This article is written by Reet Balmiki from NALSAR University of Law. This article in the pursuit of understanding the transnational application of competition laws in India, the United States and the European Union, provides an overview of the relevant statutes, discusses the problems with extraterritorial application and compares and analyses the competition laws in the three nations.
Table of Contents
Introduction
“A horse never runs so fast as when he has other horses to catch up and outpace.”
The above quote, by the famous poet Ovid, illustrates how competition influences people to perform better and outdo themselves. Similarly, in the arena of commerce, competition plays a significant role in encouraging businesses to perform better to accomplish superiority over their competitors. However, the benefits of free competition are not limited to this.
Need to protect and promote competition in free markets
Competition in the marketplace means rivalry among business enterprises to gain a larger customer base than the other. It is a crucial element of the open market economy as it ensures flexibility and dynamicity in the market. Regular competition in the market is beneficial for the consumers, the businesses, and the economy as a whole. The presence of multiple suppliers in the market provides the consumers with a wider range of options. Businesses are required to innovate to meet the demand for high-quality goods at a lower cost which augments their competitiveness. Since businesses are required to innovate and reduce costs, they reduce the inefficient use of resources and increase productivity. Thus, increasing the economic growth rate. In this way, even though the need for innovation arises out of the business’s self-interest, the benefits accrue to the consumers and the entire society.
Contrary to this, a lack of competition in the market will have a detrimental impact on the economy as it would result in higher prices, a lack of choice for consumers, higher profits, and a lower level of investment by the companies. Due to lack of alternatives, it would also reduce the quality of the goods, level of customer service, and need for constant innovation. Therefore, both the economy and consumers suffer in the long run. Thus arose the need for the state to intervene and monitor the markets and take cognizance of certain practices. This led to the formation of the competition law.
Meaning and purpose of Competition Law
Competition law is a codification of rules intended to prevent market distortions caused by anti-competitive practices by businesses. This includes legislation set up to promote and sustain competition and maintain a fair market by prohibiting unethical practices in the marketplace.
Though the practice of the law varies for each country, their substance and purpose remain the same. It ensures that competition in the internal market remains fair by ensuring similar application of rules to all companies in the market.
Benefits of Competition Laws
- Promotes competition by limiting the power of a company in the market.
- Prevent multiple companies from colluding and engaging in anti-competitive activities likes price fixing, bid rigging, forming a cartel, etc.
- By promoting competition, they provide the consumers with more options thus ensuring reasonable pricing and quality.
- Set up governing bodies to oversee the practices of the firms and hold them accountable in case of anti-competitive behaviour.
- Protects small businesses from anti-business practices done by large companies. This is done by providing an equal playing field for similar businesses in the same industry.
It is for these reasons that countries across the globe are strengthening their laws governing market practices through the enactment of competition law and by setting up regulatory authorities. Now that we have understood the general meaning, scope, and benefits of competition law, we must further look into the specific laws in a few countries.
Overview of Competition Law in India, United States, and the European Union
India
After independence, there existed a huge inequality in the markets with the concentration of economic power in the hands of a few. This led the Indian government to enact the first legislation to restrain the abuse of power in the market i.e. the Monopolies and Restrictive Trade Practices Act, 1969. This legislation was formulated to ensure the economic power is not in a few hands by prohibiting monopolistic and restrictive trade practices. However, after the new Economic Reform Policy of 1991, the 1969 Act became obsolete in certain areas due to the changes brought by the new policy. Therefore, there arose a need for a framework that was more responsive to the current realities and international competition.
The Indian Parliament passed the Competition Act, 2002 keeping in view the new economic developments in the country. This Act marked a paradigm shift from curbing anti-competitive practices to the promotion of competition in the market. The main objectives of the Act are-
- To promote and sustain competition in the markets.
- To prevent practices that have an adverse effect on competition.
- To ensure freedom of trade in the market.
- To protect the interests of the consumers and society.
