Horizontal or vertical ties not required for violation

The Competition Commission of India (CCI) recently held that an exclusive agreement between Hiranandani Hospital and Cryobank India, for collection and banking of stem cells, was anti-competitive. Hiranandani Hospital was fined ₹38.16 million (US$624,000) and barred from entering into any similar agreements in the future.

The CCI also clarified that the scope section 3(1) of the Competition Act, 2002, is wide and although an agreement might not be anti-competitive for the purposes of section 3(3) horizontal agreements (i.e. identical/similar trade of goods or services) or section 3(4) vertical agreements (different levels of production chain of goods or services), it could still fall foul of section 3(1), which prohibits anti-competitive agreements generally.

Facts of the case

The facts in brief are that a pregnant woman, Mrs Jain, entered into an agreement with Life Cell India to avail of its services for banking of stem cells. Mrs Jain registered with Hiranandani Hospital for delivery of her child and requested that Life Cell be permitted to collect umbilical cord blood within 10 minutes of her delivery. The hospital refused and informed her that instead she could use the services of Cryobank India – a competing stem cell banking service provider – since the hospital had an exclusive agreement with Cryobank under which only Cryobank is permitted to collect umbilical cord blood from its patients.

Mrs Jain ultimately went to another hospital for her delivery. Information was filed before the CCI, alleging violation of sections 3(4) and 4 of the Competition Act relating to anti-competitive vertical agreements and abuse of dominance respectively.

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Findings

The Director General’s investigation concluded that Hiranandani Hospital is a dominant player in the provision of maternity services by super specialty hospitals and that the hospital was imposing unfair conditions. The CCI however disagreed and held that there was no contravention of section 4.

The Director General’s investigation also concluded that the agreement violated section 3(4). Hiranandani Hospital contended that the agreement was outside the purview of section 3(4) as the hospital and Cryobank operated in two different markets and were not operating at different stages or levels of same production chain. The CCI struck down this argument on the basis that its mandate is to consider the impact of any agreement which falls within the ambit of section 3(1) and assess if the agreement has an appreciable adverse effect on competition.

The CCI has in essence clarified that section 3(1) of the Competition Act is independent of the parameters set out under the subsequent subsections of section 3. The question then is – are there any specific precautions that parties should take? The answer is not straightforward and will ultimately depend on the facts and circumstances of each case.

This is because section 3(1) is widely worded and does not set out any indicative parameters other than that the agreement must not cause an appreciable adverse effect on competition in India. The only indicators are the generic parameters of section 3 set out under section 19(3) of the Competition Act: (a) creation of barriers to new entrants in the market; (b) driving existing competitors out of the market; (c) foreclosure of competition by hindering entry into the market; (d) accrual of benefits to consumers; (e) improvements in production or distribution of goods or provision of services; (f) promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services.

In a previous case before the CCI (Automobile Dealers Association, Hathras, UP v Global Automobiles Limited and another), the CCI clarified that the existence of factors (a) to (c) will normally indicate contravention while absence will normally indicate no contravention. The presence of factors (d) to (f) is likely to mean no contravention but absence of these factors alone can neither determine violation nor establish efficiency justifications.

In the Hiranandani Hospital case, the CCI accepted that ordinarily enterprises may choose business models which suit their requirements. However, since stem cell banking involves a lock-in arrangement of 21 years and since the market in India is nascent, an exclusive agreement would foreclose the competition and create entry barriers for competitors, affecting not only the quality or price of services offered but also depriving consumers of a choice of service providers. The CCI stated that for the purpose of section 3, it does not need to identify the relevant market but instead has to see if the agreement has anti-competitive effect in any market, which may be the market of the product or service of any party entering into the agreement.

This means that now parties which may be unrelated horizontally or vertically will also need to be cautious while entering into restrictive agreements and more so if such parties are significant players in their respective spheres.

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Amit Tambe is a partner at Trilegal and Kunal Chandra is a counsel. Trilegal is a full-service law firm with offices in Delhi, Mumbai, Bangalore and Hyderabad.