The Relevant Market Question

 

 

 

 

 

 

 

 

 


The pharmaceutical and healthcare sector has historically been one of the key areas of the Competition Commission of India’s (CCI) enforcement of the Competition Act, 2002 (Act). A review of the CCI’s decisional practice in this sector evidences that the CCI’s approach in this sector does not only relate to maintaining healthy competition in the market but has also extended to protecting consumer welfare, given the social implications. In line with this approach, the CCI has recently penalised a manufacturer of magnetic resonance imaging (MRI) machines, for having abused its dominance in the market for a specific type of MRI machines. Interestingly, the CCI’s Chairperson passed a dissenting order, disagreeing with the supposedly narrow definition of the relevant market identified in the majority order[1] (order). The differing approaches in the order and the dissent note bring to the forefront, moot issues concerning the definition of the relevant market .

Background

The matter arose out of an information filed by M/s House of Diagnostics LLP (informant)  a medical diagnostics and diagnostic imaging company against Esaote SpA (Esaote) and its Indian subsidiary, Esaote Asia Pacific Diagnostic Pvt. Ltd. (Esaote India). The informant stated that Esaote was the sole seller of dedicated standing/tilting MRI machines (G-Scan machines) and had abused its dominance in the market for these MRI machines by :

(i) providing the informant with old and defective G-Scan machines;

(ii) unilaterally altering the agreed terms of the sale contract and the purchase orders by not providing “perforated see through cage” (PTC) and “head coils” (as agreed in the purchase orders);

(iii) charging significant sums for maintenance services. The informant highlighted that the servicing and aftersales market was a monopoly created by Esaote which had granted the exclusive right for providing these services to Esaote India;  and

(iv) entering into the market for providing MRI scans, by executing a revenue sharing agreement with another diagnostic centre [Star Imaging and Path Labs (P) Ltd. (Star)], to supply the G-Scan machines free of cost.

The Majority Decision

The contentious question in this case related to the definition of the relevant market  i.e. whether these specific type of standing/tilting MRI machines would constitute a market in themselves .

Emphasising on the distinct physical characteristics and end use, the CCI in the order[2] found reason to identify a separate relevant market for G-Scan machines based on: (i) its unique ability to scan the body of a person in weight bearing position; (ii) its advantages over conventional MRI machines, in terms of being less claustrophobic and effectively diagnosing ailments of specific portions of the body, such as joints and spine; and (iii) the fact that certain diagnostic centres had both types of MRI machines, which would imply the distinct nature of the two products . 

Having delineated a specific market for “dedicated standing/tilting MRI machines”, the CCI assessed the dominance of Esaote and Esaote India, as a group. Given that the other two manufacturers of dedicated standing/tilting MRI machines did not operate in India, the CCI observed that Esaote had the opportunity to operate independently of competitive forces and affect the relevant market in its favour. The CCI concluded that Esaote and Esaote India (Esaote Group) commanded a “virtual monopoly”, with 100% market share in the relevant market .

The CCI also found merit in most of the allegations of abuse levelled by the informant. Based on the purchase order, invoices and dispatch lists, the CCI noted that the G-Scan machines supplied to the informant were manufactured around a year prior to placing of the purchase order by the informant. This was in contrast to the supply schedule of the G-Scan machines to other customers in India, where supplies were made either in the same month of manufacture or a month or two thereafter. The CCI also noted that the Esaote Group had impressed on the informant that it would be supplying newly manufactured G-Scan machines. The CCI held that Esaote Group’s supply of defective and old machines amounted to an unfair business practice.

It also found Esaote Group to have abused its dominance by refusing to supply the PTC and the “head coils”, despite having agreed to supply the same. The CCI also held that by having supplied lesser priced opaque cages, instead of the PTC, the Esaote Group had imposed unfair prices on the informant .

