Jurisdiction - India
Reports and Analysis
India – Settlements Under The Competition Act: A New Dawn?

26 May, 2015

 

 

Introduction


While settlements are a widely used regulatory mechanism across the world, India is yet to see settlements become part of the antitrust enforcement matrix. The Competition Act gives CCI wide discretion to deal with enterprises or persons found to be in contravention of the Competition Act. Upon inquiry into anti-competitive agreements or conduct amounting to abuse of dominance, the CCI has the power to not only impose significant penalties, but also ‘pass such other order or issue such directions as it may deem fit’1. Whether this wide discretion endows CCI with the power to accept settlements/commitments2, as an appropriate remedy for anticompetitive conduct, is a question that still lacks a clear and final answer. However, the issue has come to fore again in light of the Hon’ble Madras High Court’s recent decision in Tamil Nadu Film Exhibitors Association v. CCI & Ors.3 (‘HC Decision’) which could well see settlements/commitments becoming an important part of competition enforcement in India.
In this article, we review the enforcement measures that are available under the Competition Act and analyze the role of settlements/commitments as means of effective enforcement. To this end, we examine domestic jurisprudence on settlements/commitments, both within the competition law sphere and outside, and also look at relevant international practices.


Enforcement Measures Under The Competition Act


The current scheme of the Competition Act envisages the following key stages in an investigation of alleged anti-competitive agreements (Section 3 of the Competition Act) and abuse of dominance (Section 4 of the Competition Act): (i) CCI first forms an opinion on whether there exists a prima facie case, which merits further investigation; (ii) if there is such a prima facie case, CCI directs the Director General (‘DG’) to conduct an investigation into the matter; (iii) DG produces a report based on his findings, (iv) if DG report recommends that there has been a contravention of the Competition Act, CCI may conduct further inquiry; and (v) if the CCI finds that there has been a contravention of Sections 3 or 4, it can exercise the powers granted to it under Section 27 of the Competition Act.


Section 27 of the Competition Act gives CCI a wide berth to pass orders once it finds there has been a contravention of Sections 3 and/or Section 4. Among others, CCI may impose large financial penalties on the erring enterprises. Under Section 27 (b) of the Competition Act, in the case of anti-competitive agreements and abuse of dominance, a fine imposed by CCI may extend up to a maximum of ten percent of the average turnover for three preceding financial years of each party to the agreement or the entity found to have abused its dominant position. Additionally, in the case of a cartel agreement, CCI is empowered to levy fines which may extend up to the higher of three times of each company’s profit for each year of continuance of the cartel agreement or ten per cent of the total turnover for each year of the cartel agreement.


Apart from just monetary penalties, Section 27 of the Competition Act also empowers CCI to, (a) direct the persons or enterprises to discontinue the anti-competitive agreement or abuse of dominant position; (b) direct that the agreements be modified per CCI’s specifications; and (c) pass such order or issue such directions as it may deem fit.


Domestic Jurisprudence On Settlement Mechanisms


The concept of settlement through commitments is not alien to the Indian legal system. For example, under Section 245C of the Income Tax Act 1961 (‘IT Act’), settlement is possible provided the applicant provides a full and true disclosure of his undisclosed income and the manner in which such income has been derived. The applicant must also disclose the additional amount of income tax payable by him. There exists a Settlement Commission (established by the Central Government under Section 245B of the IT Act) to which an application to settle must be directed. The Settlement Commission must then decide whether to allow or reject the application based on the facts of the case and complexity of the investigation. It was even clarified by the Supreme Court of India in CIT v. Bhattacharjee 4 that the purpose of settlement is not to provide a rescue shelter for big tax-dodgers who indulge in criminal activities by approaching the Settlement Commission. The Settlement Commission can entertain any ‘case’, i.e. any proceeding under the IT Act for the assessment or reassessment of any person, or appeal or revision in connection with such assessment or reassessment (Section 245A(b)of the IT Act).


