COMPAT overturns CCI in stem cell banking case

By Upasana Rao and Somil Kumar, Trilegal
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The Competition Appellate Tribunal (COMPAT), in an order dated 18 December 2015, set aside a penalty order of the Competition Commission of India (CCI) under section 27 of the Competition Act, 2002, against Dr LH Hiranandani Hospital (LHH).

Upasana Rao is a partner at Trilegal and Somil Kumar is an associate. Trilegal is a full-service law firm with offices in New Delhi, Mumbai, Bangalore and Hyderabad.
Upasana Rao is a partner at Trilegal and Somil Kumar is an associate. Trilegal is a full-service law firm with offices in New Delhi, Mumbai, Bangalore and Hyderabad.

LHH had given Cryobanks the exclusive right for a period of one year to provide stem cell banking services to maternity patients at LHH. Due to this exclusive arrangement, LHH refused to allow one of its patients to obtain stem cell banking services from Lifecell International (Lifecell), with which the patient had entered into an agreement. Although the patient did not file a complaint with the CCI, a third party informant filed a complaint alleging that LHH’s exclusive agreement with Cryobanks was anti-competitive and had forced the patient to avail of maternity services at another hospital.

Relying on the investigative report of the Director General (DG), the CCI passed a majority order stating that LHH was one of the major players in the “stem cell banking services sector”, and the exclusive contract between LHH and Cryobanks was anti-competitive under section 3(1) of the Competition Act as it had the tendency of distorting the market for stem cell banking and deterring new entrants. The CCI majority also concluded that the agreement was a vertical “tie-in” arrangement that violated section 3(4) of the act. One of the members of the CCI passed a dissenting order holding that the agreement did not contravene section 3(4) of the act and there was no appreciable adverse effect on the market for stem cell banking.

The COMPAT agreed with and relied extensively on the opinion of the dissenting CCI member, holding that the agreement was not a tie-in arrangement under the act. The COMPAT referred to the CCI’s decision in the case of Sonam Sharma v Apple Inc USA & Ors, in which it was discussed that a tying arrangement occurs when a seller conditions the sale of a product on the customer’s agreement to purchase a tied product.

The COMPAT observed that LHH did not compel its maternity patients to use the stem cell banking services on its premises. There were 13 other players in the market of stem cell banking and the patients were free to avail of services from any of them according to their convenience and financial capacity.

The COMPAT also held that the agreement was not an exclusive supply agreement for the reason that LHH did not stop Cryobanks from enrolling patients from other hospitals and Cryobanks also had exclusive tie-ups with various other competing hospitals. Further, the COMPAT held that in analysing whether an agreement is a “refusal to deal”, it needs to be established that the agreement has an appreciable adverse effect on competition. In this case, the COMPAT did not find an appreciable adverse effect on competition in the market since the agreement did not create barriers to new entrants in the market nor did it foreclose competition in the market.

The COMPAT noted that the CCI had not followed its previous decision in Subhash Yadav v Force Motors Ltd, in which it had rejected the argument that there was an abuse of dominant position and had held that individual consumer grievances against unfair trade practices and deficiencies in goods and services was the subject matter of consumer law.

With regard to the penalty imposed by the CCI, the COMPAT referred to the previous decisions of the Supreme Court and its own decision in Excel Crop Care v CCI on the principle of proportionality, holding that only “relevant turnover” should be considered in determining the amount of penalty in the case of multi-product companies. The COMPAT observed that LHH provided multiple healthcare services, maternity services being one of them, and even if it is held that the agreement between LHH and Cryobanks violates section 3(1) of the act, LHH’s turnover with reference to stem cell banking services only could be taken into consideration for the purpose of imposing penalty and not the turnover with reference to other services provided by LHH.

Lastly, the COMPAT questioned the locus standi of the informant in the matter, stating that the CCI ought to be cautious where the informant is a third party who may be espousing the cause of someone else with an ulterior motive. In this case there was no direct or remote nexus between the informant and the patient, and the DG’s failure even to examine the patient was a fatal procedural defect.

In conclusion, the COMPAT’s decision highlights the CCI’s inconsistency in following its own precedent. The COMPAT’s acceptance of the stand-alone scope and applicability of section 3(1) of the act may also be inferred from the order. In other words, certain agreements that do not fall under section 3(3) (horizontal) or section 3(4) (vertical) categories, may still be caught for being anti-competitive under section 3(1) of the act.

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