Hub-and-Spoke Arrangements under Competition Act, 2002

The concept of hub-and-spoke arrangements has gained increasing attention in the domain of competition law. These arrangements represent a hybrid form of anti-competitive conduct, involving both horizontal and vertical components. Traditionally, the Competition Act, 2002 distinguished between horizontal agreements (between competitors at the same level of the supply chain) and vertical agreements (between entities at different levels, such as manufacturer and distributor). However, hub-and-spoke arrangements do not fit neatly into either category.

With the Competition Amendment Act, 2023, India has taken a significant step towards expressly recognising and prohibiting such arrangements. This article explores the nature of hub-and-spoke cartels, their regulation under the Competition Act, the changes introduced by the 2023 Amendment, and their practical and legal implications for businesses operating in India.

What is a Hub-and-Spoke Arrangement?

A hub-and-spoke cartel is a structure where a single entity—the hub—facilitates coordination among various competing entities—the spokes—operating at the same level of the supply chain. Unlike traditional cartels, where competitors directly communicate and agree, in hub-and-spoke cartels, the spokes coordinate indirectly through the hub.

• Hub: Typically, a manufacturer, online platform, or service provider with significant market power.
• Spokes: Competing dealers, distributors, or service providers who have vertical agreements with the hub but do not directly communicate with one another.
• Rim: The implicit or explicit “agreement” connecting the spokes, established through the hub’s facilitation.

How Does the Hub-and-Spoke Arrangement Work?

The hub enters into separate agreements with each spoke. It may collect sensitive information, such as prices, sales, or market shares, and pass this information between spokes. By doing so, the hub effectively enables the spokes to coordinate their conduct, often leading to price-fixing, market or customer allocation, bid rigging, or production restrictions.

In some cases, the hub may issue directives to spokes about pricing or sales strategies. Even if spokes do not directly talk to one another, the hub’s role in sharing information or imposing rules results in concerted conduct among the spokes.

Why Are Hub-and-Spoke Cartels Difficult to Detect?

Unlike traditional cartels, where evidence of direct communication between competitors can be easier to uncover, hub-and-spoke cartels operate through indirect coordination. The lack of direct contact between spokes makes gathering proof challenging. Furthermore, with the rise of digital platforms and algorithms, real-time data sharing and automated price adjustments have made such cartels more sophisticated and harder to detect.

Provisions under the Competition Act, 2002

Sections 3(1), 3(3), and 3(4) Overview

The Competition Act prohibits anti-competitive agreements that have an appreciable adverse effect on competition (AAEC) within India.

• Section 3(1) broadly prohibits agreements that cause or are likely to cause AAEC.
• Section 3(3) lists various categories of horizontal agreements, including cartels, that are presumed to cause AAEC.
• Section 3(4) provides a non-exhaustive list of vertical agreements which may cause AAEC but are examined under the “rule of reason” approach.

Pre-Amendment Ambiguity

Hub-and-spoke arrangements, having both vertical and horizontal features, did not fit clearly into Sections 3(3) or 3(4). This created a gap in enforcement as it was unclear whether these arrangements should be treated as horizontal cartels or vertical agreements.

The Competition Commission of India (CCI) adopted a pragmatic approach by examining such cases under Section 3(1) where no direct horizontal or vertical agreement fit perfectly. However, this led to uncertainty about how hubs should be treated, especially regarding liability and penalties.

CCI’s Approach to Hub-and-Spoke Arrangements Before the 2023 Amendment

Key Cases

• Samir Agarwal v. ANI Technologies Private Limited and Others (2020): This case involved allegations against online cab aggregators Ola and Uber for facilitating price-fixing among drivers through surge pricing algorithms. The CCI rejected the allegations, stating there was no evidence of a “rim” or agreement among drivers, nor any agreement between drivers and the platform to fix prices.
• Jasper/Kaff and Fx/Hyundai Cases: These cases raised concerns about resale price maintenance but did not pursue hub-and-spoke cartel allegations directly. The CCI limited its analysis to vertical agreements under Section 3(4).

Insights from CCI’s Practice

The CCI’s decisions reveal that for a hub-and-spoke cartel to be actionable, there must be some form of agreement or tacit understanding among the spokes to coordinate their conduct, either directly or indirectly.

• Mere issuance of price instructions by a manufacturer or hub does not automatically amount to an H&S cartel.
• If dealers or spokes independently comply without coordinating or having a “meeting of minds,” the arrangement may fall outside the ambit of anti-competitive agreements.
• The mens rea, or intention to collude, is a crucial component in proving such cases.

The 2023 Amendment: Codification and Changes

Inclusion of Hub-and-Spoke Cartels in Section 3(3)

The Competition Amendment Act, 2023 has made the following key changes:

• Express Recognition: Hub-and-spoke cartels are now explicitly included as prohibited cartels under Section 3(3) of the Competition Act.
• Hub Liability: The hub, even if not competing directly, is liable if it “participates or intends to participate in furtherance of” the cartel.
• Lower Evidence Threshold: The amendment dilutes the standard of evidence needed to hold hubs liable, making mere intention sufficient once a spokes’ agreement exists.
• Equal Financial Liability: Hubs face the same penalties and leniency eligibility as spokes.

What Has Not Changed?

• There must still be an agreement (rim) among the spokes.
• The exact standard of what constitutes an “agreement” among spokes, including tacit collusion, remains uncertain.
• Mere exchange of commercially sensitive information without an understanding to coordinate may not suffice.

Intent vs. Actual Participation: Implications for Businesses

What Constitutes “Intent”?

• The 2023 Amendment emphasises the hub’s intent to participate rather than actual active facilitation.
• Knowledge of the spokes’ coordination combined with failure to act may be treated as intent.
• This raises the stakes for hubs to monitor and control conduct in their vertical networks.

Practical Scenarios

• Routine Data Sharing: Forward-looking market forecasts and sales projections exchanged between a hub and spokes may not be problematic if no tacit coordination exists.
• Cross-Dealer Information Sharing: If the hub shares confidential information from one dealer with another without their knowledge, and the dealers act in a coordinated manner, it may attract liability.
• Inaction as Tacit Approval: Hubs knowing about collusion but failing to intervene may be held liable under the amended law.

Compliance Requirements for Hubs

• Limit Information Flows: Hubs should restrict the sharing of competitively sensitive information across spokes.
• Contracts and NDAs: Include strict confidentiality and competition compliance clauses in agreements with dealers and distributors.
• Monitoring and Intervention: Establish mechanisms to detect and act on signs of coordination or price alignment.
• Documentation: Maintain records of investigations and corrective measures to demonstrate compliance efforts.

Conclusion

The express inclusion of hub-and-spoke arrangements in the Competition Act through the 2023 Amendment is a landmark development. It fills a crucial gap in India’s competition law by addressing sophisticated forms of indirect collusion that harm market competition.

While the amendment strengthens the CCI’s ability to tackle these cartels, it also increases the compliance burden on hubs, especially digital platforms and manufacturers.