Decoding CCI’s stance on exclusivity agreements – case involving multiplex malls and beverage manufacturers

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Decoding CCI’s stance on exclusivity agreements – case involving multiplex malls and beverage manufacturers 26 March 2019

Introduction

The Competition Commission of India (CCI) recently dismissed a case filed by a social activist alleging harm to consumer welfare in the form of higher prices of beverages sold in multiplex malls viz.-a-viz. retail markets. The decision was delivered on 28 February 2019.

In this update, we have analyzed the procedure adopted by the CCI in the context of exclusive supply and distribution agreements between multiplex malls and manufacturers of beverages and its impact on the jurisprudence of non- horizontal restraints in the Indian market.

Background

Under the Competition Act, 2002 (Act), the commission has the discretion to form an opinion, based on the information provided by an informant, submissions of the opposite party(ies) and publicly available information, on whether or not to proceed with a case. In terms of Section 26(1) of the Act, if the CCI is of the view that the case requires an investigation, then it directs the director general, which is the investigative wing of the CCI, to conduct an investigation into the matter and submit a report for the CCI to act upon.

However, the CCI recently in the case of Mr. Vijay Gopal v Inox Leisure Limited & Hindustan Coca-Cola Beverages Private Limited (Case No. 29/2018)2, dismissed and closed the case in favor of Inox which was alleged to have entered into an exclusive sale and supply agreement with Hindustan Coca-Cola Beverages Private Ltd. (HCCBPL) for selling the latter’s products at increased prices in the premises of Inox.

Key aspects of the case

The key highlights of the decision analyzed in this update are as follows:

On higher prices of beverages within the premises of multiplex cinema theatres : as per the law regulating the prices of goods sold in the Indian markets, identical goods cannot be priced differently.

In this case, the opposite party, HCCBPL introduced a slight difference in the quantity/volume of beverages sold in the premises of Inox cinema theatres as compared to those sold in the retail market. This enabled it to circumvent the restrictions under the Packaged Commodity Rules, 2011 which were amended on June 23, 2017 to prohibit the mischief of dual pricing of identical products – a practice being carried out by adopting a different label viz., “to be sold at select channels”. Even though this case could not reach the stage of an investigation report, the CCI has yet again established the rule that imposing higher prices of a product in and of itself is not per se anti-competitive, unless it is also proved that the entity(ies) involved exercise significant market power and are causing or are likely to cause appreciable adverse effect on competition in the market.

On exclusive beverage supply and distribution agreements: the informant alleged contravention of Section 3(4)(a) and (b) of the Act on the ground that Inox does not sell products of the competitors of HCCBPL (example: Pepsi) in its premises, thus indicating existence of an exclusive supply agreement between the two enterprises. The CCI examined the said agreement and noted the impugned clause that stated: “HCCBPL will act as exclusive partner of Inox for beverage availability in the Multiplexes Cinema Theatres of Inox”.

However, in line with the legislative mandate, the CCI emphasized on the following factors and decided against the possibility of any appreciable adverse effect on competition in the market of sale and supply of beverages:

  • That given the negligible market power of Inox in the market of multiplexes in India, the exclusive supply agreement entered into by it does not cause or is not likely to cause appreciable adverse effect on competition in the market;
  • That the duration of the exclusive agreements was short i.e., for a period of three years and therefore, it does not hold up either party for a long period;
  • That either party can terminate the agreement by giving 60 days’ notice, denoting that Inox had the option to switch to other suppliers of beverages at any point of time.

The CCI was of the view that the competition in the market of sale and supply of beverages was not getting foreclosed as the provisions of the agreement did not create any barriers to entry and exit.

Impact analysis

Non-involvement of the director general makes a strong case for appeal

Even though the CCI noted the outcome of the precedents on the same issue involving the opposite parties, i.e., Inox and HCCBPL, and cited similarity of facts (example: short-term agreements) to support its decision on non-contravention of the provisions of the Act, it bypassed the involvement of the director general, giving rise to a significant ground of appeal to the informant.

Validity of exclusivity agreements and its impact on business entities

It is imperative to note that the existence of the prospect of availing better terms and conditions by either party is an essential element of a market which has sufficient number of players operating in it. By noting that the market for supply of beverages to multiplex cinema theaters is highly contestable owing to the short-term duration of the agreements coupled with the freedom to terminate, the CCI has yet again clarified there cannot be an absolute ban on exclusive agreements since these are not per se anti- competitive. As long as the volume of business of a particular entity constitutes a miniscule/insignificant portion of the total market volume, the entity can afford to enter into exclusive agreements, without finding itself in the radar of the competition watchdog. Thus, owners of closed market of multiplexes and other commercial enterprises, which adopt the strategic choice of entering into contractual arrangements mandating exclusivity, can continue to do so subject to absence of significant market power in their respective markets.

Limited consumer choice

As reiterated through this case, multiplex cinema theaters are free to enjoy their position of privilege and sell only a particular brand of goods. With the CCI citing the availability of other brands and substitutable products in markets outside multiplexes, the limited choice available to movie-goers seems here to stay, unless re-visited by the competition appellate body.

Conclusion

The decision of the CCI addressed in this update may be critical for the manufacturers of beverages as well as multiplex cinema halls as the competition regulator has settled the issue of competition concerns arising out of the exclusive agreements between such enterprises that are situated at different levels of the supply chain.