C. Defences Raised by KSE: 58. KSE and LSE raised the defence (see paragraphs 25(a) and 26 (j) respectively), that their act of placing the floor had the tacit approval of the securities regulator, ie the Securities and Exchange Commission of Pakistan (SECP)
In essence they argued for informal exemption from the application of the Competition Ordinance, and this type of defence is known as "state compulsion" defence in the EU, "regulated conduct" defence in Canada, or "grant of implied immunity," in the United States.
Under the Competition Ordinance, Section 52 empowers the Federal Government to (formally) exempt any class of undertaking from the application of the Ordinance or any provision thereof, and the Federal Government has not provided any exemption for stock exchanges from the application of the Ordinance.
59. On the other hand, Section 57 states that "the provision of this Ordinance shall have the effect notwithstanding anything to the contrary contained in any other law for the time being in force." However, it is quite possible that a subsequent legislation establishing a regulatory regime over an area of commercial activity may also have an overriding clause similar to Section 57.
Would that mean that the Competition Ordinance will be displaced? he reply is in the negative, for "the general sense of the phrase for the time being is that of time indefinite, and refers to an indefinite state of facts which will arise in the future and which may vary from time to time." (Devkumarsinghji Kusturchandji v State of Madhya Pradesh and others, AIR 1967 MP 268 at para 11 citing Ellison v Thomas, (1862) 31 U Chaudhry 867).
Thus, notwithstanding the overriding clause, a valid piece of legislation incompatible or repugnant to the provisions of the Competition Ordinance may be enacted. In such a situation, the Commission may ascertain how other jurisdictions have resolved the conflict between competition law and other regulatory laws. Here, the conflict resolution standards of "state compulsion" defence or "grant of implied immunity" adopted in the EU and US respectively, are instructive and persuasive.
60. In the EU, to plead the defence of state compulsion successfully, the party claiming the defence must satisfy the following three points:
i. That the state must have made certain conduct compulsory: mere persuasion is insufficient;
ii. That the defence is available only where there is a legal basis for this compulsion; and
iii. That there must be no latitude at all for individual choice as to the implementation of the governmental policy (Whish, supra note 38 at p. 129.).
61. The position in the United States is as follows:
"[W]hen Congress, by subsequent legislation, establishes a regulatory regime over an area of commercial activity, the antitrust laws will not be displaced unless it appears that the antitrust and regulatory provisions are plainly repugnant"; and "[r]epeal is to be regarded as implied only if necessary to make the [regulatory act] work, and even then only to the minimum extent necessary."
The Court has also professed an unwillingness to grant immunity "absent an unequivocally declared congressional purpose to do so." (Parker C. Folse, III, Antitrust and Regulated Industries: A critique and Proposal for Reform of the Implied Immunity Doctrine, 57 Tex. L. Rev. 751 at 767 (1979) citing: City of Lafayette v. Louisiana Power & Light Co, 435 US 389, 398 (1978); Gordon v. New York StockExch.. 422 US 659. 682 (1975); United States v. Philadelphia Natl Bank, 374 US 321, 350-5 1 (1963); Silver v. New York Stock Exch.. 373 US 341, 357 (1963). See Gordon v. New York Stock Exch., 422 US 659, 682 (1975): Pan Am. Workd Airways. Inc v. United Slates, 371 US 296, 305 (1963).
62. The standard for repealing antitrust laws by implication, in the US, is "clear incompatibility" (credit Suisse Securities i. Glen Billing et al., 127 S.Ct. 2383 (2007). or "plain repugnancy between the antitrust and regulatory provisions." (Gordon v. New York Stock Exchange, Inc, 422 US 659 at 682 (1975); citing the following cases: United States v. Philadelphia National Bank, 374 US 321, 350-35 1, 83 S.Ct. 1715, 1734-1735, 10 L.Ed.2d 915 (1963). See also Merrill Lynch, Pierce, Penner & Smith v. Ware, 414 US, at 126. 94 S.Ct.. at 389: Hughes Tool Co v. Trans World Airlines, Inc, 409 US 363, 385-389, 93 S.Ct. 647, 659-662, 34 L.Ed.2d 577 (1973); Carnation Co v. Pacific Conference, 383 US 213, 217-218, 86 S.Ct. 781, 784-785, 15 1..Ed.2d 709 (1966); Silver v. New York Stock Exchange, 373 US, at 357-358, 83 S.Ct. at 1257-1258;United Slates v. Borden Co, 308 US 188, 198-199, 60 S.Ct. 182, 188-189, 84 LEd. 181 (1939): United States v National Assn.
