This article is written by Sonali Kohli.                                                                                  

Introduction

Section 2(h) of Competition Act defines ‘Enterprise’ specifically as a person or department which works “either directly or through one or more of its units or divisions or subsidiaries” creating a presumption in favour of the existence of Doctrine of Single Economic Entity in Indian domain even if it is not mentioned in any provision. The enterprises falling under this category cannot enter into an agreement because of several factors. The roots of this can be traced in European Union Competition Law. Article 101 and 102 are applied to undertakings that enter into an agreement and violates competition in the market. Undertaking implies an entity engaged in an economic entity regardless of its legal status. This is the essence of this provision that two undertakings agreeing should be sufficiently independent to give their consent for an agreement and compete with each other. 

The doctrine was recognized in the Public Insurers case where opposite parties being prosecuted for forming a cartel argued that they are under the direction and control of the Department of Financial Services (DFS) and are a single economic entity, therefore unable to enter into an agreement. The plea was refused by the court on the ground that they participated in the bidding process hence competed with each other. But in another case of Volkswagen, relief was granted to two wholly-owned subsidiaries of Volkswagen who entered into an exclusive distribution agreement just because of the capital share owned by its owner company. This confusing approach by courts leaves a grey area for the Single Economic Entity doctrine and its application in the Indian context.

Single Economic Entity doctrine is logical but is in contravention of the legal doctrine of Separate Legal Entity of corporate law. Founded in the celebrated case of Salomon v. Salomon and Co Ltd, a corporate entity is separate from its shareholders and owners, giving it an independent legal existence. 

The aim of this article is to find out whether a separate legal entity can be a single economic entity. This article seeks that whether the application of these two doctrines simultaneously is possible or not. Another aim is to check whether a single economic entity could be punished for infringement of section 3 of competition law despite being incapable to enter into an agreement? For this various secondary sources have been used and explanation is presented in terms of decisions derived by European Union courts. 

Single economic entity doctrine

The EC guidelines on Horizontal Cooperation says that “Companies that form part of the same ‘undertaking’ within the meaning of Article 101(1) are not considered to be competitors for the purposes of these guidelines. Article 101 only applies to agreements between independent undertakings. When a company exercises decisive influence over another company they form a single economic entity and, hence, are part of the same undertaking. The same is true for sister companies, that is to say, companies over which decisive influence is exercised by the same parent company. They are consequently not considered to be competitors even if they are both active on the same relevant product and geographic markets”.

The first time it was held in the Viho case that there could be no competition between the holding company and its wholly-owned subsidiaries due to the absence of independence to determine their own policies and decisions. Later in Hydrotherm v. Compact, it was decided that the agreement between Hydrotherm, Mr Andreoli and two companies fully controlled by him are not infringing the act because they are one economic unit and cannot compete with each other. It clarifies that all economic transactions between Separate legal entities cannot have competitive traits. Therefore, the use of this doctrine can be equated with the piercing of the corporate veil concept of Corporate law because the separateness of legal entities is set aside and persons acting together economically are considered as one and the same.  

It was not considered whether competition between separate legal entities is possible in absence of their owner. Moreover, in the Viho case Advocate General Lenz recognized that: “there is much in favour of the view that courts wished to keep open the possibility of applying Article 101 to certain agreements between group undertakings forming a single economic unit. To determine the applicability of Article 101 between separate legal entities impossibility of competition should not be the criteria but the possibility of an agreement between them. For example, two sister concerns may disagree between themselves to collude in case of no parental intervention, thereby becoming a subject matter of Article 101. Hence, there can be situations when the corporate veil is not lifted and Separate legal status is maintained due to independence in decision making.

Situation in India

In the Public Insurers case, the court disapproved the application of SEE doctrine and quoted “In the present case the appellants are Board managed companies with autonomy in operational matters and cannot be aggregated with DFS, which is not engaged in any activities relating to goods and services.”. Undoubtedly they applied the control and direction test to figure out whether a SEE exists or not. As explained above in EC guidelines, a sister concern should be presumed to be part of a single group, even if they are active on the same platform of business, due to decisive control over them by their owner company. Therefore the judgment seems to be erroneous.

Later in the Volkswagen case, only upon the basis of share capital structure existence of a SEE was determined. Here also, little time was given to check other relevant factors to determine the truth i.e. control and direction. The approach in different cases illustrates that SEE doctrine is at a nascent stage under Indian Anti-trust law and there is a need to delve more into this to frame proper legislation. 

Determination of liability

Article 299 of TFEU provides that commission which imposes a pecuniary obligation on persons other than state are enforceable under the rules of civil procedure under the respective state. It implies that penalties are imposed on persons i.e. a legal entity and not a group (single economic entity). Therefore, the commission will have the authority to choose which of the entities should be held liable. In absence of any specific criteria to choose the infringer, European Court has asked Commission to define one pursuant to which parent companies shall be made jointly and severally liable for cartel-like behaviour on the part of their subsidiaries.