The informant had also alleged that the Esaote Group had abused their dominance by unilaterally changing the price of the comprehensive maintenance contract from INR 6.5 lakhs per year for three G-Scan machines to INR 6.5 lakhs per year for each of the machines. Based on a reading of the purchase order, the CCI was of the view that the purchase order was a cumulative document for all the three G-Scan machines and the conditions for maintenance services in the purchase order should also be read accordingly. The CCI held that the conduct of the Esaote Group in demanding arbitrary charges amounted to imposition of unfair prices .

The CCI also found the exclusive arrangement granting Esaote India sole rights to provide aftersales services as abusive, on account of limiting the market for provision of the aftersales services and denial of market access to other players. 

While the CCI did not find the revenue sharing arrangement between Esaote and Star as resulting in leveraging of dominance in one market to enter another or a case of predatory pricing, the CCI held that Esaote was resorting to discriminatory market practices. This was on account of the fact that while Esaote Group had guaranteed a 95% uptime of the G-Scan machine to Star and offered a compensation for downtime extending beyond 5%, a similar offer was not made to the informant, despite the informant being the largest purchaser of G-Scan machines in India through a single order . 

Basis the above, the CCI in its order[3], imposed a penalty of INR 9.33 lakhs on the Esaote Group.

Chairperson’s Dissent

In his dissent note, the CCI’s Chairman disagreed with the delineation of the relevant market in the order[4], finding that different technological features and functionalities do not constitute a separate product market .

He noted and emphasised on the substitutability of not only the different types of MRI machines, but also the different types of diagnostic equipments that are available to hospitals/clinics. He also took into consideration the negligible demand of weight bearing MRI machines (with Esaote having sold only ten G-Scan machines in India in 11 years of its operations) and weight bearing MRI scans in India, which he found as indicative of the fact that such technological additions were not decisive factors for consumers. Interestingly, the Esaote Group had also argued that all MRI machines could have weight bearing functionality added at a fraction of the cost of a dedicated standing/titling MRI machine.

The Chairperson noted that if the results and features of these specific MRI machines were indeed different and distinct, there would have been more sales of these machines. The Chairperson observed that the consumer demand was being satisfied by both kinds of MRI machines, and accordingly, these two machines did not differ from the perspective of the intended use. Instead of a factor attributing dominance of the Esaote Group, the Chairperson viewed the absence of the other two dedicated/standing titling MRI machine manufacturers in India as evidence of the low demand for such machines and a reinforcement of the fact that a market for such machines did not exist. Consequently, the Chairperson held that a distinct market for standing/tilting MRI machines could not be delineated .

The Relevant Market Question — Narrow or Broad

The Act defines the “relevant product market” to mean a market comprising all those products which are regarded as substitutable by reason of characteristics of the products, their prices and intended use. Section 19(7) of the Act also requires the CCI to consider factors such as physical characteristics, end use, price and consumer preferences, when defining the relevant market .

The question that then emerges from the contrasting views in the order and the Chairperson’s dissent is whether a technological advancement or variation would itself imply a change in the characteristic of a given product, thereby warranting the identification of a separate product market. Similarly, would every technological modification be seen as a change in the product’s characteristic or would the CCI’s order[5] be applicable only in cases of intrinsic changes. Further, another question to consider is whether such an approach would be applicable across sectors, including in high technology markets, where innovation forms the core of the business or is the order a result of the CCI’s extremely vigilant approach in the healthcare sector. It would be interesting to see if the CCI mirrors its approach in this case in other markets and if yes, the larger impact on innovation centric markets, that ensues from it.  

Anshuman Sakle is a Partner with the Competition Law Practice at Cyril Amarchand Mangaldas and can be contacted at anshuman.sakle@cyrilshroff.com.  Arunima Chandra is a Senior Associate with the Competition Law Practice at Cyril Amarchand Mangaldas and can be contacted at arunima.chandra@cyrilshroff.com.

[1] House of Diagnostics LLP v. Esaote SpA, Case No. 09 of 2016, order dated 27-9-2018.

[2] Ibid.

[3] Ibid.

[4] Ibid.

[5] Ibid.

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