ANTI COMPETETIVE AGREEMENTS

November 11, 2021

INTRODUCTION

The Competition Act, 2002 (the “Competition Act”) was brought into effect in stages from 2002 to 2011. The Competition Commission of India (the “CCI”) was established during this period to administer the Competition Act.

The Competition Act repealed the Monopolies and Restrictive Trade Practices Act, 1969 (the “MRTP Act”), and substituted for it, a new framework of competition law in India based on the wisdom of competition law in certain mature jurisdictions, including the European Union, and the perceived change in the economic and business landscape in India. In addition to there being significant differences in the substantive prohibitions of the Competition Act and the MRTP Act, the Competition Act also empowered the CCI with an enlarged role and extensive punitive powers as compared with the erstwhile Monopolies and Restrictive Trade Practices Commission.

The substantive provisions of the Competition Act relating to anti-competitive agreements and abuse of dominance were brought into effect on 20 May 2009, and on 4 February 2010, the CCI passed its first orders in relation to alleged violations of the Competition Act. The provisions of the Competition Act relating to combinations (i.e., the framework for scrutiny of mergers and acquisitions) were brought into effect on 1 June 2011. [1]

This article focuses on Section 3 of the Competition Act which sets out the substantive prohibitions on anti-competitive agreements. Part I of this article provides an overview of Section 3 of the Competition Act and highlights certain differences between the provisions of the Competition Act and the competition regulation framework of the European Union. Part II analyses certain key orders of the CCI on issues relevant to Section 3 of the Competition Act.

THE AIMS AND OBJECTIVES OF THIS ACT WERE:
To ensure that the operation of the economic system does not result in the concentration of economic power in hands of few rich.
To provide for the control of monopolies, and
To prohibit monopolistic and restrictive trade practices.[2]

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 –

whether or not, such arrangement, understanding or action is formal or in writing; or
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.

CATEGORIES OF ANTI-COMPETITIVE AGREEMENTS

These categories broadly include the following agreements, between two entities, engaged in trade of similar or identical goods or services:

That directly or indirectly leads to determination of purchase or sale prices;
That limits or controls production, supply, markets, technical development, investment or provision of services;
That 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;[3]
That directly or indirectly results in bid rigging or collusive bidding, shall be presumed to have an appreciable adverse effect on competition. Whether an agreement has an anti-competitive effect on the competition in India is to be decided by the Competition Commission of India. According to Section 19 of the Act, the parameters for judging or determining whether the agreement can have appreciable adverse impact on the competition include the following:
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 utilizing production or distribution of goods or provision of services.

However, an exception can be created to this rule. If the nature of agreements is that of increasing efficiency regarding production, supply, distribution, storage, acquisition or control of goods or services. In the case where the agreement has a direct nexus between cost and quality efficiencies and it benefits the consumers or compensates them for any actual or negative impact that the agreement is likely to cause, then such an agreement does not fall within this category.

Also the Competition Act, 2002 does not recognize those agreements which impose reasonable restrictions that restrict or protect infringement of rights as guaranteed under the Intellectual Property laws. In the case of Shri Ashok Kumar Sharma v. Agni Devices Pvt. Ltd [4]it was held that a mere restriction on the use of the trademark would not be held as anti – competitive within the meaning of Section 3 or 4 of the Act.

Section 19(3) requires that the Competition Commission of India should give due regard to the factors as mentioned above while deciding whether it causes appreciable adverse effect or not. However, in the case of Automobiles Dealers Association v. Global Automobiles Limited & Anr.[5], CCI held that while examining the said matter, it shall work on the principles of prudence in light of the factors as mentioned in Section 19 (3).

Agreements among enterprises or persons at different stages or levels of the production, supply, storage, sale, price of trade of goods or services including the following:
Tie-in arrangement – agreement which requires a purchaser to purchase some other goods as a condition to purchase the goods that he wants to purchase.
Exclusive supply agreement – agreement that restricts a purchaser in any manner, directly or indirectly, from acquiring or dealing in the goods other than those of the seller or any of the other person.
Exclusive distribution agreement – agreement which limits, restricts or withholds the output or supply of any goods or allocates the area or market for disposal or sale of the goods.
Refusal to deal – Any agreement that restricts or is likely to restrict any person or class of persons, by any method, to or from whom the goods can be sold or brought.
Resale price maintenance – Any agreement that in which the price for resale by the purchaser is stipulated by the seller unless it is clearly stated that the prices lower than those prices can be charged.

While determining whether the agreement falls within the category of anti-competitive one or not, the competition Commission can employ the yardstick of the rule of reason. According to the rule of reason as explained by the United States Supreme Court in the case of Board of Trade of City of Chicago v. The US[6], any restraint is of an 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 restraint was imposed, the nature of restraining and its actual or probable effect.

AGREEMENT UNDER COMPETITION ACT

Section 3[1] of the Competition Act states about anti-competitive agreement, there are two kinds of agreement under the Act-

1. Vertical

2. Horizontal

Agreement is defined under Section 2(b) of the Competition Act[2]. Agreement is relating to production, supply, distribution, storage, acquisition or control of goods or services which causes or is likely to cause an appreciable adverse effect on competition in India shall be void. Agreement widely defined – even a nod or a wink can suffice. It need not be written, covers oral understandings as well. Direct proof of agreement not required, may be conditional from facts, circumstantial evidence is enough.

