Resale Price Maintenance Under Competition Law: A Closer Look At Maruti Suzuki Case

Resale price maintenance (“RPM”) is a price maintenance mechanism where the manufacturing company agrees to sell the product on condition that the purchaser can resell for the stipulated price fixed by the producer, unless it is clearly stated that prices lower than those prices may be charged. This means that although the possession of the goods is with dealers, the resale price is controlled by the producer. These types of agreements are suspicious for regulatory bodies since agreements have an adverse impact on consumers as they directly affect the price at which the product is sold and create an entry barrier, therefore affecting the competition in the market. The courts across various jurisdictions have taken a 'per se' and 'rule of reason' approach to deal with such cases. The per se approach employed in the EU makes RPM per se anti-competitive. Conversely, countries like the USA have transitioned to the 'rule of reason' approach, where the effect of RPM determines initiation of any action against such upstream parties. India has seen an evolving jurisprudence on RPM under its competition law framework. Section 3(4)(e) of the Competition Act, 2002 deals specifically with such vertical restraints. This paper seeks to explore the application of RPM in India, with a particular focus on the landmark In Re: Alleged anti-competitive conduct by Maruti Suzuki India (“Maruti case”).

Anatomy of the Maruti case

A suo motu matter was taken by the Competition Commission of India (“CCI”) by a mail received alleging the company (MSIL) is involved in a policy where the dealers are not permitted to offer discounts beyond what was decided by Maruti Suzuki India Ltd (“MSIL”), and any violation of this policy invites penalties. MSIL hired an independent agency to conduct a Mystery Shopping Audit as a customer to dealerships, checking whether extra discounts are being offered. If found so, the agency would send audio proof of the offer to MSIL management, who, in turn, would send a 'Mystery Shopping Audit Report' via email to the errant dealership asking for clarification. Penalty was levied if the clarification given by dealers was not satisfactory.

The Directorate General (“DG”) conducted a thorough investigation and found that MSIL had a significant market share of 51.22% in FY 2018-19. Evidence was gathered from many emails exchanged between MSIL and its dealers, indicating MSIL's direct involvement in enforcing the Discount Control Policy. Notably, in Pune, Maharashtra, dealerships were allegedly required to pay a penalty via cheque in the name of Ms. Swati Kale, wife of Mr. Vinod Kale, Vice-President of an MSIL dealership. The emails also showed that MSIL tracked the penalties imposed, their recovery, and even the utilisation of the penalty amounts, further solidifying its role in enforcing the policy. Based on the reports and careful analysis of the evidence presented, CCI held that MSIL violated Section 3(4)(e).

RPM jurisprudence and the Maruti Case

CCI has adjudicated around 29 cases to date, dealing with RPM, and found a violation of Section 3(4)(e) in very few cases. Therefore, factors preventing CCI from imposing penalties warrant close examination. In a landmark case, M/s ESYS Information Technologies Pvt. Ltd vs Intel Corporation (Intel Inc.), it held that merely suggesting resale prices does not constitute RPM. To prove a violation of Section 3(4)(e), the Minimum Resale Price (“MSP”) needs to be enforced by the upstream party. In another case, Ghanshyam Dass Vij and Bajaj Corp. Ltd., there was the presence of a proactive measure by the upstream party; however, the CCI established that the proactive measure needed to have an adverse impact on competition (AAEC) in the relevant market, taking into consideration the factors listed in Section 19(3) of the act. Another clarification was made by CCI in Shubham Sanitarywares v HSIL Limited, stating that Section 3(4)(e) specifically targets the setting of an MSP. An agreement that caps the price above which the downstream party cannot sell does not attract Section 3(4)(e). Finally, in the In Re: Enterprise Solutions India Pvt Ltd v Hyundai Motors India Ltd (“Hyundai case”), CCI imposed a penalty ruling that Hyundai had imposed vertical restraints of RPM by implementing a discount control mechanism that penalised dealers for offering discounts exceeding a specified limit. However, the order was set aside by the National Company Law Appellate Tribunal (“NCLAT”) in Hyundai Motors India Ltd v Competition Commission of India due to a lack of evidence and proper delineation of the relevant market.