Liability can be implied either on the basis that (i) the legal entity directly participated in the infringement or (ii) a presumption of participation because the liability is not imposed on any legal entity but on an economic entity that is liable for its own behaviour. The Parental liability doctrine on the above rationale was established in Akzo Nobel case and it was held that parent companies should systematically be held severally and jointly liable for anti-competitive infringements committed by their wholly-owned subsidiaries.

Revisiting the parental liability doctrine

Due to several criticisms of parental liability doctrine e.g violating of principle that responsibility in competition law is personal, the courts were required to identify more genuine rationales to apply this doctrine. Those are: “failure to exercise vigilance theory” and “enterprise liability” argument.

1. Failure to exercise vigilance: Article 101 and 102 carves out the “vigilance duty” by conferring upon undertakings an obligation to ensure that their activities do not distort competition.  This becomes an effective criterion to choose a corporate entity to bear responsibility for the infringement. 
2. Enterprise Liability: This reasoning says that when a parent company gets benefits from the activities of their subsidiaries they should also bear the risks attached. 

To determine an undertakings liability important factor to be assessed is economic reality as competition law is guided by actual conduct of undertaking in the market and not by technicalities and it is immaterial whether there is a corporate veil between legal entities or not.

Conclusion

The two contrasting doctrines of single economic entity and separate legal entity have their sacred space in their own legislations of competition law and corporate law respectively but they do find a simultaneous application in anti-trust laws too. As noted above, to determine the nature and relationships of entities infringing competition law the possibility to compete with each other is the criteria but the same is not for determining liability. The penalty can be imposed by identifying an individual’s role and participation in the act because the competition act is personal, thereby a criterion is to check whether they can enter into an agreement or not. In situations where the interests of an individual legal entity will differ from others in group, there is a possibility that agreements can be made. Therefore to levy penalties, separate legal status is to be considered. The answer to the first problem is that there is some possibility of simultaneous application of both the doctrines in competition law.

The second problem seeks whether a SEE can be made liable for infringement of Section 3 of the Competition Act despite the fact of being incapable to enter into an agreement. Answer to this can be found in the above discussed parental liability doctrine and its new theories. The application of section 3 is based on the fact of whether there is an agreement or not. On being established as a Single economic entity the presumption is that there cannot be any agreement due to the absence of independent decision-making power and competition amongst them. But on a perusal of what has been developed in foreign jurisdictions to date there is a scope that SEE can be made liable by creating an onus of responsibility for their owner company. 

Competition Act in India is in a nascent stage and to make giant, wealthy organizations liable for their infringements it is high time to develop and focus on such concepts which can help to trap them and stop anti-competitive activities rather than to find a way for avoiding legal sanctions by them. The judgment in the Public Insurers case was surely made to punish the cartel-like acts of Insurance companies but the path is chosen somehow lack legal authenticity. Therefore, the above-discussed principles should be analyzed in the Indian context, their applicability and adaptability in this country’s scenario.

References 

• S. 2(h), Competition Act, 2012.
• The prohibition on restrictive agreements overview
• <www.lexisnexis.com/uk/lexispsl/competition/document/391329/55KB-7MM1-F187-511S-00000-00/The_prohibition_on_restrictive_agreements_overview# >
• National Insurance Companies Ltd. and Ors. V. Competition Commission of India (2017) Comp LR 1 
• Exclusive Motors Pvt. Ltd. V. Automobili Lamborghini SPA [2014] 121 CLA 230 (CAT) 
• Salomon V. Salomon and Co. L [1896] UKHL 1 [1897] AC 22
• EC guidelines on Horizontal cooperation ,Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements, [2011/C 11/01], para 11
• C-73/95 P Viho Europe BV V. Commission of European Communities [1996] ECR I-5482
• 170/83 Hydrotherm V. Compact [1984] ECR 1984-02999
• Wils “The undertakings as subject of EC competition law and the imputation of infringements to natural or lega lpersons” 6 ECLR [1995] 348
• C-73/95 P Viho Europe BV V. Commission of European Communities [1996] ECR I-5459, para 50
• 467 Copperweld Corp v. Independence Tube Corp [1984] US 769
• National Insurance Companies Ltd. and Ors. V. Competition Commission of India (2017) Comp LR 1
• Exclusive motors pvt ltd v. Automobili lambhorghini SPA [2014] 121 CLA 230 (CAT), p 8-11, 14
• Consolidated version of the Treaty on the Functioning of the European Union Article 299 [2016] OJ C 202 p.176-177
• 15 Report on Competition Policy [2008], European Parliament Resolution [2010] (2009/2173(INI), para 50
• Okeoghene Odudu and David Bailey, ‘The single economic entity doctrine in EU competition law’ [2014] 51CMLR UK Kluwer Law International p. 1747 para 5.3
• C-550/07 P Akzo Nobel Chemicals Ltd. V. European Commission [2010] ECR I-08301

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