ANTI – COMPETITIVE AGREEMENT UNDER THE COMPETITION ACT, 2002
3.1 SECTION 3 OF THE BARE ACT
(1) No enterprise or association of enterprises or person or association of persons shall enter into any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services which causes or is likely to cause an appreciable adverse effect on competition within India.
(2) Any agreement entered into contravening the provisions contained in sub-section (1) shall be void.
(3) Any agreement entered into between enterprises or associations of enterprises or persons or associations of persons or between any person and enterprise or practice carried on, or decision taken by, any association of enterprises or association of persons, including cartels, engaged in identical or similar trade of goods or provision of services, which—
(a) directly or indirectly determines purchase or sale prices;
(b) limits or controls production, supply, markets, technical development, investment or provision of services;
(c) shares the market or source of production or provision of services by way of allocation of the geographical area of the market, or type of goods or services, or number of customers in the market or any other similar way
(d) directly or indirectly results in bid rigging or collusive bidding,
shall be presumed to have an appreciable adverse effect on competition:
Provided that nothing contained in this sub-section shall apply to any agreement entered into by way of joint ventures if such agreement increases efficiency in production, supply, distribution, storage, acquisition or control of goods or provision of services.
Explanation- For this subsection, “bid rigging” means any agreement between enterprises or persons referred to in subsection (3) engaged in identical or similar production or trading of goods or provision of services, which has the effect of eliminating or reducing competition for bids or adversely affecting or manipulating the process for bidding.
(4) Any agreement amongst enterprises or persons at different stages or levels of the production chain in other markets, in respect of production, supply, distribution, storage, sale or price of, or trade in goods or provision of services, including
a) Tie-in-arrangement
b) Exclusive supply agreement
c) Exclusive distributive agreement
d) Refusal to deal
e) Re-sale price maintenance
shall be an agreement in contravention of section 3(1) if such agreement causes or is likely to cause an appreciable adverse effect on competition in India.
3.2 APPRECIABLE ADVERSE EFFECT ON COMPETITION
Section 3(1) prohibits any agreement that causes or is likely to cause an appreciable adverse effect on competition within India.
Section 19 (3) of the Act specifies certain factors for determining AAEC under Section 3: • Creation of barriers to new entrants in the market
• Driving out of the market
• Foreclosure of competition by hindering entry into the market
• Accrual of benefits to consumers
• Improvements in the production or distribution of goods or provision of services • Promotion of technical, scientific and economic development using the production or distribution of goods or services
CCI shall have ‘due regard to all or any’ of the factors above.
TYPES OF ANTI-COMPETITIVE AGREEMENT
HORIZONTAL AGREEMENT VERTICAL AGREEMENT
3.3 HORIZONTAL AGREEMENTS
Horizontal agreements exist between competitors, i.e., entities at the same distribution level. They are more likely to reduce competition than vertical agreements.
These agreements are defined under section 3(3). Horizontal agreements like price fixing and market sharing are agreements that, by their nature, are almost always considered detrimental to the competition. Generally, horizontal agreements are synonymously called cartels in competition law terminology.
These types of agreements follow the per se rule. The Per Se Rule is when one person on whom the offences or the allegations which pertain to a specific issue are alleged in front of any Court of Law, such alleged person has the onus to prove that such accusation is a falsified one. In the Per Se Rule, the accused person claims innocence by alleging. This is also called the Rule of Presumption, as the defendant party must prove that they made no such arrangements in the first place.
Aamir Khan Productions Private Limited V. Union Of India, Associations/Enterprises who jointly control approximately 100% of the market share for the production and distribution of Hindi Motion Pictures exhibited in Multiplexes, by organising themselves under the umbrella of United Producers Distributors Forum (UPDF), took a collective decision not to release films to the Multiplexes from 4th April 2009 onwards to extract higher revenue sharing ratio from the members of the informant and this cartel-like activity has an appreciable adverse effect on competition in India. The Commission took cognisance of the matter under Section 19 of the Act, and on forming an opinion under Section 26(1) that a prima facie case exists, it issued directions to the Director General (DG) to investigate the matter.
