The Competition Commission of India (“CCI”) has recently penalized certain airlines for being guilty of cartelization in fixing the Fuel Surcharge rates (“FSC”) which constitute a significant component of their overall air cargo freight charges. It is significant that the CCI has concluded that the airlines indulged in collusion / cartelization solely on the basis of circumstantial evidences1.

Cartels are anti-competitive agreements wherein the competitors agree to work towards their mutual benefit by suppressing competition or eliminating the uncertainties of their market behavior. The resultant loss of inter serivalry and the absence of the incentive to earn the patronage of the customers leads to higher prices, lower output and in general a dead weight loss for the economy. They are considered to be the most egregious form of competition law violation and are awarded the highest penalty permissible under the law. Since most cartels are hatched in secrecy, and often by using sophisticated methods, they are harder to detect than other forms of anti-competitive agreements. In this article, we examine the legal provisions and some of the factors that the CCI looks into, in the absence of any direct evidence of anticompetitive agreement, to conclude that the competitors have indulged in cartelization or collusion.

Competition laws, world over, are written broadly to apply to more than straight forward explicit agreements. Even under the Competition Act, 2002 (“Act”) the term ‘agreement’ has been defined very broadly and includes any arrangement or understanding or action in concert2. Thus, the sweep of the law engulfs all such explicit and implicit conduct or activities that could be construed to conclude that competitors have forged an anticompetitive agreement in violation of the law.

It is significant that while the word ‘agreement’ has been used in Section 3(1), the words ‘agreement’, ‘practices carried on’ and ‘decisions taken’ have been used in Section 3(3) of the Act. Further, the conjunction ‘or’ has also been used before the words ‘practices carried on’ or ‘decisions taken’ in addition to the word ‘agreement’ in Section 3(3) of the Act. However, to assume that these terms or concepts constitute separate compartments or mutually exclusive categories would be to misconstrue the legislative intent behind Section 3. This is because the reach of the law hinges essentially on the existence of an ‘agreement’. The use of the words ‘practices carried on’ or ‘decision taken’ in Section 3(3) of the Act merely allow the identification of long duration infringements and show that consensual element or agreement exists which cannot be proved by direct evidence. These concepts cannot be used as a surrogate for an unproven anti-competitive agreement.

In the background of the fact that agreements can be implicit and collusion between competitors may be hatched in secrecy, the competition authorities more often than not have to rely upon the use of circumstantial evidence to prove the existence of a collusion. However, such evidences can be ambiguous and subject to dual interpretations. For example, a competitor operating in an oligopolistic market structure may have a pricing policy similar to that of his competitors for a variety of reasons, such as being players in a repeated game knowing fully well that it would be mutually self-destructive to indulge in price wars, certainty in demand where in the competitors do not have any incentive to indulge in price competition so as to attract more customers. Further, it could be possible that the entities may be secretly offering backend discounts while keeping their catalogue prices the same. In any case, almost all the competition authorities including the CCI recognize that evidence of parallel conduct, such as simultaneous price increases by rivals, alone is not sufficient proof of a cartel arrangement. Parallel conduct is never construed to infer that the parties have entered into tacit collusion or have acted in concert, warranting condemnation. Without deviating into the aim of eliminating competition or removing uncertainty from the market, the conscious involvement in similar or identical market behaviours cannot be considered as a proof of concerted practice. The competition authorities look for additional evidences, referred to as the plus factors, which tend to prove the existence of an unlawful agreement as required under the applicable standards of proof. The existence of such plus factors may tilt the balance of probabilities towards the existence of a cartel.

Structural economic evidence such as high market concentration, high profits, stable market share, high barriers to entry, high degree of vertical integration, standardized or homogeneous product are seldom sufficient to infer the existence of a concerted practice or are the simultaneous and identical price increases. However, the existence of plus factors such as the following may lead the anti-trust authorities to infer or at least raise a rebuttable presumption that the impugned conduct is more likely to be a result of an anti-competitive agreement:

• Actions contrary to self-interest unless pursued as part of a collective plan.
• Phenomena that can be explained rationally only as the result of concerted action.
• Evidence that the opportunity for regular communication was created.
• Industry performance data, such as extraordinary profits, that suggest successful coordination.
• The absence of a plausible, legitimate business rationale for the suspicious conduct.

It is also relevant to state that plus factors also include facilitating practices, the presence of which can make it easier for competitors to reach or sustain an agreement. Facilitating practices may include information exchanges, price signaling, price protection and most favoured nation policies5, and unnecessarily restrictive product standards.

Due to the difficulty in applying circumstantial evidence which are susceptible to alternate interpretations, courts world over continue to struggle to develop a satisfactory evidentiary standard and a calculus for determining whether, without direct proof of agreement, the charged parties conspired or indulged in an anti-competitive agreement / conduct. Be that as it may, competition authorities tend to presume that parallel conduct is the result of concertation / anti-competitive agreement if they see no clear evidence supporting an alternative explanation. Whatever be the nature of evidence, three elements in particular seem to be of importance while relying on circumstantial / economic evidences: (i) the facts must be sufficiently proven (ii) there must be a causal link between such facts and the allegedly infringing conduct and (iii) there must be no other rational interpretation for the observed behavior.

In the Airlines’ case, the CCI arrived at its findings purely on the basis of circumstantial evidences. It held that the airlines fixed the Fuel Surcharge on the basis of the fact that the FSC rates were same and were not affected by the difference in the aircraft type, flight distance, flight sector, flight timings. It was, therefore, observed that there was a high degree of predictability in the FSC rates. Such rates moved upward or downward in tandem having very high and positive coefficient of correlation amongst each other and a negative coefficient correlation with movement of ATF prices. It seems, however, that it was the inability on the part of the airlines to furnish internal company documents showing data or costing studies or systematic break up of weight assigned to each parameter claimed to be important in determining the calculation of the individual FSC rates of the Airlines, that became an important consideration for the CCI to tilt the balance against the airlines. Thus, consistent with its practice, the CCI has adopted the standard of “preponderance of probabilities”, which means that the evidences, taken holistically in the case point towards the existence of cartel more than the existence of unilateral /independent conduct. In times to come, the Appellate courts would adjudicate whether the degree of evidence relied upon by the CCI for finding a violation under the provisions of the Act are appropriate or otherwise. Till then, it may be advisable for the enterprises to document the rationale and factors considered while taking commercially sensitive decisions.