Regulatory Structure under Competition Laws: Case of EC and India

I. INTRODUCTION

Competition law differs from other branches of law for various reasons. It is not about the fairness or morality to be instilled in the actions which mark societal behaviour. Instead the rules of competition reflect economic principles, designed to render the operation of the markets in a manner beneficial to the common good. These rules are of immense importance as they not only vouchsafe against the monopolistic and exploitative tendencies of the bigger market players, they are also instrumental in providing the smaller and newer entrants in the markets to work towards achieving self-sustaining levels.

Their importance is noted well in by the US Supreme Court when it observed, “the antitrust laws … are the Magna Carta of free enterprise. They are as important to the preservation of economic freedom and our free enterprise system as the Bill of Rights is to the protection of our fundamental freedoms”. [United States v. Topco Associates Inc., 405 US 596 at 610 (1972)]

To speak of the European Economic Communities (EEC), the rules relating to competition to be observed in the common markets of the EEC flow from Article 81-86 of the EC Treaty. From these are derived the three central legal provisions upon which this law operates;

• Article 81, prohibiting anti-competitive agreements,
• Article 82, prohibiting abuse of dominant positions, and
• The EC Merger Regulation (ECMR), prohibiting anti-competitive merges, acquisitions and joint ventures.

Each of these rules apply in different circumstances but the underlying purpose beneath them is one and the same: to prevent the problem of welfare loss that can arise when an undertaking or a coordinated group of undertakings exercise certain market power. To effectuate this legal framework, the EC Treaty also vests the powers and functions of regulation upon various bodies functioning under the EC and national member states. The aim of this paper is to examine the regulatory structure in vogue under the EC competition law and to identify the key traits which may as well be applicable for the recently formulated Competition Commission of India, in its quest towards rendering competition workable in the Indian markets.

II. REGULATORY STRUCTURE UNDER THE EC COMPETITION LAWS

The competition law framework, as originally envisaged under the EC Treaty concentrated upon the EU Commission as the sole benefactor and regulator of market actions pertaining to competition in the EEC markets. This framework underwent substantial reform (w.e.f. May 1, 2004) whereby the EC’s modernized competition regime took effect. Thereunder, devolving responsibility for enforcing competition law from the European Commission to national competition authorities (NCAs) and courts in the EU member states, an entirely new framework was given effect to. Known as the European Competition Network (ECN), the system was designed to effectuate a shift in policy. There was a move away from a system of advance clearance or exempting of agreements to a retrospective exception system.

Since the aim is to comparatively examine the EC Competition law structure, it is this new framework which forms the subject-matter of study of this project. With this background, let us proceed towards the attainment of our objectives.

(a) The legal regime for competition in the EC

As with other Community policy areas, EC Competition law is established and developed via a variety of legal sources. At the top of the legal hierarchy is the EC Treaty. By itself the Treaty does not provide sufficient detail to permit the existence of a fully and completely functioning legal order, and a considerable quantity of secondary legislation has been made. Article 249 of the Treaty lists the types of secondary legislation that may be adopted by the EC, which are, regulations, decisions, and directives. Thus EC competition law may be enforced by way of decisions made by the EC Commission and Article 249 provides that a ‘decision shall be binding in its entirely upon those to whom it is addressed’.

The legislations may further be interpreted by the European Court of Justice (ECJ) or the national courts. Thus these decisions serve as the third source of EC competition law. Further, the notices and guidance issued by the EC Commission are also binding instruments of state policy and thus serve as another important source of the competition law.

As noted above, Article 81 and 82 comprise the bulk of the substantive competition rules of the EC. However what is important as regards their implementation is the objective set forth in Article 2 of the EC Treaty, which includes ‘a high degree of competitiveness and converging economic performances.’ Further, Article 3(g) provides that the activities to be undertaken for the purpose of achieving the objectives of Article 2 include, the development of ‘a system ensuring that competition in the internal market is not distorted. In these one may find the broad objectives upon which the functioning of the EC competition law regime is based.

(b) The EC Regulatory Authorities

While Articles 81 and 82 form the bulk of the substantive rules, Articles 83 and 85 provide the mechanism for the implementation of these substantive rules. Article 83 makes a provision for the enactment of ‘any appropriate regulation or directives to give effect to the principles set out in Articles’ 81 and 82. Thereunder various regulations have been made, the major ones being Regulation 1 of 2003, block exemption regulations, etc.

