Competition Law

Break-up of Dominant Enterprises: It’s Not Me, its You [Part II: Understanding the law of Breaks-ups]

The law of breakup of monopolies/dominant companies differs across jurisdictions. In this article, the Author analyses the law of breakups in the United States and India.

In this series of articles, the author makes a holistic analysis of the concept of break-up/division of dominant enterprises/monopolies along with the jurisprudence on the subject. The other parts of this series can be found here:

Part I –Understanding the Remedy of Break-up of Dominant Enterprises

Part II – Understanding the Law of Break-ups

 

1. American Perspective

Under Section 2 of the Sherman Antitrust Act, 1890 (“Sherman Act”) monopolization has been prohibited in its various forms. The Supreme Court of the United States of America (“SCUS”) in the case of Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko, LLP has interpreted the monopolization offence to require both monopoly power in the market along with anticompetitive conduct. Just being a monopoly, and even charging monopoly prices, are not themselves violations, because monopoly may be achieved through competition on the merits, which benefits consumers and society.

In the US, the Federal Trade Commission (“FTC”) opts to pursue behavioural or structural remedies in Monopolization cases in order to stop the illegal conduct. The SCUS in the case of United States v. E. I. du Pont de Nemours & Co. had held that “divestiture or dissolution has traditionally been the remedy for Sherman Act violations whose heart is intercorporate combination and control”. Very few monopolization breakup cases have been brought up by the US Government and up till 1999, only 20% of the cases brought have been successful and otherwise focusing only on the non-merger cases, the percentage drops below 10%.[1] As an essential safeguard, the burden and standard of proof are taken to be very high for the Government to be able to effect a division through the judicial process.

In the US, there is a substantial point of difference in the process of affecting a break-up compared to India. In the US, the FTC has to file a civil suit before the District Judge and prove its case for monopolization under the Sherman Act against the company or group and thereon, prove why the remedy of a break-up is appropriate in that particular case. This means that the Regulator cannot act merely on its whims and make a decision. Only when the judge affirms the monopolization of the company/group and the appropriateness of the remedy can the breakup be affected. Furthermore, the power to break-up monopolies in the US arises from the inherent powers of the Court and not the Sheman Act itself.

The American cases of monopolization are many. While many a times the FTC has failed, it has been successful in pursuing the division of companies like Standard Oil, American Tobacco, Alcoa, Paramount, and AT&T. A study of these decisions shows that the Government’s pursuit of against such companies has many times lasted for decades altogether, while the Government persists on its position again and again. An egregious example of this is the case of breakup of Standard Oil whereby the Department of Justice of the US recently moved a Court to end the 1911 Decree ordering the breakup. This concluded the 108-year-old Decree.  Fascinating!

 

2. Indian Perspective

Under the Competition Act, abuse of dominant position is condemned and merely being a dominant entity does not in and of itself warrant action by the CCI. However, where an enterprise or group does hold a dominant position, the Competition Act places a special responsibility on them to not abuse such a dominant position.[2] An exception to the rule is found under Section 28 of the Competition Act. Herein, the CCI is vested with the power to direct for the division of an enterprise enjoying dominant position to ensure that such an Enterprise does not abuse its dominant position. This is a discretionary and pre-emptive power vested with the CCI, which, acting in the interest of the market, competition and the customers, is of the view that there is an abuse of dominant position eminent, can order for the division of the Dominant Enterprise. Section 28 of the Act is reproduced as under:

 

28. Division of enterprise enjoying dominant position

(1) The Commission may, notwithstanding anything contained in any other law for the time being in force, by order in writing, direct division of an enterprise enjoying dominant position to ensure that such enterprise does not abuse its dominant position.

(2) In particular, and without prejudice to the generality of the foregoing powers, the order referred to in sub-section (1) may provide for all or any of the following matters, namely:—

(a)  the transfer or vesting of property, rights, liabilities or obligations;

(b)  the adjustment of contracts either by discharge or reduction of any liability or obligation or otherwise;

(c)  the creation, allotment, surrender or cancellation of any shares, stocks or securities; 

(e)  the formation or winding up of an enterprise or the amendment of

the memorandum of association or articles of association or any

other instruments regulating the business of any enterprise;

(f)  the extent to which, and the circumstances in which, provisions of the order affecting an enterprise may be altered by the enterprise

and the registration thereof;

(g) any other matter which may be necessary to give effect to the

division of the enterprise.