The Maruti Case was the culmination of all cases, considering no such factor was left by the upstream party to avoid a penalty. Contrasting with the Intel case, the discount policy was not merely suggestive but enforceable. Similarly, the question of the adverse impact on competition (AAEC) in the relevant market was also addressed through the significant share in the passenger vehicle segment market. While market share is a determining factor, CCI failed to provide a bright-line test for market share. For instance, in Jasper Infotech Pvt. Ltd, v KAFF Appliances (India) Pvt. Limited, CCI commenced an investigation where the opposing party's market share was 28%, basing the conduct of the party causing AAEC. On the same note, in the Federation of Hotel & Restaurant Associations of India (FHRAI) and others. v. MakeMyTrip India Pvt. Ltd. and Ors., while directing an investigation into an alleged agreement between Make My Trip and OYO based on the reasoning that both have a significant presence in their respective market, and any agreement that leads to refusal to deal with some players or exclusive arrangement with some players may potentially have an adverse effect on competition. So, there is no fixed market share above which it can be said that CCI would intervene and impose a penalty. While there is no test, the Maruti case would surely be fulfilling a significant market share test since it holds around 50 % market share in the market for passenger vehicles. It's pertinent to note that, applying market share criteria, the CCI took the view that MSIL will also reduce the inter-brand competition. The reasoning was that other manufacturers would easily monitor the prices and factor in their pricing strategy, therefore softening the competition. However, it can also be the other way round. Competitors might take it as an advantage by reducing the price and therefore increasing their sales.

Another point of gap was 'evidence' in the Hyundai case, which was fulfilled in the Maruti case. In the Hyundai case, NCLAT dismissed the CCI order, emphasizing that a violation of Section 3(4)(e) cannot be ruled out until it is proved by the 'Commission' with the help of any evidence. NCALT reasoned that CCI failed to investigate evidence and relied on DG's report solely to rule against Hyundai. It held that the commission is expected to analyse the report and read it in conjunction with other evidence on record, and then to form its final opinion as to whether such a report is worthy of reliance or not. In the Maruti case, CCI again relied on DG's reports, including emails that were analysed to conclude. The difference was in the Hyundai case, where DG relied on e-mails provided by the Informants without annexing the mandatory certificate under the Evidence Act, 1872, which barred CCI from considering those. Hence, CCI relied on DG's report, which could not go into the inquiry and analysis that was done in the Maruti case, where CCI read the attached mails and analysed those, and the judgment was delivered based on CCI's analysis.

RPM and Free Riding

Aside from the debates on the factors required to set up RPM, MSIL challenged the effects of RPM itself. MSIL posited that RPM, with its Discount Control Policy, would have pro-competitive effects such as solving the problem of free riding. This issue is highlighted by many scholars delving into the beneficial competitive impacts of RPM, especially in terms of how it affects service level decisions. The argument is that some retailers choose to offer services like sales support and promotional activities with their products. Without a minimum RPM, sellers will be incentivized to reduce such services, thus "free riding" on the labor of others providing similar services.^[1] Buyers, likewise, are incentivized to free ride by consuming related services from one seller while buying goods at a reduced price from another seller. In these settings, applying for an RPM inhibits free riding by maintaining uniform pricing among sellers. With uniform pricing, consumers have less incentive to go for ancillary services from one shop while purchasing products from another. Additionally, better profit margins under minimum RPM can encourage retailers to increase related services, which will generate more demand and revenue for producers. Such factors enhance non-price competition between retailers.

Though such arguments are convincing, the CCI rebutted MSIL's assertions by holding that the Standard Operating Procedures (“SOP”) and Sales Process Guidelines (“SPG”) drawn up by MSIL clearly state and comprehensively outline the guidelines on the services to be rendered by MSIL dealers to customers and associated pre-sales activities. Moreover, MSIL also ensures active monitoring of such services via Market Share Agreements (“MSAs”) and imposition of fines. With these exhaustive dealer instructions coupled with enforcement practices, the risk of problems like free riding is greatly minimised. All MSIL dealers must follow the SOP/SPG, and non-compliance is punished. The CCI rejected MSIL's argument that the SOPs/SPGs were insufficient and specifically declared that vertical restraints like RPM don't solve the issue of free riding. But the court did not specify what remedies could be applied when a manufacturer does not furnish SOPs, thus leaving the free-riding aspect to case-by-case assessment, just as it could not determine a clear benchmark for substantial market share.

The Maruti Suzuki case elucidated some key areas of RPM enforcement under Section 3(4)(e) of the Competition Act, 2002. Some issues are still undecided in India's RPM jurisprudence. The CCI has not defined a specific threshold for what amounts to significant market power but has taken a case-by-case approach. Concomitantly, even as the defense of free-riding was spurned in MSIL's instance, given prevalent service standards enforcement, the Commission has reserved to itself the possibility of considering this defense on a case-by-case basis for those manufacturers that do not have such detailed SOPs. As India's competition law evolves, the MSIL case is informative on how RPM cases will be assessed, exemplifying the CCI's desire to adhere to a rule of reason approach, balancing evidence, market power, and competitive impacts.

Views Are Personal. 

References

1. Amit Bansal, Nandita Jain and Prasanna Sakhadeo, 'Debate on the Legality of Resale Price Maintenance: Evidence from across Countries and Time Periods' (2021) Centre for Competition Law and Economics, National Law University Jodhpur, Working Paper No. 002/21. The paper argues that the legality of resale price maintenance (RPM) varies across jurisdictions and time periods, reflecting a shift from a per se illegality approach to a more nuanced, effects-based analysis. ↑