In this framework, Article 85 confers upon the EC Commission the primary role in the enforcement of the EC Competition law by requiring it that it ‘shall ensure the application of the principles laid down in Article 81 and 82’. In this regard, the Commission is required to investigate infringements of law and in cases of breach, it is duty bound to ‘propose appropriate measures to bring it to an end’. Thus our study proceeds with the examination of the EC Commission.

(i) EC Commission

Given the importance of the institution and its pivotal role in rendering the EC competition law effective, the Commission has been described as the ‘guardian of the Treaty’, or the ‘watchdog of the Community’. Established under the Treaty itself, the rules relating to the Commission are set out in Articles 211-19 of the Treaty with Article 211 providing that the Commission should ensure compliance with the EC law, and exercise specific powers given to it by the Council of Ministers.

The Commission consists of 27 Commissioners, nominated by the Member States. Administratively the Commission is divided into Directorates General, with one Directorate General having responsibility for competition policy, which includes the contentious areas of state aids, and merger policy as well as ‘antitrust’.

The role of the Commission, as at present, is to supervise the operation of competition policy and to play the lead role in the formulation of that policy as change is needed. The Commission has the power to investigate infringements of the law, and to take appropriate action, on its own initiative, or in response to complaints. However, each Member state is also required to apply the law in specific areas with the use of the appropriate national procedures applied by the relevant national competition authority. The Commission is also required to submit an annual report to the European Parliament detailing its activities in competition law over the last year.

The change in the role of the Commission came with the EU Council of Ministers adopting Regulation 1/2003 in November 2002 (which came into force from May, 2004), replacing Regulation 17/62 which set out the hitherto existing procedural rules for enforcement of Articles 81 and 82. This Regulation introduced fundamental changes to the process by which EC competition law was enforced and also the roles of the various authorities.

Under the new regime, the Commission is not required to be notified in advance about their proposed actions whereas earlier the companies were required to notify agreements to the Commission in advance for clearance confirming that the arrangements do not infringe Article 81(1) or an exemption confirming that the arrangements infringe but are exempted under Article 81(3). Under the new regime, companies will now have to form their own view on whether the agreement is compliant and would survive an attack by a regulator or other third party during the life of the arrangements or even after they are concluded. Thus the market players have been vested with the power to declare that the conditions of Article 81(3) are satisfied so as to protect arrangements from attack; an instance of self-regulation.

Nonetheless, in order to assist the players in arriving at decisions regarding compatibility of their actions with the competition law, the Regulation does not formally prevent parties applying to court for a declaration as to the status of an agreement. Further, in respect of novel or unresolved questions on the application of Articles 81 and 82, the Commission retains the power to provide informal guidance.

It may also be noted that now the power of regulation is decentralized with the National Competition Authorities (NCAs) and the national courts of the Member states also allowed enforcing Articles 81 and 82. This may, depending on the geographical spread of the arrangements, give aggrieved parties a range of potential venues. Nonetheless the parental role of the Commission is retained with the Regulation requiring each NCA to send the Commission drafts of its intended decisions at least 30 days before the NCA intends to adopt the decision. This would allow the Commission to detect any inconsistency in the application of Articles 81 and 82 and, if necessary, take over the investigation.

It is now widely believed that under the aim of modernization the purpose is instead to allow the Commission to focus its attention on the enforcement of competition law; moving from being a regulator to a policeman, a belief which has been reinforced with present Competition Commissioner Mrs. Neelie Kroes’ handling of the Microsoft case. Under the new regime, the Commission deals only with complaints that have a sufficient ‘Community interest’. This is brought out by the draft Commission notice on the handling of complaints which may be only in cases wherein;

• One or more agreements or practices have effects on competition where there are cross-border markets covering more than three member states or several national markets; or
• Where a Community decision is required to develop Community competition policy or provide effective enforcement.

This emphasizes the Commission’s new role as dealing only with matters that are strategic or of EU-wide significance.