As per the findings of the D.G. in these reports, the allegations made in the information are acting in concert by forming a cartel to extract a higher revenue-sharing ratio for the supply of films to the Multiplexes and achieve profit, indulged in limiting/ controlling the collection of movies in the market by refusing to release films to Multiplexes for exhibition and succeeded in attaining objective by raising revenue sharing ratio and have thus by your conduct and activities contravened the provisions of Section 3(3) of the Competition Act, 2002.
TYPES OF HORIZONTAL AGREEMENTS
1. Price fixing Agreements: the agreement between competitors to sell the same products or services at the same price. Price fixing is harmful, especially to the consumers, as they have to pay higher costs for goods and services.
Price-fixing agreements may be directly or indirectly prohibited. Under direct prohibition, price fixing associations, enterprises or persons formally or otherwise agree on the price to be charged for their purchases or sales.
Under indirect price fixing, on the other hand, the person, enterprise or association agree to fix commissions, discounts, rebates, warranties, etc., which indirectly impact the prices of the purchase or sale of goods and services.
2. Output limitation: There can be a scenario where competitors agree to restrict and control the production, thereby preventing the supply in the market.
Under production or output control agreements, quotas are created amongst the agreement members to limit ‘the volume or type of particular goods or services available on the market.’ Output restrictions can occur in various forms, including agreements on production and sales volumes.
The objective of controlling and limiting supplies is to create market scarcity and raise prices in the market. Such output restriction agreements lead to a deadweight loss in society. 3. Market Sharing: Another joint horizontal agreement amongst competitors is market sharing. These are also called market allocation and market division agreements. Under such agreements, the competitors agree to divide specific territories, customers, or products amongst themselves. Such market-allocating actions are restrictive in nature because they leave no room for competition in the market. It includes:
• Non-production of goods in competition with each other.
• Not selling in each other’s allocated geographical territories.
• Not soliciting or selling to each other’s existing customers.
4. Bid Rigging: Bidding is a practice to enable the procurement of goods or services on the most favourable terms and conditions of the person asking for the bid. Both governmental and private entities can open bids. Though bidding aims to secure the best price, certain anti-competitive practices like bid rigging may vitiate this primary objective.
Bid rigging occurs when bidders collude and keep the bid amount at a pre-determined level. Bid rigging is how conspiring competitors effectively raise prices where purchasers– often various departments and authorities of the Government acquire goods or services by soliciting competing bids.
• Subcontract bid-rigging: Under this type of bid-rigging, the conspirators agree not to submit bids or to submit cover bids that are intended not to be successful on the condition that some parts of the successful bidder’s contract will be subcontracted to them.
• Complementary bidding: It is also known as cover bidding or courtesy bidding. It involves a situation where some bidders bid an amount that is too high or contains unacceptable conditions. Thus, cover bidding might give the impression of competitive bidding. In reality, suppliers agree to submit symbolic bids that are unreasonably high to succeed.
• Bid suppression occurs when some conspirators agree not to submit a bid so that another conspirator can successfully win the contract.
• Bid rotation occurs where the bidders take turns being the designated successful bidder. For example, each conspirator is meant to be the successful bidder on specific contracts, with conspirators established to win other contracts. This is a form of market allocation where the conspirators allocate or apportion markets, products, customers, or geographic territories among themselves so that each will get a “fair share” of the total business without competing with the others for that business.
3.4 CARTELS
Cartel activities are more likely to succeed in oligopolistic markets with few producers and sellers. Thus, such an oligopolistic market structure makes coordinating and colluding easy for those players.
The definition of the hardcore cartel as given by OECD is an anti-competitive agreement, anticompetitive concerted practice or anticompetitive arrangement by companies to fix prices, make rigged bids (collusive tenders), establish output restrictions or quotas or share or divide markets by allocating customers, suppliers, territories, or lines of commerce the most egregious violations of competition law.
SECTION 2(O) of The MRTP Act, 1969 “restrictive trade practice” means a trade practice which has, or may have, the effect of preventing, distorting or restricting competition in any manner and in particular, —
(i) which tends to obstruct the flow of capital or resources into the stream of production, or
(ii) which tends to bring about manipulation of prices or conditions of delivery or to affect the flow of supplies in the market relating to goods or services in such manner as to impose on the consumer’s unjustified cost or restrictions;
SECTION 2(c) of Competition Act, 2002 “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;
There are many ill effects of a cartel. Some of them are:
• Cartels led to increases in the prices of goods and services for consumers • Increase in price of goods and materials that act as inputs for other businesses, thereby raising capital costs across the supply chain.
