While doing business in India, parties are prohibited from executing anti-competitive agreements. Generally, the agreements which cause or are likely to cause appreciable adverse effect on competition ("AAEC") are anti-competitive agreements. Such agreements may be horizontal or vertical. However, the Competition Act, 2002 ("Act") recognizes intellectual property rights and to facilitate their protection, the Act permits reasonable restrictions imposed by their owners. Similarly, the Act exempts agreements between exporters as exports do not impact markets in India. The Competition Commission of India ("CCI") has been given the authority to direct any enterprise or person to modify, discontinue and not re-enter into anti-competitive agreement and impose penalty, which can be 10% of the average of the turnover for the last three years.
In light of such power of CCI, it becomes essential that parties doing business in India are aware regarding the agreements which can fall within the ambit of being labeled as "anti-competitive". In this bulletin we will discuss the situations and conditions in which an agreement can become anti-competitive.
1. Bar from entering anti-competitive agreements
Section 3(1) of the Act provides a general prohibition on the following to enter into agreements which causes or is likely to cause an AAEC in India:
- Enterprise and enterprise;
- Enterprise and association of enterprises;
- Two associations of enterprises;
- Two persons;
- Person and an association of persons;
- Between two association of persons;
- Person and an enterprise;
- Person and an association of enterprise;
- Association of persons and enterprises;
- Association of persons and association of enterprises
If an agreement is entered between any of the above, it would be void under the Act and while deciding so they will be examined under the rule of reason1 on a case-to-case basis.
Now the question that arises here is what would be termed as anti-competitive? Section 3(2) of the Act says that the key determinant of anti-competitive agreement is their AAEC within India. It is crucial to note here that section 32 of the Act provides that even if an agreement has been entered into outside India, the CCI would have powers to enquire into such an arrangement if such an agreement has an AAEC in India.
Further, it is crucial to note that section 2(b) of the Act provides that "agreement" includes any arrangement or understanding or action in concert – (i) whether or not, such arrangement, understanding or action is formal or in writing; or (ii) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings. So, even oral arrangement can be anti-competitive. Arrangement between parties which have not been formalized or if written but not executed or registered can also be considered anti-competitive if they are found to have AAEC in India.
2. Horizontal Agreements
Horizontal agreements are arrangements between enterprises at the same stage of the production chain and that is generally between two rivals for either fixing prices or for limiting production or for sharing markets. In all such agreements, there is a presumption in the Act that such agreements cause AAEC. Cartel is also a horizontal agreement. This is generally between producers of goods or providers of services for price-fixing or sharing of market, and is generally regarded as the most pernicious form of anti-competitive agreement.
Section 3(3) provides that an agreement would have AAEC if there is a practice that is carried on, or a decision that has been taken, between any of the parties mentioned above, including cartels, engaged in identical or similar trade of goods or provision of services, that can either –
- Directly or indirectly determine the purchase or sale prices;
- Limits or controls production, supply, markets, technical development, investment or provision of services;
- Shares the market or source of production or provision of services by way of allocation of geographical area of market, or type of goods or services, or number of customers in the market or any other similar way;
- Directly or indirectly results in bid rigging or collusive bidding (effect of eliminating or reducing competition for bids or adversely affecting or manipulating the process for bidding).
The section provides an exception to the joint ventures entered into by the parties if they increase the efficiency in production, supply, distribution, storage, acquisition or control of goods or provisions of services. Section 3(1) of the Act cannot be invoked independently and is necessarily to be used along with section 3(3) related to horizontal agreements or section 3(4) related to vertical agreements. However, it should be clarified that section 3(1) is not merely a suggestive provision but is essentially the "genus" of the Act. It should also be invoked independently to serve the interest of consumers and also cover various other types of agreements which may not fall under the aegis of section 3(3) or 3(4).
3. Vertical Agreements
Vertical agreements are between enterprises at different stages of the production chain, like an arrangement between the manufacturer and a distributor. The presumptive rule does not apply to vertical agreements. The question whether the vertical agreement is causing AAEC is determined by rule of reason. When rule of reason is employed, both positive as well as negative impact of competition is analyzed. In order to determine whether any agreement is in contravention of section 3(4) read with section 3(1) of the Act, the following five essential ingredients of section 3(4) have to be satisfied:
- There must be an agreement amongst enterprises or persons;
- The parties to such agreement must be at different stages or levels of production chain, in respect of production, supply, distribution, storage, sale or price of, or trade in goods or provision of services;
- The agreeing parties must be in different markets;
- The agreement should cause or should be likely to cause AAEC;
- The agreement should be of one of the following nature as
illustrated in section 3(4) of the Act:
- Tie-in arrangement (includes any agreement requiring a purchaser of goods, as a condition of such purchase, to purchase some other goods);
- Exclusive supply agreement (includes any agreement restricting in any matter the purchaser in the course of his trade from acquiring or otherwise dealing in any goods other than those of the seller or any other person);
- Exclusive distribution agreement (includes any agreement to limit, restrict or withhold the output or supply of any goods or allocate any area or market for the disposal or sale of the goods);
- Refusal to deal (includes any agreement which restricts, or is likely to restrict, by any method the persons or classes of persons to whom goods are sold or from whom goods are bought);
- Resale price maintenance (includes any agreement to sell goods on condition that the prices to be changed 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 changed).
4. Additional grounds
While determining whether an agreement has an AAEC under section 3, the CCI also gives due regard to all or any of the following factors provided under section 19(3) of the Act –
- 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
5. Enquiry by the CCI
Section 19(1) of the Act provides that the CCI may enquire into any alleged contravention of section 3(1) of the Act on its own or on receipt of any information from any person, consumer or their association or trade association upon payment of the fees and the manner prescribed. The CCI may also act if a reference is made to it by the central government or a state government or a statutory authority. The CCI proceeds with enquiry only when there exists a prima facie case and then it directs the director general to cause an investigation in the matter. In cases where after enquiry CCI finds that the agreement is anti-competitive and have AAEC, it may pass all or any of the following orders, apart from any interim orders that it can pass under section 33 of the Act:
- Direct the parties to discontinue and not to re-enter such agreement (cease and desist);
- Impose such penalty as it may deem fit which shall not be more than 10% of the average of the turnover for the last three preceding financial years upon each of the party;
- In case of a cartel, each producer, seller, distributor, trader or service provider included in that cartel can be imposed 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;
- Direct to modify the agreement and in the manner as may be specified in the order of the CCI;
- Pass any such order or issue such directions as it may deem fit.
The Act aims to prevent practices by parties that have AAEC in India. This can ensure freedom of trade and would protect the interest of all the parties, including consumers. But such an aim would not be achieved unless the parties doing business follow the principles laid down in the Act. It is important for the parties while doing business in India to keep a check on retaining any anti-competitive element in the agreements between them. Enterprises should be proactive and diligent to identify the existing anti-competitive elements from their current agreements. The employees can be trained to understand the implications of anti-competitive agreements and how to avoid that. If need be persons and enterprises can always consult experts who can guide them to a safer option.
1 The rule of reason in examining the legality of restraints on trade was explained by the US Supreme Court in Board of Trade of City of Chicago v US (1918) 246 US 231 as follows: "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"