Locus Standi and the digital Hub & Spoke conspiracy: Shackling the competitive spirit

To nip digital anti-competitive practices in the bud, some new competition tools are the need of the hour.
Locus Standi and the digital Hub & Spoke conspiracy: Shackling the competitive spirit

On May 29, the National Company Law Appellate Tribunal (NCLAT) dismissed an appeal challenging the order of the Competition Commission of India (CCI) dismissing a complaint alleging price discrimination and cartelization on the part of cab aggregators Ola and Uber.

This judgment of the NCLAT – Samir Aggarwal v. CCI has raised more questions than answers. Firstly, the Tribunal erred while holding that an informant will have no locus standi before the CCI if it has not been suffered due to the unfair practices of the respondents, and secondly, the Tribunal denied the possibility of the hub and spoke cartel between the Uber/Ola and their respective drivers without understanding the essence of the matter.

Also Read
No price discrimination, cartelization on the part of Ola, Uber: CCI

Locus Standi before the CCI

The NCLAT observed that a person cannot file an information before the CCI unless his legal rights as a consumer or as a beneficiary of healthy competitive practices have been infringed. However, the Legislature has neither prescribed any qualification for the person who wants to file an information nor prescribed any condition which must be fulfilled before an information can be filed under Section 19(1)(a) of the Competition Act, 2002.

Section 19(1) stipulates that an inquiry by the CCI may be carried out by three different methods –

(i) a suo motu inquiry;

(ii) an inquiry upon receipt of information from any person, consumer or their association; and

(iii) an inquiry upon a reference made to it by the Central government or a state government.

While highlighting the scheme of the Act, the CCI has clarified its position, in many instances, noting that a person does not need to be personally aggrieved of any anti-competitive practice to file an information before the CCI. It is to be noted that the expression ‘person’ has a broad and inclusive definition under Section 2(l) of the Act. But the qualifier ‘any’ under section 19(1) postulates even a wider meaning to the term ‘any person’.

The proceedings before the Commission are not ‘in personam’ but are rather proceedings ‘in rem’, affecting an entire market. Therefore, what matters is the substance of an information and not the antecedents or the standing of the Informant. Antecedents of the informant cannot be a ground for the Commission to not take cognizance of abusive conduct of any entity.

The role of an informant is merely to initiate the proceedings for an order under Section 26(1) for direction to DG to investigate, verify and submit the report on the information being so provided. In Shri Surendra Prasad v. CCI (2015), the Competition Appellate Tribunal (COMPAT) held.

"...there is nothing in the plain language of Sections 18 and 19 read with Section 26(1) from which it can be inferred that the Commission has the power to reject the prayer for an investigation into the allegations involving the violation of Sections 3 and 4 only on the ground that the informant does not have a personal interest in the matter or he appears to be acting at the behest of someone else.”

In Central Circuit Cine Association v. Reliance Big Entertainment Pvt. Ltd. (2013), the COMPAT held that the informant does not lack standing before the CCI merely because the rules of the association are binding only on the members. The CCI has the power to take suo motu cognizance of the facts presented before it. Therefore, anyone can attract the attention of the CCI to any anti-competitive practice flourishing in the market.

The CCI was formed to curb anti-competitive practices and abuse of dominant position in the market, which ultimately affects the public at large. Now, the impugned NCLAT judgement precludes whistle-blowers from objecting to any unfair trade practices (e.g. cartels) in the market, which may have serious and far-reaching repercussions, if not corrected, in the antitrust domain of India. Hence, it is hoped that the NCLAT will soon rectify its position in a suitable case.

Hub and Spoke Conundrum

The traditional “Hub and Spoke” arrangement contemplates horizontal restrictions on the ‘spokes’ (manufacturer or supplier) facilitated by a common ‘hub’ (service provider or retailer) without any direct contact between the spokes. In other words, it is an arrangement to exchange strategic information amongst competitors (spokes) indirectly through a hub operating at a different level of the production chain, which also facilitates the stabilization of the cartel.

