PROHIBITION OF CERTAIN AGREEMENTS UNDER THE COMPETITION ACT, 2002

INTRODUCTION

Competition is rivalry amongst firms for a larger share of the market. It can also be defined as a process in which cost-efficient production is achieved in a structure where entry and exit are easy, a reasonable number of players are present in the market, and close substitution between products of different players in a given industry exists.


Competition boosts innovation and the quality of goods and services, and it lowers costs and prices. When firms have to compete for consumers, it leads to lower prices, higher quality of goods, and more innovation. Competition is also essential for the labor market. Competition in the labor market leads to better compensation and working conditions. Thus, the promotion of competition is vital.


In an unhindered market, competition will stabilize the prices of goods. This affects the suppliers of goods and services who aim to maintain their profits at a predetermined level.

These suppliers are in a position to manipulate the market. Various means can be used to achieve this. Price fixing, group boycotts, limiting the supply, exclusive dealing, etc., are some of the means. When the suppliers manipulate the market, it is the consumer who falls prey to the predatory prices.[1]


Competition laws, also referred to as anti-trust laws, are statutes developed by the government to protect consumers from predatory prices, and to ensure competition exists in an open market. Simply put, competition law stops businesses from playing dirty to make a profit.


Section 3, The Competition Act, 2002

Competition law in India is governed by The Competition Act, 2002(hereinafter referred to as the Act). Anti-competitive agreements are one of the anti-competitive practices regulated by The Competitive Act, of 2002. Section 3 of The Competition Act, 2002, prohibits anti-competitive agreements which cause or is likely to cause an appreciable adverse effect on competition in India.


Section 3(1), The Competition Act, 2002 - Appreciable Adverse Effect on Competition within India

This section is a general prohibition of an agreement in the supply of goods or services that causes or is likely to cause an appreciable adverse effect on competition within India. The key elements of this section are as follows:

● Agreement;

● Effect of the agreement on competition;

● The effect is adverse to competition;

● The adverse effect is appreciable.

The territory where the effect on competition is to be considered is India.


Appreciable Adverse Effect on Competition

Agreements that adversely affect competition to an appreciable extent constitute anti-competitive agreements. Agreements entered for price fixing, group boycotts, limiting the supply, exclusive dealing, bid rigging, market sharing, etc., constitute such anti-competitive agreements. These agreements aim at reducing or eliminating competition.


Any agreement which leads to the following is said to have an appreciable adverse effect on competition and is prohibited under Section 3 of the Competition Act, 2002:


● Directly affects purchase or sale prices;

● Indirectly affects purchase or sale prices;

● Limits production;

● Limits sales;

● Limits technical development;

● Leads to bid rigging;

● Leads to collusive bidding, etc.


Section 2(d) of The Competition Act, 2002, defines an “agreement”. The Act defines the term broadly to include both written and oral agreements along with those which were not intended to be enforced legally.


Anti-competitive agreements are broadly divided into the following two categories:


Horizontal Agreements (Agreements between parties in the same line of production)

Vertical Agreements (Agreements between parties at different stages of production)


To determine the effects of an agreement on competition which is taken to be anti-competitive, the first step is to determine the market which has been affected.

The market taken into consideration is termed a “relevant market”. This relevant market can be either product-based or geography-based. Once the relevant market is ascertained, the effect of the said agreement is considered. Determining the effect of any anti-competitive agreement, conduct, or practice is based on two rules: the rule of reason and the per se rule. If it is established that the agreement leads to reducing existing competition or elimination of competition in the relevant market, it is deemed to be anti-competitive.


Section 3(2), The Competition Act, 2002:

An agreement in contravention of the provision of Section 3(1) of The Competition Act, 2002, is void.


Section 3(3), The Competition Act, 2002 - Horizontal Agreements

Section 3(3) deals with enterprises that are engaged in the supply of identical or similar goods or services or constitute a cartel (an agreement between businesses not to compete against each other) and which engage in certain anti-competitive agreements, practices, or take certain decisions set out therein. These agreements are referred to as horizontal agreements.


Section 3(3) of the Act states that the agreements entered between the entities of the class described therein, or any practice carried on by them, or any decision taken by them and containing the terms set out in clauses (a) to (d), shall be presumed to have an appreciable adverse effect on competition.


According to the Competition Commission of India (CCI)[2], the following categories of agreements amongst competitors are presumed to have an appreciable adverse effect on competition:


● Agreement to fix price (Price Fixing);

● Agreement to limit production and/or supply (Output Limitation);

● Agreement to allocate markets (Market Allocation);

● Bid rigging or collusive bidding (Bid Rigging).


To ascertain whether a horizontal agreement has an appreciable adverse effect on competition, the CCI will regard all or any of the factors mentioned in Section 19(3)[3] of the Act. Factors taken into consideration are if the agreement:


● Created barriers to new entrants into the market;

● Drove existing competitors out of the market;

● Foreclosed competition by hindering entry to the market;

● Accrued benefits to consumers;

● Improved production or distribution of goods or provisions of services;

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


The provisions of Section 3(3) of the Act do not apply to Joint Venture (JV) Agreements that promote technical, scientific, and economic development by means of production or distribution of goods or provision of services. Similarly, as under Section 3(5)(ii) of the Act, the provisions do not apply to export cartels provided they do not affect competition in the domestic market.

