Study Notes: Anti-Competitive Agreements under Competition Act, 2002

WHAT ARE ANTI-COMPETITIVE AGREEMENTS?

• One of the main objectives of Competition Act, 2002 is to promote a fair and healthy competition in the market and prevent anti-competitive practices/agreements that cause or are likely to cause appreciable adverse effect on competition.
• Section 3(1) of Competition Act, 2002 prohibits such Anti-Competitive Agreements relating to production, supply, distribution, storage, acquisition or control of goods or provision of services, which cause or are likely to cause an Appreciable Adverse Effect on Competition (hereinafter referred to as “AAEC”) within India.
• According to Section 32 of the Act even if an agreement has been entered into outside India, the CCI has power to enquire into such an arrangement if such an agreement has an AAEC in India.
• These anti-competitive agreements are declared void by Section 3(2) of the Act.

TYPES OF ANTI-COMPETITIVE AGREEMENTS

Anti-competitive agreements can further be categorized into:

• Horizontal Agreements [Section 3(3)]
• Vertical Agreements[Section 3(4)]

HORIZONTAL AGREEMENTS [Section 3(3)]

• Horizontal agreements are agreements/arrangements between enterprises/persons at the same stage of production and hence generally take place between rivals.

For example, agreement between two or more manufacturers of same product or; between two or more service providers of same service.

Section 3(3) of the Act provides that horizontal agreements are agreements between enterprises/persons engaged in identical or similar trade of goods or provision of services.

• Horizontal agreements are subject to the adverse presumption of being anti-competitive. This is known as ‘per se rule’ which implies that the agreements (here, horizontal agreement), acts or practices specified by the Competition Act as deemed or presumed to have appreciable adverse effect on competition (AAEC) are by themselves void.

Types of Anti-Competitive Horizontal Agreements:

As per Section 3(3) of the Act any horizontal agreement of either of the following kinds shall be presumed to have AAEC and hence is anti-competitive and void:

• Cartel– A serious type of anti-competitive agreement is cartel. Cartel is defined in Section 2(c) of the Act as an association of producers, sellers, distributors, traders or service providers who, by agreement amongst themselves, limit, control or attempt to control the production, distribution, sale, price or trade of goods/services.

There are four main types of cartel agreements: Price Fixing; Limiting Production or Supply; Market Sharing and; Bid Rigging/Collusive Bidding.

In Builders Association of India v. Cement Manufacturers Association and Ors.[1] (Cement Cartel Case) it was held that existence of written material is not necessary to prove a common understanding or agreement and it is sufficient if the activities of the companies imply the existence of such an agreement. The Commission also gave the concept of parallelism-plus that parallel behaviour in prices, dispatch, supply, accompanied with some other factors indicating coordinated behaviour among firms may become a basis apart to determine the existence of cartels in the market.

• Price Fixing- Agreements that directly or indirectly determine purchase or sale prices are void. Price fixing can either be direct (by maintaining actual prices) or indirect (by offering same discounts, credit terms etc.).
• Limiting Production or Supply– Agreements that either limit or control production, supply, markets, technical development, investment or provision of services are void.
• Sharing of Market- Under Market Sharing Agreements the competitors divide/allot the market amongst themselves in various ways [geographically, goods/services wise, customer wise or in any other way] and agree to deal only in their allotted segment of the market. Hence, the competitors agree not to compete with each other by not dealing in each other other’s allotted area. Such agreements result in creation of monopoly of enterprises in their allotted area; less number of choices of goods/services for consumers; decrease in supply of products/services to customers; increase in prices etc. Therefore, these agreements are presumed to be void.
• Bid Rigging/Collusive Bidding– Agreements that directly/indirectly eliminate or reduce competition for bids or manipulate the process for bidding are known as Big Rigging Agreements. Under these agreements competitors agree and take turns to be the winner of the tenders by not competing with each other in the tender.

In the landmark judgment Rajasthan Cylinders and Containers Ltd. v. Union of India[2] the Supreme Courtestablished a law on price parallelism for oligopolies that price parallelism by itself is not conclusive of arrangement of bid rigging.

VERTICAL AGREEMENTS [Section 3(4)]

• Agreement between enterprises operating at different levels of production is known as Vertical Agreement. These agreements operate at different levels of trade.

For example, agreement between supplier and manufacturer or; between supplier and dealer.

As per Section 3(4) of the Act Vertical Agreement is an agreement between enterprises/persons at different stages of the production chain in different markets.

• ‘Per se Rule’ does not apply in case of Vertical Agreements, that is, they are not per se presumed to be anti-competitive. Legality of Vertical Agreement is assessed on the basis of ‘Rule of Reason’. The Rule of Reason is a legal approach where in order to decide whether or not a practice/agreement should be prohibited an attempt is made to evaluate the pro-competitive features of the practice/agreement against its anti-competitive effects. In short, a vertical agreement is declared void only if it causes or is likely to cause AAEC.

US Supreme Court in Chicago Board of Trade v. United States[3] explained Rule of Reason in examining the legality of restraint of trade as “Any restraint is of essence, until it merely regulates and promotes competition. To determine this question, the Court must ordinarily consider the facts peculiar to the business to which restraint is applied, its condition before and after the restrain was imposed, the nature of restrain and its actual or probable effect.”

Types of Vertical Agreements:

Tie-in Arrangement– Under this arrangement, the seller ties the desirable good that he is selling with another good and makes a precondition that in order to purchase the desired good the purchaser has to also purchase the second good (the tied good) irrespective of the fact whether the purchaser wants to buy the second good or not.

