Secondly, even if the submission of the Informant regarding
dominance of the Adidas AG Group is accepted post the formation of group in
2005, the conduct of the Adidas AG Group vis-a-vis the Informant remained
same (as „the Agreement‟ was said to be continued on same terms and
conditions). Further, as per Informant‟s own submissions, the agreement with
M/s Neelkanth Traders was more favourable than the one with it which fact goes
against the allegation of abuse by the Adidas AG Group.
23. Although there were certain differences between the two franchisee agreements
as stated above, the differences cannot be termed as abusive unless they are
discriminatory within the meaning of section 4(2) (a) (i) and 4(2) (a) (ii) of the
Act. These franchisee agreements were entered into on different dates, the first
one (between the Opposite Party No. 3 and the Informant) was executed in
August 2003 and the second (between the Opposite Party No. 3
and M/s
Neelkanth Traders) in March 2006. It may also be pertinent to note that a
manufacturer is not be obligated to follow a single template agreement
throughout its existence. With passage of time and operations, the commercial
arrangements may undergo a change. It is not the case of the Informant that the
margin of 28% was imposed on him even after the expiry of „the Agreement‟ in
2006. „The Agreement‟ was renewable/terminable after 3 years (i.e., after
27.08.2006) by mutual consent of the parties. Moreover, the difference of
margins is not substantial which can be termed as abusive within the meaning of
Section 4 of the Act.
Case No. 10 of 2014
In Re:
Mr. Om Datt Sharma
- Informant
And
M/s Adidas AG
- Opposite Party No. 1
M/s Reebok International Limited
- Opposite Party No. 2
M/s Reebok India Company
- Opposite Party No. 3
CORAM
Mr. Ashok Chawla
Chairperson
Mr. Anurag Goel
Member
Mr. M. L. Tayal
Member
Mr. S. L. Bunker
Member
ORDER UNDER SECTION 26(2) OF THE COMPETITION ACT, 2002
Dated: 13-05-2014
1. Mr. Om Datt Sharma, the Managing Partner of M/s Kalpataru Enterprises, has
filed the information in instant case under Section 19(1) (a) of the Competition
Act, 2002 (“the Act”) alleging that the Opposite Parties i.e., M/s Adidas AG, M/s
Reebok International Limited and M/s Reebok India Company, as a group, have
infringed the provisions of Section 4 of the Act with respect to sale of premium
sports goods to it.
2. The Informant is stated to be engaged in the business of retailing of single brand
sports goods on a franchisee model. The Opposite Party No. 1 is a listed German
stock corporation and is the holding company of the Adidas Group. It has been
engaged in the business of designing, developing, manufacturing and marketing
of sports and leisure goods including footwear, apparel, and equipment. The
Opposite Party No. 2 is a USA based renowned manufacturer of sports goods
such as shoes, apparel, accessories/equipments and casual footwear, apparel etc.,
for non-athletic use. The Opposite Party No. 3 is a registered company under the
Companies Act, 1956 and, inter alia, is engaged in the business of supply of
footwear, apparel, accessories, sports equipment etc., in India.
3. It is stated in the information that the Opposite Party No. 2, through its wholly-
owned subsidiary Reebok (Mauritius) Company Limited, owns 93.15% equity in
the Opposite Party No. 3 and the Opposite Party No. 1 acquired 100% equity in
the Opposite Party No. 2 in 02.08.2005. Thus, since 02.08.2005, all the Opposite
Parties belong to a group headed by the Opposite Party No. 1(henceforth, “the
Adidas AG Group”), as provided in the Act.
4. Relying on a research study report of the Indian Council for Research on
International Economic Relations (ICRIER) on „Sports Retailing in India‟,
different newspaper articles, case laws of the European Commission and India, a
market study report by a group of students of MDI (Management Development
Institute), on “Marketing Strategy of Reebok in India”, and its own assessment
the Informant submitted that the Adidas AG Group held a dominant position in
the relevant of “market of sale of premium sports goods in Noida”.
5. As per the information, through a Franchisee Agreement („the Agreement‟) on
27.08.2003, the Opposite Party No. 3 appointed the Informant as franchisee for
sale of its manufactured and/or branded premium sports goods in a retail outlet at
F-26, Sector 18, Noida, Uttar Pradesh. The duration of „the Agreement‟ was three
years, subject to renewal.
