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  • Saket Sharma

Competition Through Evolution, Not Pre-Selection: A Case Against Ex-Ante Regulations in India

Saket Sharma*

 

I. INTRODUCTION

 

In recent years, the digital market has grown exponentially which has raised regulatory concerns all over the world. In December 2022, the Parliamentary Standing Committee on Finance (“Standing Committee”) presented its 53rd report titled ‘Anti-competitive Practices by Big Tech Companies’. This report advocated for a separate ex-ante regime for digital markets. Pursuant to this report, the Ministry of Corporate Affairs (“MCA”) set up a Committee on Digital Competition Law (“CDCL”). The committee submitted its report with a Draft Digital Competition Bill (“Draft Bill”). The bill advocates for the ex-ante approach, critiquing the inefficacy of the ex-post approach followed by the Competition Commission of India (“CCI”) in digital marketplaces. Furthermore, the Bill seeks to impose these regulations on Systematically Significant Digital Enterprises (“SSDE”), these SSDEs are to be identified on the basis of objective criteria such as turnover, gross merchandise value, etc. MCA vide notification dated 12th March 2024 has invited public comments on the CDCL report and the Draft Bill.

 

The author argues that imposing an ex-ante regime is not appropriately suited to deal with digital ecosystems because it restricts competition and limits our understanding of digital markets. The author suggests an alternative approach of strengthening the ex-post powers of the CCI to better regulate digital markets. Further, the author argues that pre-identification of SSDE is a step back in evolution of competition law and regulates dominance instead of abuse of dominance.

 

 

II. A CASE AGAINST EX-ANTE REGIME

 

Ex-ante means ‘before the event’, i.e., it imposes regulations on the entities before the default has occurred. In the current competition law regime, the CCI follows an ex-post means of regulating competition, which means that the CCI deals on a case-by-case basis and analyses the facts according to the procedure established by the Competition Act, 2002. Therefore, the CCI deals with anti-competitive agreements and abuse of dominance after such contraventions have occurred.

 

The CDCL is cynical of the application of the ex-post approach used by the CCI to digital ecosystems. As per the CDCL and the Standing Committee, digital markets are very dynamic and have the propensity to lead towards a ‘winner-takes-all’ scenario (see Page 15). The CDCL stated that establishing ‘dominance’ and determining ‘relevant market’ are very time-consuming processes during the pendency of which the market may irreversibly tip in the favour of the dominant enterprise. The CDCL further noted that the pendency of matters and the inherent complexity in determining the relevant market are more reasons for the increased time in the redressal of grievances (see Page 34). In this section the author will first establish the inefficacy of the ex-ante regime and then establish that strengthening ex-post regime is a more viable alternative.  

 

A. Problems with Ex-ante Regulations

 

In the ex-ante regime, issues are pre-identified for the purpose of regulation and enterprises are told to abide by these directions. Both the Standing Committee and the CDCL have relied upon the emerging global usage of ex-ante regulations. However, there does not exist a global consensus on the usage of ex-ante regulations to regulate digital markets. In fact, the usage of the same is at a very nascent stage and is widely criticised.  In the EU the Digital Market Act (“DMA”) on which both the committees have relied on, has similar ex-ante provisions. Frederick Jenny, the chair of the OECD Competition Committee, has criticised the DMA, stating that it is stifling competition instead of protecting it.  The report of the European Centre for International Political Economy (“ECIPE”) criticised the ex-ante approach for not being a correct fit for the dynamic digital market because legislations are slow to change which can lead to market failures instead of pre-empting them. This is so because digital markets are still evolving and legislative bodies are not quick to change policies; it creates a risk where ex-ante regulation may become obsolete due to their slow changing nature. The Indian legislative framework is not quick to adapt to market changes, which further makes this risk imminent.  Section 3 of the Draft Bill suggests a 3-year period for updating the criteria for designating an enterprise as an SSDE; the dynamic nature of the digital market can soon turn these ex-ante regulations obsolete. The OECD 2021 report also highlights that ex-ante regulations will have to be constantly reassessed as disruption in digital markets can occur very quickly and specific obligations imposed on the stakeholders may quickly become inapplicable or redundant. Changes in regulatory framework in India are generally slow and courts are not quick to adapt to changes either, this can lead to obsolete restrictions being applied to the market. Ex-post on the other hand, allows for a case-by-case examination which allows courts to identify new trends and adapt accordingly. Further, in the USA, ex-ante regulations have failed to get the support needed because of these criticisms. 

