- Apprentice Lawyer
Addressing market failures has assumed a central place in public policy. A market failure may emanate from a variety of sources including monopoly power and other variants of anti-competitive conduct, where a firm controls the market and can set higher prices. A market failure, whether emanating from structure or conduct, exerts tremendous cost on the economy and on consumers.
Competitive dynamics add an angle to market failures. In new age markets such as digital platforms, high-tech markets like pharma, the speed of market dynamics may warrant a swift correction. The speed of correction or remedy of a given market failure defines the efficacy of the intervention in many cases. Hence, the speed of correction or remedy of a given market failure assumes great significance especially in today’s fast-changing economy.
Competition distortions are primarily remedied under the Competition Act, 2002. A remedy typically has two components: time taken to correct a market failure and efficacy of the remedy including penalties. In the absence of any summary statistics, one can reasonably state that a matter which merits due investigations and an order by Competition Commission of India (CCI) may take anywhere between one and five years before it is appealed at National Company Law Appellate Tribunal (NCLAT) and/or the Supreme Court.
As per the CCI Annual Report 2018-19, between 2011 and 2019, only 0.4 percent (net) of the total penalties awarded could be realized. Approximately 35 per cent of CCI orders are appealed at NCLAT. Therefore, long legal proceedings and minimal market correction yielded by penalties or other remedies are at odds with the dynamic nature of market competition. In simple words, by the time a remedy is offered by the legal apparatus, it may have partly or fully lost its usefulness to consumers.
To address the situation of “time economy”, the Competition Law Reform Committee (CLRC) deliberated this issue and suggested that the Competition Act may be amended to bring in settlement and commitment provisions. An avenue to accept commitment of remedies (without admission of guilt) from a company throws open a possibility to address a market distortion without any lengthy investigation and subsequent court proceedings.
Similarly, a settlement mechanism (with admission of guilt) will enable the CCI to terminate a contravention much earlier than it would otherwise take place after due investigations. The CLRC recommendation and subsequent Competition (Amendment) Bill, 2020 (Draft Bill) further the direction adopted by the CCI regarding cartel busting through use of leniency applications. Once put in place, the settlement mechanism will bring in faster “finality” to the outcome of an investigation.
The EU and the US experience
Use of a settlement mechanism is quite revealing, internationally. Regulation 1/2003 introduced settlement decisions as a new enforcement instrument at the European Union (EU) level. In 2008, settlements were introduced for cartel cases. The EU as well as national competition authorities like Germany Federal Cartel Office (FCO) have extensively used settlement mechanisms since their introduction.
Similarly, the US has a longstanding practice of settling a large number of cartel cases through the ‘settlement track’. Such timeliness introduced through a settlement mechanism yields twin benefits: firstly, it allows a competition authority to conserve resources for cases which merit detailed investigations, and secondly, consumers may receive the benefits quickly once a market failure is corrected.
The Indian experience
In India, there are favourable precedents of using the settlement mechanisms. The Securities and Exchange Board of India (SEBI) has brought the SEBI Settlement Regulation, 2014 under the SEBI Act, 1992 for settlement of specific violations of various laws in relation to the securities market by payment of fees without admitting guilt.
Similarly, to settle matters pertaining to income tax, the Settlement Commission was constituted in 1976 under the Income Tax Act, 1961 and the Wealth Tax Act, 1957. An assessee can approach the Settlement Commission at any stage of the proceedings for assessment pending before an Assessing Officer, subject to certain prescribed conditions. The Commission has the power to grant immunity from prosecution from any offence and also from imposition of penalty in cases where the applicants make a full and true disclosure of their income or wealth. The orders passed by the Settlement Commission are conclusive as to the matters stated therein and no appeal lies to any authority against these orders.
The time dividend
From these examples from India and abroad, it is clear that an enforcement agency resolving a case by entering into a settlement or commitment or consent decree with a person or firm accused of having violated the law may be able to extract more favourable terms by agreement. An authority’s ability to obtain concessions, whether up to or beyond the remedies it might obtain at law, reflects the defendant’s comparison of the costs and benefits of litigating as opposed to the costs and benefits of acquiescing to the terms sought by the agency.
