IP Connect

Hyundai slapped with a fine of Rs. 420 crore by Competition Commission of India

The Competition Commission of India (CCI) on July 27, 2015 passed an order imposing a hefty penalty of Rs. 420 crore  on leading automobile company Hyundai Motors India Ltd., for violating the provisions of Competition Act 2002.

Brief Facts of the Case

Shri Shamsher Kataria (hereinafter referred to as the Informant) initially filed an information under Section 19 (1) (a) of the Competition Act 2002, against automobile manufacturers Honda Seil Cars India Ltd., Volkswagen India Pvt. Ltd and Fiat India Ltd. alleging anti-competitive practices on the grounds that the genuine spare parts of automobile manufacturers by them were not made freely available in the market;

• The CCI after considering the matter directed the Director General (DG) to conduct an investigation and submit the report;
•  During the said investigation the DG was of the opinion that other automobile manufacturers may also be indulging in unfair practices, and they all should also come under the ambit of the said investigation;
•  CCI after the completion of the said investigation imposed a penalty of Rs. 2545 Crores on 14 car manufacturers in India in August last year. However, no order was passed against Mahindra Reva Electric Car Company (P) Ltd. (hereinafter, referred to as “Reva”), Premier Ltd. (hereinafter, referred to as “Premier”) and Hyundai Motors India Ltd. (hereinafter referred to as Hyundai) as Reva and Premiere had filed applications for striking out of their names from the array of parties and Hyundai had filed a writ petition in the Madras High Court, challenging the jurisdiction of CCI, wherein the Court granted Hyundai an ex parte stay in the matter;
• In view of the aforesaid, CCI in the matter could not proceed against Reva, Premiere and Hyundai and the order of CCI remained pending against them and held that it would pass separate order in respect of three car manufacturers, viz., Hyundai, Reva and Premier after affording them reasonable opportunity to make their submissions in respect of the findings of the DG report and queries raised by the Commission.

Findings of the DG with respect to Hyundai

1. That Hyundai entered into a technology and royalty agreement with HMC (Hyundai Motor Company, South Korea) for supply of spare parts for its operations in India and the fact that the overseas supplier is the parent company of Hyundai and only supplies spare parts to MIL (a group company of Hyundai for dealing with aftermarket requirements in India), indicates the existence of an arrangement between Hyundai and the overseas supplier for not supplying spare parts directly into the Indian aftermarket;
2. That Hyundai’s basic purchase agreement (entered with the OESs for supply of spare parts) indicate restriction on OESs (Original Equipment Suppliers) from supplying spare parts directly to the aftermarket;
3. That dealers refused to sell spare parts in the open market and spare parts of only certain car models were made available over the counter;
4. That authorized dealers were being permitted to source spare parts from Hyundai directly or from its authorized vendors but not from the OESs;
5. That during the warranty period, owners of Hyundai cars are totally dependent on its authorized network as the warranty extended is liable to be invalidated if a Hyundai car is repaired by an independent repairer;
6. That Hyundai’s dealers are not permitted to deal with competing brands without seeking the prior permission of OEM (Original Equipment Manufacturer);
7. That Hyundai has justified its restrictions on the basis of IPR and safety issues but it has failed to establish that it possesses valid IPRs in India, with respect to its spare parts for which restrictions were being imposed upon OESs.
8. That refusal to supply diagnostic tools and spare parts by Hyundai to independent repairers amounts to denial of access to an “essential facility”;
9. That the restrictions imposed upon the OESs and the authorized dealers, coupled with the restrictions on independent repairers amounts to not only imposition of unfair terms under section 4(2)(a)(i) of Competition Act but also denial of market access under section 4(2)(c) of the Act;
10. That in view of aforesaid, the acts of Hyundai are in violation of Section 3(4)(c) and 3(4)(d) of the Act, for not allowing its authorized dealers to deal with competing brands of cars and not allowing them to sell spare parts and diagnostic tools to the independent repairers;