• Reducing investment by blocking new industry entrants by creating entry barriers in markets, thereby affecting economic growth and entrepreneurship
• This leads to deadweight loss by locking up resources as cartels interfere with regular supply and demand forces and can effectively lock out other operators from access to resources and distribution channels.
• Cartel members enjoy a ‘quiet life’, as they agree not to compete, impairing investments in product development and research and development activities.
• Cartels can have a market-exiting effect on non-members in the market. • Bid rigging and other activities by members of cartels targeting the public tendering process can significantly burden the public exchequer.
But with this, there are also some exemptions like Joint Ventures and Export Cartels.
In the case of Builders Association Of India V. Cement Manufacturers, The CCI noted that cement prices increased immediately after the High-Power Committee Meetings of the CMA, which were attended by the cement companies in January and February 2011.
Amendments to the CMA constitutional documents serious competition concerns were only carried out once the DG notified the respondents. There was a robust positive correlation in the prices of all companies. This, according to the DG, confirmed price parallelism.
• The capacity utilisation across the respondents had decreased.
• Lower dispatches coupled with lower utilisation establish that the cement companies indulged in controlling and limiting the cement supply in the market.
• Production Parallelism: The production figures across cement companies (in a particular geographical region) showed a strong positive correlation. This was a clear indication of coordinated behavior.
• Dispatch Parallelism: The dispatches made by the cement companies have been almost identical.
• Price increase: The deliberate shortage in production and supplies by the cement companies and the almost inelastic demand for cement in the market resulted in higher cement prices. • Price Leadership: The CCI noted that given the small number of major cement manufacturers, the price leaders gave price signals through advanced media reporting, making it easier for other manufacturers to coordinate their strategies.
• High-profit margins over the cost of sales.
In another case, All India Tyres Dealers Federation V. Tyres Manufacturers, The Commission observes that the existence of a written agreement is not necessary to establish a common understanding, standard design, common motive, common intent or commonality of approach among the parties to an anti-competitive agreement. These aspects may be found
from their activities, the objects sought to be achieved, and evidence gathered from the anterior and subsequent relevant circumstances. Circumstantial evidence concerning the market and the conduct of market participants may also establish an anti-competitive agreement and suggest concerted action. Parallel behaviour in price or sales is indicative of coordinated behaviour
among participants in a market.
A piece of direct evidence, indirect evidence, or a combination of both may prove the existence of a cartel. Some jurisdictions have adopted a “price parallelism” approach in cases of price parallelism. For instance, conscious price parallelism implies a practice whereby sellers in a given market raise their prices quickly without explicitly agreeing with each other. Some jurisdictions have adopted a “price parallelism plus” approach in cases of price parallelism. This implies that the existence of “plus factors” beyond merely the firms’ parallel behaviour must be shown to prove the anticompetitive conduct.
The Leniency Regulations contemplate the assignment of priority markers to applicants, marking their position in the “queue” for leniency among the members of a cartel. The Leniency Regulations state that subject to satisfaction of the conditions set out above, the CCI may grant reductions in fines to leniency applicants in the following manner:
a. the first applicant to make a vital disclosure in connection with a cartel that enables the CCI to form a prima facie opinion or which allows the DG to establish a contravention may be granted a 100% reduction in fine, i.e., effective immunity from a fine;
b. the second applicant to provide significant “added value” to the investigation may be granted a reduction of up to 50% of the monetary penalty; and
c. the third applicant may be granted a reduction of up to 30% of the monetary penalty.
3.5 VERTICAL AGREEMENTS
Section 3(1) and 3(2), read together with Section 3(4), prohibit entering into vertical agreements and declare them to be void.
Vertical agreements are those between parties on different levels of the distribution chain, such as between a manufacturer and a distributor or between a wholesaler and a retailer. To increase their profits, the firms at different levels of the production chain may enter into such agreements amongst each other that may affect the competition adversely. The intention of the economically more vital party behind such arrangements is to compel the other party to supply that goods or service, which is the subject matter of such arrangement in its favour.