(3) Notwithstanding anything contained in any other law for the time being in force or in any contract or in any memorandum or articles of association, an officer of a company who ceases to hold office as such in consequence of the division of an enterprise shall not be entitled to claim any compensation for such cesser.

 

1.1. Division for holding a dominant position

Contrary to US jurisprudence on breakups, Section 28 of the Competition Act, 2002 stipulates that CCI may order for the division of any Enterprise that holds a Dominant Position, in order to prevent such Enterprise from abusing its dominant position. This differs from the trite principle under competition law that merely holding a dominant position is not prohibited, its abuse is. This aspect of Section 28 seems to be a remnant of the prohibitory regime under the MRTP Act that has made its way to the Competition Act.

 

1.2. Too much power in the hands of CCI

On the recommendation of the Report of the High-Level Committee on Competition Law and Policy, headed by Mr S. V. S. Raghavan (“Raghavan Committee Report”), CCI held an advisory jurisdiction with regard to the division of dominant enterprises where the final call vested with the Central Government. However, from 2007, CCI holds the final call in this matter.

Section 28 of the Competition Act casts a very wide net whereby, a division can be affected in numerous instances of both post-merger and non-merger dominance cases. This power in the hands of CCI is imbalanced looking to its overwhelming implications and the low requirement for affecting it. While CCI does hold similar powers under its combination regulation role, the decision matrix for affecting a division carries a higher standard of proof compared to Section 28. It is true that post-decision, the aggrieved Enterprise has numerous recourses against the final decision of CCI but, those are curative and not preventive in nature.

One argument that is raised in defence of this provision that it allows the CCI to exercise its discretion to deal with enterprises, whose abuse of their dominant position cannot be proven for want of sufficient evidence or on a mere technicality. Therein lies a prejudicial fallacy of bringing low the mighty. Insufficiency of evidence does not mean presumable guilt not substantiated by requisite evidence but rather must be read in a more neutral sense. This lack of evidence can equally be because the Enterprise hadn’t abused its dominant position.

 

1.3. The law under the MRTP Act

Prior to the Competition Act, the Monopolies and Restrictive Trade Practices Act, 1969 (“MRTP Act”) under Sections 27, 27A and 27B went in a similar direction. However, among other basic differences, the power to direct division of enterprises was actually vested with the Central Government, to act on with the recommendation of the Monopolies and Restrictive Trade Practices Commission or on its own accord. Therefore, the power of the MRTP Commission was recommendatory in nature. This not the case under the Competition Act, wherein the CCI itself holds the power to direct the division of dominant enterprises after the 2007 amendment to the Competition Act. Even the Central Government had the power to order for the division of undertakings in cases where the continuance of interconnection between an undertaking with another undertaking is detrimental to its interests or its future development. This is no longer the case. Furthermore, for recommending a division, the MRPT C0mmission ought to have been of the opinion that the working of the ‘Undertaking’ is prejudicial to the public interest or has led or leading to or is likely to lead to the adoption of any monopolistic or restrictive practice. This is a higher standard of proof compared to Section 28 of the Competition Act, 2002. Even the decision of the MRTP Commission in this matter had to be in public interest.

 


End-notes:

[1]See RICHARD A. POSNER, ANTITRUST LAW 106-07 (2d ed. 2001); United States v. E. I. du Pont de Nemours & Co., 366 U.S. 316, 329 (1961) (“divestiture or dissolution has traditionally been the remedy for Sherman Act violations whose heart is intercorporate combination and control”).

[2] Shri Neeraj Malhotra, Advocate vs North Delhi Power Ltd. & Ors., CASE NO. 06/2009, (decided on 11.05.2011) (CCI).

Siddharth is the Founder of CorpLexia and serves as its Editor. He is a student of BBA LL.B (Hons.) and has a special focus on corporate, commercial, insolvency, arbitration, securities and competition laws. He can be reached at siddharth@corplexia.com

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