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This article is written by Shweta Rath, Team LawSikho.

I grew up playing the Age of Empires. It was such a fun game! 

If one were to pick a name for today’s age- it would certainly be called the age of start-ups. The global startup economy has generated a whopping $2.8 trillion in economic value (according to the report submitted by Forbes on May 09, 2019) over the past two years.

In India alone, there has been an addition of over 1300 start-ups in 2019 and it is considered to be the third-largest start-up ecosystem in the world after the United States of America and China!

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How does that affect lawyers?  Apart from the diverse work that a lawyer can perform for startups, today I want to share with you the specific areas of competition law that are relevant to some of the practices in the startup industry.

In principle, high-growth startups of today seek to expand and ‘dominate’ the market – whether it is global, national or local. That’s how the competition concerns begin. 

Let us examine the most common practices that may run foul of competition law. 

#1 The Big Daddies May Consume Small Start-ups

The most concerning problem that the start-ups are facing today is the rising exploitation at the hands of the big daddies of the technology world which are: the FAAGM (Facebook, Amazon, Apple, Google, and Microsoft).

All these companies today are facing global investigations by competition authorities. Google has alone been penalized in the European Union (€ 5.4 Billion) and India (INR 137 crores). 

It all started with Microsoft being the oldest all that has spent a decade fighting antitrust battles. 20 years ago, Microsoft faced a challenge from the upstart company Netscape and its internet browser, Netscape Navigator. The suit accused Microsoft of illegally protecting its operating-system monopoly and seeking a new monopoly for its own browser, Internet Explorer.  Microsoft eventually lost that battle due to which today we users get to choose which internet browser we want to use. 

But now companies like Google and Apple are facing such allegations.

For example, Spotify, an international media service provider has alleged that Apple uses its App Store to stifle innovation and limit consumer choice in favor of its own Apple Music service. 

This is because Apple takes a 30% cut from Spotify on every Spotify subscription signed up via the App Store during the first year, and then 15 percent each year thereafter. Paying this kind of money forces Spotify to inflate its prices which makes it less competitive than iTunes. 

According to Spotify, Apple is abusing its monopoly in its app-store space.

What is your take on this issue? Do you think Apple is abusing its dominant position? Do let us know by commenting below!

Because of such instances, startups are of the opinion that this kind of tight grip that digital giants like Google and Apple have over distribution makes it very difficult for them as new players in the industry to not only make money from consumers but also grow as a brand.

This is a common tactic used by big players that are aware of the dependency that small players (who are also their competitors) have on them. Therefore, big tech dominance is a very crucial issue with more and more start-ups calling out the big daddies. 

Majority of the competition enforcement in India has been taking place in this particular area where lawyers have been involved in fighting cases under Abuse of Dominant Position. As mentioned above, the landmark ruling came in when Google was heavily penalised for the first time in India. 

Therefore, in the coming days, following the changes in the Act, we can see a lot of litigation cropping up where ‘informants’ will be filing information under Section 4 of the Act trying to dismantle the rising monopolies.   

#2 If you can’t kill, buy them

This is the golden rule that is being followed by these big tech giants who foresee a possible threat in the form of rising start-ups that cannot be competed with. 

Google leads the pack with around a whopping 236 acquisitions while Facebook to date has acquired over 70 companies with most of them being start-ups (most famous one being Whatsapp which was acquired for $19 Billion and Instagram for $1 Billion).

Due to this reason, a certain amount of customer-based innovation is dying out because start-ups are becoming more inclined towards acquisition-based innovation whereby they project themselves to get acquired by one of the big techs in 5-7 years. This not only protects but reinforces the dominance of these big tech companies. 

The biggest example has been the Walmart-Flipkart deal (A deal worth $ 16 Billion dollars) which opened the floodgates to more and more FDI in India. We welcomed 2019 with Zomato’s acquisition of Uber Eats. The CCI is looking to expand its combination division (the division which reviews all such merger/acquisition/amalgamations filing for approval). 

Infact, in 2018, a total of 118 acquisition deals were recorded in the Indian startup ecosystem. Do you know what this means for the merger control circle in competition teams in law firms? Even in-house counsels in such companies are required to pursue specialized training in competition law to ensure that the acquirer is able to pass safely through the CCI’s scanner.  

The workload is only going to multiply and firms in the coming days will be looking to hire more and more competition lawyers to cater to the rising demand of workload of transactions. 

#3 Deep discounting

Deep-discounting is the go-to strategy for all rising start-ups today. 

Even if it comes at the cost of heavy expenditure. Uber alone burnt $1 billion cash in 2019. The e-platforms follow a “growth over profit” model of business, and as such many small offline players that ride on these platforms are now feeling the “heat”. 

Discounts have eroded the value of their products, making it difficult for them to sustain their businesses.  The CCI has finally taken a step towards this issue by releasing its recent report on “market study of e-commerce in India”. 

We even wrote about it a few days back. Check it out here.

This is another area of competition enforcement which has found new ground. It all started with ‘Informations’ being filed against ride hailing apps like Ola and Uber which were alleged to be engaged in predatory pricing and deep discounting. Now such cases have spilled over to companies like OYO, MakeMyTrip and  Zomato as well. 

You can see a lot of traction in the coming months with respect to such cases being filed in the CCI. Competition lawyers will be expected to represent companies and the associations and informants who are involved in such cases. The main bone of contention in such cases will be to determine the dominance of these startups to engage in such harmful predatory pricing. 

 This brings us to our next issue. 

#4 Difficulty to ascertain dominance in India 

In India, it is not easy to penalize these start-ups for predatory pricing as it comes under the provision of abuse of dominant position and to date, our competition law does not have a provision for collective dominance. 