(ii) The Advisory Committee

Article 14 of Regulation 1/2003 makes provision for an Advisory Committee on Restrictive Practices and Dominant Positions, which must be consulted before the Commission takes various decisions, in particular those which have an adverse affect on those to whom they are addressed. It is the forum where experts from the various competition authorities discuss individual cases and general issues of Community competition law. It is consulted at the request of the Commission or a Member State and is composed of ‘representatives of the competition authorities of the Member States’. [Article 14(2) of Regulation 1/2003] Thus this Committee serves as an important link between the Commission and the Member States. The Commission is required to take an utmost account of the opinion delivered by the Committee. [Article 14(4) of Regulation 1/2003]

(iii) National Competition Authorities & European Competition Network

With the modernization in 2004, an important role was assigned to the National Competitions Authorities (NCAs) in the effectuation of the EC competition law regime. While earlier they had been responsible for giving effect to the national competition laws and the orders of the Commission in so far as they pertained to their states, now they also vested with the powers to apply Article 81 and 82 of the EC Treaty, a power which was hitherto vested solely with the EC Commission.

Towards this end, Article 5 of Regulation 1/2003 sets out the basic role of the national competition authorities. It states,

“The competition authorities of the Member States shall have the power to apply Articles 81 and 82 of the Treaty in individual cases. For this purpose, acting on their own initiative or on the complaint, they may take the following decisions:

- requiring that an infringement be brought to an end,

- ordering interim measures,

- accepting commitments,

- imposing fines, periodic penalty payments or any other penalty provided for in their national law.

They may also decide that there is no ground for action. However their importance in the EC competition law framework is derived from Article 11(1) of Regulation 1/2003 which provides that ‘the Commission and the competition authorities of the Member States shall apply the Community competition rules in close cooperation’. Thus from being independent observers and actors, the NCAs have been formally instituted as the lower tier of the EC competition regime, supplementing the functions of the Commission.

The purpose of this new system is the expected faster resolution of competition cases than it has been in the past where the Commission was the sole arbiter in such matters. In its zeal to maintain constant communication between the two tiers of regulators, Article 11 of the Regulation 1 of 2003 imposes upon the Commission the requirement to send the NCAs copies of important documents in its possession, and the NCAs in turn are required to tell the Commission whenever they commence formal investigative measures. Similarly, the NCAs intending to take infringement actions or accepting commitments etc., are required to inform the Commission and provide a summary of the case and a copy of the proposed decision. Thus it is seen that significant powers have been conferred upon the NCAs but nonetheless they are required to act in close coordination with the EC Commission. [To this effect, the Commission has also produced a Notice on cooperation with the Network of Competition Authorities (2004) OJ C101/43]

In order to maintain close coordination amongst the various authorities responsible for implementation of the EC competition law and to avoid inconsistencies in their actions, the Regulation 1 of 2003 also created a framework, known as the European Competition Network (ECN). This ECN consists of the European Commission and the competition authorities of the 25 Member States. It was established during the modernization reform of the EC antitrust rules as a forum for discussion and cooperation of Member States competition authorities in cases where Articles 81 and 82 of the EC Treaty are applied. The ECN ensures an efficient division of work and an effective and consistent application of EC competition rules.

This creates an effective mechanism to counter companies which engage in cross-border practices restricting competition. As European competition rules are applied by all members of the ECN, the ECN provides means to ensure their effective and consistent application. Through the ECN, the competition authorities inform each other of proposed decisions and take on board comments from the other competition authorities. In this way, the ECN allows the competition authorities to pool their experience and identify best practices.

(III) EC MODEL: LESSONS FOR INDIA

The above examination of the regulatory model for the implementation of competition law in the EC may serve some purpose in the re-evaluation of the competition model proposed for India. Let us analyze the same.

(a) Regulatory Structure under the Competition Act, 2002

Enacted on the lines of the recommendations of the Raghavan Committee, the Competition Act of 2002 marks a significant shift in the economic policy of India. It can broadly be stated as the second tier of reforms after the broad and swift changes in 1991 in the industrial policy of India. Repealing to a large extent the Monopolies and Restrictive Trade Practices Act of 1969, the Competition Act of India is in line with the international state of affairs as regards their attempts to regulate markets giving full effect to competitive positions.

Chapter III of the Act provides for a ‘Competition Commission of India’, which is the sole authority under the Act to give vigor to the substantive provisions and also to ensure its implementation. Of this, Sections 7 to 17 deal with the establishment, composition, conditions of membership etc. However what is relevant for our purposes is Chapter IV which entails the ‘duties, powers and functions of the Commission’.

Section 19 of the Act required the conducting of ‘inquiry into certain agreements and dominant position of enterprise’. This may be proceeded to upon the basis of a complaint alleging contravention of the provisions of the Act or by the Commission on its own motion. Similarly Section 20 requires ‘inquiry into combination by the Commission’. Section 22 provides for the Benches of the Commission and Section 23 provides for the ‘distribution of business of Commission amongst Benches’. Thereupon there are other provisions providing the procedure for investigation and its necessary fallouts.

