A perspective on the single economic entity concept

By R Sudhinder and Mihir Kamdar, Udwadia Udeshi & Argus Partners
0
1609

It has been four years since most of the provisions of the Competition Act, 2002, came into force and the Competition Commission of India became fully functional. However, there are still no guidelines on vertical and horizontal agreements covered under section 3 of the act. A significant aspect in vertical and horizontal agreements is the concept of “single economic entity” or “single economic unit”.

A single economic entity broadly means different companies or entities constituting a single entity from an economic standpoint. From a competition law standpoint, if two or more entities or companies are construed as a single economic entity, agreements between them are not generally considered as anti-competitive, on the principle that a single economic entity cannot enter into an agreement with itself.

Law in the EU

The concept of single economic entity was recognized in the European Union well before the present guidelines on horizontal and vertical agreements were brought into effect. In Viho Europe BV v Commission of the European Communities it was observed that in competition law, the term undertaking designates an economic unit for the purpose of the subject matter of the agreement in question even if in law that economic unit consists of several natural or legal persons.

R Sudhinder
R Sudhinder

Subsequent guidelines on vertical and horizontal restraints incorporate the single economic entity principle. In the case of vertical agreements, connected undertakings are construed as one undertaking. The test to determine whether undertakings are connected is based on voting rights, the right to appoint members of the supervisory board/management and the right to manage an undertaking’s affairs.

In the case of horizontal agreements, the guidelines specify that companies forming part of the same undertaking are not considered as competitors and lay down the test of “decisive influence” to determine whether companies form a part of the same undertaking. The test of decisive influence is applicable in the case of sister companies, that is to say companies over which decisive influence is exercised by the same parent company.

Law in the US

The US law appears to have evolved through jurisprudence rather than legislation. In Copperweld Corp v Independence Tube Corp it was held that a parent company is incapable of conspiring with its wholly owned subsidiary to violate section 1 of the Sherman Act. Further, although entities may be “separate” for purposes of incorporation or formal title, if they are controlled by a single centre of decision making and they control a single aggregation of economic power, an agreement between them does not constitute a contract, combination or conspiracy under the same section.

Mihir Kamdar
Mihir Kamdar

Subsequently, in Texaco Inc v Dagher it was held that even when persons who would otherwise be competitors pool their capital and share the risks of loss and opportunities for profits (through a joint venture) they are regarded as a single entity competing with other sellers in the market.

In the recent case of American Needle Inc v National Football League, the US Supreme Court stated that the relevant inquiry is whether the agreement in question joins together separate economic actors pursuing separate economic interests. The court held that the NFL, an unincorporated association of 32 professional teams, could not be construed as a single economic entity since the teams competed with each other not just on the field but off the field as well.

Law in India

As India has no guidelines on vertical or horizontal agreements there is no direct reference to the concept of single economic entity. However, it is clear from the manner in which the EU and US have construed the concept of single economic entity in jurisprudence that this concept is not necessarily founded in statute, but is a principle derived on the basis of economic considerations. Certainly, the EU has framed guidelines, but it is also important to note that the decision in Viho Europe was made much prior to the framing of the guidelines. Accordingly, it would appear that in a competition/antitrust regime it is not necessary to statutorily import this globally evolved concept.

Competition law and policy aim to ensure fair competition in the market. In view of the well recognized economic concept of a single economic entity, an agreement among the constituents of a single economic entity which is nothing but an internal allocation of resources would not affect competition adversely. It will be interesting to watch how the enforcement agencies and other judicial authorities in India deal with this concept.

Udwadia Udeshi & Argus Partners is a full-service law firm with offices at Mumbai, Delhi, Bangalore, Kolkata and Chennai. R Sudhinder is a partner and Mihir Kamdar is an associate partner at the firm. The views expressed in this article are the personal views of the authors and do not reflect the views of the firm.

Udwadia_Udeshi_&_Argus_Partners_logo

Udwadia Udeshi & Argus Partners

1st Floor, Elphinstone House

17 Murzban Road, Mumbai – 400 001

Tel: +91 22 2200 1400

Fax: + 91 22 2200 1411

Other offices: Delhi, Bangalore, Kolkata and Chennai

Email: uuargusknowledgecentre@uuargus.com