6. Following the expiry of the term of „the Agreement‟, the Informant was orally
assured by the Opposite Party No. 3 that „the Agreement‟ shall be replaced by a
new franchisee agreement with more favourable terms. Based on its assurance,
the Informant continued to carry on the business as per „the Agreement‟ and
purchased goods numerous times from the authorized distributor of the Opposite
Party No. 3 and sold its product till February, 2009.
7. The Informant averred that thereafter, the Opposite Party No. 3 had failed to fulfil
its several obligations such as to pay the amount due under „the Agreement‟, to
collect the unsold stocks/goods etc., which caused financial loss to it which
amounts to imposition of unfair terms and conditions in contravention of the
provisions of Section 4(2) (a) (i) of the Act. In this regard the Informant had sent
last email to the Opposite Party No. 3 on 16.01.2014 to remind it to collect the
unsold goods from it.
8. The Informant alleged that the terms and conditions of „the Agreement‟ are not
only unfair but also discriminatory vis-a-vis other franchisees. To substantiate its
claim, the Informant submitted that the Opposite Party No. 3 had entered into a
franchisee agreement with one M/s Neelkanth Traders on 27.03.2006 which had
more favourable terms than the one entered with it. The rate of commission given
to the Informant was 28% whereas M/s Neelkanth Traders was given 33%. It is
averred that such discriminating practice of the Opposite Party No. 3 had put
some franchisees/retailers at a competitive disadvantage position vis-a-vis the
others thus, causing an appreciable adverse effect on competition in the
downstream market. The Informant alleged that the said acts of the Adidas AG
Group amounted to imposition of discriminatory conditions which is in
infringement of the provisions of Section 4(2) (a) (ii) of the Act.
9. The Informant contended that though „the Agreement‟ was executed prior to „the
Act‟ coming into force, however, the Adidas AG Group become liable since the
anti-competitive effects of „the Agreement‟ continued even after the enforcement
of the relevant provisions.
10. Based on the above stated facts and grounds, the Informant prayed before the
Commission to initiate an investigation into the matter; to restrain the Adidas
AG Group from the above said activities; to recommend such clauses which the
Adidas AG Group should uniformly apply across all their franchise agreements;
and to pass such other and further order(s) as the Commission may deem fit and
proper.
11. The Commission has perused the material available on record and heard the
learned counsel appearing on behalf of the Informant. Facts of the matter reveal
that the allegations of the Informant pertains infraction of the provisions of
Section 4 of the Act by the Opposite Parties.
12. The first issue needs to be examined is that whether the Opposite Parties can be
treated as a „group‟ for applicability of the provisions of Section 4 of the Act?
As per Explanation (b) of Section 5 of the Act, “group” means:
“two or more enterprises which, directly or indirectly, are in a
position to-
(i) exercise twenty-six percent or more of the voting rights in the
other enterprise; or
(ii) appoint more than fifty percent of the members of the board of
directors in the other enterprise; or
(iii) control the management or affairs of the other enterprise”
13. It is observed that the Opposite Party No. I acquired 100% equity in the
Opposite Party No. 2 on 02.08.2005 and the Opposite Party No. 2, through its
wholly owned subsidiary Reebok (Mauritius) Company Limited, owns 93.15%
Case No. 10 of 2014
Page 4 of 10
equity share in the Opposite Party No. 3. Thus, based on the above said
provisions of „the Act‟ all the Opposite Parties can be treated as „a group‟ for the
purpose of Section 4 of the Act.
14. For examining the alleged abusive conduct of the Adidas AG Group, the first
essential requirement is to delineate the relevant market and then, to assess its
dominance in the relevant market followed by the examination of its alleged
abusive conduct.
15. On the issue of relevant product market, the Informant contended that the market
for premium branded sports goods including footwear, sports apparel, protective
equipment, and sport-specific equipment like cricket bat, football, hockey sticks
and pucks etc., manufactured by the prominent and well-known brands such as
Adidas AG (brand “Adidas”), Reebok (brand “Reebok”), Nike AG (brand
“Nike”) and Puma AG Rudolf Dassler Sport (brand “Puma”) constitutes a
separate product market.