Horizontal agreements are deemed to be per se in violation of Section 3 of the Act. However, it is for the party claiming that the agreement is not anti-competitive to prove that the agreement does not have an appreciable adverse effect on competition.


Section 3(4), The Competition Act, 2002 - Vertical Agreements

Vertical Agreements are entered by enterprises at different stages or levels of production, distribution, supply, storage, etc. Vertical agreements involve vertical restraints. These restraints remove the freedom of one of the parties in concluding the agreements in a manner that would meet its actual needs and the intentions behind the transaction.

This is done by imposing an unwanted burden on the economically weaker parties. Not all vertical agreements are prohibited though.


Under Section 3(4) of The Competition Act, 2002, it would be anti-competitive only if the agreements or the restraints involved are causing or likely to cause an appreciable adverse effect on competition. The restraints are to be evaluated under the rule of reason.


The following are the vertical restraints specifically stated to be considered anti-competitive by the CCI[4]:


● Tie-in arrangement: The purchase of goods is tied with the purchase of some other goods as a condition of that purchase;

● Exclusive supply agreement: An exclusive agreement that restricts the purchaser from acquiring any goods or services from anyone other than the seller or any other person nominated;

● Exclusive distribution agreement: An exclusive agreement that contains stipulates limiting, restricting, or withholding output or supply of any goods, or allocating any area or market for the sale of goods;

● Refusal to deal: Agreements that restrict by any method the persons or classes to whom goods may be sold or from whom goods may be bought;

● Resale price maintenance: Imposition of a condition by a seller fixing the price at which the purchaser may sell the goods.


There could be other types of agreements falling under Section 3(4) of the Act as those stated in the subsection are not exhaustive. The explanation of this subsection gives an inclusive definition of each vertical restraint. This means there could be vertical restraints other than those stated in the subsection.


To ascertain whether a vertical agreement has an appreciable adverse effect on competition, the CCI will regard all or any of the factors mentioned in Section 19(3) of the Act.


The provisions of this section will not restrict the rights of any person to restrict any infringement of Intellectual Property Rights (IPR) as he may deem necessary to protect his rights which have been conferred upon him by the various IPR statutes. These IPR statutes are mentioned in Section 3(5)(i)(a) to Section 3(5)(i)(f) of the Act. These restrictions though can be subject to scrutiny by the CCI to ascertain whether the restrictions imposed are necessary and reasonable.


Not all vertical agreements are prohibited. These agreements are subject to the rule of reason while establishing their effects on competition. Vertical agreements in which the anti-competitive aspects outweigh the pro-competitive aspects are deemed to cause or like to cause an appreciable adverse effect on competition.


Section 3(5), The Competition Act, 2002 - Exercise of Intellectual Property Rights and Competition

To protect their intellectual properties, IPR holders, especially patentees and copyright holders, impose conditions on their licensees. These conditions can affect competition.


Section 3 does not apply to agreements in which the owner of the intellectual property right has imposed certain restrictions to protect his intellectual property rights from being infringed.

These restrictions must be conferred on the owner by the acts mentioned in Section 3(5)(i)(a) to Section 3(5)(i)(f) of the Act. The owner may also impose certain “reasonable” conditions that are necessary to protect his intellectual properties.


Sometimes, the conditions imposed by intellectual property owners reduce or eliminate competition in the relevant market. Thus, the reasonability and the necessity of the conditions imposed can be subjected to scrutiny by the CCI to determine if they have an appreciable adverse effect on competition. Agreements that fix prices or allocate territories may be treated as illegal per se. Others may be examined under the rule of reason.


Section 27, The Competition Act, 2002

Section 27 of the Act is a common provision covering anti-competitive agreements and abuse of dominant position. This section empowers the CCI to pass orders, as mentioned in the section, or impose penalties after an inquiry into the agreements.


Conclusion

One of the objectives of The Competition Act, 2002, is to prevent practices that have an appreciable adverse effect on competition in India. Thus, under Section 3 of the Act, anti-competitive agreements are void and prohibited. Adherence to Section 3 can help ensure that fair competition exists in an open market that consumers are protected from predatory prices, and anti-competitive behavior by businesses in the market is prevented. This would ensure fair competition in an open market.


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[1] T.Ramappa, Competition Law in India: Policy, Issues, and Developments, Oxford University Press, India, Third Edition [2]Competition Commission of India, available at https://www.cci.gov.in/antitrust; Last visited on 21 October 2022 [3] The Competition Act, 2002( Act 12 of 2003) [4] Competition Commission of India, available at https://www.cci.gov.in/antitrust; Last Visited on 21 October 2022


References

1. Berwal, Paramjeet. “SECTION 3(5)(i) OF THE COMPETITION ACT – AN ANALYSIS.” National Law School of India Review, vol. 27, no. 2, 2015, pp. 168–84. JSTOR, http://www.jstor.org/stable/44283656. Accessed 21 Oct. 2022.

2. Asnani, Harsha. “Anti-competitive Agreements”, https://blog.ipleaders.in/anti-competitive-agreements/; Accessed 21 Oct. 2022


This article is written by Simanchal Swain of Faculty of Law, University of Delhi.

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