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Avirup Bose: A touch of class for competition laws

Competition law class actions may become a reality this summer, heralding a US-style litigation culture in the India

Avirup Bose 

Avirup Bose

Almost within days of the Narendra Modi-led Bharatiya Janata Party winning the 2014 Lok Sabha elections with an outstanding majority, the party's proverbial election catchphrase "achhe din aane wale hain" (good days are coming) came knocking at the doors of the residents of three DLF projects, Belaire, Park Place and Magnolias. The harbinger of good news was the Competition Appellate Tribunal (Compat), which on May 19 upheld an earlier decision of the Competition Commission of India (CCI) penalising DLF to the tune of Rs 630 crore for abusing its dominant position in the real estate market of Gurgaon.

DLF predictably, has decided to appeal against the decision of the Compat to the Supreme Court of India. However, now that Compat has upheld the CCI's decision, under the provisions of India's Competition Act, 2002, residents of DLF-built apartments, who have faced similar exploitative abuses, can form a "group of similarly affected persons" and file a US-styled class action suit against DLF to claim damages.

The Competition Act in section 53N(4) provides that if competition law violations cause any loss or damage, persons aggrieved by the violations can form a group (known in legal parlance as a "class") and file compensation claims before the Compat; after it has finally decided the matter.

Besides the DLF decision, in June 2012, the CCI imposed a penalty of over Rs 6,000 crore on 11 Indian cement producers after finding them guilty of cartelisation under the provisions of the Competition Act. If Compat, in the cement cartelisation case (which is in the final stages of the appeal process) upholds the decision of the CCI, all persons aggrieved by such anti-competitive practices can similarly come together and apply to the Compat to be compensated by the erring cement companies.

The fact that such class action suits are only permitted after the Compat upholds a decision of the CCI finding a contravention, is to provide a check against un-meritorious claims or frivolous competition law class action suits, which may be used strategically by competitors to limit market opportunities for their rivals.

For those who think that provisions of the Competition Act that allow multiple recourses for the same offence (in the form of punitive damages by the CCI and compensatory damages in class action suits), are unfair, a clarification would be helpful. The Indian competition enforcement system has been wisely designed, keeping in mind both the "deterrence" and the "compensation" goals of competition law. While the imposition of substantial fines by the CCI attempts to deter errant market behaviour, it does not provide an opportunity to end-consumers, who are the real victims of any competition law breach, to claim damages. For example, in cases of price-fixing, overcharges are usually passed on along the supply chain: from manufacturers to wholesalers, from wholesalers to retailers, and from retailers to end-consumers. If the latter do not have a standing to claim damages, the law-breaking enterprises will never be confronted with the total size of the economic harm caused by their anti-competitive market behaviour. The "class action" suits provide such end-consumers that standing to claim damages, within the ambit of India's competition law enforcement mechanism.

The class action suit also remedies the "rational apathy" problem. An individual end-consumer, may not initiate proceedings to recover damages, perceiving that the benefits of doing so (small size of the damages recovered) would be lower than the costs of such litigation (hiring lawyers, court fees and so on). The class action suit is a collective action mechanism that incentivises individual petitioners to bring suit by reducing costs and spreading the risk. However, identifying members of a prospective class of litigants may be a tricky business. The Competition Act allows the creation of a "class of litigants" where any loss or damage has been caused to numerous persons having the same interest. But how big should Compat allow the net to be cast - what constitutes a class of aggrieved persons with sufficient commonality of interest?

Now that Compat has upheld the abuse of dominance charge against DLF, should the class of aggrieved persons be limited to only the members of the owner's association of the three DLF housing projects (Belaire, Park Place and Magnolias), which successfully complained about DLF's unfair practices before the CCI? Or does every apartment buyer of DLF, who has been subject to similar unfair and onerous terms of the standard DLF Apartment-Buyer agreement, have sufficient "commonality of interest", and claim compensation from DLF? Ideally, the purpose of the law is to compensate every person who has been unfairly harmed by anti-competitive conduct of enterprises. However, identifying such end-consumers may be difficult, and at times impossible. Therefore, the Compat in deciding the membership of a class action must prima facie decide whether the members of such a proposed class can be "objectively identified". In the DLF example, identifying members of the complainant resident-welfare associations is easy, but there may not be any objective test in identifying which of the DLF apartment-buyers in India have been aggrieved by the imposition of unfair charges/terms by DLF.

The next step, in identifying a class of litigants, is to ensure that all such litigants have a common cause of action against the defendant companies. For example, in case of a class action against the 11 cartelising cement companies, should both: retail cement consumers and builders/real estate promoters, be included in the same class? Although, both the group of cement consumers may have bought cement at a hiked-up price, they may not have the same cause of action against the cement companies. While the retail consumers bore the brunt of the cartelised price, the builders could have passed down enhanced costs of building materials to the ultimate apartment buyers and allowing their inclusion in the same class could unjustly enrich them.

Given the size of a class action suit, the financial implications of such litigation could be limitless. Consider a scenario where DLF is required to compensate each of its apartment buyers in India, or the 11 cement companies are directed to pay damages to each of its customers, who have purchased cement at a cartelised price.

With the new Companies Act, 2013, also allowing dissatisfied investors to bring class action suits against the management of a company, India may finally be on its way to usher in a US-style class action litigation culture. However, for class action suits to really take-off, the draconian Advocates Act, 1961, and the rules of professional conduct of the Bar Council of India need to be amended first. Currently, the rules do not allow an Indian lawyer to act or plead in any matter in which she has a financial interest. This means that Indian lawyers cannot enter into contingent fee arrangements with class action plaintiffs - where the litigation costs are recovered as a percentage of the final damages, awarded by the courts. The members of a class, who are typically without deep pockets, would have to bear the litigation costs themselves, which greatly reduces their incentive to sue. Would enabling the development of an overly litigatous culture, help improve consumer welfare and the state of Indian corporate governance? Only time will tell.

The writer is a competition lawyer with the Competition Commission of India.

These views are personal

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First Published: Tue, June 17 2014. 21:46 IST