Anti Competitive Agreements under Competition Act,2002

The main objective of competition law in any country is to provide a level field to various enterprises that conduct business. Presence of competitors in a free market, forces business entities to bring innovation in their respective industries to provide better products to stay relevant. It is to be noted that the main objective of any business is to make profit by all means, hence we often find competitors join hands i.e collaborate instead of competing with one another. When competitors collaborate they essentially reduce the choice of the consumers.

For example take the telecom sector. We have three major players Jio, Airtel and Vi. If these companies decide to undertake a joint venture or form a Trust by combining all the players, they have reduced customers choice from three to one.

Such undertakings can charge discriminatory prices to the consumers and they have no choice but accept them. Hence the presence of a robust competition law and authority is a need.

What constitutes as effective competition;

1. Rivalry among firms;

2. Absence of restraints; and

3. Absence of monopolistic market leader

In India if any horizontal or vertical agreement between entities affects negatively any of the above factors,they would be considered as anti-competitive causing an appreciable adverse effect on competition in india. Herein as AAEC

Competition Commission of India the regulator and enforcer of competition law in india shall

Evaluate the situation by asking these questions:

1. Will the agreement collectively restrict prices?

2. Will the agreement restrict output that would prevent existing market players to

conduct business operations?

3. Is the agreement necessary to achieve pro-competitive goals? or

4. Do these agreements facilitate an entity getting market power?

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 India, there is no bright-line test or a benchmark for quantified assessment of

appreciability. Therefore assessment will be according to the factors laid down under

Section 19(3) of the Act.

SECTION 19(3) states the following

The Commission shall, while determining whether an agreement has an appreciable

adverse effect on competition under Section 3, have due regard to all or any of the

following factors, namely:

1. Creation of barriers to new entrants in the market;

2. Driving existing competitors out of the market;

3. Foreclosure of competition by hindering entry into the market;

4. Accrual of benefits to consumers;

5. Improvements in production or distribution of goods or provision of services; or

6. Promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services.

7. A cursory read through the factors will let you know that the first three factors are negative factors which have an anti-competitive effect on competition and the next three factors are positive factors which have a pro-competitive effect on competition

Agreements That Cause AAEC In India

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:

1. Enterprise and enterprise;

2. Enterprise and association of enterprises;

3. Two associations of enterprises;

4. Two persons;

5. Person and an association of persons;

6. Between two association of persons;

7. Person and an enterprise;

8. Person and an association of enterprise;

9. Association of persons and enterprises;

10. 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 reason 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. Arrangements 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 

1. Directly or indirectly determine the purchase or sale prices;

2. Limits or controls production, supply, markets, technical development, investment or provision of services;

3. 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;

4. 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 the 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:

1. There must be an agreement amongst enterprises or persons;

2. 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;

3. The agreeing parties must be in different markets;

4. The agreement should cause or should be likely to cause AAEC;

5. 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);

2. 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);

3. 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);

4. 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);

5. 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 �

1. Creation of barriers to new entrants in the market;

2. Driving existing competitors out of the market;

3. Foreclosure of competition by hindering entry into the market;

4. Accrual of benefits to consumers;

5. Improvements in production or distribution of goods or provision of services;

6. 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:

1. Direct the parties to discontinue and not to re-enter such agreement (cease and desist);

2. 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;

3. 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;

4. Direct to modify the agreement and in the manner as may be specified in the order of the CCI;

5. Pass any such order or issue such directions as it may deem fit.

Conclusion

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.