16. The Commission notes that for determining the relevant product market, the
demand side substitutability is the decisive factor because whether a consumer
would consider any other product as a substitute or inter-changeable with the
products manufactured by the Opposite Parties will determine what all goods
can be included in the relevant product market definition. Seemingly, sports
goods like sports apparel, sports shoes, sports equipments have a different
intended end-usage and are generally not-substitutable for a consumer intending
to purchase the same. With the growing trend of premiumisation, the consumers
seek to purchase better quality and innovative product, thereby making the non-
branded sports goods non-substitutable for premium branded sports goods.
Further, substantial price difference between the branded and non-branded sports
goods makes the market for branded sports goods a separate relevant product
market because there are different consumer groups for the above said two types
of markets. Accordingly, the Commission is of the opinion that the relevant
product market in this case is „the market of premium sports goods‟.
17. With regards to the relevant geographic market, the Informant urged the
Commission to consider the territory of Noida as the relevant geographic market
because it is operating at Noida and for a franchisee a particular geographic area
is not substitutable for another area. As per Section 2(s) of the Act, relevant
geographic market comprising the area in which the conditions of competition
for supply of goods or provision of services or demand of goods or services are
distinctly homogenous and can be distinguished from the conditions prevailing
in the neighbouring areas. Based on the provisions of the Act, the territory of
Noida appears to be the relevant geographic market in the instant case. Because
a consumer prefers to purchase such products from a location which is easily
accessible by him. A consumer residing in Noida would not prefer to go to
National Capital Region (NCR) or other cities solely with a view to purchase the
sports goods as it involves additional transportation cost and time. Thus, prima
facie, the relevant market in the present case appears to be „the market of
premium sports-goods in Noida‟.
18. On the issue of dominance, the Informant contended that the Adidas AG Group
held a dominant position in the relevant market as defined above. In support of
its contention the Informant placed reliance on the ICRIER study report (June,
2010) on „Sports Retailing in India‟ which states that Reebok held 50% of the
market and Adidas held between 20%-25% in the premium branded sportswear
market in India. Though Nike and Puma seems to operate in the same market but
the majority of the market is catered by the Adidas AG Group which runs
thousands of stores across India. However, the Informant has not provided the
market share data of the Adidas AG Group pertaining to the geographic area of
Noida. Based on the all India market share figure submitted by the Informant, it
seems that the same set of players operate in the market for sale of premium
sports-goods across India and the market share distribution of the Adidas AG
Group and its competitors in Noida is likely to follow the similar pattern.
Considering the nature of distribution of relevant product market in India, the
Commission feels that market share of the players in Noida will not be
substantially different from their market shares in India. Accordingly, the
Commission, in consonance with the Informant‟s contention, is of the prima
facie view that the Adidas AG Group appears to be in a dominant position in the
relevant market as defined above.
19. Having established that the Adidas AG Group is in a dominant position in the
relevant market, the next issue is to examine whether its alleged conduct is
abusive in terms of the provisions of Section 4 of the Act. On the issue of
abusive conduct of the Adidas AG Group, the Informant contended that the
terms of „the Agreement‟ which it entered into with the Opposite Party No. 3 to
run a franchise store at Noida are unfair and discriminatory vis-a-vis the
agreement the Opposite Party No. 3 entered into with another franchise namely,
M/s Neelkanth Traders. Some of such conditions are: difference in the rate of
commission assured to the Informant and M/s Neelkanth Traders, assurance of a
minimum guaranteed payment for operating the retail outlet to M/s Neelkanth
Traders whereas Informant was not offered such term, M/s Neelkanth Traders
was promised a monthly rent to be paid to the property owner of the retail outlet
whereas Informant was not offered such term, the Opposite Party No. 3 has
unilateral power to terminate „the Agreement‟, no liberty was given by the
Opposite Party No. 3 to the franchise to return the unsold goods, etc. As per the
Informant, the said acts of the Adidas AG Group are in contravention of section
4(2) (a) (i) and 4(2) (a) (ii) of the Act.
20. It was also pointed out by the Informant that after the expiry of the term of the
franchisee Agreement in 2006, the Informant and OP 3 continued to do business
as per that Agreement and Informant continued to function as OP 3‟s franchisee
till February, 2009 i.e., when the last sale of OP 3‟s products from the
Informant‟s Franchisee was being made. Thereafter, allegedly OP 3 never took
back the dead stock lying at Informant‟s store leading to insurmountable losses
to the Informant.