- To establish the Competition Commission of India.
The Act was created to regulate business practices and prevent practices from having an appreciable adverse effect on competition (AAEC) in India. As a result, the Act seeks to regulate mainly four areas – anti-competitive agreements, abuse of dominance, regulation of combinations, and competition advocacy and reference.
United States
In the US, the laws ensuring and promoting competition while keeping a check on the anti-competitive practices are called antitrust laws. These laws are designed to make sure that businesses compete fairly and maintain an open marketplace.
Congress passed the Interstate Commerce Act in 1887. Though this Act was not specifically directed to regulate competition, it proved to be beneficial in upholding the antitrust regulations. However, this Act was less influential in this regard when compared to the subsequent legislation.
Congress passed the first antitrust legislation, the Sherman Act, in 1890. This Act aimed at preventing restrictions on trade and monopolization of the market by promoting unfettered competition. Further, Congress passed two more legislations in 1914, the Federal Trade Commission (FTC) Act and the Clayton Antitrust Act.
The FTC Act led to the formation of the Federal Trade Commission which enforces antitrust laws and protects consumers from unfair practices. The Act also bans unfair methods of competition and deceptive acts. The Clayton Act was enacted as an improvement to the Sherman Act. This Act addressed specific practices that were left out of the first two legislations. There were certain antitrust practices that the Sherman Act did not specifically prohibit. This Act expanded the list of outlawed anticompetitive practices by prohibiting such practices. These include price discrimination, exclusive sales contracts, anti-competitive mergers, and so on.
European Union
The fundamental objective of the EU competition policy is to ensure the proper functioning of the internal markets. This goal to establish a competitive and open market economy is enshrined in the Treaty on European Union (TEU) and the Treaty on the Functioning of the European Union (TFEU). In addition to the antitrust laws, the competition policy of the EU also includes merger control, state aid, and public undertakings and services.
The antitrust laws mainly aim to the following areas-
- Place a ban on anti-competitive agreements.
- Prohibit the abuse of dominant position in the market.
- Control the merger procedures.
- Prohibit state aid.
- Public services of general economic interest (SGEIs).
To ensure the effective enforcement of the competition policy of the EU, the European Commission has been given the responsibility to ensure proper application of the rules. The Commission has wide-ranging inspection and enforcement powers. These include the power to carry out unannounced inspections at companies or to compel them to provide evidence relevant to their investigations.
Transnational application of the law
Each country has its own interests, economic market structure, and challenges to overcome in the marketplace, and thus, a specific competition law to meet the requirements of the domestic market. However, the rise in business and commerce beyond the territorial boundaries of the country has also increased the impact that foreign anti-competitive activities have on the domestic market. To prevent such anti-competitive activities outside its territory from impacting the domestic market, the competition laws need to be applied extraterritorially.
The doctrine of territorial jurisdiction gives the states the authority over the acts performed within their jurisdiction, at the exclusion of other nations. The strict application of this doctrine is however inconsistent in the present situation due to the rise in transnational activities. This is because the conduct in one jurisdiction may have severe impacts on the markets of other jurisdictions, due to the increasing transactions between the countries. Since the territorial principle has become obsolete in governing such international transactions, several countries apply their domestic laws extraterritorially.
US law on the transnational application
The antitrust laws of the US provide very cryptic clues on the scope of their territorial jurisdiction. Despite lack of clarity on extraterritorial application, the US has been a strong supporter of the application of its laws in a foreign context. These rules have majorly developed through the US courts’ interpretation of the laws and their application in several case laws.
The Sherman Act does not provide clear limitations to the application of the Act to a foreign nation which poses an issue of defining the extraterritorial jurisdiction of the Act. This led to the enactment of the Foreign Trade Antitrust Improvement Act of 1982, which places certain restrictions on the application of the US antitrust laws in foreign jurisdictions. The Act provides that the antitrust laws do not apply to wholly foreign transactions or export trade unless the requisite effect is felt within the United States. This Act aims to apply antitrust law in the light of the effects doctrine.
