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SOLVING THE ENIGMA OF HUB-AND-SPOKE CARTELS- APPLICABILITY AND ENFORCEMENT

[Ansruta Debnath is a student at National Law University, Odisha]


The Competition (Amendment) Act, 2023 (‘the Act’) has been enacted and among the myriad of changes it brought, a key feature was the explicit recognition of the hub-and-spoke model of cartels. Although the term has not been used, the amendment in the form of a Proviso in Section 3(3) of the Act covers the same. In light of the broadening of the understanding of anti-competitive agreements, this article aims to explain the criteria that may lead to the formation and prosecution of hub-and-spoke cartels while tracing the key issues that continue to remain unaddressed in the current regime, especially in relation to over-deterrence.


Understanding Hub and Spoke Cartels: A short case study


It will be apt to understand the dynamics of hub-and-spoke cartels via an example. During the late 2000s, Apple was keen on entering the market for e-books. Amazon was already a strong market player herein, with a business model where they purchased e-books from various publishers at fixed wholesale prices and then sold them on their platform at competitively low prices. To control the market, Apple allowed publishers to sell e-books directly but also imposed a price parity clause which stated that the publisher could not sell e-books on Apple’s platform at higher prices than other platforms, knowing well that this clause could not be implemented unless the all the publishers individually re-negotiated with Amazon and entered into agency contracts with the latter.

Apple hence, became the middleman among the publishers for communication among them regarding their negotiations with Amazon. By March 2010, the majority of prominent publishers had successfully established agency agreements with Amazon and accordingly, iBookstore was launched. This stunt became the subject of prosecution from the Department of Justice which found the acts of them as cartelization, collusion and tantamount to violation of Section 1 of the Sherman Act, 1890. While the publishers settled, Apple fought the case and eventually lost.

The above-mentioned case clearly demonstrates what is known as a hub-and-spoke cartel. A hub-and-spoke model is a form of indirect cartelization between entities that engage in the sharing of sensitive information through a third party, which are generally in a different stage of production. Thus, a horizontal agreement, in the form of tacit collusion exists, between the “spokes” exists due to independent, mostly legal, agreements between each spoke and a single “hub”. In the above-mentioned case, Apple was the hub while all the other publishers were spokes. While the spokes i.e., the publishers never came in direct contact with each other, they indirectly formed a cartel to strong-arm Amazon into re-negotiating their contracts. This was held to be blatantly unethical as it was giving Apple an unfair advantage to control the prices of e-books sold on Amazon. 


The Indian context in comparison with foreign jurisdictions


Cartels, which are horizontal associations between entities engaged in identical or similar trade of goods, have been penalised under Section 3(3) of the Act. While the Indian Competition regime, in line with global standards, has been heavily focused on preventing hard-core cartels, there has been an acute deficiency in regulating vertical restraints leading to indirect horizontal collusion. When caught, while the cartels per se could be prosecuted on established norms, given the indirect nature of the communications, such cartels were quite difficult to prove. Another major problem was the lack of means of ascribing penalty on the hub, according to the bare provisions of the Act.

The jurisprudence vis-à-vis hub-and-spoke cartels has developed primarily through judicial precedents in the United States (“US”) and European Union (“EU”), specifically the United Kingdom (“UK”). In the UK, hub-and-spoke models necessitate there must be some kind of agreement or “concerted practice” done with the intention to indulge in collusive practices. In the US, the concept of spokes attached to a “rim” connecting the horizontal spokes, which are otherwise just individual parties to parallel vertical agreements, has always been prevalent since the 1930s.

The Indian Courts, in line with EU and US jurisprudence have established that in cases such as these, the hub had to be held in the same liability as the spokes. The most important case that specifically mentioned this point was the Samir Aggarwal Uber case which was confirmed by the Supreme Court of India and stated that hubs must be a third-party platform which is the instrument of exchange of sensitive information. The case also held that conspiracy to fix prices through collusion, in one way or another, between the spokes was very essential for a case of the hub-and-spoke cartel to be concretised. The “spokes” must act because of an inter se agreement between each other. This is in line with the general understanding of “agreement” between entities which has been aptly described by the European Court of Justice in Bayern AG v. Commission as a “concurrence of wills” regardless of the “form in which (it) manifested”.

However, the competition statutes in these foreign jurisdictions had always been much broader and the bar against such hub and spoke models were implicit within the language of the relevant statute. The Indian Competition Act is however much more specific and hence, to remedy the loophole, an amendment was added in Section 3(3) of the Act such that an entity i.e., the hub participating or intending to participate in the furtherance of agreements which lead to cartelization could also be held liable for anti-competitive conduct.


Correcting an inadequate regime and way forward


Pre-amendment, there was no statutory recognition of hub-and-spoke cartels. Through the newly amended Section 3 of the Act, entities (spokes) which intentionally indulge in cartel-like activities with the facilitation of a third-party unrelated entity (hub) shall be considered liable. However, with the other amendments in place, it is unclear whether entities involved in the hub-and-spoke model would be eligible for leniency. In the Hasbro Case (supra), Hasbro as the hub was given leniency by the OFT for full cooperation while the two retail stores were penalised for collusion through Hasbro.

Further, in its current suggested state, these provisions could potentially lead to a surge in enforcement cases. Therefore, it is essential to establish explicit and transparent guidelines for the evidentiary standards that the Competition Commission of India (“CCI”) must adhere to when evaluating hub-and-spoke cartels, accompanied by the issuance of appropriate guidelines to rectify among other things the lack of clarity on the type of “exchange of information” that can sufficiently constitute indirect cartelization.

As a marked departure from the EU regime where hub and spoke models are penalised with due emphasis given to intention, for the Indian regime, following the blueprint of Section 3, a per se approach will be taken and there will be a rebuttable presumption of the anticompetitive nature of such agreements. Given the practice followed in foreign jurisdictions, the CCI through its investigations should mandatorily show agreements between the hub and the spokes and this is quite a high evidentiary burden. This is required as there is a very high chance of over-deterrence as given the dynamic nature of online platforms and algorithmic collusions, entities might find themselves penalised for being hubs without having the intention to do so.


While the Competition Law Review Committee in its 2019 Report recommended that intention should not be an essential factor and the Act follows the same standard, as the technological market stands today, it seems extremely dangerous for the presumption of guilt of the alleged hub. Accordingly, guidelines should first put the burden on the CCI to prove the guilt of the “hub” instead of placing the entire burden of proof on the latter.


Conclusion


The preceding discussion has shown the global standards for determining the formation of the anti-competitive hub and spoke arrangements while at the same time drawing a distinction between deterrence and over-deterrence. The lack of Indian precedents in this regard makes it extremely difficult to predict CCI’s stance regarding the standard that entities must maintain especially in light of the difficulties posed by online markets and the development of technology. Hence, proper guidelines are a need of the hour to prevent the enforcement floodgates from opening on unsuspecting entities.

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