Vertical agreements were prohibited per se earlier, while the rule of reason is now being preferred by the Court to evaluate vertical restraints. The Indian Competition law is in tune with US competition law regarding the applicability of the rule of reason.
Tata Engineering and Locomotive Co. Ltd. v Registrar of Restrictive Trade Agreement is a landmark decision of the Supreme Court of India that aptly illustrated the applicability of the rule of reason in restrictive trade practices. The SC, in this case, held that the following three issues should be considered to determine whether a restraint suppressed or promoted competition:
i. Facts peculiar to the business to which the restraint is applied;
ii. The condition before and after the restraint is imposed;
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iii. Nature of restraint and actual and probable effects.
TYPES OF VERTICAL AGREEMENTS
1. Tie-in arrangement – Tie-in-arrangements include any agreement requiring a purchaser of goods to purchase other goods as a condition of such purchase. This is an arrangement by which a seller agrees to sell a product known as the tying item only when the buyer agrees to buy a second product known as the tied product from the seller. Such arrangements completely reduce or eliminate the competition and remove the buyer’s resistance to the tied product, in Shri Sonam Sharma V Apple Inc. And Ors The allegations in this case pertained to distribution agreements between Apple India Pvt. Ltd., the Indian subsidiary of Apple Inc. U.S.A. Vodafone Limited and Bharat Airtel Limited, by which Apple iPhones (3G/3GS) could only be purchased on the GSM network of Airtel or Vodafone and only through their respective distributors.
As per C.C.I.’s order, A tying arrangement occurs when, through a contractual or technological requirement, a seller conditions the sale or lease of one product or service on the customer’s agreement to take a second product or service. Further in the order, C.C.I. acknowledges that tie-ins are not per se anticompetitive as ‘economics literature suggests that there are pro-competitive rationales for product-tying. These include assembly benefits, quality improvement, and addressing pricing inefficiencies’.
Thus, it seems clear that C.C.I., in essence, acknowledges that tie-ins should be dealt with under the rule of reason approach, as is the scheme under the scheme. 3(4) of the Act. After that, C.C.I. very categorically goes on to identify ‘necessary and essential conditions’ in respect of ‘anti-competitive tying’, these being:
(1) the Presence of two separate products or services capable of being tied; (2) For considerable restrain-free competition in the market for their product, the seller must have sufficient economic power concerning the tying product
(3) The tying arrangement must affect an insubstantial amount of commerce, 2. Exclusive supply agreement – Exclusive supply agreements include any agreement restricting in any manner the purchase in the course of his trade from acquiring or otherwise dealing in any goods other than those of the seller or any other person. In Jindal Steel v SAIL, an exclusive supply agreement, through a memorandum of understanding (MOU), was entered into between Indian Railways and the Steel Authority of India (SAIL) to supply rails continuously. Jindal Steel and Power Limited alleged that the MOU foreclosed the relevant market. It was held that the MOU was not hit by Sec. 3(4) and, hence, was not anti-competitive.
Consumer Guidance Society v Hindustan Coca-Cola Beverages Ltd. is another case of exclusive supply agreements.
3. Exclusive distributive agreement – Exclusive distribution agreements include 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. The main feature of such agreements is that the manufacturer or supplier agrees to supply certain goods for resale to only one party, the exclusive distributor within a defined territory, and no other party will be provided with the goods within that area by the supplier. Exclusive dealing is a way of restraining inter-brand competition.
4. Refusal to deal – refusal to deal includes any agreement that restricts or is likely to determine, by any method, the persons or classes of persons to whom goods are sold or from whom goods are bought. It is a boycott. It means refusal to buy or sell by a mutual agreement to restrict competition is illegal. Refusal to buy or sell by a mutual understanding
to limit competition is unlawful. The Act, however, does not empower the authority to decide on behalf of any parties whether they should enter into any particular agreement. To deal or not to deal is the freedom of the enterprise, and they can choose not to deal with any specific firm or person. But where such refusal to deal falls within the Act’s definition, the enterprises’ behaviour is considered anti-competitive. In Kapoor Glass Pvt. Ltd. v Schott Glass Pvt. Ltd., the COMPAT held the joint venture NOT anti-competitive since it was created to finish off competition in the downstream market and that various agreements were in contravention of clauses (a), (b), (d) and (e) of section 3(4)
5. Re-sale price maintenance – Resale price maintenance (RPM) 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 set. RPM is a form of price fixing.
