snapdeal has raised millions of dollars in several rounds of funding led by major investors like Alibaba, SoftBank etc. Since the market also includes small competitors who do not receive such massive funding, when it comes to the size of resources, e-commerce entities are better placed than others. As a result of this, these companies can afford to allow pricing below cost for their preferred sellers, resulting in the creation of high entry barriers for other sellers. As observed by the Income Tax Appellate Tribunal in the case of Flipkart v. Assistant Commissioner of Income Tax, selling below the cost price is not irrational behaviour and is indicative of a strategy to establish a monopoly by way of gaining consumer goodwill.
Furthermore, certain commercial advantages that these entities hold over their competitors must also be considered. The CCI has identified certain factors that provide a company commercial advantages over competitors- visibility, joint ventures, access to better technologies etc. The e-commerce firms engage in vast marketing efforts, which provides them with greater visibility as opposed to their competitors. They have joint ventures with other companies to provide home delivery services, payment services etc. Such services are provided to some vendors on their platform as incentives depending upon volume and value of sales. As a result, the larger sellers on these platforms enjoy these services whereas smaller vendors still suffer from certain handicaps as they do not have access to them, thereby conceding a commercial advantage to large sellers.
As further averred in the case of Delhi Vyapar Mahasangh, they have access to technological facilities such as large repositories of data, which allows them to create targeted advertisements based on consumer preferences. This may result in foreclosing other competitors from the market on account of network effects.
Thus, it is abundantly evident that when factors other than market share are considered, we can conclusively establish that these entities enjoy significant advantages over their competitors and therefore they can be described as having a ‘dominant position’ in the market. Having established a dominant position, the next step would be to establish an abuse of this dominant position by these enterprises.
ABUSE OF DOMINANCE IN E-COMMERCE
According to Section 4 of the Act, abuse of dominance is established when an enterprise imposes unfair and discriminatory conditions on the purchase of goods and/or creates conditions that result in denial of market access.
From the nature of these arrangements which enable the vendors to sell products at steep discounts to the detriment of other sellers, it is reasonable to infer that they amount to an abuse of dominant position because they enable the e-marketplace to impose unfair and discriminatory prices. Furthermore, the act of selling these goods at extremely low prices, sometimes even below the cost price, causes an unfair denial of market access to other competitors in the market. Though price competition is often regarded as pro-competitive, not all of it can be regarded as legitimate. This was affirmed by the EU in AKZO Chemie v.Commission, which stated that selling below the average costs of production is anti-competitive because, due to the losses inherent in this practice, the only motivation thereof would be capturing the market by driving out competitors, who would be unable to withstand this onslaught because of lesser financial resources.
Furthermore, as averred by Flipkart itself, these entities provide certain incentives to sellers based upon criteria such as volume/value of sales. The preferential treatment of certain sellers with regard to the provision of these services in a discretionary manner unfairly prejudices other sellers on the platform and therefore constitutes an abuse of the dominant position.
The CCI took a narrow approach in the case of AIOVA v. Flipkart (which was concluded in early 2018). The nature, scope and impact of these arrangements were not thoroughly investigated and thus, it did not properly adjudicate upon them. It refused to take cognisance of the unconscionable & detrimental nature of these agreements. This is further corroborated by the fact that this case was overruled by the NCLAT and a prima facie case was made out with sufficient cause for investigation. However, since the competent authority recused itself from taking requisite action and there were delays associated with the appellate process and the investigation, it became a prerogative of the government to protect weaker competitors from the exploitative dominance of some enterprises until such time that the regulatory authority undertook corrective action (as in the case of Delhi Vyapar Mahasangh, wherein the authority ordered a thorough investigation in order to ascertain the combined effects of practices such as preferential treatment, deep discounting and network effects).
However, the efficacy of this regulation can be called into question after considering the fact that the companies have managed to renegotiate their arrangements and modify their structure in accordance with the new rules. Amazon simply divested its stake in the preferred vendors, Cloudtail and Appario, to comply with the amendments, while Flipkart created a layer of business-to-business entities to act as intermediaries between its wholesale arm and prominent sellers on its platform. This indicates that the regulations promulgated by the government may not be sufficient to restrict anti-competitive practices and entails stricter vigilance by the competent authority to prevent the occurrence of these practices.
Based on the aforementioned information and analysis, it is reasonable to conclude that arrangements of such a nature are anti-competitive and constitute an abuse of a dominant position. The CCI, while adjudicating upon the legality of these agreements, failed to consider factors other than market share while establishing a dominant position in the initial case of AIOVA v. Flipkart. Having established that no entity is dominant, it failed to analyse the anti-competitive effect of such agreements. This position has been overruled in subsequent cases by the CCI as well as the National Company Law Appellate Tribunal and it was subsequently established that the e-commerce entities are in a dominant position because they fulfil the criteria set out in Section 19 of the Act. Thereafter, it was established that such arrangements amount to an imposition of unfair and discriminatory trade practices and result in denial of market access. Furthermore, since the CCI, which is the competent authority, precluded itself from restricting these practices, it became a prerogative of the government to prevent such them until corrective action was taken, which it fulfilled by promulgating amendments in the 2017 FDI Policy as part of Press Note 2.
Views are personal.
Image credits: Disfold
ABOUT THE AUTHOR
Tavashya Kumar is currently pursuing B.A. LLB. (Hons.) from National Law University, Delhi.
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Aditi Shrivastava, Alnoor Peermohamed, The Economic Times, (n 9).
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Delhi Vyapar Mahasangh, (n 7).
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