Reply of Hyundai:-

1. That the DG has drawn incorrect conclusions and erred in the application of competition law and established competition law principles;
2. That Hyundai is not dominant in any of the relevant markets and has not engaged in any conduct which would be an abuse of dominant position under the Act.
3. In addition, Hyundai has not imposed any condition or engaged in any conduct that would constitute an infringement of Section 3 of the Act relating to anti-competitive agreements;
4. That Hyundai had a large and one of the most accessible service and sales network as compared to other car manufacturers in India with 412 dealers and more than 1,087 service points located across India;
5. That the unorganized sector in India is characterized by a lack of skills and proper training because independent repairers are averse to investing in training themselves for repairing of high end and executive premium cars. Further the absence of any effective government regulation and the problem of counterfeits are the major challenges being faced by the OEMs like Hyundai in the Indian market;
6. That DG had incorrectly relied upon the developments in USA and EU, with respect to after-market services without considering the differences and dynamics of Indian Automobile Industry;
7. That Hyundai’s agreements with its OESs are basically subcontracting arrangements and as such exclusivity in such arrangements fall outside the purview of Section 3 of the Act as such exclusivity is required to protect Hyundai’s significant investments in developing its OESs and contributions to the manufacture of spare parts;
8. That even if the sub-contracting agreements are found to fall within the scope of Section 3, the designs, specifications, drawings and technologies provided by Hyundai to its OESs are protected by unregistered copyright and trade secret;
9. That Hyundai’s drawings/know-how/specifications would also be conferred with IP protection by virtue of them being confidential information and reference could be made to the case of Cattle Remedies and Anr. vs. Licensing Authority/Director of Ayurvedic and Unani Services, wherein it had been observed that apart from specific statutes relating to trade mark, copyright, design and patent, even trade secrets are also a form of IP;
10. That Hyundai encourages over the counter sale of spare parts and diagnostic tools by authorized dealers, dealer’s branch and Hyundai’s authorized service centres and does not prohibit its dealers from taking competing dealerships and that a number of its dealers have competing dealerships;

Decision of the Commission:-

The CCI passed its order with respect to the automobile manufacturers Hyundai, Reva and Premier (hereinafter referred to as ‘car manufacturers’) and made the following observations in the matter:

1. That considering the technical compatibility between the products in the primary market and the secondary market, car manufacturers hold 100% market share and are dominant in the aftermarket of their respective genuine spare parts and diagnostic tools and correspondingly in the aftermarket of their respective repair services for their brand of automobiles;
2. That warranty conditions that the car manufacturers impose on their consumers dissuade them from availing the services of independent repairers, therefore, they hold a position of strength which enables them to affect their competitors in the secondary market and limiting consumer choice;
3. That conduct of car manufacturers amounts to denial of market access to independent repairers to procure genuine spare parts in the aftermarket;
4. That the practice of car manufacturers in denying the availability of its genuine spare parts severely limits the independent repairers and other multi-brand service providers in effectively competing with the authorized dealers of the OEMs in the aftermarket which amounts to denial of market access by the OEMs under section 4(2)(c) of the Act;

IPR exemptions under the Act

That the license agreement entered into between Hyundai and HMC did not specify the technologies, patents, knowhow, copyrights and other IPRs which are being granted to Hyundai.That as per the observations of the DG and submissions made by car manufacturers, none of them own any registered IPR on any of their spare parts as such in India. It has been admitted by Hyundai and MIL that they do not possess any valid IPRs in India except for its trademark/logo.

That though registration of an IPR is necessary, the same does not automatically entitle a company to seek exemption under section 3(5) (i) of the Act. The important criteria for determining whether the exemption under section 3(5)(i) is available or not is to assess whether the condition imposed by the IPR holder can be termed as “imposition of a reasonable conditions, as may be necessary for the protection of any of his rights”.

That mere selling of the spare parts, which are manufactured end products, does not necessarily compromise upon the IPRs held by the OEMs in such products. Therefore, the OEMs could contractually protect their IPRs as against the OESs and still allow such OESs to sell the finished products in the open market without imposing the restrictive conditions.

That trade secrets and confidential knowledge, are not among the listed categories of IPR laws and hence Hyundai cannot claim any exemption under section 3(5)(i) of the Act;

In view of the aforesaid observations, the CCI held that the car manufacturers have restricted the sale of spare parts over the counter, thereby resulting in prescribing exclusive distribution agreements and refusal to deal in terms of Section 3(4) (c) and 3(4) (d) of the Act and these agreements were found to be in the nature of exclusive supply agreements in terms of Section 3(4)(b) of the Act.

The CCI directed the car manufacturers to cease from indulging in such restrictive trade practices and imposed a penalty of Rs. 420 Crores on Hyundai.

Conclusion

The present order condemns the prevalent conduct of car manufacturers of entering into exclusive supply agreement for supply of spare parts which limits the choice of customers and also leads to unfair trade practices in the relevant market.