Anti Competitive Agreements under Competition Act 2002

Section 3 of the Competition Act, 2002 - The Act provided for in Section 3(1) precludes any undertaking or organization from entering into any arrangement that causes or is likely to cause significant adverse effects on competition (AAEC) within India. The Act specifically provides for the nullity of an arrangement that is contrary to Section 3(1).

How to determine AAEC (Appreciable Adverse Effect onCompetition)

Any deal, including cartels, is provided for in the Act, which is:

• Defines purchase or selling rates directly or indirectly;
• Restricts the manufacture, supply, technological growth or business provision of services;
• Bid-rigging results or collusive bidding results

Section 3 of the Act specifies that the above conditions shall not extend to joint ventures entered into with a view of  enhancing the efficiency of the production, procurement, delivery, acquisition and control of products or services.

Horizontal agreements and vertical agreements are further categorized into anti-competitive agreements.

What are Horizontal Agreements?

HORIZONTAL AGREEMENTS- Horizontal agreements are agreements signed between undertakings at the same stage of manufacture. Section 3(3) of the Act specifies that such arrangements involve cartels engaged in trade in goods or in the provision of services on an equal or similar basis, which :

• Determines purchase or selling rates directly or indirectly
• Output limits or controls, supply
• Share the market or source of production
• Bid-rigging or collusive bidding occurs directly or indirectly

Horizontal agreements are put in a particular category under the Act and are subject to the negative assumption that they are anti-competitive. This is regarded by  law 'per se' as well. This means that if a horizontal arrangement occurs pursuant to Section 3(3) of the Act, it is assumed that such an agreement is anti-competitive and has a substantial adverse impact on competition.

What are Vertical Agreements?

VERTICAL AGREEMENTS- Vertical agreements are agreements signed between two or more undertakings operating at different production levels. Between manufacturers and distributors, for example. Other examples of vertical deals that are anti-competitive include:

• Special contract of supply & refusal to trade
• Maintenance of Resale Price
• Tie-in-Arranges
• Unique deal for distribution

For vertical agreements, the 'per se' rule as applicable for horizontal agreements does not apply. Accordingly, a vertical agreement is not anti-competitive per se or has no appreciable adverse impact on competition.

Under Section 3 of the Act, the Act also prohibits any arrangement between undertakings that materialize in:Tie-in arrangement

What is a tie-in arrangement?

According to the Law, it requires any agreement requiring, as a condition of purchase, the purchaser of goods to purchase certain other goods. In the case of Sonam Sharma v. Apple & Ors., the CCI claimed that the following ingredients must be present in order to have a contractual arrangement:

• There must be two goods that can be tied together by the seller. In addition, there must be a sale or an agreement to sell one product or service on the condition that the other product or service is purchased by the buyer. The condition, in other words, is that the purchase of a product relies on the purchase of another commodity.
• In order to appreciably limit free competition in the market for the tied product, the seller must have ample market power in relation to the tied product. That is, the seller must have such authority in the tying product market that it can compel the buyer to buy the tied product; and
• A "not insubstantial" volume of exchange must be affected by the tying agreement. Tying deals are normally not viewed as anti-competitive because there is no effect on a large portion of the market.

Exclusive supply agreement-

The Act determines such agreements to include any arrangement that in any way prevents the buyer from purchasing or otherwise trading in any products other than those of the seller or any other person in the course of his trade.

Exclusive distribution agreement-

This includes any arrangement to limit, restrict or withhold the production or supply of any products, or to delegate the disposal or selling of goods to any region or market.

Refusal to deal-

The Act notes that this criterion requires an arrangement that limits the individuals or groups of persons to whom the products are marketed or from whom the products are purchased by any process.

Shri Shamsher Kataria v. Honda Siel Cars India Ltd. & Ors- Key Anti-Competitive Agreements Case Law

In the case of Shri Shamsher Kataria v. Honda Siel Cars India Ltd. & Ors, the Commission deliberated on the principle of vertical contracts, including exclusive supply agreements, exclusive distribution agreements and refusal to deal.

Facts of the matter

In the case, the informant claimed that the Opposite Parties (OPs) had anti-competitive practices whereby the genuine spare parts of cars produced by some of the OPs were not readily made available on the open market and most of the OEMs (original suppliers of equipment) and the authorized dealers had provisions in their agreements requiring the authorized dealers to supply spare parts on the open market.

CCI's final decision

The Commission found that such agreements were exclusive supply agreements, exclusive distribution agreements and refusal to deal pursuant to Section 3(4) of the Act, and it was therefore appropriate for the Commission to decide if such agreements in India would have an AAEC.