Of Securities Dealers, 422 US 694, at 719-720, 729-730, 95 S.Ct. 2427. 2443, 2447-2448. 45 L.Ed.2d 486). In order to ascertain sufficient incompatibility to warrant an implication of preclusion, the Courts have frequently employed the following four point test:
i. the existence of regulatory authority under the securities law to supervise the activities in question;
ii. evidence that the responsible regulatory entities exercise that authority;
iii. a resulting risk that the securities and antitrust laws, if both applicable, would produce conflicting guidance, requirements, duties, privileges, or standards of conduct; and
iv. the possible conflict affected practices that lie squarely within an area of financial market activity that securities law seeks to regulate (Credit Suisse Securities v. Glen Billing et al., 127 S.Ct. 2383 (2007). Citing Gordon v. New York Stock Exchange, Inc, 422 US 659 (1975); United States v. National Association of Securities Dealers. 422 US 694 (1975).
63. In the instant case, employing the EU state compulsion test, the SECP had not made the price floor compulsory. Both the KSE and LSE themselves claim that they had the "tacit" approval of the SECP, which is not enough to let the KSE and LSE avail the defence.
The tacit approval, as claimed by the KSE and LSE, would not pass the test as employed by the Courts in the US either. In this case, there is existence of a regulatory authority (ie SECP), which did exercise its authority by placing circuit breakers. The fact that the Undertakings have set the floor while the circuit breakers were in place at the behest of SECP may tantamount to usurping the powers of the SECP.
If the conduct in question is not regulated by the regulatory authority, as in the present case, the need to assess resulting risks and possible conflict (points iii & iv) become redundant. Thus, the tacit approval of the SECP is not sufficient to show that the Undertakings were acting under conflicting regulatory commands.
64. The KSE argued (see para 25 (d) above) that the floor was placed pursuant to its Regulations Governing Risk Management, promulgated in exercise of powers conferred by section 34 of the Securities and Exchange Commission Ordinance, 1969 with the prior approval of the SECP; and that the decision to place the floor was a decision taken by the Karachi Stock Exchange as a frontline regulator and not as a business. In this particular situation, the application of Section 57 of the Ordinance is obviously quite apt, and the argument, therefore, fails.
This argument would even fail to meet the "implied immunity" standard, as the "regulatory responsibility sufficient to trigger immunity when in the hands of an administrative agency may not be sufficient when conferred on an industry organ as a self-regulatory regime." (Lawrence A. Sullivan & Warren S. Grimes, THE LAW OF ANTITRUST: AN INTEGRATED HANDBOOK. 2nd edition Thomson, West 2006 at p. 790).
65. Further, the KSE argued the instant proceedings were initiated without fulfilling the prerequisites in Section 37 of the Ordinance. First to conduct inquiry by the Commission (not any person/body) and thereafter, to determine whether the proceedings under Section will be in the public interest (See para 25 (c) above).
As to the argument that only the Commission and not any person/body should conduct the inquiry, I have to say that I am a little disappointed with lawyers who present their arguments based on a selective reading of the Ordinance.
Section 28(2) of the Ordinance authorises the Commission to "delegate all or any of its functions and powers to any of its members or officers as it deems fit." The Commission had delegated the powers to initiate inquiries under Section 37 to the Members and had been notified in the Official Gazette (see SRO. 999(I)/2008 dated 19th September, 2008).
As to determination of public interest, the Inquiry Report at paragraph 24 mentioned that "setting a floor on the price of securities on the part of the Undertakings, has significantly impacted confidence of investors." When the attention of the counsel for KSE was drawn to paragraph 24, he conceded that "confidence of investors" is a matter of public interest.
66. The argument as to the determination of public interest, however, raises a question, that is, what is meant by "public interest" as used in Section 37. Section 37 in relevant part is reproduced below:
37 (4) If upon the conclusion of an inquiry under sub-section (1) or subsection (2), the Commission is of the opinion that the findings are such that it is necessary in the public interest so to do, it shall initiate proceedings under section 30.