In a traditional setup, enterprises determine prices of the goods and services on the basis of demand and supply, rival’s prices, customer’s loyalty and market structure etc. But the rapidly evolving digital world has brought the internet and the algorithms to the centre of daily human interactions. In this context of strategic interactions, algorithms might facilitate collusion and assist in the implementation of cartels. Pricing algorithms are a set of computational codes which enable the setting of prices automatically and optimize the profits by using big data.

In this context, a digital “Hub and Spoke” arrangement would be formed when the competitors use the same algorithms or outsource to a common third-party to determine the prices which even though manifest the conscious price parallelism amongst the competitors, anti-trust scrutiny can be circumvented by pleading the defence of unilateral price determination.

Using the same algorithm by all the platforms to stabilize or fix the prices would result in de-facto digital “Hub and Spoke” arrangement as the common algorithm (hub) will be facilitating the co-ordination in prices amongst all the competitors (spokes).

Ola and Uber are technology-based platforms that act as intermediaries to facilitate the provision of services between cab-drivers and riders. The drivers are not the employees of these platforms; rather they function as independent third-party service providers. Since drivers are independent entities registered on the Ola/Uber software, they should have been allowed to compete inter-se on price too. However, they have to charge fares set by the price algorithms of Ola/Uber, which are calculated after deducting the commission of cab-aggregators.

The drivers enter into vertical arrangements with Ola/Uber with the presumption that there will be no competition between cab-drivers inter-se, and prices shall be determined by algorithms. Therefore, when competitors (cab-drivers) used price algorithms to determine the prices through a common agent (Ola/Uber), this arrangement does form a “hub and spoke” conspiracy.

The fare is calculated on the basis of many factors including ride distance and time spent in transit, which may be multiplied during the “surge” period due to changes in demand and supply. During the surge period, Ola/Uber encourage their drivers to use the app to optimise their profits and as an incentive to drivers.

Now, the surge in the prices of Ola/Uber during peak hours or sometimes even during non-peak hours is a common phenomenon. But the real question is – does it occur due to an increase in demand or as a result of pre-determined algorithms? An ‘artificial surge’ may be created by discouraging the drivers not to use the app during non-peak hours which would lead to a decrease in the supply and thereby creating an artificial surge by manipulating the pricing algorithms. Now, this could only be answered after a proper investigation of the fact-finder authority (DG), but unfortunately, for the time being, this is not the case.

The observation of the NCLAT that the US Class Action suit Spencer Meyer v. Travis Kalanick has no application in India because the business model of Uber/Ola does not manifest any restriction on price competition among drivers, does not hold any ground as all the cab-aggregators follow the same business model around the world. Given the foregoing discussion, it seems that there was sufficient prima facie evidence to order the DG’s investigation under Section 26(1).

For the time being, the Tribunal/CCI seems to be far away from assessing digital collusions based on algorithms under the current competition regime. Therefore, to nip digital anti-competitive practices in the bud, some new competition tools like ex-ante regulations for algorithmic collusions are the need of the hour.

Legal provisions regarding Hub and Spoke cartel

Section 3 of the Competition Act prohibits enterprises from making a cartel which is presumed to have an appreciable adverse effect on competition. The Act does not contain any express provision on ‘Hub and Spoke’ cartel, but the inclusive nature of the definition of ‘cartel’ under Section 2(c) provides ample scope for interpreting ‘Hub and Spoke’ arrangements under it. However, the proposed Competition (Amendment) Bill, 2020 will bring ‘Hub and Spoke’ cartel within the definition of ‘cartel’ explicitly.

For some, the digital hub and spoke cartels would be nothing but old wine in a new bottle. Pertinently, the Competition Law Review Committee (CLRC) also noted that a digital collusion is just a virtual form of traditional express collusions. Hence, the ‘digital Hub and Spoke’ cartel will also come under the purview of the proposed amendment due to the technology-neutral language of the Competition Act.

The author is student of Dr Ram Manohar Lohiya National Law University, Lucknow.

Bar and Bench - Indian Legal news