Now coming back to the Competition Act, the CCI has been effective in enforcing the leniency regulations and pre-merger consultation with notifying parties. In three out of the last five cartel decisions passed by the CCI, including the first international cartel, the disclosures made by cartel participants themselves were relied upon by the CCI. This shows the effectiveness of the leniency regime in unearthing cartels. The number of cartels busted during the last 3-4 years and the number of combination filings disposed of adequately confirm that the CCI has in-house strength to deliver the dividends of the settlement and commitment to the Indian economy.
While the settlement and commitment provisions in the Draft Bill are welcome, based on India’s own experience and the best practices globally, the new settlement and commitment mechanism may incorporate improvement such as:
Making Settlements Work
If acceptance of settlement by a party leads to a finding of contravention of the Competition Act, the settlement should be made on a “without prejudice” basis, so that the party may still defend itself against any subsequent legal actions. There should be a protection from follow on compensation claims. This is critical since there is no possibility of an appeal against the settlement order under the current wording of the Draft Bill.
If the settlement process fails, the party offering the settlement should be protected from any prejudice. Information and materials from settlement negotiations should not be used in any subsequent investigation or for any other purpose.
If the settlement proposal is accepted by the CCI, the settlement order must state that no proceedings shall be initiated against the applicant in the future by the CCI arising from the “same conduct”.
In the Draft Bill, if the CCI and the party or parties concerned do not reach an agreement on the terms of the settlement, the CCI can reject the application for settlement. The legislation should clarify who are the “parties concerned” to the settlement. Involved parties should be allowed to settle the case amongst themselves prior to the CCI directing an investigation, allowing the informant to withdraw its complaint, or to settle the case at a later stage. The CCI can be subsequently notified of such settlement or withdrawal of information.
The Draft Bill refers to payment of a “sum” further to settlement. The deposit of a monetary sum may not be justified if the settlement terms are on a without prejudice basis. Payments should not be mandatory, but only when required by the CCI.
Settlement provisions should be extended to all ongoing inquiries, since the objective is to ‘restore competition’ and save time and resources for the CCI and the investigated party.
Ensuring that Commitments Deliver
The Draft Bill restricts the commitments process to the investigation stage only and requires that an offer for commitments must be made before the DG report is issued. This timing is too narrow and should be extended. Parties should be able to offer commitments at any time until the final order is passed by the CCI. Major jurisdictions around the world follow the same practice and do not have a fixed timeline for commitment discussions and decisions.
Investigated parties should be able to understand the theory of harm and the underlying factual evidence before offering a commitment. There should be a mechanism whereby an investigated party can appreciate the CCI’s or DG’s preliminary assessment of the findings and evidence gathered. Absent an understanding of potential findings from the investigation process or theories of harm (if any) that may be applied by the DG, any commitment offers would be speculative. Therefore, for this additional reason, commitments should not be restricted to the timelines proposed in the Draft Bill and a party should have the flexibility to offer commitments at any stage.
The commitment order must state that no proceedings shall be initiated against the party for the same conduct in the future by the CCI.
If the commitments are rejected by the CCI, the party offering commitments should be protected from any prejudice. Information and materials from commitment negotiations should not be used in a subsequent investigation or for any other purpose.
Commitments should be extended to all ongoing inquiries, since they save time and resources for the CCI and the investigated party.
Turbocharging Settlements and Commitments
Elsewhere, at Stanford University, competition experts are figuring out how competition authorities can make use of machine learning to address information asymmetries and use computational tools to process data more efficiently and understand practices better. Such adoption of computational tools is bringing the “law time” closer to “market time.”
The Competition Act seeks to promote and protect competition in markets. In the current economic context, when post-COVID recovery is on top of the policy agenda, competition law can provide the economic stimulus needed. Instead of the CCI entangling itself with long legal proceedings, an effective settlement and commitment regime, augmented by computational abilities, can not only scrub “anti-competitive rust” away from our markets, but also unleash healthy entrepreneurship and its consequent benefits to consumers and employees. Therefore, settlement and commitment provisions should be implemented in India at the earliest opportunity.
The author is VB Padode Chair Professor of Business Responsibility at Vijaybhoomi University. His research interests include policy-induced competition distortions and competition policy.