The effects doctrine was also applied in the case of the United States v. Aluminum Co. of America (1969). In this case, an American and British company entered into an agreement to dominate the tobacco market within and outside the United States. The court took jurisdiction of the case and held the agreement to be invalid. Despite the case concerning foreign markets, it fell within the Sherman Act because the agreement had a substantial effect on American commerce.
EU law on the transnational application
The EU competition law is not explicit about its jurisdictional application. Article 101 (1) of TFEU provides certain necessary criteria for its application. This includes there being an anti-competitive agreement between two parties and the agreement must have an impact on the trade within the EU or in between the member states. Similarly, Article 102 of TFEU required there to be a dominant position within the internal market of the EU.
Since the words of the statutes are unclear as to the extent of jurisdiction of the laws, the EU developed several doctrines to extend and exercise jurisdiction in foreign nations. One of these is the “Single Economic Entity Doctrine”. As per this doctrine, a parent company and its subsidiary are considered as a single unit for the application of the competition law. This means that if the subsidiary falls within the provisions of the EU antitrust laws, all other subsidiaries and the parent company will be considered as a single unit and will be within the jurisdiction of the EU.
The Implementation doctrine, a crucial doctrine that laid down the main approach towards extraterritorial jurisdiction in the EU, was applied for the first time in A Ahlstrom Oy v. Commission (1993), also known as the “wood pulp case”. Here, the wood pulp industry had engaged in a price-fixing cartel. The notable aspect of the case was that the price cartel was formed outside the jurisdiction of the EU. Despite their business being outside the EU, the Commission imposed fines on their conduct. On this decision being appealed, the Court applied the effects doctrine and held jurisdiction due to anti-competitive effects in the EU market.
Despite the effects doctrine developed by the US being closely related to the implementation doctrine applied in the EU, the EU does not formally recognize the effects doctrine. However, in the case of Intel Corp. v. European Commission (2017), there has been an infringement of Article 102 of the TFEU that deals with the abuse of dominant position in the market. The court found Intel, the US-based company to be guilty of abuse of dominant position in the market as it granted its customers rebates and payments on the condition of exclusive purchasing of its processors and selling exclusive computers containing such processors. When Intel appealed before the General Court, challenging the Commission’s jurisdiction, the GC held that the jurisdiction was justified under Public International Law as sufficient qualified effects of the practice were present in the EU. “Qualified Effects”, here refer to the “criteria of immediate, substantial and foreseeable effects”. This led to the application of the qualified effects doctrine to extend territorial jurisdiction to the Commission.
Indian law on the transnational application
The Preamble of the Indian Constitution upholds the sovereignty of the country, which is the exclusive right of a country to govern itself. The concept of extraterritorial jurisdiction is an extension of the aspect of sovereignty. However, It is also a contradiction to this concept.
Under Article 245(2) of the Constitution, a law that has been granted extraterritorial jurisdiction by the parliament cannot be held invalid merely on this ground. Therefore, while the Constitution recognizes the right of the country to govern itself, it also gives the Parliament the power to enact legislation that gives the country unbridled powers to govern beyond its territory.
Similar to the anti-trust laws of the US and EU, the MRTP Act did not have an express provision granting extraterritorial jurisdiction. However, Section 14 of the Act laid down that an order can be passed under the Act for any practice outside India that affects the competition in India and is monopolistic, restrictive, or unfair. However, after the enforcement of the Competition Act of 2002, this Act was repealed.
The 2002 Act was enacted to shift the focus from the prevention of certain activities to the promotion of competition. After the liberalization and globalization, the transnational business, investments, and transactions grew increasing the countries’ threat to adverse effects of the anti-competitive activities outside the local jurisdiction. The Act was enacted to fill the deficiencies in the MRTP that came to light after the opening up of the economy. Due to these reasons, the Act differs from all the previous Acts discussed as it expressly extends jurisdiction to all practices having an appreciable adverse effect on competition in India.