Moreover, assessment proceedings need not be stayed during the pendency of a settlement application. However, once the Settlement Commission allows the settlement, an assessing officer cannot levy any penalty or interest. The Settlement Commission may also grant immunity from prosecution or imposition of penalty in respect to the case covered by the settlement.


The Central Excise Act 1944 also contains a settlement mechanism in Section 32E, which mandates full and true disclosure to the Settlement Commission. The Settlement Commission may call for the relevant records from the Commissioner of Central Excise, and even direct the Commissioner (Investigation) to conduct further inquiry if required. A settlement order may be passed based on an examination of the records and the report of the Commissioner of Central Excise and any additional report prepared by the Commissioner (Investigation) (as provided for under Section 32F(7) of the Central Excise Act 1944).


International Jurisprudence On Competition Enforcement Through Settlements/ Commitments


1. European Union


The predecessor to the European Commission’s (‘EC’) Modernisation Regulation (Regulation 1/2003) did not expressly provide for the settlement of cases. Despite this, records show that most cases were settled between the EC and the undertakings under investigation, without any formal decision being taken, or a suspension of the proceedings. The current regime, i.e. Regulation 1/2003, expressly provides for such a mechanism in Article 9.


Settlement is possible at EC if during the course of proceedings that could lead to a prohibition decision, undertakings offer commitments to the Commission that meet its concerns. A decision is then taken to make these commitments binding, while stating that there do not exist any further grounds for investigation by EC. Most importantly, the decision does not conclude whether or not there has been an infringement.5
There is sufficient guidance to accompany the power to issue a settlement decision. For instance, EC may only make commitments binding insofar as they are necessary and proportionate to address the competition concerns identified. EC does not have to arrive at a conclusion on guilt, but it does have to establish that there were competition concerns, which were addressed by the commitments. A period of at least one month is required to be given for interested parties to submit their comments on the proposed commitments. Failure to comply with commitments exposes the undertakings concerned to significant penalties of up to 10% of their turnover in the previous year. A daily penalty of up to 5% of average daily turnover in the preceding year may also be imposed in order to mandate compliance with the commitments.


2. United States Of America


In the United States, both the Federal Trade Commission and the Department of Justice (‘DOJ’) can enter into settlements (consent decrees) in antitrust cases. Antitrust settlements by DOJ are conducted under the Tunney Act 1974 (‘Tunney Act’), and need to be considered by a district court before it comes into effect. DOJ must file, along with the consent decree, a Competitive Impact Statement (‘CIS’), i.e. a summary and the impact of the settlement, which will be published in the Federal Register for any public/third party comments. The defendant must submit a record of all its communication with the government for the purpose of the settlement (except those made by the counsel on record).


While considering a consent decree, the court shall determine whether the consent decree is in ‘public interest’. As per the Tunney Act, this could extend to: (a) the competitive impact, including termination of alleged violations, provisions for enforcement and modification, duration or relief sought, anticipated effects of alternative remedies actually considered, and any other considerations bearing upon the adequacy of such judgment; and (b) the impact of entry of such judgment upon the public generally and individuals alleging specific injury from the violations set forth in the complaint including consideration of the public benefit, if any, to be derived from a determination of the issues at trial.

 

In practice, most courts approve consent decrees. In United States v. Microsoft,6 the DC Circuit court held that as long as a consent decree does not make a mockery of judicial power, district courts must approve consent decrees under the Tunney Act. Notably, the United States requires an admission of guilt or confession before a cartel participant can settle. 7 Other jurisdictions also have settlement mechanisms in place such as Brazil (a notable example of settlement was of a cement cartel in 2007), Australia, Canada and Israel.