 

Secondly, digital markets are still evolving and the mechanics of digital ecosystems are not fully understood, yet, the ex-ante regime imposes these regulations based on half-baked knowledge of the working of the digital ecosystem. The ex-post system, on the other hand, allows for understanding the workings of the digital market on a case-by-case basis, which could lead to a more nuanced approach. The standing committee has identified ten anti-competitive practices (“ACP”), the CCI is already dealing with almost all these issues on a case-by-case basis. For example, the question of anti-steering provisions and restricting third party apps (Issue number 1 and 8 in the Standing Committee report) were dealt with in the case of XYZ v. Alphabet Inc and Others, Google was held to be in violation of competition law for imposing unfair and discriminatory conditions to only use Google Play’s billing system for paid app downloads and in-app purchases, foreclosing other payment gateways. The CCI has also dealt with the question of Platform Neutrality (Competition Issue No. 2) in the case of Umar Javed and Others v. Google LLC and Another, where abuse of dominance was found against google for pre-installing and primary placement of its own application. Furthermore, the CCI has also dealt with or is currently dealing with other competition issues such as bundling and tying, data usage, deep discounting, exclusive tie-ups, search and ranking preferencing and advertising policies[1]. This is to say that the ex-post approach by the CCI aids in understanding of the complexity of digital marketplaces; thus, the goal should be to aid the CCI and expand the existing framework to incorporate digital markets. Imposing the ex-ante regime which does not have global consensus specifically to digital marketplaces would hinder the much-needed understanding of the digital marketplace and the evolution of competition law to adapt to this new age.

 

Thirdly, in certain cases, an act done by an enterprise may seem prima facie anti-competitive in nature but on closer inspection they were found not to be contravening competition law. For example, in the case of Prachi Agarwal v. UrbanClap, the allegations were of denial of market access; however, the Competition Commission, on receiving the specificities and objective information provided by UrbanClap held that it was not anti-competitive since they were enhancing consumer experience. Similarly, in the case of Harshita Chawla v. Whatsapp, the NCLAT took a nuanced approach and held that the incorporation of WhatsApp pay feature is not anti-competitive due to the existence of multiple comparable payment applications and because the feature was optional for users. It was held that this would not amount to violation of Section 4(2)(d) and (e). In the above two cases, ex-ante regulations may not allow for this as they seem prima facie anti-competitive. The ex-post approach allows for the close inspection of every case and steps which are for the benefit of consumers are not restricted as anti-competitive. Ex-ante regulation, on the other hand, imposes restrictions and codes of conduct on businesses which can potentially deprive consumers of steps taken for their welfare. Due to the lack of nuance in these regulations, it may lead to false positives, potentially stifling innovation in policies and services. Therefore, the ex-post framework allows for the rule-of-reason approach which allows case-by-case inspection, instead of a textbook application of rules to entities. 

 

The CDCL seems to suggest strengthening the CCI's current ex-post regime and a complementary nature between the ex-post regime and the proposed ex-ante regime It is the contention of the author that the lacuna pointed out by both the committees can be resolved by strengthening the ex-post regime and there is no need for introducing the ex-ante regime. The same is elaborated in this next subsection.