CARTEL is very important part of the same. Cartel includes 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 or price of, or, trade in goods or provision of services. Cartel is a secret and not public, they work under the skin.

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.[7]

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).

There is direct or indirect determination of prices, it is between competitiors presumed and anti-competitive. Sharing of

• Prices,

• Input costs,

• Price/cost components,

• Profit margins,

• Cost structure and price calculation,

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).

CERTAIN KEY ISSUES UNDER HORIZONTAL AGREEMENTS:

1. Limiting production or supply

All decisions on increase or decrease of production, sales or capacity, entry into new markets, capacity utilization etc. should be taken independently. Any agreement/understanding on the above between competitors may raise concerns. It is best to keep a record of independent business reasons for any decisions regarding the same.

2. Market sharing

There should not be any formal or informal agreement or understanding with competitors in relation to sharing of territories / products. Competitors must not agree not to target each other’s customers (regardless of the size of these customers).

3. Bid-rigging

Any agreement…which has the effect of eliminating or reducing competition for bids or adversely affecting or manipulating the process for bidding. Common forms of bid rigging:

• Bid suppression,

• Complementary bidding,

• Bid rotation,

• Agreements not to bid against each other or squeeze other bidders,

• Agreements on common terms or pricing formulae.

A.R. Polymers Case[8]– the COMPAT overturned the CCI decision on the grounds that CCI and the DG failed to give due weightage to the nature of the market for jungle boots, manner in which the tender is conducted, and execution of the rate contract to arrive at finding of bid rigging solely on the grounds of identical pricing.

FACTORS WHICH MAY NOT MITIGATE LIABILITY:

• Success or failure of a cartel.

• Normal practice in the industry.

• Ignorance of the law.

• The agreement /understanding between parties not being in writing.

• The practice occurring through a trade association.

• Remaining silent in a meeting where an anti-competitive practice took place.

• Not leading but merely following others in the practice.

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:[9]

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:
1. Tie-in arrangement (includes any agreement requiring a purchaser of goods, as a condition of such purchase, to purchase some other goods);
1. 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);
1. 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);
1. 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);
1. 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).[10]

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

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.[11]

CASE LAWS

Shri Shamsher Kataria v. Honda Siel Cars India Ltd. & Ors[12] – Violations of Section 3 and 4 Allegations: Car manufacturers had entered into anti-competitive agreements with their Original Equipment Suppliers (OESs) and authorised dealers, restricting sale of spare parts and tools in the open market. It was further alleged that the car manufacturers were abusing their dominant position by restricting the OESs from supplying their spare parts in the open market.

In re. Godrej and Boyce Mfg. Co. Pvt. Ltd.[13], the burden of proof is one the plaintiff who institutes the claim per se violation to prove that:-
The seller conditioned the sale of ne product or service on the purchase of second.
That the two products or services are two separate products that they are not parts of the same product.
That the seller has sufficient position on the market for tying the product to enforce it.

CONCLUSION

The Competition Act represents a significant departure in scope from the MRTP Act. The enactment of the Competition Act has substituted the MRTP’s feeble protection against dominance, cartels and unfair trade practices with a system focussed on the promotion of competition and prevention of anti-competitive practices and transactions.

Within this new framework of law, the CCI has made a significant contribution towards development of awareness of competition law in India, not least with its imposition of substantial fines on parties infringing the Competition Act. It has also identified and attempted to address complex issues arising under the Competition Act, such as those related to information sharing in the Cement Case.

As expected in the nascent stage of development of any body of law, there are several areas where the performance of the CCI could be improved, most significantly, in the matter of clarity in its decisions and reasons for rejection of arguments of parties. Due to the early stage of development of competition law in India, this is important not only for the relevant matter in question, but also to create a better understanding of the legal framework amongst the general public.

Finally, it would be immensely useful if the CCI were to publish guidelines in relation to matters such as fining principles, de-minimis thresholds and specific guidance on commercial arrangements. Such guidelines can be expected in due course, once the CCI has established firm internal views on such subjects

BIBLIOGRAPHY

[1] https://www.mondaq.com/india/trade-regulation-practices/250048/anti-competitive-agreements-tests-and-tribulation

[2] https://www.legalserviceindia.com/legal/article-1000-anti-competitive-agreements-and-the-competition-act-2002.html

[3] https://blog.ipleaders.in/anti-competitive-agreements/

[4] Shri Ashok Kumar Sharma v. Agni Devices Pvt. Ltd AIR 2015

[5] Automobiles Dealers Association v. Global Automobiles Limited & Anr AIR 1908

[6] Board of Trade of City of Chicago v. The US AIR 1986

[7] https://www.legalserviceindia.com/legal/article-1000-anti-competitive-agreements-and-the-competition-act-2002

[8] A.R. Polymers Case AIR 2016

[9] http://docs.manupatra.in/newsline/articles/Upload/7182BCB8-7FFD-4D9A-8F53-8606AE3BEBD7.pdf

[10] https://blog.ipleaders.in/anti-competitive-agreements/

[11] https://blog.ipleaders.in/anti-competitive-agreements/

[12] Shri Shamsher Kataria v. Honda Siel Cars India Ltd. & Ors AIR 2010

[13] Godrej and Boyce Mfg. Co. Pvt. Ltd. , AIR 1978

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November 11, 2021