Potential Impact Of The HC Decision On Competition Enforcement In India


In light of the preceding discussion, the HC Decision assumes great significance when it comes to competition enforcement in India. By way of context, Raaj Kamal Films International (‘Raaj Kamal Films’) had sought CCI’s intervention when faced with a boycott of its movie Viswaroopam by the Tamil Nadu Film Exhibitors Association (‘TNFEA’). CCI found prima facie merit in the allegations made by Raaj Kamal Films and directed DG to investigate the matter. While DG’s investigation was going on, TNFEA approached the Madras High Court and the Madras High Court, while allowing DG to complete his investigation, directed CCI not to proceed with the matter without the court’s permission. While DG was finalising his report, both Raaj Kamal Films and TNFEA reached a settlement whereby Raaj Kamal Films agreed to withdraw its complaint against TNFEA at CCI. Both parties approached the Madras High Court for recording their compromise memo. However, CCI submitted before the Madras High Court that such an inter-party settlement could not negate the proceedings under the Competition Act. Further, CCI submitted that DG had already submitted its final report to CCI wherein TNFEA was found in contravention of the Competition Act.


Madras High Court framed the following relevant issue – “whether it is possible, in the context of the scheme of the Competition Act, 2002, for two adversaries to reach a settlement, thereby closing the doors for an investigation or inquiry”.8


Analyzing the issue, Madras High Court observed that – (i) CCI is not a body set up to decide private disputes between individuals but rather, its mandate is to prevent adverse effects on competition; and (ii) CCI has residuary powers under Section 27(g) of the Competition Act to pass such orders or issue such directions as it may deem fit. The HC Decision goes on to hold that the scheme of the Competition Act does allow parties to enter into a compromise/settlement and CCI to accept such a compromise/settlement if CCI is satisfied that it: (i) would not lead to continuance of anti-competitive practices; (ii) would not allow an abuse of dominance to continue; and (iii) would not be prejudicial to consumer interests or freedom of trade.9 Madras High Court directed TNFEA to file the compromise/settlement memorandum before CCI which would examine the compromise/settlement and either accept it (with or without modifications) or reject it and such decision by CCI must be arrived at after a proper consideration of the three factors listed above.


Conclusion

 

Though the HC Decision appears to allow the entry of settlements/compromises into the landscape of competition enforcement in India, several issues still remain and require resolution. First, the HC Decision refers to the residuary powers enjoyed by CCI under Section 27(g) of the Competition Act; however, Section 27 applies only to situations where CCI has already arrived at a finding of contravention. We do not have any clarity yet on whether CCI can accept a settlement/compromise at a stage where it has not yet reached a finding of contravention. Secondly, the HC Decision dealt only with the issue of inter-party settlement/ compromise and not whether parties can make commitments to the CCI directly, as is allowed in many international jurisdictions. Interesting times await competition enforcement in India and it remains to be seen how the CCI deals with the issue of settlements/commitments now in light of the HC Decision.

 

End Notes:

 

1 Section 27 of the Competition Act


2 Settlements/commitments here broadly refer to compromises/agreements between parties as well as voluntary
commitments made by the parties to CCI.


3 W.A. No. 1806 and 1807 of 2013.

 

4 118 ITR 461


5 This is unlike the position under Section 27 of the Competition Act, wherein the CCI can issue orders only upon finding a contravention of Section 3 or 4 of the Competition Act.

 

6 56 F.3d 1448


7 This appears to be more in line with the legal position under Section 27 of the Competition Act wherein CCI must arrive at a finding of contravention before issuing any order under Section 27.


8 Supra note 7.


9  Supra note 7.


AZB      

 

For further information, please contact:

 

Zia Mody, AZB & Partners
zia.mody@azbpartners.com

 

Abhijit Joshi, AZB & Partners 
abhijit.joshi@azbpartners.com

Shuva Mandal, AZB & Partners 
shuva.mandal@azbpartners.com

 

Samir Gandhi, AZB & Partners
samir.gandhi@azbpartners.com

Percy Billimoria, AZB & Partners 
percy.billimoria@azbpartners.com

 

Aditya Bhat, AZB & Partners 
aditya.bhat@azbpartners.com

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