67. Ensuring competitive markets is in the public interest. (See, eg, Areeda & Hovenkamp, supra note 37 at p. 7-103 (the existence of a tort remedy does not necessarily obviate antitrust concern, for the public interest in competition is not-necessarily vindicated by private tort remedies); FCC v. RCA, 346 US 86, 94, 73 S.Ct. 998, 1004 (1953) ("there can be no doubt that competition is a relevant factor in weighing the public interest."); Gordon v. New York Stock Exchange, Inc, 422 US 659 at 692 (1975).(The antitrust laws are designed to safeguard a strong public interest in free and open competition, and immunity from those laws should properly be implied only when some equivalent mechanism is functioning to protect that public interest.).
On the other hand, ensuring provision of "clean air" to the public is also in the public interest. Consider for example that a giant multinational enterprise (MNE") installed a technologically advanced brick making factory which produces zero emissions in the air, thus contributing to environment by not polluting it.
However, under the guise to ensure cleaner air, the MNE decides to engage in predatory pricing so as to push all traditional brick kilns, which emit a lot of smoke in the air and thus pollute the environment and reduce the quality of air available to public, out of business.
The practice of predatory pricing, while reducing competition will also result in ensuring clean air to the public. Should the Commission not initiate any proceedings against the MNE since the practice of predatory pricing was promoting a certain "public interest"? I would reply in the negative. [(Indeed, an environmental protection agency may order the brick kilns to shut down for environmental or any other related concern.
See, for example, The NEWS, Closure of 12 Brick Kilns Ordered, 19 March 2009, available at http ://www.thenews.com.pk/daily detail.asp?id= 167801) (The Ministry of Environment has directed 12 brick kilns located in the vicinity of Benazir Bhutto International Airport, Islamabad, to stop their operation within one month to overcome visibility problems for aeroplanes as well as improving air quality in the area)].
It is an established rule of statutory interpretation that "where a word is used in an Act, which is capable of various shades of meaning, the particular meaning to be attached must be arrived at by reference to the scheme of the Act." Lord Cave, in Brown v. National Provident Institution held: (M N Rao & Amita Dhanda (editors), N S BHINDRAS INTERPRETATION OF STATUTEs (LcxisNexis Butterworths 10th Ed. 2007) at p. 798 citing Nihal Singh v Sri Ram AIR 1939 Lah 388; Manohar Lal v Emperor AIR 1943 Lah 1; Hazara Singh v State of Punjab AIR 1961 Punj 34, p. 39 (FB).
[I]n choosing between two competing constructions, each of them possible, it is not irrelevant to consider that one of them is consistent with the obvious purpose of the Act, while the other would render the statute capricious or abortive. (Id. at p. 799. [1921] 2 AC 222, p. 241.).
The words "public interest" when read with the obvious purpose of the Competition Ordinance would mean nothing else but ensuring competitive markets. And the "confidence of investors" is an essential element in ensuring competitiveness of stock exchanges. The SECP has also taken the same view.
In its Directive, SMD/SE/2(20) 2008, dated 11th December 2008, the SECP noted that "it is in the public interest to allow the securities markets to function without any hindrance in order to maintain the confidence of the investors." The Directive is reproduced at paragraph 24 above.
68. The KSE further argued that the circumstances surrounding the KSEs decision to place a floor on 27th August 2008 were indeed emergent, exceptional and all but drastic and such decision made by the KSE board was in the public interest. (See para 25 (e) above). However, the SECP held a different view.
In its Directive instructing the Undertaking to lift the floor, SECP noted that "the continuing restriction on the trade prices of securities had adversely affected the ability of market participants to manage their respective investments" and the public interest demands that "the securities markets to function without any hindrance in order to maintain the confidence of the investors." (SECP Directive reproduced at paragraph 24 above.). For further comment on KSEs argument regarding public interest, see paragraphs 65 to 67, above.