Section 32 of the Act provides for the extraterritorial jurisdiction of the Indian Competition Law. This Section also provides a wide scope to the Competition Commission of India as the jurisdiction is not limited by the place the Anti-Competitive Act occurred. It also defines the powers of the CCI to inquire into transnational practices. Post the 2007 Amendment to this Act, the powers of the CCI were extended from mere inquiry into such practices to passing an order against such practices.
Section 32 embodies the effects doctrine in the Competition law of India. However, the actual application by the Indian courts requires improvement. However, the 2002 Act incorporates the effects doctrine, its scope, and enforcement and assures the proper application of the rules laid down under the Act to all transnational practices affecting the Indian market.
Comparative analysis of the Competition Law and its enforcement in the three countries
Unlike the US and EU, India is still a developing country that recently opened up its markets to the rest of the world. The focus here is that India had to undergo a drastic transition from a mostly restrictive economy to an open and free market. The other two countries did not have to undergo such a change and were not required to adjust to the changed circumstances.
The Indian Competition law is also fairly recent when compared to the US law which dates back to the 1890s and the EU law which emerged from the Treaty of Rome, 1957. Since Indian Competition law is still in its nascent stages, there is a need to look at the law in the light of the well-established laws of the EU and US to better understand the efficiency in functioning and enforcement along with the need for improvements in the laws.
Enforcement structure
As opposed to the Indian framework, the US and EU antitrust laws comprise multiple agencies and legislations. As discussed above, the US has three major legislations governing anti-competitive activities. The major task of ensuring the enforcement of these legislations is undertaken by two federal agencies – the FTC and the U.S. Department of Justice (DOJ) Antitrust Division. These two agencies share jurisdiction in certain matters and complement each other’s roles. However, the DoJ has exclusive authority in cases involving criminal prosecution.
The EU antitrust law is governed by the TEU, the TFEU, and several other laws on mergers regulations, state aid, etc. Article 106 of the TFEU entrusts the European Commission with the duty to ensure the enforcement, implementation and development of the European Competition laws. In addition, Article 14 of the Regulation1/2003 of EC establishes an Advisory Committee and mentions that the EC should consult the Advisory Committee before taking any decisions.
The Indian competition law framework is similar to that of the EU and the US. The powers and functions of the CCI are also known to be fashioned based on the powers of the EC. However, even though the Act is similar in its structure and enforcement, there exist several differences in the level and quality of enforcement due to the significant differences in the systems.
Anti-competitive agreements
Section 3 of the Competition Act 2002, Section 1 of the Sherman Act, and Article 101 of the TFEU are the relevant provisions related to anti-competitive agreements. Unlike the US and EU law, Indian law does not classify the agreements into horizontal and vertical agreements. However, the language of the provision is such that it deals with both the agreements separately. Therefore, the approach to governing such agreements is similar under the laws of all three countries.
Abuse of dominance
Section 4 of the Competition Act and Article 102 of TFEU deal with abuse of dominant position and list down the abusive practices under the statute. The lists provided in both the legislations are almost entirely similar. Similarly, Section 2 of the Sherman Act governs such abuse of position in the market and punishes any attempt to monopolize the market. However, this Section merely lays down the provision and punishment of such acts and does not provide a list of practices. In addition, “the abuse of dominant position” is a wider term than “an attempt to monopolize” as it includes other activities such as the use of a dominant position in one market to enter another market. While the Indian and EU law is similar in this aspect the US law slightly differs.
Powers vested in the commissions
The Competition Commission of India was established under Section 7 of the 2002 Act to fulfill the duty of eliminating the effects of anti-competitive activities and promoting competition in the domestic market. For this purpose, the Act vested several powers to the CCI including the power to intervene and inquire into a matter, either on its authority or through the information of malpractice. The CCI also has the power to impose monetary penalties upon violation of provisions under the Act. The 2007 Amendment granted the CCI the power to pass an order against practices prohibited under the Act.