This provisioning for the exercisal of the quasi-judicial functions of the Commission may as well be comparable with the various Tribunal operating in India. However the fact that that the Commission is entrusted with both investigative and adjudicatory powers is concomitant with its existence as a market regulatory, on the lines of SEBI. Similar positioning is also found of the various commissions under the competition laws of other nations.

It is noteworthy that the arrival of the Competition Act of 2002 of India coincides with the British reform of its competition law, also enacting the Competition Act of 2002, wherein the powers and functions of the Competition Commissions under the two enactments is largely the same.

(b) Lessons from the EC model for India

The EC Competition law model is a unique one as it envisages two tiers of regulatory structure (pursuant to the 2004 reform) and the situation is almost unparallel across the world. Even the United States, with 50 states to manage, operates with the Federal Trade Commission as the sole arbiter to manage the federal anti-trust statues. The coordination between the federal and state authorities is not that pronounced as in case of EC.

Given the existing situation, the Competition Commission of India (CCI) is at best comparable as a NCA of the EC framework, being required to administer the Competition Act of 2002 alone. However in my opinion it would be worthwhile to develop the CCI on the lines of the EC Commission as the first tier of regulator. This presupposes institution of the second tier of regulator, which may in case of India, may be best instituted as the various competition commissions of the states. This may not necessarily mean that there would be requiring a competition commission for each state but the jurisdiction could be divided on the basis of geographic lines and dominance of economic activities. However that is for the administration to decide.

What I propose is that in its quest for competition to spurt from the grass root levels and thereupon to gush up to the top, the aspect of regulation should be decentralized to these local commissions with the CCI to monitor their functioning and involved in the designing of the policy framework, being equipped with all the relevant information and filled with the experience of these commissions.

Thus I propose a second tier of competition commissions, initially divided on geographic lines (like one for north, south, east, and west regions each) and later on one for each state, which are primarily entrusted with the responsibility and functions of investigation, monitoring compliance etc., on the lines of the NCAs in the case of EC. They would act in close coordination with each other and with the CCI at the top to assist them and regulating their activities.

This would serve three fold purposes. Firstly, the CCI would be rendered divested from the investigative functioning and thus it can devote its resources towards designing of policy framework for competition in India and spearheading the litigation at the level of higher courts of India. Secondly, with the second tier of commissions being responsible with the investigative aspects and there being close coordination and sharing of information between these commissions, with a proper reporting system available with the CCI, the CCI would be able to monitor the competition scenario on a national and holistic level in India. This would also equip it with the necessary data for the formulation of guidelines and issuance of directions, a niche area with the capital market regulator SEBI has perfected well. Thirdly, with the localization of the regulatory functioning through the second tier of commissions, the markets in the India would be more closely monitored and the vastness of geographic markets would not be an issue which could arise in proper administration of the competition policy of India.

To this effect, I am aware that this may be termed as premature for India given the fact even the CCI has not yet come into full vigour even five years of the enactment. Nonetheless, keeping in line with the reform aspect of the Indian economy, I believe the germination of competition model requires such close regulatory supervision.

(IV) CONCLUSION

The position of EEC is unique in world economy history and continues to fascinate the researchers as to its efficient working despite divergent considerations posed by the member states. With the shift in policy approach and the redesigning of framework in 2004 owing to the joining of 10 more members, the EC competition law model has send signals to the world as regards the improvements that may be made in the existing state-of-affairs in regulation of competition.

In tandem with India's transition from a highly controlled to liberalized economy, the Competition Act 2002 has replaced the earlier focus on concentration of economic power with a focus on effects on competition, thereby bringing Indian competition law substantially in line with international practice. However the country is yet to witness an efficient competition regulator.

It is imminent that by the time a proper competition framework becomes operationalized in India, there may be yet other changes in the EC competition law regime. However we may fail in our commitments towards making the Indian economy self regulatory and providing means to all irrespective of the size if we are unable to incorporate the lessons learned from abroad in our system. The redesigning of the regulatory functions and the established of ECN in the EC regime marks the beginning of dual system of regulators in competition law frameworks. India would be tremendously benefited by incorporating such changes in it own system, definitely only when the correct time come for bringing such changes.