69. KSEs arguments listed at paragraph 25 (f), (g) (h) and (i), above are addressed in section II. B. titled Application of Section 4, starting at page 18, above. With regard to the argument that the price floor was not the result of an arrangement and or agreement among the KSE, LSE and ISE, suffice it to say that the KSE has misread the Inquiry Report. Nowhere in the Report was it alleged that the placing of price floor was a result of an agreement or arrangement among the KSE, LSE and ISE.
70. Finally, the KSE argued that Article IV (4)(d) of Memorandum of Association of the KSE authorises it to make or adopt regulations relating to "fixing and declaring market rates and settlement rates and dates." (see paragraph 25 (j), above). Suffice it to say that Article IV(4)(d) of the Memorandum of Association of KSE, being clearly repugnant to section 4 of the Competition Ordinance cannot save the decision of the KSE.
D. Defences Raised by LSE:
71. Arguments raised by LSE at paragraph ?26 (e) and (i) are addressed in section II. B. titled Application of Section 4, starting at page 18, above. The argument listed at paragraph ?26 (j) is already addressed at paragraphs ?58 to ?63, above.
72. The LSE argued that it placed the floor to prevent panic selling through its platform. Had the LSE not imposed the price floor, the resultant exaggerated price fall would have created the danger of a large-scale default by the members of the LSE, which would have resulted in the erosion of the security value of the members of the KSE. (See paragraph ?26 (f) and (g)).
While the placing of the floor by the LSE with a view to protect the security value of its members and that of the KSE members, perhaps may have been well-intentioned, but it certainly had the effect of preventing, restricting, and reducing competition in the relevant market. See paragraphs 54 to 57 above, for further discussion on this point.
73. LSE further argued that its actions amounted to a mere suspension of a service for securities trading below a certain level. (see paragraph 26 (h)). Benign as it was portrayed, the decision of LSE was no different from a decision of an association of architects, accountants, lawyers or doctors who refuse to provide their service "below a certain level" of fee. (See, eg, Goldfarh v. Virginia State Bar, 421 US 773, 95 S.Ct. 2004 (1975) (Lawyers were party to a price-fixing decision); Arizona v. Maricopa cy. Medical Soc y, 457 US 332, 102 S.Ct. 2466.
73 L.Ed.2d 48 (1982) (doctors were parties to price fixing agreement); National Socy of Professional Engrs v. United States, 435 US: 679, 98 SQ. 1355, 55 L.Ed.2d 637 (1978) (Engineers were party to a price fixing agreement); Northern Cal. PharmaceuticalAss n v. United States, 306 F.2d 379 -(9th Cir.), cert. denied, 371 US 862, 83 S.Ct. 119, 9 L.Ed.2d 99 (1962) (pharmacists); Mardi rosian v. American Inst. of Architects, 474 F.Supp. 628 (D.C.C. 1979) (architects subject to antitrust laws); United States Dental Inst. v. American Assn of Orthodontists, 396 F.Supp. 565 (N.D.Ill.1975) (dentists and orthodontist); Commission I)ecision of 24 June 2004 relating to a proceeding under Article 81 of the EC Treaty (In the matter of Belgian Architects Association). See paragraphs 46 to 57 above, for further discussion on this point.
E. Defences raised by ISE:
74. Submissions made by ISE at paragraph ?28 are addressed in section II. B. titled Application of Section 4, starting at page 18, above.
III. Penalties:
75. Ordinarily, in view of the seriousness of the violation, high penalties would be appropriate. However, the competition regime is rather new in Pakistan, and it is understandable that the market players need some time to align their activities/business practices to conform with the dictates of the Competition Ordinance. Keeping this aspect in mind, I am inclined to err on the lower side rather than the higher side while imposing penalties for this violation of Section 4(1). Also, I need to bear in mind that while the ISE had been rather contrite, both the KSE and LSE were not. Further, the actions of the KSE and LSE had broad consequences on the economy; whereas consequences of ISEs actions were somewhat de minimis. The parties are, therefore, penalised as follows:
i. The KSE for a sum of rupees six million (Rs 6,000,000).
ii. The LSE for a sum of rupees one million (Rs 1,000,000);
iii. The ISE for a sum of rupees two hundred thousand (Rs 200,000).
The Undertakings shall pay the penalty imposed within thirty days of the date of this Order, failing which recovery proceedings shall be initiated under Section 40 of the Ordinance.
76. It is so ordered.
(Concluded)
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