This means, unless a start-up is held to be dominant, you cannot bring a case of predatory pricing/aggressive discounting. This is the reason why all the emerging startups/unicorn startups/tech giants are going scot-free. 

The CCI has maintained the position that while the industry evolves rapidly, with changes and competition going nail-to-nail, it is not easy to ascertain one market leader in this space. This is why most of the cases under “abuse of dominant position” have been dismissed. 

Google has remained the one exception because, in the market of search engines, it does have an unparalleled dominance which it has been exploiting by giving preferences to some websites over others in terms of search results. Moreover, it is no longer a start-up. It was accordingly penalized for its conduct in 2018 with a penalty of INR 137 crores which are still in appeal before the NCLAT.

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Now competition lawyers are using a different technique to target the rising startups. They are challenging the nature of the agreements (which comes under Section 3), that startups impose upon their stakeholders. The Amazon & Flipkart investigation order is one such example. Since a Section 4 case remains difficult to argue, a Section 3 case becomes easier to take up because there you don’t have to ascertain dominance. The order of the CCI against Amazon & Flipkart is just the beginning of many such cases.

In such matters, transactional lawyers will be expected to upskill and become adept with vetting contracts from a competition point of view to ensure that clauses mentioned in those contracts should not violate the Act in any manner.  Alternatively, they will simply pass the review work to dedicated competition teams in the law firms. 

If you are an independent practitioner who has been a competition lawyer earlier, you may be given some portion of this work through your existing networks or of-counsel relationships with big law firms.

#5 Anti-poaching agreements

This is an issue that has been cropping up outside India and was started mostly by the big tech companies. Now, this issue has also percolated across the start-up industry!

Last year, a US district court judge ruled that Apple, Google, Intel, and Adobe will have to shell out $415 million to put to rest an anti-poaching civil lawsuit that accused the companies of conspiring not to hire each other’s employees. The fear of losing talent and ideas is a very real concern for all employers, including start-ups. 

However, A non-compete that provides for an employment restriction for a short period of time (i.e., under two years), limited scope of focus of employment (i.e., only competitor employers and similar job position), and limited geographic scope could still substantially limit the movement of employees bringing in the focus of competition authorities. 

In order to address these issues, start-ups are bringing in non-disclosure agreements to protect their confidential information and trade secrets. However, start-ups are still figuring out a LEGAL way to retain their talent and not let them cross over to competitors which will not attract anti-trust/competition scrutiny.  Competition lawyers have to work with the employment lawyers to figure out a workable method which will avoid CCI scrutiny. 

Can you suggest a measure against this practice by these biggies? Let us know by commenting below!

The way forward for competition lawyers operating in the startup space

The big tech companies no doubt have too much power. As Peter Thiel wrote in Zero to One, the strategy used by companies to expand is to dominate the market segment they operate in. Therefore, start-ups are being acquired, or are decimated by big players as their market is eaten up. 

By design, strategies to dominate have a high tendency to run foul of competition law provisions. Some start-ups like Snapchat are still trying to resist the pressure by revamping corporate structure and bringing in innovation. 

As a competition lawyer, you will either defend a market leader or be on the side of the informant. You could even represent both sides of the table in different scenarios, as long as your work does not conflict, and as long as you do not take opposing stances against your client. 

What’s in it for you? The work for competition lawyers is expanding. The opportunity to rise up the ranks and be a well-known competition lawyer has not saturated yet. The road is vast open. The anti-trust law has not been completely solidified on this front as it is new waters for the authorities. The CCI has been trying to follow the footsteps of its EU and US counterparts but considering the importance of start-ups in India, it has expedited the process. Right now, we still don’t have a hard-core order against the practices of start-ups or the exploitation suffered. 

However, with the upcoming investigations, and the amendments in the Competition Act, we should be prepared for regular updates and changes in the law. And the best part is that it will be the fraternity of practitioners who will ultimately bring about this change with the rising complexity in matters!

In a time like this, corporate lawyers are certainly expected to get some solid expertise in this field so as to make a constructive contribution. 

  • There is going to be a massive requirement of competition lawyers in the corporate firms – preferably with a background of cyber and IT laws to work on the transactions pertaining to merger/acquisitions or amalgamations of startups. 
  • Such combinations should also be prepared to face resistance from some third parties like it happened in the case of the Walmart-Flipkart merger which is currently in appeal before the NCLAT
  • Lawyers will also be required to do policy research and suggest new amendments in the Act which will cater to FDI in startups in India.
  • As mentioned above, the competition enforcement scenario is also gaining momentum  with the increase in cases under Section 3 and 4. Hence, effective competition litigation is of vital importance. 
  • A major issue that has been cropping up is that companies are trying to stifle the powers of the CCI by filing writs before High Courts challenging the investigation orders passed by the CCI. Very recently, Amazon challenged the investigation order in the Karnataka High Court. Companies usually try filing such writs outside Delhi to gain attention of courts in Mumbai, Madras, Bengaluru etc and make it more difficult for the CCI to operate. Therefore, now the fight is spreading geographically outside Delhi. 

To learn more about how you can perform real work for clients, you can explore the Certificate Course In Competition Law, Practice And Enforcement. You will have an opportunity to attend 1 online live class per week (after work hours – you can watch a recording if you cannot attend the live session and ask your doubts later), perform 2 simulation exercises and receive in-line feedback on your drafts, access online study materials (along with hard copies despatched to your address), doubt clearance within 24 hours and a lot of other benefits that you can find on the course page with details.

The course is aimed at bringing you at par with at least 1 year of post-qualification experience in a top law firm, in as little as 3 months’ time. Independent lawyers and professionals who specialize in a different area will be adequately empowered to spot competition concerns and deal with them. If you are a student, securing internships becomes a super-streamlined process, as you would have acquired the relevant skills. 

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