In Shri Sonam Sharma v. Apple Inc.[4], the CCI held that the following ingredients must be present in a Tie-in Arrangement:

1. Presence of two separate products or services capable of being tied.
2. The seller must have sufficient market power with respect to the tying product to appreciably restrain free competition in the market for the tied product.
3. The tying arrangement must affect a “not insubstantial” amount of commerce.

• Exclusive Supply Agreement– These agreements restrict the purchaser in the course of his trade from acquiring or dealing in any goods other than those of the seller. For example, a supplier of goods of one seller is prohibited from dealing with other sellers of the same goods.
• Exclusive Distribution Agreement– These agreements limit, restrict or withhold the output or supply of any goods or allocate any area or market for the sale of goods.
• Refusal to Deal– According to the Act these agreements restrict the persons or classes of persons to whom the goods are sold or from whom goods are bought.

In Shri Shamsher Kataria v. Honda Siel Cars India Ltd.[5](Spare Parts case) the genuine spare parts of automobiles were not made freely available in the market and agreements were made between the OEMs (Original Equipment Manufacturers) and the authorized dealers requiring the latter to source spare parts only from the OEMs or their authorized vendors only.

CCI held that these agreements allowed the OEMs to become monopolistic players in the market for their model of cars, create entry barriers, foreclose competition from the independent service providers, and seek exploitative prices from consumers besides having potential long term anti-competitive structural effects on the automobile market in India. These agreements were held to be of the nature of vertical agreements including exclusive supply agreements, exclusive distribution agreements and refusal to deal under Section 3(4) and held them to have AAEC in India.

• Resale Price Maintenance– This includes any agreement to sell goods on condition that the prices to be charged on the resale by the purchaser shall be the prices stipulated by the seller unless it is clearly stated that prices lower than those prices may be charged.

In Fx Enterprise Solutions India v. Hyundai Motor India Limited[6] CCI imposed penalty on Hyundai for violation of Section 3(4)(e) [Resale Price Maintenance] for monitoring maximum permissible discount level through a Discount Control Mechanism whereby dealers (who were mandated to procure all automobile parts and accessories from Hyundai) were only permitted to provide a maximum permissible discount and were also not authorized to give discount beyond a recommended range.

EXEMPTIONS FROM ANTI-COMPETITIVE AGREEMENTS [Section 3(5)]

• According to Section 3(5)(i), a person exercising his right to prevent infringement or imposing reasonable conditions to protect his Intellectual Property Rights (hereinafter referred to as “IPRs”), that is, Copyright, Patent, Trademark, Geographical Indications and Designs shall exempted from forming anti-competitive agreement under Section 3.

In Shri Shamsher Kataria v. Honda Siel Cars India Ltd.[7] CCI rejected the exemption claimed under Section 3(5)(i) of the Act and held that:

“….. though registration of an IPR is necessary, the same does not automatically entitle a company to seek exemption under section 3(5)(i) of the Act. The important criteria for determining whether the exemption under section 3(5)(i) is available or not is to assess whether the condition imposed by the IPR holder can be termed as “imposition of a reasonable conditions, as may be necessary for the protection of any of his rights”.” [Para 9.1.13]

• As per Section 3(5)(ii), anti-competitive agreement under section 3 shall not restrict the right of any person to export goods from India to the extent to which the agreement relates exclusively to the production, supply, distribution or control of goods or provision of services for such export.

INQUIRY OF ANTI-COMPETITIVE AGREEMENTS [Section 19]

• Who may ask for inquiry?

Section 19(1) of the Competition Act provides that the CCI may inquire into anti-competitive agreements:

• On its own or;
• On receipt of any information from any person or consumer or their association or trade association or;
• On a reference by the government.
• Factors Determining Appreciable Adverse Effect On Competition

While determining whether an agreement is anti-competitive and has AAEC under Section 3, the CCI takes into account the following factors as provided under Section 19(3):

• Creation of barriers to new entrants in the market;
• Driving existing competitors out of the market;
• Foreclosure of competition by hindering entry into the market;
• Accrual of benefits to consumers;
• Improvements in production or distribution of goods or provision of services;
• Promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services.
• Relief in case of Anti-Competitive Agreement [Section 27 & 33]

If after inquiry CC finds that the agreement is anti-competitive and has AAEC, it may pass all or any of the following orders:

• Direct the parties to discontinue and not to re-enter such anti-competitive agreement [Section 27(a)].
• Impose penalty (not to be more than 10% of the average of the turnover for the last three preceding financial years) upon each party involved in such agreement [Section 27(b)].
• In case of a cartel, impose a penalty up to three times of its profit for each year of the continuance of such agreement or 10% of its turnover for each such year, whichever is higher [Section 27(b)].
• Modify the agreement [Section 27(d)].
• Direct the enterprise to comply with the orders, directions and make payment of cost as directed by CCI [Section 27(e)].
• Pass any other order or direction as it may deem fit [Section 27(g)].
• Issue interim orders [Section 33].

[1] Builders Association of India v. Cement Manufacturers Association, Case No. 29/2010.
[2] Rajasthan Cylinders and Containers Ltd. v. Union of India, 2018 SCC Online SC 1718.
[3] Chicago Board of Trade v. United States, 246 U.S. 231 (1918).
[4] Shri Sonam Sharma v. Apple Inc., Case No: 24/2011.
[5] Shri Shamsher Kataria v. Honda Siel Cars India Ltd., Case No. 03/2011.
[6] Fx Enterprise Solutions India v. Hyundai Motor India Limited, Case no. 36 & 82 of 2014.
[7] Shri Shamsher Kataria v. Honda Siel Cars India Ltd., Case No. 03/2011.