 

B. Strengthening the Ex-post Regime is a Viable Alternative

 

Both the CDCL and the Standing Committee have argued that the ex-post framework is time consuming and that the fast-changing nature of the digital market can lead to irreversible damage. However, these contentions can be remedied by amending the existing framework to suit the digital ecosystem. As stated above, the CCI is already tackling the competition issues mentioned by the Standing Committee under the existing framework of Section 3 and 4 the Competition Act, 2002 (“the Act”).

 

With regard to the delay caused by the ex-post framework, Section 33 of the Act gives the CCI the power to give interim measures. In cases where irreversible damage could be caused due to delay in proceedings, the CCI can pass appropriate interim measures to restrain the opposing party from continuing to commit anti-competitive acts or direct them to take appropriate action. Such power can continue till the end of the proceedings. There has been an increase in the demand for interim measures especially in cases involving digital markets because of how quickly harm can be caused in these cases. In FHRAI v. MMT, which was related to digital markets, the CCI granted the interim measures of relisting the hotels which were removed from the MMT website so as to not cause any financial harm during the pendency of proceedings. Such a pro-active use of interim measures can be used to pre-empt similar damages due to delay in proceedings. In the case of CCI v. Steel Authority of India, it was held that the CCI can pass an interim order only if the applicant will suffer irreparable damage in all likelihood. However, a pro-active use of interim measures provides a much simpler and better recourse as opposed to ex-ante regulation since it does not carry the negative effects of having a chilling effect on innovation and over-regulation.

 

As already mentioned, the CCI can deal with the majority of the ACPs identified by the Standing Committee within the existing framework itself. These ACPs can be classified in the broad definitions provided by Section 3 and Section 4 of the Act. For example, anti-steering provisions can be dealt under Section 4(2)(a) (Unfair and Discriminatory conditions or prices) and 4(2)(c) (Denial of Market Access), while deep discounting can be dealt under 4(2)(a). The CCI released a report in 2020 which identified issues in digital markets which overlap with the ACPs identified by the Standing Committee. The CCI report also stated that these issues can be delt under Section 3 and Section 4 of the Competition Act. Since the ACPs identified can already be covered in the existing framework, it is unclear why a separate regime is being implemented to deal with them. The CCI is already doing a commendable job of dealing with digital markets and has also shown prompt action in the above-mentioned case of FHRAI v. MMT by giving interim measures to prevent any irreparable harm. The Competition Law Review Committee (“CLRC”) concluded that the existing framework of competition law is broad enough to deal with digital markets and in case there is a lacuna the same can be incorporated through an amendment.

 

Therefore, strengthening the ex-post framework provides sufficient ground to deal with the emerging digital ecosystem. It also provides an opportunity to understand the workings of the digital ecosystem which ex-ante regulations do not allow. The employment of ex-ante regulations is at a nascent stage and there does not exist any evidence as to whether this new model of competition law governance will be able to deliver on its claims. Further, the ECIPE report also states that there is a lack of clarity as to what are these specific issues that cannot be dealt with within the ex-post framework. The CDCL and the Standing Committee both observe that digital markets are different from traditional markets, which is true. However, mere existence of difference does not mean the existing framework cannot be amended to accommodate the specificities of the new age.

 

III. PRE- IDENTIFICATION OF SSDEs: A STEP BACKWARDS

 

The CDCL has incorporated a quantitative threshold for identifying SSDEs. This criterion dated back to the era of the heavily criticized and now repealed Monopolies and Restrictive Trade Practices Act. 1969 (“MRTP Act”). The assessment of dominance in the MRTP Act was heavily flawed; since the bare existence of dominance was considered bad, this approach led to restriction of competition and stifling of expansion. Similar to the Draft Bill, MRTP relied on strict mathematical criterion for assessing dominance. This approach was disregarded by the Raghavan Committee, and the 2002 Competition Act incorporated different qualitative thresholds for assessing dominance under Section 19. Further, only the abuse of dominance was penalised and not just the mere existence of dominance. The approach taken by the CDCL represents a de-evolution of competition law as it imposes restrictions on enterprises which could potentially lead to anti-competitive conduct in the name of “early detection”.