Section 5(a) of the FTC Act empowers the Commission to investigate and prevent unfair methods of competition, and unfair or deceptive acts or practices affecting commerce. The Act also gives FTC the authority to provide relief to the customers if affected by unfair practices. The commission also has powers to investigate certain matters, agreements, statutes that might be unethical, illegal, or deceptive. It can also investigate any violation of the antitrust statute to ensure that the competition in the market is free and unaffected. It also has the power to make recommendations to keep up with the changes in the markets.
Article 4 of Regulation 1/2003 provides the Commission with the power to apply the provisions under Article 81 and 82 of the Treaty (Article 101 and 102 of TFEU). Article 105 of TFEU lays down the powers of the Commission which include investigating and proposing activities in cases of suspected infringement, instructing members to take measures to remedy the situation, and so on. In addition, Regulation 1/2003 also provides for an Advisory body to be set up and requires the Commission to consult with the Advisory body in cases related to particular provisions mentioned under Article 14 of the Regulation.
While the Indian law allows the CCI to pass an order restricting certain practices, unlike the other laws, it does not lay down any guidelines to impose such penalties which results in ambiguity in its application. In addition, while the EU Competition law makes it essential for the Commission to consult the Advisory body in certain matters, the Indian and US laws do not provide such assistance to the governing agencies set up under the laws. Therefore, while the object to be achieved is common under the laws of all three countries, its enforcement by the bodies differs based on the procedure and powers laid down under the legislation.
Transnational application
The Doctrine of Effects, enshrined under Section 32 of the Competition Act of 2002 empowers the CCI to enforce jurisdiction beyond the country’s territory. Though this doctrine was formulated and is widely applied by the US courts today, it finds no mention within the governing legislations. Similarly, though the EU Competition law extends jurisdiction beyond the territory of the EU through several doctrines, there has been little or no mention of these in the statutes.
Though the current practice in the US and EU courts is in favour of extraterritoriality, due to the application being based on doctrines in favour and against the concept there have been several instances where the lack of the proper scope and application of the doctrine has resulted in anti-competitive practices being let go unrestricted due to lack of jurisdiction. The MRTP Act also has similar provisions to that of the US and EU laws for providing jurisdiction to the commissions. Recognizing this deficiency and with an aim to resolve it, Section 32 was added to the 2002 Act. Therefore, the explicit mention of the concept of extraterritorial jurisdiction and explaining its scope and application provides certainty and similar treatment to such cases.
Problems in the transnational application of Competition Law
- In the modern world where international trade among nations is practised so often, the application of antitrust laws in a transnational manner will inevitably lead to conflicts over the jurisdiction.
- The application of competition laws over the practices of other nations often leads to backlash and mistrust in the country’s laws and resistance to exercise jurisdiction.
- If not applied in a proper manner, the transnational nature of these laws could lead to excessive enforcement of the competition laws against its jurisdiction and would thus prove to be counterproductive to the object the laws seek to achieve.
- The lack of a strict rule in many countries could lead to unpredictability in the future of the transnational application.
Conclusion
In an ever-changing and developing world, the shift from a domestic to a global market led to an increase in international transactions and brought the need to regulate such practices. This was essential to maintain freedom of trade and free competition in the markets. Due to this, several countries began applying their Competition laws in a transnational manner.
This article in the pursuit of understanding the transnational application of competition laws in India, the United States, and the European Union, provides an overview of the relevant statutes, discusses the problems with the extraterritorial application, and compares and analyses the competition laws in the three nations.
References
- http://www.nishithdesai.com/fileadmin/user_upload/pdfs/New_Competition_Law_in_India_vs_USA_and_EU.pdf
- https://www.cci.gov.in/sites/default/files/advocacy_booklet_document/CCI%20Basic%20Introduction_0.pdf
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