There are certain exceptions to section 3(4), they are under the following acts –
• The Copyright Act of 1957
• The Patents Act 1970
• The Trade and Merchandise Marks Act, 1958 or the Trade Marks Act, 1999 • The Geographical Indications of Goods (Registration and Protection) Act, 1999
• The Designs Act, 2000
• The Semi-Conductor Integrated Circuits Layout-Designs Act, 2000
3.6 INVESTIGATION PROCESS AND ORDER
Section 26 of the Competition Act, 2002 empowers the Competition Commission of India (CCI) to request an inquiry by the Director General in cases of “prima facie” breaches of the Act. In this regard, such an inquiry’s outcome is not obligated to impact the CCI’s ultimate decision. The DG’s question is critical for analysing and comprehending the facts and situations.
Although such an inquiry appears to be procedural in nature, it is critical to understand what threshold of proof qualifies as a ‘prima facie’ breach for the CCI for a variety of reasons:
First, because the CCI has limited funds and operates with restricted resources, it must do a cost-benefit analysis while conducting such an examination.
Second, such an investigation conducted by CCI has a direct role in determining the business practices used by the parties for them to follow this set pattern to escape court scrutiny.
Finally, the Competition Act of 2002 framework only allows the CCI to discover an ultimate violation once the Director General orders an inquiry. The structure above of the Act permits opposing parties concerned in the case to defend themselves in two phases: during the investigation stage and after the report is submitted to the Director General.
Furthermore, the CCI General Regulations, 2009, indicate that the inquiry must be finished within 60 days. However, according to a study by the Centre for Competition Law and Economics, the median time to examine the concerns was 240 days. Given such facts, it is reasonable to conclude that each prima facie violation of the Act discovered by the CCI results in significant spending through the Director General’s Office.
In Federation of Hotel & Restaurant Associations of India v. Ashok Kumar Gupta, RKG Travels Pvt. Ltd (Informants) alleged that OYO is abusing its dominant position in the relevant market by imposing unfair conditions on hotel owners to maximise its revenue and consumer base. The Competition Commission of India (CCI) did not form any ‘prima facie’ view of the Competition Act 2002 violation and closed the case by 26(2) of the Act. Moreover, the CCI defined the relevant market as the “market for franchising services for budget hotels in India”. However, it tracked back the same later. And also, ultimately, took a view on the opposite party based on the relevant market defined in the first place.
In Google V. Android, The instant case was initiated by Umar Javeed against Google. It was alleged that Google was abusing its dominant position by imposing unfair terms on the app developers and end-users, causing foreclosure in the market and harming the competitive environment. The informants relied on the international precedents decided by other antitrust regulators, which had already found Google dominant in the relevant market. In the present case, the CCI relied on the findings provided by the informants. This shifted the burden of proof to the opposite party to discharge the doubt placed by the informants.
Section 27 discusses Orders By Commission After Inquiry Into Agreements Or Abuse Of Dominant Position. Where after inquiry, the Commission finds that any agreement referred to in section 3 or action of an enterprise in a dominant position is in contravention of section 3 or section 4, as the case may be, it may pass all or any of the following orders, namely:–
(a) direct any enterprise or association of enterprises or person or association of persons, as the case may be, involved in such agreement, or abuse of dominant position, to discontinue and not to re-enter such agreement or discontinue such abuse of dominant position, as the case may be;
(b) impose such penalty, as it may deem fit, which shall be not more than ten per cent. Of the average turnover for the last three preceding financial years upon each of such person or enterprises that are parties to such agreements or abuse:
Provided that in case a cartel has entered into any agreement referred to in section 3, the Commission may impose upon each producer, seller, distributor, trader or service provider included in that cartel a penalty of up to three times its profit for each year of the continuance of such agreement or ten per cent. Of its turnover for each year of the continuation of such agreement, whichever is higher.