 

The CDCL superficially seems to address this by allowing both qualitative and quantitative restrictions. However, the qualitative thresholds are only applicable when the enterprise does not fall within the quantitative thresholds. This implies that any corporation falling within the quantitative thresholds will be an SSDE and thus would be subject to regulations no matter what the qualitative thresholds suggest. This approach is very similar to the MRTP Act and should not be followed as it imposes restrictions merely based on dominance determined by unreliable criteria.  

 

The CDCL also considered that certain countries such as Australia and South Korea only impose ex-ante regulations on pre-identified markets, i.e., digital news publishers and mobile app stores respectively. On the other hand, the UK, Japan and Germany enforce ex-ante regulations without identifying any specific markets.  The CDCL, in its bid to incorporate best of both worlds, stated that the draft bill should only be applicable to an “inclusive and predetermined list of Core Digital Services that are susceptible to concentration and anti-competitive behaviour”. For identifying these Core Digital Services, the CDCL suggested that the “CCI’s enforcement practices, market practices and emerging international practices” should be considered. The aim of the CDCL was to provide certainty regarding which Digital Markets will be under regulation. However, this definition of Core Digital Services (“CDS”) is very broad and can encompass almost all digital markets. Further, the central government can also amend this list from time to time, which can lead to confusion among stakeholders as to whether they will be under regulation. This is particularly important since the obligation to self-assess and report rests on the parties. Unlike the countries relied upon by the CDCL, the Draft Bill does not identify any market areas and just provides a broad definition. Therefore, they may virtually add any market area to the list by using these broad qualifiers. Due to these reasons the CDCL fails in its attempt to give certainty as to what areas of digital market they aim to regulate to the parties involved.

 

The broad definition of CDS and the obsolete regime in determining SSDEs may lead to a scenario where enterprises within the digital ecosystem which need not be regulated will be regulated based on quantitative thresholds which may not be reflective of their actual impact in the market. This is especially concerning because the qualitative thresholds are inclusive and not limiting in nature.


IV. CONCLUSION

 

The ex-ante regime may stifle innovation and limit our pursuit of understanding the inner workings of digital ecosystems. The CCI is taking a proactive approach and adapting to the new issues of anti-competitive behaviour in digital markets. Revamping antitrust law does not mean imposition of a regime that is nascent and deficient. The author has analysed the existing framework and suggested necessary changes to aid the CCI in dealing with digital markets. Furthermore, the pre-identification of SSDEs should not be done as it leads to the obsolete approach of ‘big is bad’ in competition law. The new regulatory paradigm for digital markets should focus on strengthening the ex-post framework by supplementing it with additional rules and amendments. Such strengthening should facilitate speedy disposal of cases and greater leeway in passing interim measures.

 

In regulatory authorities, there is often a tendency to restrain rather than regulate new technological developments, as they are commonly viewed as inherently problematic. The aim of the law should be to facilitate technological advancements and not hinder them. A special legislation such as this is required when the existing framework falls short of dealing with emerging advancements. As elaborated in this article, the Competition Act with minimal changes can be applied to digital markets as well. Further, the error costs associated with ex-ante regime are much higher which has not been considered by the CDCL. Given these considerations, the ex-ante regime proves to be an ill-fitting solution to the new age of digital markets.

 

[1] Together We Fight Society v. Apple Inc., CCI, Case No. 24 of 2021, Matrimony.com Limited v. Google LLC and Others, CCI, Case No. 07 and 30 of 2012, In Re: Updated Terms of Service and Privacy Policy for WhatsApp Users, CCI, Suo Moto Case No. 01 of 2021, Delhi Vyapar Mahasangh v. Flipkart Internet Private Limited and Another, CCI, Case No. 40 of 2019.


*Saket Sharma is a 4th Year BA.LLB (Hons) student at the National Law Institute University, Bhopal.

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