21. After having perused these allegations, the Commission is of the opinion that the
allegations seem baseless and not amounting to an abuse of dominant by the
Adidas AG Group within the meaning of Section 4 of the Act. Without going
into greater details of the allegations posed, it may be pertinent to take note of
the chronology of events that took place from 2003 to 2009. „The Agreement‟
was entered into between the Opposite Party No. 3 and the Informant on
27.08.2003 when the Opposite Party No. 3 was not part of the Adidas AG Group
alleged to be dominant in this case. In August, 2005, the Opposite Party No. 1
acquired the Opposite Party No. 2 (and also the Opposite Party No. 3) and the
Adidas AG Group came into existence. „The Agreement‟ expired on 26.08.2006
as per the terms stated therein. The Informant submitted that „the Agreement‟
continued thereafter on oral understanding between the parties on the same
terms and conditions. On 27.03.2006, another franchisee agreement between the
Opposite Party No. 3 and its another franchisee M/s Neelkanth Traders was
entered into which was alleged to be more favourable than the one entered into
between the Informant and the Opposite Party No. 3 in 2003.
22. The Commission finds two fundamental flaws in the allegations made by the
Informant. Firstly, „the Agreement‟ which was termed as unfair and arbitrary
was entered into in 2003 when the alleged dominant group had not even come
into existence. Secondly, even if the submission of the Informant regarding
dominance of the Adidas AG Group is accepted post the formation of group in
2005, the conduct of the Adidas AG Group vis-a-vis the Informant remained
same (as „the Agreement‟ was said to be continued on same terms and
conditions). Further, as per Informant‟s own submissions, the agreement with
M/s Neelkanth Traders was more favourable than the one with it which fact goes
against the allegation of abuse by the Adidas AG Group.
23. Although there were certain differences between the two franchisee agreements
as stated above, the differences cannot be termed as abusive unless they are
discriminatory within the meaning of section 4(2) (a) (i) and 4(2) (a) (ii) of the
Act. These franchisee agreements were entered into on different dates, the first
one (between the Opposite Party No. 3 and the Informant) was executed in
August 2003 and the second (between the Opposite Party No. 3
and M/s
Neelkanth Traders) in March 2006. It may also be pertinent to note that a
manufacturer is not be obligated to follow a single template agreement
throughout its existence. With passage of time and operations, the commercial
arrangements may undergo a change. It is not the case of the Informant that the
margin of 28% was imposed on him even after the expiry of „the Agreement‟ in
2006. „The Agreement‟ was renewable/terminable after 3 years (i.e., after
27.08.2006) by mutual consent of the parties. Moreover, the difference of
margins is not substantial which can be termed as abusive within the meaning of
Section 4 of the Act.
24. The Commission further notes that the allegation of the Informant regarding the
Opposite Party No. 3 not taking back the dead stock lying in the custody of the
Informant which allegedly inflicted financial harm on it, prima facie does not
raise any competition concern. Otherwise also, the Informant did not provide
any correspondence sent to the Opposite Party No. 3 regarding the dead stock
lying at its store between February, 2009 (when the last sale of the Opposite
Party No. 3‟s products from the Informant‟s Franchise was being made) and 16
January, 2014 when allegedly a request was made to take back the dead stock. It
seems unlikely that a person feeling aggrieved by the abusive conduct of the
Adidas AG Group selects to suffer silently for five long years. In the backdrop
of this fact the e-mail which was purportedly sent on 16.01.2014, just before
filing the information, appears to have been sent only to bring the case within
the jurisdiction of the Commission. Therefore, the contention of the Informant
that though „the Agreement‟ was executed prior to the Act coming into force, the
Opposite Parties are liable as its anti-competitive effects continue even after the
enforcement of the provisions of the Act, in the absence of any evidence to this
effect, cannot be accepted.
25. Based on the foregoing, the Commission is of the considered opinion that the
conduct of the Adidas AG Group, prima facie, does not amount to any
contravention of the provisions of Section 4 of the Act. Therefore, even though
the Adidas AG Group appears to be a dominant group in the relevant market
defined supra, the facts available on record show no violation of provisions of
Section 4 of the Act in the present matter.
26. For the reasons stated above, the case deserves to be closed down under Section
26(2) of the Act.
27. The Secretary is directed to send a copy of the order to all concerned.
Sd/-
(Ashok Chawla)
Chairperson
Sd/-
(Anurag Goel)
Member
Sd/-
(M. L. Tayal)
Member
Sd/-
(S. L. Bunker)
Member
New Delhi
Dated: 13-05-2014
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