The Commission considered that the agreements at issue contravened Section 3 of the Act and noted that the network of such agreements allowed OEMs to become monopoly players in the aftermarket of their vehicle models, creating barriers to entry and removing competition from independent service providers.

Furthermore, the Commission claimed that such a distribution system allowed OEMs to obtain exploitative pricing from their locked-in buyers, to increase the revenue margin from the selling of automotive component parts relative to the cars themselves, in addition to having a possible long-term anti-competitive structural impact on the Indian automotive industry.

What is resale price maintenance?

This involves any arrangement to sell the goods, given that the resale prices paid by the buyer are the prices stipulated by the seller, unless it is explicitly specified that prices below those prices can be charged.

In the case of Fx Enterprise Solutions India Pvt, the principle of resale price maintenance was explored by the Commission. Ltd. v. Hyundai Limited Motor India. In the case, the Informant claimed that, according to the Hyundai Agreement, dealers were forced to buy all automotive parts and accessories from Hyundai or through its suppliers only. "While collaborating on Hyundai's alleged anti-competitive practices, the Informant stated that Hyundai had imposed a "Discount Control System" whereby dealers were only permitted to provide a maximum permissible discount and dealers were also not permitted to give discounts beyond the recommended range, in contravention of Section 3(4)(e) of the Act, amounting to "resale price maintenance.”

In the event, the CCI noted that Hyundai had contravened provisions of Section 3(4)(e) by exclusive agreements and arrangements, read with Section 3(1) of the Act by arrangements that resulted in the preservation of resale prices. While imposing the penalty of INR 87 Crore on Hyundai, the CCI noted that Hyundai's infringing anti-competitive behavior in the case included putting in place arrangements that resulted in resale price maintenance through a discount control system and also a penalty mechanism for non-compliance with the discount scheme by means of tracking the maximum permissible discount amount.

IPR exemption under section 3(5) of the Act and Anti-Competitive Agreements

Section 3(5) of the Competition Act provides that nothing contained in Section 3 (prohibition of anti-competitive agreements) shall limit any person's right to prevent infringement or to enforce fair conditions, such as copyright, trade marks, trademarks, designs and geographical indications, that may be appropriate for the defense of his/her intellectual property rights.

In the foregoing sense, CCI notes that Section 3 would not attract any 'fair condition' imposed for the security of IPR, but the imposition of 'unreasonable condition' to protect IPR would contravene Section 3 of the Act. An illustrative list of practices/agreements is issued by the CCI which, while entered into for IPR protection, can contravene Section 3 of the Act. Suchagreements/practices are:

1. Patent pooling-if pooling companies decide not to issue a license to third parties, it could be a restrictive practice;
2. Tie-in agreement-If the licensee is allowed to purchase specific products exclusively from the patentee under the tying arrangement, then it could be a restrictive practice;
3. Agreement to continue paying royalties long after the expiry of the patent;
4. Clause limiting R&D competition;
5. The licensee may be subject to a provision which does not call into question the validity of the IPR in question.
6. The price at which the licensee can sell is set by the licensee.
7. While the licensee may not require all of them, a licensee may be compelled by the licensor to accept multiple intellectual property licenses.
8. A requirement that imposes quality controls beyond those required on the approved patented product.
9. Limiting the right of the licensee to market the licensed know-how product to persons other than the persons designated by the licensor.
10. Undue limitations on the company of licensees can be anticompetitive.
11. Competition can be influenced by restricting the maximum amount of use the licensee can allow of the patented invention.
12. A restriction placed on the licensee for hiring or utilizing the licensor's designated workers.

Conclusion and Remedies to Anti-Competitive Agreements

• Following an investigation, if the Commission determines that the agreement in question falls under the category of Section 3, it can, as the case may be, issue any of the following orders:
• Direct to discontinue or re-enter such agreement by the individual, business or association involved in the agreement;
• Such fines shall not surpass, for the preceding three financial years, 10% of the total turnover.
• In the case of cartels, the fines referred to above shall be applied to each maker, supplier, dealer, broker or service provider involved in that cartel and the amount of the penalty may be extended by upto three times its profit for each year of continuation of the arrangement, or by up to ten per cent, whichever is greater.
• Direct to amend the agreement to the degree and in the manner that may be stated in the commission's order.
• Payment of costs and delivery of guidance to the company to comply with the orders.
• Pass any other order or direction it may deem important